The Goff Arbitration Lectures 1990 - 2022 by School_of_Law_CityU

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Lord Goff of Chieveley

1991

Arbitrability

Justice Andrew Rogers

1992

Arbitration: 1979 and All That

The Right Honourable Sir Thomas Bingham

1993

The Role of ADR in the Settlement of Commercial Disputes

Arthur Marriott

1994

The Validity of an Arbitral Award Rendered by a Truncated Tribunal

Stephen M. Schwebel

1995

Is the Need for Writing as Expressed in the New York Convention and the Model Law Out of Step with Commercial Practice?

Neil Kaplan QC

1995 Addition Arbitration Agreement in Writing: Where do we Currently Stand? A 2021 Postscript to the 1995 Goff Lecture

Neil Kaplan QC

1996

Too Many Laws?

The Right Honourable Lord Mustill

1997

Enforcing Arbitral Awards Notwithstanding Local Standard Annulments

Jan Paulsson

1998

Irresponsibility in International Commercial Arbitration

Pierre Lalive

2000

The Spirit of Arbitration

Fali S. Nariman

2001

The Lawyer’s Duty to Arbitrate in Good Faith

V. V. Veeder

2004

Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor

L. Yves Fortier and Stephen L Drymer

2006

The Role of Arbitration within Today’s Challenges to the World Community and to International Law

Karl-Heinz Böckstiegel

CMY

Karl-Heinz Böckstiegel

2007

W(h)ither International Commercial Arbitration?

Charles N. Brower

2008

National Emergencies and Necessity Defenses: Do They and Should They Relieve States of Their Investment Obligations?

W. Michael Reisman

2009

The Small, the Useful and the Impossible: The Experience of UNCITRAL in Revising its Rules

David D. Caron

2010

A Proposed Model Procedural Order on Confidentiality in International Arbitration: A Comprehensive and Self-Governing Code

Michael Hwang and Nicholas Thio

2011

The Case for Better, and Better-armed, Arbitrators

Jacques Werner

2011 Addition When Arbitration Becomes War

Jacques Werner

2013

The Rise of Treaty-based Investment Arbitration in Asia

Kaj Hobér

2015

The Right to Arbitrate: Historical and Contemporary Perspectives

Gary B. Born

2016

Arbitration and Public Policy

Robert French

Feb 2018

Making the Best of Arbitration

David Hope

July 2018

Arbitral Autonomy and Applicable and Overriding Law

Jonathan Mance

2019

Isn’t 700 Years Long Enough? - Time to Think Again about Costs

Neil Kaplan QC

2020

Arbitrator ‘Temperance’: David Caron’s Rule of X

Lucy F. Reed

2021

The Complexification of Disputes in the Digital Age

Sundaresh Menon

2022

Independence and Apparent Bias: Judicial and Arbitral Confidence: Halliburton v Chubb

James Allsop

Edited by Neil Kaplan KC, CBE, SBS and Robert Morgan JP

2006 Addition Major Developments Since the Goff Lecture of 2006

The Goff Arbitration Lectures

Future Imperfect

1990–2022

1990

The Goff Arbitration Lectures 1990–2022

Edited by Neil Kaplan KC, CBE, SBS and Robert Morgan JP

The Goff Arbitration Lectures 1990–2022

Edited by Neil Kaplan KC, CBE, SBS and Robert Morgan JP

©2024 City University of Hong Kong All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, Internet, or otherwise, without the prior written permission of the School of Law, City University of Hong Kong. ISBN: 978-962-442-469-0 Published by School of Law City University of Hong Kong Tat Chee Avenue Kowloon, Hong Kong Website: www.cityu.edu.hk/slw Printed in Hong Kong

Contents

Forewords

Preface

1990

Future Imperfect

1991

Arbitrability

1992

Arbitration: 1979 and All That

1993

The Role of ADR in the Settlement of Commercial Disputes

1994

The Validity of an Arbitral Award Rendered by a Truncated Tribunal

1995

Is the Need for Writing as Expressed in the New York Convention and the Model Law Out of Step with Commercial Practice?

1995 Addition

Arbitration Agreement in Writing:Where do we Currently Stand? A 2021 Postscript to the 1995 Goff Lecture

1996

Too Many Laws?

105

1997

Enforcing Arbitral Awards Notwithstanding Local Standard Annulments

125

1998

Irresponsibility in International Commercial Arbitration

149

2000

The Spirit of Arbitration

165

2001

The Lawyer’s Duty to Arbitrate in Good Faith

183

2004

Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor

203

2006

The Role of Arbitration within Today’s Challenges to the World Community and to International Law

233

2006 Addition

Major Developments Since the Goff Lecture of 2006

245

2007

W(h)ither International Commercial Arbitration?

247

2008

National Emergencies and Necessities: Do They and Should They Relieve States of Their Investment Obligations?

265

2009

The Small, the Useful and the Impossible: The Experience of UNCITRAL in Revising its Rules

311

2010

A Proposed Model Procedural Order on Confidentiality in 325 International Arbitration: A Comprehensive and Self-Governing Code

2011

The Case for Better, and Better-armed, Arbitrators

361

2011 Addition

When Arbitration Becomes War

369

2013

The Rise of Treaty-based Investment Arbitration in Asia

371

2015

The Right to Arbitrate: Historical and Contemporary Perspectives

373

2016

Arbitration and Public Policy

379

Feb 2018

Making the Best of Arbitration

395

July 2018

Arbitral Autonomy and Applicable and Overriding Law

409

2019

Isn’t 700 Years Long Enough? - Time to Think Again about Costs

423

2020

Arbitrator ‘Temperance’: David Caron’s Rule of X

435

2021

The Complexification of Disputes in the Digital Age

453

2022

Independence and Apparent Bias: Judicial and Arbitral Confidence: Halliburton v Chubb

477

Foreword I am honoured to be asked to write a Foreword for this collection of Goff Lectures organised by the School of Law of City University of Hong Kong since 1990. This lecture series was initiated by the founding head of our School (it was a department under the Faculty of Humanities at that time), the late Professor Derek Roebuck, who was an expert in the history of arbitration. Since joining the School of Law in 1992, I have attended many lectures in this series and also facilitated the publication of serveral of them in our School’s law journal (Asia Pacific Law Review). Thirty-three years after its inauguration, the Goff Lecture has become a brand name for this series of distinguished lecturers in the field of arbitration. I am really thrilled to see the publication of this collection. Together with our Master of Laws in Arbitration and Dispute Resolution (LLMArbDR) programme, which has the longest history in the Asia region (32 years), this lecture series is evidence of our commitment to training practitioners and experts in the field of arbitration and alternative dispute resolution. The successful organisation of 27 Goff Lectures so far has not been possible without the support of many prominent practitioners in the field in Hong Kong, including Mr Anthony Neoh KC, SC, Mr Philip Yang, Mr Rimsky Yuen SC, Mr Neil Kaplan KC and Dr Christopher To. They have also made great contributions to our LLMArbDR programme. As the current Dean of the School of Law, I am glad to report that our School has also recruited three experts in both international and domestic arbitration. Our School aims to be not only one of the best institutions to train practitioners in arbitration but also one of the best in producing research in arbitration and other forms of alternative dispute resolution. We are also committed to bringing prominent practitioners and scholars to Hong Kong as speakers in this lecture series.

Lin Feng Dean and Professor School of Law City University of Hong Kong

Foreword It is a great pleasure as a past Dean of the City University of Hong Kong (CityU) School of Law to write this Foreword for this collection of 26 lectures delivered over 32 years. This lecture series was inaugurated by the CityU School of Law in 1990 with Lord Goff of Chieveley, then a Lord of Appeal in Ordinary in the House of Lords, delivering the first lecture, entitled ‘Future Imperfect’. It is for this reason that the series came to be known as the Goff Arbitration Lecture. Since the inaugural lecture, 24 other distinguished and learned personalities have delivered thoughtful and thought provoking lectures on a variety of topics. These speakers range from distinguished judges, such as Sir Thomas Bingham, Master of the Rolls, Judge Stephen Schwebel of the International Court of Justice, Chief Justice Robert French of the Australian High Court, Lord Jonathan Mance of the UK Supreme Court and. Chief Justice Sundaresh Menon of the Singapore Supreme Court of Singapore, to distinguished academics and practitioners, including Professor Neil Kaplan QC (twice), Professor Pierre Lalive, Professor Michael Reisman, Dr Jacques Werner, Professor Gary Born and Ms Lucy Reed. The lecture topics range across a wide spectrum of issues, from the role of Alternative Dispute Resolution to matters of enforcement and other interesting questions, including good faith, private and public interest dimensions, arbitral autonomy, costs and arbitrator temperance. As a long-standing lecture series, the topics also provide perspectives on some of the contemporary issues of the day, which two of the most recent lectures particularly reflect. In 2020, Ms Lucy Reed highlighted the need for arbitrator discipline in setting a presumptive number of arbitral appointments – the ‘Rule of X’ – that arbitrators are reasonably able to handle at any one time. This number depends on the circumstances applicable to each arbitrator and is further dependent on different variables such as complexity and whether one is the presiding arbitrator. The importance of such self-reflection and discipline resonates with me. While not having applied the mental model of the ‘Rule of X’, I have certainly found that my academic responsibilities only allow me to take on two to three appointments at any one time, given that most appointments tend either to be as presiding or sole arbitrator. In a similar vein, the 2021 lecture by Chief Justice Menon pointed to the growing class of disputes that are so factually rich and complex that they have become extremely difficult for the arbitrator to understand fully and properly, much less decide. Beyond solutions directed at improving the efficiency of legal proceedings, should there be reconsideration of the approach to the resolution of complex disputes? Ought there to be a shift away from a narrow conception of justice as requiring a full and exhaustive determination of the facts to one that embraces procedures which, whilst less thorough, are nevertheless capable of producing reasonably accurate and acceptable decisions more quickly and at far lower cost? These are questions that no doubt will continue to be discussed in the years ahead.

iii

In recent years, the lecture series has benefited immensely from the support given to the School of Law by Mr Neil Kaplan KC and Dr Christopher To. I wish to express my deep appreciation to them for working with the School to maintain this vibrant and valuable lecture series. It is the School’s hope that it will continue to run for another 32 years and beyond.

Professor Tan Cheng-Han SC Dean and Chair Professor of Commercial Law (2019–2022) City University of Hong Kong

Preface Nearly thirty-three years ago, Lord Goff delivered the first in this series of lectures that bear his name. In the 24th lecture of this series, I refer to how I was intimately involved in setting up the series. In 1990, Lord Goff was President of the Chartered Institute of Arbitrators and I was both Chairman of the then Hong Kong (now East Asia) Branch of the Chartered Institute and the Judge in Charge of the Arbitration and Construction List of the then High Court in Hong Kong. Thanks to the foresight of my friend the late Professor Derek Roebuck, Lord Goff was invited to give a lecture during his visit, and this became the first in this eminent series. At about this time, Professor Roebuck was just beginning his epic series on the history of arbitration, which he very nearly finished before his death in April 2020. Fortunately, the final volume is in the process of being written. Furthermore, the co-editors of the present volume had the pleasure of co-editing a Liber Amicorum dedicated to the life and achievements of Professor Roebuck.1 As the lectures built up over the years, it occurred to us that the time was right to include them in one volume. How could we not publish a collection of lectures from the who’s who of international arbitration and spanning globally such formative years as 1990 to 2022? Roughly a third of the lectures were delivered by persons who were or would later become Law Lords, the Chief Justice of Australia, the Chief Justice of Singapore, the Chief Justice of the Commercial Division of the Supreme Court of New South Wales in Sydney and the Chief Justice of the DIFC Courts in Dubai. The remaining lecturers were leaders in their field of arbitration and academics of distinction. We believe that this collection will be of great use to students of arbitration at all levels. The high standard of these lectures matches the City University of Hong Kong’s commitment to be in the forefront of teaching arbitration and alternative dispute resolution. Having introduced a Master’s degree in Dispute Resolution before most other universities, City University has maintained its pioneering activities by supporting this lecture series. Most of these lectures have previously been published elsewhere and we are very grateful to all who have given permission so that these can be included in one volume. We are also grateful to those lecturers who took the time - long after the event - to update their lectures in the light of subsequent events and developments. I would like to pay a special tribute to the former Dean of City University’s Law School, Professor Tan Cheng-Han SC, for his fulsome support of this project. Thanks are also due to Christopher To, who has been extremely supportive throughout this project. Last but not least, we are also grateful to Judy Xu of City University, who bore the brunt of liaising with the publishers, the authors and myself.

1 Neil Kaplan and Robert Morgan, Lawyer, Scholar, Teacher and Activist: A Liber Amicorum in Honour of Derek Roebuck (2021, Oxford: HOLO Books: The Arbitration Press). This includes a literature review of Professor Roebuck’s arbitration volumes by Robert Morgan at pp 329-373.

Having reviewed all the lectures in this series, the standout for me was that they were all relevant to today’s arbitration scene. Although, as an example, arbitrability has faded a little as a hot topic, its bounds still need to be stated. Truncated tribunals will continue to cause problems. The law of the arbitration agreement and other relevant laws referable to an arbitration frequently require to be considered and were recently so considered by the United Kingdom Supreme Court. Enforcing an award that has been set aside at the seat still fascinates academics and sometimes engages enforcing courts. The importance of good faith in arbitration has been rightly emphasised by the late Johnny Veeder QC in his lecture and we see express reference to the concept in many procedural orders today. The late Professor David Caron’s ‘Rule of X’ taken up by Lucy Reed is a timely reminder that some arbitrators accept too much work, and this causes adverse consequences. Public policy and arbitral autonomy are still topics ripe for discussion. It is fitting that the penultimate lecture covered in this compendium, by Chief Justice Sundaresh Menon of the Supreme Court of Singapore, is on the very relevant topic of the complexification of disputes in the digital age. This lecture is a stark reminder of the challenges ahead and the effect they will have on the way we currently carry out our functions. I was delighted that Robert Morgan JP was able to join me as Co-Editor. His meticulous editing and proof reading will surprise even the original lecturer with its elegance and accuracy. We have worked together on other books and his standards have inspired me. All of us concerned with producing this volume hope that this collection of lectures will adorn your bookshelf and thus enable you to dip into it from time to time and extract some of the collective wisdom contained therein.

Neil Kaplan KC CBE SBS 6 March 2023

About the Master of Laws in Arbitration and Dispute Resolution The Master of Laws in Arbitration and Dispute Resolution (LLMArbDR) Programme at City University of Hong Kong School of Law was established in 1991 and was, at that time, the first Master’s degree programme in arbitration and dispute resolution in Asia. In 2011, it became the first programme recognised by the Chartered Institute of Arbitrators to offer the ‘Advanced Award Writing course (LW6409B)’ in Hong Kong. Every year, we receive over 500 applications competing for one of 100 places in the programme. Over 200 students are currently enrolled in this popular programme, one which has acquired an outstanding reputation both within and outside of Hong Kong. Dispute resolution does not only take place in the courtroom through litigation, but also through arbitration and mediation, which are increasingly popular and well-respected alternative dispute resolution (ADR) techniques. The programme offers a unique blend of academic and practical training in a broad range of dispute resolution methods, with emphasis on domestic and international arbitration, as well as on mediation, adjudication and negotiation. Many of our graduates have become leading experts in arbitration, mediation and other forms of dispute resolution. The programme inspires leadership in these areas and is taught by highly qualified and experienced professionals from the industry. City University of Hong Kong strives for excellence in preparing and equipping students for professional practice within the dispute resolution industry. To this end, the School of Law and the LLMArbDR Programme continue to collaborate with a number of leading ADR institutions, including the Hong Kong International Arbitration Centre (HKIAC), the Chartered Institute of Arbitrators (CIArb), the Hong Kong Institute of Arbitrators (HKIArb), Hong Kong Mediation Accreditation Association Limited (HKMAAL) and the African Legal Consultative Organisation (AALCO) Hong Kong Regional Arbitration Centre. All of these organisations play an active and pivotal role in supporting the programme, promoting arbitration and mediation services, and maintaining the standards of arbitrators and mediators in Hong Kong.

About the Goff Arbitration Lecture The Goff Lecture was instituted in 1990 by the City University of Hong Kong to celebrate the commencement of our Master of Arts in Arbitration and Dispute Resolution. The first lecture was delivered by Lord Goff of Chieveley, a Lord of Appeal, who then consented to the series bearing his name. The Goff Lecture provides an excellent opportunity for discussion and exchange of views among practitioners and academics in the arbitration field. Over the years, it has gathered 24 eminent scholars to share their views and philosophies on developments and opportunities within the arbitration domain.

Future Imperfect Lord Goff of Chieveley*

I. Introduction I am greatly honoured that my name should have been given to this new series of lectures on arbitration, and that I should have been invited to deliver the first lecture. Of course I appreciate that, since the subject-matter of these lectures is to be arbitration, it is because I happen at the moment to be President of the Chartered Institute of Arbitrators - an institute which is very proud of its thriving branch in Hong Kong - that my name has been chosen. I have to apologise, however, for the fact that my name is so inelegant, so abrupt, and so unmusical. Even worse, though I suspect that you, Professor Roebuck, were unaware of it, it is no more than the Celtic equivalent of the occupational name which we know so well in its Anglo-Saxon form of Smith. Long ago, my ancestors must have been useful but humble citizens of Cornwall, members of that attractive, artistic but, some think, feckless race which was driven by ferocious tribes almost out of Europe to what, in this part of the world, might appropriately be called the Atlantic Rim. It was for you, Professor Roebuck, and your colleagues, to choose a title for this series of lectures. It is, however, for me to choose the title of the first lecture. I have chosen the title ‘Future Imperfect’. But I do not intend to talk about English grammar. I intend rather to talk about arbitration in the context of a particular aspect of our legal culture which is, I believe, of its very essence. I refer in particular to our rejection of the abstract in favour of the concrete; to our preference for gradual development, rather than revolutionary change; to our conviction, as a result, that there is no perfect solution to our problems, only a series of temporary solutions which may in due course themselves require to be modified or abandoned as circumstances change. In other words, I speak to you as a proponent of the working hypothesis as the basis upon which we all have to work. But I also speak to you and this is of particular relevance to arbitration - as one who sees not only beauty, but also utility, in diversity. It is not, as I see it, incumbent upon us all to adopt the same solutions, and it may ultimately be to the benefit of us all if we do not do so. What each one of us chooses to do must depend upon our own judgement of our own interest, in the circumstances in which we find ourselves, We have however, to remind ourselves that, in the shrinking world of today, those interests are more likely than ever before to be shared with others in this world; and that in the case of international arbitration, a process not so much of harmonisation as of approximation may be seen at work as each country seeks to present its own system as providing an acceptable forum for the resolution of disputes.

* Lord of Appeal in Ordinary. This was the First Goff Lecture, delivered at the then City Polytechnic of Hong Kong, 18 October 1990. Editorial note: It was orginally published at (1992) 1(1) Asia Pacific Law Review 1-12.

The Goff Arbitration Lectures 1990-2022

The world in which we find ourselves is indeed shrinking, but it is also changing at a rate more rapid than we have ever known before. For those of us who live in Europe, our eyes during the past year have been fixed upon the great leap for freedom in Eastern Europe, which we have watched with astonishment, with admiration, and with joy, as the citizens of proud countries have cast off their chains, the Cold War has literally been hacked down, and the Cold War has thawed and melted away like the snow in summer. The consequences are incalculable, though the emergence of a mighty Germany at the heart of Europe is there for us all to see. How far this profound political and economic fact will affect the present balance of arbitration centres in Europe cannot yet be discerned. Even so, the future of the European arbitration centres, important though they are and still more important though they are likely to be, cannot be considered in isolation. They have to be considered in a global context, both in relation to the United States and, for present purposes more important, the Far East. Events in Eastern Europe apart, the most significant development in recent years has been the enormous, and still continuing, growth of the economies on the rim of the Pacific Ocean, which now constitutes an area of economic importance as significant as those of Europe and North America. Again, we are only beginning to understand the impact of this upon the world as a whole. This is profoundly true of the future of arbitration in this region. The picture of arbitration in the Far East has yet to emerge; and all those interested in arbitration centres in this area are not merely flinging their hats into the ring, but gazing deeply into the crystal ball in an effort to read the future. In the past, international commercial arbitration has gravitated toward centres of economic power. The most obvious examples are London in the nineteenth century and New York in the twentieth, though it is important for us all to ponder how and why London has retained its position despite the relative economic decline of the United Kingdom. Other centres have emerged for other reasons. Paris has emerged as the home of the institutionalised arbitration; I speak of course of the International Chamber of Commerce. Rotterdam and Hamburg are significant centres of commercial arbitration. Stockholm has emerged as the venue preferred by Eastern European countries, including the Soviet Union, because of its neutrality, a characteristic shared with Geneva and Vienna. How far neutrality will, in this context, continue to be of importance after the end of the Cold War remains to be seen. It is of some interest to observe that neutral countries in Europe are now showing signs of wishing to join the European Community. Indeed for Vienna, its further importance may in future derive not so much from neutrality as from its position as a German-speaking centre set at the heart of the old Austro-Hungarian empire. It is interesting to consider the position of the Far East against this background. A test of economic strength would point to Japan as a future centre of arbitration. So far, however, there have been few signs of this development taking place. This appears to be due, in part, to a cultural distaste for dispute resolution in any form which involves confrontation, in part to the comparatively modest position of lawyers in the Japanese social and political hierarchy, in part also to the protectionism of the Japanese legal fraternity, and to linguistic problems. There are now signs of change, and of active steps being taken to promote change. How quickly change will take place, and how far it will go, must be a matter of speculation.

[1990]

Another candidate must be Beijing as the Chinese economy continues to develop. Apart from political problems, there are cultural and linguistic difficulties similar to those in Japan, though here too we can see active steps being taken to promote change. Another candidate is Australia, and another is, I imagine, Singapore. And there is yet another candidate, close at hand; that is, of course, Hong Kong itself. Hong Kong possesses great advantages. Culturally, it provides a bridge between East and West, which enables it to gain the confidence of citizens and corporations of both Eastern and Western countries. Linguistically, it is competent not only in the Chinese languages but also in English, which is the lingua franca of the commercial world - though the impact of this may in future be of less importance in Central and Eastern Europe, where German may well reassert itself, at least in those countries which once formed part of the Habsburg empire. Hong Kong has also, through its close connections with the common law world, a source of strength in the sense that it can draw, with full understanding, upon the experience of the Anglo-American legal culture, and notably upon English commercial law. But in the end, as I see it, its great strength lies in the fact that it is a truly international trading centre, whose commercial strength has been to a large extent derived from that central fact. I do not propose to attempt any assessment of the likely outcome of this developing competition between nascent arbitration centres in the Pacific region. Obviously, I lack the competence to do so; many people in this room must have greater knowledge of the subject, and greater competence to make such an assessment than I have. My only advantage is that, by reason of my lack of expertise, I can perhaps survey the scene with a greater sense of detachment. From my distant viewpoint, I see great efforts being made by those directly involved in arbitration in Hong Kong to develop the facilities in the territory, now admirably supported by the Government. I also see the exercise of innovative skills, characteristic of our common culture, and I see a pervading sense of realism. I shall be referring to some aspects of the developments which have recently been taking place in Hong Kong as illustrations of the central thesis of this lecture - notably, the adoption of the UNCITRAL Model Law, with its resultant impact upon the process of the power of review of arbitration awards by the courts, and the development of what is nowadays called Alternative Dispute Resolution. But at this stage, I cannot forbear from expressing my admiration for the setting up of the Arbitration Centre in Hong Kong, a project which the Hong Kong Government has so far-sightedly supported both financially and in other ways. And I wish also to record my admiration for the work done in the cause of arbitration in Hong Kong by my old friend David Hunter (Mr Justice Hunter) - we were undergraduates together at Oxford University - who so sadly cannot be with us here today. Not only has he been a tireless and extremely practical source of strength for the cause of arbitration in Hong Kong; he has also been, on occasion, an admirable ambassador for arbitration in Hong Kong on visits overseas. I tum then to the first of my two special topics, which I believe to be of particular importance for arbitration in Hong Kong, and which I wish to use as illustrations for my central thesis. This is the adoption by Hong Kong of the UNCITRAL Model Law.

The Goff Arbitration Lectures 1990-2022

II. The UNCITRAL Model Law The UNCITRAL Model Law has been the subject of much discussion in Hong Kong, London and elsewhere throughout the world. There have been one or two predictable reactions. In some countries, where the indigenous arbitration law has been perceived to be Jess than satisfactory - perhaps because it was incomplete, or because it was scattered among diverse sources - the adoption of the Model Law has solved a domestic problem by providing a unified, coherent arbitration law contained in one instrument. In other countries, the adoption of the Model Law has been perceived as providing an attraction to overseas customers to arbitrate in those countries. In yet other countries, in particular those with highly developed laws of arbitration, the adoption of the Model Law has been resisted on the ground that to adopt it would create a new source of uncertainty in place of principles defined in detail in a mass of judicial decisions. I hesitate to comment on these various reactions, except to stress that circumstances are indeed different in different places and that different pressures may lead to different attitudes being adopted to the UNCITRAL Model Law. I entirely accept that for countries without a developed arbitration law the adoption of UNCITRAL may well provide a benefit by assuring possible customers that there are, so to speak, no hidden minefields in the arbitration law of that country; no doubt that is all to the good. I understand too that, for some countries which are seeking to promote themselves as arbitration centres, the adoption of UNCITRAL may well be a desirable, if not a necessary, condition to so establishing themselves. But I do wonder whether the adoption of UNCITRAL will of itself provide a positive attraction. I have been much impressed by two papers presented by Arthur Marriott, one at last year’s annual conference of the Chartered Institute of Arbitrators in Stratfordupon-Avon and the other at this year’s annual conference in London, only about ten days ago, in which he expounded the thesis that the development of new centres of arbitration is likely to be dependent upon other factors - economic, cultural, political, geographic and linguistic. It is of interest for us to contrast the different approaches which have been adopted in this respect by England and Hong Kong. Hong Kong is, as I see it, to be numbered among those jurisdictions which have thought it desirable to adopt the Model Law, in furtherance of a policy to promote itself as a centre of arbitration. In England, on the other hand, it has in effect been decided not to do so. This was basically the result of a comparative assessment carried out by Lord Justice Mustill’s Committee on Arbitration Law, in which the differences between English arbitration law and the UNCITRAL Model Law were isolated and the English solutions were, on balance, preferred. My own opinion, for what it is worth, is that both decisions were well-advised, and that they demonstrate very clearly that the interests of different countries may, in certain circumstances, call for different solutions. A central element in the discussion has been the appropriate attitude to be adopted to the question whether the courts should have power to entertain an appeal from an arbitration award on a question of law - a process which our American friends call judicial review, whereas nowadays we regard it as a matter of appeal. The American view has always been that no such power should be vested in the courts - a view which is shared by those who drafted the UNCITRAL Model Law. Historically, the English courts were vested with a power to set aside awards on the ground of error of law, and to entertain appeals by way of a case stated. Now, however, that jurisdiction is heavily curtailed. In the case of

[1990]

international arbitrations, parties can in most cases simply contract out of the court’s power, either before or after the commencement of a dispute. Exceptionally they cannot do so before the commencement of the arbitration - in disputes concerning maritime, insurance or commodity transactions. Even there, however, an exclusion agreement is valid if entered into after the commencement of the arbitration, or if the contract is governed by a system of law other than English law. Furthermore, even where there is no exclusion clause, a disappointed party who wishes to invoke the court’s assistance to correct a supposed error of law must obtain leave to appeal; and by judicial guidelines laid down by the House of Lords, derived by some rather remarkable processes of construction from the Arbitration Act 1979, that right of appeal is stringently limited. I do not need, however, to explore the precise nature of these limits today. Limited as it now is, the opportunity to appeal on questions of law now available in English law is still criticised today, especially by our American friends. This is perhaps understandable, having regard to the view which has traditionally prevailed in the United States, though it also derives from a perception that the English courts are prone to unwarranted interference in the process of arbitration - a perception which is roundly condemned by Lord Justice Mustill’s Committee as having no foundation in history or in fact. We have, however, to bear in mind that, when Lord Justice Mustill’s Committee, and the Commercial Court Committee before it, recently enquired of all those concerned with arbitration in the City of London, whether the restricted right of appeal should or should not be continued in existence, there was virtually no support for the view that it should be abolished. This is of itself of some interest. Moreover, underlying the original decision to retain the three areas in which exclusion clauses are restricted is the simple fact that in them, not only has London been the dominant centre since the nineteenth century, but also that there has developed a great mass of applicable law, set out in the reported cases, which are applied all over the commercial world. These are the fruit of judicial decisions by commercial judges, often men of very considerable distinction, who have spent their working lives in the closest contact with the commercial centres in the City - the Baltic Exchange, Lloyd’s and the principal commodity trades. As barristers, they have advised innumerable clients. They have worked with commercial solicitors and the P & I Clubs. They have also appeared before arbitrators and they have sat as arbitrators, often with brokers and other commercial men. Even after they have become judges, they have maintained very close contact, especially with the commercial barristers, the City’s solicitors’ firms and the arbitration fraternity. Historically, they have included, and still include, some of the principal scholars in the field of commercial law. Indeed the leading scholars in that field are to be found, in England, not so much in the universities as at the Bar or on the Bench. The decisions of the commercial court in England are recorded in books such as Scrutton on Charterparties and Arnould on Marine Insurance - books which are used in the offices of shipowners and other commercial men all over the world. In maritime law, in the commodity trades and in insurance, we find ourselves in the world of the standard form. And when arbitration or litigation occurs in other countries, they may well look for English decisions, especially on the construction of standard forms of charterparty or of Lloyd’s standard form of marine insurance policy, to guide them in construing contracts based on these forms even when they are expressed to be governed by a system of law other than English law. In

The Goff Arbitration Lectures 1990-2022

my own time as a commercial Queen’s Counsel, I remember advising an Italian arbitration tribunal on the construction of a clause contained in a charterparty between Italian shipowners and Bulgarian charterers, governed by Italian law. I remember too advising the Egyptian nationalised insurance company on a claim by the Egyptian nationalised Suez Canal Company under an insurance policy, in Lloyd’s form but governed by Egyptian law, in respect of a ship sunk by Israeli aircraft in the Suez Canal. There has been a strong feeling that this source of knowledge, perhaps unique in the commercial law of the world, should not simply be cut off. Hence the conclusion that there should not be a wholesale exclusion of the right to appeal, but rather a closely restricted right, as established under the guidelines laid down by the House of Lords. I wish to add that I was very struck by the fact that, in the course of the Conference on Maritime Disputes held earlier this week in Hong Kong, there was much reference to the English authorities in the course of our discussions and demonstrations. Even so, the English approach to appeals on questions of law runs counter to that being adopted nowadays in many countries, at least for international arbitrations, and not by any means exclusively by the adoption of the UNCITRAL Model Law. Notable examples are to be found in recent legislation in Belgium, France, the Netherlands and Switzerland. Furthermore, I have no doubt that American lawyers regularly advise their clients to enter into an exclusion clause whenever they can, and that their attitude must to some extent militate against the adoption of London as a venue for substantial one-off arbitrations. However, the point I wish to make is a simple one. The considerations which have impelled England not to adopt the UNCITRAL Model Law and to retain a closely restricted system of appeals on questions of law are matters of limited or of no relevance in Hong Kong, and are surely outweighed by the policy considerations which have persuaded Hong Kong to adopt the UNCITRAL Model Law. I only wish to reinforce my comment that UNCITRAL is, for Hong Kong, a prerequisite of, rather than a positive means for promoting, Hong Kong as an international arbitration centre. For such promotion, other steps are necessary, as I am sure that all those concerned in this Territory are very well aware. As a footnote to my observations on the UNCITRAL Model Law, I wish to say a few words about the harmonisation of arbitration law. Harmonisation of laws, in the true sense of bringing them into accordance with each other, is really too much to expect, certainly in the short term. We in the European Community have seen what a difficult and painful process it is. Indeed, the whole concept is the fruit of an idealist approach to the law, more in vogue among our academic friends than with the lawyers who spend their days in the courts or in lawyers’ offices. In truth we have to recognise that, in the diverse legal systems of the world, each has its own integrity. Not only that, but there are benefits to be derived from diversity as well as from harmony. This is particularly true in the world of international arbitration, in which diversity presents our customers with a range of systems and of procedures from which parties can choose the venue which they perceive to be best suited to their particular dispute. After all, if we believe in a free market, we should be in favour of a free market in arbitration centres. Freedom of choice presupposes that there is a variety to choose from. More important still, the existence of this freedom of choice is prompting all the major centres to reconsider their systems and to introduce improvements which, while by no means identical, demonstrate a significant harmony of view. Competition is therefore promoting an

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approximation in our arbitration laws. This is not merely a thoroughly healthy development; it is surely of greater benefit to the international commercial community than an identical system universally applied. This prompts me to make a similar observation, not so much about our law, as about our procedure. Since the Second World War we have seen something which can almost be regarded as a crisis of confidence in some countries of the world, as each of us looks critically upon our own legal system and we wonder anxiously whether the systems in other countries have come up with better answers than we ourselves have produced. There has been talk, and perhaps more than talk, in some common law countries of moving towards a more inquisitorial system of procedure. Likewise in some civil law countries, there has been talk, and perhaps more than talk, of moving toward a more adversarial system. This, if true, is surely all to the good. Perhaps, one day, we shall discover that Darwin was right, not only about the natural world around us, but also about the legal world, as processes of natural selection weed out the defects in our respective systems of procedure. But in procedure, as in law, there is no doubt that arbitration is one of the world’s great market-places, where there is genuinely free trade in ideas. International commercial arbitration is one of the principal areas in which common lawyers and civil lawyers meet in a professional context on equal terms, not only as advocates but also sitting as members of the same tribunal. We learn of the development of procedures which are neither specifically common law nor specifically civil law but draw elements from each system. In the European Court of Justice since the advent of the United Kingdom and the Republic of lreland, there has been a graceful bow in the direction of the common lawyers in a generous recognition of the professionalism of the advocacy which comes from those countries. But international arbitration sees a true meeting, and to some extent, on some occasions at least, a true merger of the different systems, in a search for a more effective procedure.

III. Alternative Dispute Resolution (ADR) I tum next to the subject of ADR. New developments in the world of arbitration are very often the result of new pressures, mainly of an economic kind. Certainly we can place in that category the ADR movement, the initials ADR standing, at the moment, for Alternative Dispute Resolution. I say ‘at the moment’ because at our annual conference in London, where there was much discussion about ADR, other meanings of ADR were proposed, in particular Additional Dispute Resolution; the idea being, I understand, that the traditional methods of adjudication and the new are not mutually exclusive. My own view is that we should not trouble ourselves too much with definition. So long as we know what we are talking about, it does not really matter too much what we call it. We all know that the birthplace of ADR, at least in its most recent form, is the United States of America. I myself regard the American readiness to experiment, and the American energy and enthusiasm in the pursuit and application of new ideas, with mingled admiration and gratitude. I admire the dynamism of American society and I am grateful that the United States should have constituted itself as the legal laboratory of the world, for the benefit not only of itself, but even more so of other countries who are wise enough to watch their

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developments with interest and yet with caution, and who are, as a result of their efforts, spared the painful processes of experiment. Of course, the American enthusiasm embraces not merely experimentation, but also pressing its new ideas on others and a certain intolerance of those who do not immediately agree with them. Our American friends have been busily propagating the gospel of ADR around that world, with almost missionary zeal. At first their efforts have met with some scepticism, certainly in some of the European countries. This. scepticism has not been without foundation. We must never forget how strong the economic pressures are in the United States which have led to the birth of this new phenomenon. In litigation, the costs of legal representation are very high and, even if a litigant is successful, the costs are not recoverable from the unsuccessful party. There is the burden of a system of oral discovery, which can be protracted to intolerable lengths. There are overcrowded lists, leading to great delays in cases coming on for trial. Some at least of these pressures exist in the case of traditional arbitration, as well as in litigation. All these, and other things, have pointed to the need for some alternative method of disposing of disputes, if that can be found. I doubt if these pressures exist quite to the same extent in England, or indeed in Hong Kong. Moreover, ADR has, in limited forms, been around for a long time. In its most basic form, we know that in our legal system, and I have no doubt also elsewhere, the great majority of lawyers perceive it to be part of their duty to their clients to promote the amicable settlement of disputes, and judges have taken an active part in this process, so far as it is consistent with their judicial functions to do so. Special systems of ADR have developed in various countries to meet special needs. I am fortunate to have the opportunity of visiting Japan after I leave Hong Kong and, in the course of my reading about the Japanese legal system in preparation for my visit, I stumbled upon a remarkable example of ADR, which has been available since 1978. I refer to the Centre for the Settlement of Traffic Accident Disputes in Tokyo, funded by the insurance industry, where more than 100 attorneys work part-time, giving advice and acting as conciliators in disputes. In one year, 1986, the Centre advised on 11,653 cases; in 1,671 cases, the parties reached a compromise. In this way, delay is greatly reduced, as are costs. I have been told that, in most cases, the dispute is settled after four or five visits to the Centre; and that the time needed for each is about 100 days. Here, surely, are lessons for us all. More important, it is a special feature of at least some civil law systems, that it is formally established that the role of the mediator is conferred upon the judge, so that mediation by the judge is an accepted feature of those systems. This factor has been suggested by lawyers from those countries as providing of itself a reason why ADR is not so attractive to them as it is to common lawyers. I myself suspect that economic factors are, as always, more important, in the sense that in, for example, Italy, legal costs are not nearly so heavy as they are in the United States. Some observers fear that mediation by a judge presents its own difficulties. It is thought that the prospect of a mediator embarking upon a process of adjudication if mediation fails may inhibit the parties from showing their hands during the mediation process; and that a mediator who has already expressed an opinion on the outcome during the mediation process may be less than acceptable to the parties as a judge thereafter. Certainly, one experience of mediation described by a German lawyer at our recent conference in London raised some doubts about the role of the judge as mediator;

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though, as our German colleague himself stressed, his example served rather to remind us of the importance of the personality of any mediator or conciliator, and of the importance too of training for those who are regularly involved in those activities. In any event, we are assured by our lawyer friends from civil law countries, and indeed from American lawyers who have been involved in the mediation process, that in practice there is no difficulty in a mediator acting as judge thereafter if the mediation process is unsuccessful. In all events, we do not see much evidence of enthusiasm for ADR among our European colleagues. This may provide some explanation of the remarkable fact that although the ICC has for some years had in place detailed provisions in their rules for ADR, so far these have very rarely been invoked. In the common law countries, however, ADR is being looked at very seriously indeed, though I believe with reasonable caution and with clarity of vision, realising that ADR, like everything else in the world, has its vices as well as its virtues. There is very great interest in it in the United Kingdom. We have a system of annual legal exchange with the United States, under which judges and lawyers regularly visit each other’s countries to study legal developments there. ADR has, in recent years, been very high on the agenda. The Chartered Institute has, of course, been devoting a great deal of attention to ADR. Next month, for example, a day’s conference is being mounted in London by the Chartered Institute devoted entirely to ADR. Here England is fortunate in having the benefit of experience from pioneering schemes already in force in countries such as Canada, and, of course, in Hong Kong. I have been very anxious that, while I am here, I should learn something of the scheme which is now, I understand, in place here for arbitrations in the construction industry. I am particularly interested also to learn about views in Hong Kong about the binding nature of the conciliation process, both in Hong Kong itself and in the People’s Republic of China. I foresee that similar developments are very likely to take place in the United Kingdom. I speak not only of arbitration, but also of the courts. There are great pressures on the courts, especially upon the County Courts to which extra work has been transferred in order to relieve the pressure on the High Court. There are proposals to introduce a system of conciliation or mediation in the County Court, and also to introduce a form of court-annexed arbitration. But, so far as arbitration is concerned, it is in the construction industry that the greatest interest is being shown. It must not be forgotten that the construction industry is by far the greatest source of arbitration in England, and indeed that arbitrators from the construction field constitute over eighty per cent of the membership of the Chartered Institute. It is, however, doubtful whether maritime arbitration provides such a fertile field for ADR. In the first place, disputes in the maritime field are of a different character. Many of them are concerned with issues of law, particularly issues on the construction of charterparties. Disputes of complexity, in particular of factual complexity, on the scale which occur in the construction industry, seem to be comparatively rare. I suppose that they can occur in shipbuilding contracts; even there, I imagine that they usually get ironed out either during or after the ship’s trials. But there is another factor at work. It is not to be forgotten that, in the construction industry, there is usually a single arbitrator; whereas in maritime arbitrations, it is customary for each side to appoint its own arbitrator, the two then having power to appoint an umpire or a third arbitrator in the event of their being unable to agree on the outcome of the dispute. It has been suggested that this system is uneconomical, in the sense that a single

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arbitrator can advance the arbitration process more rapidly, and that a single arbitrator’s fees will, in any event, be less than the fees of three arbitrators. But the parties still seem to be happier to appoint their own arbitrators, despite the well-known fact that the identity of the appointor has no impact upon the arbitrator’s impartiality. The effect of this system of appointment used to be that, at the initial stages of a maritime arbitration, there was considerable pressure in favour of agreement being reached through the medium of the two arbitrators appointed by the parties, and many arbitrations were disposed of in this way. This is not, of course, the same thing as conciliation or mediation by an independent person; but to some extent it served the same function. However, I understand that this useful process is no longer so effective in modem circumstances, which is perhaps a pity. If so, the maritime arbitrators would, I believe, be well advised to look closely at the new ADR procedures. If we look back at the development of ADR, our survey will serve, I believe, to substantiate and indeed underline the thesis of my lecture. In particular, I respect the different approach of the civil law countries. All legal systems have their own traditions and their own practices; and different legal systems may be subject to different pressures. We must not be surprised if there is diversity; and this very diversity may be of assistance to us all as we benefit from each other’s experience. Even in our own legal system, we can see different practices and different pressures at work, in the construction industry and in the maritime field. It follows that our approach to these things must, in the tradition of the common law, be pragmatic and not doctrinaire: and I believe that we are all well aware of this need.

IV. Conclusion If we stand back from our subject, what do we see? We see almost a state of ferment in the world of arbitration. We see a background of enormous political and economic changes. In Europe there is fragmentation in the East and cohesion in the West, with at the centre a powerful, united Germany. In the Far East there is immense economic growth which is changing the face of the world, and the great question of the future of China. We see an enormously increased interchange of ideas about arbitration through publications and meetings, and we see a far greater readiness of different systems to learn from each other. We see the continuous growth of the English language as the lingua franca of commerce, encouraging the free trade in ideas; yet we see the first real challenge to that growth since the Second World War, as the German language begins to reassert itself in central Europe. We see a tendency towards a form of unification of arbitration law, in the production and gradual adoption by some countries of the UNCITRAL Model Law; and yet at the same time we see other countries reasserting that there is a free world market in arbitration, and that customers should be given the opportunity to choose between different systems. At the same time, all over the world, we see arbitration centres, large and small, seeking to promote themselves in order to attract customers. We see the economic pressures of cost and delay promoting experiments in the nature of a spectrum of new forms of dispute resolution, whose value and efficacy are gradually being assessed in different circumstances in various countries of the world. And we see, in true international arbitrations, a meeting place between different legal cultures, in a context where national rules and national structures seem to diminish in importance, where the processes of natural selection are at work uninhibited by such rules,

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where there is a true mingling of systems of procedure, and where personal excellence and professionalism, from whatever country, is at a premium. It is for all these reasons that it is true to describe international arbitration as a melting pot, from which new ideas can emerge and new structures can be formed and forged. The legal systems of the world would be well advised to keep abreast of these developments. All of us are locked in our own national systems; though the common lawyers are very fortunate in the experiences which they share with so many different common law countries throughout the world. We are also fortunate in the long tradition, which has its origin in the relationship between the Commercial Court and the arbitrators in London, and between the Official Referees in the Royal Courts of Justice and the construction industry, of the judges being deeply involved in arbitration - in their practices at the Bar before they are elevated to the Bench, in their work in court, in personal friendship with leading arbitrators, in their involvement in the leading arbitration institutions, and in the processes of reform of arbitration law and procedure. I have naturally been very glad to see that tradition continuing, with renewed strength, in Hong Kong. It is a tradition which is of mutual advantage for both arbitration tribunals and the courts. In particular, we are now seeing the courts learning more and more from developments in arbitration, and drawing on that experience to streamline and revitalise the court processes. Conversely, however, arbitration derives great benefits from a close relationship with the judges. In judicial work, at its very best, there is high intelligence and an intense discipline, a power of analysis and a sense of relevance, a habit of order and a mastery of detail, coupled with a power to segregate and focus upon the real issues. Inside our own common law system, the interplay between the judicial virtues on the one hand, and the essential arbitral virtues of practical experience and practical expertise on the other, can be immensely fruitful. Fundamentally, however, at the heart of it all, whatever the system may be, whatever reforms may be adopted, the bedrock qualities of good arbitration are twofold - profession alism and integrity. These are the qualities which every arbitrator has to cultivate and maintain. In the modem world, professionalism is of the essence, and marks out the arbitrators, and the arbitration centres, of the future. But without integrity, any judicial system or arbitral system is flawed. Integrity is the prerequisite of everything; and, I may add, confidence in the absolute integrity of the arbitrators is what most attracts the lay clients of this world.

Arbitrability Justice Andrew Rogers* In the last decade at least in the industrialised countries, courts adhering to the common law system, have enlarged the permissible field of arbitrability beyond all recognition. The Supreme Court of the United States has led the field. Is the world of arbitration putting at risk the adherence of a large part of its constituency, particularly in the developing world? Where is the line to be drawn? Do we have it right? Arbitrability of a dispute may come into question at two different stages of the dispute resolution process and may fall for determination in accordance with two or more systems. The first stage is at the commencement of the process. A national court may be asked to stay curial proceedings, instituted in apparent contravention of an arbitration agreement. A stay may be refused on the ground that, according to the relevant national legal system, the dispute is not susceptible of determination by arbitration. Alternatively, at that point a national court may be asked to affirm, by some appropriate declaration, or order, the enforceability of an arbitration clause. The other point where the question may arise is at the enforcement stage. Then, the question may arise in one, or more, countries where the award may be sought to be enforced, whether recognition should be refused on the ground that the subject matter of the dispute was not capable of settlement by arbitration ‘under the law of that country’.1 Self-evidently, at the present time, it is possible that the various national legal systems invoked may return different answers. The restrictions on arbitrability rest on twin concepts imposed by the courts. First, it is accepted that certain disputes, by reason of their very character, fall to be determined by the courts and are inappropriate for arbitral decision. Second is the requirement that disputes be determined in accordance with certain mandatory obligations of the municipal law. The two concepts are related in that a principal reason for requiring determination by the courts was the perception that only a court could correctly interpret public law, particularly a statute, relating to the dispute and give effect to it in accordance with the wishes of the national parliament. As Professor Park put it: The central theme in nonarbitrability cases is a concern that society will be injured by arbitration of public law claims. Courts express a fear that public law issues are too complicated for arbitrators; that arbitration proceedings are too informal; or that arbitrators are like foxes guarding the chicken coop, with a pro-business bias that will lead to under-enforcement of laws designed to protect the public. Lack of appeal on the merits of arbitral awards in the United States makes arbitration seem to some as a ‘black hole’ to which rights are sent and never heard from again.2 The sea-change in the approach to arbitrability in the United States is marked by the statement that:

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Having made the bargain to arbitrate, the party should be held to it unless Congress itself has evinced an intention to preclude a waiver of judicial remedies for the statutory rights at issue. Nothing, in the meantime, prevents a party from excluding statutory claims from the scope of an agreement to arbitrate.3 The burden lies on the party so claiming to show that Congress intended to preclude a waiver of a judicial forum.4 The Court in Mitsubishi explained that such an intention may be discovered not just in the text of the legislation, and its history, but also in an ‘inherent conflict’ between arbitration and the underlying purpose of the legislation. Bearing in mind that this approach to arbitrability had not come into full flower until 1985 it is hardly a source of surprise that, mostly, a clear manifestation of such Congressional intent cannot be found. It may be a harbinger of the future that, in the more recent Older Workers Benefit Protection Act, Congress provided in terms that an individual may not waive any right or claim under the Act, including presumably a curial determination, unless the waiver was ‘knowing and voluntary’. Specific requirements had to be met to satisfy that condition. The claims in Mitsubishi included alleged breaches of securities and anti-trust legislation. It had long been thought that these were areas which would be jealously guarded as the preserve of the courts, both because of their highly complex and technical nature and also because of their extreme importance to the economy of the state.5 Notwithstanding the vigorous dissent of three members of the Court, a majority of five judges considered that, in international transactions at least, the call of the arbitration provision must prevail. In Dean Witter Reynolds Inc v Lamar Byrd (1985),6 Justice White filed a concurring opinion in which he seemed to suggest that even in domestic arbitration the same view might well be taken. This anticipation was realised by the decision of the Supreme Court in McMahon. Mr and Mrs McMahon were customers of Shearson, a brokerage firm. They signed customer agreements which included arbitration clauses. They brought action in the Federal District Court alleging violations of the Securities Exchange Act and the Racketeer Influenced and Corrupt Organizations Act (RICO) as well as fraud and breach of fiduciary duties. Shearson sought to compel arbitration of all the complaints, the subject of the court proceedings. The Court of Appeals held that public policy considerations made it inappropriate to apply the provisions of the Arbitration Act to RICO suits. It distinguished the reasoning in Mitsubishi concerning the arbitrability of anti-trust claims on the ground that the transactions which gave rise to that dispute were international business transactions. In relation to the claim under the securities legislation the Court of Appeals relied on the decision of the Supreme Court in Wilko v Swan (1953).7 In Wilko the court held that the Securities Act forbade waiver of the right to a judicial determination because ‘Arbitration lacks the certainty of a suit at law under the Act to enforce (the Customer’s) rights’. The right to select a judicial forum was thought by the court in Wilko to be a particularly valuable feature of the Securities Act. In McMahon the Supreme Court reversed the decision of the Court of Appeals with respect to the RICO claim and by majority as to the securities legislation claim as well. The judges so held on the basis that there was no inherent conflict between arbitration and the statutes’ underlying purposes. The judgment of the Court was delivered by Justice O’Connor, who summarised the competing interests:

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The other reason advanced by the McMahons for finding waiver of their #10(b) rights is that arbitration does ‘weaken their ability to recover under the [Exchange] Act’. That is the heart of the Court’s decision in Wilko and respondents urge that we should follow its reasoning. Wilko listed several grounds why, in the Court’s view, the ‘effectiveness [of the Act’s provisions] in application is lessened in arbitration’. First, the Wilko Court believed that arbitration proceedings were not suited to cases requiring ‘subjective findings on the purpose and knowledge of an alleged violator’. Wilko also was concerned that arbitrators must make legal determinations ‘without judicial instruction on the law’, and that an arbitration award ‘may be made without explanation of [the arbitrator’s] reasons and without a complete record of their proceedings’. Finally Wilko noted that the ‘power to vacate an award is limited’, and that ‘interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation’. Wilko concluded that in view of these drawbacks to arbitration, #12(2) claims ‘require[d] the exercise of judicial direction to fairly assure their effectiveness’ ....8 Indeed, most of the reasons given in Wilko have been rejected subsequently by the Court as a basis for holding claims to be nonarbitrable. In Mitsubishi, for example, we recognised that arbitral tribunals are readily capable of handling the factual and legal complexities of anti-trust claims, notwithstanding the absence of judicial instruction and supervision.9 Likewise, we have concluded that the streamlined procedures of arbitration do not entail any consequential restriction on substantive rights.10 Finally, we have indicated that there is no reason to assume at the outset that arbitrators will not follow the law; although judicial scrutiny of arbitration awards necessarily is limited, such review is sufficient to ensure that arbitrators comply with the requirements of the statute11 (declining to assume that arbitration will not be resolved in accordance with statutory law, but reserving consideration of ‘effect of an arbitral tribunal’s failure to take cognizance of the statutory cause of action on the claimant’s capacity to reinstate suit in federal court’). This reservation in Mitsubishi appears to have been overlooked somewhat. It has been argued by commentators that the supposed protection is limited in a very significant respect. The opportunity for review is all well and good assuming that the claimant succeeds and obtains an award which it then seeks to enforce. However, where the claimant is unsuccessful in an international arbitration, held outside the country, there will be no opportunity for the national court to consider whether the claimant’s failure was due to the arbitrator’s neglect to apply, or to apply correctly, the anti-trust provisions. With due respect for that view, what the court had in contemplation was the possible resumption or, I suppose, institution of curial proceedings, if it could be demonstrated that the arbitrator failed to give effect to the relevant public law. This last statement, of course, begs the question: What is the standard by which the court is to determine the issue of alleged failure? This dicta in Mitsubishi has come to be known as the ‘second look doctrine’. As Professor Park pointed out:

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It is uncertain if the second look involves a broad examination of whether the arbitrator properly applied the law, or merely involves a mechanical examination of whether the arbitrator in fact considered the American statute. Mitsubishi thus exacts a problematic price for arbitrability of anti-trust matters. Judicial review of the contents of awards, at least for their conformity with public policy, is the cost for letting the dispute go to arbitration. In a situation like Mitsubishi the arbitrator is in a bind. If a contract includes a choice of law clause explicitly selecting the legal system of a country whose competition law fundamentally differs from that of the enforcement forum, the arbitrator, mindful of Justice Blackmun’s caveat, may nevertheless decide the anti-trust claims according to United States law. This departure from the parties’ express choice of Swiss law might increase the award’s chances of enforcement in the United States, but could open the door to a challenge of the award outside the United States not once, but twice. First, the loser in an arbitration in which the Sherman Act was applied could be expected to seek annulment of the award where rendered, on the theory that the arbitrator decided inconsistently with his mission, which is a ground for review in most major arbitral centres. Annulment would make the award more difficult to enforce throughout the world, because the New York Convention permits refusal of recognition to awards set aside in the country where made. Departure from the parties’ chosen law also might result in a challenge to enforcement of the award against assets outside the jurisdiction in which the award is rendered. Article V(l)(c) of the New York Convention permits the refusal of enforcement to awards when arbitrators decide matters not submitted to them, which is not a totally unreasonable characterisation of an adjudication of Sherman Act claims under a Swiss governing law clause. Because the mandatory national norms of the enforcement forum. often called lois de police. arguably may apply notwithstanding the parties’ choiee of law clause. the arbitrator could be required to choose whether to give effect to the will of the parties, or to respect the imperative rules of a country with a vital interest in the subject of dispute. Such an interest might exist in matters such as competition law, currency controls, trade boycott, environmental protection and bribery. Even if compatible with the policy of the place of arbitration, an award might run afoul of the mandatory public law of the place of performance, thus giving rise to a refusal of recognition of the award under article V(2) of the New York Convention.12 The concern expressed by Professor Park was put much more strongly by Professor Carbonneau, who argues that the majority must have contemplated ‘a form of merits review’.13 On that assumption he claims that the safeguard constitutes a retrograde step and draws attention to the effort it took in England to narrow the scope of judicial review in arbitration. Professor Carbonneau concedes that the Mitsubishi Court specified that the substantive review remain ‘minimal’ and proceeded to lend some definition to this,

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ascertaining whether ‘the tribunal took cognizance of the anti-trust claims and actually decided them’. Even Professor Lowenfeld, an otherwise strong supporter of the majority opinion, is not wholly convinced by the Court’s approach on this point.14 In McMahon, apparently untroubled by such concerns, the Court repeated the view that ‘although judicial scrutiny of arbitration awards necessarily is limited, such review is sufficient to ensure that arbitrators comply with the requirements of the statute’.15 It will be appreciated of course that many of the difficulties to which Professor Park refers arise from the fact that in Mitsubishi the parties had expressly chosen Swiss law as the applicable law.16 Presumably the rationale for this was that Mitsubishi Motors Corporation was a Japanese corporation owned by Chrysler International SA, a Swiss corporation and Mitsubishi Heavy Industries Inc of Japan. It is not clear to what extent the second-look doctrine is bound up with the statement by the Supreme Court in Wilko v Swan11 that an arbitrator’s ‘manifest disregard of the law’ in rendering an award could constitute a non-statutory ground for vacating an arbitration award. The only authoritative guidance to be had as to the scope of this defence at present, is in the opinion in Merrill Lynch, Pierce Fenner & Smith v Bobker (1986) where the Second Circuit said: ... [a]lthough the bounds of this ground have never been defined, it clearly means more than error or misunderstanding with respect to the law. The error must have been obvious and capable of being readily and instantly perceived by the average person qualified to serve as an arbitrator. Moreover, the term ‘disregard’ implies that the arbitrator appreciates the existence of a clearly governing legal principle but decides to ignore or pay no attention to it. To adopt a less strict standard of judicial review would be to undermine our wellestablished deference to arbitration as a favoured method of settling disputes when agreed to by the parties. Judicial inquiry under the ‘manifest disregard’ standard is therefore extremely limited. The governing law alleged to have been ignored by the arbitrators must be well defined, explicit, and clearly applicable. We are not at liberty to set aside an arbitration panel’s award because of an arguable difference regarding the meaning or applicability of laws urged upon it.18 There is authority in US District Court decisions that the doctrine is not available to resist enforcement of awards under the New York Convention.19 In ‘Manifest Disregard of the Law in International Commercial Arbitration’ (1990),20 the author concludes: To the extent that manifest disregard of the law might be used to impose American law and public policy on parties to international commercial contracts, it undermines the purpose of the Convention. Where this is the case, the ground has no place in international arbitrations. However, where manifest disregard of the law is limited to violations of international public policy, it could play an important role in judicial review of international arbitrations.21 There is another interesting aspect of the decision in McMahon that has not received a great deal of attention. One of the reasons given by the majority for accepting arbitration

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procedures as appropriate was that the Securities and Exchange Commission has power to abrogate, add to and delete from any rule if it finds such change necessary or appropriate to further the objectives of the Act. As the Court said: In short the Commission has broad authority to oversee and to regulate the rules adopted by the SROs relating to customer disputes, including the power to mandate the adoption of any rules it deems necessary to ensure that arbitration procedures adequately protect statutory rights.22 As a logical follow on to McMahon, the US Supreme Court, in de Quijas v Shearson/ American Express /nc23 finally overruled its previous decision in Wilko and held that predispute agreements to arbitrate disputes arising under the Securities Act were enforceable. The reversal of Wilko was another important milestone in the march to supremacy of the Federal Arbitration Act. In de Quijas, Justice Kennedy, for the majority, said: 24 Once the outmoded presumption of disfavoring arbitration proceedings is set to one side, it becomes clear that the right to select the judicial forum and the wider choice of courts are not such essential features of the Securities Act that para 14 is properly construed to bar any waiver of these provisions. Nor are they so critical that they cannot be waived under the rationale that the Securities Act was intended to place buyers of securities on an equal footing with sellers. Wilko identified two different kinds of provisions in the Securities Act that would advance this objective. Some are substantive, such as placing on the seller the burden of proving lack of scienter when a buyer alleges fraud.25 Others are procedural. The specific procedural improvements highlighted in Wilko are the statute’s broad venue provisions in the federal courts; the existence of nationwide service of process in the federal courts; the extinction of the amount-in-controversy requirement that had applied to fraud suits when they were brought in federal courts under diversity jurisdiction rather than as a federal cause of action; and the grant of concurrent jurisdiction in the state and federal courts without possibility of removal.26 There is no sound basis for construing the prohibition in para 14 on wa1vmg ‘compliance with any provision’ of the Securities Act to apply to these procedural provisions. Although the first three measures do facilitate suits by buyers of securities, the grant of concurrent jurisdiction constitutes explicit authorization for complainants to waive those protections by filing suit in state court without possibility of removal to federal court. These measures, moreover, are present in other federal statutes which have not been interpreted to prohibit enforcement of pre-dispute agreements to arbitrate. The latest expression of opinion is in Gilmer v Interstate/Johnson Lane Corporation. The court held that a claim under the Age Discrimination in Employment Act could be subjected to compulsory arbitration. The majority opinion accepted that the Act was designed not only to provide relief to individuals but as well ‘to further important social policies.’ In this respect the Act stood on the same footing as the Sherman Act, the Securities Exchange Acts, and RICO. Nonetheless the majority was unable to discern the Congressional intent

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necessary to displace the obligation to arbitrate. In the present state of authority, in the United States, it is difficult to think of any field which is foreclosed to arbitration. The common law approach was probably taken to its extreme in Attorney General of New Zealand v Mobil Oil New Zealand Ltd.28 The New Zealand Attorney General sought a declaration from the High Court that an agreement, which had been entered into in 1982, conflicted in its operation with the Commerce Act as amended in 1986. The claim was that the agreement had the effect of substantially lessening competition in the relevant market. The agreement contained a provision, in Article VII, whereby any dispute arising from a matter contained in the agreement was to be submitted to resolution by arbitration by the International Centre for Settlement of Investment Disputes (ICSID). The trial judge was asked to refuse, in the exercise of his discretion, to make an order for a stay. That discretion was provided for by the 1979 New Zealand statute which brought into operation in New Zealand the ICSID Convention. It seems to me that an extremely strong case was made out for the grant of a stay. lt was pointed out that the public-policy objective of the Commerce Act was to promote competition in markets in New Zealand. The High Court had the significant and indeed exclusive jurisdiction to formulate the policy for the future. In order to enable it to discharge this function with a proper appreciation of New Zealand commercial life, the Court was required to sit with additional lay members with experience in industry, commerce, economics, law or accountancy. Furthermore, while ICSID was able to determine, as a matter of law, the applicability of the section of the Act to the agreement, the Judge took the view that it was not able to make an order by way of injunction, or any order varying the particular covenants between the parties, as the Court was able to do. The Judge said: For my part I see this as a very serious disadvantage to both parties if it comes about, because the Commerce Act 1986 is a comprehensive code for the resolution of such disputes when they arise. But I cannot forecast the likely outcome of these proceedings in a way which would enable me to conclude that the mutual disadvantages of proceedings with international arbitration are such that they should influence my discretion in the face of an application for stay. One must assume that the defendants have considered the flexibility, or lack of it, which the Centre may demonstrate once seized of this matter. Indeed. it may be that it will consider it appropriate to decline jurisdiction.29 (Emphasis added) As will be seen, in the light of the decision in Australia, to which I will shortly come, the conclusion that ICSID arbitrators could not exercise the powers of the High Court may not have been as clear cut as the parties and the Court seemed to think. The difference between the Mitsubishi case and the New Zealand application was self-evident. Nonetheless, in what, if l may be permitted to say so, was a most carefully crafted judgment, Heron J, after referring to the US decisions, said: Such expressions are of course expressions of United States judicial policy towards international investments and contracts. I think such principles are appropriate even in this small country as international trade and commercial relationships are of critical importance. In holding the Crown to its agreement

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I see no reason for departing from those principles of international commercial comity, and in my view, they accurately reflect the attitude that New Zealand courts should take to international arbitration provisions of this kind.30 The decision was a robust affirmation of the primacy of the arbitral procedure, bearing in mind that, at the time when the arbitration clause was incorporated in the agreement, the Commerce Act was in a substantially different form. It is difficult to envisage a type of dispute that could more closely impact on the economic life of the country. The Parliament went to some pains to establish a specialist tribunal with extraordinary powers for determination of disputes of this kind. Yet that was insufficient to ensure a hearing before that tribunal. It is instructive perhaps to mention some of the subsequent history of the dispute. The Centre did not, as the Judge thought possible, decline to exercise jurisdiction. It appointed Sir Graham Speight, a highly respected retired judge of the New Zealand High Court, as arbitrator. No doubt the appointment of a New Zealander recognised the difficulties that would have been encountered by a foreigner in resolving a dispute so intimately involved with the commercial life of New Zealand. At the same time, the other party to the dispute may have been entitled to feel a degree of surprise at the first that the arbitrator after all possessed the attributes of nationality, training and lack of specialist expertise in economics that the ICSID Convention was designed to avoid. When all was said and done, and with the greatest of respect to the arbitrator, the defendant got a New Zealand judge, albeit a retired one, but was deprived of the specialist assistance for which the Act called. One may be permitted to ask whether any procedural advantage the arbitral procedure provided was sufficient to outweigh the absence of the specialist lay members of the tribunal and the restricted range of remedies which, in the judge’s opinion, the arbitrator was able to provide. The question in IBM Australia Ltd v National Distribution Services Pty Ltd31 was whether claims for relief made pursuant to sections 52 and 87 of the Trade Practices Act 1974 (Cth) fell within the terms of an arbitration clause in the agreement entered into by the parties. The agreement called for the supply by IBM of its Systems Integration Services. A computer specialist was appointed as arbitrator because most of the complaints related to adequacy of the service provided by IBM. As the passage quoted from Kirby P makes clear, the remedies available under the Act, range from awarding damages, through rectification of the agreement and injunction to holding the agreement, in whole, or in part, void abinitio. Although it was not argued that it was against public policy to submit such claims to arbitration, the argument that, on its proper construction, the clause did not clothe the arbitrator with power under the Act was supported by reference to the width and nature of the remedies which could be afforded pursuant to section 87 of the Act. As Kirby P said: The appellant asked rhetorically whether it should really be imputed to the parties that they envisaged that the arbitrator should have a power to declare the contract void ab initio from which his own jurisdiction derived? Could it really be suggested that the arbitrator should have a power of injunction, whether limited to the particular parties or to officers of those parties, at least in the absence of an express conferral of such power in the agreement? Could it be contended that there should be read into the arbitration clause an intention of the parties that the arbitrator should enjoy such wide power as the Trade

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Practices Act confers upon courts? Originally those powers were confined to the Federal Court of Australia exercising an exclusive jurisdiction. Since 1986, the jurisdiction to exercise such powers has been conferred concurrently upon State courts exercising federal jurisdiction. But those courts are part of the constitutional machinery of the Commonwealth. They have such wide powers (so it was argued) because they are courts constituted by people trained in the law and versed in the traditional respect for liberties which our law safeguards. The notion that the parties to the present agreement should be taken to have agreed that such powers were conferred upon a then still undetermined arbitrator was one which the appellant argued was so unlikely that it should not be the construction preferred by the Court. Not only did the appellant point to the width of some of the powers themselves. It also pointed out that the very width of some of the powers contemplated (for example, an order varying the contract or an order for the supply of services) was so fundamentally inconsistent with the other express terms of the agreement itself that it would not be a construction put on clause 9. In particular, the appellant referred to those provisions of the opening words of the agreement and clauses 5, 7, 10(b) and 10(e) showed an endeavour to confine the parties to limited damages and to rights defined within the four walls of the agreement. ... If the arbitrator, armed with the ‘authority to give the claimant such relief as would be available to him in a court of law having jurisdiction with respect to the subject matter’ were persuaded to provide relief of a particular kind (such as injunction) any such order as the arbitrator purportedly made could only be enforced, as a judgment or order of the Court, after judgment is entered in the terms of the award. But that might only be done ‘by leave of the Court’. It might be expected that the Court. in considering whether or not to grant such leave, would have regard to the nature of the relief given in the arbitrator’s award. The appellant urged that the very width of the relief available under the Trade Practices Act was an argument against imputing to the parties the intention to provide all of the relief of the kind afforded to courts by that Act. It is sufficient to answer this argument by saying that the holding in Government Insurance Office of New South Wales v Atkinson-Leighton contemplates that the very purpose of a reference to arbitration will frequently be to confer on the arbitrator the powers which would be enjoyed, even by statute only, by the court of law of competent jurisdiction that would otherwise hear the case.32 (Emphasis added) I may perhaps be pardoned if I dwell on this decision for a minute. First, the statement in the penultimate paragraph quoted may be an Australian echo of the second-look doctrine. In the light of comments made by another member of Court, Handley JA, to the effect that the arbitrator could not declare the whole of the agreement void ab initio, because that would destroy the arbitrator’s very jurisdiction, Kirby P may not have been intending to

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refer to anything more than that problem, which is still unresolved in Australian law. If he meant anything more, then, with very great respect, the suggestion would be out of line with today’s accepted approach to the enforcement of awards. Second, and more important, is the statement in the last paragraph. The decision referred to is by the High Court of Australia, the ultimate court of appeal for Australia. The question before the Court was whether an arbitrator had power to award interest. In holding that the arbitrator had that power, members of the majority spoke in terms of complete generality. Thus Stephen J said: The principle to be extracted from this line of authority is that, subject to such qualifications as relevant statute law may reguire, an arbitrator may award interest where interest would have been recoverable and the matter been determined in a court of law. What lies behind that principle is that arbitrators must determine disputes according to the law of the land. Subject to certain exceptions, principally related to forms of equitable relief which are of no present relevance, and which reflect the private, and necessarily evanescent status of arbitrators, a claimant should be able to obtain from arbitrators just such rights and remedies as would have been available to him were he to sue in a court of law of appropriate jurisdiction.33 (Emphasis added) According to Mason J, with whom Murphy J agreed, the real question is: Whether there is to be implied in the parties’ submission to arbitration a term that the arbitrator is to have authority to give the claimant such relief as would be available to him in a court of law having jurisdiction with respect to the subject matter. In the United States, it is accepted that the parties to an arbitration are free to clothe the arbitrator with such powers as they may deem it proper to confer, provided that they do not violate any rule of law. There it has been held that the parties may authorise the arbitrator to grant equitable relief, even including relief by way of injunction.34 When the question of an arbitrator’s power to award interest came up in England in President of India v La Pintada Campania Navigacion, Lord Brandon, who delivered the principal speech in the House of Lords, said: Where the parties refer a dispute between them to arbitration in England, they impliedly agree that the arbitration is to be conducted in accordance, in all respects, with the law of England, unless, which seldom occurs, the agreement of reference provides otherwise. It is on this basis that it was held by the Court of Appeal in Chandris v Isbrandtsen-Moller Co Inc [1951] 1 KB 240 that, although s 3 (1) of the Act of 1934, by its terms, empowered only courts of record to include interest in sums for which judgment was given for damages or debt, arbitrators were nevertheless empowered, by the agreement of reference, to apply English law, including so much of that law as is to be found in s 3 (I) of the Act of 1934.35 In IBM Kirby P applied Atkinson with evident reluctance. However, the High Court refused special leave to appeal from the decision.

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Handley JA was prepared to take a rather more broad approach: I can see no basis for excluding claims arising under statutes which grant remedies enforceable in or confer powers on courts of general jurisdiction. For example, the Contracts Review Act 1980, the Frustrated Contracts Act 1978 or the Insurance Contracts Act 1984 (Cth). Once this position is reached there is no basis, in my opinion, for excluding claims arising under the Trade Practices Act 1974 (Cth). An arbitrator who is authorised by the submission to determine controversies or claims under that Act must also be able to exercise the powers which are conferred by that Act on courts of general jurisdiction, provided those powers are appropriate.36 (Emphasis added) It remains for another day to determine what should be the attitude of the Australian courts where the dispute involves the anti-competitive provisions of the Trade Practices Act rather than the consumer protection provisions in section 52. In relation to the former category of case the Federal Court of Australia has exclusive jurisdiction to the exclusion of the entire State court system. It may be that it is to that type of provision to which the reservation of Handley JA was directed. A somewhat similar question came before the United States Court of Appeals for the 7th Circuit in The Saturday Evening Post Company v Rumbleseat Press lnc.37 As will be seen, in a judgment delivered by Judge Posner, the Court considered the question in the light of sound judicial case management rather than as a matter of construction. The Saturday Evening Post had granted Rumbleseat an exclusive licence to manufacture porcelain dolls. After the licence was cancelled Rumbleseat continued to make the dolls, which the Post claimed was an infringement of its copyright. The dispute went to arbitration and an award was duly delivered. The Post moved the District Court under the Federal Arbitration Code to confirm the award. The Court did so. One of the issues for determination before the Court of Appeal was whether the validity of a copyright was arbitrable. This question had been left open in Kamakazi Music Corporation v Robbins Music Corporation.38 Rumbleseat’s main argument against arbitrability was that Congress’s decision to give the Federal courts exclusive jurisdiction over copyright actions implicitly precluded arbitration of disputes over the validity of a copyright. The court said: This is a non sequitur. The dispute that the Post wanted to arbitrate was a dispute over compliance with a copyright licensing agreement; and, as we have seen, state courts have jurisdiction over such disputes - indeed, federal courts can acquire jurisdiction over them only by virtue of diversity or pendent jurisdiction. And, if in the course of a lawsuit in state court over a licensing agreement an issue of patent or copyright law arises, the state court is empowered to decide it. ... It is also supported by the principle that although federal courts have been held to have exclusive jurisdiction over cases arising under the federal antitrust laws, state courts are allowed to decide federal antitrust defences to suits properly brought in those courts under state law. It is also supported by the practical consideration that if the state court is not allowed to decide federal defences the litigation will be split up in an uneconomical fashion....

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It does not follow as the night the day that an arbitrator should also be allowed to decide the issue of validity. But it does follow that an argument against his being allowed to do so cannot be based on the exclusivity of federal copyright jurisdiction. That exclusivity just isn’t engaged by a suit over a breach of a copyright licence. At argument we pressed counsel for Rumbleseat to give us a practical reason why arbitrators should not be allowed to decide issues of validity that arise in copyright licence suits. He was unable to do so, and we can think of none ourselves. It is true that a copyright is a form of monopoly, so a decision erroneously upholding the validity of a copyright might have the effect of continuing an unlawful monopoly in force. But there is no reason to think that arbitrators are more likely to err in copyright cases than state or federal judges are; the Supreme Court recently rejected such an argument in holding that the arbitration of antitrust claims arising out of international transactions is not contrary to public policy.... The question is not whether the parties to a suit for copyright infringement may decide to refer the dispute to arbitration — no-one doubts they may; it is whether the arbitration of a dispute arising from a copyright licence must be interrupted if the licensee challenges the validity of the copyright. If so, this would toss a monkey wrench into an important means of resolving contractual disputes over intellectual property. We hold that federal law does not forbid arbitration of the validity of a copyright, at least where that validity becomes an issue in the arbitration of a contract dispute.39 Decisions of the kind of which Mobil Oil New Zealand is probably an extreme example have earned particularly strong criticism from Professor Sornarajah of Singapore: Developing states are also likely to have stronger views on arbitrability. Thus, an Indian court has held that a dispute arising from an international agreement for the transfer of technology is not arbitrable under Indian law because such agreements implicate national economic policies. Likewise, ‘exploitation agreements and concessions’ which are facilely included in the Model Law definition of commercial agreements are subject to the doctrine of permanent sovereignty over natural resources, a doctrine which, whatever its validity in international law may be, is constitutionally enshrined in many countries. Such countries may not lightly accept the notion in the Model Law that these agreements could be removed from the public law sphere by a mere commercial contract.40 The Professor has expressed his views in a more expanded form elsewhere.41 The premise from which he starts must command universal acceptance. He says that a legal system ‘may override the will of the parties to arbitrate a dispute where the settlement of the dispute affects interests other than those of the parties or implicates values other than those that concern only the parties’.42 It is where he goes from that statement that enlivens debate. Accepting as a truism that many public interest laws are intended to protect the weaker party, he asserts that ‘the aim of such protection will be frustrated if disputes involving

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such laws can be resolved by private procedures.’ He cites an article by Professor Park in support of this statement. More importantly, from the statement that a state may, if it so wishes, overrule the will of the parties to arbitrate the argument advances to ‘arbitration is possible only of disputes that exclusively involve the interests of the two parties involved.’ The last mentioned proposition has a number of assumptions about the arbitral process and arbitrators as its substratum. It is important for the future health of arbitrators that such assumptions be confronted. It is appropriate to point out that it is not only developing countries that are uncomfortable with the developments in the common law countries. The civil law approach is much more restrained. For example, in 1987, the German Federal Supreme Court held that, according to the German Stock Exchange Law, the German plaintiff’s transactions with the German subsidiary of Merrill Lynch were not binding on him and therefore he could not, as a matter of public policy, conclude a binding arbitration clause in relation to them. Therefore, the Court found that an agreement to arbitrate before a foreign tribunal and to apply foreign law to the dispute was invalid. Moreover, in complete contrast to Mitsubishi, the Court took the view that it would not be appropriate to allow the arbitral proceedings to go forward under New York law and then have the plaintiff object to enforcement of a possible award in Germany as a violation of German public policy. The certainty that under New York law the German statute would not apply made it useless for the arbitration to be allowed to go forward.43 I delivered the initial judgment in IBM which was affirmed by the Court of Appeal. I remain of the view that international trade and investment require that a wide interpretation be given to arbitrability. That will have an inevitable effect on arbitrability in domestic arbitration. That having been said, the rule of law and respect for the supremacy of Parliament will mean that the boundaries clearly drawn by the national Parliament may narrow or widen the boundaries in a given field in accordance with Parliament’s assessment of national, social and economic needs. Indeed so much is recognised by every decision from Mitsubishi onwards. Unfortunately Parliaments have not kept pace with developing judicial thought in the area, and in the result, the Courts have been left in uncontested possession of the field. It is too early to judge whether the courts have drawn boundaries wisely. Of one thing there can be no doubt. As a result of today’s approach to arbitrability there are many problems which will require resolution by the courts. The continued health of arbitration will depend on the sensitivity to the views of others with which that task is undertaken.

* Chief Judge, Commercial Division, Supreme Court of New South Wales, Australia. This lecture, delivered in Hong Kong on 26 September 1991, was the second in the series of Goff Lectures on arbitration sponsored by the then City Polytechnic of Hong Kong Department of Law and named after Lord Goff of Chieveley. Editorial note: It was originally published at (1992) 1(2) Asia Pacific Law Review 1-17.

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Endnotes 1 New York Convention Art V (2)(a). 2 WW Park, ‘National Law and Commercial Justice; Safeguarding Procedural Integrity in International Arbitration’ (1989) 63 Tul L Review 647. 3 Mitsubishi Motors Corp v Soler Chrysler-Plymouth Inc (1985) 473 US 614. 4 Shearson/American Express Inc v McMahon (1987) 482 US 220, 227. 5 Compare American Safety Equipment Corp v J P Maguire & Co 391 F 2d 821 (2 CA 1968). 6 470 US 213. 7 Wilko v Swan (1953) 346 US 427. 8 Supra n 4, pp 231-32. 9 See Mitsubishi 633-634. 10 Ibid 628. 11 Ibid 636-637. 12 Park, op cit n 2. 13 TE Carbonneau, ‘Mitsubishi, the folly of Quixotic Internationalism’ (1986) 2 Arb Int 116. 14 AF Lowenfeld, ‘The Mitsubishi Case; Another View’ (1986) 2 Arb Int 178. 15 Supra n 4 232. 16 Compare Lowenfeld op cit n 14 p 88. 17 Supra n 7 436. 18 Merrill Lynch, Pierce Fenner & Smith v Bobker (1986) 808 F 2d 930. 19 Brandeis Intsel Ltd v Calabrian Chemicals Corp 656 F Supp 160 (SDNY 1987); American Constructions v Mechanized Constructions of Pakistan 659F Supp426 (SDNY) affd per curiam 828 F2d 117 (3 CA 1987); Carte Blanche (Singapore) Pte Ltd v Carte Blanch International Ltd 683 F Supp 945 (SDNY 1988). 20 28 Col. Jnl of Transnational Law 449 (I de Ia Houssaye). 21 Ibid, p 472. 22 Supra n 4 pp 233-34. 23 de Quijas v Shearson/American Express Inc (1989) 490 US 477. 24 Ibid, p 534. 25 See supra n 7 p 431, 98 LEd 168,74 Ct 182, citing 15 USC para 771(2) [15 uses para 771(2)]. 26 Ibid, para 77v(a) [15 USCS para 77v(a)]. 27 Gilmer v Interstate/Johnson Lane Corporation (1991) 500 US; S.Ct 1647. 28 Attorney General of New Zealand v Mobil Oil New Zealand Ltd [1989] 2 NZLR 649. 29 Ibid, p 666. 30 Ibid, p 668. 31 IBM Australia Ltd v National Distribution Services Pty Ltd (1991) 100 ALR 3 61; 27 NSWLR 466. 32 Ibid, ALR p 371; NSWLR p 477. 33 Government Insurance Office of New South Wales v Atkinson-Leighton Joint Venture (1982) 146 CLR 206 p 235. 34 Ibid, p 246. 35 President of India v La Pintada Campania Navigacion [1985] 1 AC 104 p 119.

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36 Supra n 31, ALR 381; NSWLR p 487. 37 The Saturday Evening Post Company v Rumbleseat Press Inc (1987) 816 F 2nd 1191. 38 Kamakazi Music Corporation v Robbins Music Corporation (1982) 684 F 2nd 228, 231. 39 Supra n 37 p 1198. 40 M Sornarajah, ‘The UNICITRAL Model Law; A Third World Viewpoint’ (1989) 6 J Int Arb 7. 41 M Sornarajah, International Commercial Arbitration (1990). 42 Ibid, p 163. 43 Compare Kunner, ‘The Public Policy Exception to the Enforcement of Foreign Arbitral Awards in the United States and West Germany under the New York Convention’ (1990) 7 J Int Arb 71, 76.

Arbitration: 1979 and All That The Right Honourable Sir Thomas Bingham*

There are two reasons in particular why it is a pleasure for me to give the third Goff Lecture under the auspices of the City Polytechnic of Hong Kong. The first is that I, like countless other lawyers and judges throughout the world, hold Lord Goff in very special esteem, as a judge of the highest intellect, formidable erudition, vast practical experience and great wisdom. If, as I think, a rapprochement between the academic and professional practitioners of the law would be of benefit to both and to the law as a whole, I feel sure that both parties would recognise Lord Goff as their ideal emissary. The second reason is more personal to me. It is very nearly 40 years since I first came to Hong Kong. It was a different world. The troopship on which I arrived, after nearly a month at sea, called at Gibraltar, Malta, the Canal Zone, Aden, Colombo and Singapore. In each place the Union Jack flew. British military bands played us round the globe. Here in Hong Kong, the expiry of the lease looked — and, indeed, was — very distant. But the immediate outlook was uncertain: the accession to power of the Chinese communists was still relatively recent, the Korean War was still raging and it seemed quite possible — at least to uneducated soldiers up by the wire — that the communist tide would sweep on down to Victoria as the Japanese tide had done not so long before. But one thing has not changed. The first impression made by Hong Kong, then as now, was of dynamic enterprise, teeming activity, restless innovation. And that brings me, at last, to arbitration. I suppose there may have been a time when a president of the Chartered Institute visiting Hong Kong might have come in a proconsular frame of mind, bringing the riches of Roman civilisation to the outlying provinces. Whether that be so or not, there can be no doubt that the roles are now reversed. Hong Kong, with its highly successful Centre for International Arbitration [sic], its growing stake in maritime arbitration, its adoption of the Model Law for international arbitration and its willingness to innovate also in its regime of domestic arbitration, has shown the imaginative enterprise for which the colony is renowned. I accordingly come not in the mood of a proconsul, but more that of a punter hoping to pick up some tips that might prove useful later on. Against that background I fear that it seems, and is, a little pedestrian and inward-looking to dwell on the current practice of English arbitration. But we have now had a dozen or so years of experience of the 1979 Act in practice, and that is not a bad time to take stock. The Act still influences and will, at least in the short term, continue to influence the conduct * Master of the Rolls. This lecture, delivered in Hong Kong on 20 October 1992, was the third in the series of Goff Lectures on arbitration sponsored by the then City Polytechnic of Hong Kong Department of Law and named after Lord Goff of Chieveley. Editiorial note: It was originally published at (1992) 2(1) Asia Pacific Law Review 1-11.

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of domestic arbitration in Hong Kong. And the Act perhaps provides pegs on which more general reflections can be hung. So I hope I may usefully speak of the arbitral regime which I know best. I myself played no part in preparing the report of the Commercial Court Committee on which the 1979 Act was based. I can accordingly claim no share of the credit when expressing the view that, after a lapse of years and in the light of intervening experience, it reads well. There can be no doubt that replacement of the old special case by a procedure for appealing with leave against reasoned awards was an improvement. But three brief historical observations may be of interest. First, it has often been said (I have said so myself) that the special case procedure had been the subject of gross abuse. I am not sure this was really so. At one of the Commercial Court Committee meetings which considered the report, the busiest maritime arbitrator of the day (who was a member) was asked if he had experience of the procedure being abused. He said that he had, on one or two occasions, but no more than that. It seems unlikely that anyone else would have had greater experience of abuse. So it may be that a little mythology has grown up. Second, one notes with some surprise that the report does not recommend that leave to appeal against arbitration awards should be sparingly given, nor did the Act expressly or impliedly contain such a restriction. The origin of what I may perhaps call the Nema/Antaios doctrine was an observation of Lord Denning who (if anecdotal evidence is to be believed) was prompted to make it by Lord Diplock, who had himself contemplated proposing an amendment to the Bill to restrict the grant of leave to appeal but had not in the event done so, possibly because of the time constraints to which the passage of the Bill was subject in the dying days of the Callaghan government. Third, by a curious irony it seems likely that the effect of the 1979 Act in one field has been to increase and not decrease the incidence of legal challenges to arbitral awards. That is the construction field. If used at all by the parties to construction disputes, the special case procedure seems to have been invoked only exceptionally. It may be doubted whether such parties fully appreciated the possibilities. There are, however, much more fundamental questions to be asked and answered. What, in 1992, do we regard as the essential features of an acceptable regime of arbitration? And how well does the 1979 Act (with the practice developed under it) protect and promote those essential features? The first essential feature to which I would draw attention, obvious enough I am afraid, is that the law (and the courts) should respect the parties’ agreement to arbitrate. I am inclined to think that the current record of the English courts is fairly good. It may, of course, be said that in cases covered by legislation implementing the New York Convention the courts have little option, and that more generally the courts would always (or almost always) have respected a clearly expressed agreement plainly covering the dispute in question. Both points have a measure of truth. But only a measure. The English Act of 1975, implementing the New York Convention, permits the court to refuse a stay if satisfied that there is not in fact any dispute between the parties. There was the opportunity here for judges to hold that

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there was not in fact any dispute because they, as judges, were in a position to rule that one party was plainly right and the other plainly wrong. The law on this point took a little while to settle down, but settle down it did. I understand it now to be that if a defendant raises a genuine defence he is entitled to an arbitrator’s (and not a judge’s) view on its merits. That is what I venture to think that the law should be.1 While the judges might always (or almost always) have respected a clearly expressed agreement plainly covering the dispute in question, a judge’s mental approach could, I think, affect his conclusion whether that condition was satisfied or not. The Court of Appeal relatively recently had the opportunity to consider a question of this kind in Ashville Investments Limited v Elmer Contractors Limited.2 In that case, there were differences between a building owner and a contractor concerning the specifications on which the contract was based. The contractors claimed that the contract should be rectified and also claimed damages for misrepresentation. The contract included an arbitration clause covering ‘any dispute or difference ... as to the construction of this contract or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith’. The contractors accordingly sought to arbitrate their dispute with the owner, but the owner resisted, contending that the claims for rectification and damages for misrepresentation did not fall within the clause. This might have seemed a rather ambitious contention. The arbitration clause appeared to have been drawn in wide terms. And there were other differences which only an arbitrator could resolve anyway, so that the owner’s contention (if upheld) would have necessitated two sets of proceedings. But the owner was able to rely on English cases of high authority and long standing which lent colour, if not direct authoritative support, to his contention. It had been held that a claim for rectification was not a claim in relation to a deed which it was sought to rectify,3 and that a claim for damages for fraudulent misrepresentation inducing the making of a contract was not a claim in connection with the contract.4 Interestingly, courts in South Africa, New Zealand and Queensland had recently declined to follow these cases.5 The Court of Appeal held that it was not bound by authority and was free to construe the clause in its factual context to ascertain its true meaning, and concluded that the clause was indeed wide enough to cover the contractors’ claims for rectification and damages. As a party to that decision, I had at the time, and still have, no doubt of its correctness. It is significant, perhaps, as illustrating the courts’ present willingness to give ample effect to an arbitration clause. They certainly make no effort to give such clauses a restricted meaning. A different, but somewhat related, problem arose in Cunningham-Reid v Buchanan Jardine.6 It will be recalled that s 4 of the English Act of 1950 gives the court a discretion to stay court proceedings brought in breach of an arbitration agreement if no sufficient reason is shown why the matter should not be referred to arbitration. That general discretion is supplemented by s 24, which gives the High Court power to order that an arbitration agreement shall cease to have effect and to give leave to revoke the authority of the arbitrator if a dispute arises involving the question whether either party had been guilty of fraud. Section 24 is general in its terms, but a line of authority suggested that it was parties charged with fraud who could claim to clear their names in open court despite the existence of the arbitration agreement, and that trial in court could not be claimed by those who made the charge.7 In Cunningham-Reid, the plaintiff, who had employed the defendant, an interior designer, on terms which included an arbitration clause, claimed to have been defrauded

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and issued a writ. The defendant, as the party charged with fraud, sought a stay which the plaintiff resisted and the judge in chambers, reversing the decision of a Queen’s Bench master, refused. Following the authority already referred to, the Court of Appeal had very little hesitation in reinstating the stay. If the defendant wished his good faith to be ruled upon by an arbitrator in private, it was very hard to see any good reason why he should be denied. That case did not raise the question, but I am provoked to ask why, authority apart, the result should really be any different if it is the plaintiff charging fraud who seeks to arbitrate and the impugned respondent who seeks trial in court. The traditional answer, that the parties do not contemplate fraud when they make their arbitration agreement, is not very convincing: they probably do not contemplate a claim for damages or rectification either, and fraud can scarcely be regarded as the rarity our forefathers believed — or hoped — it to be. It is not easy to see why a respondent should be entitled to insist on public refutation of a charge made privately. Nor is the view that only a judicial tribunal is fit to be entrusted with a decision on the respondent’s good faith readily reconcilable with the trial of criminal charges by lay jurors or with the statutory rule which entitles a defendant charged with fraud in the Queen’s Bench Division to claim trial by a civil jury.8 But the view that fraud is a thing apart, requiring quite different procedural treatment, is surely weakening. Hence abrogation of the old rule that summary judgment may not be sought in an action which includes a claim by the plaintiff based on an allegation of fraud. Should a case arise directly challenging the older authority I have mentioned, an interesting argument could develop — in the House of Lords, at least. The second essential feature of an acceptable arbitration regime is, I suggest. the guarantee of an independent, impartial tribunal. In practical terms, this requires that effective legal means should exist to remove arbitrators who lack these qualities. Both the English legislation and the Model Law provide such means. I do not know how often they are invoked. But perhaps it is worth making brief mention of two personal experiences, one as counsel, the other as judge. I once took part in a large international arbitration conducted by three arbitrators. One of them was a banker, appointed by the claimant. The arbitration went on for weeks. The bankerturned-arbitrator dutifully attended the hearings, but he asked no questions. took no notes and usually found it unnecessary to bring with him to the hearings any of the voluminous documentation in the case. He plainly regarded his task as, in principle, a simple one: to cast his vote in favour of the maximum award to the claimant who had appointed him. This he duly did, unfortunately (for me and my clients) securing the assent of the chairman. There was, so far as we knew, no improper relationship between the banker and the claimant. It could not, from beginning to end, be said that the arbitrator made any prejudicial or biased observation (for he made no observation at all). Nor did he caucus privately with his client. And yet he plainly did not approach his task with anything approaching an open mind. How, I wonder — and this is a genuine speculation — would an application to remove him have fared under the law of England or Hong Kong? My second instance concerns an arbitrator in a commodity arbitration. One of the parties challenged some interim decision of the arbitrator (I cannot remember what, and the decision may well have been correct). But at the court hearing (so it was said) the arbitrator

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attended, sat with the party seeking to uphold his decision and appeared to participate fully and vigorously in that party’s conduct of the appeal. The other party sought his removal. Most judges, if they are honest, will admit that they are inclined mentally to spur on those who seek to support their decisions when they become subject to appeal, but it is of course unacceptable for any decision-maker to be or appear partisan, particularly when he has further matters yet to decide, and it did appear that this arbitrator had gone well beyond the limits of propriety. I was happily relieved of the need to make any order: a few words to a perceptive solicitor were followed by a timely resignation of the arbitrator. It is perhaps remarkable how rarely such problems arise. This reflects great credit on arbitrators, whose judicial integrity is subjected to infinitely greater strain than that of judges. The point is worthy of emphasis not because it gives rise to difficulty in practice but because of its cardinal importance in maintaining confidence in the arbitral process. As my third essential feature of an acceptable arbitration regime I would list the autonomy of the parties. I hope I am using that expression correctly: I mean by it that the parties should be free to agree how their arbitration shall be conducted, a principle which logically derives from the consensual nature of the whole arbitration process. This is an area in which Hong Kong has, without doubt, blazed a trail along which I would expect the English courts in due course to travel. It may be worth a brief look at the sticking-points, actual or imagined, which remain in England. English law has been strongly and authoritatively criticised for its failure to recognise the arbitrator’s jurisdiction to rule on the validity of the agreement which contains the agreement to arbitrate.9 Now I readily accept that it is often convenient for an arbitrator to take an initial view on this question and proceed for the time being in accordance with whatever view he forms, and there can be no possible objection to an ad hoc reference to determine whether an agreement was validly made or not. But at that point I have to confess that my imagination fails. Since an arbitrator’s jurisdiction derives from the consent of the parties, I simply cannot see how he can have jurisdiction without an ad hoc reference finally to determine whether at the outset such consent existed or not. I understand that the law of Hong Kong expressly allows an arbitrator to rely on evidence which would not be admissible in court proceedings. I have no doubt, for reasons powerfully expressed by Professor Roy Goode in his 1991 Freshfields Lecture, that this is what the law of England should be.10 It is little short of absurd that arbitrators should be hampered by rules of evidence developed in bygone days of jury trial, often anomalous, imperfectly understood and widely ignored or circumvented in ordinary civil litigation. But for the great authority of Mustill and Boyd, I should indeed have needed much persuasion that arbitrators were not free, in the exercise of a fair and responsible discretion, to ignore these rules.11 But I am here concerned with a simpler and more limited question, whether the parties may validly agree that he should do so. If the parties to an arbitration were to agree that an arbitrator could receive hearsay evidence, or depart from the parol evidence rule, or pay attention to pre-contractual negotiations or post-contractual conduct, I cannot imagine any judge taking the view that such agreement was not effective. Hong Kong has also, as I understand, taken the lead in recognising the validity of submissions where the arbitrator is empowered to make decisions according to the justice

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and equity of the case. Traditionally, the English courts have been reluctant to recognise the validity of an agreement not tied to a particular system of law. But there are faint signs of a more relaxed approach12 and if the parties have plainly entrusted resolution of their dispute to one just arbitrator, or three just arbitrators, of their choice, according to their sense of fairness and equity, I cannot for my part see any reason why the law should frown on the arrangement. Such an approach would, of course, preclude a challenge to the award on grounds of legal error, but that is a perfectly acceptable reason for adopting it. There certainly remains in England one shackle on the autonomy of the parties which Hong Kong has abandoned: the prohibition of pre-arbitration exclusion agreements in maritime, insurance and commodity disputes governed by English law.13 As will become clear, I am not one of those who would restrict intervention by the courts to the narrow limits provided by the Model Law. I see force in the view that the three fields in question are so central to the traditional role of the English court in commercial and maritime matters that they may sensibly be differentiated from the broad run of arbitral disputes. The situations in London and Hong Kong are sufficiently different that divergent views may be taken in the two places without either view being clearly wrong. But I would for my part favour the exercise by the Secretary of State of the power which the Act gives him to revoke this restriction so as to assimilate the law in the two jurisdictions.14 If the parties to an agreement in any field choose. before a dispute has arisen, finally to forgo any resort to the court on a question of law, very strong grounds indeed have, in my view, to be shown to justify a prohibition on their doing so. I would not for my part regard the fact that an agreement affected a particular, rather special, area of the law as a ground of sufficient strength. The undoubted public interest in orderly and comprehensive development of the law in these fields should not in my view outweigh the legitimate desire of parties to bring their dispute to an end by a swift and final decision of the tribunal they have chosen. No one, I think, would challenge in principle the existence of what I would identify as the fourth essential ingredient of an acceptable arbitration regime: a measure of involvement by the courts. It is plainly desirable that the courts should have power to protect the parties’ right to arbitrate by staying court proceedings, to lend their aid to construct a tribunal where the parties cannot or will not do so for themselves, to exercise coercive powers in support of arbitration proceedings where this is necessary to make a reference effective and to exercise supervisory powers to ensure the existence of an independent, impartial tribunal. No supporter of the arbitration process, surely, would wish to deny municipal courts any involvement in these areas. Much more controversial, of course, is the courts’ exercise of power to correct errors of law in arbitration awards. Many, perhaps most, authorities on arbitration take the view that where parties choose to have their disputes resolved by an arbitration tribunal and not by the courts, they choose just that — for better for worse, for richer for poorer. The courts have no business to be gatecrashing a private party. It is this philosophy which, as I understand, informs many European arbitration regimes and also the Model Law. This argument is, without doubt, one of very great persuasive power. I do not think anyone would argue — and I question whether anyone ever has argued — that an arbitration award should be as readily open to legal challenge as an ordinary court decision. The only

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issue is whether the court’s power to correct errors of law should be excluded entirely, or almost entirely, or whether such a power, strictly circumscribed by practice and authority, should remain. This is, par excellence, a question on which reasonable minds may differ. The proponents of one view are unlikely to persuade the adherents of the other. And Lord Mustill has raised his voice in support of variety, both domestically and intemationally.15 There is probably no single right answer applicable at all times and in all places. I can certainly see very powerful reasons why adoption of the Model Law — which I gather is increasingly supplanting the domestic regime — was the wise choice in the special situation of Hong Kong. That said, I have to express my own. purely personal, belief that the present English position is just about right for England. It was criticised by Professor Roy Goode in his 1991 Freshfields Lecture, to which I have already referred, when he said: If l were asked by foreign parties negotiating a contract whether if they chose English arbitration and the rules of natural justice, procedure and jurisdiction had been followed, they could rely on the award being final, my answer would have to be: ‘God only knows!’16 Now it is some years since I have advised clients on a question such as this. The same may also be true of my friend the professor. But my answer would be, ‘Almost certainly.’ It would, of course, be wrong to give an unqualified assurance that an award would be final. The very familiar guidelines laid down in the Nema and the Antaios leave open the possibility that it would not, and the client would no doubt be entitled to a summary account of the circumstances in which the award would not be final. This would not be hard to give. But the figures do not, I think, suggest that the outcome is as uncertain as the professor’s invocation of the deity might suggest. It is not at all easy to obtain reliable and comprehensive statistics over the past decade, but certain figures appear to be reasonably reliable. In 1991 the Official Referees, to whom all arbitration applications relating to construction are referred, heard 21 applications for leave to appeal. Leave was given in 7 of the 21 cases. In two of the seven cases the appeal was heard and was successful. In the remaining five cases the parties came to terms before the date fixed for hearing of the appeal. The Official Referees’ practice is to hear applications for leave within about three weeks of the reference of the case by the Commercial Court and to hear the appeals, if leave is granted, within about six weeks of the grant. So there is not in the ordinary way any inordinate delay, and the awards which prove not to be final are a tiny proportion of the construction arbitrations held every year. In the three special categories of maritime, insurance and commodity arbitrations there were in 1990 some 67 applications to the Commercial Court for leave to appeal under s 1 of the 1979 Act. It appears that leave was given in well under a third of these cases, so that about 22 cases at most went further. Of these, about 13 were shipping cases. If it be the case, as is suggested, that there are about 10,000 arbitrations per year in these special categories, it would appear that application is made to the Commercial Court in about 0.67 per cent of these cases, that leave is given in 0.23 per cent of them and that the award is disturbed in a percentage of cases which is unknown but must be smaller than that.

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These figures suggest to me that the judges have in practice been loyal to the Nema/ Antaios guidelines. The picture of constant and mischievous judicial intrusion sometimes painted by those critical of the 1979 Act regime or jealous of the English arbitration market does not, in my view, match with the reality of practice. The principle of judicial abstinence has, I think, been not, only proclaimed but in general observed. There remains, of course, an entirely defensible view that even this degree of interference, modest though it may be, is excessive. While I hope I understand, and I certainly respect, the opposite view, I am myself convinced that the present English practice, within its present confines, is a desirable one for us. I have three main reasons for holding that view. First, I think it is on the whole undesirable for any legal decision-maker to regard his or her decision as effectively unappealable. Where parties have agreed to have their dispute decided according to law, it is in my view desirable that there should be some curb on an arbitrator’s freedom to take liberties with the law in order to achieve what may be regarded as a just result. Knowledge that an award vitiated by blatant legal error may be corrected is, I think, a valuable guarantee of rectitude. Second, while I have no doubt that commercial parties generally wish for a quick, final and inexpensive decision, I doubt if they would at the time of agreement regard the risk of blatant and irremediable legal error as a price worth paying for that desirable outcome. Third, since the legal system of the State is, in the last resort. invoked to enforce awards, I think there should be a reserve power in the courts to correct manifest errors. Most of the world literature, I appreciate, is against me. It is said that the English practice does not give businessmen what they want. This may be so. But I am not convinced. Consultation of regular users of arbitration procedures in England did not confirm this. The former Secretary General of the Grain and Feed Trade Association, with his unrivalled knowledge of commodity arbitration, recently wrote: Nevertheless, appeals to the court are important and greatly valued by the trade. They provide rulings on points of law and they are the link which makes arbitration part of the law of the land.17 In another field, I recently saw the Shelltime 4 charterparty form which contains an express clause providing for the parties’ agreement that either of them might appeal to the court on points of law and on a consultative basis during a hearing, and might apply to the court for an order that the arbitrator state the reasons for his award. A construction arbitrator recently told me that the parties’ express agreement to this effect was not unusual. The evidence is not all one way. No doubt a party with an award in his favour wishes to keep the benefit of it, whether it is right or wrong. No doubt his opponent thinks differently. No doubt their views would change if their roles were reversed. It may be doubtful what they wish at the outset. But if they both really wish to exclude a legal appeal to the courts they can, at some stage, effectively do so. It is probably best for each jurisdiction to decide what is best, in its own peculiar situation. That, I think, is what both Hong Kong and England have done. Three sentences will suffice to dispose of my fifth essential ingredient of an acceptable arbitration regime. It is essential that effective procedures exist for enforcing arbitral awards. Like most judges, perhaps, I know little about this. I am not aware of objections in principle to the procedures available in England.

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So my end-of-decade report would be: ‘A marked improvement, although still a bit slow in some areas. But trying hard. Conduct generally good.’ This all sounds rather optimistic, perhaps more optimistic than I feel. The upsurge of support for ADR, mediation, conciliation, mini-trials and so on is, I fear, a reproach to conventional arbitration. It should be the alternative to conventional methods of dispute resolution. That alternatives are sought to it reflects, I fear, the extent to which arbitration has succumbed to the traditional vices of litigation. I say this in no mood of hostility to these thrusting and apparently promising newcomers, who deserve a sincere welcome, but regret that arbitration itself has not shown a greater bent for the unorthodox, the unconventional, the one-off. The inhibiting factor has perhaps been the dreaded stigma of misconduct. The removal of that expression from the lexicon of arbitration is one reform upon which we could all, I am sure, agree.

Endnotes 1 Home and Overseas Insurance Co Ltd v Mentor Insurance Co (UK) Ltd [1990] 1WLR 153; Hayterv Nelson and Home Insurance Co [1990] 2Lloyd’s Rep 265; Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1992] 2 All ER 609. 2 [1989] QB 488. 3. Printing Machinery Co Ltd v Linotype and Machinery Ltd [1912) 1 Ch 566. 4. Monro v Bognor Urban District Council [1915] 3 KB 167. 5 Kathmer Investments Pty Ltd v Woolworths Pty Ltd 1970 (2) SA 498; Roose Industries Ltd v Ready Mixed Concrete Ltd [1974] 2 NZLR 247; Drennan v Pickett [1983) 1 QB 445. 6 [1988] 1WLR 678. 7 Russell v Russell (1880) 14 Ch D 471; Camilla Cotton Oil Co v Grenadex SA [1976] 2 Lloyd’s Rep 10. 8 Supreme Court Act 1981 (UK) s 69. 9 For example, by Professor Roy Goode in his 1991 Freshfields Lecture: see Arbitration, Vol 58 No 1 (February 1992) p 21 at 23. 10 Ibid. 11 Commercial Arbitration (2nd ed) p 352. 12 Deutsche Schachtbau- und Tiefbohrgesellschaft mbH v Ras al-Khaimah National Oil Company [1987] 2 Lloyd’s Rep 246. 13 Section 4(1) of the Arbitration Act 1979. 14 Ibid, s 4(3) 15 Cedric Barclay Memorial Lecture No 1, Arbitration, Vol 58 No 3 (August 1982) 159 at 162. 16 Arbitration, Vol 58 No 1 (February 1992) 21 at 26, 17. James CS Mackie, ‘Thesis on Commercial Arbitration in Commodity Trades’, Arbitration, Vol 57 No 1 (February 1991) 156 at 160,

The Role of ADR in the Settlement of Commercial Disputes Arthur Marriott*

I have taken as the title of this lecture ‘The Role of Alternative Dispute Resolution (ADR) in the Settlement of Commercial Disputes’. I am conscious of straying, perhaps, beyond the boundary of the Goff Lectures, which are devoted to arbitration. However, I do so following the example of Lord Goff himself who, in the first Goff Lecture given in Hong Kong in 1990 and entitled ‘Future Imperfect’, referred perceptively and sympathetically to the growing interest in ADR, particularly in the common law world. The central theme of Lord Goff’s lecture was what he described as ‘the working hypothesis’ to be applied to commercial dispute resolution; the idea, as he put it, that there is no perfect solution to our problems, only a series of temporary solutions which may in due course themselves require to be modified or abandoned, as circumstances change. The test of the working hypothesis is particularly apt when judging the value of ADR in resolving commercial disputes. The commercial community and those who advise them will only use ADR if it is a viable alternative to the formal and adjudicatory procedures of arbitration and litigation, or to conventional unmediated negotiation before or during adjudicatory processes. ADR, if it is to be of value, must work. The central theme of this lecture is to compare ADR with systems of adjudication, particularly arbitration, to assess its value and thereby to define its place in the spectrum of methods of dispute resolution open to the commercial community. l shall also say something of the history and significance of ADR in Hong Kong. There have been attempts in England. most notably by the British Academy of Experts, to compile a glossary of terms for ADR. It matters not what we call it, provided we understand what ADR is and what it can and cannot do. ADR is not the panacea which cures all ills: neither is it suitable for all disputes, particularly those involving the liberty or rights of the citizen, nor for those cases of general commercial importance where an authoritative judicial decision is required on a matter of commercial principle.

* Arthur Marriott is a solicitor practising in England and Wales and consultant to the London Office of the American law firm Wilmer Cutler & Pickering. He is a member of the English Departmental Advisory Committee on Arbitration Law (the Steyn Committee) and headed the original private drafting group which produced early versions of a draft Arbitration Bill. Mr Marriott has been closely associated with City Polytechnic of Hong Kong’s Postgraduate Diploma/Master of Arts in Arbitration and Dispute Resolution (PGD/MA ArbDR). This lecture. delivered in Hong Kong on 3 December 1993. was the fourth in the series of Goff Lectures on arbitration sponsored by the then City Polytechnic of Hong Kong Law Department and named after Lord Goff of Chieveley. Editorial note: It was originally prblished at (1993) 391) Asia Pacific Law Review 1-19.

The Goff Arbitration Lectures 1990-2022

Perhaps I may also be forgiven if I adopt the definition of ADR which Henry Brown and I formulated in our recent book. We defined ADR as: ‘a range of procedures which serve as alternatives to the adjudicatory procedures of litigation and arbitration for the resolution of disputes, generally but not necessarily involving the intercession and assistance of a neutral third party who helps to facilitate such resolution.’1 That neutral third party is usually known as a mediator or conciliator. I use the terms interchangeably and I regard the debate as to any difference as sterile and best avoided. By adjudication, we mean a dispute resolution process in which a neutral third party hears each party’s case and makes a decision which is binding on them. There are various form of adjudication, for example litigation and arbitration; also, in some jurisdictions, private judging. There is also a more specific meaning in some industries, including in particular the construction industry, of a procedure by which a neutral party, the adjudicator, is empowered and required by contract to make summary binding decisions about disputes arising under that contract without following litigation or arbitration procedures. This specialised meaning, also called ‘fast-track adjudication’ and ‘interim adjudication’, generally provides for the determination to be binding only until the parties have reached some further agreement on the issue, or have taken it to litigation or arbitration. There are also procedures for the use of experts to make binding decisions pursuant to contractual provisions. Extensive use is made of such experts in England in the commercial real estate industry and in oil and gas field redetermination in the North Sea. The formal processes of arbitration and litigation are avoided and, in English law, such decisions are not arbitral awards. An interesting combination of ADR and adjudication is to be found in the dispute resolution provisions of the Airport Core Programme contracts in Hong Kong of which I will have something to say later in this lecture. The increasing use of ADR as an alternative to litigation has arisen because the civil justice system in many common law jurisdictions, particularly the United States and England, has become too expensive and protracted, with the result that there is a denial of access to the courts. Most citizens and many, even affluent, corporations simply cannot afford to litigate, even when, as in our system, Legal Aid is provided and a substantial part of the costs incurred may be recovered by the successful party. Only the very rich or the very poor citizen can afford to go to law, and access to administrative tribunals, so important in our system of justice in England, is hampered by the lack of Legal Aid. The crisis in the civil justice system in the United States and England is worsened by the even greater crisis in the criminal justice system, a topic beyond the scope of this paper, and not one with which ADR is directly concerned, although there is some experience of ADR in resolving community disputes and in enabling the victims of crime to negotiate and receive reparation and to be, to some extent, reconciled with the perpetrators. The problem of access to justice is at its most acute in the United States, provoked by the gross overloading of the courts in the criminal justice system. The massive increase in drug and drug-related cases, combined with the requirement of the Speedy Trial Act 1974 that criminal cases take priority over civil cases, has drained resources from the civil justice

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system in several American jurisdictions to a point of near-paralysis. I was told recently of one Federal Court which had suspended all civil trials for 18 months because of pressure of criminal cases. These difficulties have led the American Bar Association (ABA), in its Working Group Report on Civil Justice entitled ‘Blueprint for Improving the Civil Justice System’, published in February 1992, to conclude that For most Americans, the justice system is not a friend; rather, it is a labyrinth which they do not understand and which they believe, rightly or wrongly, they can neither use nor afford. More than 200 years ago, our country’s founders framed a constitution that established a government of laws, not of men. Neglect and chronic underfunding of our justice system has weakened that system, and now threatens our citizens’ basic faith in justice. The common law system of civil justice rests on the adversarial system. As that same ABA report pointed out, the system relies heavily on an adversarial system where contending litigants, through their lawyers, marshal and formally present the proof that will persuade a neutral and objective factfinder. Fundamental to this system are an accessible and zealous Bar, an independent and skilled judiciary with the time and energy to adjudicate justly and effectively, and, when called upon, a neutral and fairminded jury capable of resolving cases on the evidence presented. Fortunately, in England and in other common law jurisdictions which have followed the English example, the jury trial in civil cases is reserved for a very limited number of disputes but, apart from that, the description of the ABA of the American adversarial system applies with equal force to ours in England and in Hong Kong. The difficulty which faces those who would reform civil procedure in litigation is that all litigation, whether adversarial or inquisitorial, is labour-intensive. The principal cause of the high cost of litigation is the unavoidable fact that lawyers in all jurisdictions enjoy a privileged position and a privileged, and high, income. It is the general level of lawyers’ charges and the labour-intensive nature of the procedures which drive the cost of litigation to current levels. It is idle to expect that this will change, or that the government in the United States or in the United Kingdom will be prepared, through taxation, to increase significantly the financial resources available to the administration of civil justice. Reform of the system will demand other measures of organisational and procedural change. Although the pressures of the market place may well force reductions in lawyers’ fees, the impact on the cost of litigation is marginal. It is only systems which reduce the time spent by lawyers to a minimum and are directed to the achievement of negotiated settlements which can substantially reduce the cost of dispute resolution. A frequent criticism of ADR methods by litigation lawyers is that, in any event, all responsible lawyers look for the opportunity to settle litigation or arbitration. Indeed, a whole regime of without-prejudice communications has evolved in order to facilitate the negotiation of settlements in an adversarial context. But one critical aspect of settlement is its timing, and while, obviously, some settlement negotiations are conducted

The Goff Arbitration Lectures 1990-2022

at an early stage of the dispute, a hesitation to appear weak by suggesting negotiations quite often militates against attempting early settlement. Alas, initial settlement approaches are often left until pleadings are closed, and when complete discovery and inspection of documents has taken place. The theory is that both parties need to go through this process in order properly to assess their strengths and weaknesses. Unfortunately, to get to that stage involves considerable cost and delay, and the increasingly abrasive and aggressive manner in which litigation in England is conducted often does little more than escalate belligerence and animosity and makes the settlement of disputes the more difficult to achieve. Disputes are not readily capable of neat categorisation, and ADR has been used in England in many kinds of disputes both public and private. I suspect that the use of ADR is best known in England in labour disputes conducted under the aegis of ACAS, which was established as long ago as 1920. In recent years, the use of ADR in England in family disputes has developed, given the move away from divorce based on fault and the increasing number of marriages which end in divorce and cohabitations which end in separation. ADR has fulfilled a role of considerable social importance in resolving difficult and distressing issues of property, finance and relationships with children. However, this lecture focuses particularly on the use of ADR in the resolution of commercial disputes - a very wide category. It includes contractual disputes, issues arising in numerous types of commercial relationships, such as partnerships and joint ventures, and in various commercial activities such as banking, shipping, commodities, intellectual property and construction. Such disputes usually involve issues of fact and issues of law. Frequently. there are technical differences with different opinions from professional and technical experts on each side. They can also involve differences of understanding arising. for example. from ambiguous language, or from different assumptions as to obligations and allocation of risk, or the factual and commercial basis upon which commitments were entered into. Traditionally, commercial disputes in England, both domestic and international, have been resolved primarily by arbitration, alternatively by litigation, rather than by ADR. Arbitration has been conducted under the auspices of exchanges, guilds, trade associations and other professional organisations. This continues, particularly in maritime, commodity, construction and commercial real estate arbitration. This is not for want of an alternative in international cases as, for some time, ADR has been offered by arbitral institutions as part of their dispute arbitration services. Thus, for example, the International Chamber of Commerce (ICC) bas conciliation rules, rarely used, and the Zurich Chamber of Commerce has a mini-trial system, which I gather has not been used at all. The International Centre for Settlement of Investment Disputes (ICSID), too, has a conciliation service, also rarely used. For those who prefer ad hoc conciliation in international cases, the United Nations Commission on International Trade Law (UNCITRAL) rules are available, but anecdotal evidence suggests they are not widely known or used. Parties to international disputes appear to have favoured litigation or arbitration, although, as I will discuss later, this is beginning to change. Recourse to the courts in England has been confined (and since 1979 increasingly so) to a minority of commercial disputes, with specialist Commercial Judges and the Official

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Referees providing a necessary and expert service in resolving disputes and in supporting and supervising arbitration. This is not to underestimate the value of such specialist courts, either historically or at the present day, for their contribution to the development of English commercial and construction law and in strengthening English arbitral law and practice has been enormous. It is, incidentally, a common misconception, particularly abroad, that the English courts have traditionally been hostile to arbitration. As Lord Mustill has pointed out, the contrary is true, though it cannot be denied that the abuse of the case stated procedure in the 1960s and 1970s seriously damaged the reputation of English arbitration, particularly internationally. Fortunately, the 1979 Act and its subsequent interpretation by the Commercial Court judges and the appellate courts in a series of important cases has done much to confirm England as one of the leading developed arbitral jurisdictions in which full recognition and effect is given to the autonomy of the parties in both domestic and international commercial arbitration. Regrettably, other than in maritime or commodity cases, that autonomy has not been fully exploited, in domestic cases in particular, despite judicial encouragement at a senior level, to develop procedures radically different. faster, less formal and less expensive than those of the courts. The ugly spectre of misconduct is invoked by some to deter arbitrators who try to be innovative. Yet, a striking feature of the English law of arbitration is the freedom of the parties to organise the arbitration procedure as they like. Unfortunately, and to the increasing detriment of English arbitration, arbitrators and parties have been slow to take full advantage of that procedural freedom. This is, perhaps, born of ignorance or conservatism, with too unquestioning an acceptance of the orthodox view that the English law of evidence applies and that arbitrators should conduct the proceedings in adversarial fashion. This orthodox and conservative view clearly influenced the decision of Sir William Stabb QC in Town and City Properties (Development) Ltd v Wiltshire Southern Ltd & Gilbert Powell,2 where he adopted as a statement of applicable principle a passage from the first edition of Mustill and Boyd at p 261 which is reflected in similar language in the second edition of Mustill and Boyd at p 299.3 That passage advances the proposition, based on principles of natural justice, that ‘unless the parties have agreed to the contrary, expressly or by implication, the arbitrator is required to adopt an “adversary” rather than an “inquisitorial” procedure’. That statement of principle has operated as a straitjacket on procedural innovation, despite the clear qualification of Mustill and Boyd that it is open to the parties to agree to the contrary, whether expressly or by implication, and the fact that the courts will readily imply such agreement, particularly in an international case. The key question in all cases must be whether the arbitrator is acting in accordance with the rules of natural justice which, incidentally, are not confined to England and Wales and do not find their most sublime expression in English or American adversarial procedures. As Goff J remarked in Carlisle Place Investments Ltd v Wimpey Construction (UK) Ltd,4 a case he decided well over ten years ago, ‘an arbitrator is the master of his own procedure. The courts, in my own experience — and no authority has been cited to me otherwise — do not ordinarily attempt to control the procedure in an arbitration.’ What the courts seek to

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control is a breach of natural justice, but if the arbitrator acts according to the tenets of natural justice, then he should not be open to a misconduct application simply because he has chosen not to proceed in an adversarial manner. In characteristically bold and lucid fashion, Lord Justice Steyn has challenged the accepted orthodoxy in his formidable and provocative Freshfields Arbitration Lecture 1993. The main theme of the lecture was England’s response to the Model Law but, in the course of it Lord Justice Steyn emphatically rejected the view that arbitrators in England are bound to apply the English law of evidence and to follow adversarial procedures. Fortunately, these questions will not remain a matter of controversy for much longer, it being the intention of the Departmental Advisory Committee to advise the Secretary of State for Trade and Industry that the new Arbitration Act, a work of consolidation and clarification of the more important principles of English arbitration, should make it completely clear that arbitrators in England are bound neither to follow the English law of evidence, nor to observe adversarial procedures. I hope this will release the creative energies of those willing to experiment with procedural reform. I also hope that arbitrators will be prepared to raise the possibility of settlement with the parties at regular intervals. This is commonplace in civil law litigation and also in arbitration under civil law systems. American judges regularly do so at pretrial conferences, and even English judges have been known to tip the wink to the advocates that settlement ought, perhaps, to be considered, given the tentative view which the judge has formed and which he is prepared to express. I should like to see this approach adopted by arbitrators, enshrined in institutional rules and encouraged by the courts. Slavish adherence to the orthodox view of adversarial procedure has caused considerable damage to the arbitral process in England. It has resulted in domestic arbitration following High Court procedures, often taking longer and, almost invariably, costing more than litigation. It is a scandal that disputes in the construction industry, for example, are still largely conducted virtually in the traditional fashion of 19th century litigation. This encourages abuse of power and creates grave injustice. Examples are rife in the behaviour both of employers toward contractors and of main contractors toward subcontractors, rendered particularly vulnerable by problems of cash flow in the worst recession we have experienced in England since the 1930s. So it is perhaps hardly surprising that ADR is being considered as an alternative to arbitration certainly in the construction industry, but also in other fields of commercial activity; and that practitioners are getting used to the differences between the two methods. Arbitration differs from ADR in five main ways. First, systems of ADR and arbitration are consensual and their use rests on agreement; but agreements to enter into arbitration will be enforced by the courts, whereas the common wisdom is that agreements to enter into an ADR process may not necessarily be, though this may be changing. There are two Australian cases which merit close attention, namely Allco Steel (Queensland) Pty Ltd v Torres Strait Gold Pty Ltd 5 and Reed Constructions Pty Ltd v Federal Airports Corporate.6 In the first case, the court decided that an ADR clause in the relevant contract, providing for the parties to try to resolve their dispute through ADR before litigating, was not enforceable. But in the Reed Constructions case, where a differently formulated ADR clause provided for an arbitration procedure which included as one of the mandatory steps an attempt to mediate

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the dispute, it was ruled that the parties had to comply with the whole dispute resolution clause before adjudication could begin. In the United States, the question of enforceability of non-adjudicatory ADR clauses is still not fully resolved. Some American courts have enforced agreements to submit to ADR procedures other than arbitration, and some American state statutes suggest that agreements to mediate are enforceable. The position has not been tested in England, but it is hoped that the approach set out by Kerr LJ in the Tubeworkers case7 (a case of adjudication) will be followed. In that case, Kerr LJ approved and applied the principles enunciated in Northern Regional Health Authority v Derek Crouch Construction Co Ltd,8 in order to uphold and enforce the dispute resolution mechanisms upon which the parties had agreed. The second main difference is that arbitration has as its object the rendering of a final and binding award. ADR procedures have as their object bringing the parties to the point of making binding agreements or consent orders to resolve, either in whole or in part, the matters in dispute between them, but it is by no means an automatic consequence of the process. Whereas an arbitrator has authority to make a binding decision, the ADR neutral does not. A third difference is that ADR processes are subject to no statutory regime in England, whereas arbitration is subject to an extensive statutory regime, principally of the 1950, the 1975 and the 1979 Acts. There is no plan to incorporate ADR provisions in the new English Arbitration Act, even to permit arbitrators to render an award ex aequo et bono, hardly a form of ADR, but necessary to bring us into step with our civil law colleagues. It appears unlikely that we will follow the interesting and innovative approach taken in Hong Kong, in s 2B of the 1989 Arbitration Ordinance. A fourth point of difference lies in procedures adopted in arbitration and in ADR. As has already been noted, arbitral procedures are constrained by the rules of natural justice. Yet, the rules of natural justice would positively hinder an ADR neutral, who must be free to see the parties together or separately, with the utmost flexibility as to what is disclosed from one party to the other. Yet this does not mean that ADR should be unfair or influenced in favour of those with stronger bargaining positions or deeper pockets. The fifth and final point of comparison between arbitration and ADR procedures is the basis upon which decisions are reached. Arbitrators are expected to decide matters according to law, and even when acting ex aequo et bono, are generally expected, in the words of Art 28(4) of the UNCITRAL Model Law, to ‘decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction’. ADR neutrals do not decide at all; and their recommendations and opinions do not have to follow the law. At the heart of the ADR process is the act of negotiation, of which there are various theories. All of us learn to negotiate from an early age, and styles of negotiation reflect our social and economic environment and the professional and other influences to which we have been exposed.

The Goff Arbitration Lectures 1990-2022

An often cited distinction is between the problem-solving and competitive approaches to negotiation. Problem solving usually involves a more principled approach to dispute resolution, often in an attempt to increase the joint gains for both or all parties. The competitive approach accepts that there may be limited resources available and increasing one party’s share necessarily involves a reduction in another’s. Fisher and Ury,9 the American authors, conveniently summarise the problem-solving principles as being: the avoidance of fixed positions; the concentration on the respective interests of the parties; sticking to a problem-solving approach and not allowing personality differences to dislodge it; generating as many options as possible, particularly those creating mutual benefit, before reaching decisions; and, establishing objective and fair criteria for a resolution, rather than the judgement of either party. There are those who consider that to apply such principles is naive when faced with negotiators adopting the competitive approach. There is some force in this, but the problem solving approach is nonetheless a useful part of the negotiator’s armoury and can be effective even in the face of the toughest opposition. This is particularly so when trying to assess and define the underlying aspirations and needs of the negotiating parties. What I want is not necessarily what I need, and realising that, or being made to realise it in negotiation, may result in a settlement which satisfies my needs, even if not my wants. Undoubtedly, the problem-solving approach is preferred by mediators assisting in negotiation and should be tried even with a hard and unprincipled competitive negotiator. At the very least, the maintenance of a principled position may cause even the toughest negotiator to think again and to be fully aware of the consequences of failure. However, the use of ADR does not by any means depend upon parties employing problem-solving negotiation, and ADR operates effectively even where both parties adopt strongly competitive approaches. Of great importance in the structure of any negotiation is the respective power, actual or perceived, of the parties. Power takes many forms. Sometimes it is based on hierarchy or on influence, on a stronger legal case, or on moral authority. Often there are built-in restraints on the exercise even of extreme power, particularly where, as for example between debtor and creditor, the power to inflict bankruptcy will cause a loss to the creditor. Emotional and psychological considerations play a role in most negotiations, even if only at the level of assessment of how one party may respond to a given move by the other. The skilled negotiator and mediator learns to take these factors into account. An important question that arises in negotiation or mediation is whether a duty of good faith is owed by one party to another. The civil lawyer has no difficulty or hesitation in replying affirmatively. Principles of culpa in contrahendo and venire contra factum proprium are well established in the civil law. Many civil codes, such as in Switzerland, have express provisions of good faith as an overriding duty in the negotiation and performance of contracts. But as Bingham LJ has reminded us in lnterfoto Library Ltd v Stiletto Ltd:10 ‘English law has, characteristically, committed itself to no such overriding principle but has developed solutions in response to demonstrated problems of unfairness.’ Regrettably, in Walford v Miles,11 the House of Lords has gone so far as to say that:

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The concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiation. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact, in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms. It remains to be seen whether these views are, as one would hope, confined to adversarial situations and are not to be applied to mediation. However, I fear that Lord Justice Steyn’s eloquent and persuasive plea in his Royal Bank of Scotland Lecture may fall on deaf ears, at least where some English judges are concerned. As Lord Justice Steyn pointed out: The aim of any mature system of contract law must be to promote the observance of good faith and fair dealing in the conclusion and performance of contracts. The first imperative of good faith and fair dealing is that contracts ought to be upheld but there is another theme of good faith and fair dealing: the reasonable expectations of honest men must be protected. We ought, in English law, to develop concepts of good faith in negotiation beyond the lockout cases and other discrete examples. I very much hope that under the influence of our continental colleagues and in recognition of the important role of mediation in the settlement of commercial disputes, we may be led to embrace such indicia of good faith as duties to disclose and not to break off negotiations without reasonable cause. It is important to the future of mediation and, I think, of English commercial law, that we do so. In the meantime, ADR, like traditional bilateral negotiation, can work quite effectively even in the absence of good faith; but this would not ordinarily be the case if the bad faith extended to an abuse of the process itself. Mediation is a facilitative process in which disputing parties engage the assistance of a neutral third party who acts as a mediator in their dispute: the mediator has no authority to make any decisions which are binding on the parties, but uses certain procedures, techniques and skills to help the parties to negotiate a resolution of their dispute by agreement without adjudication. Mediation comes in different models and covers different fields of activity, each with its own traditions, ethos and culture. Thus, mediators practising in the resolution of commercial disputes may well adopt different procedures and have different views and approaches from mediators working in community disputes, or in labour, or divorce disputes. But there are certain fundamental features common to all mediation, such as neutrality, impartiality and independence; and it should go without saying that the mediator should not be associated or connected with any of the disputing parties in a way which would inhibit neutrality or effective intervention. The outcome of mediation has to be consensual, and any process under which a binding outcome is imposed is not mediation but is some form of adjudication. All mediators have, as their primary objective, a settlement of differences by negotiated agreement and the mediator’s primary role is to assist the parties with their negotiations. I see no merit in the

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differing arguments as to whether the mediator should propose a solution, or merely attempt to help the parties to devise their own. It all depends on the nature of the dispute, on the parties, and on the personality and skill and approach of the mediator. In that sense, all roads lead to Rome and no particular way is to be preferred. We must guard against attempts to formalise mediation or to put it in a conceptual or procedural straitjacket. An advantage of mediation is generally thought to be the empowerment of the parties, namely an increase in the parties’ ability to make their own decisions and the corresponding reduction of dependence on third parties including professional advisers. This can be a major difference between mediation and adjudication and is an important aspect of the mediation process. It is also important that confidentiality be preserved, for mediation is by nature private and confidential and can only work effectively if those principles are respected. It should also be a feature of mediation that the dispute is defused and de-escalated, in contrast to litigation where disputes often mushroom and escalate in a way quite unforeseen by the parties at the outset, and render settlements more difficult to achieve. ADR has developed in two general ways — first, attached to courts and, second, independent of the court system. Undoubtedly, the acceptance of ADR as an alternative to formal adjudication has been greatly enhanced as a consequence of its use as part of the procedures available to those who go to court. In my view, general acceptance of ADR in England and, possibly, in Hong Kong, will be easier and faster to achieve if there are ADR systems grafted on to the courts, even if such systems are voluntary and are operated by practitioners, rather than judges or court officials. It is in the procedural reform of litigation that techniques of ADR have been employed by the courts and practitioners in the United States and elsewhere. The objective has been the promotion of settlement, but their introduction and use, particularly when court-annexed, should be subject to caveats. First, in principle, the use of ADR should be entirely voluntary. Only if there are clear procedural safeguards against abuse should parties be bound to use ADR. Second, the ADR processes and techniques are there to assist the parties to reach a settlement, and not to compel them to do so. The current systems of civil justice are justifiably criticised, because the effect of cost and delay is often to compel parties to settle on terms which are unfair, and do little or no justice to the case. The use of ADR processes, whether by the courts or privately, must not become oppressive and operate as a denial of access to justice. Various procedural devices have been used in the United States, ancillary to litigation, to promote settlement, to ease the congestion of the court calendars and to reduce the cost of litigation. Thus, for example, in Texas, courts may order parties to undertake non-binding ADR procedures such as arbitration, mediation, settlement conferences, settlement weeks, mini-trials, summary jury trials and early neutral evaluation. Such measures have also been used elsewhere, and are well-described in the literature. Court-ordered, or court-annexed, arbitration has also been used in the United States and in Australia The court orders the case to be dealt with by way of arbitration by a third party whose finding is initially non-binding. Either party may require a rehearing by a judge, but if neither does so the award becomes a binding court order. However, if the case is reheard by a judge and the judge’s decision does not result in a better award to the party who

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applied for the re-hearing, then there may be cost sanctions applied to that party where such sanctions are constitutionally allowed. Although court-annexed arbitration is not yet available in England, it has become established in a number of other jurisdictions. Thus, it was first used in Pennsylvania in 1952, and there are now over 100 trial courts in various jurisdictions in the United States using some form of court-annexed arbitration. It appears that the results of a number of studies in the United States indicate that most litigants are satisfied with the process, and that it achieves a high rate of success. There are variations in the United States of the court-annexed arbitration principle. One of these is the moderated settlement conference, under which a panel, usually comprising three impartial lawyers, follows a procedure similar to court-annexed arbitration. Another variation is ‘Michigan Mediation’, adopted in the Michigan Supreme Court, which is a blend of mediation and arbitration in which a panel meets the lawyers of the parties separately to seek an agreed settlement. Failing agreement, the panel makes its own settlement proposals which become binding if not objected to within a specified period. It will be apparent that court-annexed arbitration differs from ordinary arbitration by virtue of the fact that it is not binding in the first instance, and that disputants do not lose their right to have the matter heard by the court; also that the awards, once accepted, become as effective as orders of the court. These differences appear to make them more acceptable to the public in the United States than traditional binding arbitration. Court-annexed mediation has also been used in the United States, and in England there has been some experience with this system, particularly in family matters involving issues relating to children and financial and property issues. There have also been a number of ideas for pilot mediation schemes in the civil sector. Proposals for drawing the attention of litigants to the use of ADR, involving some form of mediation, are on the point of publication by the Commercial Court in London. This is a direct, if timid, response to the pressure on that Court, namely, the threat of being swamped by massive litigation, such as has been provoked by the scandals at Lloyd’s and the wholesale fraud of Robert Maxwell. ADR independent of the courts bas seen considerable growth and the development of new techniques such as the mini-trial. The various alternative mechanisms are well set out in the literature and need no repetition here. But what may not be generally known is the anecdotal evidence of the increasing use of ADR in private sector disputes, particularly in the United States but also in the United Kingdom. It is now commonplace for corporate clients to demand of their lawyers in the United States that attempts be made to settle by ADR methods before embarking on litigation or arbitration. And there has been an increase, both in the number and case load, of private organisations such as Endispute Inc. Although Hong Kong has been considering a system of court-annexed mediation, it has not so far been introduced; but Hong Kong can justifiably claim to be further advanced than England in the use of ADR independently of the courts, in both the private and public sectors, in the settlement of certain disputes, notably construction. The use of ADR has developed in the context of an extraordinary growth in arbitration and litigation in Hong Kong in the last 25 years. This has its origins in the fact that Hong Kong has become one of

The Goff Arbitration Lectures 1990-2022

the world’s major financial and mercantile centres. As part of that process, there has been an enormous increase in infrastructure works, beginning with the construction of Kai Tak airport in 1955 and the ambitious programme of water supply involving the construction of major dams, such as Shek Pik, Plover Cove and High Island, which took place in the late 1950s and early 1960s. The process continued with a vast programme of transport infrastructure works, including the truly remarkable achievement of constructing the Mass Transit Railway system in three stages, beginning in the mid- l 970s. It goes on today with the new airport. Inevitably, this growth in the infrastructure and commercial activity of Hong Kong has produced a growth in dispute resolution, particularly in arbitration and litigation, but latterly, in ADR systems as well. It is interesting to consider some statistics for the administration of the judicial system in 1972, a mere 20 years ago. In 1972, the Courts of Justice in Hong Kong were: the Full Court, the Supreme Court, the District Court, the Magistrates Court, the Coroner’s Court and the Tenancy Tribunal. There were a total of 69 office holders in these courts. They were: l

Chief Justice

Senior Puisne Judge

Puisne Judges

District Judges

Magistrates, and

Presidents of the Tenancy Tribunal.

A Justice of the Peace Court, consisting of two Justices of the Peace and having the same jurisdiction as a special magistrate, also sat several times a week. There were also two Coroners’ Courts. The highest court was the Full Court, which sat when required and was comprised of two or three Judges of the Supreme Court as the Chief Justice directed. The Chief Justice usually presided over the Full Court, which heard appeals from the Supreme Court and the District Court. Its jurisdiction corresponded roughly to that of the Court of Appeal in England. Now, there are 32 senior judges, 29 District Judges and 71 magistrates. In the Supreme Court in 1972 there was a total of 7,056 cases, of which just over 1,000 were criminal matters. The District Court dealt with 20,887 cases, of which 470 were criminal. In 1992 the Supreme Court and High Court dealt with 15,414 cases, of which 152 were commercial cases and 13 were construction cases. Criminal cases were about 2,000 in number. The District Court dealt with over 55,000 cases. The increase in arbitration has been even more dramatic than the increase in litigation. So far as I am aware, prior to the Plover Cove arbitration, which began in the early 1970s, and was concluded by agreement in 1976, there had only been one arbitration against the Government, notably a dispute between the Government and the Sand Monopoly contractor. That arbitration was resolved by an award in the contractor’s favour. Arbitration in the private sector was, so far as I am aware, virtually unknown. But with the advent of overseas contractors to effect the Government’s ambitious public works programme, attention focused more on dispute resolution. It had always been thought

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that both the nature of local contracting and the undoubted power of the Government as the employer had militated against claims being made by local contractors, and certainly against such claims resulting in either arbitration or litigation. However, during the 1970s, the contractors’ professional advisers became more and more involved in presenting claims against the Government. From time to time, those claims proved incapable of resolution by agreement, and litigation or arbitration resulted. There were also those who recognised that it was essential to the healthy development of Hong Kong as one of the world’s leading financial and mercantile centres, that it should have a dispute resolution service capable of satisfying the requirements of domestic and international business. The Attorney-General, John Griffiths QC, to whom credit must be given for his efforts in this field, was determined that Hong Kong should have an arbitration law and facilities worthy of its growing status as an international centre. Others shared that view, notably the late David Hunter, whose memory will, I hope, be honoured by the creation of a Chair in Arbitration. The reforms of the Hong Kong International Arbitration Centre, recently rejuvenated and firmly re-established, demonstrate the importance which the Government and others attach to effective dispute resolution by arbitration, particularly of international disputes. The last 20 years have seen a growth in maritime arbitration in Hong Kong, which previously had been disposed of in either London or New York. Given the importance of Hong Kong to world shipping, it was perhaps only to be expected that a practice of maritime arbitration would develop here, and certainly this has been helped by the presence of the major London shipping law firms with their thriving practices in Hong Kong. Anecdotal evidence suggests that arbitration is being used for other kinds of commercial disputes and that there are many deals being struck in the region which provide for Hong Kong as the venue and either Hong Kong or English law as the applicable Law. This is not only an example of Hong Kong’s leading financial and mercantile position, but also a recognition that the statutory regime, the support of the courts and the skill of practitioners all help to create a satisfactory venue for the fair and efficient despatch of international disputes. I would have thought, though I know of no statistical evidence to prove it, that the enactment of the UNCITRAL Model Law, another far-sighted decision on the part of the arbitral community and the Government, is of assistance in establishing Hong Kong as the major arbitral venue in this part of the world. The history of alternative dispute resolution in Hong Kong is even more recent than the growth in arbitration and commercial and construction litigation. I believe it has its origins first in the realisation by David Hunter and others of the traditional role which the search for compromise and consensus has played in the Chinese legal culture and, second, in a growing realisation on the part of all concerned that the traditional methods of dispute resolution, particularly in the construction industry, were simply not working. Regrettably, arbitration in the construction industry here appears to follow English procedures, despite attempts to streamline them and reduce the impact of discovery and orality. I vividly remember being told by David Hunter of his experiences and impressions on his first visit to China, when he discovered the Chinese concept of what he described to me as a rolling arbitration, whereby the arbitrator could become a conciliator and then revert

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to an adjudicatory role if the search for compromise and consensus proved in vain. Section 2B of the Hong Kong Ordinance is a direct consequence of this appreciation of the Chinese system and it is encouraging to know, from such anecdotal evidence as exists, that there have been successful examples of the use of s 2B. It is a matter of regret that, as I have already mentioned, we in England will not have the courage of your convictions in Hong Kong and introduce a similar measure in the new Arbitration Act or even give arbitrators the right to render an award ex aequo et bono. The second impetus for the use of ADR in Hong Kong arose from the work of the Joint Discussion Group for the construction industry, which was established by the Government as a consequence of certain representations which the construction industry made to the Governor in 1981.Those representations sought improvement in the administration of major public works contracts, many of which had given rise to unacceptable overruns of both cost and time. By definition, public works contracts engage the public interest, and it was increasingly unacceptable that major contracts should be subject to this kind of disruption. This led the Civil Engineering Group within the Building Contractors Association (BCA), as it was then called, to make a number of representations on many aspects of contract conditions and administration. In that context, a number of specific proposals were made for the reform of the procedures of dispute resolution. At that time, government contracts contained arbitration clauses providing for arbitration at the end of the work, following the well-known two-tier procedure rightly criticised by lan Duncan Wallace. We also proposed the introduction of mediation and tabled specific rules which were taken (with full acknowledgement) from the Construction Mediation Rules of the American Arbitration Association (AAA). The construction industry in Hong Kong is indebted to the AAA for its assistance and encouragement over the years. It is a tribute to the open-mindedness of the government officers concerned, that they agreed to introduce a mediation scheme on a trial basis, which was done in some 15 contracts ranging in value from HK$2 to HK$50 million, and up to 18 months’ duration. Government officers were concerned by the floodgates argument, but though the gates did open, the flood did not come. This led the Government to accept, as a matter of policy, that mediation should be introduced into government civil engineering and building contracts and, over the years, this has been done, finding its latest expression in the dispute resolution provisions for the Airport Core Programme. These provisions are of great importance and merit close study. The objective is to settle disputes within the term of the contract, prevent delay and reduce the scope for serious disruption. I believe the provisions will work to the benefit of the project, but the three-stage procedure is rather cumbersome and unnecessarily complex. The system will only work satisfactorily if there is strong and interventionist management which seeks to avoid disputes maturing to the point where the procedure must be invoked. Without effective management the dispute resolution provisions in themselves will not achieve the commercial objectives of the contract. The Airport Core Programme contracts envisage mediation as a compulsory first step in the event of any dispute; and that was part of the original proposals which the contractors made in the Joint Discussion Group, something which the Government rejected at that time. To inject a personal note, I also wanted to ensure that the work of the mediator was not lost to any subsequent method of dispute resolution. I tried to persuade the contractors to agree

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that the mediator could become the arbitrator, but the contractors would have none of it, fearing that neither Government nor contractors would be wholly frank and forthcoming ifthe mediator could subsequently become the arbitrator. That is a valid concern about this form of ADR, known as ‘Med-Arb’; but it can be met by having the mediator’s conversion into arbitrator be optional, allowing the parties either to accept the mediator as arbitrator at the conclusion of the mediation phase, or to choose a different person to act as arbitrator. The original proposals in the Joint Discussion Group were designed to produce an opinion by the mediator as to how the dispute ought to be resolved, particularly if the dispute was of a technical nature with contractual and financial implications. The rules envisaged an essentially pro-active mediator who would seek to bring the parties together by indicating his own view of an acceptable compromise. In the second version of the rules, this was changed somewhat, reflecting the debate within mediation circles as to the nature of mediation. However, it is interesting that in mediation in public sector contracts in Hong Kong, government officers appear to prefer a report or opinion to be given by an independent third party, which they are then able to produce to those in Government who control the purse strings. This, I think, also avoids any suggestion or suspicion of corruption that could attract the attention of the Independent Commission Against Corruption (ICAC). It is clear from the enthusiasm of Government and contractors for mediation, and from its undoubted success so far, that mediation is becoming the primary means of dispute resolution in the construction industry in Hong Kong. The Hong Kong Construction Association (HKCA) has contributed to that by organising, at the request of the Government, very successful mediation workshops, a necessary step to provide the appropriate introduction to mediation techniques and practice. The trend towards mediation in the construction industry is now beginning in England. There has been an Institution of Civil Engineers (ICE) Conciliation Procedure for some time, and an ICE Working Party is to publish in 1994 a new Conciliation Procedure for use with the new sixth edition, with the Design and Construct contract and other ICE forms. The Centre for Dispute Resolution (CEDR) has reported the successful mediation of construction and other commercial disputes. These are welcome signs, undoubtedly produced by the realisation that the traditional systems do not work and, in today’s economic climate, cannot be justified. They constitute an outrageous waste of public and private money and resources. It is, I believe, the combined effect of the lack of public funds for judicial expenditure, the apparent inability of the legal profession to devise rapid and inexpensive adjudicatory procedures and the effect of the recession that is providing the main impetus for the use of ADR in England, particularly in commercial disputes. ADR offers the legal profession and the commercial community the opportunity to put its own house in order, without radical change to the law of dispute resolution. Essentially consensual in nature, ADR can be implemented independently of the courts by private agreement. By agreement, all aspects of the process can be regulated, such as immunity for mediators, fees, procedures and confidentiality. The law of contract provides an existing framework and rules within which mediation can take place. Court-attached ADR, if it is to be compulsory, does require a change in the traditional rules and procedures of the courts. Depending on the jurisdiction, that may require legislation

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or be able to be achieved by court rules committees, or by the courts themselves exercising an inherent jurisdiction to control their own procedures, or by a combination of any or all of these factors. But it is also possible to establish voluntary schemes of court-attached ADR, which can be operated with the blessing of the judiciary by private practitioners. What is to prevent the creation of a scheme in Hong Kong by the Law Society and the Bar, in conjunction, perhaps, with the Arbitration Centre, whereby senior practitioners could offer their services as mediators, or arbitrators or neutral fact-finders to assist parties to commercial litigation to come to terms? Initially, to overcome prejudice and scepticism, some of these services could, perhaps, be offered pro bono, but as confidence grows there is no reason why fees should not be charged and such work become a regular and respected part of private practice. Such a scheme could involve fact-finding, particularly in technical disputes, by professionals other than lawyers. This is especially useful where parties are trying to litigate issues of high technology with which most of us are quite unfamiliar. Nor should such a scheme be confined to first-instance disputes. Attempts could be made to resolve disputes, either in whole or in part, in the appellate list. This is done very successfully in some jurisdictions in the United States, where very senior practitioners with no power other than their own experience and persuasive authority examine the merits of appeals with the counsel concerned. Such schemes could materially assist the administration of civil justice and, perhaps, free resources for the administration of criminal justice and improve access to the courts in civil matters. Such schemes would also encourage the use of ADR independently of litigation and arbitration. And such schemes have the great merit of being able to be introduced easily, rapidly and cheaply. Discussion of ADR in England is part of a much larger debate as to how we should resolve conflicts and disputes in our increasingly pluralist and complex society. There is, perhaps, a need for such debate in Hong Kong, given Hong Kong’s unique position and the pending transfer of sovereignty. It is beyond the scope of this lecture to initiate such a debate, much less contribute to it. But if such a debate begins here, let us remember in the words of the great judge in whose honour these lectures are given, that the future is imperfect; and let us take to heart his advice that there is no perfect solution to our problems, only a series of temporary solutions. But let us also have the conviction and skill to find them.

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Endnotes l

Henry J Brown and Arthur L Marriott, ADR Principles and Practice (London: Sweet & Maxwell, 1993) p 9.

2 (1988) 44 BLR 109 at p ll5. 3 Sir Michael I Mutill and Stewart C Boyd, Commercial Arbitration (London: Butterworths, 1982; 2nd ed 1989). 4 (1980) 15 BLR 109 at p 116. 5 Supreme Court of Queensland No 2742 of 1989, 12 March 1990 (unreported). Robert S Angyal, ‘Enforceability of Alternative Dispute Resolution Clauses’, Autralian DL1pute Resolution Journal Vol 2, No 1 (February 1991) pp 32-40. 6 Supreme Court of Queensland, March 1990. See Brown and Marriott, op cit n 1, p 327. 7 Tubeworks Ltd v Tilbury Construction Ltd (1985) 30 BLR 67 at pp 77-78. 8 [1984) QB 644 at p 664. 9 Roger Fisher, William Ury and Bruce Patton, Gelling to Yes: Negotiating an Agreement Without Giving In (Boston: Houghton Mifflin, c. 1991). 10 [1989] QB 433 at p 439. 11 [1992] 2 WLR 175 at p 181 per Lord Ackner.

The Validity of an Arbitral Award Rendered by a Truncated Tribunal

Stephen M Schwebel*

It is a privilege to give the Goff Lecture, named as it is in honour of Lord Goff, one of the most distinguished and engaging judges of our time. And it is a pleasure to return after too long to Hong Kong, a city of remarkable vitality which today is a centre of international commercial arbitration as well as of so much else. I wish to speak about a problem of international commercial arbitration which is better known as a problem of inter-State arbitration: whether a truncated tribunal has the authority to render a valid award. The problem has been notorious in international law since the inception of modern arbitration late in the eighteenth century. It has reared its ugly head in international commercial arbitration as well. The problem is this. Where there is the characteristic arbitral tribunal of three arbitrators, one appointed by each party, and a chairman agreed upon by the parties or the party-appointed arbitrators, and where the tribunal duly so constituted embarks upon the proceedings, schedules and receives and studies the pleadings, hears oral argument, and begins or completes its deliberations, or even begins or completes its draft award, and when, at any such point, one of the party-appointed arbitrators withdraws—walks out, indefinitely absents himself, or resigns or purports to—are the remaining two arbitrators entitled in law to render a valid award? This problem is so prominent in the practice of arbitration between States that, when the International Law Commission of the United Nations endeavoured in the 1950s to codify and progressively develop that practice through preparation of a Convention on Arbitral Procedure, it was a principal focus of the Commission’s concerns. The special rapporteur of the Commission, the late, great Professor Georges Scelle, described it as ‘une question très delicate mais capitale.’ 1 For his part, Professor Scelle had no doubt about the answer to the question. He regarded the withdrawal of an arbitrator under such circumstances as generally designed to sabotage the arbitration. It was ‘non seulement injustifiables au regard de la bonne foi, mais entièrement contraires au droit.’2 It followed that, since in international law withdrawal of an

* Judge and Vice-President of the International Court of Justice and author of International Arbitration: Three Salient Problems (1987). This lecture, the fifth in honour of Lord Goff, was delivered under the auspices of the Faculty of Law of the City University of Hong Kong on 30 November 1994, at the Hong Kong International Arbitration Centre. Editorial note: It was originally published at (1995) 4(2) Asia Pacific Law Review 1-20.

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arbitrator under such circumstances was wrong, no legal right could spring from that wrong; the withdrawing arbitrator, and the party appointing him, could not be heard to challenge the validity of an arbitral award rendered by the remaining arbitrators. A decade ago I was privileged to inaugurate the Hersch Lauterpacht Memorial Lectures at Cambridge University and I devoted one of those lectures to the question of truncated arbitral tribunals. I surveyed the problem as it had developed over the past two centuries and as it had recently intensified in the proceedings of the Iran-United States Claims Tribunal. Every known international case bearing on the question was taken into account, as were the international codes of arbitral procedure then existing. I reached the following conclusions: Withdrawal of an arbitrator from an international arbitral tribunal which is not authorised or approved by the tribunal is a wrong under customary international law and the general principles of law recognised and applied in the practice of international arbitration. It generally will constitute a violation of the treaty or contract constituting the tribunal, if not in terms then because the intention of the parties normally cannot be deemed to have authorised such withdrawal. Such a wrongful withdrawal may not, as a matter of international legal principle, debar an international arbitral tribunal from proceeding and rendering a valid award. While the precedents are not uniform, and the commentators are divided, the weight of international authority, to which the International Court of Justice has given its support, clearly favours the authority of an international arbitral tribunal from which an arbitrator has withdrawn to proceed and to render a valid award.3 Today’s lecture will revisit the problem. I shall not recapitulate my earlier examination, because it is far too long, it is published, and I do not disagree now with what I set out and settled upon then. I shall rather confine myself to what has happened since publication of that Lauterpacht Lecture. There are four developments that merit analysis. First, the problem has persisted (though abated) in the Iran-United States Claims Tribunal. Second, it has been passed upon by arbitrators of exceptional experience and distinction in an international commercial arbitration, and then treated by Swiss courts in half a dozen connected, controversial judgments involving that arbitral award rendered by a truncated tribunal. Third, the authority of truncated arbitral tribunals has been comparatively analysed at length and in depth at the 1990 Stockholm Arbitration Congress of the International Council for Commercial Arbitration (ICCA). And fourth, the problem has been dealt with in international arbitration rules newly adopted by international arbitral institutions. The subject calls for renewed consideration in the light of these four developments and because the authority of a truncated arbitral tribunal to render a valid award is not universally accepted, at any rate in all national jurisdictions, as the Swiss cases and the ICCA survey demonstrate.

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I. Iran-United States Claims Tribunal One of the more important and, until lately, productive arbitral tribunals in the history of international arbitration has been the Iran-United States Claims Tribunal. A product of the dispute over the taking of hostages in Tehran and their eventual release, the Tribunal has in the past 14 years rendered a large number of awards dealing with a multiplicity of property claims, published to date in 27 volumes.4 The Algiers Declarations which provide for the Tribunal specify that: The Tribunal shall consist of nine members ... each government shall appoint onethird of the members ... the members so appointed shall by mutual agreement select the remaining third of the members ... Claims may be decided by the full Tribunal or by a panel of three members ... Each such panel ... shall consist of one member appointed by each of the three methods ... The UNCITRAL Rules for appointing members of three-member Tribunals shall apply mutatis mutandis to the appointment of the Tribunal.5 The Tribunal adopted Tribunal Rules, incorporating and in some cases modifying the UNCITRAL Rules. The UNCITRAL Rules provide, in Article 13, that, in the event of the resignation of an arbitrator during the course of the arbitral proceedings, a substitute arbitrator shall be appointed pursuant to the procedure for initial appointment; in the event that an arbitrator fails to act, the procedure in respect of challenge and replacement (if needs be by an appointing authority) shall apply.6 In the course of its work, the full Tribunal and Chambers of the Tribunal have been at times confronted with the purposeful absence of one or another of the arbitrators appointed by Iran. On some occasions this has led to the postponement of the proceedings; on other occasions, the Tribunal and its Chambers have decided that they were entitled to proceed in the absence of the Iranian-appointed arbitrator and did. Iran challenged the resultant awards, sometimes in Dutch courts, but the latter challenges were discontinued, the awards have been treated by the Tribunal as valid, and they have been paid.7 Dispute over the validity of these awards was bitter and protracted. The Iranian arbitrators maintained that neither the full Tribunal nor its Chambers were validly composed in the absence of any of its nationally appointed arbitrators. In the event of alleged failure of such an arbitrator to act, the sole recourse, they contended, was to invoke the procedure of the UNCITRAL Rules for challenge and replacement of an arbitrator. The majority of the Tribunal maintained that the specification in the Algiers Declarations about the three elements in the composition of the Tribunal and its Chambers was descriptive of their constitutive process; it was not a quorum requirement. The challenge and replacement procedure of the UNCITRAL Rules could not be interpreted to frustrate continued proceedings. Where a case has been pleaded and heard and deliberation has begun, unauthorised absence of an arbitrator will not require resort to the challenge and replacement procedure, which by its nature will take extended time and might require fresh hearings, at great trouble and expense. Repeated such processes, repeated walkouts or resignations and replacementcould stultify the Tribunal.

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In so deciding, the Tribunal’s majority could rely and did rely on a line of international precedent, on leading cases in which procedures for replacement — if any — of absent arbitrators were not followed but where the tribunals in question held themselves entitled to proceed and render valid awards.8 The holdings of those tribunals for the most part withstood subsequent national and international challenge. Since the expedient of absence from the Iran-United States Claims Tribunal and its Chambers of a party-appointed arbitrator has not been effective in accomplishing its apparent purpose, it might have been supposed that that approach would have been abandoned in the Tribunal. In a measure, it has been, but not fully. Thus in James M Saghi, Michael R Saghi and Allan J Saghi, Claimants and the Government of the Islamic Republic of Iran, Respondent, the arbitrator appointed by Iran ‘did not participate in the deliberation of this Case, stating that in his view such cases are not admissible, and he refused to sign the present Award,’ an interlocutory award which established that the nationality or dominant nationality of the applicants was that of the United States. ‘As this Tribunal has previously held, a continuing international tribunal with many cases on its docket cannot permit its work to be frustrated by the refusal of one of its members to deliberate a claim or to sign an award.’9 When the case subsequently was argued on the merits, Iran maintained that the interlocutory award was invalid because it was signed by only two arbitrators. The Tribunal held that it could not accept that argument. It observed that the Tribunal’s Rules make a provision for that occurrence: ‘Where there are three arbitrators and one of them fails to sign, the award shall state the reason for the absence of signature.’10 It may be noted that the Iranian-appointed arbitrator did sign this award on the merits while dissenting. In the case of Uiterwyk Corporation (et al), Claimants, and the Government of the Islamic Republic of Iran (et al), Respondents, the majority of Chamber One of the Tribunal held as follows: Mr MOSTAFAVI took part in the Hearing and in three sessions of oral deliberations on various procedural issues in the Case. However, at the third session, he announced that, in view of his dissent from decisions reached by a majority of the Chamber on procedural issues, he did not wish to take part in further deliberations. The Chairman then informed Mr MOSTAFAVI that, in accordance with the Tribunal Rules and Tribunal practice, the Chamber could and would nevertheless continue the deliberations and prepared an Award notwithstanding his absence. Mr MOSTAFAVI then withdrew from further participation in the preparation of this Case. The other two Members of the Chamber continued the deliberations and prepared the Award. This is in accordance with the established practice of the Tribunal to continue its work and make awards despite the failure of one arbitrator to participate. The practice of the Tribunal in this respect is necessary to prevent disruption and frustration by one Member of the Tribunal’s performance of its functions and is fully in accordance with recognized principles of international law. As Judge Stephen SCHWEBEL has observed, ‘the weight of international authority, to which the International Court of Justice has given its support, clearly favors the

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authority of an international tribunal from which an arbitrator has withdrawn to render a valid award ...’11 Subsequently, in the same case, the Tribunal found for the Claimants in an award which the Iranian-appointed arbitrator failed to sign. It equally denied a request for correction of the final award by the same majority.12 While I have not set out in this lecture the earlier published exchanges over the effect of the absence of an Iranian-appointed arbitrator, which are fully described in my Lauterpacht Lecture, it may be observed that they were much fuller and sharper. These more recent incidents are relatively mild in comparison. Perhaps it may be concluded that, in the IranUnited States Claims Tribunal, it has in effect been recognised on all sides that a truncated tribunal may render an award which will be treated as valid. At any rate, the majority practice of the Tribunal uniformly, repeatedly and emphatically sustains that conclusion. It does so, moreover, in a context which is not one of purely public international arbitration. It is generally recognised that the Tribunal’s awards may be regarded as ‘Dutch’ awards which may be enforced pursuant to the New York Convention on the Recognition and Enforcement of Arbitral Awards.13

II. Ivan Milutinovic PIM v Deutsche Babcock AG In Ivan Milutinovic PIM v Deutsche Babcock AG, an arbitration held under the Rules of the International Chamber of Commerce, the three-man Tribunal was composed of Professor Eugen Bucher, chairman, and Professors Vladimir Jovanović and Karl-Heinz Böckstiegel, arbitrators.14 1t concerned a monetary dispute between members of a construction consortium which had contracted to build a power station in Homs, Libya. The Consortium Agreement provided that the place of the arbitration would be Zurich. The Terms of Reference agreed upon by the parties recorded that the ICC Rules of Arbitration and the Code of Civil Procedure of the Canton of Zurich governed the procedure of the arbitration. It was further provided that the Tribunal might deviate from the non-mandatory provisions of the Zurich Code. The parties exchanged three sets of written briefs and additional written submissions. Two sessions of oral hearings were held at which witnesses were examined. At the latter set of hearings, at the end of the examination of witnesses, claimant’s counsel called for the examination of some witnesses and the hearing of additional witnesses, which defendant’s counsel opposed. The Arbitral Tribunal, after ‘great internal deliberation ... by majority and against the explicit opposition of the arbitrator proposed by claimant, took the decision to reject claimant’s request and not to allow additional evidence to be presented ...‘15 The next day, upon the chairman’s communication of this decision to the parties, Professor Jovanović announced his resignation because ‘he disagreed with the decision of the Arbitral Tribunal.’16 Claimant’s counsel thereupon refused to present its final pleadings. The Claimant’s counsel then moved in the ICC International Court of Arbitration to replace Chairman Bucher and Professor Böckstiegel. The ICC Court by a decision of 29 January 1987, rejected the challenge to Professors Bucher and Böckstiegel and ‘refused to accept the resignation of Mr Jovanović not failing to underscore that in the absence of any

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justification of his withdrawal, Mr Jovanović was obliged to continue to act as arbitrator.’17 The chairman then invited the co-arbitrators to an internal meeting of the Tribunal, which Professor Jovanović did not attend; rather he confirmed his resignation. A Partial Award in the arbitration was agreed upon in his absence by Professors Bucher and Böckstiegel, which Professor Jovanović was invited to sign, and which was submitted to the ICC Court pursuant to its Rules and accepted by it. The Partial Award records that the Tribunal had earlier decided that the parties were to have a last and final possibility to present requests for the taking of evidence and that, upon the hearing of agreed additional witnesses, the final pleadings would be made. All witnesses accordingly proposed at that time by the claimant were admitted. ‘The request for additional evidence presented by claimant is belated and the tardiness is not excused ... Claimant did not indicate which facts ... should be evidenced by the newly proposed witnesses ...’18 The claimant had earlier opposed additional examination of the defendant’s witnesses while proposing the examination of no further witnesses called by it. ‘Given the clear decision of the Arbitral Tribunal and its approval by the parties ... the Arbitral Tribunal could not accept claimant’s request presented at the end of the taking of evidence ...’19 The Award then continues: The present award can be rendered notwithstanding the declaration of Professor Jovanović to ‘resign’ as arbitrator and notwithstanding his not participating at the arbitrators’ meeting of February 7, 1987. Both under the Zurich procedural law and the ICC rules for arbitration the withdrawal of Professor Jovanović, not justified by any legitimate and lawful cause, is ineffective and therefore the present Arbitral Tribunal continues to be correctly constituted. It is settled under Zurich procedural law that the arbitrator cannot withdraw at his free will ... In accordance with the given situation under Zurich law, the ICC Court of Arbitration on January 29, 1987, decided ‘not to accept the resignation tendered by the co-arbitrator, Professor V Jovanović on November 12th, 1986’ and, after admonition of Professor Jovanović, expressed the confidence ‘that the arbitral tribunal as it is presently constituted will conclude its task in the instant case and that the arbitral tribunal will fully accept the decision rendered by the ICC Court of Arbitration. The determination of the chairman and of one co-arbitrator to take a decision in the absence of the other co-arbitrator seems to be justified by the given circumstances and is in accordance with the provisions of ZPO/ZH [Zurich Code of Civil Procedure], even if the latter do not include an explicit rule with respect to the present situation. Not only a decision by majority is valid, but § 254 ZPO makes clear that a refusal of a dissenting arbitrator to sign the award cannot question the validity of the award signed by the majority only; the signing ‘durch deren Mehrheit unter Anmerkung der Weigerung der Minderheit’ is explicitly admitted. If a refusal of an arbitrator to sign does not exclude the validity of the award, the result cannot be different if the minority-arbitrator does refuse to participate in the internal deliberations until their end. The rule that the finding of the final award must be performed with the participation of all arbitrators ... intends to deal with different problems: An arbitrator deceased

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before the decision of the Arbitral Tribunal must be replaced by a successor anJ likewise an arbitrator who by an admissible and therefore valid withdrawal has ceased to hold office; the majority of an arbitral tribunal is not allowed to exclude a minority from the further deliberations; an arbitral tribunal is not allowed to depart from oral deliberations inter praesentes without the consent of every member ... These (and other) problems justify the provision of § 254 cited above which stipulates positive obligations with respect to the question how to proceed in finding the award but does not exclude its validity if one arbitrator refuses to observe these obligations by not participating in the final stage of deliberations. The latter situation is in all relevant respects identical to that of an arbitrator refusing to sign. A position concurring to this conclusion has been taken by the Zurich authorities ... (‘The renunciation to an oral deliberation is furthermore justified, if an arbitrator tries to delay or to prevent the taking of the final decision by abusive shirking from the oral deliberation, a risk not existing with ordinary courts.’) This obiter dictum precisely foresees the circumstances realized in the present arbitration. — The decision of the Swiss Federal Tribunal (SFT) of October 23, 1985 ... setting aside an arbitral award does not provide an argument against the position exposed above, as all relevant facts are different: In the case decided by the SFT the decision of the arbitrators was not taken during oral deliberations of the arbitrators but by exchange of writings, and the not [sic] signing arbitrator never gave his consent to this way of procedure (even a majority decision to that end does not seem to exist). By way of contrast in the present case the decision of the arbitral tribunal was taken during oral deliberations to which all arbitrators (including Professor Jovanović) were invited. Professor Jovanović had no objective cause preventing him from participating in the last part of these oral deliberations which took place at the meeting on February 7. The SFT decision, as it does not refer to an arbitrator refusing without justification to participate in internal oral deliberations, is therefore no precedent to the present case. Nevertheless it may be added that it is based on the ‘Concordat,’ the Swiss intercantonal arbitration convention, while the present arbitral proceedings are governed by the Zurich law of Civil Procedure. Furthermore and consequently the present decision applying it is not submitted to the control of the SFT if not under the general aspect of the Swiss Federal Constitution (arbitrariness; Art 4). Again it must be said that under the rules of the Zurich ZPO as well as under the rules of the ICC, Professor Jovanović is considered to be arbitrator, even if refusing to effectively cooperate ... It is correct that both under the Zurich ZPO (§ 254) and the ICC rules (Art 2.8) Professor Jovanović could be removed and replaced. However no procedure for his removal had even been started before the final decision of the arbitral tribunal on this partial award, much less has a refusal taken effect. Both parties refrained from presenting such a request, either before the competent authorities in Zurich or the ICC Court of Arbitration. The other members of the Arbitral Tribunal cannot recognise a duty to present such request ex officio, if the parties choose to renounce to request Professor Jovanović’s removal and replacement. Claimant, who presented a

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request for removal of the other two arbitrators, by not including Professor Jovanović in the request for removal, evidences his willingness to accept the given situation, ie the arbitrator proposed by claimant not participating in the further proceedings; claimant has no title to reproach the arbitrators for not presenting a request for Professor Jovanović’s removal, as he did not himself present such a request. The rendering of the present award is the consequence of the Arbitral Tribunal not doing so. Obviously. the possibility to continue the proceedings without all arbitrators cooperating is strictly limited. Taking of evidence or accepting oral pleadings in the absence of an arbitrator would seem to be, except perhaps in exceptional circumstances, generally inadmissible. But this issue is not at stake here, since in the present case Professor Jovanović declared his intention to resign after the conclusion of the taking of evidence only. The final pleadings were not presented orally but in writing ... Professor Jovanović therefore was not absent in any of the tribunal’s activities requiring his presence. He also participated in all internal deliberations up to the moment of his declaration on October 28, 1986. Obviously the internal deliberations in which he ws involved also concerned the merits of the case. This is especially true for the deliberations on the evening of October 27, 1986, concerning the taking of additional evidence. A decision of the Arbitral Tribunal to the contrary, ie to present a request for the removal of Professor Jovanović (either in Zurich or in Paris) and to re-start the proceedings with the eventual successor of Professor Jovanović, would be contrary to the requirements of orderly and correct arbitration, providing to an arbitrator (or a party influencing him) the means to sabotage the correct coming to an end of an arbitral procedure and to extort from the tribunal and the opposed party the reopening of the proceedings. Such a possibility would neglect the demands of the solution of international commercial disputes and question the credibility of the arbitration both as offered by ICC and as performed in Zurich or Switzerland. The present Arbitral Tribunal is even less allowed to depart from a speedy settling of the main issue of the present arbitration by rendering an award (not only requested by defendant, but, up to and including the telex of October 13, 1986, also by claimant), as it is a view more and more accepted that in international commercial arbitration the possibility of delaying tactics is a serious concern and the elimination of these effects a primary task of all involved ... By a possible request of a party, the present award can be subject to the annulment procedure provided by the Zurich Code of Civil Procedure; the Obergericht of the Canton of Zurich ... is competent. In the present context it may be pointed out that an eventual annulment of the present award by the Zurich Obergericht would neither stop the competence of the arbitral tribunal as installed by the ICC nor terminate the effectiveness of the arbitration clause. § 256 ZPO/ZH implicitly presupposes that the arbitral tribunal, whose award was set aside, has again to decide on the issue. Should the same arbitral tribunal not be in the position to act, under said rule a new arbitral tribunal would

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have to be constituted in conformity with the arbitration clause and would be competent to render an award.20 I have quoted from the Partial Award in the Milutinovic case at such length because it is the fullest analysis of the authority of a truncated tribunal known to have been made in an international commercial arbitral award; because of the cogency of that analysis; because of the distinction of the arbitrators - Professors Bucher and Böckstiegel - who are the authors of the Award; and because the Award hitherto has not been published. I agree with the Tribunal that a contrary decision would have been incompatible with: the requirements of orderly and correct arbitration, providing to an arbitrator (or a party influencing him) the means to sabotage the correct coming to an end of an arbitral procedure and to extort from the tribunal and the opposed party the reopening of the proceedings. Such a possibility would neglect the demands of the solution of international commercial disputes and question the credibility of the arbitration both as offered by ICC and as performed in Zurich or Switzerland.21 Before the rendering of the Partial Award which has been so substantially quoted, the plaintiff in the proceedings, Milutinovic, brought an action in the Administrative Commission of the Supreme Court of the Canton of Zurich requesting that the Tribunal accept Professor Jovanović’s withdrawal as legally operative and maintaining that continuation of proceedings by two arbitrators gave rise to presumption of prejudice on their part. The Administrative Commission rejected the challenge, holding that continuation of the arbitral proceedings by the two arbitrators in the unusual situation that had arisen was justifiable and did not warrant a presumption of bias.22 On appeal to the Court of Cassation of the Canton of Zurich, the foregoing judgment was reversed. It was held that, while the ICC Rules governed the proceedings of the Arbitral Tribunal, they did not contemplate unilateral resignation of an arbitrator. Under the Zurich Code of Civil Procedure, no party in an arbitration could be accorded a preferential position. Equality of the parties was the essential, imperative principle. In accordance with that principle, it was absolutely prohibited that a three-member arbitral tribunal could, in the person of its chairman and one member, deliberate and take a decision which ought to have been taken collegially. While the refusal of an arbitrator to sign the award is of no legal consequence, this in no way implies that a party-appointed arbitrator and the chairman may deliberate in the absence of another legally designated arbitrator and reach a decision that must be taken collectively. Professors Bucher and Böckstiegel could have requested dismissal of Professor Jovanović on the grounds of his refusal to fulfil his functions; that would have been the lawful procedure to have been followed in this case. Whether Professor Jovanović’s resignation was right or wrong is irrelevant. Violation of the principle of nondiscrimination between the parties and according one party preferential treatment was not only unlawful, it seriously compromised confidence in the tribunal, creating as it did a presumption of partiality. Accordingly, the decision of the Administrative Commission was annulled and the case was remanded to the Administrative Commission.23 The Commission, finding that Professors Bucher and Böckstiegel did in fact discuss and draw up the Partial Award without the participation of Professor Jovanović, and being bound by the foregoing

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judgment of the Cantonal Supreme Court, required Professors Bucher and Böckstiegel to retire from the arbitration.24 Subsequently the Court of Cassation declined to consider annulment of that decision on the grounds that the application to annul was not filed within ten days of the decision’s service.25 On appeal to the Swiss Federal Tribunal it was held, by a judgment of 20 December 1989, that the criticised actions of Professors Bucher and Böckstiegel were insufficient in themselves to create an appearance of bias. Accordingly, the judgment of the Administrative Commission divesting Professors Bucher and Böckstiegel of their positions as arbitrators in the case was vacated.26 Thus, the Administrative Commission of the Zurich Court of Appeals definitely dismissed the challenge to the arbitral status of Professors Bucher and Böckstiegel.27 However, Milutinovic also submitted a request to the Court of Appeals of the Canton of Zurich for nullification of the Partial Award, arguing that it violated the Code of Civil Procedure of Zurich as well as Article 6 of the European Convention on Human Rights. The Court of Appeals dismissed the nullification request by decision of 4 July 1990. Milutinovic’s argument that, irrespective of whether Professor Jovanović had serious reasons justifying his withdrawal, after his withdrawal a properly constituted tribunal no longer existed, was unsubstantiated. An arbitrator is obliged to serve until the conclusion of the arbitral proceedings, and withdrawal is excluded in the absence of cause. Professor Jovanović had justified his resignation solely by reason of the fact that the two other arbitrators had declined to admit further testimony at that stage of the proceedings. But the fact that the arbitrators differed in that regard manifestly did not furnish a serious reason justifying withdrawal of the outvoted arbitrator. Accordingly, his resignation did not vacate the functions of Professor Jovanović. Thus, the tribunal could be treated as properly composed. In the circumstances, there was no transgression of Articles 4 and 58 of the Swiss Federal Constitution or Article 6 of the European Convention on Human Rights. It was uncontested that Professor Jovanović had, without providing justification, failed to take up an invitation to a session of the Tribunal. It was equally uncontested that he had received a draft of the Partial Award but did not sign it. His refusal to take part in the Tribunal’s deliberations may be equated with a refusal to sign. It is true that by the terms of Article 254 of the Code of Civil Procedure, an award must be given with the participation of all the arbitrators. That does not mean that all arbitrators must actually meet; a written exchange may suffice, provided that no arbitrator is deprived of the opportunity to participate in the hearing. The fact that Professor Jovanović justified his refusal to take part solely as he did is uncontested. That refusal was abusive; that it lacked cause, moreover, was made clear to him by the ICC. Milutinovic had chosen to identify itself with that abuse by not requesting the removal of its delinquent arbitrator. If it has therefore been ‘penalised,’ it can only blame itself. In any event, the remaining arbitrators and the other party may not be held to have acted irregularly. There are no grounds in the circumstances for maintaining that the principle of the equality of the parties has been impinged upon by the remaining arbitrators rendering an award, when Milutinovic alone is responsible for any lack of opportunity to participate.2 Finally, after this multiplicity of conflicting judgments, the Swiss Federal Tribunal set aside the foregoing judgment of the Zurich Court of Appeals and upheld the nullification appeal submitted by Milutinovic. The guarantees of the Federal Constitution and of the

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European Convention on Human Rights, it held, embrace not only state courts but private arbitral tribunals. They must assure the independent administration of justice. This applies, in particular, to the right to a proper composition of the tribunal. Under the governing Code of Civil Procedure of the Canton of Zurich, the final award must be made with the participation of all arbitrators. That is a fundamental principle of procedure. The case was to be distinguished from the practice cited by the Court of Appeals, because here a member of the tribunal had resigned from his function and refused to participate further in the proceedings; therefore he did not simply withdraw from an oral deliberation with an intent to delay the proceedings. It was not a question of an arbitrator simply refusing to sign the decision; such a case would have to be considered differently. Whether an arbitrator may withdraw at any time is an open question. If it is accepted that an arbitrator may withdraw only for cause, then the question immediately arises, who must decide whether a withdrawal is legitimate? That the remaining arbitrators may decide is out of the question. The only proper solution appears to be referral of this decision to the competence of a regular judge. The judge must either establish that the mandate to arbitrate is terminated or, if there are no substantial reasons justifying withdrawal, require the withdrawing arbitrator to continue to participate. An unjustified withdrawal does not simply lead to continuation of the proceedings in the absence of the withdrawing arbitrator and without appointing a new one. This could be argued only if the arbitration agreement so provides. Absent such a provision, the arbitral tribunal will again be properly composed either when the withdrawing arbitrator - if need be, pursuant to court order - reconsiders his withdrawal or when he has been replaced. The result of illegitimate withdrawal is limited to the arbitrator’s possible liability for damages and disciplinary measures. If the remaining members of the arbitral tribunal continue with the proceedings despite the withdrawal of an arbitrator, without having been authorised to do so by the parties, then the arbitral tribunal is not properly composed. The contrary view expressed by the Court of Appeals is inconsistent with the fundamental right of the parties to a proper composition of the tribunal and thus violates both Article 58 of the Federal Constitution and Article 6 of the European Convention on Human Rights. The parties referred the dispute to an arbitral tribunal consisting of three arbitrators; the Partial Award was rendered by two arbitrators only. The Code of Civil Procedure of the Canton of Zurich was violated and the Court of Appeals acted arbitrarily when it failed to nullify the Partial Award on these grounds as well.29 The ultimate consequence has been that the Partial Award rendered by the truncated tribunal composed of Professors Bucher and Böckstiegel was effectively quashed. In the circumstances, a new arbitral tribunal has been established under ICC auspices which, it is understood, is as of this writing in the course of adjudicating the dispute - which initially was brought to arbitration as long ago as 1984. The result is deplorable, and not only because it has given rise to an arbitral process extending more than ten years. The judgment of the Swiss Federal Tribunal is inconsistent with the general principle of law that a party may not invoke its own wrong (or a wrong that it adopts) to deprive another party of its rights. lt runs counter to the predominant practice of international arbitration. It places the Swiss Federal Tribunal in conflict with the Court of Arbitration of the International Chamber of Commerce: whereas the ICC, by refusing to accept the purported resignation of Professor Jovanović or the challenge to the status of the

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remaining arbitrators, and by approving their Partial Award, in authoritative interpretation of its own Rules authorised the truncated arbitral tribunal to proceed and ratified its holding when it did proceed, the Swiss Federal Tribunal held that, despite those ICC positions-to which it hardly refers, still less defersthe Award was a nullity. If, indeed, the judgment of the Swiss Federal Tribunal were today still the law of Switzerland, there might be reason to question - as did the arbitral tribunal - the suitability of the Canton of Zurich, and Switzerland itself, as optimal sites for the pursuit of international commercial arbitration. The practical effect of the judgment conduces to obstruction if not subversion of the international arbitral process. One hesitates to challenge holdings of the Swiss Federal Tribunal about the Constitution of Switzerland and Swiss law. Being uninformed about the exegesis of the Swiss Constitution, little more will be said than that, on its face, the provision of the Constitution invoked by the Swiss Federal Tribunal does not appear to be dispositive. 30 Article 58 provides: No one may be deprived of his constitutional judge; therefore no exceptional courts of law may be set up. (Nul ne peu être distrait de son juge natureI. En consequence, il ne pourra être êtabli de tribunaux extraordinaires.)31 Presumably the Swiss Federal Tribunal invoked Article 58 because it concluded that Professor Jovanović’s ‘resignation’ deprived Milutinovic of its constitutional judge; if so, the question arises whether the deprivation was not self-induced or adopted (as the Zurich Court of Appeals held that it was). Or perhaps the Swiss Federal Tribunal, in passing upon lower court judgments, reasoned that the failure of Professors Bucher and Böckstiegel, or the ICC, to move to replace Professor Jovanović (a motion which it might be thought rather rested with Milutinovic) deprived Milutinovic of its constitutional judge; if so, that is a singular interpretation of the facts. lt may be observed that the Constitutional holdings of the Swiss Federal Tribunal were not shared by some other Swiss courts. In any event, if the reliance of the Swiss Federal Tribunal on Article 6 of the European Convention of Human Rights is an indicator of the strength of its reasoning, its position is strikingly unpersuasive. Only paragraph 1 of Article 6 concerns civil suits and it provides: In the determination of his civil rights and obligations ... everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.32 Assuming, arguendo, that this provision embraces in camera arbitral proceedings, the implicit reasoning of the Swiss Federal Tribunal appears to be that the proceedings of the truncated arbitral tribunal in the Milutinovic case could not have been ‘fair,’ that the tribunal could not have been ‘independent and impartial’ by reason of the fact that one party-appointed arbitrator absented himself during some of the tribunal’s deliberations and in the preparation of the Award. It is not easy to reconcile the sense of such a judgment of the Swiss Federal Tribunal with its own judgment of 20 December 1989 rejecting the challenge to Professors Bucher and Böckstiegel. The implication of any such holding is worrisome, for it strikes against a fundamental assumption of international commercial arbitration, namely, that all members of the tribunal are independent, whether or not they are party-appointed. If Professor Jovanović acted

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independently, why should it be assumed that his absence from the tribunal cut against the interests of Milutinovic? Why should it be assumed that the tribunal was any less fair, independent and impartial in the absence of Professor Jovanović than in his presence? The ICC and Zurich Court of Appeals made no such assumption. They rather appear to have acted on the presumption that, if party-appointed arbitrators are to act not as advocates but arbitrators, they are independent; their independence and impartiality is not prejudiced by the walkout of one of them; and, in circumstances in which the tribunal had had the benefit of extensive written pleadings and oral argument, heard the witnesses agreed upon, and embarked upon its deliberations, it had every capacity to render a fair and impartial award. There is nothing in the Partial Award actually rendered which suggests otherwise. It should be noted that the Tribunal was initially constituted in precise conformity with the will of the parties and the ICC Rules. It was the walkout of one party-appointed arbitrator at an advanced stage of the proceedings which prejudiced not the constitution but the continued effective composition of the Tribunal. The distinction, as the International Court of Justice has observed, is fundamental.33 It follows that an unjustified withdrawal should not be treated as vitiating the authority of a Tribunal which initially was duly constituted. The various judgments of Swiss courts in the Milutinovic case were based on provisions of law, some of which have been superseded by the arbitral provisions of the Swiss Private International Act of 18 December 1987. Article 179 of that Act provides: (1) The arbitrators shall be appointed, removed or replaced in accordance with the agreement of the parties. (2) In the absence of such an agreement, it shall be possible for applications to be brought before the seat of the arbitral tribunal; the court shall apply the provisions of cantona11aw regarding the appointment, removal or replacement of arbitrators. Article 189 provides: (1) The arbitral award shall be rendered in accordance with the procedure and in the form agreed upon by the parties.34 A leading Swiss arbitrator and counsel, Dr Marc Blessing, has been reported to have maintained that, in view of the latter provision, a Swiss court applying current law would not annul an award rendered in the circumstances of the Milutinovic case.35 The parties are free to agree upon the procedure governing the arbitration. It consequently may be concluded that, if they have provided for the governance of ICC procedures, ICC Rules and the ICC’s interpretation of those Rules should be dispositive.36 It is unclear why such reasoning was not applied by the Swiss Federal Tribunal in the Milutinovic case even taking the governing Swiss law as it then was. The Swiss Federal Tribunal found that it was obliged to apply the Zurich Code of Civil Procedure, which required that all the arbitrators must participate in all the deliberations and decisions of the arbitral tribunal (as equally did Article 31 of the Intercantonal Arbitration Convention of 1969, the ‘Concordat,’ which was not applicable in this case). But that provision could have been read as satisfied by offering the absent arbitrator the opportunity to participate in the deliberations and in the adoption of the decision, offers in fact made in the Milutinovic

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case; or by treating the parties as having adopted the governing ICC Rule as authoritatively interpreted by the ICC;37 or on other grounds on which the Zurich Court of Appeals relied, including abusive conduct by Professor Jovanović and the adoption of that conduct by Milutinovic. In any event, as will be shown shortly, the rules of arbitral institutions in addition to the ICC may be interpreted or applied to sustain the authority of a truncated arbitral tribunal to act when a member arbitrarily withdraws.

III. The ICCA Survey It would unduly extend what is already an extensive paper if I were fully to summarise the worldwide survey of the authority of truncated arbitral tribunals which was carried out at the 1990 ICCA Congress. The chairman of those proceedings, Judge Howard M Holtzmann, observed that, where an arbitrator refuses to participate or submits a resignation without cause at a relatively early stage in the arbitration, the most prudent course is to remove the recalcitrant arbitrator and to appoint a replacement. That situation entails some delay, but it can be limited by laws and rules which assure that a new arbitrator can be appointed with minimum delay. However, appointing a new arbitrator is not practical late in the proceedings; then there is not only the time required for replacement, but to allow the new arbitrator to become familiar with the case. Hearings may have to be repeated. At a later stage, ‘the only effective solution is for the two remaining arbitrators to continue the proceedings and render an award.’38 Judge Holtzmann summarised the various national reports and comments as showing that both civil and common law courts would respect awards by truncated arbitral tribunals if the parties had so agreed or had chosen rules which so provide. He concluded that, even in the absence of such agreement or choice, it was hard to imagine that ‘a modern court in a state that otherwise has a public policy of supporting international commercial arbitration would invalidate an award because a party-appointed arbitrator, in an effort to frustrate the arbitration, ... refused to participate in deliberations ... . National laws that refer to participation by three arbitrators should be interpreted to be satisfied’ when all three have had the opportunity to participate? 39 In his survey of laws and court decisions in civil law countries, Professor Emmanuel Gaillard concordantly took the position that, ‘An arbitrator should be considered to have deliberated once he has been afforded the same opportunity to participate as that afforded his fellow arbitrators. In the same way that the adversarial principle is satisfied when each party has been given the opportunity to present its case, the deliberation requirement should be considered to have been met when each arbitrator has been given the opportunity to put forth his point of view. This is the position of French case law ... ‘40 In Professor Gaillard’s view, legal systems like the Belgian and Swedish, which specify that all arbitrators must take part in the deliberations, ‘are in no way opposed to the principles endorsed by French and Swiss case law. There is nothing in either system to prevent the expression ‘take part in the deliberations’ from being interpreted as a simple requirement that each of the arbitrators should have been given the opportunity to take part.’41 (It may be noted that Professor Gaillard’s reference to Swiss law antedated the judgment of the Swiss Federal Tribunal of 30 April 1991 reported above.)

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Mr VV Veeder QC reported that, both under the UNCITRAL Model Law and in common law countries, where the arbitrators have reached a majority decision in deliberations involving all three arbitrators, the withdrawal of a dissident arbitrator will not prevent the tribunal from completing its deliberations and making its award in her or his absence. However, where no decision has been reached in the arbitrators’ deliberations, only the UNCITRAL Model Law and United States practice permit the truncated tribunal to proceed to an award. In other common law countries, unless the parties agree otherwise (by their arbitration agreement or through applicable arbitration rules), the absent arbitrator is not equated with a mere dissenter; the parties are entitled to an opportunity whereby the absent arbitrator could persuade the other members of the tribunal to arrive at another decision. In the absence of agreement by the parties, the remedy in these jurisdictions requires the missing arbitrator to be replaced.42 However, as Professor Ivan Szasz pointed out, the Rules of the London Court of International Arbitration provide that if an arbitrator refuses to participate in ‘the making of the award, having been given reasonable opportunity to do so, the remaining arbitrators shall proceed in his absence.’43 A truncated arbitral tribunal similarly may render an award under the American Arbitration Association Rules and by interpretation of less explicit provisions of the UNCITRAL Rules.44 This appears to be the dominant opinion in interpretation of the ICC Rules; at any rate, it was the one adopted by the ICC in the Milutinovic case.45 It has been authoritatively held to be the case in respect of ICSID as well.46 The authority of a truncated arbitral tribunal has also been upheld by a 1989 Resolution of the Institute of International Law.47 If the parties to an arbitration agreement agree that the arbitration shall be governed by any of the foregoing sets of arbitration rules, it would appear to follow that they have agreed to authorise a truncated arbitral tribunal to render a valid award.

IV. Recently Adopted Rules That such rules represent the trend of modern international arbitration is suggested by the terms of three sets of arbitral rules adopted since the Milutinovic case and the ICCA Congress. The International Arbitration Rules of the American Arbitration Association effective 1 March 1991, provide, in Article 11: (1) If an arbitrator on a three-person tribunal fails to participate in the arbitration, the two other arbitrators shall have the power in their sole discretion to continue the arbitration and to make any decision, ruling or award, notwithstanding the failure of the third arbitrator to participate. In determining whether to continue the arbitration or to render any decision, ruling or award without the participation of an arbitrator, the two other arbitrators shall take into account the stage of the arbitration, the reason, if any, expressed by the third arbitrator for such nonparticipation, and such other matters as they consider appropriate in the circumstances of the case. In the event that the two other arbitrators determine not to continue the arbitration without the participation of the third arbitrator, the administrator on proof satisfactory to it shall declare the office vacant, and a substitute arbitrator shall be appointed pursuant to the provisions of Article 6, unless the parties otherwise agree.

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(2) If a substitute arbitrator is appointed, the tribunal shall determine at its sole discretion whether all or part of any prior hearings shall be repeated.48 The Permanent Court of Arbitration Optional Rules for Arbitrating Disputes between two Parties of which only one is a State, effective 6 July 1993, provide, in Article 13, paragraph 3: If an arbitrator on a three-person tribunal fails to participate in the arbitration, the other arbitrators shall, unless the parties agree otherwise, have the power in their sole discretion to continue the arbitration and to make any decision, ruling or award, notwithstanding the failure of one arbitrator to participate. In determining whether to continue the arbitration or to render any decision, ruling, or award without the participation of an arbitrator, the other arbitrators shall take into account the stage of the arbitration, the reason, if any, expressed by the arbitrator for such nonparticipation, and such other matters as they consider appropriate in the circumstances of the case. In the event that the other arbitrators determine not to continue the arbitration without the nonparticipating arbitrator, the arbitral tribunal shall declare the office vacant, and a substitute arbitrator shall be appointed ... 49 Finally, the World Intellectual Property Organization (WIPO) in 1994 adopted Arbitration Rules which contain the following provision on truncated tribunals: Truncated Tribunal Article 35 (a) If an arbitrator on a three-person Tribunal, though duly notified and without good cause, fails to participate in the work of the Tribunal, the two other arbitrators shall, unless a party has made an application under Article 32, have the power in their sole discretion to continue the arbitration and to make any award, order or other decision notwithstanding the failure of the third arbitrator to participate. In determining whether to continue the arbitration or to render any award, order or other decision without the participation of an arbitrator, the two other arbitrators shall take into account the stage of the arbitration, the reason, if any, expressed by the third arbitraior for such nonparticipation, and such other matters as they consider appropriate in the circumstances of the case. (b) In the event that the two other arbitrators determine not to continue the arbitration without the participation of a third arbitrator, the Center shall, on proof satisfactory to it of the failure of the arbitrator to participate in the work of the Tribunal, declare the office vacant, and a substitute arbitrator shall be appointed by the Center in the exercise of the discretion defined in Article 33, unless the parties otherwise agree.50 It is believed that these provisions of the AAA’ (American Arbitration Association), the PCA’ (Permanent Court of Arbitration) and WIPO’ Rules represent not only the latest but the soundest consideration of the problem of the authority of a truncated arbitral tribunal to render a valid award.

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Endnotes 1

Yearbook of International Law Commission 1951, Vol II, p 115.

ibid.

Stephen M Schwebel, International Arbitration: Three Salient Problems (1987) p 296.

Iran-United States Claims Tribunal Reports (Iran-US CTR) published by Grotius Publications Limited, Cambridge (acquired in 1994 by the Cambridge University Press).

I Iran-US CTR 10.

United Nations, UNCITRAL Arbitration Rules (1977) pp 13-14.

See Schwebel, op cit pp 251-281.

Ibid, pp 279-281.

Case No 298, Chamber Two, filed 12 January 1987, 14 Iran-US CTR 3, 9, 10.

10 Ibid, filed 22 January 1993 (unpublished). 11 Case No 381, filed 6 July 1988, 19 Iran-US CTR 107, 116, 161, 169. 12 Case No 381, Chamber One, filed 8 January 1991, 26 Iran-US CTR 3, 5-6. 13 See David D Caron, ‘The Nature of the Iran-United States Claims Tribunal and the Evolving Structure of International Dispute Resolution’ 84 American Journal of International Law I 04 (1990). 14 Milutinovic P/M v Deutsche Babcock AG, lnternational Chamber of Commerce (ICC) No 5017, Partial Award of 8 November 1987. I wish to thank the Secretary-General of the Count of International Arbitration of the ICC, Eric Schwartz, for his assistance in securing the consent of the parties, to the publication of the Award in this paper, and for providing the texts of the judgments of Swbs courts discussed below. 15 Partial Award, typescript provided by the ICC, p 13. 16 Ibid. 17 Ibid. 18 Ibid, p 16. 19 Ibid, p 18. 20 Ibid, pp 20-26. 21 Ibid, p 25. 22 Obergericht des Kantons Ziirich, Verwaltungskomrnission, Beschluss vom 2 Juni 1987, Verw.-Komm. Nr. 431/87. I wish to thank the Librarian of the International Court of Justice, Anhur Eyffinger, for providing a translation from the German of this judgment, as well as for the customary suppon of the Court’s Library. 23 Kassationsgericht des Kantons Ziirich, 10 Februar 1988, Kass.-Nr. 219/87. I have drawn my rendering of this case from the French translation provided by the ICC, and from an English translation of the French provided by the Registry of the Coun, for which I thank Mr E Didier and his colleagues. 24 Appeal Court of the Canton of Ziirich, Administrative Commission, Postal Decision of 25 April 1968, VK No 183/1988. English translation provided by the ICC. 25 Kassationsgericht des Kantons Ziirich, 9 Dezember 1988, Kass-Nr. 207/88. I have relied on the French translation provided by the ICC, and an English translation of the French provided by the Registry of the Coun. 26 Urteil des Schweizerischen Bundesgerichts, 20 Dezember 1989, 4P.II0/1988/bm. I have relied on the French translation provided by the ICC, and an English translation from the French provided by the Registry of the Court. 27 By decision of 19 May 1990, as recounted in the judgment of the Swiss Federal Tribunal of 30 April 1991 discussed below.

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28 Cour d’Appel du Canton de Zurich, Arrêt rendu le 4 juillet 1990, ZN87439U/IIIeme Chambre Civile. I have drawn my rendering from the French text provided by the ICC, and from a translation from the original German into English by Maurizio Brunetti of the staff of the Iran-United States Claims Tribunal. 29 Swiss Federal Tribunal, First Civil Section, 30 April 1991. BGE 1171a 166. I wish to thank Mr Brunetti for his translation of the Tribunal’s judgment from German into English, on which I have drawn, and for his analysis of the Tribunal’s judgment. 30 Eds Alben P Blaustein & Gisben H Flanz, ‘Switzerland’, Constitutions of the Countries of the World (1982), p 4. Articles 4 and 58. Article 4 provides: All Swiss citizens are equal before the law. In Switzerland, there shall be no subject, nor privileges of place. birth, person or family. Any pertinence of Article 4- which the Swiss Federal Tribunal did not expressly invoke- to arbitral proceedings between two foreign parties is unclear. It is understood that Swiss jurisprudence derives from Article 4 a prohibition of arbitrary judicial action. but that hardly answers the question of whether a lower court acted arbitrarily in sustaining the decision of the arbitral tribunal in the Milutinovic case. It may be that what the Swiss Federal Tribunal meant was that the failure of lower couns to apply mandatory provisions of the Zurich Code was arbitrary and hence a violation of Article 4. 31 Ibid, pp 50-51. 32 European Convention on Human Rights, reproduced in Ian Brownlie, Basic Documents on Human Rights (1992) pp 326, 329. 33 See Interpretation of Peace Treaties with Bulgaria, Hungary and Romania I Second Phase}, ICJ Reports 1950, pp 221, 229. 34 International Council on Commercial Arbitration, International Handbook on Commercial Arbitration, general eds Albert Jan van den Berg and Pieter Sanders, Vol Ill. ‘Switzerland’, by Roben Briner, Annex II (containing a translation of the Act into English), at pp 2, 4. 35 See International Council for Commercial Arbitration, Congress Series No 5, ‘Preventing delay and disruption of arbitration ...’, general ed Alben Jan van den Berg (1991 ), at p 273. 36 See also to this effect Briner in the work cited in footnote 34, who notes that, under the Act now in force, ‘the Swiss judge at the seat of the arbitral tribunal is competent to make the decision regarding a challenge unless the panics have agreed on any specific applicable rules. If the parties have agreed that, eg, the Rules of the ICC Court of International Arbitration ... are to apply, the decision of the ICC Court ... is final (Art 180(3) Act)’ at p 14. See also Judge Briner’s analysis of the Act. and the previously applicable Concordat, on points pertinent to this paper, at pp 15, 17, 22, 29, 30, 31, 32, 33, 34, 35. 37 The problem with this approach is that the pertinent provisions of the Zurich Code were mandatory and were held to be so. 38 Footnote 35, at p 27. 39 Ibid, p 28. 40 Ibid, p 320. See also at pp 249, 274.lt may be noted that the Swiss Federal Tribunal interpreted an earlier article of Professor Gaillard to the contrary. Emmanuel Gaillard, ‘Les Manoeuvres Dilatoires des Parties et des Arbitres dans I’Arbitrage Commercial International,’ Revue de /’Arbitrage (1990) p 786. 41 Footnote 35, p 321. For further pertinent comments of Professor Gaillard, see ibid, pp 247-249. 42 Ibid, pp 321-324. See Mr Veeder’s additional apposite comments at pp 249-254, 277-278. 43 Ibid, pp 324, 257. 44 Ibid, pp 256-258, 318-319. For an analysis construing the UNCITRAL Rules as supporting the authority of a truncated arbitral tribunal, see M Scott Donahey, The UNICITRAL Arbitration Rules and the Truncated Tribunal’ (1993) Volume 4 No 2 The American Review of International Arbitration 191. 45 Footnote 35, pp 257, 282, and, for the comments of Stephen Bond, then Secretary-General of the ICC Court of International Arbitration, pp 284, 263, 327. See also the comments of Professor Böckstiegel, pp 263, 273. 46 As per the first Secretary-General of ICSID, Aron Broches, ibid, pp 264, 285, 328.

[ 1994 ]

47 Annuaire de l’lnstitut de Droit International, Vol 63-1, p 204, Vol 63-II, p 328. 48 American Arbitration Association, International Arbitration Rules, effective I March 1991, pp 8-9. Article 10 provides: If an arbitrator withdraws after a challenge, or the administrator sustains the challenge, or the administrator determines that there are sufficient reasons to accept the resignation of an arbitrator, or an arbitrator dies, a substitute arbitrator shall be appointed pursuant to the provisions of Article 6, unless the parties otherwise agree. 49 Permanent Court of Arbitration, Optional Rules for Arbitrating Disputes berween Two Parties of which only one is a State, effective 6 July 1993, pp 7-8. Article 13, para I, in part provides: Any resignation by an arbitrator shall be addressed to the arbitral tribunal and shall not be effective unless the arbitral tribunal determines that there are sufficient reasons to accept the resignation, and if the arbitral tribunal so determines the resignation shall become effective on the date designated by the arbitral tribunal. In the event that an arbitrator whose resignation is not accepted by the tribunal nevertheless fails to participate in the arbitration, the provisions of paragraph 3 of this article shall apply. 50 World Intellectual Property Organization, Arbitration Rules effective from 1 October 1994, WIPO Publication No 446 (E), pp 20, 36. Article 32 provides: At the request of a party or on its own motion, the Center may release an arbitrator from appointment as arbitrator if the arbitrator has become de jure or de facto unable to fulfill, or fails to fulfill, the duties of an arbitrator ... (Ibid, p 35.) It is of interest to note that the Bermuda International Conciliation and Arbitration Act 1993 provides as follows: Failure of an arbitrator to participate in proceedings: 30 (I) Any resignation by an arbitrator shall be addressed to the arbitral tribunal and shall not be effective unless the arbitral tribunal determines that there are sufficient reasons to accept the resignation, and if the arbitral tribunal so determines the resignation becomes effective on the date designated by the arbitral tribunal. (2) If an arbitrator on a three-person or five-person arbitral tribunal fails to participate in the arbitration, the other arbitrators have, unless the parties otherwise agree, the power in their sole discretion to continue the arbitration and to make any decision, ruling or award, notwithstanding the non-participation of that arbitrator. (3) In determining whether to continue the arbitration or to render any decision, ruling or award without the participation of an arbitrator, the other arbitrators shall take into account the stage of the arbitration, the reason, if any, expressed by the arbitrator for his non-participation and such other matters as they consider appropriate in the circumstances of the case. (4) In the event of the other arbitrators determining not to continue the arbitration without the non participating arbitrator, the arbitral tribunal shall declare the office vacant and a substitute arbitrator shall be appointed pursuant to Article 15 of the Model Law, unless the parties agree on a different method of appointment.

Is the Need for Writing as Expressed in the New York Convention and the Model Law Out of Step with Commercial Practice? by Neil Kaplan CBE, QC, SBS* The English Arbitration Act 1950 was the main consolidating statute of this century. It took Hong Kong until 1963 to enact it through the Arbitration Ordinance (Cap. 341). Important amendments were subsequently made in 1982 and 1989. However, it would be quite wrong to assume that prior to 1963 Hong Kong had had no arbitration activity at all. In fact, Hong Kong missed a chance shortly after it was founded of being in the forefront of the development of arbitration. At the time of the arrival of Hong Kong’s first Governor, Henry Pottinger, in August 1841, anyone who was abreast of affairs in England was familiar with arbitration and could be expected to regard it – as much as it is regarded here and now – if not as a panacea for some of the more irritating and openly acknowledged shortcomings of the law, at least as the natural ally of an overworked and technically antiquated judicial system. Pottinger attempted to regulate and foster arbitration in the new Colony as early as 1844. Ordinance 6 of 1844, which was passed by the Legislative Council on 20 March 1844, was ‘An Ordinance to authorise His Excellency the Governor of Hong Kong to refer all civil actions or suits to arbitration’. This Ordinance is worth setting out in full because it provided as follows: Whereas the accumulation of public business prevents His Excellency the Governor of Hongkong from being able to give his time for attention to the hearing and decision of civil actions and suits, be it therefore enacted by His Excellency the Governor of Hongkong with the advice of the Legislative Council thereof: That his said Excellency the Governor of Hongkong shall have full power and authority by any order of reference, under his hand to refer all civil actions or suits whatsoever, whether now pending, or hereafter instituted and also all matters in difference between the parties thereto to the award, and arbitrament of such persons, and on such terms, or conditions as shall be named, or set forth in the said order of reference.

* Formerly High Court Judge in Charge of the Construction and Arbitration List, Hong Kong; Vice President, Chartered Institute of Arbitrators; Chairman, Hong Kong International Arbitration Centre; Special Counsel to Debevoise & Plimpton; Visiting Professor, City University of Hong Kong and Council Member of ICCA. This paper was delivered as the Sixth Goff Lecture in Hong Kong, and was originally published in (1996) 5(1) Asia Pacific Law Review 1-23. It is reproduced here by kind permission of the publisher.

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2. And be it enacted that the said order of reference shall to all intents and purposes be as valid and effectual as if the parties named therein had consented thereto and that the same proceedings in every respect shall be had therein as if same had been duly made a rule of any competent Court of Judicature in England. 3. And be it enacted that any award made in pursuance of such order of reference shall be liable to be set aside by the said Governor in like manner as any award made in pursuance of any order of reference made by any competent Court of Judicature in England.1 Had this Ordinance stopped after paragraph 3, Hong Kong would have become a centre for arbitration 150 years ago. Unfortunately, there was a fourth paragraph to this Ordinance which provided as follows: (4) And it be enacted that the said power and authority herby vested in the said Governor shall cease and determine upon the arrival in the said Colony of, and the assumption of his functions by any Judge of such Supreme Court of Judicature as shall be hereafter erected in Hongkong. So this sensible Ordinance was designed to enable arbitration to take place before there ever was a Supreme Court in Hong Kong. However, like so many of Pottinger’s early reforming Ordinances, this Ordinance was disallowed by the Colonial Office (CO 129-5, 324) on the grounds that it gave the Governor too much power and that anyway the new Supreme Court made it unnecessary.2 As a paper now being written by Christopher Munn and Derek Roebuck will illustrate, the newspapers and Colonial Office records show many instances of arbitration in early Hong Kong, not only among Europeans, but between Chinese merchants. The earliest, between two Englishmen, about the quality of ships’ biscuits, was referred to arbitration on the strong - in fact irresistible - advice of Chief Magistrate Caine on 9 March 1843. In October 1844, the Government used arbitration to fix the amount of compensation payable to a European merchant for his removal from premises in Central. Later on, in the 1860s, the judges here, like their counterparts in England had done, especially Lord Mansfield,3 referred complex business matters to arbitration. Perhaps surprisingly, in disputes relating to accounts between Chinese merchants, they appointed a sole arbitrator, the recently disgraced Daniel Caldwell - no relation, I am sure, of the Secretary General of the Hong Kong International Arbitration Centre who shares his name.

1 The Supreme Court of Hong Kong came into being on 1 October 1844. 2 I am grateful to Mr Justice Godfrey JA for drawing my attention to this Ordinance. 3 Lord Mansfield’s lists were long and thus he made much use of arbitrators to reduce the pressure. He often appointed the same solicitor, Thomas Lowton. In the case of Nash v Lindgren he said ‘I tried all I could to have the whole [case] referred and settled, but the Plaintiff would agree to nothing’. Lord Mansfield was Chief Justice of the King’s Bench from 1756 to1788.

[1995]

I. THE WRITING REQUIREMENT Why have I chosen the writing requirement as the main focus of this lecture? The simple reason is that after nearly five years of applying the Model Law in Hong Kong in my former judicial capacity, I found that problems arising from the application of Article 7(2) of the Model Law were the most difficult and frustrating which came before me. A more fundamental reason is because it is at the stage of recognition or denial of an effective agreement to arbitrate that tensions can still be seen between the courts and the arbitral process. As Holtzmann and Neuhaus put it in relation to Article 7(2) of the Model Law:4 Any effort at unifying law has its greatest potential effect not in the court or hearing room but at the point where it meets the everyday transactions of life. For arbitration statutes, that point is the rule that sets down the requirements for drafting a valid arbitration agreement, for it is that law that will influence most directly the ease with which business people and their lawyers are able to use arbitration as a system for resolving international commercial disputes. Thus, Article 7 of the Model Law, which defines the term ‘arbitration agreement’, is as a practical matter one of the most important parts of UNCITRAL’s attempt to unify national arbitration statutes. It is here that states should resist most strongly any temptation to impose more onerous or peculiarly local requirements. Another reason is that the New York Convention is coming up for its 40th birthday and the time is ripe to examine whether Article II(2) meets the needs of modern business practices. Article 7 of the Model Law is slighdy more extensive than Article II(2) of the Convention, but in my judgment both fail to provide a satisfactory solution to problems that arise in practice and, as I will shortly point out, these practical difficulties were well known to at least some of the delegates at the discussions which led to the New York Convention. At this point it may be helpful to ask: why is there a requirement of writing at all? We already know that substantial contracts are made and enforced only on oral terms. I can see the argument that parties should not be deprived of access to national courts unless they have actually agreed on arbitration. I can see the argument that allowing oral agreements would lead to uncertainty and litigation. But what I have difficulty in seeing is why, if one party is sent a contract which includes an arbitration clause and that party acts on that contract and thus adopts it without any qualification, that party should be allowed to wash his hands of the arbitration clause but at the same time maintain an action for the price of the goods delivered or conversely sue for breach. Some might say that this is the price we have to pay for the doctrine of separability! Before looking at the history of Article II(2) of the Convention, upon which Article 7(2) of the Model Law was based, I would like to refer to a case decided in Hong Kong, the facts of which were simple and commonplace.

4 See Holtzmann and Neuhaus, A Guide to the UNCITRAL Model Law (Kluwer 1989) at p. 258.

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In H Smal v Goldroyce Garment Ltd,5 A agreed to buy from B a quantity of goods on certain terms and conditions which were set out in writing and sent to B with a request that he sign and return the order. The order contained an arbitration clause. B did not sign the order form or send any document in response to the order. However, B did manufacture the goods and deliver them in accordance with the contract to A, who paid for them in accordance with the contractual terms. In due course a quality dispute arose and B offered some compensation to A which was rejected. A then applied to the court for the appointment of an arbitrator on behalf of B, who had refused to appoint one. Pausing here, this was a domestic arbitration but the definition of ‘arbitration agreement’ contained in the Model Law applies to domestic cases in Hong Kong as well as to international ones. B opposed the appointment of an arbitrator on the ground that there was no compliance with Article 7(2) of the Model Law. The court adjourned the application to give A an opportunity of placing before the court some document emanating from B upon which an argument for compliance with Article 7(2) could be based. No such document was forthcoming. The court therefore reluctandy ruled that Article 7(2) had not been complied with and refused to appoint an arbitrator, thus forcing the parties to litigation. Although a decision on Article 7(2), the same result would have been achieved if compliance with Article II(2) had been in issue. I venture to suggest that this decision, even if technically correct, produces an absurd result which is inconsistent with commercial reality. There was no doubt that the parties entered into a contract which was contained in or evidenced by the written order and B’s conduct. Why on earth should the arbitration clause in the contract require to be established by any higher degree of proof than the basic contractual terms themselves? I hasten to add that I am not advocating the bringing within the New York Convention of oral agreements to arbitrate. All I am suggesting is that, on the facts of the case under discussion, there are sufficient legal theories available which could lead to a form of words that would bring the case not only within the Model Law but also the New York Convention. In Robobar Ltd v Finncold SAS, a decision of the Italian Supreme Court reported in the 1995 ICCA Yearbook, the facts were similar to Smal v Goldroyce. The Court held that the agreement to arbitrate is an independent clause of a contract containing it and its validity must be ascertained independently of the validity of the main contract. The argument that it would have been contrary to good faith to contest the validity of the arbitration clause after having performed the obligations contained in the contract in which the clause was contained had to be denied because it is not possible to derogate from the formal requirement. With great respect to the Italian Supreme Court this is, in my view, far too narrow an approach. Article II of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards made in New York on 10 June 1958 (the New York Convention) deals with the phrase ‘agreement in writing’. The relevant provisions of Article II are as follows:

5 [1994] 2 HKC 526.

[1995]

Each Contracting State shall recognise an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

The term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams [emphases added].

It is interesting to observe that neither the Geneva Protocol of 1923 nor the Geneva Convention of 1927 laid down any specific formal requirement for the arbitration agreement. Thus as Professor Albert van den Berg points out:6 Consequently, the question of whether an arbitration agreement had to comply with any requirement as to its form had to be determined under some national law, usually the law of the place where the arbitration agreement was concluded. Apparently this led to much uncertainty under the Geneva treaties and no doubt this was why Article II of the New York. Convention attempted to address this issue. National laws clearly differ on this question. At one end of the spectrum, some national laws require a specific approval in writing of an arbitration clause in the contract or contract conditions while, at the other end of the spectrum, some courts have been content to rely upon a tacit acceptance of a contract containing an arbitration clause. For example a Dutch court,7 where the party receiving an arbitration agreement signed by the other party protested against the clause only two months after the goods had been delivered, interpreted Article II widely by holding that the requirements had been met because the parties had been aware of the existence of the arbitral clause. However, a very restrictive interpretation was taken by the Italian Supreme Court in a similar case where the other party had produced the contract in court, signed another copy, and appointed an arbitrator. This really was based on the view that the admission of the existence of an arbitration agreement was not equal to a written document which under Article II had to express clearly the intent of both parties.8 Professor Albert van den Berg deals with the genesis of Article II(2) of the Convention9 and it is, I believe, worthwhile to consider the way in which the point was developed: The ECOSOC10 Draft Convention of 1955 prescribed the written form for the arbitration agreement. It provided that, in order to obtain enforcement of an award, the party seeking enforcement had to prove that the parties had

6 The New York Arbitration Convention of 1958 (Kluwer 1981) at p. 172. 7 Rechtbank Rotterdam 26 June 1970, YB Comm Arb 1 (1976) 195. 8 Corte di Cassazione 18 September 1978 no. 4167, YB Comm Arb IV (1979) 296, 300. 9 Ibid, 172-173. 10 The United Nations Economic and Social Council.

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agreed ‘in writing’ to settle their differences by means of arbitration. However, it failed to state what constituted an agreement in writing, and this question would presumably have reverted again to municipal law. The latter worried the Dutch delegate, and right at the beginning of the New York Conference, he proposed to add that ‘Agreement in writing shall be held to include exchange of letters or telegrams’. Subsequent to the submission of this proposal, the Conference decided to prepare an additional Protocol concerning the validity of arbitration agreements. The Working Party No: 2 in charge of preparing the Protocol based its draft on the Dutch proposal and elaborated it as the present text of Article II(2). What happened thereafter has already been mentioned: at one of the last sessions of the New York Conference it was decided to insert in the new Convention itself the provisions which were intended for the additional Protocol. Such was the genesis of Article II(2). The Summary Records of the New York Conference do not reveal much discussion about what finally became Article II(2). It is interesting to note that the delegates wanted to have a definition of an arbitration agreement in writing in the Convention as seen by the rejection of a Belgian proposal to delete Article II(2). Notwithstanding the sparse discussion, two points can be deduced from the legislative history. The first is that the purpose of the written form as required by Article II(2) can be assumed to be the same as it is, in general, for the national laws on arbitration. As noted above, that purpose is to ensure that the party is aware that he is agreeing to arbitration. This purpose was apparently so self-evident that it was not even discussed at all. The reason for that is that the delegates were rather apprehensive about the second point. The second point is that the object of defining what constitutes an arbitration agreement in writing in the Convention was to remedy the divergence of the national laws regarding the form of the arbitration agreement. The fact that a definition is provided in the Convention makes it clear that the intention of the drafters was to replace the differing provisions of the national laws in this respect. In other words, their object can be presumed to be to provide for a uniform rule for the formal validity of the arbitration agreement. It is clear from Professor van den Berg’s analysis of the history of Article II(2) that the drafters of the New York Convention were anxious to exclude any oral or tacit acceptance of a written proposal to arbitrate. The Dutch delegate at the discussions leading to the New York Convention was none other than Professor Pieter Sanders. I am most grateful to Professor Sanders for having provided me with the actual minutes of the discussion of his proposal to add to Article II(2): ‘Confirmation in writing by one of the parties (which is kept) without contestation by the other party.’11

11 See n. 8 supra, 196, Note 217.

[1995]

Both the English and USSR delegates objected to this proposal and it was thus rejected. As the discussion was unfortunately very limited and as the point, I hope, will one day be revisited, I thought it might be useful to set out the discussion in full: The President invited discussion on paragraph 2 of the Netherlands draft. Mr Matteucci (Italy) felt that paragraph 2 should indicate that an exchange of letters or telegrams did not exhaust all the possibilities. Signed minutes of a conversation might also constitute an agreement in writing. Mr Bakhtov (Union of Soviet Socialist Republics) expressed a preference for the text of the Working Party, in article 1(2) of its paper, over the Netherlands Version. He could not accept the words ‘confirmation in writing by one of the parties without contestation by the other party’. Mr Wortley (United Kingdom) agreed. In common law, the failure to do something could not constitute an estoppel. Mr Herment (Belgium) proposed the deletion of paragraph 2. Mr Arnaud (France) observed that such a deletion would give a very broad meaning to the words ‘any agreement in writing’ in the paragraph just adopted. The Belgian proposal was rejected by 16 votes to 5, with 2 abstentions. The President suggested the Working Party’s version should be voted on first, and thereafter, the words in the Netherlands draft to which objection had been made. Article 1(2) of the Working Party’s draft (E/CONF.26/L.S2) was adopted by 19 votes to none, with 5 abstentions. The words in the Netherlands draft (E.CONF.26/L.S4) to which reference had been made were rejected by 10 votes to 8, with 5 abstentions. According to Professor van den Berg, most courts have unanimously affirmed that tacit acceptance does not satisfy the written form requirement of Article II(2). He deals with the question of sales and purchase confirmations at pages 205 et seq. and refers specifically to the classic scenario where a duplicate confirmation is sent to the other party with a request to sign and return it but this is not done whilst no objection is made to the conditions in the confirmation. He concurs that ‘national laws differ on the question whether this silence by the other party in regard to the conditions can be equated to an acceptance thereof. However, he concludes that: Whatever may be the binding force of the other conditions in the confirmation under the applicable law, the arbitral clause does not comply in this case with the written form as required by Article II(2) of the Convention as a tacit acceptance is not sufficient for compliance with Article II(2). I will return to the question of tacit acceptance when I come to deal with Article 7(2) of the Model Law.

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For those who caution against deviations between Article II(2) and Article 7(2), it has to be noted that such deviations could be said already to exist. Under the Model Law the writing requirement is complied with if one party asserts an arbitration agreement in his pleading and it is not denied by the other party. In most jurisdictions this would probably satisfy the requirements of Article II(2) of the New York Convention but I believe that there are some jurisdictions in which it would still be held that Article II(2) had not been complied with on these facts. The English delegate to the New York Convention discussions voted against Professor Sanders’ suggestion on the grounds that you cannot have an estoppel by silence. But that is not the position that is being considered. English law has dealt with the problem by the doctrine of ‘part performance’, which is a species of estoppel. What I have been considering by using Smal v Goldroyce as an example, is where, after having been sent a written agreement containing an arbitration clause, the party receiving it acts upon it in such circumstances that it would be unconscionable to prevent that party from relying upon the strict absence of writing. In fact, English law has been through all this before in relation to the Statute of Frauds of 1677. That statute was passed ‘for prevention of many fraudulent practices which are commonly endeavoured to be upheld by perjury and subornation or perjury’. Apparently, people were laying claim to interests in land and goods by relying upon oral contracts, many of which were mere fabrications. This statute provided that contracts dealing with certain interests in land had to be evidenced in writing signed by the party to be charged. Similarly contracts for the sale of goods for the price of £10 upwards had to be evidenced by either acceptance and actual receipt, or by gift of something as earnest or by part payment or by a note or memorandum in writing by the party to be charged. Despite the legislation coming in for much criticism at the time and thereafter, nevertheless it appears, at least according to Holdsworth, that it was needed due to the conditions that existed at the end of the 17th century in England.12 13 (Trial by jury was in a transitional state and the parties to an action were not competent witnesses. These factors militated in favour of written evidence.) The Statute of Frauds was both praised and criticised but as Holdsworth points out, the requirements of written evidence for some contracts ‘are contrary to ordinary business habits; and that they tend, both to encourage the dishonest evasion of obligations, and to

12 Sir William Holdsworth, A History of English Law (Methuen & Co., Sweet & Maxwell,) Vol. VI, at pp. 387393. 13 A court in Hong Kong had recently to consider whether the law of champerty applied in Hong Kong and, if it did whether it applied to arbitration. The rule was introduced to curb the power of barons in the Middle Ages and the evil to which it was directed had long ended before Hong Kong was founded in 1841. Nevertheless the court held that it did apply in Hong Kong but did not apply to arbitration but only to the public justice system. See Cannonway Consultants Limited v Kenworth Engineering Limited [1995] 1 HKC 179.

[1995]

defeat just claims’.14 Immediately after the statute was passed, its interpretation differed in the courts of Chancery to that of the common law courts. The Court of Chancery used a restrictive interpretation. For instance, in relation to trusts for an interest in land they permitted oral proof if to insist on writing would assist a fraud.15 In relation to interests in land, the Court of Chancery evolved the doctrine of part performance. Holdsworth explains the difference in approach between the two courts on the basis that Chancery courts did not use juries whereas common law courts did. Lord Mansfield was one of the judges who relied upon equitable principles to improve the law. He pointed out in Simon v Metivier:16 For instance, when a man admits the contract to be made, it is out of the statute, for here there can be no perjury. Again, no advantage should be taken of this statute to protect the fraud of another. This was a case of a successful bid at a public auction attended by numerous persons. Wilmot J in the same case said: Had the Statute of Frauds been always carried into execution according to the letter, it would have done ten times more mischief than it has done good, by protecting, rather than by preventing, fraud. I, therefore, incline to think sales by auction openly transacted before 500 people are not within the statute. Common law courts took a much more stringent and literal approach. Lord Ellenborough in the case of Hinde v Whitehouse,17 commenting on Simon v Metivier said: With all deference to these opinions I do not at present feel any sufficient reason for dispensing with the express requisition of a memorandum in writing in a statute applying to all sales of goods above the value of £10 without exception, merely because the quantum of parol evidence in the case of an auction is likely to render the danger of perjury less considerable. Although the requirement for writing for contracts for the sale of goods for £10 upwards has been repealed, nevertheless the Hong Kong equivalent of section 40 of the Law of Property

14 Holdsworth, op. cit. at p. 390, citing the papers of the Juridical Society i 289: ‘The statute in prescribing a general use of writing, is at variance with a natural law of social action. Hence, it is very commonly disregarded and so operates as a positive danger instead of a safeguard. It comes to pass that men may act, almost habitually, in a manner which will bring on them the penalties of the law, or at least deprive them of its protection, and yet without any imputation of moral blame on a score of dishonesty or even of negligence, it surely affords a strong argument to show, that in such case the law is in fault, and has attempted to guide the conduct of men in a wrong direction: and such seems to be the case with the Statute of Frauds... but in the vast majority of cases its operation is simply to enable a man to break a promise with impunity, because he did not write it down and with sufficient formality.’ 15 Thynn v Thynn (1684) 1 Vern 296. 16 (1776) 1 W Bl. 599. 17 (1806) 7 East 558.

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Act 1925 requires contracts for the disposition of interests in land still to be evidenced in writing. This provision still applies in Hong Kong although it has been replaced in England by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. I mention section 40 of the Law of Property Act 1925 because it was specifically referred to in the Zambia Steel case to which I will refer later. The doctrine of part performance18 was stated by Lord Cranworth LC in Caton v Caton19 as follows: …when one of two contracting parties has been induced, or allowed by the other, to alter his position on the faith of the contract, as for instance by taking possession of land, and expending money in building or other like acts, there it would be a fraud in the other party to set up the legal invalidity of the contract on the faith on which he induced, or allowed, the person contracting with him to act, and expend his money. On the facts of Smal v Goldroyce the goods were manufactured by the defendant and delivered to the plaintiff. The plaintiff paid for the goods and subsequently made a quality claim to which the defendant responded with an offer. On these facts there was a contract evidenced by the agreement sent to the defendant and further evidence by the performance of the defendant of his contractual obligations contained in the agreement. The acts of the defendant were unequivocally referable to the agreement which contained the arbitration clause. As I have said earlier, it is an absurd result that the contract for the manufacture and sale of goods will be enforced but the arbitration clause fails to meet the writing requirement.20 If Professor Sanders’ wise suggestion had been accepted then this case would have come fairly and squarely within Article II(2) of the New York Convention and no doubt Article 7(2) of the Model Law would have followed the terms of Article II(2).

II. THE MODEL LAW Article 7 of the Model Law provides as follows: (1) ‘Arbitration agreement’ is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement

18 This doctrine is not limited to contracts for the sale of land. See McManus v Cooke (1887) 35 Ch. D 681 at 697. 19 (1996) LR 1 Ch. 137 at 148. 20 Well over 100 years ago, the House of Lords found a satisfactory answer to a similar problem. In Brogden v Metropolitan Railway Co (1877) 2 HL 666, the House held that ‘Circumstances in the conduct of two parties may establish a binding contract between them, although the agreement, reduced into writing as a draft, has not been formally executed by either’. That case makes clear that the mere mental assent to the term stated in a proposed contract would not be binding, ‘but acting upon those terms, by sending coals in me quantities and at the prices mentioned in it, amounted to sufficient to show the adoption of the writing previously altered and sent and to constituted a valid contract’.

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may be in the form of an arbitration clause in a contract or in the form of a separate agreement. (2) The arbitration agreement shall be in writing. An agreement is in writing if it is contained in a document signed by the parties or in an exchange of letters, telex, telegrams or other means of telecommunications which provide a record of the agreement, or in an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by another. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement provided that the contract is in writing and the reference is such as to make that clause part of the contract, [Emphases added]. It is clear that Article 7(2) was modelled on Article II(2) of the New York Convention. However, the UNCITRAL Secretariat had already noted that there were problems with the New York Convention in practice. They set out to identify them no doubt with the view of eradicating them. As early as 1981, the Secretariat prepared a note on ‘Possible Features of the Model Law’.21 Two paragraphs are worth noting: 24. Other issues usefully to be included are those that have given rise to difficulties due to divergent interpretations, or gaps, of the 1958 New York Convention as identified in the study of the Secretary-General (A/CN.9/168). Thus, clarification could be sought, for example, of the exact meaning of the requirement that the arbitration be ‘in writing’. 43. If the requirement of written form were to be adopted, it may further be suggested to include in the Model Law a clear and detailed definition of what ‘in writing’ means. Such definition could help to achieve uniform interpretation which would be highly desirable not only for purposes of the Model Law itself, but also for other legal texts such as the 1958 New York Convention (Article II) or the United Nations Convention on the Carriage of Goods by Sea 1978 (... Article 22). One might even consider to state expressly in the Model Law that the definition given there would be applicable to relevant provisions in other legal texts, too. As to the possible shape of such a definition, it may be based on the definition set forth in the 1958 New York Convention (Article II, para. 2). However, in view of the difficulties encountered in practice, as reported in the study of the Secretary-General [on the New York Convention] (A/CN.9/168, paras. 19-26), the definition of the Model Law should be more precise and detailed. In particular, it should attempt to tackle these problems which relate, for example, to the involvement of intermediaries, to the commercial practice of sales confirmations, or to the use of standard forms or references to general conditions. Some progress appears to have been made because in the first draft dated 15 July 1982, we find the following proposal for what in the final text became Article 7:

21 First Secretariat Note - Possible Features of the Model Law - A/CN.9/207 (14 May 1981).

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(1) The arbitration agreement, whether an arbitration clause in a contract or a separate agreement, shall be [concluded or evidenced] in writing. (2) ‘Agreement in Writing’ includes an agreement contained in a document signed by the parties or contained in an exchange of letters, telegrams or communications in another, [visible and] sufficiently permanent form. The reference in a contract to general conditions containing an arbitration clause constitutes an arbitration agreement provided that the contract is in writing. [However, an arbitration agreement also exists when one party to a contract refers in its written offer, counter-offer or contract confirmation to general conditions, or uses a contract form or standard contract, containing an arbitration clause and the other party does not object, provided diat the applicable law recognizes formation of contracts in such manner.] The Second Working Group Report dated 10 November 1982 decided to delete the words ‘concluded or evidenced’ in paragraph 1 and in respect of the last sentence of paragraph 2, it was stated: In respect of the last sentence of paragraph (2), it was noted that the problem it considers frequently arises in practice. However, the Working Group decided to delete this provision since it raised difficult problems of interpretation. In relation to government comments on the first version of the Model Law it is to be noted that the United States supported Article 7 whilst noting ‘that the wording of the draft text is not identical to the definition in the 1958 New York Convention, it is believed that it is consistent with and expresses the purpose of the Convention’. Norway pointed out that problems would be caused in relation to bills of lading and suggested adding the following at the end of Article 7(2): If a bill of lading or another document, signed by only one of the parties, gives sufficient evidence of a contract, an arbitration clause in the document, or a reference in the document to another document containing an arbitration clause, shall be considered to be an agreement in writing. The United Kingdom comments on Article 7(2)22 were as follows: Article 7(2), in requiring a document signed by the parties or an exchange of letters or telecommunications recorded in a tangible form, is not sufficient to encompass trade practice. A number of valid arbitration agreements are evidenced in documents not signed by the parties. Perhaps the most important of these are bills of lading. The United Kingdom prefers the approach adopted in Article 17 of the Brussels Convention of 1968 on Jurisdiction and the Enforcement of Judgment, as amended, which refers to the agreements which are ‘in writing or, in international trade or commerce, in a form which accords with practices in that trade or commerce of which the parties are or ought to have been aware’.

22 A/CN.9/263/ADD.2 (21 May 1985).

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In its analytical commentary on the draft text23 the Secretariat noted as follows: The Model Law follows the 1958 New York Convention in requiring written form, although, in commercial arbitration, oral agreements are not unknown in practice and are recognized by some national laws. In a way, the model law is even stricter than that Convention in that it disallows reliance on a ‘more favourable provision’ in the subsidiary national law (on domestic arbitration), as would be possible under that Convention by virtue of its Article VII(l).24 The Model Law is intended to govern all international commercial arbitration agreements and, as provided in Article 7(2), requires that they be in writing. However, non-compliance with that requirement may be cured by submission to the arbitral proceedings, i.e. participation without raising the plea referred to in Article 16(2). The Observer for the International Bar Association cautioned the Commission against going too far in relation to Article 7(2) because he feared a problem might arise if an arbitration took place in one country which had adopted the Model Law and a party sought to enforce that award under the Convention in a country which had not. Howard Holtzmann, who was the representative of the United States of America, endorsed the comments of the Observer of the International Bar Association in relation to enforcement under the New York Convention. However, he added that the problem might be less serious than it seemed since: ‘The definition of an agreement in writing in that Convention (Article II(2) stated that it should “include” not that it should “be”, the kinds of agreements there specified.’ Lord Wilberforce, the observer on behalf of the Chartered Institute of Arbitrators, made the following powerful comment: In present-day trade, there are many contracts, even in writing, that were not signed by both parties. To draft the Model Law so narrowly as to exclude them from arbitration from the Model Law would be far too backward looking. The representative of the Soviet Union had suggested that they might come under the third sentence of paragraph (2), but the fact remained the second sentence called for signature by both parties. One way of meeting that requirement might be to expand the last sentence of paragraph (2) along the lines of the Norwegian suggestion. In the Commission’s report dated 21 August 198525 it was noted that Article 7(2) did not cover the cases encountered in practice where one of the parties did not declare in writing his consent to arbitration. After careful deliberation, the Commission decided not to accept the suggestion made by the United Kingdom that use could be made of Article 17 of the

23 Seventh Secretarial Note - Analytical Commentary on Draft Text. A/CN.9/264 (25 March 1985). 24 Article VII(l) of the New York Convention provides: ‘The provisions of the present Convention shall not affect the validity of multilateral or bilateral agreements concerning the recognition and enforcement of arbitral awards entered into by the Contracting States nor deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award in sought to be relied upon.’ 25 A/40/17.

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Brussels Convention of 1968. In relation to the Norwegian suggestion, the Commission noted that there was considerable support for this proposal but again after deliberation the Commission did not adopt the additional wording ‘because it appeared unlikely that many states will be prepared to accept the concept of an arbitration agreement which, although contained in a document, was not signed or at least consented to in writing by both of the parties. It was also pointed out that there might be difficulties with regard to the recognition and enforcement under the 1958 New York Convention of awards based on such agreement’. The Commission were, however, prepared to add at the end of Article 7(2) the wording which we now see in relation to exchange of statements of claim and defence in which the existence of an agreement is alleged by one side and not denied by the other. Many of these points were immediately picked up in England by the Mustill Report26 where at paragraph 87 it was stated, inter alia: Article 7 (Definition and form of arbitration agreement) The requirement that the arbitration agreement should be signed would introduce an unwelcome distinction between those arbitration agreements in international commerce which are recognized as binding although not signed by both parties (e.g. those in bills of lading, broker’s contract notes, etc) and those where the agreement is in a formal signed document (e.g. charterparties, construction contracts, loan agreements, etc). The case of Smal v Goldroyce has already illustrated that there are problems with Article 7(2). The German Law Reform Commission, a member of which was none other than Dr Gerold Herrmann, now the Secretary General of UNCITRAL, has recognised difficulties with Article 7(2) and has recommended a clause which, translated from the German, reads as follows: The written form is also recognized if the arbitration agreement is contained in a document communicated by one party to the other party or by a third party to both parties and if the content of the document is considered as subject-matter of the contract, in a case not duly (timely) denounced according to usage. Article 178(1) of the Swiss Private International Law Act 1987 provides: ‘The arbitration agreement must be made in writing, by telegram, telex, telecopier or any other means of communication which permits it to be evidenced by a text. So again we see in a modern statute no requirement for signature or exchange. On the issue of bills of lading, the Singapore International Arbitration Act 1994 which adopted the Model Law with some changes as from January 1995 deals specifically with the problem identified above by providing in section 2(1) that:

26 The Departmental Advisory Committee on Arbitration Law (DAC) under the Chairmanship of the then Lord Justice Mustill reported in 1989 against England adopting the Model Law.

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‘arbitration agreement’ means an agreement in writing referred to in Article 7 of the Model Law and includes an arbitration clause contained or incorporated by reference in a bill of lading.[Emphasis added] Article 1021 of the Netherlands Arbitration Act 1986 harkens back to Professor Sanders’ 1958 suggestion because it states: The arbitration agreement shall be proved by an instrument in writing. For this purpose an instrument in writing which provides for arbitration or which refers to standard conditions providing for arbitration is sufficient, provided that this instrument is expressly or impliedly accepted by or on behalf of the other party. I believe that this is a sensible and workable formulation and, when read with Article VII(l) of the New York Convention, may provide a perfectly satisfactory answer to the problem under discussion. The issue with which I am dealing was considered by the English Court of Appeal in Zambia Steel v Clark & Eaton.27 In that case, the plaintiff’s agents asked the defendants whether they could supply some sheet glass. As a result of that enquiry, the defendants produced a quotation which provided ‘quotations (which do not constitute offers) are made on our terms of business . . . orders are only accepted and executed on these terms to the exclusion of all others . . .’. These terms were printed on the reverse of the quotation and provided that any disputes would be settled by arbitration. This quotation produced a purchase order and thereafter there were negotiations between the parties regarding quantities and price. A letter of credit was opened and the parties met in Zambia to agree final terms. The defendant’s final quotation, which was accepted, contained the following statement: ‘This quotation is subject to our final confirmation of your acceptance.’ A dispute arose and a writ was issued. This was met by an application to stay those proceedings on the grounds that there was a binding arbitration agreement and that under section 1 of the Arbitration Act 1975 the Court was bound to stay the agreement. The judge refused the stay but the Court of Appeal imposed it. The Court of Appeal held that on the evidence the terms on the back of the quotation formed part of the contract and went on to hold: (2) Once it was clear that the assent to the written terms or evidence of it was not required to be contained in the written agreement but that assent to the written terms might be proved by other evidence, then any evidence which proved that the party had agreed to be bound by an agreement to submit contained in a document or documents was sufficient to make the document or documents an agreement in writing within the 1975 Arbitration Act;

27 [1986] 2 Lloyd’s Rep. 225, annotated by FA Mann, An ‘Agreement in Writing’ to Arbitrate (1987) 3(2) Arbitration International 171-172, at 171.

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(3) the contract was a contract partly unwritten and partly in writing and on the facts the agreement to arbitrate was a term in writing, a written term of the agreement which the parties entered into; the endorsed terms of business contained in each of the quotations thus became a written record of the terms to which the parties were assenting and a contractual document part of the contract; the requirements of the 1975 Act, section 7, was satisfied, there was a binding agreement to arbitrate and the defendants were entitled to a stay. The appeal will be allowed and the action stayed. The relevant statutory provisions in England are as follows. The Arbitration Act 1950 deals with the phrase ‘arbitration agreement’ by providing that: … the expression ‘arbitration agreement’ means a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not.28 Section 7 of the Arbitration Act 1975, which was passed to give effect to the United Kingdom’s New York Convention obligations, defined ‘arbitration agreement’ as follows: ‘Arbitration agreement’ means an agreement in writing (including an agreement contained in an exchange of letters or telegrams) to submit to arbitration present or future differences capable of settlement by arbitration. At p. 284 in Zambia Steel, Ralph Gibson LJ considered whether there was any difference between these two definitions and concluded: It was not argued before Sir Neil Lawson or before this Court that there is any difference in meaning between the phrase ‘written agreement to submit’ in section 32 of the Arbitration Act 1950, and ‘agreement in writing’ included in section 7(1) of the 1975 Act. For my part, I agree that there is no relevant difference. The words ‘including an agreement contained in an exchange of letters of telegrams’ were no doubt included so as to avoid any argument based upon their omission. It is clear tfiat the omission of the words ‘signed by the parties’ was intended to leave the requirement the same as it is under section 32 of the 1950 Act. Ralph Gibson LJ referred to an observation of Lord Justice Lloyd (as he then was) in Excomm Limited v Ahmed Abdul-Qawi Bamaodah (The St. Raphael)29 where he said: I would hold that an arbitration agreement need not be signed and that the definition in section 32 of the Act is satisfied provided there is a document or documents in writing which, to use the language of Lord Greene recognize, incorporate or confirm the existence of an agreement to submit.

28 Arbitration Act 1950, s. 32. 29 [1985] 1 Lloyd’s Rep. 403 at 409.

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Ralph Gibson LJ went on to say this: It appears to me that the test there proposed did not require that the assent of the defendant to the arbitration clause contained in the document or documents, or evidence of that assent, should be contained in those or any other document. It is sufficient if it is proved diat the defendant is contactually bound by the arbitration agreement incorporated in the document... I am unable to accept that the 1975 Act requires proof that a document emanating from the party against whom the arbitration clause is raised upon an application to stay. If the term containing the agreement to submit is incorporated in a document and it is proved that the party is bound by an agreement which includes the terms of that document, then no further proof of the agreement to submit it, in my judgment, is required Once it is clear that the assent to the written terms or evidence of it is not required to be contained in the written agreement, but that assent to the written terms may be proved by other evidence, then in my judgment any evidence which proves that the party has agreed to be bound by an agreement to submit contained in a document or documents is sufficient to make the document or documents an agreement in writing within the 1975 Act. Ralph Gibson LJ pointed out that the phrase ‘an agreement in writing’ may have at least two meanings. The first is simply where the terms agreed between the parties are set out in writing and this would permit proof that those terms were agreed to be given outside those documents. As he put it: Such proof may be given by evidence of conduct from which the court is persuaded that the inference of agreement must be drawn, or by evidence of oral acceptance, or indeed any other evidence which satisfies the court that the written terms constitute or form part of an agreement between the parties. The learned Lord Justice then went on to point out that the second possible meaning is that both the terms of the agreement to submit and the assent to those terms should be contained in the document. In this regard, he referred to section 40 of the Law of Property Act 1925 to which I have made reference above. As he points out, this provision ‘permits proof of the making of a prior agreement by a subsequent signed note of it’. He then went on to consider Article II(2) and then said this: The 1975 Act, as it states, was enacted to give effect to that Convention. It is clear to me that the Convention by Article II(2) did not impose upon the contracting state an obligation to recognize an agreement in writing to submit to arbitration unless it is signed by the parties or unless the agreement is contained in an exchange of letters or telegrams in the sense that the assent to be bound by both parties is given in writing by such a document. If, however, Parliament enacts legislation which requires the courts of this country to recognize agreements in writing of that nature, the obligation under the Convention is fulfilled. If the enactment also requires our courts to recognize

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an agreement in writing within the first meaning given above, in which proof of assent to the written terms is provided outside the document, there is no basis for regarding such provision as constituting departure by this country from any obligation assumed under the Convention. It is for this reason that I would support a widening of the scope of Article 7(2) of the Model Law which, because it applies in Hong Kong to both domestic and international arbitrations, must serve both regimes. If the new English Arbitration Bill becomes law in its present form, Clauses 5 and 6 will define ‘agreement in writing’. Clause 5.—(1) The provisions of this Part apply only where the arbitration agreement is in writing, and any other agreement between the parties as to any matter is effective for the purposes of this Part only if in writing. The expressions ‘agreement’, ‘agree’ and ‘agreed’ shall be construed accordingly. (2) There is an agreement in writing– (a) if the agreement is made in writing (whether or not it is signed by the parties), (b) if the agreement is made by exchange of communications in writing, or (c) if the agreement is evidenced in writing. (3) Where parties agree otherwise than in writing by reference to terms which are in writing, they make an agreement in writing. (4) An agreement is evidenced in writing if an agreement made otherwise than in writing is recorded by one of the parties, or by a third party, with the authority of the parties to the agreement. (5) An exchange of written submissions in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another party and not denied by the other party in his response constitutes as between those parties an agreement in writing to the effect alleged. (6) References in this Part to anything being written or in writing include its being recorded by any means. Clause 6.—(1) In this Part an ‘arbitration agreement’ means an agreement to submit to arbitration present or future disputes (whether they are contractual or not). (2) The reference in an agreement to a written form of arbitration clause or to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.

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It seems clear to me that this section covers the problems which I have identified and if it becomes the law of England then it would certainly catch the facts of a case like Smal v Goldroyce. In the light of observations in Zambia Steel it seems likely that the existing section 7 would also have the same effect. There have been several cases in Hong Kong where the court has had to consider the scope of Article 7(2) of the Model Law. Smal v Goldroyce is the only one of which I am aware where the writing requirement was clearly not complied with. In some cases the court was able to consider that there was sufficient material before it which would give rise to an arguable case of compliance with Article 7(2) and leave the jurisdictional issue to the arbitrators under the regime set out in Article 16 of the Model Law.30 Recommendations have been made to the Attorney General that, inter alia, Article 7(2) needs amendment so that it will cover not only the facts of a case like Smal v Goldroyce but also the other matters adverted to in paragraph 87 of the Mustill Report. I am hopeful that legislative changes will be introduced to the Legislative Council in May 1996. Recommendations have also been made to change Article II(3) and (4) of the Model Law to take away from the Court the default appointing power and give it instead to HKIAC. This is what Singapore did in its International Arbitration Act. We have found that far too much time and money has been wasted in issuing process in Hong Kong to get an arbitrator appointed for a recalcitrant defendant, getting leave to serve out of the jurisdiction, serving the process sometimes translated in the foreign jurisdiction and then coming back to Hong Kong to get an appointment ‘on the nod’ because the defendant still does not respond. In small demurrage cases, the cost involved represents a sizeable proportion of the claim and it is to be hoped that if HKIAC does the default appointing, it would be quicker and cheaper. The courts were powerless to prevent this waste of time and money and all they could do was to order indemnity costs against the respondent for repudiating his contractual obligations to appoint and for completely ignoring the court’s process.31 This was little deterrent to the wilfully obstructive. When the Model Law was adopted in Hong Kong in 1989, we decided to make hardly any changes. We have, however, now proposed not only the changes mentioned above but also that a Model Law arbitrator should have jurisdiction to dismiss a case for want of prosecution in the same way that this can be done in domestic cases.

30 See Pacific International Lines (Pte) Limited v Tsinlien Metals & Minerals Co. Ltd. [19931 2 HKLR 249 and Private Company ‘Triple V’ Inc. v Star (Universal) Co. Ltd., unreported, 1995 CA 90, 7 July 1995: ‘...the judge had to make a judgment as to whether there existed an underlying agreement to arbitrate, he could do no more than to form a prima facie view’. As to cases raising difficulties with Article 7(2), see also Astel-Peniger JV v Argos Engineering, unreported, Con. List 14 of 1994, 18 August 1994; PT Wearwell International Ltd. v VF Asia Ltd. 3 HKC 344; Gay Construction Pte Ltd. v Caledonian Techmore (Building) Ltd., Con. List 23 of 1993, 17 November 1994; William Company v Chu Kong Agency [1993] HKLD B 7; Hissan Trading v Orkin Shipping [19921 HKLD H8. 31 See China Ocean Shipping Co. v Mitrans Maritime Panama SA [1994] 2 HKC 614 and Safond Shipping Sdn Bhd v East Asia Sawmill Corp [1993] HKLD J11.

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III. CONCLUSIONS A problem still remains with Article II(2) of the New York Convention. The Convention has been hugely successful, with approximately 130 states and territories adhering to it. It is far easier to enforce an arbitral award in this part of the world than it is to enforce a judgment of a foreign court. As an example, Hong Kong has no reciprocal enforcement of civil judgments provisions with the United States, Japan or China - its three major trading partners - yet each is a Convention country. The New York Convention has served the international commercial community very well. Yet it has to be acknowledged that a lot of change has taken place since 1958. Many courts do not seem to be so jealous of their position as once they were thought to be. Both in England, the United States and in Hong Kong one can find judicial statements strongly supportive of arbitration. The Model Law itself, with its emphasis on party autonomy, was a leap in the dark for several nations who adopted it. For those who did not adopt it we have seen amendments to their arbitration laws which are much influenced by the Model Law. Given all these developments it is not unreasonable to propose that the time has come for another look at Article II(2). In my view, its emphasis on writing or exchange is outmoded. It would be helpful to see a general reconsideration of Article II(2) in the light of existing commercial practices and also in the light of the many developments which have occurred since 1958 in the field of international commercial arbitration. As to the Model Law, I think on reflection it was a pity that it did not broaden the definition of writing so as to bring within the definition the sort of case to which I have made reference. One has to accept that business persons will often be haphazard in relation to the entering into, drafting and execution of contracts and the law should not be over zealous in nullifying their clear understandings and intentions. However, I accept that there are very considerable practical difficulties involved in changing any part of the Convention. To be effective, there would need to be a consensus between the 130 or so States who have ratified the Convention and I suppose that this is unlikely. Whether this is a reason for not even trying, I leave to the more diplomatic members of the arbitral community. In the meantime, it is hoped that enforcing courts will not be too astute to find noncompliance with Article II(2) in cases where the arbitration was conducted under a law which deems the writing requirements to be fulfilled in a more generous way than Article II(2) of the New York Convention. Perhaps more attention should be given to the terms of Article VII(l) of the Convention. Professor Sanders made his proposals, which were unfortunately rejected, in the light of his practical experience in 1958. Time has certainly proved him correct. This should come as no surprise to those who have learned from and worked with him.

Arbitration Agreement in Writing: Where do we Currently Stand? A 2021 Postscript to the 1995 Goff Lecture Neil Kaplan CBE QC SBS

Introduction The origins of the 6th Goff Lecture1 (the 1995 Lecture) which I delivered in Hong Kong on 20 November 1995, can be traced back to the frustration I experienced as judge of the Construction and Arbitration List in a case called H Smal Ltd v Goldroyce Garment Ltd.2 The dispute concerned the colour of jeans the claimant had ordered from the defendant. In that case, the claimant sent a signed written purchase order containing an arbitration clause to the defendant. The defendant never returned a signed copy. The jeans were nonetheless delivered in accordance with the purchase order and paid for. When the claimant commenced arbitration, no agreement could be reached as to the identity of the arbitrator, and the claimant applied to me for the appointment of an arbitrator.3 However, because the claimant could not produce a copy of the purchase order signed by the defendant, I was bound under the then (1985) version of article 7 of the UNCITRAL Model Law (the Model Law)4 to decline to appoint an arbitrator. This was not a satisfactory result as there undoubtedly was a contract between the parties. The arbitration agreement only failed on purely formal grounds – the requirement of signature by both parties under article 7 – and no regard could be had to the parties’ conduct and the implied acceptance of the terms of the agreement. There was no way to compel the defendant to arbitrate. In the 1995 Lecture that ensued, I pointed to the disconnect between the requirements of article 7 of the Model Law (in its original 1985 version) and also of article II(2) of the New York Convention5 with modern business realities. The lecture, along with other early works

1 Is the Need for Writing as Expressed in the New York Convention and the Model Law Out of Step with Commercial Practice? (1996) 12 Arb Int’l 27–45, (1996) 5 APL Rev 1–23; pp 77–96 of this volume. 2 H Smal Ltd v Goldroyce Garment Ltd [1994] 2 HKC 526. 3 This was before the Hong Kong International Arbitration Centre became the appointing authority under the previous Hong Kong Arbitration Ordinance (Cap 341) in 1997. 4 Fifth Schedule to the Arbitration Ordinance (Cap 341), reproduced above: see p 36 of the 1995 Lecture. 5 Third Schedule to the Arbitration Ordinance (Cap 341), reproduced above: see p 31 of the 1995 Lecture.

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by eminent colleagues,6 stirred up the conversation on the requirement that the arbitration agreement be in writing. This eventually led to the amendments to the Model Law adopted by UNCITRAL in 2006. However, even before the amendments to the Model Law, some jurisdictions had adopted liberal legislation with regard to the requirement that the arbitration agreement be in writing. This was done in both Hong Kong and England & Wales less than a year after the lecture was delivered.

Early Amendments to Hong Kong and English Law in 1996 As is well-known, Hong Kong has been at the cutting edge of arbitral law reform since the early 1980s. It was one of the very early jurisdictions to adopt the Model Law (in 1989, effective 1990). The issue of the writing requirement had been considered since 1995. In a report on the Arbitration (Amendment) Bill 1996 for a House Committee meeting of the Hong Kong Legislative Council (LegCo), the Hong Kong Government’s Legal Services Division noted: 5. In 1995, a committee of the Hong Kong International Arbitration Centre (“HKIAC”) chaired by Mr. Justice Kaplan (as he then was) proposed to the Attorney General certain amendments aiming at minimising the differences in conducting arbitration proceedings under the existing 2 regimes (i.e. foreign and domestic) and at removing anomalies under the Ordinance. The present Bill seeks to incorporate these proposals into the Ordinance. 6.

The Bill seeks to provide for the following aspects of the law:

(a) To extend circumstances in which arbitration agreements are to be regarded as being in writing (and thus within the Ordinance) and to include cases where an agreement to arbitrate is not signed by the parties, as is often the case in a Bill of Lading;… 7

6 Particularly Gerold Herrmann ‘The Arbitration Agreement as the Foundation of Arbitration and Its Recognition by the Courts’, in Albert Jan van den Berg (Ed), International Arbitration in a Changing World, ICCA Congress Series, No 6 (1993, Kluwer), pp 41-50; and later in his 1998 Freshfields Lecture, Does the World Need Additional Uniform Legislation on Arbitration? (1999) 15 Arb Int’l 211-236. A more recent but no less important discussion of these issues is that offered by Toby Landau, ‘The Requirement of a Written Form For an Arbitration Agreement: When “Written” Means “Oral” ’, in Albert Jan van den Berg (Ed), International Commercial Arbitration: Important Contemporary Questions, ICCA Congress Series, No 11 (2003, Kluwer), pp 19-81. 7 Legal Services Division, Report on Arbitration (Amendment) Bill 1996, Paper for the House Committee Meeting on 11 October 1996, Leg Co Paper No LS5/96-97.

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When the Arbitration (Amendment) Ordinance 1996 (75 of 1996) was adopted in Hong Kong,8 the writing requirement from the old Model Law was revised as follows: (1) An agreement is not an arbitration agreement for the purposes of this Ordinance unless it is in writing. (2) An agreement is in writing for the purposes of subsection (1) if (a) the agreement is in a document, whether signed by the parties or not; or (b) the agreement is made by an exchange of written communications; or (c) although the agreement is not itself in writing, there is evidence in writing of the agreement; or (d) the parties to the agreement agree otherwise than in writing by referring to terms that are in writing; or (e) the agreement, although made otherwise than in writing, is recorded by one of the parties to the agreement, or by a third party, with the authority of each of the parties to the agreement; or (f) there is an exchange of written submissions in arbitral or legal proceedings in which the existence of an agreement otherwise than in writing is alleged by one party against another party and is not denied by the other party in response to the allegation. (3) A reference in an agreement (a) to a written form of arbitration clause; or (b) to a document containing an arbitration clause, constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement. (4) In this section “writing” (書面) includes any means by which information can be recorded. (5) This section applies to all agreements that would, if they were arbitration agreements, be either domestic arbitration agreements or international arbitration agreements and applies to those agreements to the exclusion of article 7(2) of the UNCITRAL Model Law.9 England & Wales adopted a similar formulation in section 5 of its Arbitration Act 1996.

8 For an in-depth analysis of this Ordinance, see Robert Morgan, The Arbitration Ordinance of Hong Kong: A Commentary, 1997 Supplement (Singapore/Hong Kong/Malaysia: Butterworths Asia). Editorial note: As to the requirement of writing upder the 1997 Ordinance, see Robert Morgan, Hong Kong Arbitration in Transition: The Arbitration (Amendment) Ordinance. 1996: Part 1 [1997] International Arbitration Law Review 19-38, at 25-27; Robert Morgan, Arbitration Agreements and the UNCITRAL Model Law [1999] Asian Dispute Review 33-37. 9 Section 4 of the Arbitration (Amendment) Ordinance 1996 (75 of 1996), which added section 2AC to the Arbitration Ordinance (Cap 341).

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The Significant Amendments to the Model Law in 2006 In the 1995 Lecture, I made the case for the inclusion in the definition of “in writing” of cases involving written offers to arbitrate and tacit acceptance. I did not make the case for purely oral agreements. In my view, the exclusion of the jurisdiction of the courts in favour of arbitration is a serious step, which should be evidenced in some form of writing. On 4 December 2006, more than 10 years after the lecture, the Model Law was finally amended.10 Article 7 was significantly revised. It now contains two options regarding the definition and form of the arbitration agreement. It is worth setting it out in full: Option I Article 7. Definition and form of arbitration agreement (As adopted by the Commission at its thirty-ninth session, in 2006) (1) “Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. (2) The arbitration agreement shall be in writing. (3) An arbitration agreement is in writing if its content is recorded in any form, whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means. (4) The requirement that an arbitration agreement be in writing is met by an electronic communication if the information contained therein is accessible so as to be useable for subsequent reference; “electronic communication” means any communication that the parties make by means of data messages; “data message” means information generated, sent, received or stored by electronic, magnetic, optical or similar means, including, but not limited to, electronic data interchange (EDI), electronic mail, telegram, telex or telecopy. (5) Furthermore, an arbitration agreement is in writing if it is contained in an exchange of statements of claim and defence in which the existence of an agreement is alleged by one party and not denied by the other. (6) The reference in a contract to any document containing an arbitration clause constitutes an arbitration agreement in writing, provided that the reference is such as to make that clause part of the contract. Option II Article 7. Definition of arbitration agreement (As adopted by the Commission at its thirty-ninth session, in 2006)

10 General Assembly Resolution 61/33 (4 December 2006).

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“Arbitration agreement” is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. As is immediately apparent, I would have decided H Smal Ltd v Goldroyce Garment Ltd very differently under the 2006 wording of article 7, be it Option I or Option II. Option I now expressly recognises agreements by conduct, and has abandoned the requirement for signatures. It has not, however, abandoned the requirement that there be some evidence of the agreement in writing (the content of the agreement must be recorded “in any form” and “useable for subsequent reference”). This is welcome as it ensures the agreement to arbitrate is safe and its essential components can be ascertained. Hong Kong adopted Option I when it enacted the present Arbitration Ordinance (Cap 609), which came into force in 2011.11 Section 19(1) of the Ordinance reproduces Option I verbatim. Section 19(2) and (3) retain some of the more liberal wording introduced in 1996 (shared with the English Arbitration Act 1996) and specify that: (2) Without affecting subsection (1), an arbitration agreement is in writing if— (a) the agreement is in a document, whether or not the document is signed by the parties to the agreement; or (b) the agreement, although made otherwise than in writing, is recorded by one of the parties to the agreement, or by a third party, with the authority of each of the parties to the agreement. (3) A reference in an agreement to a written form of arbitration clause constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement. As the authors of Redfern & Hunter put it: In these modern arbitration laws, there has, in effect, been a triumph of substance over form: as long as there is some written evidence of an agreement to arbitrate, the form in which that agreement is recorded is immaterial.12 Option 2 of article 7 is even more liberal as it does not refer to a writing requirement at all. It suffices that there be an agreement by the parties to submit to arbitration all or certain disputes. Article 1507 of the French Code of Civil Procedure reflects this approach whereby arbitration agreements are not subject to any requirements of form: “La convention d’arbitrage n’est soumise à aucune condition de forme / An arbitration agreement shall not be subject to any requirements as to its form”. Similarly, section 7(1) of the New Zealand Arbitration Act 1996 provides that “An arbitration agreement may be made orally or in writing”.

11 Option I has also been adopted by Singapore. Following the 2012 revision of the International Arbitration Act (Cap 143A), section 2A of the Act now adopts a formulation substantially identical to that of the Model Law. 12 Nigel Blackaby et al., Redfern and Hunter on International Arbitration (2015, Oxford University Press) pp 77-78.

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What transpires from the above is that considerable progress has been achieved in relaxing the form requirement for arbitration agreements, both in national laws and in the Model Law. However, one sizeable problem remains: the text of the New York Convention, whose award enforcement regime is arguably the most important feature of international arbitration, has not evolved since its adoption on 10 June 1958. This can create tensions between liberal national laws and a 63 year-old treaty at the crucial stage of the enforcement.

The New York Convention By contrast with article 7 of the Model Law, the wording of Article II of the New York Convention has remained unchanged since 1958. It states: 1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. 2. The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. National laws in some arbitration-friendly countries have generally moved away from the New York Convention wording, and its requirement for signature and references to telegrams - which, as we all know, are not so common in this modern day and age. However, that is not the end of the matter. The New York Convention requirements still need to be considered, as illustrated by a decision of the Hålogaland Court of Appeal in Norway.13 In this case, the Court refused to enforce an award rendered in London because the petitioner had not produced the original agreement referred to in article II of the Convention. In the Court’s view, the exchange of emails submitted by the petitioner did not satisfy the writing requirement of article II(2) of the Convention. While the arbitration agreement evidenced by emails was valid under the English Arbitration Act 1996 — the law of the seat of the arbitration — the Court ruled that its validity was to be assessed separately at the place of enforcement and that “it should not be sufficient for enforcement that the arbitral award is valid according to the law of the country in question”. Similarly, in Concordia Trading BV v Nantong Gangde Oil Co Ltd,14 the contracts contained a clause whereby disputes were to be submitted to the arbitration rules of the

13 Hålogaland Court of Appeal, 16 August 1999, Charterer v Shipowner, reported in YB Comm Arb XXVII (2002) pp 519–23 (Norway No 1), reported on by Albert Jan van den Berg in New York Convention of 1958: Refusals of Enforcement, ICC International Court of Arbitration Bulletin, Vol 18/No. 2 (2007) and in Redfern & Hunter, op cit (note 12), p.78. 14 Supreme People’s Court, 3 August 2009, [2009] Min Si Ta Zi No 22.

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Federation of Oils, Seeds and Fats Associations in London. The Supreme People’s Court of the People’s Republic of China denied enforcement of the award on the ground that only one party had signed the contract containing the arbitration clause and that this did not comply with the New York Convention.15 In my concluding remarks in 1995, I expressed the hope that enforcing courts would not be too keen to find non-compliance with article II(2) of the New York Convention in cases where the arbitration was conducted under a law which deems the writing requirements to be fulfilled in a more generous way than under article II(2). “Perhaps more attention should be given to the terms of Article VII(1) of the Convention” I suggested. Article VII(1) of the New York Convention, sometimes referred to as the ‘more favourable rule/law principle’, provides as follows: The provisions of the present Convention shall not affect the validity of multilateral or bilateral agreements concerning the recognition and enforcement of arbitral awards entered into by the Contracting States nor deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon. This provision makes it clear that the New York Convention only sets a minimum standard, not a ceiling, and that Contracting States are always at liberty to adopt more liberal legislation. For a number of years, a debate has existed on the applicability of this principle to the requirement that an arbitration agreement be “in writing” for the purposes of article II. In 2006, UNCITRAL issued a recommendation regarding the interpretation of articles II and VII,16 stating that: […] article II, paragraph 2, of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958, be applied recognizing that the circumstances described therein are not exhaustive; […] article VII, paragraph 1, of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958, should be applied to allow any interested party to avail itself of rights it may have, under the law or treaties of the country where an arbitration agreement is sought to be relied upon, to seek recognition of the validity of such an arbitration agreement.

15 Lin Yifei, Judicial Review of Arbitration: Law and Practice in China (2018, Kluwer), §4.01. 16 Recommendation regarding the interpretation of article II, paragraph 2, and article VII, paragraph 1, of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done in New York, 10 June 1958, adopted by the United Nations Commission on International Trade Law on 7 July 2006 at its thirty-ninth session, A/6/17, Annex II, pp 61-62.

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The recitals note that the recommendations were drafted in recognition of the widening use of electronic commerce and communications, as well as the development of domestic legislation and case law more favourable than the New York Convention in respect of the form requirement governing arbitration agreements, arbitration proceedings, and the enforcement of arbitral awards. In the current political climate, an update of the Convention through a recommendation was undoubtedly easier to achieve than a revision of the treaty itself.17 The first recommendation certainly brought much-needed flexibility to article II(2) in recognising that electronic communications have completely reshaped the ways of doing business, and that emails have long replaced letters and telegrams. Perhaps more importantly, the second recommendation has confirmed that article VII(1) is applicable to issues relating to the validity of an arbitration agreement. In short, this means that arbitration agreements validly formed under national laws with less stringent formal requirements than the New York Convention (such as that of countries which have adopted the 2006 Model Law or similar legislation), will also be valid under the New York Convention. It is to be hoped that this recommendation will ensure that fewer awards are refused enforcement on grounds of incompatibility with the New York Convention when issued on the basis of an arbitration agreement otherwise valid under the law to which it was subjected. Parties to arbitration agreements should nonetheless strive to ensure evidence of their arbitration agreement is as strong as possible, for there remain States where specific formal requirements apply. This can have dire consequences at the enforcement stage.

Conclusion Thus, in conclusion, it is very satisfying to note that great improvements have been made in relation to the writing requirement of the New York Convention and the Model Law in the 26 years since my first Goff Lecture was delivered.

17 See, on this subject, Emmanuel Gaillard, ‘The Urgency of Not Revising the New York Convention’, in Albert Jan van den Berg (Ed), 50 Years of the New York Convention, ICCA Congress Series No 14, (2009, Kluwer), p 689.

Too Many Laws? The Right Honourable Lord Mustill*

An invitation to deliver the latest in the series of lectures dedicated to the eminent scholarjudge whose name they bear is an honour which needs no explanation. It is also a pleasure, not only because of the opportunity to revisit the territory and marvel at the changes, but also because Hong Kong is a nerve centre of international commercial arbitration as well as a nerve centre of international commerce itself. For sheer versatility and speed of innovation, dispute resolution in Hong Kong offers an example to everyone concerned with the resolution of commercial disputes. It is a chance to learn as well as to propound, which nobody could willingly forego. Nevertheless, the honour and the pleasure were matched with responsibilities of equal weight. These began, as they usually do, almost straight away: for the speaker’s first task is to hit on a title. At first sight there seemed to be no shortage of topics. The ground-breaking initiative of the new English Arbitration Act may well prove to have an influence, direct or indirect, in the world of arbitration at large. It coincides with the imminent expansion of statutory arbitration law in Hong Kong. Both initiatives have been heavily influenced by the UNCITRAL Model Law, and are proceeding in the same general direction, although by strikingly different routes. On the broader front of dispute resolution in general, an audience in Hong Kong will need no reminding of the widespread, if not always sharply focused, discussion of the methods loosely grouped under the heading of Alternative Dispute Resolution. In England the procedural reforms proposed by Lord Woolf embody a substantial element of court-inspired, and indeed court-annexed ADR, which will give much-needed public exposure to methods which have until recently been too little known. Even in continental Europe, where ADR has tended to be greeted by indifference at best and active hostility at worst, a grudging acceptance of the unfamiliar methods is beginning to make its way. Quite plainly, these fields offer an obvious source of raw materials for lecturers in search of a subject. It is, however, possible to feel that in recent months this pasture has become rather over-grazed, and that it would benefit from being allowed to lie fallow for a while. It was therefore a welcome departure when the promoters of the lecture suggested for this year a topic of a more doctrinal character. The welcome was initially a little muted, since on studying the title - ‘Too many laws’ - I was not at first quite sure what it meant; was it, for example, a statement or a question? Others may have felt the same. On reflection, however, I am grateful for the idea, since it prompts a closer look at some features of arbitration law which have recently been rather overlooked.

* Formerly a Lord of Appeal in Ordinary. Privy Councillor; Fellow of the British Academy; LLD. This lecture, the seventh in honour of Lord Goff, was delivered under the auspices of the Faculty of Law of the City University of Hong Kong on 19 November 1996 at the Hong Kong International Arbitration Centre. Editorial note: It was originally published at (1996) 6(1) Asia Pacific Law Review 1-21.

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What then should one make of the suggestion that there are, or may be, ‘Too many laws’ in and around the arbitral process? It comes, I believe, from a general if not clearly articulated impression that a process which used to be (and should still be) practical, adaptable and economical has been transformed into something theoretical, inflexible and extravagant in cost and time: into something, that is, which is a compromise between a truly voluntary and independent process and state-oriented litigation in court, sharing the good qualities of neither. This pessimistic view, for which there is good evidence, tends to be linked with an impression that it is all the fault of the lawyers and of the law which they have brought with them to a field where they and their methods are not welcome. In short, arbitration has become too legalistic, and the business community is being driven away from it towards other methods in just the same way, and for similar reasons, as in the past it was driven from litigation to embrace arbitration as an alternative. It will be noted that this criticism is addressed both to lawyers and to laws. I will say a few words about lawyers at the end, but will concentrate mainly on the laws. Are there really too many of them, and if so, why? And why is the same criticism not made of litigation? After all, although the lay users and even the lawyers may grumble that proceedings in court are slow and expensive, or that they are too ritualised, you do not often hear it said that there is something conceptually wrong with them. We may perhaps approach the problem through that meaning of ‘law’ which denotes a national legal system - as in Roman law, Hong Kong law, English law. In this sense of the word the complaint is that where the dispute comes from an international transaction, too many domestic laws, and particularly too many domestic procedural laws, are allowed to encumber a process which should be simple and direct, and thus contribute to the complexity, cost and delay which is nowadays so widely deplored. Take as an illustration, a little extreme perhaps but not fanciful, of a contract containing a Hong Kong jurisdiction clause, made in England between a Japanese buyer and a Portuguese seller for the sale of Portuguese fish products c.i.f. Lagos, the price being payable in Tokyo in Japanese yen. A dispute takes place and an action is brought in Hong Kong. It is found that a crucial witness lives in Milan, and steps are initiated to have his evidence taken by an examiner of the Milanese court. Then, after the litigation is over, and the loser has failed to satisfy the judgment, the winner takes steps to enforce it against the loser in the loser’s home country. He also discovers that the loser has credit balances with a bank in New York, which he seeks to attach. Now it is obvious, even at first sight, that the national systems of laws of seven countries are at least potentially relevant to the resolution of the dispute - taking ‘resolution’ to mean the whole process from start to finish. A close look soon shows that the national laws are of different characters and that each may be relevant in more than one way. I must pause at this point to emphasise a distinction, which is fundamental, even though the precise line of demarcation is not always easy to draw. It is between substantive and procedural law. The former is the law which determines the nature and extent of the mutual rights and duties created by the contract which the parties are to perform. The second law determines the methods by which the substantive rights and duties will be ascertained. There

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is a marked contrast between the perspectives on such problems of the worlds of litigation and arbitration. To appreciate it fully we should distinguish between substantive and procedural laws; and since we are concerned today with commercial arbitrations, we should confine our attentions to disputes which more or less directly have their origins in a contract whereby the parties exchange promises about acts to be done in the future. (The analysis is quite different for other kinds of dispute, such as those arising from a family relationship.) With such a dispute the substantive laws which govern it are concerned primarily with the elucidation by the state, through its agencies the legislature and the courts, of the meaning and effect of the underlying contract. I say primarily, because on occasion the state will intervene directly to say that whatever the parties may have agreed a particular result must follow or (as the case may be) cannot be permitted to follow. In the main, however, the role of the state through legislation such as the Sale of Goods Act, or through decisions of the courts, is to work out the consequences of the bargain and then make sure that the parties abide by them. Where the underlying substantive contract has international features, as in the example given, complications may arise about the choice of the substantive law which should be identified as governing, or made to govern, various aspects of the dispute. Hence the branch of legal study known as the conflict of laws. These complications are rather greater in the case of arbitration, at least in theory, given the additional factors introduced by questions such as the lex mercatoria and international public policy. Nevertheless, both the courts and the arbitrators manage to deal with them pretty well. The experience of litigation and arbitration is not, however, the same when it comes to procedural law. It is true that the co-existence of various systems may complicate the task of a court in Hong Kong when dealing with international disputes. There may be jurisdictional problems concerning service of process overseas, of sole jurisdiction clauses, possible issues of forum non conveniens, the grant of Mareva relief over assets abroad, and so on. But tolerable solutions are usually found, and even when they are not the fault is ascribed to the idiosyncrasies of the individual system, rather than to any sensation that the whole business is inherently flawed. When one turns to arbitrations the reaction is different, for it can seem that the multitude of legal regimes do not simply operate on the periphery, but are allowed to insinuate themselves into the heart of the dispute-resolving process, thus adding further unwanted complexity. Why should this be so, and why should it have become evident only in quite recent times: for, after all, international arbitration is centuries old? It is tempting to blame this on what has aptly been called the ‘banalisation’ – the trivialisation – of the arbitral process, caused by a degradation of the spirit in which an honorary and honourable process is now conducted. Much has been said and written about this, and I need not labour it today. It is enough to say that international arbitration has become big business, and a kind of business in which the need to win at all costs has led to a remorselessness (to put it politely) in search of success which is quite new. The consequence has been that parties and their advisers have been willing to throw not only money and paper at the dispute, but also time and intellectual energy. The result has been, like it or not, that the inward workings of the arbitral process have been exposed to much closer analysis than ever before, and this analysis has revealed (again like it or not) that what was once thought

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and intended to be a simple process has been revealed as being in some respects of real conceptual complexity. The greater penetration of foreign systems into the mechanism of arbitration is I believe simply a reflection of this complexity, and of the fact that, although in many respects arbitration and litigation resemble one another, they are not really the same at all. Where does the difference lie? In this, that arbitration is a consensual process, called into existence by a network of contracts. This is not so with litigation where, as a general rule, the litigant is there not because he has agreed to be there but because the court has given him no choice. Once he is there, the procedures are fixed by the state through legislation, rules of court or judicial precedent, and compliance with them is monitored by the state, in the shape of the appellate courts. If you want to find the procedural principles you buy a practice book; and what you read there is the invariable framework of the dispute, and of the relationship between the dispute-resolving tribunal (the court) and the parties, put in place by the state. In arbitration the position is different. Instead of one procedural relationship, between the court on the one hand and the parties together on the other, there are two relationships, one between the parties to the transaction and one between the parties acting jointly on the one hand and their chosen tribunal on the other. As between the parties their agreement to submit their disputes to arbitration creates the framework within which the disputes will be resolved; by the express or implied terms of the agreement, or by later agreement, they set the rules of procedure; by the agreement they agree to be bound by the resulting award. As between the parties and the tribunal, the former agree to confer, and the latter agrees to accept, a mandate empowering the tribunal to decide in a binding way the substantive rights of the parties, and to arrive at that decision in a manner consistent with the procedural rules expressly or impliedly agreed by the parties. Parallel to this mandate there is a contract – albeit one which may have an element of non-contractual status – which determines the personal rights and duties (such as the right to fees) of the tribunal vis-à-vis the parties. This is wholly distinct from the mandate to conduct or resolve the dispute. In addition, there may be a third set of contractual relationships. In cases where the tribunal consists of an arbitrator appointed by one party, an arbitrator appointed by the other party, and a third arbitrator appointed in some other way, an agreement may exist between appointer and appointee ancillary to the essential web of contracts: most notably for the payment of a fee distinct from any that may result from the tribunal’s awards of fees and costs. The potential validity of such agreements is recognised by the new English Arbitration Act. These will need a close look one day, but this is not the occasion. Putting these various sets of contracts together one arrives at a procedural regime created specifically and uniquely for the individual dispute. There is, so to speak, a pocket of private procedural law within the context of which the parties and the tribunal conduct the dispute. I will call this ‘the internal law of the arbitration’. It has no counterpart in litigation. This does not, however, mean that in practice the arbitration is a closed world, where the internal law of the dispute is ascertained and applied by the tribunal and parties without any penetration from outside. The fact is, again like it or not – and some arbitration theorists like

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it not – an arbitration has to take place somewhere and that place is within the jurisdiction of a state. The dispute does not float within an extra-terrestrial bubble. Recognising this fact of life means that in practice one must also recognise the possibility that the activities of the state will impinge on the closed world of the dispute and its internal law. It is worth pausing for a moment to enquire why the state should want to impinge on it. It is odd how little this question has been explored, either in common law jurisdictions or elsewhere. It seems to have been treated as obvious, though why it is obvious may have differed at different times and in different places. However, most would agree that the principal motive has simply been this: ‘Well, if we are going to have arbitrations on our territory decided privately rather than in law courts, we had better make sure that they are done properly.’ Overlaid are other motives. For example, the arbitration system is primarily designed for domestic arbitrations, and is therefore part of the social and economic structure of the state. If arbitrations are not satisfactory - at least to a minimum standard - the welfare of the community is put at risk. Private arbitration is therefore an aspect of public law. Another, more topical, motive is the feeling that the welfare of the community is promoted by having international arbitrations conducted within the territory of the state, rather than somewhere else. Workable international arbitration procedures are seen as a desirable adjunct of an international trade presence, like an efficient banking system, telecommunications, etc. And of course the considerable amounts of foreign currency earned by having foreigners come to the territory to arbitrate their disputes are very welcome. What one thinks of this as a motive for having good laws is debatable, but I am not going to debate it today. The motive undoubtedly exists. Now, the motives just mentioned are positive reasons why a state should find it in the public interest to create and operate a general system of arbitral law which can, so to speak, enfold the closed world of internal procedural law, and if necessary inspect it to make sure that the agreed procedures are correctly performed. But there can also be a negative motive for intervention independently of any general system of arbitration law. Thus it may happen that on proof that an arbitrator is being corrupted the state will intervene, not through any specialised rule applying only to arbitration but in fulfilment of a broader principle of public policy, that fraud must be stamped out. Less colourfully, every state must reserve the right to step in and say, ‘We do not care whether the parties have agreed to submit this subject matter to arbitration, the higher interests of the state cannot permit this conduct to yield enforceable rights’; and in other cases to say, ‘The rights may or may not be enforceable in theory, but in practice they are too important for us to allow them to be enforced by a private tribunal.’ What was striking about the debates in UNCITRAL was not only the extent but also the variety of the situations which different states regarded as inappropriate for private arbitration. The question of arbitrability, once of interest only to theorists, is now of real importance. It is a reflection of public law, not of the internal law of the arbitration. Let me give another example of public interest in private arbitration. It is invariable with domestic arbitration, and very common with international arbitration (though not invariable), that the substantive law governing the rights and duties put in issue by the dispute is the law of the state where the arbitration takes place. Thus, in many cases a sale of goods dispute

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taking place in State X (which I will call ‘the home State’) will be governed by the sale of goods legislation of the home State. In the past the law-making authorities (judicial and legislative) of some countries have found it unacceptable that where the parties have agreed that their rights shall be governed by the law of the home State they shall be bound by an award which fails to apply that law, and still more unacceptable that the successful party should require the courts of the home State to use their coercive powers to enforce such an award. To protect themselves and the parties from being put in this position the courts of some countries recognised a right, under one name or another and in one shape or another, to appeal to the court against an award which was demonstrably contrary to the agreed law. In some countries such an appeal was never recognised, and in recent years it has been much attenuated in England. I am not here to argue the merits of this. I merely give it as another example of how the external agencies of the State may impinge on the internal workings of the arbitration. It is clear therefore that in every developed country there will exist a body of law, concerned with arbitration but standing outside the relationships called into existence by the web of private contracts which I have described. I will call this law ‘the external law of the arbitration’. It is the existence of this separate law which distinguishes arbitration from litigation. When a claim is brought before a court, the rules governing the procedure in the individual dispute and the mechanisms for making sure that the rules are followed are the rules and mechanisms established by the state for all litigation: so that the external law is itself the internal procedural law of the dispute. But arbitration is different. For even if the laws of the home state govern all the relationships shown in the diagrams the wholly stategenerated external law, and the party-generated internal law, occupy different domains, and it is the tension between them which has generated the perpetual controversy about what is often called the relationship between arbitration and the domestic courts - although it ought to be called the relationship between arbitration laws and state laws. It is also the source of our ‘Too many laws’ topic today. To appreciate why it creates so many laws we must look more closely at how the state involves itself in arbitration. A moment’s thought will show that it does so in two quite different ways: as the maker of laws and as the enforcer of laws. The local law has, however, another function besides providing the legal environment within which the arbitration can operate. It also enters directly into the internal law by stipulating at least some of its features. The stipulation may of course amount to no more than this, that the arbitrator is free to adopt whatever procedure he likes. Few commentators would argue for a law which goes as far as this, at least if the proposition involves that the tribunal can ignore the wishes of the parties. Almost everyone would now agree that some law can permissibly determine what is required, and what if not required is permitted, by the agreement to arbitrate; and most would accept that, subject to contrary intention, the law to perform this function is the national arbitration law of the home country. Thus, in contrast to litigation, where the state sets its own decision-making rules, applies them and directly supervises the way in which they are applied, in arbitration the state has a variety of roles, in some of which it invades the internal law directly, in others it permeates that law indirectly (by intervening on a limited scale after the event where the internal law has been broken), and in others again by furnishing wholly external support for the enforcement of the agreement to arbitrate, the process itself, and the resulting award.

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If all this sounds rather complicated, well so it is. And indeed it is the fact of the complexity which is at the root of the feeling that there are too many laws. Perhaps it may help to take stock with the aid of some diagrams. Diagram I (on page 112) shows that element of the arbitral relationship created by the agreements between the parties to the underlying contract. One agreement fixes the substantive law of the basic agreement, which in turn fixes the rights and duties of the parties: for example, in a contract of sale, the duties of the vendor concerning the quality of the goods; the duties of the purchaser concerning prompt payment of the price; and the consequences of non-compliance with these duties. That agreement is represented by the line marked 1. The second agreement is of a different character. It concerns not the substance of the parties’ relationships, but the general method of ascertaining them in the event of dispute. It creates the promise to arbitrate and the promise to honour the resulting award. It is often embodied in the basic contract, but is in law severable from it; for example, an arbitration agreement may survive if the basic agreement disappears, and vice versa. This agreement is shown as line 2. Finally, there is the contract which fixes the mechanisms of the dispute resolution process. In part, it will often be written out in the agreement to arbitrate, or incorporated by reference to standard terms. However explicit it may be, it will also have to be bulked out by implied terms which set general principles or deal with the details of an individual case. This is line 3. Next, we have Diagram II (on page 112). This diagram adds the second element to the internal law: the relationship with the tribunal. Here we see the tribunal’s first mandate, represented by line 4, which is to bind the parties by an award aiming (if not necessarily succeeding) objectively to decide the facts correctly and to apply to them the law which (line 1) the parties have expressly or impliedly agreed to govern their relationship. The diagram also shows (line 5) the tribunal’s second mandate, which is to arrive at its decision by a procedure on which the parties have expressly or impliedly agreed. These two mandates are empowering. They give the tribunal authority to create new rights and duties as between the parties. But there is also a direct contractual relationship between each of the parties and the tribunal which imposes on each of them active rights and duties distinct from those governing the parties considered as a group. For example, under the new English Arbitration Act each party individually owes a duty, no doubt to the tribunal as well as to the opponent, to proceed with expedition. The aspect of this relationship which creates several (as distinct from joint) rights and duties of the individual parties is shown as the two lines marked 6. Turning to Diagram III (on page 114), this illustrates that in addition to the joint and several rights and duties of the parties toward the tribunal as a whole, there may be (though need not be) further mutual rights and duties existing between one party individually and the member of a three-person tribunal whom he has himself appointed. It seems to be generally recognised now that a party may properly agree – for example – a level of fees for ‘his’ arbitrator different from that claimed and agreed by the tribunal as a whole. There may perhaps be other individual relationships of this sort.

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Diagram I. Internal Law: Substantive law arb

arb

tribunal court

legislature

3 1 2

party

1 Substantive law: rights and duties 2 Agreement to submit disputes to arbitration 3 Agreement on procedure

Diagram II. Internal Law: Relations between the parties and the tribunal arb

arb

tribunal court

party

3 1 2

party

4 Arbitrators’ mandate to decide according to substantive law 5 Arbitrators’ mandate to decide by the agreed procedure 6 Mutual rights and duties of parties and tribunal

legislature

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Diagram IV (on page 114) puts together the first three diagrams, to show the closed legal world of the arbitration. The dotted lines are added to emphasise that the relations between the parties (themselves acting jointly and severally) are with the members of the tribunal acting jointly and severally. Diagram V (on page 115) moves to the external law of the arbitration. It marks the appearance on the scene of the third participant in the arbitral network: the state, in the shape of the legislature and the courts. This particular diagram deals with substantive law. At line 8a the court bulks out the basic agreement between the parties. It takes the bare terms of the agreement and expounds what they mean and how they apply in particular circumstances. It is therefore in a sense part of the internal law of the arbitration. So also are the rules of the conflict of laws which prescribe the national law which is to apply (line 8b). Line 9 is of a different character, although it also shows a relationship which contributes to determining the rights and duties created by the basic contract. Here, the public policy of the home state thrusts into the relationship and asserts that whatever the parties may have agreed, certain consequences must follow, or as the case may be cannot be permitted to follow. Thus, the agreement of the parties to arbitrate a particular subject-matter cannot prevail over a local rule of national policy which says that the subject-matter is too close to the interests of the state to be submitted to private arbitration. Or that an arbitration concerned with an unlawful subject-matter cannot yield an enforceable award, even if the award faithfully reflects the basic substantive agreement. Line 9b is added for completeness, to reflect a current theory that there exists an international public interest broader than local public policy, although often coinciding with it, which the arbitrator is, by the nature of his office, bound to apply. Line 10 is similar to line 9: the local substantive law bulks out the direct agreement between the parties and the tribunal. It describes the mutual rights and duties arising from the relationship depicted in line 6. So far, this diagram reflects the influence of the law, as created by the legislature or the courts, on the internal substantive law of the relationship. Finally, we see how the courts, empowered by the legislature, enforce that substantive law. Line 11 represents the active infiltration of the state, through the court, into the closed internal world of the arbitration: whether by hearing an appeal on a question of law, or a preliminary issue of law, or by setting aside an award which is erroneous in point of law, or in some other way. The activity represented by line 11 is the most controversial of all those shown on the diagrams. With Diagram VI (on page 115) we move to the external law of procedure, rather than substance. The diagram illustrates some, although not all, of the ways in which the state can furnish the internal closed procedural law with external support, in the absence of which it may struggle. The lines drawn are, I believe, self-explanatory. They show the court exercising the coercive powers of the state to force a compliance with the agreement to submit disputes to arbitration: powers which the arbitrators themselves have no status to compel. Diagram VII (on page 117) is equally straightforward. It differs from Diagram VI in showing how the state provides support whilst the arbitration is in progress rather than before it starts or after it has finished. The examples given are no more than illustrations. Those familiar with arbitration can visualise several more.

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Diagram III. Internal Law: Relations between party and appointed arbitrator arb

arb

tribunal court 7

7 legislature

party

7 Rights and duties of party and party-appointed arbitrator

Diagram IV. Internal Law: The network of internal law arb

arb

tribunal court 7

7 6

party

3 1 2

party

legislature

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Diagram V. External Law: Substantive law

arb

tribunal

11 10

court 12

10 legislature

8a 8b party

party

9a 9b 8 9 10 11 12

a. Local substantive law b. Local conflict of laws a. Local public policy b. International public policy Law on mutual rights and duties of parties and tribunal Supervision of application of substantive law Empowering legislation

Diagram VI. External Law: Procedural framework 15 arb

arb

arb 15

tribunal

court

13 14 party

party

12 legislature

13a 14 13 a. Interpreting agreement to arbitrate b. Staying court proceedings in breach of agreement to arbitrate 14 Enforcing award 15 Constituting the tribunal

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Finally, in Diagram VIII (on page 117) we see the counterpart of Diagram V, only this time illustrating procedural not substantive law. At lines 17 and 18 the state bulks out the procedural agreement and the procedural mandate (lines 1 and 5 on the earlier diagrams) and at line 19 imposes on them the mandatory requirements of public policy. Line 20 shows the court enforcing the procedural aspect of the relationship between the parties inter se and between the parties and the tribunal. Different systems have different ways of achieving this. Some of them operate on the award, either positively by setting it aside or remitting it for further consideration, or by declining to enforce it. Others bear directly on the tribunal itself, by (for example) removing an arbitrator who lacks impartiality, or who persistently transgresses the mandate. Now, for the sake of exposition I have isolated the various relationships. In real life they all exist at the same time. It was tempting to draw all the diagrams together in a single representation of the relationships created by a perfectly ordinary international arbitration. The cat’s cradle of lines and symbols would have been simply unintelligible, unless depicted on such a large scale as to be unsuitable either for a lecture or for subsequent publication. Perhaps in the future such a diagram might be useful as a medium for teaching. For the moment we must leave it to the imagination. Now the listener or reader may well ask: Is all this really necessary? I fear so, and I have generated the diagrams to show why there will always be scope for a complaint that there are ‘too many laws’. What the critics really mean is that there are too many opportunities for lawyers to display their techniques. The multiplicity of relationships stems from the presence on the scene of the state: and some degree of tension will be inevitable unless it is possible to get rid of the external procedural law altogether. This was a solution in vogue some 20 years ago, under the name of ‘transnationalism’. This is nothing to do with the lex mercatoria and harmonisation, to which I will return later. The idea behind transnationalism is that the internal procedural law of international arbitrations is a completely self-contained system, insulated from any national law: the concept being that it should make no difference where the arbitration is held, since local procedural laws are irrelevant. The concept is attractive, and there may be other means of achieving it in practice, but transnationalism is surely unworkable. Even the most dedicated isolationist must concede that the degree of contact shown by lines 13 and 14 on Diagram VI is inescapable: for more than 100 states have acceded to the 1958 New York Convention, which requires them to enforce international arbitration agreements by staying court proceedings brought in breach of them, and to enforce foreign awards resulting from such agreements. The general recognition that, like it or not, the local law is a necessary feature of international arbitration has gone further than this, in two directions. First, there is the widespread acceptance that interim measures of protection of the kind shown in Diagram VI are unobjectionable in principle. They are needed at the very outset of the dispute, when the tribunal has not yet been nominated, or having been nominated has not taken over the file; so that if procedural safeguards are required there is nobody but the court to provide them. Protective measures may also be called for later, when technologies such as the instantaneous transfer of funds may enable an unscrupulous party to stultify the arbitration long before it reaches its end unless prevented by a Mareva type of order, or an injunction of the kind recognised, although not in fact granted, by the House of Lords in the Channel Tunnel case.

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Diagram VII. External Law: Supportive measures arb

arb

tribunal court 12

16a, b, c legislature

party

party 16a, b, c

16 a. Preservative measures b. Status quo measures c. Award- preservative measures (Mareva etc.)

Diagram VIII. External Law: Procedural law arb

arb

arb 20b

tribunal

19 18b

court 12

18a

party

legislature

party

17a 17b

17 a. (statute) b. (court) interpreting the agreement on procedures 18 a. (statute) b. (court) interpreting the mandate

20a 19 19 Public policy 20 Enforcing a. (the procedural agreement) b. (the mandate)

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There is of course nothing in theory to prevent arbitrators from making orders of this type once they have taken over the reference. But a preservation order which does not bind third parties, such as banks and carriers, is useless: and arbitrators, being appointed by private bilateral agreement, cannot bind those who have not agreed to be bound. Even as between the parties an order by a tribunal not to infringe the rules of the game is unlikely to be fruitful, for only the court with its penal powers in reserve as a last resort can force a cynical party to comply. Thus, we find that the UNCITRAL Model Law, the rules of major institutions such as the ICC and the LCIA, and many national arbitration laws, leave space for the local court to lend its protective powers. This is no more than a recognition that interim measures of protection are simple procedural common sense. Similarly, it is now accepted that the law of the home state can provide a valuable service when the mechanisms for setting up the arbitration have broken down, particularly if one party is wilfully obstructing the bringing together of a tribunal: see line 15 on Diagram VI. If there is no institution empowered by contract to fulfil this task, only the court can step in. The measures which I describe are all truly external. They enable the decision making process, but do not enter into it. Much more controversial has been the propriety of allowing the court an entry, even in a remedial sense, into the process itself. Here we are concerned with line 20 on Diagram VIII. To what extent, if at all, should the private internal law suffer intrusion from the local external law: by allowing it to interpret the procedural agreement (line 3) or by interfering with awards made in breach of that agreement? That some such intrusion is unavoidable has I believed gained wide although not universal acceptance. During the debates leading to the UNCITRAL Model Law, two philosophies were in collision. The first was that arbitrations should be left undisturbed by the local law, complaints about procedural unfairness being addressed at the stage of enforcement in a foreign court. Whilst I respect this view, I see two grave objections. One seems obvious, although apparently not to those states who have legislated in these terms, that if complaints are reserved for this stage of enforcement there is no remedy for the claimant who, through unfairness, has seen his claim wrongfully dismissed: for there would be nothing to enforce, and therefore no enforcing court to receive his complaint. Moreover, in the opposite case, where the defendant has been unjustly ordered to make a payment, he may be in a most unfavourable position. As an honest trader, he may have strong objections to being regarded as a defaulter, and may pay up (or might in former times have paid up, before commercial morality took a new direction); and if he stands his ground, he would be harassed by enforcement proceedings all round the world, accompanied by the blocking of credit balances and seizure of assets. Surely it is better to nip these problems in the bud, by tackling procedural errors and failures of justice at the earliest possible moment, on the spot, through the medium of the national court. After a considerable struggle this view prevailed in the UNCLTRAL deliberations, and led to the inclusion of Article 34 of the Model Law. Ten years later, I believe that the trend is now to welcome local intervention on matters of procedure, within reason. Diagram VII does not, in my opinion, show ‘Too many laws’.

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I would like to turn aside now for a few moments to consider external supervision of the internal substantive law: line 1 and also Diagram V. As before, there are arguments on both sides. In favour of court intervention the strongest are these. First, if the parties have chosen to have their rights and duties governed by a particular national law, an arbitrator who decides according to no law at all, or to a mistaken version of the law, not only contradicts his mandate but changes the shape of the original bargain. Thus, if you get rid of the court’s power to correct departures from the law, you effectively get rid of the law itself; and if you do that you get rid of the reliability of outcome which is so important to business transactions. The second reason for retaining a supervisory power is that it can be repugnant for the court to lend its coercive powers to the enforcement of an award which can be seen by everybody on its face to ignore or misunderstand the law which the parties chose the arbitrators to apply. This is not a question of judicial hostility to arbitration: that idea has long since been exploded. Nor is it a kind of judicial chauvinism which insists on imposing, ab extra, a local legal regime on a method of resolution which ought to be free from it. The principle is simply this: that international commercial arbitration is concerned with agreements between business people. These agreements are worthless unless those who bind themselves by the agreements know what they can do, what they may do, and what they may not do. An arbitrator who decides contrary to the expectations created by the contract subverts the bargain, and subverts his own mandate to give effect to it. The arguments for the opposite view are again twofold. The first is that it is wrong in principle for the court to assert a decision-making power which the parties chose to entrust to the arbitrator, however fallible he or she may prove to be. The second argument is strictly practical. The opportunities for the losing party to devise a question of law and to prosecute an appeal on it, with a possibility of onward appeals, is too attractive and more difficult to inhibit than in a case of complaints about procedural error. On the issues involved in the decision, as distinct from the means of arriving at the decision, an award ought in principle to be the end of the dispute; and summary enforcement in the event of non-satisfaction ought to be the norm. These are the conflicting arguments. I doubt whether there is any principled basis for preferring one to the other. As all the discussions on this question have long recognised, a balance must be struck between finality on the one hand and objective rightness on the other. Where it is struck depends upon national traditions and instincts, and (one must say) contemporary international fashions. As it seems to me, realism suggests that the contemporary trend is strongly opposed to national supervision on matters of substance. If this continues, as I believe it will, ‘too many laws’ will not in this respect be a problem. And if this means ‘too few laws’ in the sense that business people do not get the laws they have bargained for when entering into their commercial dealings, this is the choice which they have allowed the lawyers and arbitrators in the international dispute resolution community to make on their behalf. I say no more about this, and return to the internal procedural law. A few moments ago I suggested that court intervention is acceptable ‘within reason’. This is where the argument begins. How much intervention is reasonable?

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Thinking on this subject has recently been dominated by two catch-phrases: ‘party autonomy’ and ‘judicial minimalism’. The first is simply an old idea in new clothes, namely that since the parties use a contract to choose arbitration they can also use a contract to decide how the arbitration will be performed. One corollary of this principle has long been recognised: that if the parties get the procedure for which they contracted they have nothing to complain about, and in particular that they have no ground for recourse if the procedure lacks some of the elements which in litigation would be regarded as essential to the proper conduct of the trial. Lord Justice Scrutton pronounced this with emphasis more than 70 years ago, and in English law it has never since been seriously doubted, although individual courts have from time to time been guilty of back-sliding. The other catch-phrase, ‘judicial minimalism’, often seems to be regarded as the same thing, and so it is in the situation where the procedure as carried out conforms with the procedure contracted for. Here, obviously, the court should not interfere. The judge’s personal view of fairness or efficacy of the process is irrelevant. The parties have made their procedural bed and must lie on it. But the two principles are not in truth the same, as one sees at once when the procedure adopted does not comply with the agreement. In such a case, if the court allows the award to stand and enforces it, proper respect is not being paid to the concept of party autonomy: that the parties should receive the procedure on which they have agreed. Where a court sets the award aside or declines to enforce, it is not obeying the precept of judicial minimalism. This dilemma has received little attention. Writers and speakers on arbitration have tended to praise the steady shift toward judicial minimalism without noticing that if carried to an extreme it can make party autonomy little more than an empty slogan. In practice this has probably not mattered greatly and the arbitrating world would have continued to paper over the difficulty of principle without any great harm but for the arrival on the scene of another current preoccupation: namely a deep and well-merited concern about the rocketing expense and cost of large-scale international arbitration, and indeed of large-scale domestic arbitration as well, particularly in the field of building and engineering works. We all know about this and we all have our theories about the causes and possible remedies, so I will not linger, but I do want to emphasise one feature. Most of the solutions proposed have consisted of institutional tinkering, or exhortation or both. Creating ‘fast track’ procedures (another catch-phrase) is only a palliative; if the parties and their advisers want to be slow, and cannot be bothered to do anything else, slow is what they will be and smart new names will not prevent them. Nor has the urging of arbitrators to be tougher yet made much impact, for they do not seem ready to accept the undertakings given by the judges inside and outside the courtroom that drastic action by arbitrators to speed things up will not be treated as want of due process. This is not altogether surprising since, in those cases where the parties are content to let matters drift, an interventionist arbitrator can be pointedly reminded that, under the principle of party autonomy, the arbitration belongs to the parties themselves and not to the arbitrator. It is in this unsatisfactory state of affairs that a new idea has entered the scene, without perhaps being fully articulated: that if the state in the form of the court cannot help to restore arbitration to its former health, perhaps the state in its other capacity as legislator should do something about it. This is what has happened, in some respects quite strikingly, and in others almost unnoticed, in the new English Arbitration Act of 1996. By way of introduction

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I should read parts of section 1 and section 34: 1(1) The provisions of this Part are founded on the following principles, and shall be construed accordingly – ... (b) the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest; (c) in matters governed by this Part the court should not intervene except as provided by this Part. 34(1) It shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter. So here we find, side by side, the familiar principles of party autonomy and judicial minimalism. But there is something new as well. The first subsection of section I adds another statutory general principle, that the object of arbitration is to obtain ‘the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense’. This motif is picked up in section 33(1)(b) which requires the tribunal to: 33(1) (b) Adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined. The same theme appears in section 40, which imposes on the parties (as distinct from the arbitrators) a duty to ‘do all things necessary for the proper and expeditious conduct of the arbitral proceedings’. Now the concept that these are things which the tribunal and the parties ought to do is one with which nobody could possibly disagree, but their endowment with statutory force does have novel consequences. Thus, the ever-present conflict between party autonomy and judicial minimalism is now enshrined in a single Act of Parliament, and heightened by the creation of a statutory duty to avoid delay. In practice, one of the main sources of delay is the behaviour of the parties themselves. Either they agree from the start on a mode of procedure which is inherently slow, or they agree on a brisk method and let it slip away. If the tribunal protests and calls up the statutory obligation to proceed with dispatch, the parties can respond with the statutory principle of party autonomy, which requires the tribunal to defer to their wishes. There is thus an impasse whose existence was recognised whilst the Arbitration Bill was still in draft. I mention it not to criticise a splendid piece of legislation but because it brings out into the open the tension resulting in all systems of arbitration law from the impulse to put into practice a set of irreconcilable ideals. This tension is accentuated in the English legislation by the inclusion of the statutory duties of dispatch imposed on the tribunal and the parties by sections 33 and 40. The novel character of these duties has not yet been widely recognised, but novel they certainly are. Statutory terms concerning procedure we have of course seen before, but these have operated by way of elaboration and reinforcement of the terms which the parties have themselves agreed. The creation of free-standing statutory obligations independent of consent is something very different, and it means that the internal law of the arbitration,

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shown in Diagrams I to IV, has gained a new dimension through the direct intervention of the state. Moreover, unless sections 33 and 40 are to be toothless, it must be intended that the duties which they create would be enforced by the only available instrument, namely the court, and this entails an elaboration of Diagram VII to show the further penetration of the internal procedural law by instrumentalities of the home state. As it seems to me, arbitration in England has moved significantly in the direction of becoming an aspect of public law; and if I am right in this it must follow that the analysis of the arbitrator’s position must now acknowledge an element of status, to modify if not displace the purely contractual interpretation which has largely prevailed to date. All this means, to my mind, that so far from laws gradually fading away from the arbitration scene they are becoming more prominent. This is not just another example of what the unsympathetic would regard as typically English meddling with the arbitral process. Arbitration has got itself into a mess, and a movement of the kind which I have summarised is perceived as a way to put it back on course. This does not worry me, for I have spent a lifetime working with an arbitral system where, on the whole and with some regrettable exceptions, rules and arbitrations have worked pretty well together. But I know that others will react differently and fear that we are in danger of having not simply too many laws, but far too many laws. If this is so, what do the critics propose should be done? One proposed solution, in relation to the multiplicity of substantive laws, is the construct known as the lex mercatoria. This is, I believe, seen by its proponents as the outcome of a kind of automatic distillation of national laws round the world out of which gradually evolves a set of universally accepted rules of law. These are said to apply to all international commercial transactions, or at any rate all of those which are subject to arbitration. There are a number of theoretical problems with this concept, which have been debated with much warmth in recent times. I will not linger over them, and will simply suggest that the real difficulty with the lex mercatoria is strictly practical: namely, that whereas it is indeed possible to identify some principles of reasonably general application - such as the rule that contractual promises ought to be kept - they are largely useless when trying to solve an individual dispute. Conversely, when one searches for a rule which is sufficiently specific to be useful, there is nothing which can be claimed as a universal feature of developed laws: unless one confines the search to a handful of countries in the northern hemisphere, surely an approach too parochial to sustain the vision of the lex mercatoria as possessing a greater moral strength than any individual national law. However this may be, I doubt whether many advocates of the lex mercatoria would suggest that it could properly prevail over an express choice of law in the contract: for this would wholly contradict the principle of party autonomy. Since certainty is important above almost everything else in commercial relationships, the parties would be most unwise to enter into any transaction on terms which left the governing law completely blank, I will not pursue the matter further. The legendary shrewdness of Hong Kong business people must surely stand in the way of any such expedient, so I will leave the matter there. I will also refrain from occupying the limited time with a discussion of another alternative, which is for arbitrators in the international field to get rid of substantive laws altogether, by engaging in ‘amiable composition’, decisions ex aequo et bono, or on a similar basis denoted by other expressions. This concept is, of course, well known even if it is hard to discern from

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authoritative studies exactly what it involves. It has long been a feature of civilian legal systems, and it is no stranger to English law: as witness its long-standing use in the field of reinsurance. All the same, I find it hard to envisage that business people will want to entrust their financial futures to a basis of decision about whose outcome no prediction can be made until the arbitral tribunal has actually published its award. The parties are of course free to decide on such a method if they wish, and this is not the place to debate the wisdom of their doing so, but it must surely be equally clear that the arbitrators cannot impose this solution on parties who have not chosen to have it applied. I will therefore leave it on one side. Before leaving the question of substantive law, I must make it clear that I am not at all sceptical about a quite different means of reducing the impact of differing national laws on the same contract. The solution is for the parties to cut down, so far as possible, the vacant space within the contractual relationship which one national law or another must be called on to fill. This can be done most readily by writing down in clear language what the parties intend, and what result is to follow in various foreseeable situations: a task which can be much simplified, and the outcome made even more predictable, if the parties avail themselves of the standard commercial terms (such as the Uniform Customs and Practices, in the field of banking transactions) whose terms have been carefully hammered out by experts, and whose meaning is the subject of wide acceptance. This will not in itself prevent there from being too many laws, but it will make the superfluity of much less practical importance. I turn to procedural laws which, paradoxical as it may seem, are often more important to the business man than substantive laws. Most international disputes turn either on the meaning of the contract or on the facts. Moreover, in the field of international commerce (as distinct from family law, testamentary disposition, nationality and so on) the differences between the substantive laws of commerce of different nations, though real, are rarely decisive. Consequently, in only a small minority of cases does it matter which national law is chosen to govern the dispute. The abundance of procedural laws is, however, another matter, in two respects. First, because if one takes the procedural regime as a whole, including those parts of it which apply before the arbitration has begun and after the arbitration has ended, it undoubtedly can make a real difference to the outcome of the dispute which national law is applied. Secondly, because the presence of all the lines shown in the diagrams (and as I have said a complete picture would show several more) provides an opportunity for the simplicity of the intended private dispute resolution process to be muddied by too much contact with the state, in the shape of its legislature and its courts, and with the lawyers who inevitably follow in their wake. As to the first of these features, a much-discussed solution was the concept of transnationalism. This mooted that the true spirit of international arbitration required the erasure of all the lines joining the courts and the legislature to the direct participants in the process. These participants are (so the argument ran) by the very nature of international arbitration wholly and automatically freed from the erratic consequences which arise when different procedural regimes may be applicable; for in truth no legal regimes are applicable. The arbitration creates its own legal environment, uncontaminated by any contact from outside.

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This is a fine ideal, but in practice it is quite unsustainable. I need scarcely labour the point. The practical inevitability of some contact between arbitration and national institutions could not now be denied, and is not denied: see, for example the UNCITRAL Model Law which in several places accepts, and indeed demands, the intervention of state organs in case of need. There is, however, a better solution, albeit one which in my opinion can never be complete: namely the harmonisation of national arbitration laws. The UNCITRAL Model Law was a great step forward in this respect, as much for the development of a common psychology about arbitration as for its direct incorporation into national laws. One has only to glance at the text, however, to appreciate that the harmonisation is no more than partial. Many aspects of the relationships illustrated by the lines in the diagrams are simply not touched by it all. Now that the Model Law and its offspring have had a decade to settle down it may be that the time is right for the process to inch forward another step or two, and one might dare to hope that the new English Act might act as a stimulant to start people thinking, even if its ideas prove unacceptable. But to imagine the whole of international arbitration covered by a single harmonised law is to my mind an impossible dream. Whilst participating in the debates which led up to the evolution of the Model Law I was profoundly struck by the extent to which even the most magnanimous of delegates, even those who were the most ready to yield to the reasoned arguments of others, became wholly uncompromising when issues of what may broadly be termed public policy were involved; and I was also struck by the fact that what were regarded as non-negotiable issues varied widely from one Member State to another. The closer that an issue gets to the central preoccupations of a state, the less likely it is that anything other than its own ‘political’ (in the broadest sense) priorities will be decisive. Nevertheless, the progress towards harmonisation is impressive, and I hope that the pressure will be kept up. This does not, however, deal with the second of the problems posed by procedural laws: not that there are too many different systems, but that within the individual systems the legal relationships are simply too numerous. There are too many lines on the diagrams; every line brings a potential dispute; every dispute brings lawyers; and lawyers bring expense, delay, aggression and a general atmosphere inimical to the true spirit of arbitration. There is truth in all this, but the complaint should not be addressed to the laws which are, as it seems to me, the inevitable fruits of a system created by private contracts which are not self-enforcing. If the parties do not like to have so many laws they must choose some other method for resolving their disputes, which either involves no legal binding relationships at all or makes them binding in different ways. But if they choose arbitration, as in very many cases they are right to do, they must accept the laws and exercise both personally and through their lawyers the self-discipline which arbitration requires; and arbitrators must help them to do this by imposing the personal authority which their position demands. So, I would respond to the question posed as follows. ‘No, there are not too many laws. Arbitration is far from perfect, but the real failings are those of its participants. If all play their parts efficiently and in the right spirit only the internal laws will be needed, and the court will never be called on to enforce them.’ This may be an ideal, but the parties, their lawyers and their chosen arbitrators can bring it closer to reality if they join together to move arbitration forward, and leave the laws behind.

Enforcing Arbitral Awards Notwithstanding Local Standard Annulments Jan Paulsson*

I. Introduction The New York Convention is 40 years old, and it is time to discover its full potential. By now, national courts should be prepared to allow the arbitral process to become truly international, by enforcing awards rendered in other countries on the basis of internationally accepted criteria and nothing else. To be more specific, I propose that the annulment of an award by the courts in the country where it was rendered should not be a bar to enforcement elsewhere unless the ground of that annulment were ones that are internationally recognised. It is, moreover, my contention that legal bases for disregarding annulments that do not meet this requirement already exist. The New York Convention was intended to ensure that arbitral awards would be enforced around the world unless the party resisting enforcement proved a fundamental impropriety such as excess of jurisdiction, wrongful constitution of the arbitral tribunal, or denial of the opportunity to be heard. Nevertheless, Article V(l)(e) of the Convention allows courts to decline to enforce a foreign award if it has been set aside in its country of origin, without distinction as to the ground upon which it was annulled. In his seminal work on the Convention published in 1981, Professor van den Berg noted the danger that the Convention could be ‘undermined’ if ‘all kinds of particularities’1 of the law of the seat of arbitration were allowed to frustrate enforcement.

* Freshfields, Paris. This article is adapted from the City University of Hong Kong’s Eighth Annual Goff Lecture, given by the author at the Hong Kong International Arbitration Centre on 12 November 1997 (Editorial note: Originally published at (1998) 6(2) Asia Pacific Law Review 1-28), in which he developed and updated a theme originally explored in ‘Rediscovering the New York Convention: Further Reflections on Chromalloy’ (1997) Mealey’s International Arbitration Report April, 20; and ‘The Case for Disregarding LSAs (Local Standard Annulments) under the New York Convention’ (1996) 7 American Review of International Arbitration 99. It is responsive to the following matters not dealt with in those two articles: the French Cour de cassation’s final decision in the Hilmarton case (see note 27 below) and the appearance of the following articles: P Fouchard, ‘La portée intemationale de l’annulation de la sentence arbitrale dans son pays d’origine’ (1997) Revue de /’arbitrage 329; E Schwartz, ‘A Commentary on Chromalloy: Hilmarton a l’americaine’ (1997) Journal of International Arbitration 125; G Sampliner, ‘Enforcement of Nullified Foreign Arbitral Awards – Chromalloy Revisited’ (1997) Journal of International Arbitration at 141; G Delaume, ‘Enforcement Against a Foreign State of an Arbitral Award Annulled in the Foreign State’ (1997) Revue du droit des affaires internationales 253; H Gharavi, ‘A Nightmare Called Hilmarton’ (1997) Mealey’s International Arbitration Report September, 20; and H Gharavi, ‘Enforcing Set Aside Awards: France’s Controversial Steps Beyond the New York Convention’ (1996) 6 Journal of Transnational Law & Policy 93.

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The anathema of ‘local particularities’ might conveniently be referred to as ‘Local Standard Annulments’ or LSAs. An example would be the setting aside of an international award on the ground that it fails to meet a requirement that it be signed by all arbitrators. Such a requirement (which, to take a concrete case, once existed in Austria but was abandoned in 1983) is clearly at odds with contemporary international standards. Moreover, it contradicts modern rules of arbitration, which ensure that a valid award may be rendered even if one arbitrator refuses to co-operate. A party agreeing to international arbitration legitimately expects that a good claim cannot be defeated by the cynical expedient of appointing an arbitrator-saboteur. The choice of a particular place of arbitration should not facilitate such a subterfuge by dint of an unusual or internationally unacceptable local rule (an example of an unusual rule would be one which allowed judicial review of the merits of an award; an example of an intentionally unacceptable rule would be one which required all arbitrators to be of a particular religious confession, or to be men). To those who would say that ignorance of the law is no excuse, one may answer that it would be unfortunate and unnecessary to allow the system of international arbitration to be a minefield for the unwary. Moreover, there are instances where the place of international arbitration is chosen by an institution like the International Chamber of Commerce or the American Arbitration Association, thus making it irrelevant whether a party is ignorant or well informed. It is my conclusion that Article V(l)(e) is not a bar to disregarding LSAs, and that they should be disregarded. Even if Article V(l)(e) were such a bar, it may, as we shall see, be overcome by Article VIL. The discussion is structured as follows. First, I describe cases in which LSAs have been disregarded by enforcement courts, focusing especially on the recent and much-discussed Hilmarton and Chromalloy cases. Then I consider, and try to refute, various ground on which it is argued that all annulments, even LSAs, must be given effect. Finally, I propose criteria for deciding how and in what circumstances LSAs should be disregarded.

II. Instances of Disregard of LSAs The matter is simplified in legal systems that apply more liberal criteria for enforceability than those defined in the New York Convention. Since Article VII of the Convention requires application of a national law (or another treaty) under which the award is enforceable,2 those legal systems simply disregard the more restrictive criteria for enforceability set out in Article V. More than a decade ago, I took the position that in principle there was no obstacle to such a result.3 Despite more than respectable opposition to this view,4 I have not resiled from it, and consider myself vindicated by the subsequent emergence of a number of cases which did exactly what I thought could be done.5 The recent Chromalloy case provides a further useful illustration, involving enforcement in the United States and in France of an award rendered in Egypt even though it had been set aside by the Court of Appeal of Cairo. The Chromalloy award was rendered in 1994 (for US$16.2 million plus interest) against the Arab Republic of Egypt, in favour of Chromalloy Aeroservices Inc. (CAS), a US company which had contracted to provide inspection and repair services for helicopters

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owned by the Egyptian Air Force. The arbitral tribunal held by a majority that the contract had been improperly terminated. Two months later, CAS petitioned the US District Court in Washington for confirmation of the award, whereupon Egypt brought an action before the Court of Appeal of Cairo seeking annulment of the award. This event provided an occasion to observe that Egypt’s 1994 Law on Arbitration in at least one important respect does not follow the UNCITRAL Model Law. In article 53(1), it adds two uniquely Egyptian ground for the annulment of awards, namely: (d) if the arbitral award fails to apply the law agreed by the parties to the subject matter of the dispute; (g) if nullity occurs in the arbitral award, or if the arbitral proceedings are tainted by nullity affecting the award.6 The Egyptian Court considered only paragraph (d), which it held sufficient to justify setting the award aside (by an order of 5 December 1995). To reach this result, the Court first determined that the contract properly fell under the category of administrative contracts, and that therefore the contractual reference to ‘Egypt Law’ (sic) should be understood as an acceptance of the exclusive application of Egyptian administrative law. The arbitral tribunal had instead applied the Egyptian Civil Code (while noting, however, that neither party had even alleged that a different result would follow if administrative law were applied). It had thus failed, in the Egyptian Court’s opinion, to apply the law agreed by the parties and it therefore ran afoul of article 53(1)(d). So the choice facing the District of Columbia federal Court was whether it should enforce the award, or consider itself precluded from doing so by the Egyptian decision. On 31 July 1996,7 the Court (a sole judge) granted enforcement. CAS achieved similar success in France in early 1997. The arbitral award had been granted exequatur (declaration of enforceability) by the Tribunal de Grande Instance on 4 May 1995, ie several months before the annulment of the award by the Court of Appeal of Cairo. Egypt asked the Court of Appeal of Paris to overturn the exequatur on the ground, inter alia, that it violated the 1982 Franco,Egyptian Treaty of Judicial Co-operation. This Treaty provides simply that arbitral awards rendered in one of the signatory States are enforceable in the other in conformity with the New York Convention. The Paris Court reasoned that the Treaty’s unreserved reference to the New York Convention embraced the latter’s Article VII, and concluded that the French courts were therefore required to apply French law to enforce the award; French law is more favourable than the Convention inasmuch as it does not recognise foreign annulment of an award as a ground to refuse to enforce it. The Court stated flatly that as a consequence the Convention was ‘put to the side’ (cartée).8 CAS received payment in full in the wake of these decisions, and there were thus no appeals.9 From the perspective of US law, the District Court’s decision (per Judge June L Green) is therefore all we have on this subject. Much time may pass before it is revisited. It was in fact the first occasion a reported attempt had been made to enforce an annulled foreign award before a US court. As for the French decision, it confirms the other cases cited in note 5.

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III. Objections to Disregarding LSAs A. The New York Convention Requires Alignment with Foreign Annulments The five subparagraphs of Article V(l) of the New York Convention define cases where applications to enforce foreign awards may be denied. Some readers are led to the hasty conclusion that if any of the subparagraphs apply, the award in question must be rejected. This would then be the case if, as subparagraph (e) puts it, the award: has been set aside... by a competent authority of the country in which, or under the law of which, that award was made. This conclusion is, however, incorrect, because Article V(l) allows but does not require rejection of foreign awards that fall under any of the five subparagraphs. The relevant language reads ‘recognition and enforcement may be refused... only if’ one of the subparagraphs applies. The conditional ‘may’ leaps out at any lawyer, since it necessarily contemplates ‘or may not’. There is no other guidance in the text of the Convention.10 One therefore may fairly conclude (unless the national implementing statute provides to the contrary) that enforcement notwithstanding annulment is a matter of judicial discretion.11 Decisions like Chromalloy do not violate the New York Convention. The fact is that courts cannot violate the Convention by enforcing a foreign award. Rather, a violation would occur if a court of a State bound by the Convention were to refuse enforcement in the absence of one of the limited exceptions defined in Article V. This requires some elaboration. Contrary to what many people seem to assume, the New York Convention was not intended to establish a regime for the international enforcement of awards. Ways of enforcing awards across borders existed before the New York Convention. Ways of doing so without applying the Convention not only survive, but have evolved to a significant degree since 1958. For example, in countries which have adopted the 1985 UNCITRAL Model Law, enforcement of foreign awards may be achieved on exactly the same bases as under the Convention without any need to refer to it.12 Under article 1502 of the French Code of Civil Procedure, foreign awards are more liberally enforced than under the Convention — and again with no need to refer to it (a similar effect has been ascribed to article 1044 of the German Code of Civil Procedure). The same is also true of the other 26 States which are parties to the European Convention of 1961, all of which are at the same time parties to the New York Convention. The purpose of the New York Convention was simply to make it easier to enforce foreign awards, not to establish a comprehensive and unitary regime.13 To the extent that past or future rules already allowed enforcement, the Convention was not intended to intrude; Article VII makes this clear, providing that national rules or indeed other treaties shall be given preference if they are more favourable to enforcement. In other words, the Convention was not intended to fix things that were not broken, nor to prevent individual legal systems from going further. The question therefore is not whether

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it is possible for signatories to the Convention to enforce foreign awards even when the Convention would not so require, but whether and when it is wise — or indeed obligatory on another basis — for them to do so. What is then the appropriate reaction of a court asked to enforce an award which has been set aside by a foreign court in the country where it was rendered? This brings us to a core objective of the New York Convention: to free the international arbitral process from domination by the law of the place of arbitration.

1. From Geneva to New York It should be recalled that the previous international framework was that established by two instruments: the 1923 Geneva Protocol on Arbitration Clauses, Article 2 of which provides that: The arbitral procedure... shall be governed by the will of the parties and by the law of the country in whose territory the arbitration takes place,14 and the 1927 Geneva Convention on the Execution of Foreign Arbitral Awards, which applied to awards based on agreements covered by the 1923 Protocol, and which provided for the execution of foreign awards only if the party seeking to rely on it could demonstrate that the award was ‘final’ in its country of origin. This notion was defined in Article l(d) as an award neither open to any form of recourse nor the subject of pending proceedings contesting its validity. In practice, the only feasible way to demonstrate that an award was final was to obtain exequatur in its country of origin before seeking exequatur elsewhere — creating de facto what came to be called the ‘double exequatur’ requirement. The combined effect of the Geneva Protocol and Convention was to make the enforcement mechanism exceedingly arduous, and the choice of an unfamiliar venue for arbitration fraught with danger. The existence of some unanticipated form of recourse in a neutral venue having no connection with the parties, or the unwitting failure to observe peculiar local forms, could destroy the award, or tie it up in years of litigation before enforcement in the practically relevant forum (ie, the one where the losing party had assets) could even begin. This engendered acute frustration in cases where the award was perfectly valid under the law of the enforcement forum. Whenever the arbitral venue was in one of the litigants’ home jurisdiction, the Geneva system put the process at the ultimate mercy of the procedural requirements (or even partiality) of that party’s courts — the very thing international arbitration is intended to avoid. The initiative that led to the New York Convention was a ‘Draft Convention on the Enforcement of International Arbitral Awards’ presented in 1953 by the International Chamber of Commerce (which of course is an NGO) to the UN Economic and Social Council. This draft sought to address the inadequacies of the Geneva Protocol and Convention. As the Convention took form, the internationalists’ camp was naturally enough championed by Frédéric Eisemann, Secretary-General of the International Chamber of Commerce Court of Arbitration from 1947 to 1973. Mr Eisemann and his allies wanted a treaty that catered for ‘international’ awards; what they got was a convention on ‘foreign’ awards. Nevertheless, they succeeded in overturning the two principal obstacles of the Geneva Protocol and

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Convention. First and foremost, Articles III and IV of the New York Convention compel enforcement of awards without requiring proof of finality in their country of origin. Secondly, Article V(l)(d) of the New York Convention allows the arbitral procedure to be defined by the parties alone; national law comes into play only with respect to procedural issues not covered by their agreement. These were great achievements, and have had momentous and salutary practical effects; Lord Mustill once wrote that the New York Convention could perhaps ‘lay claim to be the most effective instance of international legislation in the entire history of commercial law’.15 But the Convention’s failure to define ‘international’ awards, and to create an enforcement regime for them, was a real disappointment. This failure is manifested precisely in Article V(l)(e), which Mr Eisemann’s successor described in 1978 as: a hitherto rock-solid rampart against the true internationalisation of arbitration, because in the award’s country of origin all means of recourse and all ground of nullity applicable to purely domestic awards may be used to oppose recognition abroad....16 Thus the New York Convention breathes hot and cold; the ‘double exequatur’ of the Geneva Convention is no longer required, but annulment in the country of origin may nevertheless be given effect (Art. V(l)(e)) — unless the law of the enforcement forum provides otherwise (Art. VII).17 Mr Eisemann’s hopes for a greater measure of internationalisation were shared by Professor Lazare Kopelmanas, who was technical adviser to the UN Economic Commission for Europe, and in that capacity influenced the drafting of the 1961 European Convention on International Commercial Arbitration. Under Article IX(l) of this treaty, the fact that an award has been set aside in its country of origin may justify a refusal of enforcement elsewhere only if the ground for the annulment were those recognised by the Convention itself. These ground simply repeat those of Article V(l) of the New York Convention - except of course paragraph (e).

2. The New York Convention de lege lata If the drafters of the New York Convention thus balked at the last obstacle, where did they leave us? The text of the Convention contains a set of absolute obligations on the part of signatory States. Their courts ‘shall’ defer to arbitration agreements (Art. II). They ‘shall’ recognise and enforce foreign awards presented in accordance with the formalities defined in Article IV without imposing more onerous conditions than on domestic ones (Art. III). The Convention ‘shall not’ prevent enforcement under treaties or laws which are more favourable than the Convention (Art. VII). The Convention also contains discretionary provisions: Article V, under which enforcement ‘may’ be denied under the five familiar paragraphs; and Article VI, under which enforcement ‘may’ be adjourned pending the outcome of a challenge against the award in its country of origin.18

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This does not seem to require exalted legal analysis. By virtue of the combined effects of Articles V and VII, a country bound by the Convention may require its judges to refuse enforcement under the circumstances defined in Article V, or to the contrary require them to allow enforcement notwithstanding Article V unless stricter criteria for non-enforcement are met, or yet again leave them discretion (more or less explained) to decline enforcement under the circumstances defined in Article V. The French courts in Chromalloy and the other cases cited in note 5 found themselves operating under the second of these possibilities; they were bound to enforce awards that passed muster under French law irrespective of annulment in their country of origin. The same is true for any other country where the law is more favourable to enforcement, such as the US (if the Chromalloy court was right19) where an award cannot be neutralised by reference to the objection which underlay the annulment by the Cairo Court of Appeal. For the same reason, in cases where the European Convention applies, France or any other signatory State would be equally bound to enforce awards which meet the enforcement forum’s criteria, irrespective of annulment in their country of origin.

B. An Award Annulled has no Existence Mr Schwartz is clearly in this line of thought when he chides the Chromalloy judgment for not having ‘addressed explicitly the question of the award’s continuing legal existence’, since ‘the essential question is whether there still exists an award to which Article VII can be applied’.20 But this criticism misses the point, I believe, in assuming that the existence of an award is an exclusive matter for the courts of the country where it was rendered. This assumption strikes me as unwarranted. So long as the courts of country X have properly established their jurisdiction, they may conclude that a contract or a marriage or an adoption is valid and produces effects in country X, even if the relevant act had its origin in country Y and has been annulled there. The same is true for arbitral awards.21 As we reach the end of the century, there ought not to be much wind left in the sails of die-hard territorialists, who cling to the abstract notion that nothing of legal significance can happen anywhere if it is not approved or tolerated by the local sovereign. They consider it heretical for an award to be enforced abroad if it has been set aside in the country where it was rendered. This abstract vision simply does not correspond to contemporary commercial reality. Japanese and American businessmen may meet in an Indian airport hotel and sign a contract relating to a European venture and given legal effect in Europe without anyone pausing to consider whether the contract is ‘heretical’ because it has not complied with Indian formalities. The fact that an Indian court has intervened to declare the contract null and void means it has no existence in India, but does not — just because India is the contract’s place of origin — prevent another court from disagreeing. Similarly, an arbitrator is not an emanation of a sovereign, and when he or she resolves an international dispute his or her award may be given effect without necessary reference to the acceptance or tolerance of the legal system of the place where he or she rendered his or her award.

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Dr Francis Mann considered that no matter how the seat of arbitration had been selected, so long as it was consistent with the arbitration agreement the parties had made a ‘direct or indirect, express or implied’ choice of the law of that seat as lex arbitri. He equated this with a choice between two available court jurisdictions: ‘Just as the submission to the sovereign of the forum results in the application of his or her lex, so the determination of the arbitrator’s seat establishes the identity of the lex arbitri.’22 Dr Mann did not, however, demonstrate the foundation of his syllogism. The problem of course lies in the second ‘given’: (1) submission to the court results in the application of that country’s procedural law; (2) a choice of arbitral venue is like submission to a court; (3) therefore a choice of arbitral venue means that the validity of the award will be governed by that country’s procedural law. There is a world of difference between submission to the jurisdiction of a court and the choice of a venue for arbitral proceedings which by their nature are susceptible of being conducted anywhere. The international arbitrator cannot be deemed a manifestation of the power of the State. His mission, conferred by the parties’ consent, is one of a private nature, and, as Professor Pierre Lalive has put it: it would be a rather artificial interpretation to deem his power to be derived, and very indirectly at that, from a tolerance of the State of the place of arbitration.23 Perhaps no more needs to be said except that one of the reasons Dr Mann is remembered so fondly is that, for all the seriousness of most of his scholarship, he occasionally made entirely unsupported statements which appear on analysis to be but a whim or an idée fixe, irresistibly recalling a line from Le Mariage de Figaro: ‘Prouver que j’ai raison serait accorder que je puis avoir tort.’24

C. Inconsistent Results must be Avoided A more pertinent argument, expressed notably by Professor van den Berg,25 is based on a prudential perception of the orderly administration of justice. One cannot be a serious supporter of the international arbitral process without considering the need for a safety valve, ie a way to neutralise improper awards. The victim of such an award — resulting say from an excess of authority, a violation of the right to be heard, or indeed corruption — ought to be able, under this analysis, to eradicate the evil at its roots, namely in the country where the award was rendered. Unless other legal systems respect that outcome, the consequence might be inconsistent decisions and vast confusion. The Hilmarton case has become a popular paradigm: an ICC award in Switzerland rejected a contractual claim on the basis that it contravened Algerian anti-corruption norms; the award was set aside in Switzerland on the (since-abolished) ground that it was arbitrary; the award was nevertheless granted recognition in France where the defect of ‘arbitrariness’ is not known as a reason to reject awards; subsequently a second award was rendered in Switzerland which disregarded the corruption defence and ordered the defendant to pay a consulting fee under the contract; whereupon both the Swiss judgment (that set aside the first award) and the second award itself were successfully presented for recognition by the French courts — without any

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retraction of the recognition of the first award. Unquestionably this example will inspire authors of law school examination questions. The prudential argument based on the orderly administration of justice has surface appeal. Speakers at conferences often amusingly combine it with a hairraising scenario of conflicting decisions à la Hilmarton which gets the audience quickly to agree that such a grotesque regime surely could never have been intended. Yet, I find the argument specious. First, it is not obvious that we cannot live with occasional situations of inconsistent decisions.26 Until the very far-off day of a World Commercial Court of compulsory jurisdiction, there are a multitude of circumstances where untidy outcomes are possible. To remain in the context of international arbitration, imagine an award challenged by the loser on the ground of an invalid arbitration agreement, but nevertheless enforced in the Netherlands where an excellent provision of the Code of Civil Procedure (art. 1076(2)) excludes such an objection if it had not been raised before the arbitral tribunal. Imagine further that the law of the country where the award was rendered does not contemplate such an implicit waiver, thereby preserving the jurisdictional objection, and the award is set aside. A new, entirely proper yet entirely inconsistent award may eventuate, and may in due course be presented in the Netherlands where the first award has already been enforced. Such things are conceivable, but they are once in a blue moon occurrences and should not be allowed to turn the world upside down. Hilmarton, for example, is a two-headed white rhinoceros which might give us a thrill in the cinema but does not really endanger our daily walk to work. Its oddity, I believe, reveals precisely why this concern is more theoretical than real. In most situations in contemporary practice, an award sufficiently defective to be set aside in country A will not pass muster under the enforcement criteria of country B, whereas the Swiss annulment criterion in Hilmarton (‘arbitrariness’) was an old and much-criticised concept which would not have been applicable if that case had arisen under contemporary Swiss law. Likewise, in most situations a court granting annulment could also require restitution of any sums paid out in consequence of the award,27 whereas in Hilmarton the first application for recognition in France was purely tactical, since the award had rejected the claim and there was therefore no enforcement in France, nor therefore any reason to ask for restitution in Switzerland.28 Last but not least, need we recall how rarely awards are in fact set aside, but how often losing parties mount hopeless tactical challenges? Why should the predicament of a hypothetical party which might face the task of recovering amounts unduly paid cause us greater concern than the frustration of countless real parties whose recovery under perfectly valid awards is delayed and even destroyed by spurious challenges? The second argument seems conclusive. In order to be intellectually honest, anyone who maintains that inconsistent results are intolerable — no matter how rare in practice or how inconsequential in concrete effect — would have to accept that enforcement should never be granted until any possibility of challenge to the award in its country of origin has been disposed of. To the purist, there cannot be a difference between ‘annulled’ and ‘might be annulled.’29 In other words, ‘may’ should be understood as ‘shall’ in Article V of the New

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York Convention, and ‘binding’ in Article V(l)(e) should be understood as ‘final’, with the effect that no enforcement is possible until the applicant proves that the award can no longer be set aside in its country of origin. This would in effect take us back to the Geneva Convention of 1927. That is not all. Rigorous opposition to the possibility of inconsistent results would also require re-engineering of Article VI under which enforcement of a foreign award may be ‘adjourned’ pending the outcome of an annulment application in its country of origin. Article VI is more important in practice than Article V(l)(e), because there are many annulment applications, but very few instances where they succeed. Such considerations should not deter the purist, who as a matter of logic ought to insist that adjournment of enforcement not be left to the vagaries of ‘may, if it considers it proper’, but once again be subjected to a mandatory ‘shall’ in order to ensure that no award will ever be enforced until any possible challenges in the country of origin have been disposed of. To be faithful to his thought that inconsistent judgments should be avoided, one would thus expect Professor van den Berg to insist that adjournments should always be granted. If his prudential argument were truly of great moment to him, he should campaign vigorously against any enforcement until the courts of the country of origin have pronounced themselves on the validity of the award. But to the contrary, Professor van den Berg sets a high standard for parties wishing to impede immediate enforcement, by inviting enforcement courts to make their own evaluation of the ground presented to the foreign court in support of the application to set aside, and to grant enforcement unless it is shown that ‘the award is tainted by a defect which is likely to cause its setting aside in the country of origin’.30 In 1987, another commentator reviewed five national decisions ruling on applications for adjournment pending challenges elsewhere, and found that in three cases they were denied.31 Since then, several other courts have also applied the high standard advocated by Professor van den Berg, particularly in England.32 Such decisions would be unacceptable if the avoidance of inconsistent decisions were given paramount importance. It is thus incongruous that Professor van den Berg defends both the proposition that adjournments should be granted parsimoniously and that the setting aside of an award under the New York Convention ‘has extra-territorial effect as it precludes enforcement in the other Contracting States by virtue of [Article V(l)(e)]’.33 Surpassing strange it would be if the leading exponent of the New York Convention thus turned out to be half-stuck in 1927, in the mindset of the Geneva Convention. Quandoque bonus dormitat Homerus.34

D. Disregarding Annulments Insults the Courts of the Place of Arbitration CAS invited the US judge to entertain criticism of the Cairo judgment, on the ground that an evaluation of its bona fides was relevant to the judge’s exercise of discretion under Article V of the New York Convention. If that is the case, how should that discretion be exercised? Should it depend on the apparent bona fides of the annulment? If so, does the concept of bona fides allow the enforcement judge to apply subjective perceptions of the integrity of foreign legal systems, and thus give effect to annulments pronounced by ‘good’ foreign courts but disregard them when they emanate from ‘bad’ ones?

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By avoiding Article V as a foundation for her decision, the US judge steered clear of such vexatious questions altogether. By relying on Article VII, Judge Green was able to state in a footnote35 that she assumed the Cairo decision to be ‘proper under applicable Egyptian law’ while nonetheless going on to enforce the award on the footing that US law does not recognise the alleged infirmity which impressed her Egyptian colleagues. There should be no assumption that the courts of the place of arbitration are offended if foreign judges disregard their opinions about the validity of awards. Prudent judges at the seat of arbitration may be diffident with respect to the erga omnes effect of their authority to set aside.36 Particularly in the case of international arbitration, this makes sense: if neither of the parties nor their dispute has a connection with the jurisdiction of the arbitral venue, the judges there do not have any intrinsic interest in the controversy, or understanding of the culture and expectations of the parties, and thus may treat the matter superficially; if one of the parties is local, there is of course the uneasy paradox that the result of a neutral arbitration may be controlled by one party’s home courts. Enforcement notwithstanding, an LSA implies no insult to the annulling court; individual systems should be entitled to enact local rules tailored to local perceptions without being encumbered by the thought that they are legislating for the whole world.

E. Parties who have Chosen a Venue where Awards are Susceptible to LSAs may have a Contractual Expectation that such Annulments not be Disregarded It may be — so this argument goes — that the parties chose a venue in a country where LSAs are available precisely because they wish to put certain limits on the arbitrators.37 Thus they may welcome the idea that the local courts have the power to annul awards if they disagree with the arbitrators on the merits, even though the availability of such review goes squarely against modern international concepts. If a losing party is able to have the award overturned on this basis, it would thus be wrong for other jurisdictions to deprive that party of the benefits of the annulment it consciously sought to preserve as a remedy. My sympathy for the expectations (real or invented post facto) of parties who might say that they chose a place of arbitration whose laws provided many ways of correcting improper awards is not sufficient to justify architectonic adjustments on their behalf. To do so would operate against the objective of keeping as much as possible of the parties’ disputes out of the courts, and I believe that the law and practice of international trade has by now developed a consensus around this objective. Of course this affirmation does not meet the objection: are parties not entitled by agreement to establish a regime divergent from the consensus? To this I might answer yes in principle, but my understanding of practical reality leads me to counter with a Benthamite argument. For every case where the parties intentionally seek a maximum review regime (and I recall few instances of clients articulating such an objective), there will be a hundred cases where an LSA would come as a bitter surprise. I would be astonished if either party in the Hilmarton case had the faintest idea that it was choosing a venue which (still) recognised an unpredictable ‘arbitrariness’ ground for overturning awards. I would be equally astonished if either party in the Chromalloy case had imagined that an award

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could be set aside because the arbitrators had referred to the wrong branch of Egyptian law. Indeed, even if that had been the Chromalloy parties’ expectation, the circumstances suggest that the error of Egyptian law was not committed by the arbitral tribunal, but by the Egyptian court in applying the new Egyptian arbitration law. Although these preliminary objections are decisive in my own thinking, I would moreover venture that mythical parties who might seek maximum review do have a solution. Those who approach international arbitration with such ambivalence could solve their problem by wording their arbitration agreement to exclude enforcement in the event of any type of annulment, ie even if it is only an LSA. Or why not go all the way back to the 1920s and preclude enforcement until the award has been positively and finally endorsed by the courts of the place of arbitration?

F. To Enforce Annulled Awards Violates an Implicit Allocation of National Court Authority Based on an intricate policy analysis, this theoretical objection has been articulated in considerable detail by Professor Michael Reisman, in a monograph entitled Systems of Control in International Adjudication and Arbitration.38 He argues that, even if its text may be read to allow enforcement of annulled awards (as demonstrated in section A. above}, the New York Convention contains an implicit bargain between signatory States to the effect that courts at the arbitral venue promise to control awards in exchange for the promise of other courts to respect the outcome of that control. To understand Professor Reisman’s thesis, it is necessary to consider his book as a whole. Its genesis was a series of three lectures in 1989, which in turn had their foundation in a series of six articles. The lectures dealt with very different subjects: the International Court of Justice, the International Centre for the Settlement of Investment Disputes (ICSID) and the New York Convention. To give the lectures (and thus the monograph) a leitmotif, Professor Reisman posited that each of these systems was in a state of acute crisis. Thus, the chapter on the ICJ is subtitled ‘The Atrophy of Informal Control Mechanisms’; that on ICSID, ‘The Breakdown of International Institutional Control Mechanisms’; and the third, ‘The Breakdown of the Control System of the New York Convention.’ But the leitmotif dissolves as soon as one tries to perceive it. Most strikingly, the chapter on the ‘breakdown’ of the ICSID mechanism was based on a lecture given and an article published39 just after two much-criticised ICSID annulment decisions, but just before matters were by and large set right by a third decision.40 Professor Reisman added passages to acknowledge this important development, referring to ‘a sweeping repudiation’ of the initial approach41 and concluding in a postscript that ‘the prognosis is good’42 — but without changing the title of the chapter or amending the ominous tone of the original essay.43 In a word, the leitmotif no longer fits the ICSID example. As for the ICJ, the author’s erudition is not to be questioned. In fact five of the six articles that provided the basis of the book deal with the ICJ and issues of excés de pouvoir. Nor do I seek to assess the accuracy of his critique. The only relevance of my observations in this regard is to show precisely that this debate is irrelevant to our subject.

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Professor Reisman believes that the ICJ has drifted away from the principle of restrictive jurisdiction. He sees this as a dangrous development given the fact that the ICJ decides its own jurisdiction without any satisfactory further control. Although under the UN Charter the Security Council ‘may, if it deems necessary’ act to ‘give effect’ to a judgment of the ICJ, which clearly implies that it may disregard an excés de pouvoir by the ICJ, this is not an acceptable safety valve (it is political; it depends on who might be prepared to cast a veto; it provides no remedy of annulment and thus no apparent way to undo a paradoxically illegitimate res judicata). The author then describes three judgments which he believes reflect a breakdown of control in the ICJ’s jurisprudence, and concludes that this has led to a lack of confidence in it. Must it be pointed out that the thousands of tribunals which carry out the daily work of international commercial arbitration operate under constraints immeasurably more diverse and numerous than those of the ICJ? In the realm of arbitration that falls under the ambit of the New York Convention, the potential sources of judicial intervention to assist or neutralise the arbitral process are practically infinite — and moreover difficult to predict a priori with respect to each relationship subject to the relevant arbitration agreement. What then is the ‘crisis’ in the control mechanism of the New York Convention? Although Professor Reisman concedes that the text of the New York Convention allows an enforcing jurisdiction to disregard an annulment decision in the country where an award was rendered, he sets out to prove that a: coherent control theory and a proper interpretation of the texts require the jurisdictions implicated in the arbitration to perform, as the case may be, a primary or secondary control function under Article V.44 He then proceeds to define these concepts of ‘primary’ and ‘secondary’, which are pure products of his own reflections. Without this distinction, he says, all States parties to the Convention would be jurisdictionally equal. Without the notion of a secondary jurisdiction, an ‘unscrupulous loser’ could run to any favourable court, obtain an annulment of the award, and claim that the annulment was effective worldwide. Without the notion of a primary jurisdiction, the winner of a defective award could engage in endless worldwide harassment of the victim, who would have nowhere to go to seek a once-and-for-all nullification. Therefore, argues Professor Reisman, ‘the scheme of Article V of the Convention represents a compact between two distinct groups’;45 the countries where an arbitration takes place agree that their courts will act as primary jurisdictions to exercise ultimate control of the award, while other countries agree to enforce it, safe in the knowledge that it is subject to control in its country of origin, and with the proviso that they will accept the universal effectiveness of annulment in that country. Having posited that this is the ‘compact’ of the Convention, Professor Reisman then explains that the ‘crisis’ he perceives is due to the violation of this compact by the legislatures of Belgium and Switzerland, and the danger that other countries may be tempted to follow their unacceptable example. The Belgian violation was to amend article 1717 of the Civil Code so as to exclude the jurisdiction of Belgian courts to entertain applications for the annulment of awards rendered

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in Belgium but implicating no Belgian nationals or foreigners.46 The Swiss violation was to allow parties to arbitrations in that country, provided that neither is a Swiss national or resident, to agree that there may be no challenge to the award before the Swiss courts.47 Professor Reisman considers that each of these two systems has out of ‘selfinterested motives’ refused to ‘perform the functions assigned to it in the New York Convention’s scheme’.48 He asserts that they are acting as ‘free riders... taking advantage of the more stringent jurisdictional practices of other jurisdictions to attract a quantity of arbitral business that would otherwise not have selected their venue’.49 In his view, a State signatory of the Convention whose national has been deprived of protection against an unfavourable award might well seek reparation of that injury against Belgium or Switzerland as a treaty violator, ie on the level of public international law, and concludes his essay with the recommendation that States parties to the New York Convention ‘should protest to those governments over their policy of defection from obligations they have assumed under the Convention’.50 This appears to be a singularly unpromising project for creating diplomatic incidents, let alone seeking international adjudication.51 To begin with, it is impossible to demonstrate a violation of the explicit text; Professor Reisman simply cannot point to any definition of what he believes to be ‘obligations... assumed under the Convention’. Any complaint would have to be based on notions of the ‘assigned functions’, ‘coherent theory’, and implicit ‘compact’ of the Convention which not only lack textual foundation, but are contradicted by the demonstrable purpose of the Convention: to facilitate the enforcement of awards. But most of alt there is no victim. No other country is about to attack Belgium or Switzerland for adopting a hands-off approach; enforcement jurisdictions are in a position to ensure that a defective award will not be effective on their territory. Indeed, they invariably insist on carrying out such a control. In fact Professor Reisman has turned the real world upside down; when complaints arise against the attitude of the courts of the place of arbitration, it is because of their excessive control — as in England under the pre-1979 obligation to ‘state a case’ to the courts, or as per the Egyptian decision in Chromalloy or the Swiss decision in Hilmarton — and not the reverse. As for the notion that Belgium and Switzerland are gaining an unfair competitive advantage, the fact is that most parties prudently prefer a reasonable and predictable level of control. That explains why there has been no phenomenal rush to arbitrate in Belgium, and why I have yet to see an arbitration clause that uses the facility offered by article 192(2) of the Swiss law. The Convention itself does not use the categories ‘primary’ and ‘secondary’, and I find them unwarranted. If anything, the primary jurisdiction should be the one where the economic or other consequences of an award are sought. Professor Reisman’s vision of things would mean that an annulment at the place of arbitration would be binding everywhere — no matter how parochial, or indeed odious, the ground of the annulment (eg, blatant xenophobia or religious discrimination). Even as a theoretical matter, it is unsatisfactory in that it evades the issue of asymmetry already considered; Professor Reisman does not say that the upholding of an award by the courts of the country where is was rendered should oblige other jurisdictions to enforce it.52

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Given my great respect for an eminent scholar - all the more sincere as it comes from an indebted former student — I have taken pains to discover the origins of what seems to be a misguided view of the Convention. It appears that the entire construct of Professor Reisman’s third essay is built on the quicksand of an erroneous first premise. At the beginning of his discussion, he writes in describing the regime of Article V that: The carefully prescribed and limited ground for reviewing an award set out in the Convention are the same for primary jurisdictions... and secondary jurisdictions. 53 This is of course a fundamental error. It is a misapprehension of the text of the Convention, which fails to define any — let alone ‘carefully prescribed and limited’ - ground upon which the courts of the country of origin may annul an award. Moreover, the error also concerns the purpose of the Convention, which as explained above was not to impose a worldwide law of arbitration, but to enhance the enforcement of awards rendered abroad. Professor Reisman’s mistake is thus to have started with the postulate that the New York Convention itself prohibited LSAs. If that was so, this very article would be pointless. The objectives defined in my first two sentences would long since have been attained. Someone in the last 50 years would surely have noticed it.

IV. Why and how to Disregard LSAs A court which considers that its national arbitration law justifies the enforcement of an arbitration award must, by virtue of Article VII of the New York Convention, enforce the award without heed to its annulment elsewhere. This is a good thing. The unfortunate simple fact is that in today’s world, injustice will result if too much credence is given to the law of the place of arbitration, for two reasons. Firstly, in some places this appears to incite courts to assist the losing party’s attempt to overcome the arbitrators’ decision on the merits. Courts in India and Pakistan have taken such regrettable attitudes into an entirely new dimension by purporting to exercise ultimate dominion over awards rendered outside their own territory.54 They have done so on the ground that the awards in question were rendered ‘under’ their law, which of course means that an annulment would create the prospect of a worldwide obstacle to enforcement under Article V(l)(e) of the New York Convention 55 (the Pakistani position is all the more unacceptable as Pakistan has not implemented the New York Convention; heads I win, tails you lose). Mischief should not so easily be allowed. Secondly, unusual or unacceptable annulments are destructive of legitimate and increasingly settled expectations. It is nevertheless wise to eschew invidious comparisons. Therefore it surely must be preferable, whenever possible, to use the Article VII approach (‘our law requires us to enforce this award even though your courts annulled it’) rather than the Article V(l)(e) approach (‘we exercise our discretion to enforce an award which your courts annulled, even

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though we recently denied enforcement of an award annulled in country X, because we are not convinced by what your judge did’).56 An attractive way to achieve a true internationalisation of the international arbitral process would be for other national legal systems to follow the French example - as perhaps Belgium and the US already have (if one can rely on two cases) - and to establish criteria for enforcement that do not take account of annulment in the country of origin.57 This is not, however, the current legislative trend, which is inspired by the UNCITRAL Model Law. Like the New York Convention itself, the Model Law is a great achievement in many other ways but on this particular score perpetuates exactly58 the same half-hearted thinking, because Article 36(1)(a) simply repeats all five paragraphs of Article V(l) of the New York Convention and thereby proposes a national law on the enforcement of awards which contains the same discretionary hesitation with respect to paragraph (e) of the latter. How this will work out in individual countries remains to be seen, but uniformity is certainly not assured. Perhaps some guidelines may be suggested, as follows. Since neither abstract territorialism nor the fear of inconsistent results pose insurmountable barriers to the enforcement of awards set aside in their country of origin, I suggest that the proper enforcement criterion should be whether the foreign-based decision was a ‘local standard annulment’ (LSA) as opposed to an ‘international standard annulment’ (ISA).59 The rich experience of international trade law since 1958 has taught us what an ISA is: something which falls within the scope of the first four paragraphs of Article V(l) of the New York Convention and Article 36(1)(a) of the UNCITRAL Model Law.60 Everything else would be an LSA, and entitled only to local effect. When preparing the ground for its Model Law in 1979, the UNCITRAL Secretariat prepared a ‘Study on the New York Convention’ which noted that the Convention: lends force to reasons which may be rather unexpected due to the disparity of national laws or which may be so much geared to particular local circumstances that their forced recognition in the country of enforcement would seem inappropriate.61 In less bureaucratic language, the Secretariat doubted that LSAs should be allowed to impede enforcement around the world. Accordingly, a proposal was made to adopt the approach of Article IX of the European Convention, with the effect that the annulment of an award could impede its enforcement in a Model Law country only if the annulment had been based on a ground of invalidity acknowledged in the Model Law itself. In 1983, however, ‘the prevailing view’ within the working group decided against this approach on the ground that: the restriction therein was not generally acceptable and, thus, too ambitious and its application could lead to difficul ties.62 Today, our understanding of what is ‘generally acceptable’ and ‘too ambitious’ has evolved significantly, and I believe that we may now finally deal with the pernicious effects of local peculiarities.

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Enforcement courts should consider the ground upon which awards are set aside, and exercise their discretion to disregard LSAs. Moreover, an LSA does not become an ISA only because the annulling court used the words that correspond to international norms; there should be no reward for the hypocritical recitation of mantras. The enforcement judge, who is after all making a decision which will have practical consequences on resources located in his or her jurisdiction, has no less ‘sovereign’ authority to assess whether international standards have been met than a court in the country where the award was rendered. In sum, he or she may find the annulment decision more or less persuasive, but never automatically controlling. At the same time, it should be understood that even an ISA need not exclude enforcement. The laws of a number of countries have gone beyond Article V of the New York Convention, which today in some respects appears somewhat oldfashioned and restrictive.63 Given Article VII of the New York Convention, those countries are perfectly entitled to enforce awards on a more favourable basis. The fact that awards may thus suffer occasionally inconsistent fates is not, for reasons discussed above, a fundamental objection. Inconsistent decisions already do occur from time to time; they are the product of a world in which each country’s legal system considers itself sovereign. No one has suggested that the fact that the courts of the place of arbitration have rejected an annulment application should require all other countries to enforce the award.64 If it is not shocking that the enforcement court makes its own determination in deciding not to enforce, why should the reverse situation be of any greater concern? Indeed, the approach I advocate does no more than to accord court decisions from the country of origin equal authority, whether they uphold or annul the award.65 The decision to enforce may either be predicated on the view that Article V(l) is discretionary, or may, pursuant to Article VII, be based on a more favourable law (the latter would require rejection of Art. 36(1)(a)(v) of the Model Law). This is a secondary issue; national solutions may differ technically but yet reach the same result of disregarding LSAs. Under my proposed approach, applications to adjourn enforcement actions should not be granted unless the enforcement court considers that an ISA is likely to materialise.66 In no case should it grant an adjournment if the resisting party cannot show that it has invoked an internationally recognised standard as a ground for annulment and that the circumstances lend credence to its objection.

V. Conclusion Participants in international transactions should play according to the same rules. The approach to the New York Convention advocated here will create incentives for national courts to conform to internationally accepted standards. As they come to see the futility of LSAs in the international context, national law-makers and judges will limit their censure to arbitral misconduct of a kind which is recognised everywhere as justifying

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non-recognition. The unfortunate (though not intolerable) spectre of inconsistent results will materialise only as a consequence of court rulings in the most obtuse or chauvinistic jurisdictions. The foundation of this approach is the modern consensus as to the usefulness of a reliable international arbitral process. This consensus is reflected in the widely accepted UNCITRAL Model Law, as well as in innumerable court decisions, treaties, high-level political declarations and influential scholarly writings. It should allow us now to achieve, by using the discretionary features built into the New York Convention, something that was premature half a century ago.

Endnotes 1

Albert Jan van den Berg, The New York Arbitration Convention of 1958 (1981) p 355. The text of the United Nations Convention of 10 June 1958 on the Recognition and Enforcement of Foreign Arbitral Awards (generally known as ‘the New York Convention’) is reprinted in this monograph.

Article VII(l) of the Convention states: ‘The provisions of the present Convention shall not affect the validity of multilateral or bilateral agreements concerning the recognition and enforcement of arbitral awards entered into by the Contracting States nor deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon.’

See, for example, the following articles: ‘Arbitre et juge en Suede : Expose general et reflexions sur la délocalisation des sentences arbitrales’ (1980) Revue de /’arbitrage 441; ‘France and the Arbitral Process in 1980’ (1981) Svensk och internationell skiljedom (arbitration yearbook of the Stockholm Chamber of Commerce) 40; ‘Arbitration Unbound’ (1981) International and Comparative Law Quarterly 40; ‘Procedural Law of the Forum’ in Proceedings of the Chartered Institute of Arbitrators (Hong Kong, 1981) p 35; ‘Delocalisation of International Commercial Arbitration: When and Where It Matters’ (1983) International and Comparative Law Quarterly 53; ‘Arbitration Unbound in Belgium’ (1986) 2 Arbitration International 68; and ‘The Extent of Independence of International Arbitration from the Law of the Situs’ in Contemporary Problems in International Arbitration (1986, ed Julian Lew) p 41.

See, for example, FA Mann, ‘Lex Facit Arbitrum’ in International Arbitration: Liber Amicorum for Martin Domke (1967), reprinted in (1986) 2 Arbitration International 241; WW Park, ‘The Lex Loci Arbitri and International Commercial Arbitration’ (1983) International and Comparative Law Quarterly 25.

In 1983, I conceded that there was no ‘satisfactory all-fours precedent’ of an award surprising given that ‘in an overwhelming majority of cases’ a defect sufficient to see nullify an award in its country of origin will also prevent its enforcement elsewhere: ‘Delocalisation of International Commercial Arbitration: When and Where It Matters’ (1983) International and Comparative Law Quarterly 53 at 60. Nevertheless, it did not take long for exceptional cases to emerge. The first arose in the aftermath of the unlovely SEEE v. Yugoslavia decision rendered in 1956 by a two-member tribunal sitting in Lausanne, which was declared by a Swiss court in 1957 not to be an arbitral award but was nevertheless held enforceable in France (in 1984!): Court of Appeal of Rouen, 13 November 1984, (1985) Revue de /’arbitrage 115, English translation in (1985) 24 International Legal Materials 345: see J Paulsson, The Extent of Independence of International Arbitration from the Law of the Situs’ in Contemporary Problems in International Arbitration (1986, ed Julian Lew) p 41 at pp 142 et seq. The Dutch Supreme Court in 1975 had gone the other way, holding that the Swiss decision should preclude enforcement under Art. V(l)(e) of the New York Convention: ibid, pp 144-45. Since then and up to Chromalloy, we have seen: Pabalk Ticaret Sirketi v. Norsolor SA, French Cour de cassation, 9 October 1984, (1984) 112 Journal de droit international 679, English translation in (1985) 24 International Legal Materials 360 (award rendered in Austria in favour of Turkish party partially set aside in Austria on ground of arbitral excess of power in basing award on equitable rather than legal principles; refusal by a French Court of Appeal to enforce award reversed by French Supreme Court on ground that under Art. VII

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of the New York Convention enforcement forum has a duty to determine whether its own law would allow enforcement irrespective of Art. V of the Convention); SONATRACH v. Ford, Bacon and Davis Inc., Brussels Court of First Instance, 6 December 1988, unreported, excerpts in English translation in (1990) 15 Yearbook Commercial Arbitration 370 (ICC award rendered in Algiers in favour of US party declared enforceable in Belgium notwithstanding its having been ‘overruled’ (infirmée) by the Court of Appeal of Algiers; New York Convention held inapplicable because Algeria acceded to it after the award had been rendered, and no ground for refusal of enforcement under Belgian law had been shown); Ministry of Public Works of Tunisia v. Société Bee Frères, Court of Appeal of Paris, 24 February 1994, (1995) Revue de /’arbitrage 275, excerpts in English in (1997) 22 Yearbook Commercial Arbitration 682 (award enforced in France notwithstanding a Tunisian court judgment declaring the arbitration clause to be null and void); Hilmarton Ltd v. Omnium de traitement et de valorisation, French Cour de cassation, 23 March 1984, (1994) Revue de /’arbitrage 327, excerpts in English in (1995) 20 Yearbook Commercial Arbitration 663 (award which had dismissed claim on ground that underlying contract was unenforceable, because contrary to Algerian anti-corruption law, recognised in France notwithstanding its annulment in Switzerland for ‘arbitrariness’). 6

The passages above reproduce the English translation that appears in the dissenting opinion of the Egyptian arbitrator, Dr El-Sharkawi, (1996) Mealey’s International Arbitration Report August, C-52. No particular elucidation is provided by the French translation published in (1994) Revue de l’arbitrage 763; B FillionDulfouleur and Ph Leboulanger, in their commentary on ‘Le nouveau droit egyptien de l’arbitrage’ (1994) Revue de l’arbitrage 665, agree that the circular and obscure text of para. (g) is likely to lead to applications for annulment.

Chromalloy Aeroservices v. Arab Republic of Egypt, 939 F Supp 907 (DDC 1996).

Decision of 14 January 1997, (1997) Revue de l’arbitrage 395; (1997) Mealey’s International Arbitration Report April, B-1 (original text in French, with English translation); excerpts in English in (1997) 22 Yearbook Commercial Arbitration 691 (1997).

Sampliner, ‘Enforcement of Nullified Foreign Arbitral Awards – Chromalloy Revisited’ (1997) Journal of International Arbitration at 145.

10 The French text of the Convention, equally official, when translated more literally into English reads: ‘recognition and enforcement of the award shall not be refused... unless’ etc. Although this version does not provide explicitly ‘and in such cases shall be refused’, some commentators (such as Professor Fouchard, ‘La portée internationale de l’annulation de la sentence arbitrale dans son pays d’origine’ (1997) Revue de l’arbitrage 329 at 344) believe that an implication to that effect is unambiguous in French. If that were so, Art. VII of the Convention would be crucial in a Francophone context. I do not, however, agree that the French text excludes discretion. Moreover, the Chinese, Spanish and Russian texts are congruent with the English, and principles applicable to plurilingual treaties militate against une exception française: see J Paulsson, ‘May or Must Under the New York Convention: An Exercise in Syntax and Linguistics’ (1998) 14 Arbitration International 227. Mr Sampliner’s useful review of the travaux préparatoires demonstrates that they are inconclusive, and if anything I agree with him that they suggest that discretionary enforcement is permissible; see Sampliner, op cit n 9, p 149. Given the Convention’s pro-enforcement bias (per Art. VII) a purposive interpretation would also militate against reading Art. V(l) as mandating refusal in the cases there cited. 11 See the Chromalloy judgment, 939 F Supp at 909; China Agribusiness Development Corp. v. Balli Trading, High Court of England, judgment of 20 January 1997, per Longmore J (unreported); Delaume, ‘Enforcement Against a Foreign State of an Arbitral Award Annulled in the Foreign State’ (1997) Revue du droit des affaires internationales 253 at 254; Schwartz, ‘A Commentary on Chromalloy: Hilmarton à l’americaine’ (1997) Journal of International Arbitration 125 at 133; and H Alvarez, ‘The Enforcement of Arbitral Awards’ in Commercial Arbitration – 1996 (Continuing Legal Education, June 1996), 1.1.19. 12 This does not mean that the enforcement provisions of the UNCITRAL Model Law necessarily cover all cases falling under the ambit of the Convention. For example, countries which have signed the Convention without making a reservation to the effect that they wish to limit its effect to awards rendered in commercial matters have a broader enforcement obligation than under the Model Law, which is limited to commercial arbitration. There may also be cases where an award is ‘foreign’ and therefore enforceable under the Convention even though it is not ‘international’ in the sense required to bring it within the ambit of the Model Law.

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13 Contra Schwartz, op cit n 11, p 128, referring to ‘the lofty goal’ of the New York Convention as being ‘the harmonious and uniform international treatment of arbitration awards’. In answer to Schwartz, I would point out that, if this had been the limited (not ‘lofty’) goal, there was no need to eliminate the double exequatur requirement under the 1927 Geneva Convention discussed below, and thus no need at all for the new Convention. And, quite obviously, if Schwartz were correct on this point, the New York Convention would not include Art. VII. 14 Emphasis added. 15 ‘Arbitration: History and Background’ (1989) 6 Journal of International Arbitration 43 at 49. The President of the International Court of Justice, Judge Stephen Schwebel, put it this way, in’ A Celebration of the United Nations New York Convention’ (1996) 12 Arbitration International 83 at 84: ‘The New York Convention is one of the many, and one of the most important, of the attainments of the United Nations in promoting a more effective and universal rule of law.’ 16 Yves Derains, ‘Foreword’ in Hommage à Frédéric Eisemann (Liber Amicorwn) (1978} p 13 (my translation). 17 See Ch Jarrosson, case commentary on Hilmarton, (1994) Revue de /’arbitrage 328 at 332. 18 Finding that Art. V does not command a refusal to enforce when there has been an annulment, the US judge in Chromalloy focused on Art. VII, which she found to contain an obligation to grant enforcement in the circumstances of the case before her. Thus Art. V – and the Egyptian annulment – became irrelevancies: While Art. V provides a discretionary standard, Art. VII of the Convention requires that ‘[T]he provisions of the present Convention shall not... deprive any interested party of any right he shall have to avail himself of an arbitral award in the manner and to the extent allowed by the law... of the country where such award is sought to be relied upon.’ In other words, under the Convention, CAS maintains all rights to the enforcement of this Arbitral Award that it would have had in the absence of the Convention: 939 F Supp at 909-10. This reasoning led the judge to consider whether the award was enforceable as a matter of the US Federal Arbitration Act, under which awards are ‘presumed to be binding’ and may be vacated (ie, annulled) under only ‘very limited circumstances’. Egypt’s complaint against the award suggested only one of the ground for annulment recognised by the US Act, namely ‘manifest disregard’ of the law. In the case at hand, the arbitrators had responded to Egypt’s argument that administrative law should apply by saying that they would reach the same result irrespective of whether they applied administrative or civil law: ‘At worst, this decision constitutes a mistake of law, and thus is not subject to review by this Court’ (ibid, p 911). 19 Schwartz says no (op cit n 11, pp 131-32); for a rebuttal, see Sampliner, op cit n 9, pp 152-53. I express no view here, because my proposal does not depend on what may or may not be the correct current legal position in one particular country. 20 Schwartz, op cit n 11, p 131. At the time the text of the New York Convention was emerging, Professor Pieter Sanders wrote that, once an award has been set aside by the courts of the country where it was rendered, other courts ‘will... refuse the enforcement as there does no longer exist an arbitral award’: see ‘New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards’ (1955) 6 Netherlands International Law Review 43 at 55. It is most striking that Professor Sanders, recognised as one of the fathers of the Convention, did not base his conclusion on anything in the text of Art. V(l), but on an extrinsic (and I believe untenable) assumption. This confirms that Art. V(l) does not preclude enforcement. 21 See note 26 below. 22 Mann, op cit n 4, p 248. 23 P Lalive, ‘Les règles de conflit de lois appliquées au fond du litige par l’arbitre international siégeant en Suisse’ (1976) Revue de l’arbitrage 155 at 159. 24 Act I, scene I, Suzanne. 25 See, eg, The New York Convention of 1958 at 355 (1981). 26 See Ch Jarrosson, Case Comment, (1995) Revue de l’arbitrage 653. As Professor Fouchard points out (op cit n 10, p 344) this issue is not limited to the fate of awards; eg, contracts, marriages, or adoptions may be annulled in one country but recognised in another. I would add that inconsistent treatment of awards may occur even if an award is undisturbed in its country of origin; there have been a number of instances where enforcement has been allowed in a second country but denied in a third.

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27 See M Tupman, ‘Staying Enforcement of Arbitral Awards under the New York Convention’ 3 Arbitration International 209 at 220 (1987). This was in fact exactly the position taken by the applicant in Nu-Swift v. White Knight et al, judgment of the Paris Court of Appeal, 21 January 1997, extracts in (1997) Revue de l’arbitrage 429, full text and English translation in Mealey’s International Arbitration Report, February 1997, at El, who had lost an ICC award in Paris and been compelled by the High Court of London to satisfy the award notwithstanding the pending annulment action in Paris. Accordingly the applicant asked the Paris court not only for annulment of the award, but for restitution of the sums paid in England. As happens in most cases most everywhere, the award was upheld. 28 As for the fact that the Hilmarton saga littered the French countryside with exequaturs of irreconcilable Swiss awards and judgments, that is attributable to errors of French law committed by some of the French courts seized of the matter, and is of little interest to our analysis of the New York Convention. See Ch Jarrosson, Case comment, (1995) Revue de l’arbitrage 651. The French confusion was effectively corrected by a final Cour de cassation decision of 10 June 1997, (1997) Revue de l’arbitrage 376, excerpts in English in 22 Yearbook Commercial Arbitration 696 (1997), which held that the recognition of the first award was res judicata, and that as a result the Swiss annulment decision and the subsequent second award could not be given effect in France. Mr Gharavi’s comment on this dénouement is entitled ‘A Nightmare Called Hilmarton’, but contains no explanation why it should be considered as such. He writes, as though the use of ominous words might substitute for a reasoned critique: ‘The practice of enforcing set-aside awards... will... continue to haunt the international arbitration community, which seems to underestimate this major “dysfunction” which is progressively damaging the credibility of international arbitration’ Mealey’s International Arbitration Report, September 1997 at 22. These are portentous but hollow words. Nothing shocking happened in Hilmarton; the story started with a claimant losing his case in Geneva before an arbitrator, and it ended in France with a rejection of the same claimant’s attempt to satisfy the identical claim. (As for the possibility that the second award would be enforced elsewhere, I can only repeat that even if such an unlikely event were to occur, the international legal system can accommodate and survive such occasional inconsistencies.) What was ‘dysfunctional’ in Hilmarton was the Swiss court’s decision to overrule the arbitrator on the merits, just as the Egyptian court’s decision was the ‘dysfunctional’ element of Chromalloy. The cure in each case was to disregard the LSA on the strength of a more liberal regime in the enforcement forum. 29 Contra, Schwartz, op cit n 11, p 133, n. 31, pointing out that enforcement of an award that ‘might be annulled’ leaves open the possibility of restitution. In an international context, however, the remedy of restitution is often illusory: what is paid is gone. On the other hand, I accept Mr Schwartz’ point when enforcement has been granted subject to the posting of security that would re-establish the status quo ante in the event of an annulment. Such conditional enforcement is not the subject of this study, and the condition of security would violate the New York Convention in the event the party seeking enforcement has an unfettered right thereto by virtue of Art. VII. It is my proposal that such a condition should also be considered inappropriate when granting enforcement irrespective of Art. V(l)(e) if the challenging party is seeking an LSA. 30 Van den Berg, op cit n 1, pp 353-54. As to whether a legal provision of the country of origin to the effect that recourse against an award automatically suspends its enforcement may be considered a ‘suspension’ for the purposes of Art. V(l)(e), Professor van den Berg (in my view correctly) takes it for granted that this would clearly be wrong: ‘Consolidated Commentary’ (1996) 21 Yearbook Commercial Arbitration at 501. 31 Tupman, op cit n 27. 32 See, for example, White Knight et al, supra n 26 (referring to the applicant’s request for the reimbursement of sums paid under the award by virtue of the unreported enforcement order of 14 July 1995 by the English High Court); Soleh Boneh International Ltd et al v. Republic of Uganda et al [1993] 2 Lloyd’s Rep 208 (security rather than enforcement should be ordered if invalidity of award was ‘seriously arguable’); Far Eastern Shipping Co. v. AKP Sovcomflot, [1995] 1 Lloyd’s Rep 520 (enforcement ordered notwithstanding continuing attempts to challenge maritime award in Russia); Ungerer v. Rapid Metaal BV, judgment of s-Hertogenbosch Court of Appeal (Netherlands), 15 June 1994, excerpts in (1995) 20 Yearbook Commercial Arbitration 750; Ukrvneshprom State Foreign Economic Enterprise v. Tradeway, 1996 US Dist. LEXIS 2827 (SDNY, 12 March 1996) (arbitral award enforced against US party notwithstanding pendency of its application to court in Ukraine to have award set aside); and Kersa Holding Co. v. Infancourtage et al, judgment of Luxembourg Court of Appeal, 24 November 1993, (1996) 21 Yearbook Commercial Arbitration 617 (no adjournment of enforcement pending criminal action for fraud in the inducement brought in country where award rendered).

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33 ‘Consolidated Commentary’ (1994) 19 Yearbook Commercial Arbitration 590. The same categorical (and in my view erroneous) statement is made by Gharavi, ‘Enforcing Set Aside Awards: France’s Controversial Steps Beyond the New York Convention’ (1996) 6 Journal of Transnational & Policy 93 at 100: ‘the setting aside of the award has...extraterritorial effect insofar as Art. V(l)(e) precludes enforcement of an award in other contracting states.’ 34 I am of course playing with fire, and taking the risk that Professor van den Berg may find some way of throwing Pope’s ‘Essay on Criticism’ back at me: ‘Those oft are stratagems which errors seem, / Nor is it Homer nods, but we that dream.’ 35 939 F Supp 907 at 914, n 6. 36 In 1948, a court in Lausanne refused to set aside an ICC award notwithstanding ‘irregularities [which] were sufficiently serious not only to render the award null and void, but even non-existent’, holding that the arbitral proceedings were ‘entirely governed by the will of the parties, ie by the [ICC Rules], which override the provisions though mandatory of the Vaudois Code of Civil Procedure’ (emphasis added), quoted by Eisemann in a 1949 American Arbitration Association publication, as reprinted in (1986) Arbitration International 72 at 73. Belgium of course has ensured by law that its courts cannot entertain any action to set aside an award rendered in Belgium if the case involves no Belgian national or resident; Swiss law provides for the same result if the parties so stipulate. 37 I am indebted to Peter Caldwell (Hong Kong) for putting this argument to me; I make no claim that he will be satisfied by my answers. Mr Sampliner also gives weight to the desideratum of not frustrating the ‘intent’ of such parties: op cit n 9, p 162. 38 Reisman, Systems of Control in International Adjudication and Arbitration (Duke University Press, 1992). 39 ‘The Breakdown of the Control Mechanism in ICSID Arbitration’ (1990) 4 Duke Law Journal 739. 40 Maritime International Nominees Establishment (MINE) v. Guinea, ad hoe decision of 22 December 1989, (1990} 5 ICSID Review - Foreign Investment Law Journal 95, discussed in J Paulsson, ‘ICSID’s Achievements and Prospects’ (1991) 6 ICSID Review - Foreign Investment Law Journal 380. 41 Reisman, op cit n 38, p 79. 42 Ibid, p 106. 43 Ibid, p 87: ‘A viable and useful dispute resolving instrument is now in peril because its control system has spun out of control.’ 44 Ibid, p 116. Emphasis in the original. 45 Ibid,p119. 46 See Paulsson, ‘Arbitration Unbound in Belgium’ (1986) 2 Arbitration International 68. 47 See art. 192(2) of the Swiss Law on Private International Law. 48 Reisman, op cit n 38, p 133. Professor Reisman is not shy about laying the blame for what he views as these legislative aberrations where he thinks it lies: the self-interest of local lawyers stimulated by the ‘attractive fees for that part of the bar’ which is active in international arbitration. But this makes no sense. The elimination of any possibility of challenges means that no local lawyers are needed in arbitrations in Belgium and Switzerland that fall within the scope of the criticised laws; there is no local law to be complied with. It would make more sense to accuse the local bar of foolishness than of greed. The villains must be elsewhere. But surely this beer is too small to mobilise the Belgian and Swiss hotel lobbies? 49 Ibid, p 131. 50 Ibid, p 140. It is unclear how the present law in France has escaped Professor Reisman’s censure. After criticising the French Pabalk decision (supra n 5) as ‘inconsistent with the obligations of a secondary jurisdiction’ (see Reisman, op cit n 38, p 122), Reisman goes right on to approve art. 1502 of the French Code of Civil Procedure (‘a legislative instruction to national courts to perform control functions with regard to international commercial arbitration within the meaning of Article V’) (Reisman, op cit n 38, p 125) as though he has not noticed that art. 1502 does not list annulment in the country of origin among the exclusively enumerated ground for refusing enforcement. If Switzerland and Belgium should be attacked for failing to control awards, surely France should be just as aggressively pursued for failing to respect decisions of ‘primary’ jurisdictions which have performed their controlling function and set an award aside.

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51 Reisman’s final essay, it seems fair to suggest, may have benefited from less deliberate reflection than the two others; it is the only one which did not germinate in a previous article. This may account for some startling propositions. 52 See infra n 63. 53 Reisman, op cit n 38, p 114. 54 See M Kerr, ‘Concord and Conflict in International Arbitration’ (1997) Arbitration International 137; and J Paulsson, ‘The New York Convention’s Misadventures in India’ (1992) Meale-y’s International Arbitration Report June, 18. 55 Happily, the Indian Arbitration and Conciliation Act 1996 has repaired the textual defect which facilitated such overreaching, but one still finds Indian judges willing to issue injunctions against international arbitral institutions and arbitrators conducting proceedings outside India. 56 The interests of international respect, morality and intellectual discipline are better served by foreigners saying ‘if your courts misapply the law we will avoid them’ than by their saying ‘your courts can do what they like; we will disregard them if they step out of bounds’. As Judge Schwebel has put it: ‘If the courts of a State bend the Convention to suit domestic parties, penalties of the market will substitute for those of the law’: op cit n 15, p 86. 57 The ultimate irony here might be that the equivalent of Art. VII of the New York Convention was already present in Art. 5 of the Geneva Convention. In other words, the Chromalloy case would have been decided the same way in both France and the US if the New York Convention had not existed, and only the Geneva Convention applied. This should not, however, cause anyone to leap to the conclusion that Eisemann and his supporters might better have forgotten about the New York Convention and instead sought to convince individual countries to adopt laws like the 1981 French decree. 58 Albeit applicable to a slightly smaller category of awards, because the Model Law applies only in defined ‘commercial’ and ‘international’ situations. 59 One commentator who disapproved of the US Chromalloy decision nevertheless conceded that Art. V(l) (e) is ‘outdated’ and ‘incomplete’ in failing to ‘harmonise the ground for setting aside awards’, and urges the view that reform must be effected on ‘an international level’: H Gharavi, ‘Chromalloy: Another View’ (1997) Mealey’s International Arbitration Report January, 21 at 24. Gharavi thus calls for a new treaty to effect the desired reform. This seems a remote possibility; an evolution in the law and jurisprudence of enforcement fora in the manner described in this article seems more plausible. Moreover, the wisdom of such an approach is questionable. Presumably the search for uniformity would not only define internationally acceptable ground for annulment in the country of origin, but would also impose a duty on enforcement courts to accept such annulments. In other words, Art. VII would have to disappear. This would have several disadvantages. Enforcement courts, which after all have the most natural claim to authority over use of State power to enforce legal rights with respect to property located within their own national territory, would be subjugated to the will of courts of the place of arbitration, which, as experience has unfortunately shown, are sometimes guilty of egregious chauvinism. Moreover, this approach would also bar substantive evolution of the criteria by which awards are evaluated. For example, it would be most unfortunate if the courts of the Netherlands were prevented by such a uniform regime from applying the splendid art. 1076 of that country’s Code of Civil Procedure, which deems objections to awards to have been waived if they could have been raised in the arbitration, but were not. 60 Mr Sampliner objects (op cit n 9, p 162) to the proposal of disregarding LSAs on the ground that this would make Art. V(l)(e) redundant ‘if the only ground upon which nullification decisions could be honoured were the ground already set forth in Article V(l)(a-d).’ This critique misses the point that the New York Convention establishes a minimum standard, not a uniform regime for the international enforcement of awards. Actus interpretandus est potius ut valeat quam ut pereat (the presumption against superfluous terms) has no place here as a rule of interpretation. A treaty providing that children may not work more than ten hours per week is not violated by a signatory State which precludes child labour altogether. There are in fact a number of elements within Art. V(l)(a)-(d) which are progressively being rendered irrelevant by modern legislation: see infra n 63. 61 Doc. A/CN.9/168, 20 April 1979, para. 43, quoted in H Holtzmann and J Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (1989) p 1069.

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62 Third Working Group Report, Doc. A/CN.9/233, 28 March 1983, para. 171, quoted in Holtzmann and Neuhaus, op cit n 61, pp 1086-87. 63 Fouchard, op cit n 10, p 347. 64 But see B Leurent, ‘Reflections on the International Effectiveness of Arbitration Awards’ (1996) 12 Arbitration International 269 at 284-85, suggesting that such a result should be sought by means of a treaty among countries whose legal systems are ‘comparable’ and characterised by a reciprocal ‘high level of confidence’. He proposes as a ‘natural circle’ the signatories to the Brussels, San Sebastian and Lugano Conventions on court judgments. Leurent’s suggestion is interesting and perhaps salutary, but at best will be limited to countries having such confidence in each others’ legal systems that they are willing to conclude multilateral judgments conventions. This would, at least for the foreseeable future, exclude important countries like China, India, Russia - and the United States. In this connection, one might reflect on the final argument raised by Egypt in Chromalloy, namely that the US Court should recognise the Cairo decision as res judicata. The US does not have a treaty with Egypt concerning the enforcement of judgments (nor indeed with any other country). Nevertheless, US enforcement of foreign judgments is possible under case law, going back to the hoary precedent of Hilton v. Guyot (1895). Such a possibility may, however, be entertained only if certain criteria are met, including that the original claim must not violate US public policy. In this case, the Court found that the original claim in Egypt (ie, the claim for annulment) violated the ‘unmistakable’ US public policy in favour of final and binding arbitration of commercial disputes. 65 As Professor Fouchard puts it: ‘it is not legitimate to reserve to the judges of one State the power to destroy awards which displease them throughout the world’: op cit n 10, p348. 66 Gharavi has proposed that ‘[i]nstead of blindly and automatically applying the morefavourable-right provision’ of Art. VII, the French courts should suspend enforcement in cases such as Hilmarton pending the outcome of the annulment application: (1996) 6 Journal of Transnational Law and Policy 93 (1996) at 106. But Art. VII, as the US court in Chromalloy noted (see supra n 14) is not discretionary: courts must give parties the benefit of their more favourable right. Those who dislike Art. VII should promote disentitlement to more favourable rights, not criticise courts for respecting the law ‘blindly and automatically’. There is obviously no reason to adjourn enforcement of an award pending the outcome of an annulment application in cases where an annulment per se would not impede enforcement. Such is the case in France. Indeed, in Hilmarton the Swiss annulment had already been decreed when the award was presented for recognition in France - a fact that Gharavi’s recommendation seems to overlook. Adjournment would have been nonsense: there was nothing to wait for.

Irresponsibility in International Commercial Arbitration Pierre Lalive*

I. Introduction Some three centuries ago, in 1688, a great French writer and moralist, La Bruyère, published a book entitled Les Caractères, the very first sentence of which reads as follows: ‘Everything has been said, and one comes too late since Men, for more than seven thousand years, exist and think.’ It is tempting to paraphrase that famous sentence and apply it to the field of international commercial arbitration, where ‘everything’ or nearly everything seems to have been said - in particular after eight Goff Lectures and hundreds of articles, books and seminars, so that it would seem unlikely that anything new can be added. Indeed, a characteristic feature of the modern arbitration scene is — together with a proliferation of arbitration institutions — that one is confronted with an extraordinary multiplication of publications of all kinds which deal with some aspects of arbitration law as well as, less frequently, with the economics or the sociology of international arbitration. The cost of printing no longer appears to act as a brake and there is nothing to protect us from a deluge of arbitration publications, a majority of which are repetitive or belong to the category of ‘marketing literature’. The same phenomenon can be observed, of course, with regard to alternative dispute resolution (ADR), a fashionable subject which seems to have become a ‘must’ today in any conference dealing with the prevention and settlement of commercial disputes. Therefore, it is no easy task for a speaker to identify an arbitration subject which has not been discussed ad nauseam or analysed many many times before. The honour of being invited by the City University of Hong Kong to deliver the Ninth Goff Lecture was certainly matched by the exceptional difficulty to follow eight distinguished lecturers, nearly all of whom I have the pleasure of knowing personally, and to find something vaguely new to say. Be that as it may, for reasons which will become apparent, I chose the following theme: ‘Irresponsibility in international commercial arbitration’. Prima facie, such a theme — at least if narrowly interpreted — must have appeared remarkably uninspiring and unattractive. Indeed, some practitioners might even consider it as a ‘non-subject’. I do not share that view and I believe on the contrary that, in future years, * Partner, Lalive & Associés, Geneva; Emeritus Professor of Law, Member and former President of the lnstitut de Droit International; Hon Chairman Swiss Arbitration Association and International Chamber of Commerce Institute of World Affairs; Member of International Court of Arbitration. This lecture, delivered in Hong Kong on 10 November 1998, was the ninth in the series of Goff Lectures on arbitration sponsored by the City University of Hong Kong School of Law and named after Lord Goff of Chieveley. Editorial note: It was originally published at (1999) 7(2) Asia Pacific Law Review 161-176.

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‘irresponsibility’ (ie, the lack of legal liability — civil and criminal — of arbitrators and of arbitral institutions1) will attract more and more attention. And I submit that, for a variety of reasons, this topic will and should be scrutinized and discussed not only in a narrow juridical perspective; it should be considered also in a broader, ethical or social sense. First of all, legal responsibility and non-legal or moral responsibility are obviously and closely interrelated — one basic question being precisely whether certain types of questionable behaviour should, or should not, be regulated by law. Moreover, it is a fact that, with the success and expansion of commercial arbitration, irresponsibility, in the wide sense, can no longer be reasonably considered as a ‘non-subject’, as was probably the case in the first half of the twentieth century, when arbitration could be defined as ‘a simple and cheap method of solving commercial disputes between gentlemen’. This statement is not to be misunderstood. I do not imply that, in the world of modern international business, ‘gentlemen’ belong now to the category of ‘endangered species’. I am merely stating a fact of life, in that, in our modern complex society, in the present ‘global’ economy of our so-called ‘global village’, arbitration can no longer be seen as a simple and cheap domain reserved to a few distinguished amateurs. The same can be said mutatis mutandis about ADR. In its Final Report of the Status of the Arbitrator, a Working Group of the International Chamber of Commerce (ICC) Commission on International Arbitration led by Professor Philippe Fouchard2 explained in a convincing manner the need to clarify what it calls ‘the elements of the status generally accorded to international arbitrators’. The report attempts to stress, in a somewhat cautious manner, what it calls ‘the responsibilities implicit in the role of the international commercial arbitrator, whilst at the same time affording protection to such arbitrators’ (p 29). Two factors must be emphasised in this context. The first is ‘the intensification of contentious proceedings’. The second is, as already noted, the extraordinary expansion of international arbitration,3 with the resulting arrival on the arbitration scene of many newcomers (arbitrators, counsel, experts, etc), from every field and from all over the world. The ICC Report rightly notes that ‘not all [of these newcomers] have had the opportunity of acquiring progressively the necessary knowledge, know-how and experience’ — which is probably an understatement. Each of these two factors calls for some comment. All observers of the arbitration scene have remarked the increasingly confrontational climate of many international arbitrations, partly because of the tendency of lawyers,

1 See the excellent comparative study edited in 1990 by Julian Lew, with a foreword by Sir Michael Kerr, Queen Mary College, London, under the title The Immunity of Arbitrators; see also Ph Fouchard, ‘Final Report on the Status of the Arbitrator’ (May 1996) 7(1} ICC International Court of Arbitration Bulletin 27; E Robine, ‘Liability of Arbitrators and Arbitral Institutions in International Arbitrations and French Law’ (1989) 5(4) Arbitration International 323; C Hausmaninger, ‘Civil Liability of Arbitrators - Comparative Analysis and Proposals for Reform (1990) 7 Journal of International Arbitration 7. 2 Supra n 1, p 29. 3 In his foreword, cited supra n 1, Sir Michael Kerr stresses the ‘enormous increase in arbitration…”.

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in particular US litigators, to apply to international arbitration the domestic skills and techniques acquired in national proceedings. (See in connection to this the stimulating study by two sociologists, Dezaley and Garth,4 and the recent editorials of an experienced nonlawyer practitioner, Alan Shilston, in Arbitration, the journal of the Chartered Institute of Arbitrators.5) This general trend toward what has been called a judicialisation of international arbitration has been denounced in many quarters, without much success. This is not the place to analyse or comment on it in detail, but two rather obvious remarks deserve mention. First, this ‘judicialisation’ of arbitration, with the extra costs it generally involves, is undoubtedly one of the reasons for the development of ADR, first in the US, and then in certain other countries. Furthermore, the tendency to transpose to international arbitration procedural techniques used in domestic proceedings has clearly been encouraged by the parochial or nationalistic attitude of many lawyers — their lack of a ‘comparative outlook’,6 of curiosity, of respect and understanding for foreign cultures (legal or non-legal); in other words, a failure to realise that, by definition, international commercial arbitration is a different animal from domestic arbitration or ADR. Another factor of note is the following: one important effect of the remarkable expansion of international arbitration is that it has become a business, and, according to some,7 ‘big legal business’. This explains the multiplication of arbitral institutions and centres and the competitive arbitration environment; in short, international arbitration has become increasingly commercial or commercialised. A consequence — as aptly noted in the final report of the ICC’s Commission — is not only the ‘apparition’ on the arbitral scene of a large number of newcomers (an increase which should, in itself, be welcome), but also a greater and probably excessive professionalisation of arbitrators’ activities. Both aspects may and are likely to result in a larger number of errors - at least an increase of absolute numbers, if not in proportion. To sum up this introduction, various signs appear to show that the irresponsibility (in the strict, legal, and in the broadest sense) of arbitrators and of institutions, far from being or remaining a ‘non-subject’, is bound to become, in the years to come, a cause for concern and a practical subject. It follows that practitioners and institutions can no longer close their eyes on the possibility — to quote again the ICC’s Commission Report (p 29) — that distrustful or discontented parties will be increasingly ready to implicate them.

4 Dealing in Virtue (1996, University of Chicago Press); see, eg, pp 51-57, 305-67 and passim. 5 For example, his leader, ‘The User must be involved’ (1998) 64(2) Arbitration 81. 6 On the importance of the ‘comparative outlook’, which is part and parcel of the international arbitrator’s neutrality, see P Lalive, ‘On the Neutrality of the Arbitrator and of the Place of Arbitration’ in Swiss Essays on International Arbitration (1984, Schulthess Polygraphischer Verlag) p 23. 7 See Dezaley & Garth, op cit n 4, p 6.

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II. The Irresponsibility or Immunity of Arbitrators A. In General As is already known, there is no uniform international law of arbitration, notwithstanding the existence of the UNCITRAL Model Law. Since the modern world is still divided, in a somewhat anachronistic manner, between some two hundred sovereign States, each of which has its own national legal system (and sometimes several), it follows that conflicts of laws may inevitably occur in respect of which national law governs the juridical liability, if any, of the arbitrator toward the parties. In that connection, a first problem, well known to specialists of private international law (PIL), is that of the characterisation of the question: is responsibility a contractual matter, or a question of torts (ie, of delictual liability)? Then the question may arise for a discontented party to decide where to sue the arbitrator: at his or her domicile and/or at the seat of the arbitration? This is a matter for that branch of PIL called ‘conflicts of jurisdiction. Finally, the competent State court will have to decide, under its own conflict rules, which law to apply to the claim (ie, to the arbitrator’s liability or immunity), and the question may eventually arise of the recognition or enforcement abroad of such decision. Those questions of PIL, however, are beyond the scope of this article, as is a comparative law study and an attempt to show both the differences separating the various national legal systems, in particular between countries of the common law tradition and so-called ‘civil law countries’, or to stress the similarities or analogies which may exist between national laws, many of them silent on the subject. It should suffice here to refer to the comparative law material to be found in the interesting studies already mentioned, in particular the book edited by Julian Lew in 1990, The Immunity of Arbitrators, and the final Report of the ICC’s Commission of Arbitration.8 In his foreword to the former book, Sir Michael Kerr rightly stressed the contrast between two aspects, or chapters, of ‘arbitration law’ which had received so far little attention: the first, which he considered had become ‘reasonably clear as a matter of law’, is the extent of the parties’ obligations to their arbitrators (including of course that of paying their fees); the second, which was ‘far from clear’, is the ‘possible right of the parties to sue arbitrators for failure to perform their duties in accordance with a reasonable standard of conduct and competence’. Sir Michael went on to state that the ‘fundamental question’, in his opinion, is: whether arbitrators provide a service just like any other professional person, and are therefore liable for any failure in its reasonable performance, or whether they are immune from such claims because of the judicial character of the service which they performed [my emphasis].

8 Supra n 1; see also, in the ICC Court Bulletin 1996, the studies of A Redfern and CF Salans on the English and American views.

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There is only one element in this quote I would like to amend or correct: the reference to the so-called ‘judicial character’ of the arbitrators’ service. The reasoning — which seems traditional in England and to some extent in the US and certain other countries — is discussed below which justifies the immunity of arbitrators by the ‘judicial’ or ‘quasi-judicial’ nature of their function. However, three preliminary remarks are first to be mentioned. First, reasoning by analogy is a delicate intellectual process which may well lead one to confusion and error. The term itself implies two opposite notions, similarity on the one hand, and difference on the other. It seems tempting to lose sight of the second idea when speaking of analogies, and in particular in the case of arbitrators and judges. Secondly, to insist, as some commentators do, upon an analogy between public justice and private justice (ie, arbitration), and then to go to the extreme of assimilating the two for the purpose of determining liabilities, appears to be based on dubious reasoning, for at least two reasons: (1) because of the fundamental differences between the public domain (that of State courts) and the private sphere (that of arbitration); and (2) for an equally important, though less obvious reason: because the very term ‘justice’ does not have an identical meaning in the two domains (quite apart from the well-known fact that one is based on the superior authority of the State and not, like the other, on consent). René David, the great French comparatist,9 pointed out that, when parties resort to international commercial arbitration, it is in general because they wish to have ‘another kind of justice’. Finally, the well-known reasons why States have traditionally limited or excluded the judges’ liability, reasons which are practical and political, can only be transposed with difficulty, and to a (very) limited extent, to the vastly different domain of international commercial arbitration. But let us examine more closely that transposition, and the view, which for so many years was ‘generally accepted as self-evident’,10 ‘that an arbitrator, acting in a judicial capacity, could not be sued by one of the parties’. (It is interesting to note, in passing, that this same kind of reasoning appears to have inspired, more or less openly or consciously, recent additions to the arbitration rules of several institutions.) The immunity of arbitrators or their limited liability with regard to the parties appears to be based on a misconceived analogy that: (a) an arbitrator’s function is judicial or quasijudicial; (b) judges enjoy, and must enjoy, immunity (or a very restrictive liability) from suit from the parties; and (c) therefore, arbitrators must (also) enjoy immunity from suit (or a very limited liability). Each of these three propositions is open to criticism. The second proposition, (b), is the ‘minor’ of the three. Before reviewing the main, and sometimes convincing, reasons why judges enjoy or should enjoy some degree of immunity (and to what extent those reasons might have some force also in the field of arbitration), it is perhaps worth noting an evolution of ideas, in a number of countries, regarding judicial immunity.

9 In his excellent book, International Commercial Arbitration (1982, Economica). 10 See JCS Mackie, ‘The Grain and Feed Trade Associations and Immunity of Arbitrators’ in Lew, op cit n 1, p 111.

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In contemporary societies and in many developed and democratic countries, the judiciary has gradually assumed a role of enormous importance and unprecedented power. For instance, in some countries where the judiciary was constitutionally or practically under the influence of the Executive, it has acquired a greater independence (as illustrated, for instance in France, by cases, civil or criminal, involving the Government or political figures). This evolution seems to have led to a greater public demand for judicial accountability and for a modification of traditional regimes where, for instance, the personal liability of a judge towards third parties was entirely replaced by the liability of the State (sometimes with the possibility for the State to ‘return itself’ against the judge). To sum up, the dogma of judicial immunity may not, in the future, remain as intangible as in the past. Be that as it may, it is the major proposition (a), the basis of the whole syllogistic reasoning just cited, which appears to suffer from a fatal weakness. In order to solve the fundamental question of the arbitrator’s liability or immunity, is it correct to select or isolate one element, and one element only (ie, the function) to decide between two conflicting claims or arguments — and to characterise it as ‘judicial’? To me the answer must be in the negative, if only because the judges’ immunity is justified by their position, by their status as organs of the State, rather than by one or the other of their various activities or functions. It is also based upon the political and practical need to protect their independence. And even if the proper criterion where, contrary to this submission, the function of delivering a binding decision, one should hesitate to assimilate the position of the arbitrator to that of a judge. In any case, the reasons seem obvious to exclude an assimilation, and even an analogy, between judge and arbitrator. First a judge is in no way chosen by agreement of the parties (even in a case of a ‘choice of forum’, a prorogatio fori) — even in those States where, as in some Swiss cantons or in some parts of the US, judges are elected by the people. Secondly, when exercising their judicial function, State judges exercise a power, a public authority conferred by the State and in its own name. To sum up, the differences between the function, activity, position and status of a judge on the one hand, and those of an arbitrator on the other, are so great that no sufficient analogy can be drawn between the two which can possibly justify the immunity of the arbitrator.11 It remains to be seen whether, nevertheless, those practical or political justifications which have been adduced in support of judicial immunity from suit can be used, mutatis mutandis, in the field of international commercial arbitration, and to what extent. The independence of the judiciary has often been cited as an evident justification for judicial immunity, and this has led some writers, relying upon a well-known principle of independence of the arbitrator, to draw a similar conclusion, by analogy in the domain of international commercial arbitration.

11 The traditional position of French law is well expressed, for instance, in the following decision of 1992 (Revue de I’Arbitrage (1996) p 412): ‘The Arbitrator cannot claim the benefit of the rules on the liability of judges or of the State since he has no public function. The relation between the Arbitrator and the Parties has a contractual nature, and his liability must therefore be assessed according to the general conditions (droit commun) of the Civil Code’ (Art. 1142).

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To reason in this way seems to me to be playing on words: contrary to the term ‘impartiality’, the term ‘independence’ can hardly be said to have an identical meaning when applied to judges or to arbitrators. There is, however, a common element: in order to be able to adequately perform their respective (and different) functions, both judges and arbitrators should expect neither rewards nor reprisals from their decision. In particular, they should be protected from the risk of a personal action for damages, not to mention criminal prosecution from dissatisfied parties. In the absence of such protection (whether absolute or limited remains to be discussed), some arbitrators might well — like some overscrupulous or timid judges — be reluctant to come to a decision and might postpone rendering the award, thereby committing a professional fault. The old saying ‘justice delayed is justice denied’ is applicable to both public and private justice. Another danger may be mentioned: unless arbitrators enjoy some degree of immunity from suit, it is likely that fewer private persons, or at least fewer qualified persons, would be prepared to accept an appointment. And this at a time, precisely, when the expansion of international trade relations and the correlative increase in disputes make it necessary to find more qualified arbitrators. This being said, one must immediately mention the opposite danger which immunity could create for the parties. Human nature being what it is, the irresponsibility of arbitrators, especially if absolute immunity applies, is likely to encourage the carelessness or negligence of some arbitrators. Similarly, the modern trend (in legislation and in judicial decisions) which has gradually restricted to a minimum the grounds for setting aside proceedings and, generally, the cases of judicial review of awards (while basically justified) may also have some negative effects — that of encouraging negligence or laziness. Speaking as a practising arbitrator, I must say that I have never been, nor will I ever be, in favour of the absence or total exclusion of some degree of judicial review over arbitral awards. Similarly, speaking as counsel, I am glad that some judicial control is available, and I would hesitate, for instance, to recommend to clients to avail themselves of the possibility offered foreign residents by Article 192 of the Swiss Act to ‘exclude all setting aside proceedings’ in Switzerland, unless it was clear that such proceedings could be instituted in a competent forum, in another country. To conclude on this general question of judicial control, it may be that the ‘restrictive trend’, just mentioned, has reached its extreme point. With the predictably vast increase in arbitration cases, widespread dissatisfaction with a number of decisions is likely to lead eventually, in comparative law, to a movement towards more, rather than less, judicial review. Similarly, if it is assumed that, in the next ten years or so, there will be more arbitral decisions rendered by more inexperienced or unqualified arbitrators, one may predict that there will be less acceptance, in the commercial community, of the immunity of arbitrators. The mere possibility for a losing party to seek the setting aside of an arbitral award is clearly an argument in favour of at least some immunity for the arbitrators. From a broad social or political viewpoint, one could say that, in such a case, there is less real need for

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the legislature or for the courts to submit arbitrators to the general laws of liability, like any other provider of services. Conversely, the more limited the means are of judicial review of awards, the more reasons one may advance for not allowing the victim of an arbitrator’s serious mistake to be left without remedy. But there are two other arguments, one non-specific, the other specific to arbitration, which may also be mentioned in favour of at least a strict limitation of arbitrators’ responsibility. The first is the finality of the decision, of the res iudicata which (to follow a well-known Latin phrase) pro veritate habetur: whether in the case of public or in that of private justice, the social and general interests require that an end be put to litigation. To allow a losing party to sue who has suffered some personal losses because of a judicial or arbitral decision would imply the possibility, at least indirectly, to relitigate the case, contrary to a clear public interest, and would undermine the authority of the judicial decision. Similarly, it is widely argued that this would diminish the authority of the award (much more so than to allow dissenting opinions) and possibly undermine also the whole value of the arbitral process. It would also go directly against one of the essential purposes of arbitration, which is to obtain a final decision (without appeal), and to allow the parties to resume normal trade relationships as quickly as possible.12 The ‘specific’ argument refers to what, in dismissing a request for setting aside an award or for refusing to enforce it, several judicial decisions have called, in obiter dicta, the acceptance by both parties to an arbitration agreement of ‘the arbitral risk’, an acceptance necessarily implied in any agreement to arbitrate, either under the law governing the arbitration or under the arbitration rules of some institutions. The argument runs as follows: ‘If the parties have knowingly and consciously chosen to resort to arbitration rather than to litigate before State courts, they have thereby necessarily accepted a certain risk ....’ This means the risk of an erroneous and unsatisfactory decision (but is it necessarily greater than the judicial risk?), which they know will be final and without appeal, and subject only to limited judicial review. In the exercise of their autonomy, the parties were (a) free not to resort to arbitration, and thus to conclude a prorogatio fori before a certain judge (providing the latter was compelled by law or willing to accept the jurisdiction), or (b) free also to provide for some arbitral appeal. By choosing, directly or indirectly, some arbitrators, they also and necessarily accepted a certain risk. As already pointed out, a party dissatisfied with an arbitral award should not be allowed to relitigate before State courts. Now, whatever the prima facie force of the argument, a possible answer immediately comes to mind. When submitting to arbitration, both parties, under the applicable law or arbitration rules, have based their agreement on trust, on the implied and/or expressed condition that the arbitrators would fulfil their various duties honestly, fairly and diligently. That was their

12 There is no need to deal here with the various procedural complications which could arise in the absence of immunity, for instance, in the case of an award rendered by a majority of two against one arbitrator, or to examine to what extent, for example, a civil suit against the arbitrator might overlap with the exceptional procedure of revision of an award.

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reasonable expectation. In other words, their acceptance of the arbitral risk did not cover the case of fraud, of corruption, nor (it would seem), cases of gross and inexcusable negligence. But it did cover, or include, the possibility of mistakes in law and legal procedure. Just as, in the comparative law of contracts, public policy does not tolerate, as a general principle, clauses excluding any responsibility in case of fraud, and intentional and serious breaches of a party’s obligations; similarly, public policy could hardly admit that the acceptance of this arbitral risk would cover fraudulent behaviour by the arbitrators or inexcusable breaches of their duties. To conclude this rapid survey (of the pros and cons of the arbitrators’ immunity or liability), allow me a rapid mention of two additional considerations. First, one should not forget that in a number of countries, in particular those belonging to the ‘civil law families’, if and when the judges are immune from suit, it is not only for one or the other of the reasons just reviewed; it is also, and perhaps mainly, because their liability towards third parties is ‘replaced’ by the responsibility of the State. The parties are thereby protected in case of damage suffered because of an illegal (and in some cases even legal) judicial decision. But the possibility remains for the State, which has been held responsible, later to claim (recours) against the judge guilty of fraud or of a gross violation of his duties. Nothing of the sort, obviously, exists in the case of international commercial arbitration. This has led an Australian jurist, Mr Li,13 to propose what he calls ‘a model for improvement’, in which the responsibility of the State, as known in many civil law jurisdictions, would be replaced by that of ‘professional associations’ of arbitrators. There are many convincing observations in Mr Li’s article, in particular his criticism of the approach, taken by the majority of the House of Lords and by the US courts, according to which arbitrators are analogous to judges. Where one feels bound to disagree, with respect, is when the author heavily relies on what he calls the ‘professionalisation’ of arbitral activities, and his belief that the future lies in the ‘rise of professional arbitration as an institution’. Whether this is or may become true on a national basis and in domestic arbitration, I do believe that, in international commercial arbitration, Mr Li’s model for improvement is neither desirable nor practicable. This view cannot be developed here but, to cut a long story short, I would only add that a certain tendency toward professionalisation and excessive specialisation does constitute, in my opinion, one of the dangers threatening the present development of international commercial arbitration. This reference to the idea of professional arbitration leads me to a last consideration, for the sake of completeness: it cannot be denied that the exercise of an arbitrator’s activity nowadays is different from what it was in the first half of this century — especially, but not only, in the domestic sphere. There was a time when an arbitrator’s activity was not only much simpler than what it is in most international cases today, but rather in the nature of an honour and of a public service rendered to the community. And if fees were provided at all,

13 J Yat-Sen Li, Arbitral Immunity: A Profession Comes of Age (1998) 64(1) Arbitration 51-57.

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they were more or less symbolic, as a partial compensation for the time devoted. Moreover, many if not all members of the arbitral community were successful men or lawyers, enjoying private resources of their own and far from imagining that arbitral activity might become a profession. Tempi passati?

B. Some Arbitration Rules Until fairly recently, few rules on arbitration included provisions concerning the problem of the arbitrator’s liability. It is interesting to note that there now seems to be a tendency, reflected in the rules of some institutions, to view this situation as a gap. A good example is to be found in Article 34 of the new ICC Arbitration Rules (in force since 1 January 1998), which reads as follows: Neither the Arbitrators, nor the Court and its members, nor the ICC and its employees, nor the ICC National Committees shall be liable to any person for any act or omission in connection with the arbitration. It is perhaps significant that, after much understandable hesitation, the ICC Commission of Arbitration has finally opted for enacting such total immunity — while entertaining no illusion, it would seem, about the legality of such a solution in many jurisdictions. Let me state at the outset that I believe this solution in the new ICC Rules to be legally misconceived, unjustifiable and politically mistaken. From a juridical point of view, it seems to represent a step backwards, insofar as it does re-establish, and broaden, a somewhat similar rule to be found in the original regulations of 1923, the year of the foundation of the ICC Court of Arbitration. Moreover, it appears to ignore deliberately the fact, well-known to any student in comparative law, that the majority of national legal systems, in particular but not only in civil law countries, do not admit the absolute immunity of arbitrators.14 Other regulations, such as Article 19 of the London Court of International Arbitration (LCIA) Rules, or Article 77 of the World Intellectual Property Organization (WIPO) Rules, or Article 36 of the American Arbitration Association (AAA) Rules, are undoubtedly to be preferred. Not only in case of fraud or bad faith, but also in case of an intentional and/or inexcusable violation of one of the arbitrator’s fundamental duties, and in case of gross negligence, there is no justification for the immunity of the arbitrators, especially when it is based on a misconceived assimilation to the status of judges. As could be expected, divergent views have been expressed by commentators about the new Article 34 of the ICC Rules and, in particular, about the wisdom of making no exception in case of ‘conscious and deliberate wrongdoing’ by the arbitrator,15 like the new LCIA Rules, Article 31.1. According to some, this innovation reflects the growing American influence within the ICC.

14 See Fouchard, op cit n 1, eg pp 40-42. 15 Craig, Park and Paulsson’s Annotated Guide to the 1998 ICC Arbitration Rules, with commentary (1998) p 183, appears even more representative of the ‘American approach’ to the arbitrators’ and institutions’ immunity. For a more balanced view, see A Reiner (1998) 1 Revue (francaise) de I’Arbitrage 25, at p 70.

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There seems to be some general consensus about the fact that, in the present climate, the danger appears to have increased to some extent of liability claims, which are ‘a potential source of disruption and harassment in connection with the arbitral process’.16 But no such consensus exists as to the proper solution. Commentators close to the ICC are, of course, unanimous in justifying Article 34, sometimes with rather amusing remarks. For example, one writer17 has stressed that the former ICC Rules contained a gap that was indispensable to fill because, in his opinion, ‘there was no reason why an ICC arbitrator should run more risks than another arbitrator’. This kind of reasoning, although well intentioned, is hardly convincing. The ICC system of arbitration is generally claimed by its advocates and promoters to be superior in quality, both because of an allegedly better choice of arbitrators, and because of its special feature of review of draft awards by the ICC Court. If both assumptions were correct, the normal result would be that ICC arbitrators, with or without Article 34, run much less risk of being sued than arbitrators under another system. This does not mean that a provision limiting (but not attempting to exclude altogether) the liability of arbitrators would have no justification whatsoever. It may be conceded perhaps that, on the political or psychological level, a limiting provision may act as a deterrent and protect the arbitrators, at least to some extent. On the other hand, the possibility cannot be excluded that such emphasis on total immunity may prove counter-productive in some quarters, and create doubts rather than inspire confidence.18

III. The Irresponsibility of Arbitral Institutions An entirely different problem is the liability or immunity of arbitral institutions — an immunity which is proclaimed in Article 34, just cited, of the new ICC Rules, and extended in a rather extraordinary way to all ICC employees. While one can feel a certain sympathy for the desire for self-protection of arbitral institutions, it must be said that clauses of that type are most questionable, both from a juridical and from a social or political viewpoint. To the extent an arbitral institution is a private organisation and not a creature of public law, or of PIL, like the International Convention on the Settlement of Investment Disputes (ICSID),19 it is indeed difficult to perceive any reason why, in law, it should not be considered responsible for the consequences of its errors — in other words, why it should not be subject to the general law of liability it is indeed difficult to perceive any reason why, in law, it should not be considered responsible for the consequences of its errors - in other words, why it should not be subject to the general law of liability?

16 Y Derains and E Schwartz, A Guide to the New ICC Rules of Arbitration (1998, Kluwer) p 351. 17 M Blessing (December 1997) Bulletin ICC Court 49. 18 An analogy might be drawn, in this connection, with the case of the immunity of barristers under English law, which gave rise, when it was reasserted in court in 1969, to adverse public reaction; see The Times, 23 November 1967, quoted by Li, supra n 13, pp 52-54. 19 Washington Convention 1965, Art. 21.

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First of all, it stands to reason that it cannot be said about institutions what the drafting committee of the 1996 English Arbitration Act said of arbitrators: ‘the reasons for providing immunity are the same as those that apply to judges in our Court.’ All the reasoning based on the judicial or quasi-judicial function of arbitrators is clearly inapplicable to arbitral institutions. This is all the more so since those private institutions are generally the first, when they find it convenient, to emphasise the purely ‘administrative’ character of their activities as a shield against private suits. As a matter of fact, it is questionable whether all the decisions, as is so often claimed, of arbitral institutions are really ‘purely administrative’; for instance, when the institution accepts or rejects the challenge of an arbitrator, accepts to extend a time limit or to register a request on the basis of a prima facie existence of an arbitration clause. But this is not the place to discuss such questions, which do not seem, by the way, to have attracted the degree of attention and analysis they deserve.20 Be that as it may, even if we were to accept the notion that the activity of arbitral institutions has a mixed character, consisting to some degree of what may be called judicial administration, this would hardly suffice to justify their claim of immunity from suit. The first time I read the English Arbitration Act 1996, I remember discovering with some surprise that, under section 74, arbitral institutions were granted immunity, and this by a mandatory provision. Such a provision, like the similar Article 34 of the ICC Rules, is obviously inspired by the fear that, in the contemporary contentious climate, especially when they are deprived of the possibility of suing arbitrators, as is the case under section 29 of the Act, losing parties may well be tempted to hold the institution responsible (eg, for a bad choice of arbitrator or for negligence in the administration of the proceedings). Is such a fear a sufficient justification? It might be interpreted as a sign of a certain lack of confidence in the quality of the services rendered, and one may even imagine that, in the present intensive competition between arbitration centres, such a clause could be rather counter-productive. According to the drafting committee of the 1996 Act, another justification for section 74 was:21,22 based on the fact that many appointing institutions and trade organisations did not have the means to sustain costly litigation or even the cost of professional indemnity insurance. True though this may be in the domain of domestic arbitration, it is doubtful whether such a rationale is convincing in international commercial arbitration, when most arbitral institutions are paid for their services and sometimes live on their administrative fees and on the interest from advances received.

20 A notable exception is the book by A Kassis, Réflexions sur le règlement d’ Arbitrage de Ia CCI (1988, Paris: LGDJ). 21 See article by T Øyre, ‘Professional Liability and Judicial Immunity’ (1998) 64(1) Arbitration 49. 22 See VV Veeder, ‘National Report, England’ in ICCA Handbook (March 1997, Kluwer) pp 31-33.

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In the context of the responsibility of arbitration institutions, the question should at least be mentioned (but it cannot be entered into here) of the legal nature of the relationship existing between the arbitral institutions and the parties (not to mention the relationship between the institution and the arbitrators), a relationship generally considered as contractual. It seems logically to follow that the principles of contractual liability should normally apply. There is no sound juridical reason why a private arbitration institution or non-governmental organisation (NGO) should not be liable for its faults or negligence. All the less so since, as shown by the case law of countries like France, where there is no immunity, the courts have had little difficulty in distinguishing between liability claims,23 and in separating the chaff from the wheat. In the course of my introduction I ventured to wonder whether, as shown by the remarkable paucity of decisions, the theme of responsibility — or its counterpart irresponsibility — was perhaps a ‘non-subject’. It seems obvious to me that the answer can only be in the negative. Contrary to the impression one may well derive from reading most textbooks on arbitration, I would like to suggest now, by way of conclusion, that both in a narrow, legal sense, and in a wider, ethical or social sense, this subject deserves and should receive much more attention and discussion than it has so far received. On the practical level, the expansion of international trade appears bound to produce an ‘enormous increase’, to use Sir Michael Kerr’s expression, in the number of trade disputes of all kinds and therefore an increase in the quantity of international commercial arbitrations (in the usual sense). One should not forget also the importance of ad hoc arbitrations and the recent creation by States of different systems of dispute resolution, one important example being the WTO system, not to mention the North American Free Trade Agreement (NAFTA), the Iran-US Claims Tribunal or that strange caricature of arbitration and due process, the United Nations Compensation Commission (UNCC) in Geneva.24 Whatever the future holds for dispute resolution, whether traditional or new, it seems safe to predict that, in the coming years, there will be more rather than fewer cases of dispute settlements (especially in these times of economic uncertainty), and therefore more cases when a dissatisfied party will wish to use all possible legal means, either to attack an arbitral award, or to refuse to enforce it and/or even to call in question the personal liability of the arbitrators or arbitral institutions.25 It is precisely the fear of such an evolution which has led some arbitral institutions to innovate and to introduce new immunity provisions in their Rules.

23 One recent example is the case Societe Cubic Defense Systems Inc. (USA) v. Chambre de Commerce Internationale, Cour Paris 1ère Chambre, A of 15 September 1998. 24 See ME Schneider, ‘How Fair and Efficient is the United Nations Compensation Commission System? – A Model to Emulate? (1998) 15(1) Journal of International Arbitration 15. 25 As G Griffith stated at UNCITRAL’s New York Convention Day: ‘Particularly by aggressive litigators within the North-American hemisphere, there is an emerging tactic of recalcitrant parties engaging in personal attacks on the independence of the arbitration process. It is not uncommon for arbitrators now to be threatened with proceedings and claims ...’.

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Now two possible objections might be raised which, if found to be accurate, could lead one to conclude that, on the contrary, responsibility in arbitration is not worth studying. First, it has been forecast by some eminent commentators that the number of international commercial arbitrations will decrease, notwithstanding the continuous expansion of trade relationships. No less an expert than Sir Michael Kerr has predicted (I believe before the American Bar Association early this year) that future years would see a decline in international arbitration for two reasons: (1) because arbitration is likely to be replaced by ADR; and (2) because the growing importance of time will make the traditional arbitration process inadequate. With the greatest respect, I feel unable to agree. Since it is not possible to elaborate at this stage, it may suffice to say, very briefly, that in spite of present fashions and marketing efforts in favour of the so-called ADR (or similar new labels for the ancient techniques of mediation and conciliation) — and I fully agree with Lord Goff that we should not trouble ourselves too much with definitions, so long as we know what we are talking about — , there will always be a need to settle certain commercial disputes by a binding decision, rendered either by an arbitrator or by a court. Moreover, in the case of ADR, conciliators and mediators are not immune and there have been a few examples, already, of suits against them by dissatisfied parties. As to the influence of time, it is quite true that, for certain categories of disputes, to quote Michael Kerr, ‘it takes too much time, effort and argument’ to reach a correct result by traditional arbitral methods — hence attempts to resort to direct negotiations, ADR, fasttracked arbitration and the like. On the other hand, in important and complex disputes, there is a degree of illusion in the belief that speed is, or should be, a primary consideration. In fact, speed may well result in hasty and erroneous decisions, thereby involving their author’s liability. Moreover, one should not forget the ‘healing virtue of time’ and the educative role of arbitration proceedings in bringing about a reconciliation which seemed impossible at the outset. According to another, quite different, objection, it has been predicted that confidence (which is the very basis of any arbitration) in the arbitration process and in the arbitrators will remain so great that very few parties will ever be tempted to sue arbitrators (in particular, but not only, when the latter appear protected by clauses excluding liability as in section 29 of the English Arbitration Act 1996). Here, I must confess my scepticism about such an optimistic view of the future. From what I have seen myself and from what I have heard from many colleagues, counsel, inhouse lawyers and the like, I very much doubt that parties will accept easily, in any dispute of some substance, the errors and negligence, bordering on occasions on ‘irresponsible behaviour’, which seem to be committed by some arbitrators, not all of whom have the excuse of being comparative newcomers on the arbitration scene. What Sir Michael Kerr rightly called ‘the fundamental question’ should, I submit, be answered as follows — in clear contrast to what is now the law in England, in many jurisdictions of the US and under the recent arbitration rules of several respected institutions: ‘Yes’, arbitrators provide a service just like any other professional person and are therefore liable for any failure in its reasonable performance’. However, having regard to the public

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interest in the prevention and settlement of disputes, their liability should be limited to intentional failure, gross negligence or manifestly unreasonable performance. With regard to arbitral institutions and their employees, it is extremely difficult to perceive any reason why they should claim or enjoy immunity at all, unless, perhaps, in the rare cases when their services involve no remuneration at all. I do not forget that ‘the life of the Law has not been logic; it has been experience’ — according to a famous saying by Holmes.26 But is it not rather illogical for an arbitral institution to rely on its purely administrative character when taking ex parte and unmotivated decisions which may affect the interest of the parties to the dispute and, on the other hand, claim that quasi-judicial activities and analogy with the arbitrators’ work justify their total immunity? Under the rather vague, and somewhat misleading title Irresponsibility in International Commercial Arbitration, I have submitted a number of personal reflections or observations based on decades of practical experience in arbitrations, both commercial and inter-State, and in various capacities. In so doing, I have, consciously, ventured to present a number of rather controversial generalisations which, I hope, some have not found too irresponsible. As my friends know only too well, one of my favourite quotations is borrowed from William Blake, the great English poet and painter, who once said: ‘to generalize is to be an idiot’ — no doubt a wise statement, which happens to be in itself a remarkable generalisation. In any case, it is a rather dangerous exercise to generalise before a public of quality, and particularly so in the field of international commercial arbitration, where our knowledge is very limited because of confidentiality, where no two cases are exactly identical and, therefore, where generalisations are probably more hazardous than in any other field. Be that as it may, I do believe that, in the future, international commercial arbitration (in its various forms), whether ad hoc or institutional, traditional or electronic, will continue to expand. It will retain its importance and its complexity, and it will keep also its three essential social functions: prevention, conciliation and settlement. Nevertheless, the continuing success of arbitration and ADR should be no cause for complacency. It is a truism to repeat that ‘confidence is the basis of all business transactions and economic relations, and no viable contract or international agreement is possible without it’ (as was stressed recently by Renato Ruggiero, the Director General of the WTO, in a conference held in Geneva). It is also a truism to say that arbitration, which is based on trust, is fundamental to international transactions and that, without it, the economy could not function.27 To preserve that confidence implies preserving the quality of arbitration in the future. I do not see how that objective could be achieved if the operators, the practitioners involved in international commercial arbitration — first and foremost the arbitrators, but also the institutions and counsel involved in the prevention or settlement of disputes — are not considered and do not consider themselves responsible.

26 The Common Law (1881), Lecture 1. 27 As often emphasised by Professor F-E Klein.

The Spirit of Arbitration* Fali S. Nariman** The theme of this article is taken from the Second Epistle of St Paul to the Corinthians, in which the Apostle proclaims that God ‘hath made us able Ministers of the New Testament; not of the letter but of the spirit: for the letter killeth but the spirit giveth life’. My exhortation to all who administer international commercial arbitration is to work toward an arbitral regime which rekindles the spirit of arbitration- ‘the spirit that giveth life’. I believe that the ethos of all arbitration is the best encapsulated in that expressive French phrase ‘l’esprit de l’arbitrage’. To translate into idiomatic English French sounds easy, but it is not – especially for a person (like me) who does not converse or think in that language. So I turned to my friend philosopher M. Michel Gaudet, Honorary President of the ICC Court of International Arbitration. He is the living embodiment of all that is good and wise in arbitration - and he is always ready to help. I wrote and asked him how he understood the expression: l’esprit de l’arbitrage’. He wrote back in response: … The dominant feature of arbitration is mutual understanding so as to be able to solve the conflict that has occurred. The aim of arbitration is not to draw from the applicable law a decision against the parties involved but to clarify, together with the parties, what should be done in a given situation to achieve justice with co-operation. This is what I expect from the arbitration, whether commercial or diplomatic, national or international. Achieving this process requires all along that all participants are inspired by l’esprit de l’arbitrage’. Simply and effectively put; but the note the watchword - JUSTICE, which prompts me to draw attention to the first part of my quote from the Epistle of St. Paul; ‘letter killeth...’. It does - and this is one of our more serious problems. There is far too much of the letter in modern internationa commercial arbitration (ICA) as practised: there is just too much legal baggage taken on board the good ship ICA – as a result, it moves slowly and ponderously, and is unable to weather the strong seas of change. ICA has become almost indistinguishable from litigation which it was at one-time intended to supplant. And the baggage continues to increase- with law, more law, legalese, and more legalese: and much disputation about

* This lecture, the tenth annual Goff Lecture in honour of Lord Goff of Chievely, was delivered in Hong Kong on 17 February 2000 under the auspices of the School of Law, City University of Hong Kong, and its Master of Arts degree programme in Arbitration and Dispute Resolution. Editorial note: It was originally published at (2000) 16(3) Arbitration International 261-278. ** President, International Council for Commercial Arbitration (ICCA); President, Bar Association of India; ViceChairman, ICC Court of International Arbitration, Paris; Member, London Court of International Arbitration (LCIA), London.

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‘applicable law’, ‘multi-party arbitrations’ ‘agreements in writing’, ‘discovery in foreign arbitration’, ‘lex mercatoria’, etc., etc., etc. Meanwhile, the mills of arbitration, so efficiently run by arbitration journals, magazines and newsletters, keep grinding.1 And the books on international commercial arbitration, have proliferated over the years, growing both in weight and size. The ICCA Yearbook started in 1976, with a slim volume of 250 pages; in the last four years of the Yearbook has contained (on average) over 1100 pages. The latest 1999 edition of Fouchard Gaillard and Goldman’s International Commercial Arbitration is informative but bulky. Twelve hundred and eight printed pages bound in hard covers, richly annotated with the ratio of hundreds of court decisions around the world, splattered with extracts from and references to scores of international arbitral awards; all of which is rewarding for lawyer-arbitrators. But I doubt whether it is the function of private arbitral awards to develop international jurisprudence. All that should matter at the end of the day is that the arbitral tribunal has reached a result that commends itself as just in the particular case. The private nature of arbitration is inconsistent with any law-making function. Arbitration has lost the lightness of touch that characterised its early manifestations: motivated or reasoned decisions – majority, concurring and diffusing – are now increasingly long and turgid, and too full of legal learning. If private awards were intended for the parties alone (as they should be they would be relatively short, the conclusions and main reasons being presented in a simple format. But some of the ‘players’ in an international arbitration are increasingly tempted to address a much wider audience, their ultimate work-product often finding its way into print. And the hope of creating something that will form part of finding its way into print. And the hope of creating something that will form part of a body of ‘legal opinion’ inspires an even more elaborate composition.2 Often an award will quote or cite from other awards rendered in what is stated to be a similar fact-situation – ignoring the caution expressed by England’s Lord Chancellor (way back in 1901), that every decision must be read as applicable to the facts proved and not as an exposition of the whole law on the subject; that every case in which expressions of law are to be found is qualified and conditioned by its own peculiar facts.3 In his BBC Reith Lectures in 1986, Lord McCluskey (distinguished senator of Her Majesty’s College of Law in Scotland) said as much, but in more picturesque prose: The law as laid down in a thousand eloquently reasoned opinions is no more capable of providing all the answers than a piano is capable of providing music. The piano needs the pianist and any two pianists even with the same score may produce very different music.4

1 For which, thank God, or how else could we show off our learning in the footnotes! 2 See the article by Marcel Fontaine, ‘Drafting the Award - a Perspective from a Civil Law Jurist’ in (1994) 5 ICC International Court of Arbitration Bulletin 1 at pp. 30-37 3 See Quinn v Leatham [19011 AC 495, 506, per Lord Halsbury LC. 4 Lord McCluskey, Justice and Democracy Law - 77th Reith Lectures 1986 (London, Sweet & Maxwell 1987) at p. 7.

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That great English essayist of the 18th century, Oliver Goldsmith, deplored the lawyer’s penchant for citation of authorities. In his imaginary ‘Letters from a Chinese Philosopher Residing in London to his Friends in the East5 he questioned the necessity of prolonging a suit by citing opinions and reports of others. If arguing from authorities to be exploded from every other branch of learning, why should it be particularly adhered to in this; I plainly foresee how such a method of investigation must embarrass every suit, even perplex the student: ceremonies will be multiplied, formalities must increase and more time will thus be spent in learning the arts of litigation than in the discovery of right. This is precisely what is happening in modern international commercial arbitration ‘ceremonies’ are multiplying, formalities are on the increase and much time is spent in adapting the arts of litigation, thus often missing the true quest: the discovery of right. Cedric Barclay, a renowned maritime arbitrator, made trenchant comments on some of the disquieting features of modern international commercial arbitration. His remarks are as relevant today as when he expressed them (in 1981): Arbitrators do not have to imitate the courts. Commercial Justice can be dispensed without the turn of phrase and the logic which is expected from the Court of Appeal. The AAA and the Commonwealth associations have survived without giving of reasons. The short and concise decisions which we have given hitherto were much superior to the essays in jurisprudence which the ICC and others deem appropriate. Our function was to decide, not to teach. It is a fallacy that the publication of awards will teach others something. More often, it leads to confusion and equivocation. Look at this bundle of 1500 reasoned awards. How many have we learnt from? It is not motivation which one abhors but the endless expositions and padding which we find infiltrating our system. Brevity is the essence of wit; justice needs no adornment. 6 But all this distilled wisdom over the years has fallen on deaf ears. What we find at the start of a new millennium is a tidal wave of ‘arbitral law’ submerging international commercial arbitration. It has become increasingly precedent-bound and arbitral awards frequently contain citations from other arbitral awards, building up the lex mercatoria. And that is not the only lex that is rearing its head in transnational arbitration. Not long ago the Government of Kuwait argued before an international arbitral tribunal that awards in petroleum cars had generated customary rules valid for the entire oil industry.7 The fact that the argument was rejected by the tribunal did not deter the industrious and scholarly; a well-researched article has just been published as to how international arbitral awards in petroleum cases over the last 25 years have developed into (what the

5 Compiled in Oliver Goldsmith, The Citizens of the World (1762). 6 Cited in (1989) 5(2) Arbitration International at p. 105. 7 See ICCA Yearbook 1984, Vol. 9, p. 71 at p. 87.

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author enthusiastically calls) ‘the new lex petrolea’.8 The spirit the ethos has gone out of international commercial arbitration. It has been transformed into what Sir Michael Kerr has characterised as ‘international disputology”.9 Most international arbitrations were at one time believed to be private, and therefore confidential: they still are.10 But in some jurisdictions, the very fact that they are so closely assimilated to proceedings in court has been held to be sufficient reason to deprive them of their cloak secrecy. ‘Confidentiality may not be presumed…, as an implied term of arbitration agreement; if partied want it they should so stipulate, says Dr. Gerold Herrmann, father of the UNCITRAL Model Law.11 Fifteen years ago, Judge Howard Holtzmann’s advice to the community practising International Commercial Arbitration was to avert the fate of the dinosaur.12 At the turn of a new century, ‘the fate of the dinosaur’ is no longer a distant threat but a stark reality. ICA as a form of dispute resolution has become so overburdened by its own weight and size, that it is being supplanted by other speedier, more fruitful, more rewarding methods. In the Hamlyn Lectures on Commercial Law in the Next Millennium (1997), Professor Roy Goode drew attention to the fact that initially it was the delays and expense associated with litigation that had led to the growth of commercial arbitration, which was expected to be ‘fast, flexible, informal, private, relatively inexpensive and conducive to finality’. Whilst the expectation had come true in commodity arbitrations, commercial arbitrations took on a life of their own, acquiring the pejorative sobriquet: albitization. As we all know, arbitral proceedings, particularly with a three-member tribunal, can be very protracted and a good deal more expensive than adversarial proceedings in court; and there is already a noticeable drift towards other dispute resolution methods, such as mediation and the mini-trial. As Professor Goode says in his preface to the printed Hamlyn Lecture (dated 29 March 1999): One thing is certain: that in the future, as in the past, commercial law will be driven by and fashioned for the legitimate needs and practices of the mercantile community; for commercial law above all, is a user’s law and it is from the

8 See ICCA Yearbook 1998, Vol. XXIII at pp. 1131-1210. 9 ‘Concord and Conflict in International Arbitration’ (1997) 13 Arbitration International 2 p. 121 at p. 123. 10 But in Esso Australia Resources Ltd. v Plowman (1995) 183 CLR 10 a majority of the High Court of Australia rejected the English judicial view that a general duty of confidence exists in respect of arbitral proceedings. But English courts have consistency held that, arbitration being ‘essentially private’, there is an implied obligation of confidentiality in arbitration agreements as a matter of law. See Ali Shipping Corporation. Shipyard Trogir (decision of October/December 1997) reported in [1999] 1 WLR 314 (CA). 11 See ‘Does the World Need Additional Uniform Legislation on Arbitration?’ in (1999) 15(3) Arbitration International 211, p. 225. 12 Lecture of Howard M. Holtzmann: ‘What an Arbitrator can do to Overcome Delays in Arbitration’, reproduced in Justice for a Generation (1985), p. 336.

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creativity of the merchant and the financier devising new instruments and new business methods that it will continue to evolve.13 The bad news for ICA is that the new instruments, in the form of ADR, have already evolved and are being increasingly used. Despite the Model Law and its adoption in more and more countries around the world (including Hong Kong, which adopted it in 1990), there is considerable dissatisfaction with international arbitration, except of course on the occasions when arbitrators meet (in seminars and conferences, which are not infrequent!). Users of international commercial arbitration are neither organized nor vocal, as are NGOs in the field of human rights; and therefore, they do not intrude upon that growing sense of complacency that appears to have overtaken international arbitrators about their own work and performance: somewhat reminiscent of what was said, at a Lord Mayor’s Banquet way back in 1936, by England’s Chief Justice. Somewhat pompously, Lord Hewart informed his audience that: His Majesty’s Judges are supremely satisfied with the almost universal admiration in which they are held. Substitute ‘international arbitrators’ for ‘His Majesty’s Judges’ and you will get the current view of arbitrators on arbitrators. David Pannick, who has written a controversial but entertaining book, Judges,14 says, after quoting Hewart that it is difficult to believe that the ‘universal admiration’ at all reflected the true feelings of the customers of international arbitral tribunals around the world, the results might not be too flattering. But statistics of cases handled by arbitral institutions have shown an increase over the years. How then could one say that users are not satisfied with the current state of international commercial arbitration? Well - the answer is that it is always difficult to draw accurate conclusions from a set of figures: true it is that arbitration cases filed with leading arbitration institutions around the world have been on the increase. But there is no study as to whether this corresponds with the vastly increasing volume of international commercial transactions that are taking place, and as to what percentage they bear to contracts breached or unfulfilled. It is only if the increase in the volume of arbitration cases keeps pace proportionately with the increase in the volume of unfulfilled transactions in world trade that one could say (with any degree of confidence) that transnational users appear, on the whole, to be satisfied with dispute resolution by arbitration.

13 Commercial Law in the Next Millennium (Hamlyn Lectures 1997) (London, Sweet & Maxwell). In an address to a meeting of the London Maritime Arbitrators Association (in November 1998), Sir Christopher Staughton (commercial lawyer, judge of the English Commercial Court and then of the Court of Appeal, and now an international commercial arbitrator) said that in his time (which was in the 1980s) the Commercial Court was quicker and cheaper than commercial arbitration. He also recalled that before this, at the time when Lord Goddard was Chief Justice, businessmen were not frequenting the Commercial Court because there was previously appointed to the Court a judge with no experience in commercial work! ‘We arbitrators should take care’ (he said) ‘that the same fate does not befall us. If customers do not like our product they will go elsewhere’- reproduced in (1999) 15(3) Arbitration International, pp. 315-318. 14 David Pannick, Judges (Oxford University Press, 1987).

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But whatever statistics may say, proceedings at seminars disclose different preferences. At an ICC seminar on the Settlement of International Disputes held in Brussels in October 1995,15 general counsel of two leading multinational companies gave what they perceived as ‘business perspectives’ on settling international commercial disputes. One of them said that mediation was a useful tool for a corporation in overcoming a contractual crisis, especially in an early stage of uncertainty and where there was a mere divergence of views: in such situations, where mutual rights and obligations of parties were not clearly defined and where there was a need for concessions, litigation and arbitration were considered less favorable. General counsel of another transnational company said that the main objective of dispute resolution management was ‘to reach an acceptable settlement as quickly and as cheaply as possible and with the least disruption to their business’; that the impact of compulsion considerably influenced the choice of a particular method; and that more informal methods of dispute resolution were to be preferred, especially since such methods ‘allow a movement away from the substantive law’. Ten years ago, experienced arbitrators were inclined to be dismissive of ADR, taking the rather lofty view that whilst it would no doubt work well enough in family disputes, it would be quite unsuited to disputes of a commercial character. Now that view is increasingly seen to be misplaced - ADR is growing; it is a great deal quicker and cheaper; and most attempts at ADR are successful and end in some form of agreement. Besides, ADR is not constrained by strict legal rights, and can facilitate non-legal forms of relief, such as the offer of a substitute contract to the aggrieved party or the resuscitation of an agreement that has been legally terminated. In the second edition of ADR Principles and Practice published in 1999, Mr Henry Brown and Mr Arthur Marriott QC, both practising lawyers with vast experience in ICA, have given us their ‘practisive for the future’, which is that ADR methods in commercial arbitrations are increasingly considered not only as an alternative to litigation but as an alternative to arbitration itself!16 However, they do draw a silver lining: ‘such methods will be used’ (they write) ‘to complement and expedite arbitration [rather] than wholly replace it’. But ADR is not alien to arbitration - except for the novelty of the initialism: ADR should not only ‘complement’ or ‘expedite’ arbitration but remain, as it had once been, an integral part of it. The traditional purpose of arbitration was that of accommodation, of compromise, of a third person giving a helping hand to parties to reach a just solution of the differences between them. But all this has been jettisoned in ICA in the belief that mediation and conciliation is someone else’s job, not the arbitrator’s.17 As a consequence, arbitration has lost its best ally: until the resolution of a dispute by settlement is considered once again to be a constituent function of arbitration, ADR will take over and displace it as a pragmatic and workable alternative. Whilst there is an ongoing debate as to whether the same person or persons can consecutively act as mediator and

15 The ICC (May 1996) 7 ICC International Court of Arbitration Bulletin, pp. 76-81. 16 H. Brown and A. Marriott, ADR Principles and Practice (Sweet & Maxwell, 1999), p. 83, para. 4-l.’32 17 As Lord Mustill said, at the Chartered Institute of Arbitrators’ Millennium Conference in London (19 November 1999), ‘we have now lost the culture of compromise’.

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arbitrator in respect of the same dispute (which was one of the topics seriously discussed at the ICC Court’s 75th Anniversary Conference in Geneva in September 1998) - the Hong Kong Arbitration Ordinance has already resolved the question: it has brought back mediation and conciliation into the wide net of ‘arbitration’ by providing that where an arbitration agreement prescribes the appointment of a conciliator and further stipulates that the same person shall act as an arbitrator, then in the event of the conciliation proceedings failing, no objection can be taken to the appointment of such person solely on the ground that he has previously acted as conciliator. And the new Indian law (the Arbitration and Conciliation Act 1996) expressly permits the arbitral tribunal to use mediation at any time during arbitral proceedings to encourage settlement (section 30).18 It is submitted that use of different terminology (‘arbitrator’, ‘conciliator’, ‘mediator’) as suggestive of different tasks to be performed is confusing and only serves to mislead. An arbitrator, is an arbitrator, is an arbitrator, whose function it is not merely to adjudicate the dispute, but also to help resolve it amicably with the co-operation of the parties. If, in the course of encouraging a settlement, he has to ‘caucus’ with the parties, and the settlement talks fail and one or other of the parties does not agree to his deciding the dispute, then let him excuse himself from the proceeding: the arbitration, which had commenced initially with talks of settlement, must then go on with someone else as arbitrator. ‘Arbitration’ must never be considered as excluding from its purview the settlement of a dispute before the arbitrator, because this is of the essence of the spirit of arbitration.19 We lawyers are not altogether blameless for the ‘judicialisation’ of arbitration. In that highly successful musical Fiddler on the Roof, which opened on Broadway in 1964 (and was still playing there a decade later), the folk hero Tevye - dressed in rags and forever arguing with God - is pressed to give a blessing for the Czar. ‘A blessing for the Czar?’ he mournfully says. And then his eyes light up: ‘May the Lord bless and keep the Czar - far away from us!’ At present, the firm belief amongst users and practitioners of ADR is that the farther away the lawyerarbitrator is kept from ADR, the brighter the chances of a settlement; the less ‘lawyering’ there is in commercial dispute resolution, the better. At the ICC Seminar (mentioned before) a senior legal adviser of Shell expressed his firm conviction that ADR was doomed to fail if it became a ‘law firm activity’.20

18 Section 31 of the Act reads: ‘It is not incompatible with an arbitration agreement for an arbitral tribunal to encourage settlement of the dispute and, with the agreement of the parties, the arbitral tribunal may use mediation, conciliation or other procedures at any time during the arbitral proceedings to encourage settlement ... ‘ 19 On the different approaches of the common law and civil law on this topic there is a recendy published article by Christopher Koch (former Counsel of the International Court of Arbitration of the ICC) and Erik Schäfer: ‘Can it be Sinful for an Arbitrator Actively to Promote Settlement?’ in (1999) Arbitration and Dispute Resolution Law Journal (September) at p. 184. The conclusion of the authors is instructive: particularly in the setting of international commercial arbitration, the dual role of the arbitrator as mediator and adjudicator appears to be particularly favourable. International arbitral tribunals are not only adjudicating bodies; they are, because of their international composition, also bridges to understanding, and as such they can play an important and salutary role in resolving international commercial disputes more flexibly and to the greater benefit of the parties than if they are only considered the international equivalents of national courts. 20 (1996) 7 ICC International Court of Arbitration Bulletin May, pp. 76-81

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The first lesson in humility, then, is the awareness that ICA is by no means the exclusive preserve of lawyers. In fact, the world of commercial arbitration is not premised on its participants possessing any legal qualifications: it is only in four out of the 125 New York Convention countries that there is an express legal requirement that an arbitrator must be a qualified lawyer.21 The New York Convention 1958, the Washington Convention of 1965 and the UNCITRAL Model Law 1985 are all silent on the arbitrator’s qualifications: the only requirement contained in the UNCITRAL Model Law is that the person appointed should be independent and impartial. ICA could certainly be helped along by lawyers - it has been so far (and very efficiently too). But it could do with inputs from others as well. Dr Robert Briner recalls a construction case between an African country and a Continental European contractor, in which the chairman was a former judge of the English Court of Appeal, and his co-arbitrator was an English engineer. English counsel estimated that the examination and cross-examination of witnesses would last at least four weeks: but the mixed tribunal was able to reduce the hearing schedule to 12 days and was also able successfully to nudge parties to settle the entire case even before the hearing actually commenced.22 The spirit in international commercial arbitration could be revived if the ‘non-lawyer arbitrator’ is not a mere occasional visitor in an arbitral panel (especially in disputes requiring scientific or technical expertise); and if the good arbitrator23 keeps asking himself (or herself) in every single arbitral proceeding what justice demands in the fact situation presented, and then enquires whether there is anything in the applicable law which would militate against the tribunal arriving at a just decision. It is often believed that ‘equity’ is a stranger in ICA; that the whole business is anchored in strict substantive law, words which are associated in the public mind only with ‘legal intricacies and technicalities’. Hence the preference for more informal methods which (it is believed) would permit a movement away from substantive law. This trend, this impression, is unfortunately gaining ground. Recent decisions under the New York. Convention illustrate the incorrectness of this impression. In an ICC arbitration between Chromalloy Aero Services Inc. and the Government of Egypt, an award was made in August 1994 against the Egyptian Government for wrongfully cancelling and terminating the contract for supply (by Chromalloy) of spare parts and for maintenance and repairs of helicopters belonging to the Egyptian Air Force. In December 1995, the Egyptian Court of Appeal in Cairo annulled the award on the ground that the arbitral panel had wrongly applied Egyptian civil law and not the applicable Egyptian administrative law, thus deviating from the parties’ contractual

21 China, Peru, Colombia, and Ukraine are the only four New York Convention countries that have prescribed legal qualifications for arbitrators. 22 Dr Robert Briner, Chairman, ICC International Court of Arbitration - ‘Domestic Arbitration: Practice in Continental Europe and its Lessons for Arbitration in England’ (1997) 13(2) Arbitration International at p. 158 (based on the Bernstein Lecture 1996). 23 A good arbitrator? In the Millennium Issue of the London Times (1 January 2000) William Rees-Mogg, a regular contributor, gave his memories of the century that went before. He described a visit to Hong Kong and dinner with the Pattens at Government House. He took a taxi back to his hotel. The taxi driver, who was Chinese, had a comment about the last Governor: ‘He was a good Governor’ (he said) ‘even when he was wrong’. Which is as nice an epitaph for an arbitrator as one can hope for!

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choice of law, which constituted a separate ground for annulment of the arbitral award according to Egyptian law. But when enforcement was sought of the same ICC award in the United States, a US District Court (District of Columbia - July 1996) found the award to be valid under US law and granted enforcement - principally on the ground that Article VII of the New York Convention 1958 permitted a party to avail itself of an arbitral award in the manner and to the extent allowed by the law of the country where such award was sought to be relied upon. About the arbitral panel disregarding applicable law, the US District Court said: The arbitrators in the present case made a procedural decision that allegedly led to a misapplication of substantive law. After considering Egypt’s arguments that Egyptian administrative law should govern the contract, the majority of the arbitral panel held that it did not matter which substantive law they applied - civil or administrative. At worst, this decision constitutes a mistake of law, and thus is not subject to review by this Court. 24 Chromalloy also sought enforcement of the award in France, where it was granted in May 1995 by the Paris Court of First Instance, which was upheld by the Court of Appeal of Paris - relying on the more-favourable-right provision in Article VII of the New York Convention. Since the Government of Egypt had ample opportunity before the arbitral panel of submitting memorials regarding the applicable law, the fact that the arbitral award erroneously failed to apply the applicable law (Egyptian administrative law), which permitted unilateral termination of an administration contract without penal or civil consequences, was in effect a review on the merits of the award, which was impermissible. The decision of the US District Court25 and the judgment of the French Court of Appeal26 in Chromalloy, though controversial on the subject of enforcing awards annulled in the country of origin, do clearly show that where the arbitral tribunal under the New York Convention fails to apply the applicable law or applies a different law, an international award may not be refused enforcement in any of the Convention States only on that ground.27 The desire to move away from the substantive law is much greater in the world of the common law than in the civil law countries. The reason is that the gradual coalescence of equity and strict law has been the normal course of legal evolution in the civil law world, while the evolution of Anglo-American law has taken a different course. In all great legal

24 (1997) XXII ICCA Yearbook at p. 1006. 25 Chromalloy Aeroservices v.Arab Republic of Egypt. F. Supp. 907 DDC - 1996. Extracts in (1997) XXII ICCA Yearbook pp. 1001-1012. Editorial note: For discussion of the enforcement proceedings in the US and France, see Jan Paulsson’s Eighth Goff Lecture of 1997, at pp 126–128 above. 26 (1997) Rev de l’Arb 395 - extracts in (1997) XXII ICCA Yearbook, pp. 691-695. 27 As Prof. William Park of Boston University writes (in an article recently published in the American Journal of International Law: ‘For better or for worse the New York Convention was not designed to address the over enforcement that occurs when annulled awards are recognized. Rather it was intended to deal with under enforcement of awards that resulted from the cumbersome double exequatur requirement of an earlier arbitration treaty which called for judicial recognition at both the arbitral situs and the enforcement forum’: (1999) 93 AJIL 4, at p. 805.

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systems of the world - except in common law systems - elevated moral principles (which we call ‘equity’) are applied throughout the law. In the legal systems governed by common law they are applied only in a narrow segment of cases. In England the integration of equity and common law proceeded gradually until the beginning of the 15th century, when it slowed down and came to a halt: thereafter law and equity flowed in separate channels and for many hundreds of years much of the ethical content of English law consisted of principles of equity developed and applied in a separate court. Equity was used to correct the inadequacies and precedent-bound decisions of the common law. But the situations in which and the principles upon which relief was granted became in course of time so well defined that equity developed into as technical a branch of the law as what it was intended to correct! Reliance on equity to bring about a balance between legal rights and the interests of those persons who would be seriously harmed by their strict enforcement became less frequent, with the result that equitable principles as to what was fair and just were far less widely used in Anglo-American law than in any of the other great legal systems in the world.28 The simultaneous existence of two systems of substantive law in modern times is a phenomenon peculiar to common law countries. In two competing systems in the same body of law, the concept of ‘equity’ came to be regarded as an act of grace; it could not be demanded as of right. In the year 1948, the president of England’s Court of Appeal (the Master of the Rolls), speaking judicially, said: If the claim in equity exists, it must be shown to have an ancestry founded in history and in the practice and precedents of the courts administering equity jurisdiction. It is not sufficient that because we may think that the ‘justice’ of the present case requires it, we should invent such a jurisdiction for the first time.29 Lord Greene spoke at the time for all the members of his court, but apparently not for Lord Justice Denning, then only a junior member of the Court of Appeal. In Solle v Butcher,30 decided in 1949, Denning LJ expressed a point of view totally at variance with that of the Master of the Rolls. He said: If the rules of equity have become so rigid that they cannot remedy ... an injustice, it is time we had new rules invented ... But Denning’s was a voice in the wilderness - his voice was so often a voice in the judicial wilderness of English law. In 1982, Lord Denning (by then Master of the Rolls presiding in the Court of Appeal) had to consider a case concerning the sale of 30 pounds of ‘cabbage

28 For an excellent comparative study of equity and law in different legal systems see Ralph A. Newman, Equity and Law: a Comparative Study (New York, Oceana Publications Inc., 1961). 29 Re Diplock’s Estate [1948] 2 All ER 318, 326, per Lord Greene MR. 30 [1949] 2 All ER 1107, 1121.

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seed’. The seed was supplied by the seed company - it looked just like cabbage seed, no one could say it was not; but the farmers who bought and planted it found six months later that out of the ground there appeared a great deal of loose green leaves, but no cabbage; what looked like cabbage seeds had no heart. The crop was useless for human consumption; sheep or cattle might eat it if they were hungry enough, but it was commercially useless. The price of the seed was £192, but the loss to the farmers was over £61,000. The farmers claimed damages from the seed company. The trial judge awarded them that sum with interest, which came to nearly £100,000. The seed merchants approached the Court of Appeal. They said that they had supplied the seed on the basis of a printed clause in their invoice by which liability was expressly limited to the cost of the seed, which was £192. Lord Denning MR said that since the buyers had no opportunity at all of knowing or discovering that the seed supplied was not cabbage seed, whereas the seller could and should have known that it was the wrong seed, ‘it was not fair and reasonable31 to permit the seed merchant to rely on the exemption clause so as to limit their liability’. While the Lords Justices sitting with Lord Denning MR agreed with the ultimate result, they did not agree with the equitable view. They said that the seed merchants could not rely on the exemption clause only because the clause did not protect them against the consequence of their own negligence; they were negligent in representing that the seed supplied was ‘cabbage seed’. Lord Denning MR refused to go along with this view, calling it a ‘gymnastic contortion’! Fortunately, all the judges agreed that the appeal should be dismissed, and the farmers retained the damages awarded to them by the trial judge.32 In the same year (1982), however, a differently constituted Court of Appeal, this time presided over by Sir John Donaldson (who succeeded Lord Denning as Master of the Rolls), had to consider whether the equitable remedy of relief against forfeiture was available in commercial cases. This was a case of a time charter of a vessel (the Scaptrade): the time charterer, whose chartered vessel was withdrawn by the owner for non-payment of a single hire instalment on the due date, invoked the equitable remedy of ‘relief against forfeiture’, an equity that English courts had applied in landlord and tenant cases. But a unanimous Court of Appeal said ‘that equitable relief had no application to commercial transactions when parties dealt with each other at arm’s length and had been of equal bargaining strength’. The need for certainty was of paramount importance (the judges said) and the existence

31 The word ‘reasonable’ has an ancient ancestry in English law: the word first appears in the earliest great treatise on English law (AD 1189) ascribed to Ranulf de Glanville (Chief Justiciar of England): when should a mortgaged debt be paid where there is no express agreement? To which Glanville answered, rationabile terminum (reasonable time). 32 George Mitchell (Chesterhall) Ltd. v Finney Lock Seeds Ltd. [19831 1 All ER 108 (CA).

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of a jurisdiction to grant relief against forfeiture, however sparingly exercised, would be antipathetic to that primary consideration. 33 English courts have set their face against exercising what is called ‘a benevolent paternalism’ to, mitigate the plainly expressed rigours of an agreement. The need for certainty is the watchword in English courts of law.34 It may be that courts in common law countries are inhibited from ‘bending’ the law to suit the equity or justice of the case, for the reason that the law (the commercial law) needs to be certain. But surely that is precisely the reason why arbitrators, who are not courts, could and should invoke justice and equity in an individual case, because this is what represents the ‘spirit of arbitration’. Take the case of the time charter of the vessel (the Scaptrade) mentioned earlier: payments of hire for the vessel under the charter were to be made by the charterers (a State trading corporation of the Government of Ecuador) to the owner (a Swedish trading company) monthly in advance on the eighth day of each

33 Scandinavian Trading Tanker Co. AB v Flota Petrolera Ecuatoriana (The Scaptrade) (1983] 1 All ER 301 at 306-307 (CA). However, when, faced with a stark choice between hard cases and bad law, Lord Uthwatt, (not an arbitrator but a great equity judge) envisaged the possibility of a court relieving against failure to make payment on a stipulated date in A/S Tank Express [1949] 2 All ER 939 at p. 949 (HL) (a charterparty case), and so did Lord Simon 30 years later in a forceful dissent in Mardorf Peach & Co Ltd v Attica Sea Carriers Corp of Liberia (The Laconia) [1977] 1 All ER 545 at 554 (HL), where failure to make punctual payment was due to pure accident and occasioned no real detriment to the owners, whereas withdrawal of the vessel might cause very heavy loss to the charterers, ‘so that reasonable commercial people might think it unconscionable for the owners to take advantage of the failure’ 34 But not in other Commonwealth jurisdictions. In British India, for instance, English judges applied the common law - not in its full rigour but as circumstances permitted; where the common law would work injustice they applied what they called the rules of ‘justice, equity and good conscience’ - a useful colonial invention! As a result, equitable jurisdiction in India has become flexible and not hidebound by tradition or precedent. Some years ago a bench of the Supreme Court, in finally deciding a suit to enforce a foreign judgment, gave the judgment debtor the benefit of equitable relief though the statute (section 13 of the Code of Civil Procedure 1908) did not so prescribe. In that case a decree for 500,000 rupees was obtained by Rai Bahadur Oberoi (owner of the Oberoi Hotels) against one Roshanlal Nuthiala in Pakistan’s courts and this decree was sustained in Pakistan’s highest court (the Federal Court) in 1953. The judgment debtor in Pakistan had made a security deposit of 300,000 rupees for stay of execution of the decree originally passed in the lower courts in Pakistan, and the plaintiff decree holder could not withdraw that amount until the final decree of the Federal Court in his favour. Thereafter (in Pakistan) both parties took the position that the security deposit of 300,000 rupees should be adjusted toward partial satisfaction of the decree. But the Pakistan government, treating the amount of deposit as evacuee property, refused to transfer the deposit to India despite the provisions of the Pakistan Evacuee Deposits Ordinance 1954 and a court order which required the amount of deposit held as evacuee property in Pakistan to be transferred to the decree holder in India. The amount of 300,000 rupees lay in the Government Treasury in Pakistan. When the suit on the foreign judgment for 500,000 rupees was filed by Oberoi in a court in India, the Supreme Court of India held that ‘justice, equity and good conscience’ required that the whole of the security deposit should be equitably adjusted towards the decretal debt, even though the decree holder (Oberoi) did not in fact receive the amount of 300,000 rupees deposited for his benefit in the Pakistan court. The equity arose largely because of the foreign government’s (Pakistan) refusal to carry out the directions of its own Municipal Court viz. to transfer the deposit amount to India under the Pakistan Evacuee Deposits Ordinance 1954.

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month. Clause 8 of the charter provided that if the charterers defaulted in paying any of the monthly hire instalments by the due date, the owner could withdraw the vessel from hire. In the case of the hiring of the vessel Scaptrade, the eighth day of the particular month when default in payment occurred was in fact a Sunday (it was 8 July 1979): the charterers had failed to pay the advance hire instalment for July on the due date. Suppose they had tendered payment of the hire on the next working day, Monday (in fact they did not, but suppose the fact situation was that they did), and the owners had refused to accept payment, insisting on the peremptory language of the charterparty, and so insisting, had withdrawn the vessel from hire. Could not an arbitral tribunal in an international arbitration, seized of the dispute, applying English law and without being unduly obsessed with the need for certainty in commercial law, have granted equitable relief against the unilateral withdrawal of the vessel if it found that there was no detriment to the owners whereas withdrawal would cause heavy loss to the charterers? I would submit that it could - and if it did, national courts would not have interfered (under the New York Convention or otherwise). Private awards, because they are addressed to the parties, need not contribute to the certainty of the law, simply because that is not their function. The essential function of equity is ‘rectification’ of law, where the law is defective owing to its universality. ‘Substantive law’ (or positive law) does not always do justice: for instance, in English law a promise may be binding as a matter of justice and equity although for some reason or other (for example, because it is in favour of a third party) it would not be enforceable in law. Substantive law does not (simply because it cannot) provide for every situation, and so requires special treatment to suit differing circumstances. The function of equity when so used is not to destroy law but to fulfil it. Even that great historian of English law Professor Maitland wrote that ‘when the law is fully obeyed something might yet be needed’ - something that recourse to equity would fulfill. The dichotomy between law and equity in Anglo-American law had penetrated into consensual arbitration as well, because at common law ‘arbitration’ was a process for determining disputes by the application of law, by one or more persons (the arbitral tribunal) instead of by a court of law. The definition went back to the time of Bacon’s Abridgment - Arbitrament and Award: the original, and still vibrant, source of the common law of arbitration.35 The change from court to arbitration was seen historically and conceptually only as a change of forum, not a change in the method of resolving the dispute. It is for this reason that for many lawyers in the common law countries, agreements for resolution of disputes outside courts, by persons appointed by the parties for the purpose, in disregard of the law, or by application of the principles of equity (or ex aequo et bono) are not considered ‘arbitration’ at all. Some judges reared in the common law tradition have not been very comfortable with this view. More than a century ago, in August 1882, in an anonymous letter to the London Times - which

35 Bacon’s Abridgement is cited in the reissue of Halsbury’s Laws of England, Vol. 4 (4th edn, 1992), para 601.

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became notorious only because it was reliably believed to have been authored by a distinguished English judge of the Court of Appeal (Lord Justice Bowen)36 - it was stated: The mercantile public is not fond of law if law can be avoided. They prefer the hazardous and mysterious chances of arbitration in which some arbitrator who knows as much of law as he does of theology by the application of a rough and ready moral consciousness or upon the affable principle of dividing the victory equally between both sides decides intricate questions of law and fact with equal ease. But this rather facile view was not widely shared by England’s judiciary. In England before the Arbitration Act 1979 (under the regime of the Special Case procedure) it was well-established by precedent that an agreement not to ask for a special case to be stated (for the opinion of the court on points of law) was unenforceable - could be breached with impunity. This was on the high principle that such an agreement involved an ouster of the statutory jurisdiction of the courts, contrary to public policy and therefore void. ‘There must be no Alsatias37 in England where the King’s writ does not run’, said Lord Justice Scrutton,38 encapsulating in one grand sentence the entire decision of a unanimous Court of Appeal. Czarnikow marked the triumph of court-supervised law in the practice of arbitration in England, and in the many Commonwealth countries where it was followed. The Arbitration Act 1979 altered all this in England & Wales. It abolished the Case Stated procedure but conferred power on the High Court to review arbitral awards on substantial questions of law (sections 1 and 2). However ‘exclusion’ agreements in writing (i.e., excluding judicial review of arbitral awards on certain subjects) were statutorily permitted (sections 3 and 4), thereby negating the assumption previously made by English

36 Famous for what has come to be known as the ‘Bowen Accord’! In Sir Robert Megarry’s delightful Miscellany at Law, the author relates an incident at the time of the opening of the Royal Courts of Justice by Queen Victoria. A meeting was called by the Lord Chancellor (Lord Selbourne) to consider a draft of the proposed address to the Queen on the occasion. The draft contained the words: ‘Your Majesty’s Judges are deeply sensible of their own many shortcomings ...’: Selbourne thought there could be no objection to obsequious language - certainly not for one’s Queen! But Sir George Jessel, Master of the Rolls, thought differently. He strongly objected, saying ‘I am not conscious of many shortcomings; if I were I should not be fit to be on the Bench’. After some wrangling as to the terms of the address, amity was restored - only after Lord Justice Bowen suggested a compromise. He said: ‘Instead of saying that we are “deeply sensible of our own many shortcomings”, why not say that we are deeply sensible of the many shortcomings of each other! 37 ‘The colloquial name (which first appears in Shadwell’s plays in the time of Charles II) for recognized areas of sanctuary for criminals, survivals of the mediaeval sanctuaries (q.v.), which lasted till the end of the 17th century in London’: Oxford Companion to Law (Oxford, Clarendon Press, 1980), p. ,50. 38 In Czarnikow v Roth [1922] 2 KB 478, 488.

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courts that agreements ousting the court’s jurisdiction violated ‘public policy’. Since 1979 there could conceivably be Alsatias beyond the reach of Her Majesty’s courts! 39 In the second edition of that classic work Commercial Arbitration (published in 1989), the authors (Sir Michael Mustill (now Lord Mustill) and Mr. Stewart Boyd) surprised many English lawyers, judges and arbitrators with the format of an imaginary arbitral award containing the following passage: I am well aware that if I apply the firmly established rules of English law to the facts which I have found, I will be compelled to decide in favour of the respondent. I have always thought that the law on this topic is unfair nonsense. This is very clearly demonstrated by the present case. In my view, the only just course is to divide the loss equally between the two parties, and I shall give effect to my opinion by awarding the claimant 50 per cent of his claim. More surprising still was the authors’ authoritative opinion that such an award would be ‘impregnable’ under the new English law!40 If an express exclusion agreement not to question an award, even though it was in manifest disregard of the law, was recognised by the UK Parliament, what was there to prevent an arbitration agreement providing for the arbitrator to discountenance the law when making his award? Nothing - nothing except that the river of the common law can never rise above its source! This can be the only reason why the same authors (Mustill and Boyd), at the end of the passage already cited, appeared again to put in doubt the ‘impregnable’ character of the imaginary award, with the following loaded query: Is the Court really obliged to lend its coercive powers, so as to compel a result which is not one which the parties contracted to obtain, through the medium of a document which openly defies the law?41 The truth is that lawyers and academicians in the arbitral world of common law have been, and still are, in two opposing camps: their attitudes reminiscent of the pleas of Bassanio and Portia when arguing the case of their respective clients before the Duke (in The Merchant of Venice). The ‘Bassanions’ would recommend the ‘equity’ approach (ex aequo et bono) in international (and national) arbitration, but particularly international arbitration. When drafting arbitration agreements they would empower the arbitral tribunal to do justice, according to law if possible, contrary to law if necessary - they would say: And, I beseech you, Wrest once the law to your authority; To do a great right, do a little wrong.

39 The position in the Commonwealth countries was as stated in the decision of the Privy Council in Ramkishan Dass v E.D. Sassoon (1929): in an appeal from the High Court of Calcutta, the Judicial Committee held that in a commercial arbitration it was an implied term of the submission that the arbitrator must decide the dispute according to the existing law of contract and that every defense ‘including any defense under a statute of limitation’ which would have been open in a court of law would apply to the arbitrator’s decision unless the parties had specifically agreed (in the submission to arbitration) to exclude that defence. 40 M. Mustill and S. Boyd, Commercial Arbitration (2nd ed., Butterworths, 1989) pp. 638-639. 41 See supra n. 39.

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The camp of the Bassanios has strong and persuasive advocates. In a Ronald Bernstein Lecture of 1989, Mr. Steward Boyd QC said that most members of the public, if asked whether an arbitrator was entitled to disregard strict rules of law if he was satisfied that they would lead to ‘a wholly unjust result’, would start from the assumption that this was the whole point of going to arbitration.42 A great English commercial judge, Lord Devlin, voiced similar sentiments some years before; he said that devotion to law was less admired by the public than43 a willingness to strain it! Speaking of the concept of justice in accordance with settled legal rules and precedents, Lord Devlin said: ... it is a concept which the public dislikes and with which the lawyers themselves are not always happy. It is a common enough feeling to desire the end and to dislike the means. The public desires order and dislikes law, though without law there would be no order. The judicial qualities which the public singles out for praise are common sense and humanity ... It is not surprising, therefore, that from the earliest times English law has accommodated various devices designed to enmesh the legal system with the justice of the case. Originally, arbitration (including commercial arbitration) was introduced to achieve just this very result - as a device to enmesh the legal system with the justice of the case! It was only later that it acquired legalistic overtones. The ‘Portias’ in England then said that ‘Justice’ was an elusive concept best left for courts of justice to administer, not for arbitrators. Besides, in practice, there were bound to be many more disputes about a ‘just’ result than about conclusions arrived at ‘according to the law’. They opposed ‘equity clauses’ and invocation of equitable considerations in a given case, simply because this permitted disregard of law. They said (with Shakespeare): It must not be; ... ‘Twill be recorded for a precedent, And many an error, by the same example, Will rush into the State; if cannot be. Until five years ago it appeared that the round had gone to the Portias. The draft clauses proposed in the Arbitration Bill circulated for comments in February 1994 (by the Department of Trade and Industry in the UK) clarified that arbitration clauses empowering the arbitrator to decide according to ‘fairness and justice’ were not to be countenanced. The common law was flexible enough to accommodate a clause empowering the arbitrator to decide according to some recognized principle of law - in fact, a clause enabling an arbitrator to decide ‘according to internationally accepted principles of law governing contractual relations’ had

42 S. Boyd, ‘Arbitrators not to be bound by the law clauses’ (1990) 6(2) Arbitration International 122-132. The Ronald Bernstein Lecture are sponsored by the Chartered Institute of Arbitrators, the Bar Council and the Inns of Court. 43 Lord Devlin, The Judge (Oxford University Press, 1979).

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then been just approved by the Court of Appeal in England.44 But permitting and arbitrator to dispense with legal principles altogether was seen to encourage ‘palmtree justice’; it would not be in the wider interests of international (or national) arbitration. It would also affect the quality of awards under such agreements. As Portia would say: ‘It [just] cannot be’. But with the new Arbitration Act 1996, things have changed. The Bassanios of arbitration appear now to be in control. Section 46 of the Act provides that the arbitral tribunal shall decide the dispute either in accordance with the law chosen by the parties as applicable to the substance of the dispute or ‘if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal’. However, enabling statutes apart, I would suggest that an arbitrator (including an arbitrator in an international commercial arbitration) is not without the implements of justice. The arbitrator must, of course, apply the positive law, as must a court. But there is a moral element in every positive law that cannot be overlooked. Lord Ackner, who frequently sat with Lord Denning in England’s Court of Appeal, has publicly acknowledged the influence on him of the latter’s philosophy of law. Lord Ackner said that he put foremost: ... the need to ensure the just result and therefore, to circumvent precedent if you can do it properly . . . And then he set out what he thought was the right approach: The right approach, I am sure is: what does common sense indicate as the right angle? Then, what are the relevant principles? And then what is the situation so far as precedent is concerned?45 If this be the right attitude for a judge, it is (or should be) an ideal approach for an arbitrator in a domestic or international arbitration. Fortunately for the common law, the moral dimensions of decision-making are gaining more adherents. Lord Steyn, a Lord of Appeal in Ordinary in England’s highest court, wrote very recently that the judge’s sense of the moral answer to a question of law, his instinct for edging closer to a conclusion that fits the justice of the case, had always been ‘one of the great and shaping forces of law’.46 But most encouraging - the fact that the judge expressed this view in a dissenting speech does not detract one bit from its force or attractiveness: the dissent was on the ultimate decision of the case at hand, not on whether there was a moral answer to every question of law.

44 In Deutsche Schachtbau- und Tiefbohrgesellschaft mbH v Ras Al-Khaimah National Oil Co. [1987] 2 Lloyd’s Rep 246. 45 Quoted in P. Chubb and G. Sturgess, Judging the World - Law and Politics in the World’s Leading Courts (Butterworths) at p. 269. In the same interview with the authors, Lord Ackner related a story then going about in the universities. After Lord Denning had addressed students at a particular university, one of the students had a request. He said: ‘Lord Denning, do you think you could resist making further law ... at least until our examination is over?’ 46 McFarlane v Tayside Health Board [1999] 3 WLR 1301, at 1319, per Lord Steyn (HL).

In the best known of Plato’s dialogues, The Republic, there is a passage about justice and right conduct. In it, Plato’s friend and teacher, Socrates, appears as the narrator. Socrates tells Glaucon (an elder brother of Plato): the time then has arrived, Glaucon, when like huntsmen we should surround the cover, and look sharp that justice does not slip away and pass out of sight, and get lost; for there can be no doubt that we are in the right direction ... ‘Lead on’, says Glaucon. And they both move on in search of justice, only to find that their ‘quarry’ has been lurking right under their feet all the time and yet they haven’t seen it! Socrates then tells Glaucon: ‘We are like people searching for something they have in their hands all the time and looking away into the distance instead of at the thing we want ... which is probably why we haven’t found it.47 At the start of a new century, we must strive by our endeavours, to ensure that ‘the spirit’, the ethos, of international commercial arbitration which is under our feet does not slip away, pass out of sight, and get lost for ever.

47 Plato, The Republic, Penguin Classics (Second Edition): Book iv, 431.

The Lawyer’s Duty to Arbitrate in Good Faith* V V Veeder**

I. INTRODUCTION It is a great honour to be asked to deliver this Goff Lecture, not only because it is a privilege to follow in the footsteps of so many distinguished lecturers but also because this lecture bears the name of one of the most respected English jurists of my professional lifetime. There are many stories of Robert Goff: he was one of the greatest advocates I ever heard; he was a creative scholar; he was the most courteous judge; he is now a distinguished arbitrator; but above all else, he was and remains the epitome of fairness and human decency. To listen to his advocate’s argument even in the most contentious case provoked no sense of ill-will, just despair at the power of his legal logic; and to lose a case before him as judge left only a strong sense of his intellectual honesty. To Lord Goff, the tide of this lecture might seem so self-evident as to preclude any serious debate. Sadly, however, the debate is provoked by growing difficulties which cause the practice of transnational arbitration to fall short of his ideals. For the parties to an international commercial arbitration, justice should be the paramount objective; and procedural fairness by their legal representatives is subsumed in that single objective. But the practice of international arbitration is not so simple, certainly not for the parties’ professional lawyers coming from different jurisdictions to a still different place of arbitration. Lawyers are not musicians or ballet dancers: a lawyer’s training, skills and ethics are still essentially rooted in a national legal system; and it is far from clear how and to what extent national professional rules apply abroad to the transnational lawyer in the international arbitration process.

II. THE EUROPEAN UNION For example, for a European Union lawyer practising abroad in a host Member State, Article 6 of Directive 98/5/EC of 16 February 1998,1 which came into effect on 14 March 2000, prescribes rules of professional conduct in addition to the rules of that lawyer’s home Member State: that lawyer is subject ‘to the same rules of professional conduct as lawyers practising under the relevant professional title of the host Member State in respect of all

* This text is a revised version of the author’s eleventh Goff Lecture delivered in Hong Kong on 5 December 2001 under the auspices of die City University of Hong Kong. The editors acknowledge with thanks its permission to publish this article. Editorial note: It was originally published at (2002) 18(4) Arbitration International 431451. The author is indebted to Mr Neil Hart for assistance in researching materials for this lecture. ** QC; Essex Court Chambers, London. 1 Directive 98/5/EC of the European Parliament and of the Council of 16 February 1998 to facilitate practice of the profession of lawyer on a permanent basis in a Member State other than that in which the qualification was obtained. OJ L 077, 14/03/1998 0036-0043.

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the activities he pursues in that territory’. There is no further guidance in the Directive as to what professional rules of conduct apply to an English lawyer from London practising as an advocate in a Paris arbitration, except that the rules of the French avocat before a French court cannot simply be transposed to this English lawyer in an international arbitration.2 Of course, an English lawyer working in the European Union’s other Member States must also comply with the Code of Conduct for Lawyers in the European Union adopted in 1998 by the Conseil des Barreaux de l’Union Européenne (CCBE).3 The Code applies generally to the cross-border activities of any English lawyer working in the European Union and European Economic Area, including the great European arbitration centres of Paris, Geneva, Stockholm, Vienna, The Hague and Zurich. And the CCBE Code applies, at least in part, expressly to international arbitration.4 By Article 4.5, the 1998 Code provides that ‘the rules governing a lawyer’s relations with the courts apply also to his relations with arbitrators ...’. These particular rules are set out in Part 4 of the Code under Articles 4.1 to 4.4. Article 4.1 requires a lawyer who appears or takes part in a case before a Member State’s court ‘to comply with the rules of conduct applied before that court’. This rule is largely meaningless in the field of international arbitration because there are no ‘rules of conduct’ applied generally to lawyers before an international arbitration tribunal. The major institutional rules of arbitration, including the ICC and LCIA Rules, are silent as to the conduct of a party’s legal representative. Articles 4.2 to 4.4 of the Code are more relevant to arbitration. Article 4.2 provides generally for the fair conduct of proceedings, excluding ex parte communications with the arbitrator and requiring settlement discussions not to be communicated to the arbitrator. Article 4.3 requires the lawyer to maintain due respect and courtesy towards the arbitrator; and Article 4.4 requires that ‘a lawyer shall never knowingly give false or misleading information to the court’. These are valuable moral commandments; and this part of the Code is commendable for international practice. But that is the practical problem: it is such a small part that the Code provides no useful guidance on the most basic problems facing transnational practitioners of international commercial arbitration.

2 See Société International Contractors Group c/ Me X (1992) Rev de l’Arb 609 (where the Paris Cour d’appel decided that the prohibition against pacta de quota litis for a French avocat in French court proceedings was inapplicable to an avocat representing an Italian party to an international arbitration held in Paris under the ICC Rules; see commentaries by Leboulanger, ibid 615, and Paulsson, infra. 3 Code of Conduct for Lawyers in the European Union adopted by the 18 national delegations representing the Bars and Law Societies of the European Union at the Conseil des Barreaux de l’Union Européenne (CCBE) Plenary session held in Lyons on 28 November 1998. Copies are available from the CCBE website. (The 1998 Code originated with the Perugia Declaration made by the Bars and Law Societies of the European Community on 16 September 1977. It dealt with a lawyer’s social function, integrity, confidentiality, independence, professional spirit and publicity, and updates the 1988 Code.) 4 By Paragraph 1.5 of the CCBE Code, it applies to ‘the cross-border activities of the lawyer within the EU and EEA. Cross-border activities shall mean: - (a) all professional contacts with lawyers of Member States other than their own; and (b) the professional activities of the lawyer in a Member State other than his own, whether or not the lawyer is physically present in that Member State.’ Its terms are wide enough to apply to lawyerarbitrators as well as a party’s legal representative.

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At best, of course, the Code applies only to regional practice for European Union lawyers in Western Europe. On a worldwide basis, what are the professional rules or guide for a lawyer seeking to discharge a duty to achieve procedural fairness in an international arbitration? The issue was raised ten years ago by a distinguished commentator, Jan Paulsson;5 but his call went unheeded.6 Yet the problem is real; the solution ought not to be insuperable; and the matter needs addressing by an international body because the problem applies generally to all of us, everywhere, practising as lawyers in the field of international arbitration. It applies especially in Hong Kong as a leading centre for international commercial arbitration, attracting legal practitioners from all over the world. To the question: what are the professional rules applicable to an Indian lawyer in a Hong Kong arbitration between a Bahraini claimant and a Japanese defendant represented by New York lawyers, the answer is no more obvious than it would be in London, Paris, Geneva and Stockholm. There is no clear answer; but perhaps, as we shall see, there should and could be.

III. PROCEDURAL UNFAIRNESS In 1937, the ICC Congress met in Berlin, where its opening session was attended by the German Chancellor Hitler and his colleagues Goering and Goebbels. Even then, the ICC’s new president, the American Thomas J Watson of IBM, felt able to proclaim the keynote of the conference: ‘world peace through world trade’.7 Thomas Watson was right - but not as right as he would be 50 years later. The great cause today is the same but still greater: without world trade, there can be no world peace; international arbitration is the oil which lubricates the machinery of world trade; and the mechanics, the international arbitration practitioners, now deserve better practical guidance as to how to apply that oil. International commercial arbitration cannot wait another 50 years. Let us start with the root of the problem: what is procedural unfairness? Many decades ago, when I was at school in Bristol, in the west of England, our school rugby team played a match against a local school badly endowed with playing fields. In fact, its rugby field lay on a steep hill; and given other demands for its use (which must have included abseiling), we had time for only one half of the match, all of which we played uphill - and lost, badly. In my ears, for a long time, the phrase ‘playing on a level playing field’ resonated as the basic moral rule of fairness in any adversarial game. What was procedurally unfair, however, was not the pitch itself but the unfairness of playing uphill without the subsequent advantage of playing downhill. Given the range of geographic diversity, fairness is a general concept which must accommodate both flat and hilly ground.

5 Paulsson, ‘Standards of Conduct for Counsel in International Arbitration’ in (1992) 3 Amer. Rev Int. Arb. 214, where the author analysed the earlier 1988 CCBE Code of Conduct. 6 Indeed, many years ago, the arbitration conference in Brussels at which we were both to deliver papers on this subject was cancelled by the organizers, the Chartered Institute of Arbitrators, apparently for lack of interest. 7 Ridgeway, Merchants of Peace (1938) at p. 384.

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The procedural difficulties in arbitration come from human rather than geographic diversity; and human diversity is surprisingly diverse. For example, there is a large house, beautifully built by one of our arbitration colleagues with a large circular drive leading to the main entrance, adjoining a magnificent tennis court. As many of you will know, the turning circle of a Rolls Royce is disappointingly large; and so it proved that the circular drive had to be enlarged by taking out a large chunk of the tennis court. Tennis matches are still played at that house; the far half of the tennis court retained its full size although the near half is now severely truncated. The playing field is level, even if it is not equal; it is technically difficult serving and receiving a serve in a few feet of court; but it is not unfair if contestants take turns serving from the truncated half of the tennis court, which they apparently do. Where the tennis players are Rolls Royce owners, a turning circle is perhaps more important than a full tennis court; tennis can still be played fairly; and tennis teas can still be taken without tears. But what if not all players are Rolls Royce owners? Or if the field is not only uphill or unequal, but the other half is a cricket pitch, or a baseball diamond or a swimming pool and there is no equivalent change at half-time? Then there can be tears; and where the game is arbitration, it can raise acute questions of legal, professional and cultural diversity which are now potentially of immense importance in the practice of international arbitration by parties and particularly by their lawyers. Such diversity can unbalance the arbitral process. This is different from the situation where both parties equally lack recourse to documentary production or factual testimony tested by cross-examination or the use of their own party-appointed expert witnesses. There is here a level and fair playing field; and of course awards have been enforced in a state court even if the arbitration’s procedure was very different from the procedures employed in that court. We are also not dealing with deliberate dishonesty or criminal fraud here; and the international arbitral process can deal with acts of illegality8, which thankfully seem to be rare. And we are not addressing noncriminal misconduct which is generally regarded as morally questionable; for example, the deliberate nomination of different specialist arbitrators in multiple disputes to deprive the other parties of specialist legal advice; or the deliberate conflicting out of specialist counsel by a party to the same end; or one party’s beauty-parading of arbitral candidates which looks more at partiality than beauty; or the wilful aggravation of the parties’ dispute in order to put unfair pressure on the adverse party. We are concerned here with ambiguous acts short of deliberate dishonesty which cross the line of procedural fairness because no-one really knows quite where that line is now drawn at the international level. The issue can arise on challenges to awards under national legislation before state courts, including the UNCITRAL Model Law; and the enforcement of arbitration awards under the 1958 New York Convention. Then, however, it will often be too late to put right what was at the time, perhaps inadvertently, wrong. The common starting point is necessarily the concept of procedural fairness; and whilst no arbitration tribunal can guarantee perfection at all times in deciding substantive law or fact (because judges and arbitrators are not deities), arbitrators can reasonably be asked always

8 For example, see Roth, ‘False Testimony at International Arbitration Hearings Conducted in England and Switzerland - A Comparative View’ in (1994) 11 J. Int’I Arb. 5.

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to deliver procedural fairness. In England, that objective is now recognised expressly in Lord Woolf s massive reforms to civil procedure in the State courts; for arbitration tribunals, independently, it is expressed by section 1(a) of the English Arbitration Act 1996;9 and for both courts and arbitration tribunals, directly and indirectly, by the English Human Rights Act 1998 applying Article 6 of the European Convention on Human Rights, guaranteeing a fair hearing to every person, legal and moral. But, as we all know, procedural fairness is no easy objective, and there is nothing ‘natural’ about natural justice. In the Anglo-Saxon adversarial system, fairness is dependent on the standards of conduct deployed by the parties and especially the parties’ legal representatives, towards each other and towards the court or arbitration tribunal. As the US Supreme Court decided long ago in the Gideon case.10 A defendant’s attorney at a criminal trial can be just as much an essential part of a properly constituted court as the judge or jury; and in complex civil litigation and arbitration, the same is almost invariably true. Judges just cannot do it as well or at all without the help of the parties’ lawyers, and an international arbitration of any size would be equally incomplete without the parties’ legal representatives. This symbiotic relationship can be readily illustrated with a recent cautionary tale from England.

IV. THE CAUTIONARY TALE In Vernon v Bosley (No 2) (1998),11 the defendant nanny had killed by negligent driving two of the plaintiff’s children and the plaintiff sued her for nervous shock. In a reserved judgment delivered long after the trial, the judge awarded damages for post-traumatic stress disorder based on expert evidence from a psychiatrist and psychologist. The defendant then appealed to the Court of Appeal. The Court of Appeal heard this appeal and gave judgment upholding liability but reducing the amount of damages. Before the formal order was drawn up, the defendant’s counsel received anonymously through the post copies of a county court judgment in different family proceedings between the plaintiff and his divorced wife relating to the custody of their remaining children and of a judgment of the Court of Appeal (differently constituted) dismissing the plaintiff’s appeal from that county court judgment. What was significant was the expert issue in these family proceedings, taking place six months after the trial in the personal injury proceedings. In stark contrast to their evidence at that earlier trial, the same psychiatrist and psychologist had given expert evidence that the mental health of the plaintiff father had dramatically improved and that he was substantially, if not fully, recovered. This was not a case where these experts had given false evidence or expressed opinions which were incorrect; and in this sense neither had ‘changed his evidence’, but rather only their prognosis as time had elapsed between the evidence

9 Section 1 (a) of the 1996 Act states as a principle on which Part I of the Act is founded: ‘the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense’. 10 Gideon v Wainwright 372 U.S. 335 (1963). 11 Vernon v Bosley (No 2) [1999] QB 18 (Stuart-Smith and Thorpe LJJ, Evans IJ dissenting); see also Vernon v Bosley (No 1) [19971 1 All ER 577.

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in the personal injury trial and the later hearing in the family proceedings during which the plaintiff’s mental health had significantly improved. As Lord Justice Stuart-Smith’s judgment reports: It appeared to the defendant’s legal advisers [this must have been somewhat of an understatement] that this evidence was materially different from the picture presented to Sedley J [the trial judge] and this court [the Court of Appeal], and in particular it might affect the judge’s findings as to the plaintiff’s state of health at the time of the judgment and to the prognosis for the future. This would affect the level of general damages and also elements of future loss... (page 688D). The plaintiff was morally blameless; he acted on the advice of his legal advisers. He was represented by different solicitors and counsel in the two sets of proceedings; and before the trial judge delivered his reserved judgment in the personal injury proceedings, his legal advisers advised him not to disclose the improved prognosis to the defendant, the trial judge or even later to the Court of Appeal; and when the plaintiff learnt that his former wife might disclose these medical reports obtained in the family proceedings to the defendant’s insurers, his legal advisers sought and obtained from the High Court an injunction restraining her from doing so. Factually it is a complicated case; but what is clear was the absence of any dishonesty on the part of any of the plaintiff’s legal advisers. They were plainly faced with an acute problem of professional ethics where their duty to the court appeared to conflict radically with the duty to their own client. At the resumed hearing before the Court of Appeal, the defendant submitted that by one or more of three routes, discovery or disclosure of the later medical reports or the requirements not to mislead the court, the change in prognosis should have been made known by the plaintiff and his legal advisers. As to documentary discovery, by a majority, the Court of Appeal decided that the parties’ duty continued up to judgment, after the conclusion of evidence and the trial; that the notes and medical reports were not privileged; and that these materials should have been disclosed to the defendant before the trial judge delivered his reserved judgment, even though both sides had long before closed their respective cases. As to the duty not to mislead the court, Lord Justice Stuart-Smith concluded: I readily accept that the plaintiff’s counsel did not deliberately intend to deceive the court and believed that the advice they gave [to the plaintiff] was sound. But in my judgment they made a serious error of judgment in failing to advise him on the need for disclosure. By an overtechnical construction of the rules and a failure to appreciate that their previous conduct of the case would result in the court reaching an unjust result unless disclosure was made, they found themselves in an impossible position. By the time the case came to this court they should have appreciated that they could no longer seek to uphold the judge’s judgment ... The defendant’s second appeal was allowed by the Court of Appeal: and damages were further reduced. However, Lord Justice Evans dissented and would have dismissed the first part of this appeal and, whereas Lord Justice Stuart-Smith decided (obiter) that counsel’s remedy was to resign if his advice to correct testimony or disclose documentation was

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rejected by his client, Lord Justice Thorpe decided that counsel’s duty went much further: counsel had an overriding duty to disclose the relevant material to his opponent and, unless there was agreement between the parties otherwise, to the trial judge. For present purposes, the point is simple. Difficult as this case was for the ethics of English lawyers before an English court, what would the answer be in a like case for a party’s legal representatives acting in an international arbitration? For example, what would happen if a Hong Kong solicitor or counsel acting for an Australian party in an international arbitration in Singapore discovered weeks after the final hearing and as the tribunal was writing its final award, that part of their client’s case was now quite wrong? Would these lawyers advise their client that a correction must be notified to their opponent and the tribunal? And if their client said ‘no’, as it might and then dismissed them if they pressed their advice, would that counsel and solicitor have a duty to notify their foreign opponents or the arbitration tribunal abroad? The answer should probably be ‘yes’, but juridically why? It is regrettable that these questions are currently beyond any clear answer, both in Hong Kong and elsewhere.

V. FOUR CHARACTERISTICS International arbitration clearly raises more difficulties here than national practice before state courts; and there are four distinguishing characteristics which any solution needs to address. First, as already discussed, practitioners in the field of international commercial arbitration extend over the full rainbow colours of human diversity around the world; the legal representatives of parties do not usually share the same national legal culture or practise subject to the rules of the same professional body. In the United Kingdom, long after the Act of Union with Scotland, it was on occasion still difficult for Scots and English lawyers to work with each other,12 but those difficulties pale into insignificance compared to the brave attempts within the European Union to subject the Member States’ Bars and law societies to a uniform professional code of conduct, already mentioned above. Outside such legal regions, the problem is greater still. This does not mean that international practitioners are pirates sailing under no national flag; it means only that on the high seas, navigators need more than a coastal chart. Secondly, unlike most national court systems, there is no appeal on the merits from an arbitration award. The need for finality generally outweighs justice in the particular case; and procedural mistakes can be left uncorrected even when caused by professional errors of judgement. In England, the Arbitration Act 1996 has made an important difference in abolishing the English court’s old power to remit an award to the arbitration tribunal on the grounds either that fresh evidence has become available after the award or that a procedural mishap has occurred short of any misconduct by the arbitration tribunal. These procedures can still be invoked in respect of appeals from English court judgments, but not anymore in respect of English arbitration awards. A disgruntled losing party is left with the traditional but extreme remedy, if available, of challenging the award on the basis that it was obtained

12 See D.L. Carey-Miller, ‘The Advocate’s Duty to Justice’ in (1981) 97 LQR 127.

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by fraud or contrary to public policy13. This quality of finality special to arbitration, but particularly so to international arbitration, means that it is even more important that an arbitration award should be the product of procedural fairness. Thirdly, there is a lack of transparency in international arbitration. There are no useful statistics for institutional arbitration; and there is no reliable data at all for non-institutional or ad hoc arbitration. The whole activity takes place in a cloud of privacy without the same public scrutiny directed at state courts. In the absence of sufficient reported cases, it is not easy to learn how many arbitrations are unfairly conducted and, in particular, how fairness can be harmed by the conduct of parties’ legal representatives. Yet the system of international arbitration does seem to work well. If so, like State litigation, the system must work because it is essentially self-policing - but self-policing by lawyers and arbitrators depends on practitioners having a clear idea of where the line is drawn between good and bad arbitration practices. If a lawyer advises a client that it must disclose voluntarily a relevant but harmful document or cannot plead fraud on existing materials, that client is entitled to know the reason why, and if there is no good reason, the pressures of international practice may mean that the client will find another lawyer who will do what the other has declined to do. In the field of international arbitration, like State litigation, there are many fish competing in the same sea. Clear rules and self-policing are an essential part of any solution. Lastly, in arbitration, where the legal links between the parties usually derive from the contractual agreement to arbitrate (in whole or in part), the legal roots of a party’s duty to play the game fairly must begin with that arbitration agreement, as a general contractual obligation to arbitrate in good faith. This is the most awkward characteristic: how can such a general obligation impose practical rules; and how does a contractual duty imposed on a party work itself through to rules influencing that party’s legal representative? As to the former, it is obvious, even more so than in State litigation, that the rules need to be practical; and it is useless to maintain any rule at the level of supreme generality. A formulation based only on good faith could be too vague to be of practical use, and yet, in default of any other available legal principle, it is the necessary starting point. There is also a particular problem with a general principle of good faith as an English legal concept; in short, in recent history, it has not been very English at all.

VI. GOOD FAITH Good faith in the performance of civil procedural obligations is assumed by civilian lawyers. This duty of good faith is readily transposed from the duty of good faith in civil law. Professor Hanotiau, from Brussels, concluded in his work on multi-party arbitrations that it is a ‘basic principle of international commercial arbitration that the parties have the duty to co-operate in good faith in the performance of their agreement as well as in the arbitral proceedings’, and another distinguished commentator from Greece, Antonias Dimolitsa, identified the source of that obligation: ‘... the international principle of the inviolability of

13 Section 68(2) (g) of the 1996 Act: see Mustill & Boyd’s 2001 Companion (2001) at pp. 352-354, to which we return below.

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the arbitration agreement is actually just a special application of the principle of pacta sunt servanda which, together with the parallel application of good faith, is strictly applied to arbitration agreements ...’14 To an English lawyer, regrettably, the concept of good faith remains somewhat vague, and although the House of Lords has recently defined the term in the different context of a regulator’s exemption from liability for the tort of misfeasance,15 English law on good faith says nothing about the activities of a party’s legal representatives in an international arbitration. Former students of English law may recall that Professor Sir Roy Goode QC concluded in the first edition of his great work on commercial law16 that, surprisingly, there was no general principle of English law that requires legal remedies to be exercised in good faith, adding that it was ‘at once the most remarkable and most reprehensible feature of English contract law’. That was written even before the House of Lords decided in Walford v Miles (1992)17 that English law could not recognize and enforce obligations to negotiate ‘in good faith’. Nonetheless the contractual duty to arbitrate in good faith is recognised in the common law outside England. It is rare in international arbitration to see this duty spelt out, but there is a useful example in Hong Kong. In China Nanhai Oil v Gee Tai Holdings (1994),18 the Hong Kong High Court granted leave to enforce a CIETAC award on the ground that the losing defendant was estopped from relying on the improper constitution of the arbitration tribunal, which had been formed in Beijing and not Shenzhen as required by the parties’ arbitration agreement. The facts need not concern us here, but Mr Justice Kaplan did not base his decision on the classic English equitable doctrine of estoppel. He cited the work on the New York Convention by the civilian Professor van den Berg, recognizing estoppel as a principle emanating from a party’s general obligation to arbitrate in good faith ‘enshrined in the [New York] Convention’s provisions’. The learned judge applied that duty of good faith so as to have required the defendant promptly to bring to the notice of the arbitration tribunal or CIETAC in Beijing its objections to the tribunal’s formation, rather than wait two years after losing the arbitration before complaining for the first time that the arbitrators were chosen from the wrong CIETAC list of arbitrators. What is needed is this kind of practical guidance on good faith for the legal representatives of parties. There is nothing to prevent that same approach being applied to the most

14 Hanotiau, ‘Complex Multicontract-Multiparty Arbitration’ in (1998) 14(4) Arbitration International 369; Dimolitsa, ‘Arbitration Agreements and Foreign Investments: The Greek State’ in (1988) 5 J. Int’l Arb. 17 at p. 39. 15 See Three Rivers District Council v Governor and Company of the Bank of England (No 3) [2000] 2 WLR 1220 for the first judgment; and for the second judgment, see [2001] 2 All ER 513. (Section 29 of the Arbitration Act 1996 exempts, in similar terms, an arbitrator from liability save for ‘bad faith’). 16 Goode, Commercial Law (1982, 1st ed.) at p. 117. 17 Walford v Miles [1992] 2 A.C. 128. This decision has generated a mass of comment, conveniently summarized in Beatson and Friedman (eds) Good Faith and Fault in Contractual Law (1995) at pp. 36-42. See also Brownsford et al (ed), Good Faith in Contract (1998, Ashgate). 18 China Nanhai Oil Joint Services Corporation v Gee Tai Holdings Limited (1995) XX ICCA Yearbook 671 (reporting the decision dated 13 July 1994 of the Hong Kong High Court (Kaplan J), citing van den Berg, The New York Convention (1981) at p. 185).

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contentious areas of professional practice: document production, the preparation of factual witness statements and the commissioning of independent expert reports. These procedures are now increasingly common in international arbitrations, given the widespread interest in the International Bar Association’s Rules on the Taking of Evidence in International Commercial Arbitration of June 1999, and the success of this initiative may answer the second part of the problem raised above, namely: how to influence the parties’ lawyers.

VII. THE IBA RULES In 1983 there was a muted welcome for the first edition of these IBA Rules. Nonetheless, their quiet acceptance in practice over the next decade paved the way for the more ambitious second edition in 1999.19 There was then criticism from some quarters over the new procedures for document production under Article 3 of the 1999 Rules - it either went too far in allowing a party to request unspecified documentation or not far enough in limiting that request to narrow and specific categories reasonably believed to exist. That criticism seems now to have died down. What was not at first controversial were Articles 4 and 5 dealing with factual witness statements and the written reports of party-appointed experts. For international arbitration, the procedure whereby a party and not the tribunal leads its own factual and expert testimony is now well accepted by both civilian and common law practitioners and arbitrators, and it is the well-worn practice for a factual and expert witness to reduce into writing in advance what would be their evidence-in-chief or direct examination, confining their oral testimony largely to cross-examination by the adverse party and the tribunal. This procedure removes the unfair element of surprise or deliberate ambush at the main hearing; it allows expert witnesses to meet and exchange views before the hearing (a procedure now reflected in Article 5(3) of the IBA Rules); and since hearing time is money, it saves both time and money by having everyone read these materials in advance of the main hearing without the need for direct testimony to be recited aloud. That is the theory, but as experience now shows, the practice can be different, and here experience has begun to mean bad experience. There is an increasing tendency for a factual witness statement to take the form of special pleading prepared substantially by lawyers and not the witness (albeit later formally ‘approved’ by that witness). This practice diminishes the statement’s probative value and increases the need for oral cross-examination. There is again a similar practice whereby expert reports express less than independent expert opinions, again substantially prepared by lawyers and not the expert (albeit also ‘approved’ by that expert); and this practice significantly complicates the task of the arbitration tribunal. As regards document production, there is increasing evidence that such production is assessed not by any uniform professional standards, but rather by subjective, client-driven rules calculated to support the factual and witness testimony to be adduced by that client.

19 IBA Rules on the Taking of Evidence in International Commercial Arbitration, adopted by a resolution of the IBA Council on 1 June 1999, available at <www.ibanet.org>.

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VIII. THE PROBLEM IN PRACTICE Why does any of this matter for international arbitration? It matters first because it can easily breed procedural unfairness in the particular case, and it matters generally because it attacks the integrity of the system of international arbitration. The system of self-policing may become impossible and there may be a gradual deterioration in the standards of legal professional conduct. The international arbitral process would then be brought into disrepute and, once its good reputation was lost, it could take decades to rebuild confidence.20 To date, for example, the English court has rejected every attempt to attack a foreign award on strictly procedural grounds under the New York Convention. Indeed, there is still no reported case of an English court refusing enforcement of any foreign award on the ground of English public policy. However, there are now cases where the English court has broadened the public policy exception for English awards in section 68(2)(g) of the Arbitration Act 1996,21 and there is one recent case which illustrates that the English court may in future look critically at serious procedural unfairness under the same public policy exception in Article V(2)(b) of the New York Convention.

(a) Document Disclosure The case related to documentary disclosure, allegedly made deficiently in the arbitration by the successful claimant. In Profilati Italia SRL v Paine Webber Inc & anr (2001),22 the losing applicant challenged the award on the ground that part of it had been procured by the claimant in a way which was contrary to public policy under section 68 of the Arbitration Act 1996. The substance of its argument was that the claimant had wrongly failed to disclose two material documents which would have supported the applicant’s case and, having failed to do so, that the claimant allowed its counsel to make submissions to the arbitration tribunal which could not have been made in the same way or with the same force if those documents had been disclosed and, to that extent, therefore, the award was improperly procured because the tribunal was effectively misled. The English Commercial Court (Moore-Bick J) dismissed the application on its factual merits, but the judgment makes clear that, subject to factual proof, the application could be well founded under section 68(2)(g) of the 1996 Act. The learned judge held:

20 There is an existing analogy with the loss of professional courtesy between English arbitration practitioners, once the norm and now increasingly the exception. As Lord Mustill warned a decade ago: ‘There is precious little self-discipline, comradeship or community spirit between the parties to a typical arbitration’ (1992) 9 J. Int’l Arb. 5 at p. 15. There is no rational explanation for this regrettable change, which is particularly evident in correspondence, but the process now seems irreversible. 21 Section 68 of the 1996 Act provides: ‘(1) A party to arbitral proceedings may... apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award ... (2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant... (g) the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy.’ 22 Profilati Italia SRL v Paine Webber Inc & anr [2001] 1 Lloyd’s Rep. 715.

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17. It would be unwise in my view to attempt to define the circumstances in which an award might be set aside or remitted on public policy grounds, but in the light of that comment and of the language of subsection (2)(g) as a whole I think that where the successful party is said to have procured the award in a way which is contrary to public policy it will normally be necessary to satisfy the court that some form of reprehensible or unconscionable conduct on his part has contributed in a substantial way to obtaining an award in his favour ... And later: 19. Where an important document which ought to have been disclosed is deliberately withheld and as a result the party withholding it has obtained an award in his favour the court may well consider that he has procured that award in a manner contrary to public policy. After all, such conduct is not far removed from fraud ... Fraud is here actual dishonesty in the English legal sense. It is much more than a failure to disclose a document as a result of negligence or mishap or a simple error of judgment; but the Court acknowledged that something less than fraud might suffice if it qualified as ‘reprehensible or unconscionable conduct’ - but what is that in an international commercial arbitration? It must presumably include ‘bad faith’, even if that civilian term was never uttered by the English court. If this analysis were correct, subject to further elaboration, the court’s approach could be readily imported into the IBA Rules on document production.

(b) Factual Witness Statements and Expert Reports For witness statements and expert reports, it is here again necessary for practical guidance to turn to court decisions because of the paucity of arbitration materials. It can be found in the English cases leading to the recent Woolf reforms.

(i) Expert reports The House of Lords held in Whitehouse v Jordan (1987)23 that even though some degree of consultation between experts and legal advisers was entirely proper, it was necessary that expert evidence presented to the court should be, and should be seen to be, the independent product of the expert, ‘uninfluenced as to form or content by the exigencies of litigation’. In the Court of Appeal, which reversed the trial judge, Lord Denning MR had identified a number of flaws in a joint experts’ report submitted by the plaintiff’s. Most prominent among these flaws was the intrusively editorial role played by the plaintiff’s lawyers in preparing that evidence, as described by Lord Denning MR: In the first place, their joint report suffers to my mind from the way it was prepared. It was the result of long conferences between the two professors and counsel in London and it was actually ‘settled’ by counsel. In short, it

23 Whitehouse v Jordan [1987] 1 WLR 246.

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wears the colour of special pleading rather than an impartial report. Whenever counsel ‘settle’ a document, we know how it goes. ‘We had better put this in’, ‘We had better leave this out’, and so forth. A striking instance is the way in which Professor Tizard’s report was ‘doctored’. The lawyers blacked out a couple of lines in which he agreed with Professor Strang [another expert witness] that there was no negligence. That counsel was a distinguished senior silk, of impeccable character and now an English High Court judge. What he did was only what we all once did; it was a professional practice not only not wrong under the standards then prevailing in England; but not to do what he did could have been widely regarded at that time as professional negligence. Lord Denning’s strictures changed that practice at the English Bar, almost overnight. This new approach to expert evidence later formed part of Cresswell J’s classic summary of the duties and responsibilities of expert witnesses in The Ikarian Reefer (1998).24 Foremost among those duties was the importance of the expert’s autonomy from the influence of the parties to the litigation, as emphasized in Whitehouse. It required the expert witness to provide ‘independent assistance to the Court by way of objective unbiased opinion in relation to matters within his expertise’. That expert opinion must also be complete. Where there are conflicting experts’ reports, the tribunal cannot reach any satisfactory finding if the relevant materials have been partially withheld by one or more expert witnesses. As Bracewell J held in Clough v Tameside & Glossop HA (1998):25 It is not for one party to keep their cards face down on the table so that the other party does not know the full extent of information supplied. Fairness dictates that a party should not be forced to meet a case pleaded or an expert opinion on the basis of documents he cannot see. Although civil litigation is adversarial, it is not permissible to withhold relevant information, or to delete or amend the contents of a report before disclosure. The early identification and narrowing of expert issues is increasingly important in international commercial arbitration and, as already mentioned above, the practice of expert meetings is reflected in the IBA Rules. To make these procedures work fairly (and indeed to work at all), they must be played candidly, with open hands. As the English Court of Appeal noted in Naylor v Preston Area Health Authority (1987),26 the English courts: have moved far and fast from a procedure where tactical considerations which did not have any relation to the achievement of justice were allowed to carry any weight. ... Whilst a party is entitled to privacy in seeking out the ‘cards’ for his hand, once he has put his hand together, the litigation is to be conducted with all the cards face up on the table.

24 The Ikarian Reefer [19931 2 Lloyd’s Rep. 68 at pp. 81-82. The Court of Appeal reversed the judgment but approved this passage intact: see [1995] 1 Lloyd’s Rep. 455 at p. 496. 25 Clough v Tameside & Glossop HA [1998] 1 WLR 1478 at p. 1484. 26 Naylor v Preston Area HA [1987] 1 WLR 958 at p. 967.

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All this is a sea change from the former practice of lawyers in the English courts. It has all happened within the last 15 years without primary legislation until the Woolf reforms, being driven by English judges and practitioners.

(ii) Factual witness statements The practice of taking factual witness statements requires urgent reform. Increasingly, many international arbitrators pay little credence to written witness statements on any contentious issue, unless independently corroborated by other reliable evidence. It is perhaps surprising that many sophisticated practitioners have not yet understood that their massive efforts at re-shaping the testimony of their client’s factual witnesses is not only ineffective but often counter-productive. Most arbitrators have been or remain practitioners; and they can usually detect the ‘wood-shedding’ of a witness.27 In England, there is a recent case where woodshedding was taken to an extreme. In Aquarius Financial Enterprises v Lloyds’ Underwriters (2001),28 the Commercial Court was concerned with a vessel allegedly destroyed deliberately by fire, Toulson J held that it was the English solicitor’s duty to ensure that any factual witness was interviewed by the solicitor himself, or if that was not practicable, by a person who could be relied upon to exercise the same standard as an English solicitor. This decision was provoked by the treatment of a particular witness, Mr Schoenig, who was on board the vessel when the fire broke out; and the interviewer was Mr Ashton, a marine surveyor and investigator, previously a police officer and (more significantly) for many years a CID officer attached to the anti-terrorist squad. In cross-examination, Mr Ashton had explained his interviewing technique as follows: Q. You resorted to intimidation to obtain the evidence you wanted? A. I don’t call it intimidation, I was forceful. I was dealing with a person that I thought was lying to me; I was not going to pussyfoot around. I knew the type of person I was dealing with. This was a very street-wise person. Q. You had formed the conclusion that this man was not going to give you the evidence that you needed unless you bullied him, so you set about bullying him? A. I had not formed that conclusion. I formed that conclusion at the end when he didn’t give me the evidence that he could have given me. I didn’t set out to bully him, I set out to talk to him in a nice manner and to deal with the matter as I would with any other witness. It was his attitude that made me become forceful and angry at times.

27 In one case, where a witness had been thoroughly coached by his party’s lawyers in successive dress rehearsals before a ‘shadow’ arbitration tribunal, the witness concluded his testimony before the actual tribunal by congratulating, inadvertently, the opposing counsel for the brevity of his cross-examination, on the ground that it was ‘the shortest of all’. 28 Aquarius Financial Enterprises Inc & Bernard Deletirez v Certain Underwriters at Lloyd’s [2001] 2 Lloyd’s Rep. 542.

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The learned judge commented adversely on this style of interrogation. He said: 43. In English litigation, civil or criminal, there can be no proper place for trying to persuade a potential fact witness what he should say, let alone by bullying, threat or inducements.29 Such methods are totally unacceptable. Mr Ashton’s conviction that Mr Schoenig was lying is no conceivable justification. If Mr Ashton had succeeded, and if Mr Delettrez (another witness) had not been recording the conversation, the result would have been a [written witness] statement from Mr Schoenig which could have been put in evidence under the Civil Evidence Act without either the court or the opposing party knowing how it had been obtained. The learned judge then referred to the procedure by which witness statements ordinarily stand as witnesses evidence in chief, an integral part of practice in the English Commercial Court for some years but now prescribed under Rule 32.5(2) of the Civil Procedure Rules. He then cited Part HI.3 of the Commercial Court Guide, which provides that: ‘whilst it is recognised that in commercial cases, a witness statement will usually be prepared by legal representatives, the witness statement must, so far as practicable be in the witness’s own words’. His judgment continued: 46. It cannot be too strongly emphasised that this means the words which the witness wants to use and not the words which the person taking the statement would like him to use. 47. Part HI. 4 of the Commercial Court Guide provides that the rules of any professional body regarding the drafting of witness statements must also be observed. 48. The Law Society’s Guide to the Professional Conduct of Solicitors provides guidance on the taking of witness statements. It requires a high degree of skill and professional integrity. The object is to elicit that which the witness is truthfully able to say about relevant matters from his or her own knowledge or recollection, uninfluenced by what the statement taker would like him or her to say. 49. Counsel on both sides expressed anxiety that this is in practice not what generally happens even when statements are taken by solicitors. If it is not, the situation is worrying. In the USA pre-trial depositions of witnesses are a

29 See also Odyssey Re London Limited v OIR Run-Off Limited (unreported; The Times Law Report, 13 March 2000; Nourse, Brooke & Buxton LJJ, the dissenting) a case where the perjured evidence of a director was treated as that of a company obtaining a judgment which was on that ground set aside, and where Brooke LJ severely deprecated the ‘charm offensive’ deployed by the company’s English solicitors toward the alleged perjurer.

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standard feature of civil litigation.30 The process is costly and time-consuming. Our system is quicker and cheaper, but it depends for its proper working on witness statements being properly taken. Bad practices, like bad money, tend to drive out good. If bad practices in the taking of witness statements come to be seen as normal, so that witness statements become lawyers’ artefacts rather than the witnesses’ words, their use will have to be reconsidered. Central to the problem is the ignorance of the court and the other party about how any witness statement has in fact been taken. It might therefore be thought salutary that there should be a written declaration by the person who prepared the statement giving information about how, when and where it was prepared and certifying compliance with any appropriate code of practice. 50. Moreover where parties are represented in litigation by solicitors (as is almost invariably the case in the Commercial Court), I would regard it as part of their duty to ensure, so far as lies within their power, that any witness statements taken after they have been instructed are taken either by themselves or, if for some reason that is not practicable, by somebody who can be relied upon to exercise the same standard as should apply if the statements were taken by the solicitors themselves. It would be a foolish English practitioner who did not now take heed of the strictures in this judgment.

IX. THE WOOLF REFORMS The Woolf reforms have accelerated but did not initiate these judicial reforms in the English courts. All these reforms have undoubtedly made English practice easier by setting out more clearly the rules for English lawyers to follow, particularly in the preparation of factual witness statements and expert reports.31 The cardinal principle requires the draft witness

30 Outside the USA, witness depositions are not usual in international commercial arbitration. Although depositions can remove much of the need for direct and cross-examination of witnesses, the procedure takes place away from the arbitration tribunal (who cannot therefore make their own assessment of the witness); it does not always save time and expense; and the practice is regarded by the English courts as inconsistent with both court and arbitration procedures: see Commerce and Industry Insurance Co of Canada v Lloyd’s Underwriters [2002] 1 Lloyd’s Rep. 219; and Refco Capital Markets v Credit Suisse (First Boston) [2001] EWCA Civ 1733 (Court of Appeal; 21 November 2001; unreported). 31 Part HI of the Commercial Court Guide and CPR Part 32 and 32PD, paragraphs 17 to 25. For English solicitors, there is general guidance in Chapter 21 of their Code of Conduct Rules; and as officers of the court, solicitors bear a general but wide-ranging duty not to mislead the court. The English Bar can now take and assist in taking a witness statement in civil cases; and the rules are set out in Paragraph 704-5 of the Bar’s Code of Conduct and an approved guide ‘Guidance on the Preparation of Witness Statements’.

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statement to reflect accurately the witness’ evidence,32 and the Commercial Court Guide expressly warns that: ‘great care should be exercised when excluding any material which is thought to be unhelpful to the party calling the witness and no material should be excluded which might render the statement anything other than the truth, the whole truth and nothing but the truth.’ Expert witnesses must certify that they understand their duty to the. court, as set out in Appendix 12 to the Guide (which derives substantially from Cresswell J’s judgment in The Ikarian Reefer), and experts must address their reports to the court. It is the express duty of experts to help the court on the matters within their expertise (CPR 35.3(1)). This duty is paramount and overrides any obligation to the person from whom an expert has received instructions or by whom he or she is paid (CPR 35.3(2)). This Appendix 12 lists specific rules: 1 Expert evidence presented to the Court should be, and should be seen to be, the independent product of the expert uninfluenced by the exigencies of litigation. 2 An expert witness should provide independent assistance to the Court by way of objective unbiased opinion in relation to matters within his expertise. An expert witness should never assume the role of an advocate. 3 An expert witness should not omit to consider material facts which could detract from his concluded opinion. 4 An expert witness should make it clear when a particular question or issue falls outside his expertise. 5 If an expert’s opinion is not properly researched because he considers that insufficient data is available, then this must be stated with an indication that the opinion is no more than a provisional one. 6 In a case where an expert witness who has prepared a report could not assert that the report contained the truth, the whole truth and nothing but the truth without some qualification, that qualification should be stated in the report. 7 If, after exchange of reports, an expert witness changes his view on a material matter having read another expert’s report or for any other reason, such change of view should be communicated in writing (through legal representatives) to the other side without delay, and when appropriate to the Court. The expert witness must certify that he or she has read and understood Appendix 12 and that he or she has complied and will continue to comply with its terms at all stages of

32 As to the contents of an expert report, the relevant rules are set out in Part 35 of the Civil Procedure Rules 1998 and its Practice Direction, together with section H2 and Appendix 12 of the Commercial Court Guide. There is an Expert Witness Protocol (Version 1.0) prepared by the Official Referees Solicitors Association (ORSA) for use in the Technology and Construction Court (available at <www.courtservice.- gov.uk/notices/tcc/tcc-tecsaewp.htm>), and there is also a draft Code of Guidance for Experts of September 1999 awaiting approval as a Practice Direction. (These documents will be revised in 2002).

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involvement in the case. The expert must also certify that the assumptions on which his or her opinion are based are not unreasonable or unlikely or that if they are, the expert has said so; the expert must certify that the facts stated in his or her report within his or her own knowledge have been identified as such and are true; the expert must certify that the opinions expressed in the report represent his or her true professional opinion; and the expert must of course sign the opinion so as to make it his or her own expert opinion. This is all very uncontroversial; it works in practice for the English Commercial Court and suitably adapted it could work equally for international commercial arbitration.

X. POSSIBLE SOLUTIONS The question first arises whether international arbitration is susceptible to reform at all. From the English perspective, the answer is easy: if Lord Woolf could so massively reform English civil procedure, then nothing is beyond reform anywhere. For international commercial arbitration, such reforms must be possible; but equally these cannot be achieved by a monocultural approach, and, as indicated above, there are also certain criteria for any possible solutions. The initiative lies in the hands of international arbitrators and practitioners and, if ignored for much longer, it may pass to state or regional regulators with less affection for the arbitration process. The general contractual duty of good faith can provide the legal umbrella for both civilian and common law lawyers, but by itself the doctrine is too general to provide an effective practical guide for parties’ lawyers practising in the field of international arbitration. Also, that guide cannot be a national or regional code of conduct, crudely transplanted to apply to transnational lawyers arbitrating in that country or applied to its own national lawyers practising in another host State. Equally, it cannot be a guide designed to govern a lawyer’s relations with a State court. International arbitration is different from State and national practice: it is sui generis, and, in its different forms, it is a much more varied and flexible procedure which requires its own guide. Nonetheless, despite its practitioners’ legal and cultural differences, the practice of international arbitration is increasingly subject to harmonization. It is becoming supranational and the solution could also be supranational. We saw this with the 1986 IBA Code of Ethics for International Arbitrators,33 and we see it with the 1999 IBA Rules of Evidence. Like these IBA Rules, what is needed is a voluntary solution - a guide rather than a model law or disciplinary code - and the best way to start is with micro-solutions, rather than a grand project where the usual difficulties could hinder progress for a long time, even then leading perhaps only to moralistic and impractical solutions34. If the first step is the hardest, however long the eventual journey, let us make it small and easy.

33 See Branson, ‘Ethics for International Arbitrators’ in (1987) 3(1) Arbitration International 72. 34 The English Bar developed for centuries without any formal code of conduct until very recently, although a useful code was expressed informally by the Lord Chancellor in iolanthe (see Appendix), which speaks for itself.

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For witness statements under the 1999 IBA Rules, taking the suggestion proposed in the Aquarius case, let there be appended to the witness statement a written declaration by the parties’ legal representative who procured the statement giving his or her name and professional qualification, and giving information about how, when and where the statement was prepared, including a statement of time spent by witness and representative respectively. For expert reports under the 1999 IBA Rules, taking the success of the Woolf reforms, let there be a similar declaration by the party’s legal representative, together with a statement by the expert witness acknowledging his or her independent duty along the lines of the Woolf requirements, listed above. For document production, international arbitrators should more readily complain at a party’s delinquent conduct, to the extent of drawing expressly an adverse inference on the merits from procedural delinquency or making a special order on costs. These are modest suggestions; and others will wish to add their own suggestions derived from their own experience. Once collated by the IBA or another international organization, they could make a difference in improving best practice. Bad practices, like bad money, do tend to drive out good. If bad practices in the taking of written witness statements or commissioning independent expert reports come to be seen as normal by users and by international arbitrators, their probative value will be diminished still further and their use will have to be reconsidered. As for deficient documentary production, cynicism will breed contempt for the arbitral process. None of this is a cry of despair. On the contrary, it is a measure of the ever-increasing success of international arbitration that it must meet new challenges and provide new practical solutions on a larger scale. If, as has been said, international arbitration is the only show in town for international trade, let it at least not be a tennis game played with half the court always missing or a rugby match played by lawyers, like Sisyphus, eternally uphill.

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APPENDIX AN OLD ETHICAL CODE (TO BE ADAPTED) Gilbert and Sullivan’s ‘Iolanthe’ was first performed at the Savoy Theatre on 25 November 1882 and the libretto contains in Act One a possible starting point in the distant future for an ethical code for international arbitration practitioners, substituting international arbitration for the English Bar, etc. It is the song of the Lord Chancellor of England and Wales, who (as he sang in Arcadia) always kept his duty strictly before his eyes, and it was to that fact (he sang) that he owed advancement to his distinguished position: When I went to the Bar as a very young man, (Said I to myself, said I), I’ll work on a new and original plan, (Said I to myself, said I), I’ll never assume that a rogue or a thief Is a gentleman worthy of implicit belief, Because his attorney has sent me a brief, (Said I to myself, said I). Ere I go into court I will read my brief through (Said I to myself, said I), And I’ll never take work I’m unable to do (Said I to myself, said I), My learned profession I’ll never disgrace By taking a fee with a grin on my face, When I haven’t been there to attend to the case (Said I to myself, said I). I’ll never throw dust in a juryman’s eyes (Said I to myself, said I), Or hoodwink a judge who is not over-wise (Said I to myself, said I), Or assume that the witnesses summoned in force In Exchequer, Queen’s Bench, Common Pleas, or Divorce, Have perjured themselves as a matter of course (Said I to myself, said I). In other professions in which men engage (Said I to myself, said I), The Army, the Navy, the Church, and the Stage (Said I to myself, said I), Professional licence, if carried too far, Your chance of promotion will certainly mar And I fancy the rule might apply to the Bar (Said I to myself, said I!).

Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor L Yves Fortier CC, QC and Stephen L Drymer*

I. Introduction In 2002, a leading commentator prophesied that the task of defining expropriation would dominate the foreign investment legal context in the future.1 It is fair to say that this prophecy has materialized. Much of the work in the field of expropriation is concerned with discovering an appropriate basis for distinguishing expropriation, on the one hand, and no compensable regulation, on the other. Needless to say, very different and potentially far-reaching consequences flow from the characterization of State conduct as either expropriatory or regulatory in nature. Despite the efforts of authors and adjudicators alike to define in sufficiently concrete terms the meaning of ‘expropriation’, the objective frequently eludes grasp, like water and fruit receding from the hands of Tantalus.2 Indeed, the doctrine and case law on expropriation in international law remain somewhat unsettled. Several factors may explain why this is so. These include the diversity of interests in play, divergences in cultural, economic and legal concepts of property, differing understandings of the role of the State, and a general heterogeneity in State practice. In attempting to understand and reconcile these factors, international tribunals and commentators on foreign investment law occasionally resort to a comparative analysis of the domestic law of relevant legal systems, in a quest to discern general principles of law. American law in particular is frequently cited in this respect, as it is generally understood to comprise the strongest regard for property rights and thus the highest and most stringent

* Respectively, Chairman and Partner of Ogilvy Renault, Montreal, Canada. The authors wish to acknowledge the contribution of Sebastien Goff to the research and drafting of this paper. This is the text of the Twelfth Goff Lecture delivered in Hong Kong on 9 December 2004. Editorial note: It was originally published at (2005) 13(1) Asia Pacific Law Review 79-110. 1 Rudolf Dolzer, ‘Indirect Expropriations: New Developments?’ (2002) 11 NYU Envtl LJ 64, at p 66: ‘[I] t is not unreasonable to assume that the legal issues in the foreign investment context may, for the time being, be dominated by the definition of expropriation.’ 2 Tantalus, the son of Zeus and king of Sipylos, was uniquely favoured among mortals, since he was invited to share the food of the gods. However, he abused the guest-host relationship and was punished by being tantalized with hunger and thirst: he was immersed up to his neck in water, but when he bent to drink, it all drained away; luscious fruit hung on trees above him, but when he reached for it the winds blew the branches beyond his reach.

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standard of protection against State interference with such rights. Other recent sources of inspiration include decisions of the European Court of Human Rights.3 This paper does not purport to offer a comprehensive review of the treatment of expropriation in international law. Its purpose is but to offer some insight - ‘a modest foray’, to quote the author of a 1975 article on the subject4 - into what is, inevitably, an ongoing and ever-evolving discussion concerning the dividing line, in the international law of foreign investment, between valid, non-compensable regulation (including regulation of private property rights) and compensable expropriation. That discussion, perhaps not surprisingly, has spawned a jargon all its own, including terms such as ‘indirect expropriation’ and ‘creeping expropriation.’ Such phrases are meant to describe the very real idea of expropriation not so much as an act per se, singular and direct in consequence, but as a process which, notwithstanding that it may be aimed at other entirely legitimate regulatory objectives and does not involve a single instance of an outright taking, nonetheless has the effect, often degree-by-degree, of depriving an owner of fundamental rights of property. Needless to say, it is often as a consequence of such a process that the most contentious problems arise in practice. In those circumstances, it becomes necessary to determine when, how, or at what point does otherwise valid regulation become, in fact and effect, an expropriation? This is the question that is addressed briefly in this paper, by reference principally to relevant jurisprudence drawn from four sources: the Iran-United States Claims Tribunal;5 arbitral tribunals constituted under the aegis of the International Centre for the Settlement of Investment Disputes (ICSID) to resolve investorState disputes, typically arising under Bilateral Investment Treaties (BITs); tribunals constituted under Chapter 11 of the North American Free Trade Agreement (NAFTA); and ad hoc international arbitral tribunals.

3 In the 2003 decision in Tecnicas Medioambientales TECMED SA v The United Mexican States, an ICSID arbitral tribunal adopted an approach articulated by the European Court of Human Rights in applying Protocol No 1 to the European Convention for the Protection of Human Rights and Fundamental Freedoms. This important case is discussed below. 4 Burns H Weston, ‘Constructive Takings Under International Law: A Modest Foray into the Problem of “Creeping Expropriation”’ (1975) 16 Va J IL 103. 5 The Iran-United States Claims Tribunal was created in 1981 to resolve the crisis between Iran and the United States arising, in general, out of the Iranian revolution of 1979, and, in particular, out of both the detention of 52 United States nationals in the United States embassy in Tehran and the subsequent freeze of Iranian assets by the United States.

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II. Expropriation, Indirect Expropriation and Regulation A. Expropriation under International Law There is no doubt today that under customary international law States have the right to expropriate the property of foreign investors. That right is, however, subject to four conditions:6 •

the expropriation must be undertaken for a public purpose;

•

the expropriation must be non-discriminatory;

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the expropriation must comply with principles of due process of law (also known as ‘natural justice’); and

•

compensation for the expropriation must be paid to the foreign investor.7

The apparent simplicity and clarity of these norms obscure the fact that most BITs, like NAFTA, do not provide a definition of ‘expropriation’.8 Indeed, the definition of

6 These basic principles of international law, today considered well-settled, survived many challenges during the 20th century, primarily from developing countries. The Union of Soviet Socialist Republics was arguably the first major challenger to this legal framework when it claimed that a foreign investor is always subject to local, as opposed to international, law. For their part, Latin American nations invoked the doctrine articulated by the Argentine jurist Carlos Calvo, insisting that international law only requires that foreign investors receive the same treatment as domestic investors. Indeed, in 1974 the ‘Calvo doctrine’ was embodied by the United Nations General Assembly in Article 2(2)(c) of the Charter of Economic Rights and Duties of States (GA Res 3281, 29 UN GAOR Supp No 31 at p 50, UN Doc A/9631), which provided that ‘[i]n any case where the question of compensation gives rise to a controversy, it shall be settled under the domestic law of the nationalizing State and by its tribunals.’ Nonetheless, as mentioned, the modern international legal framework overcame such challenges. See, for example American Law Institute, Restatement of the Law Third - The Foreign Relations Law of the United States, vol 2 (USA: American Law Institute Publishers, 1987) (the Restatement), § 712, Reporter’s Note 1. 7 The applicable standard of compensation has been the subject of epic battles over the last century, mostly surrounding the so-called ‘Hull formula’, which provided for ‘prompt, adequate and effective’ compensation. 8 BITs usually provide that the meaning of expropriation is to be decided in accordance with international law: Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (The Hague; Boston: M Nijhoff, 1995) at p 128-129. When BITs are mute on this matter, Article 31(3)(c) of the Vienna Convention on the Law of Treaties (1155 UNTS 331, entered into force on 27 January 1980) requires the interpreter to take into account any ‘relevant rules of international law applicable in the relations between the parties.’ Relevant awards of the Iran-United States Claims Tribunal also tend to apply customary international law: see Maurizio Brunetti, ‘Iran-United States Claims Tribunal, NAFTA Chapter 11, and the Doctrine of Indirect Expropriation,’ (2001) 2 Chi J Int’l L 203. Article 1131(1) of NAFTA provides that issues in dispute in a Chapter 11 claim are to be decided ‘in accordance with this Agreement and applicable rules of international law.’ Other similar terms commonly employed in bilateral and multilateral investment agreements, such as ‘dispossession,’ ‘taking,’ ‘deprivation,’ or ‘privation,’ are also typically unaccompanied by clear definitions.

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expropriation in international law is still very much in flux, and nowhere is this more evident than in the area of indirect expropriation.9

B. Indirect Expropriation Expropriation may take many forms. It may constitute a direct act, such as the compulsory transfer of title to property to the State or a third party, or the outright seizure of property by the State. However, expropriation also, perhaps more frequently, occurs by less direct and obvious means. In particular, the deprivation of property rights may result from a series of acts - what is referred to above as a ‘process’ - the overall result of which is such as to constitute an expropriation. BITs and multilateral trade and investment accords commonly reflect this reality in referring to concepts such as ‘indirect expropriation,’ ‘de facto expropriation,’ ‘constructive expropriation,’ ‘creeping expropriation,’ ‘measures equivalent to expropriation,’ ‘measures tantamount10 to expropriation’ or ‘measures having an effect equivalent to expropriation.’

9 In contrast, many BITs and other investment agreements provide, often in jurisdictional provisions, explicit definitions of ‘property’ (or ‘investment,’ or similar terms) covered by the protection from expropriation. No longer is the concept of expropriation limited to real property; it is now acknowledged that both tangible and intangible property can be subject to expropriation. For example, NAFTA Article 1139 defines ‘investment’ in a very broad fashion as including: (a) an enterprise (defined in NAFTA Article 201(1) as ‘any entity constituted or organized under applicable law, whether or not for profit, and whether privately-owned or governmentallyowned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association’’; (b) an equity security of an enterprise; (c) under certain conditions, a debt security of an enterprise; (d) under certain conditions, a loan to an enterprise; (e) an interest in an enterprise that entitles the owner to share in income or profits of the enterprise; (f) an interest in an enterprise that entitles the owner to share in the assets of that enterprise on dissolution; (g) real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes; and (h) interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory - and in this regard, two NAFTA tribunals have held that access to market constitutes an “interest” susceptible of expropriation: Pope & Talbot Inc v Government of Canada, Interim Award (26 June 2000) (Arbitrators: Lord Dervaird, Murray J Belman and Benjamin J Greenberg), available online: http:// www.dfait-maeci.gc.ca/tna-nac/documents/pubdoc7.pdf (Pope & Talbot v Canada), at para 96, p 33: ‘[T]he Tribunal concludes that the Investment’s access to the US market is a property interest subject to protection under Article 1110’; and SD Myers Inc v Government of Canada, Partial Award (13 November 2000), 40 ILM 1408 (Arbitrators: Brian P Schwartz, Edward C Chiasson and J Martin Hunter), available online: http://www. dfait-maeci.gc.ca/tna-nac/disp/SDM archive-en.asp (SD Myers v Canada). 10 There has been considerable debate in legal circles as to whether the expression ‘measure tantamount to expropriation in NAFTA Article 1110 expands the customary international law meaning of expropriation. This debate appears settled today, as three NAFTA tribunals have found that tantamount to’ means nothing more than ‘equivalent to.’ Hence, the NAFTA coverage of expropriation is not any different from that of customary international law: Pope & Talbot v Canada, supra, at p 34, para 96, and p 38, para 104; SD Myers v Canada, supra, at pp 70-71, para 285-286; Marvin Roy Feldman Karpa v Mexico, ICSID Case No ARB(AF)/99/1, Award (16 December 2002) (Arbitrators: Konstantinos D Kerameus, Jorge Covarrubias Bravo and David A Gantz), available online: http://www. worldbank.org/icsid/cases/Feldman mexico-award-en.PDF (Feldman v Mexico), at p 36, para 100 (the scope of ‘tantamount to expropriation is functionally equivalent to that of ‘indirect expropriation’). See also: Ticnicas Medioambientales TECMED SA v The United Mexican States, ICSID Case No ARB(AF)/00/2, Award (29 May 2003) (Arbitrators: Horacio A Grigera Naón, José Carlos Fernandez Rojas, Carlos Bernal Verea), available online: http./ /www.worldbank.org/icsid/cases/laudo-051903%20-English.pdf (TECMED v Mexico), at p 43, para 114 (unofficial translation from the Spanish original).

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For example, NAFTA Article 1110(1) provides as follows: ‘No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization’ or expropriation of such an investment (“expropriation”), except ...’ (Emphases added) Even if such wording can be seen as an attempt to delineate the scope of the term ‘expropriation’ and to bring within its ambit something other, and something more, than ‘direct’ governmental acts, it offers little in the way of assistance in understanding the practical meaning of ‘indirect’ expropriation.

C. Non-compensable Regulation It is a truism that the right of foreign investors to the protection of their investment often conflicts with the right of States to regulate within their boundaries. At a macro-level, it is necessary to strike a balance between the competing interests of the host State, which represents and is responsible to a community, and the foreign investor”.11 On the one hand, the community cannot reasonably be required to bear the normal commercial risks associated with foreign investments. Nor, as one arbitrator has stated, should foreign investors ‘unjustly enrich’ themselves by conducting themselves in a manner detrimental to the general welfare.12 On the other hand, investors cannot be asked to endure unreasonable regulation without compensation, and they should not be asked to pay for risks that should be socialised.13 As stated by Justice Brandeis of the United States Supreme Court, ‘if regulation goes too far it will be recognized as a taking.’14 Determining when a regulation ‘goes too far’ is the nub of the issue. In international law, a long line of authorities has established that States are not liable to pay compensation when, in the normal exercise of their police powers,”15 they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.16 The Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, drafted in 1961 by Professors Sohn and Baxter, recognized the following categories of non-compensable takings: ‘An uncompensated taking of an alien property or a deprivation of the use or enjoyment of property of an alien which results from the execution of tax laws; from a general change in the value of currency; from the action of the competent authorities

11 Thomas Waelde & Abba Kolo, ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law,’ (2001) 50 Int’l & Comp LQ 811, at p 839. 12 SD Myers v Canada, supra, at para 212, p 71. 13 Waelde & Kolo, supra. 14 Pennsylvania Coal Co v Mahon, 260 US 393 (1922), dissenting opinion of Brandeis J. 15 Few writers in international law have ventured to propose a definition of ‘police powers’ and, for present purposes, the definition contained in Black’s Law Dictionary suffices: Police power is ‘[t]he inherent and plenary power of a sovereign to make all laws necessary and proper to preserve the public security, order, health, morality, and justice.’ (Black’s Law Dictionary, 8th ed (Thomson West, 2004), at p 1196). 16 This rule was notably approved by the International Law Association at its 36th conference held in 1930: International Law Association, Report of the 36th Conference, New York, 1930, Final Resolution, p 361, cited in S Friedman, Expropriation in International Law (London: Stevens, 1953) at p 2, fn 6; and in Gillian White, Nationalisation of Foreign Property (London: Stevens, 1961) at p 42, fn 4.

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of the State in the maintenance of public order, health or morality; or from the valid exercise of belligerent rights or otherwise incidental to the normal operation of the laws of the State shall not be considered wrongful.’17 (Emphases added) Similarly, the oft-quoted Restatement (Third) of Foreign Relations Law of the United States provides that a State does not commit an expropriation – i.e., it is not liable to pay compensation to dispossessed property holders - when it adopts general regulation that is ‘commonly accepted as within the police power of States’: ‘A state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police power of states, if it is not discriminatory ... , and is not designed to cause the alien to abandon the property to the state or sell it at a distress price.18’ (Emphases added) However, international law has yet to identify in a comprehensive and definitive fashion what regulations are ‘commonly accepted’ as within the police power of States and, thus, non-compensable.19 In other words, it has yet to draw a bright and easily distinguishable line between regulation and expropriation, especially indirect expropriation.

III. Distinguishing between Non-compensable Regulation and Indirect Expropriation One approach to distinguishing regulatory and expropriatory measures is to focus exclusively on the effect of a regulatory measure, more particularly on its degree of interference with an investment. From this perspective, a valid police power regulation is a measure that does not have a sufficiently restrictive effect on property rights to constitute an expropriation. Conversely, an expropriation will be found to have occurred where a regulatory measure, or series of measures, is sufficiently restrictive. Proponents of this approach adopt what is termed the ‘sole effect’ test.

17 Louis B Sohn & Richard Baxter, Draft Convention on the International Responsibility of States for Injuries to the Economic Interests of Aliens, (1961) 55 AJIL 545, at p 553. 18 Restatement supra, § 712, Comment g. at p 201. This rule was consecrated in Too v Greater Modesto Insurance Associates, where the Iran-United States Claims Tribunal dismissed the claim of an Iranian investor based on the seizure and auctioning of its liquor license by the United States Internal Revenue Service. The seizure was made in order to satisfy overdue withholding taxes, and constituted an exercise of the police power of the United States for which there was no duty to pay compensation: ‘A State is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation or any other action that is commonly accepted as within the police power of States, provided it is not discriminatory and is not designed to cause the alien to abandon the property to the State or to sell it at a distress price.’ (Too v Greater Modesto Insurance Associates, 23 Iran-US Cl Trib Rep 3-8 (1989) at p 38. See also: Sedco, Inc v National Iranian Oil Co, Award No ITL 55-129-3 (24 Oct 1985), 9 Iran-US Cl Trib 2-8 (1985) at p 275: ‘It is also an accepted principle of international law that a State is not liable for economic injury which is a consequence of a bona fide “regulation” within the accepted police power of states). 19 One author has proposed that academic studies be conducted to establish a ‘taxonomy of legitimate regulatory purposes’ (Allen S Weiner, ‘Indirect Expropriations: The Need for a Taxonomy of “Legitimate” Regulatory Purposes,’ (2003) 5 International Law Forum 166, available online: http://iis-db.stanford.eduipubs/20674/ expropriations-Weiner.pdf).

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Another approach is to test the purpose of a measure in order to determine its true nature. Under such an analysis, a legitimate public purpose may, in certain circumstances, in and of itself, suffice to cast a measure as being in the nature of the normal exercise of police powers, and hence non-compensable, regardless of the magnitude of its effect on an investment. A more nuanced, contextual approach consists in weighing both the purpose and effect of a measure in a sort of regulation/expropriation balance. The higher the purpose of a measure and the greater its practical benefit to the public welfare, the greater is the level of interference with an investment that must be demonstrated in order to tip the scales toward a characterization of the measure as an expropriation. Such an approach entails a consideration of all of the circumstances surrounding the measure in question, and recognises that both purpose and effect can inform the juridical characterisation of State conduct. In many cases, this is the approach adopted, sometimes implicitly, by international tribunals. Regardless of how the analysis is conducted in a given case, the effect and purpose of the impugned measure are two factors uniformly identified by international tribunals as critical to the characterisation of the measure as either regulatory or expropriatory.

A. Effect of the Measure 1. Effect on the Investment: Nature, Degree and Duration of Interference In contemporary international law, a claim of expropriation is usually analysed in terms, inter alia, of the economic prejudice caused to the investor as manifested in the impugned measure’s impact on the investor’s property rights.20 For an expropriation to be found, the host State must have unreasonably interfered with the investor’s right to use, enjoy the benefits of, or dispose of his property. One of the most well-known formulations of this principle was articulated by the Iran-United States Claims Tribunal in Tippets, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of Iran, where it wrote: ‘A deprivation or taking of property may occur under international law through interference by a state in the use of that property or the enjoyment of its benefits, even where legal title to that property is not affected.’21 (Emphases added) However, it is widely acknowledged - and common sense dictates - that not all government measures that cause a reduction in the economic value of an investment or in its capacity to earn profits constitute expropriation. The interference must be of a certain quality and exceed a certain magnitude, degree, or intensity. States have the right, indeed the duty, to regulate; and public governance would be impossible if States were liable to pay compensation for every measure that reduced the value of foreign investments.

20 This is contrasted, for example, with an analysis that focuses on such traditional concepts as the investor’s acquired rights: Yves Nouvel, ‘Les mesures équivalant à une expropriation dans la pratique récente des tribunaux arbitraux’ (2002) 106 RGDIP 79, at p 84 et seq. 21 Tippetts, Abbett, McCarthy, Stratton v TAMS-AFFA Consulting Engineers of lran, Award No 141-7-2, 6 IranUnited States Cl Trib 219 (1984) (Tippets v TAMS-AFFA), at p 225.

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In this respect, the Restatement declares that the effect of the measure must be to prevent outright, or to ‘unreasonably interfere’ with or to ‘unduly delay’ the effective enjoyment of the foreign investor’s property: ‘A state is responsible as for an expropriation of property ... when it subjects alien property to taxation, regulation, or other action that is confiscatory, or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment of an alien’s property or its removal from the state’s territory.’22 (Emphases added) In Starrett Housing Corp v Government of the Islamic Republic of Iran, the Iran-United States Claims Tribunal declared that, short of a law or decree explicitly (ie directly) expropriating a property, the line dividing regulation and expropriation, that is, the point at which interference with property rights becomes ‘undue’, is drawn at the point at which ‘these rights are rendered so useless [by the measure] that they must be deemed to have been expropriated’: ‘[I]t is recognized by international law that measures taken by a State can interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even though the State does not purport to have expropriated them and the legal title to the property formally remains with the original owner.23 (Emphases added) In Tippets v TAMS-AFFA, it was held that expropriation occurs where circumstances demonstrate that the measure deprives the foreign investor of ‘fundamental rights of ownership’ in a manner that is ‘not merely ephemeral’.24 ‘While assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under

22 Restatement, supra, § 712, Comment g, at pp 200-201. An almost identical test was put forward by the United States before the International Court of Justice in Elettronica Sicula SpA (ELSI) (United States of America v Italy), International Court of Justice, Judgment of 20 July 1989, available online: http://www.ic j-cij .org/iciwww/icases/ielsilielsiframe.htm, at para 114: ‘[A]ccording to the United States, in international law a “taking” is generally recognized as including not merely outright expropriation of property, but also unreasonable interference with its use, enjoyment or disposal.’(Emphases added) 23 Starrett Housing Corp v Government of the Islamic Republic of lran, Award No ITL 32 -24- 1 (19 December 1983), 4 Iran-US Cl Trib Rep 122, reprinted in 23 ILM 1090 (1984) (Starrett Housing v Iran), at p 1115. In that case, the Claimants were a group of corporations that, through an Iranian company, had invested in a large housing project in Tehran. By means of a ‘revolutionary decree,’ the Iranian government appointed a temporary manager of the Iranian company, whose role was to direct, on behalf of the government, all activities related to the Claimants’ investment. The Tribunal held that the appointment of the temporary manager constituted an expropriation since the Claimants were effectively deprived of the right to manage their company - which included the right to select managers, supervisors and subcontractors - and thus of the effective use and control of their investment. 24 Tippetts v TAMS-AFFA, supra. The Claimant in that case was a United States consulting enterprise whose investment consisted of a fifty percent interest in a partnership with an Iranian engineering firm established for the purpose of performing engineering and architectural services for the Tehran International Airport. The partnership was managed by a four-member co-ordination committee, of which two members were appointed by each party. As a consequence of the Iranian Revolution, work on the airport project stopped, and Iran appointed a temporary manager who assumed the right, in violation of the partnership agreement, to sign cheques by himself on the partnership’s behalf and make other management decisions without consulting the Claimant. With the escalation of the political crisis in Iran, the government-appointed manager eventually ceased all communications with the Claimant. The Tribunal held that the circumstances demonstrated that Iran had deprived the Claimant of its fundamental rights of ownership in the partnership.

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international law, such a conclusion is warranted whenever events demonstrate that the owner was deprived of fundamental rights of ownership and it appears that the deprivation is not merely ephemeral.’24 (Emphases added) In Pope & Talbot v Canada, a NAFTA case decided in 2000, the Claimant, a Delaware corporation, invested in a Canadian subsidiary involved in the manufacture and export of softwood lumber to the United States. In 1996, Canada and the United States entered into the Softwood Lumber Agreement, a bilateral accord that established limits on Canadian exports of softwood lumber to the US. In accordance with the Agreement, Canada adopted the Canadian Export Control Regime, a domestic regulatory measure designed to implement and ensure compliance with the Agreement within Canada. Pope & Talbot claimed that the Export Control Regime constituted a measure tantamount to expropriation because it had the effect of depriving Pope & Talbot of its ordinary ability to sell its products to its traditional and natural market in the United States. Canada responded that the regulation constituted the non-discriminatory use of its police powers and, as such, did not give rise to a duty of compensation. The Tribunal dismissed Canada’s contention, affirming that ‘a blanket exception for regulatory measures would create a gaping loophole in international protection against expropriation.’25 The Tribunal had this to say about the test to determine the existence of an expropriation: ‘[In determining] whether a particular interference with business activities amounts to an expropriation, the test is whether that interference is sufficiently restrictive to support a conclusion that the property has been “taken” from its owner.’ 26 (Emphases added) In Metalclad Corporation v United Mexican States, the only NAFTA case to date in which a finding of expropriation has been made,27 the Tribunal described the level of interference required for a measure to comprise an expropriation as follows: ‘[Expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host state, but also covert and incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected

25 Pope & Talbot v Canada, supra, at para 99, p 35. 26 Ibid, at para 102, p 37. It is noted that on the facts of the case, the Tribunal ultimately held that the Canadian Export Control Regime did not amount to a taking because it did not cause a sufficient degree of interference with the Claimant’s investment. Notwithstanding the measure, the investor was able to continue to export substantial quantities of softwood lumber to the United States and to earn substantial profits on those sales. The Tribunal found that the investor had not been deprived of the ownership and control of its investment and the impugned regulation did not result in a substantial deprivation of its rights such as to constitute a taking. 27 The award was eventually set aside, in part, by the British Columbia Supreme Court (the place of arbitration), although the Court did not interfere with the NAFTA Tribunal’s definition of expropriation (quoted below), which it described as ‘an extremely broad definition of expropriation for the purposes of Article 1110,’ adding that this definition was ‘sufficiently broad to include a legitimate rezoning of property by a municipality or other zoning authority.’ (United Mexican States v Metalclad Corporation, 2 May 2001, [2001] BCSC 664, available online: http://www.worldbank.org/icsid/cases/ metalclad reasons for judgment.pdf, at pp 34-35, para 99 (with Supplementary Reasons for Judgment: 31 October 2001, [20011 BCSC 1529, available online: http:// www.courts. gov.bc.ca/jdb%2Dtxt/sc/01/15/2001bcscl529.htm).

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economic benefit of the property even if not necessarily to the obvious benefit of the host state.’28 (Emphases added) A further, arguably more stringent articulation of the line dividing regulation and expropriation is found in the important award of the ICSID tribunal in TECMED v Mexico. As expressed by the Tribunal, the degree of a measure’s interference with property rights must rise to the level of ‘radical deprivation’ before it will be considered an expropriation. The Tribunal’s findings in this regard are worth quoting in extenso: To establish whether the Resolution is a measure equivalent to an expropriation under the terms of section 5(1) of the Agreement, it must be first determined if the Claimant, due to the Resolution, was radically deprived of the economical use and enjoyment of its investments, as if the rights related thereto - such as the income or benefits related to the landfill or to its exploitation - had ceased to exist. In other words, if due to the actions of the Respondent, the assets involved have lost their value or economic use for their holder and the extent of the loss. ... Therefore, it is understood that the measures adopted by a State, whether regulatory or not, are an indirect de facto expropriation if they are irreversible and permanent and if the assets or rights subject to such measure have been affected in such a way that “any form of exploitation there of... “has disappeared; i.e. the economic value of the use, enjoyment or disposition of the assets or rights affected by the administrative action or decision have been neutralized or destroyed. Under international law, the owner is also deprived of property where the use or enjoyment of benefits related thereto is exacted or interfered with to a similar extent, even where legal ownership over the assets in question is not affected, and so long as the deprivation is not temporary.29 (Emphases added, references omitted)

28 Metalclad Corporation v United Mexican States, ICSID Case No ARB(AF)/97/ 1, Award (30 August 2000), reprinted in (2001) 16 ICSID Rev 1 (Arbitrators: Sir Elihu Lauterpacht, Benjamin R Civiletti, José Luis Siqueiros), available online: http://www.worldbank.org/ icsid/cases/mm-award-e.pdf (Metalclad v Mexico), at p 28, para 103. In that case, the Claimant (Metalclad), a company incorporated in the United States, had invested in Mexico through a Mexican subsidiary in the development and operation of a hazardous waste landfill site. Prior to Metalclad’s investment in the Mexican subsidiary, the company had obtained what appeared to be all of the required permits from the relevant Mexican authorities. Metalclad began construction of the landfill in 1994, largely on the strength of representations by the Mexican federal government - which was involved throughout the project - that all relevant regulatory conditions had been fulfilled, and construction of the site was completed in 1995. However, Metalclad was prevented from commencing operations due to the refusal of the local municipality to issue a municipal permit, on the ground, inter alia, that the landfill would cause adverse environmental effects - this, in spite of the fact that the federal government ‘was satisfied that this project was consistent with, and sensitive to, its environmental concerns.’ The Tribunal found that the refusal of the municipality to grant Metalclad a permit constituted a measure equivalent to expropriation. The level of interference with the investment was found to be complete since the measure ‘involve[d] the complete frustration of the operation of the landfill and negated the possibility of any meaningful return on Metalclad’s investment.’ (Ibid, at para 113, p 30). Mexico was condemned to pay approximately USS17 million in damages to Metalclad. As mentioned above, the award was ultimately set aside, though for reasons having nothing to do with the Tribunal’s description of the test for determining the occurrence of an expropriation. 29 TECMED v Mexico, supra, at p 43, para 115.

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Yet another formulation, conceived as deriving from or expressing general principles of law, sees the level of interference required for a regulatory act to constitute indirect expropriation as lying ‘where the property in question, after introduction of the measure concerned, can no longer be put to reasonable economic use’. (Emphases added)30 In sum, in order to be considered an expropriation, the effect of a regulatory measure on property rights - that is, the required level of interference with such rights - has been variously described as: (1) unreasonable; (2) an interference that renders rights so useless that they must be deemed to have been expropriated; (3) an interference that deprives the investor of fundamental rights of ownership; (4) an interference that makes rights practically useless; (5) an interference sufficiently restrictive to warrant a conclusion that the property has been ‘taken’; (6) an interference that deprives, in whole or in significant part, the use or reasonably-to be-expected economic benefit of the property; (7) an interference that radically deprives the economical use and enjoyment of an investment, as if the rights related thereto had ceased to exist; (8) an interference that makes any form of exploitation of the property disappear (i.e. it destroys or neutralizes the economic value of the use, enjoyment or disposition of the assets or rights affected); and (9) an interference such that the property can no longer be put to reasonable use. What is one to make of this babel? It is arguable that these seemingly disparate standards, tests and formulations are but variations on a single theme - as one author contends, the criterion of ‘substantial deprivation’ could be said to encompass and reconcile all others.31 The elegance of such a thesis notwithstanding, it is submitted that the proposition is as unlikely to withstand rigorous scrutiny as to satisfy intuitive understanding. The reality is that there exists a profusion of voices. It would be equally facile, however, to infer from this fact that international investment law remains fundamentally unsettled, hindered even, in the construction of basic concepts by a confusion of tongues. As explained below, the truth is neither more nor less than that the meaning of expropriation depends in large degree on the circumstances in which the question arises.

2. Effects on the Investor: Interference with Legitimate Expectations At least as important as the effect of a governmental measure on private property is its effect on the investor, that is, the extent to which the measure may undermine the investor’s reasonable and legitimate expectations represented by the investment. Indeed, legitimate expectations are inseparable from the concept of private property rights32 - essentially the rights to use, enjoy the fruits of, and alienate one’s property and are part and parcel of the legal order.33 As with the effect of a regulatory measure on the investment, its level of interference with the legitimate expectations of the investor is a question of degree.

30 Rudolf Dolzer, ‘Indirect Expropriation of Alien Property,’ (1986) 1 ICSID Rev 41, at p 62. 31 Yves Nouvel, supra. 32 Rudolf Dolzer, ‘Indirect Expropriation of Alien Property,’ supra. 33 Waelde & Kolo, supra, at p 844.

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Acknowledging legitimate expectations in the determination of the compensable nature of a measure is largely a question of fairness. An investor who invests in a traditionally foreign investment-friendly State, or under the promise of imminent governmental commitment to the investment in the form of a licence, permit or concession, would rightly feel hard done by if the rules of the game were suddenly to change. Implicit in the Metalclad award, for example, is the legitimate reliance of the investor on the Mexican government’s assurances that the investor’s planned landfill project satisfied all relevant local laws and regulations. Indeed, commentators have noted that the expectations of the investor are of particular importance, even in environmental matters, where ‘the commitment was made recently by the host State when it had a fair idea about the environmental implications of the investment project, and when no substantial change has occurred in scientific knowledge and environmental standards regarding the project in question.’34 Acknowledging the investor’s legitimate expectations may, an contraire, serve to favour, not the investor but the host State. An obvious example is where an investor invests in a highly regulated area, or in circumstances where stringent and evolving local regulation should be anticipated, such as with respect to environmental protection: ‘One cannot postulate that the environmental regime should be absolutely frozen, especially in the case of large-scale economic development projects and of technological innovation and changing environmental expectations and accepted standards.’35 Investment protection is not an insurance policy, and international tribunals have often reminded investors that they bear the normal risks associated with conducting a business. For example, in Starrett Housing v Iran, as we have seen, the Tribunal found that the appointment by the revolutionary government of a ‘temporary manager’ to direct the activities of the Claimants’ company constituted an expropriation. However, the investors’ contention that their investment had been effectively expropriated at a point in time some months earlier, specifically as a consequence of the ‘virulent anti-American and other policies and actions of the Revolutionary Group and the Islamic Republic,’ was rejected outright by the Tribunal, which wrote interestingly that: ‘[a] revolution as such does not entitle investors to compensation under international law.’ As the Tribunal held: ‘[T]here is no reason to doubt that the events in Iran prior to January 1980, to which the Claimants refer, seriously hampered their possibilities to proceed with the construction work and eventually paralyzed the Project. But investors in Iran, like investors in all other countries, have to assume a risk that the country might experience strikes, lockouts, disturbances, changes of the economic and political system and even revolution. That any of these risks materialized does not necessarily mean that property rights affected by such events can be deemed to have been taken. A revolution as such does not entitle investors to compensation under international law.36 (Emphases added) Similarly, in Robert Azinian and others v The United Mexican States, the first NAFTA Chapter 11 case to be decided on the merits, the Tribunal observed in obiter ‘It is a fact of

34 Ibid. 35 Ibid, at p 824. 36 Starrett Housing v Iran, supra, at p 117.

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life everywhere that individuals may be disappointed in their dealings with public authorities ... . It may be safely assumed that many Mexican parties can be found who had business dealings with governmental entities which were not to their satisfaction; Mexico is unlikely to be different from other countries in this respect. NAFTA was not intended to provide foreign investors with blanket protection from this kind of disappointment, and nothing in its terms so provides.’37

3. The ‘Sole Effect Test’ As mentioned above, some authorities posit that an analysis, or test, of the effect (whether on the investment or the investor) of a governmental measure is all that is required to distinguish regulatory from indirect expropriatory state conduct: a purported regulation becomes an effective expropriation when it interferes unduly with the investment itself or with the investor’s legitimate expectations with respect to the investment. The “exception” for police power regulation is understood as follows: general measures taken in the exercise of a State’s police powers consist precisely, and exclusively, in measures that do not unduly deprive a foreign investor of his economic interest in the investment.38 In the event of such deprivation or interference, an expropriation is deemed to have occurred and compensation must be paid. Neither the character of the measure nor the intention of the government bear much weight in this analysis. Such an approach is often referred to as the ‘sole effect’ thesis or doctrine; and the test for determining the occurrence of an expropriation is known as the ‘sole effect test.’

37 Robert Azinian and Others v United Mexican States, ICSID Case No ARB(AF)/97/2, Award (1 November 1999), reprinted in (1999) 14 ICSID Rev 2 (Arbitrators: Jan Paulsson, Benjamin R Civiletti, Claus von Wobeser), available online: http://www.worldbank.org/ icsid/cases/robert award.pdf (Azinian v Mexico), at para 83, p 23. In TECMED v Mexico, the ICSID panel resolved the question of legitimate expectations in favour of the investor, based on the facts of that case: ‘The political and social circumstances referred to above, which conclusively conditioned the issuance of the [regulatory measure], were shown with all their magnitude after a substantial part of the investment had been made and could not have reasonably been foreseen by the Claimant with the scope, effects and consequences that those circumstances had. There is no doubt that, even if Cytrar did not have an indefinite permit but a permit renewable every year, the Claimant’s expectation was that of a longterm investment relying on the recovery of its investment and the estimated return through the operation of the landfill during its entire useful life.’ (TECMED v Mexico, supra, at p 59.) 38 See, for example SD Myers v Canada, supra, at para 282, p 69: ‘Expropriations tend to involve the deprivation of ownership rights; regulations a lesser interference. The distinction between expropriation and regulation screens out most potential cases of complaints concerning economic intervention by a state and reduces the risk that governments will be subject to claims as they go about their business of managing public affairs.’ See also, for example Francisco Orrego Vicuña, ‘Carlos Calvo, Honorary NAFTA Citizen’, 11 NYU Envt LJ 19, available online: http://www.law.nyu.edu/journals/envtllaw/issues/volll/, at p 27: ‘Where to draw the threshold line is the really difficult point. On this matter, I should perhaps suggest that the concept of “police powers” of the state might be related only to those acts below the threshold line. Historically, police powers have never been meant to cover regulations amounting to expropriation, except perhaps in situations where there is a state of emergency or a state of necessity. It is thus a concept associated with an element of reasonableness.’ Barry Appleton, ‘Regulatory Takings: The International Law Perspective,’ (2002) 11 NYU Envtl LJ 35, available online: http://www.law.nyu.edu/journals/envtllaw/issues/volll/ at pp 42-43.

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The approach is grounded on the following proposition: under customary international law, an expropriation is lawful only if, inter alia, it is undertaken for a public purpose; if the fulfilment of a public purpose is a condition of the lawfulness of the expropriation, that purpose cannot serve, at the same time, as the justification that no compensation be due; hence, the purpose of the governmental measure should not be taken into account. Proponents of the sole effect doctrine acknowledge that, in practice, not all regulatory interferences amount to expropriation, but this is due to their effects and not their purposes. Indeed, the common purpose underlying both regulation and expropriation is seen as potentially nullifying any clear qualitative distinction between the two. This view was expressed by the distinguished international jurist and ICJ member, Professor Rosalyn Higgins, in the following manner: ‘Is this distinction [between expropriation and regulation] intellectually viable? Is not the State in both cases (that is, either by a taking for a public purpose, or by regulating) purporting to act in the common good? And in each case has the owner of the property not suffered loss? Under international law standards, a regulation that amounted (by virtue of its scope and effect) to a taking, would need to be “for a public purpose” (in the sense of in the general, rather than for a private, interest). And just compensation would be due. At the same time, interferences with property for economic and financial regulatory purposes are tolerated to a significant degree.’39 The case law contains numerous examples where tribunals have juggled with the ‘sole effect test’ in their determination of whether an expropriation has occurred. For example, in Phelps Dodge Corp v Iran, the Claimant, a New York corporation sought compensation for the alleged expropriation of its shareholder’s interest in an Iranian company established for the purpose of manufacturing and selling various wire and cable products in Iran. In November 1980, Iran transferred the management of the Iranian company and its factory to two agencies of the government. Pursuant to the transfer, managers were appointed by the government to operate the factory; no meetings of the Iranian company’s board of directors or shareholders were held; and no information concerning the business activities and financial affairs of the Iranian company was provided to the Claimant. In the words of the Tribunal, the Claimant was deprived of ‘virtually all of the value of its property rights.’ In response to the Iranian government’s claim that the transfer was a measure taken for the public welfare, specifically so as to prevent the closure of the factory and ensure the payment of wages owed to workers and debts owed to the government, the Tribunal had this to say: ‘The Tribunal fully understands the reasons why the Respondent felt compelled to protect its interests through this transfer of management, and the Tribunal understands the financial, economic and social concerns that inspired the law pursuant to which it acted, but those reasons and concerns cannot relieve the Respondent of the obligation to compensate Phelps Dodge for its loss.’40 (Emphases added)

39 Rosalyn Higgins, ‘The Taking of Property by the State: Recent Developments in International Law,’ (1982) 176 Recueil des Cours - Academie de Droit International 259, at p 331. 40 Phelps Dodge Corp v Iran, Award No 217-99-2 (19 March 1986), reprinted in 10 Iran-US Cl Trib Rep 121 (1986), at p 130.

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In Tippetts v TAMS-AFFA, the Tribunal clearly affirmed that the intent and form of a measure are ‘less important’ than its effect and real impact: ‘The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact.’41 (Emphases added) Another case which has been said to embody the sole effect thesis is the case of Biloune v Ghana Investment Centre. Whether or not the Tribunal truly espoused the doctrine is open to debate, though the case illustrates well the complexity of the issues involved (it also suggests the less-than-friendly treatment to which foreign investors occasionally find themselves subjected). In determining that an indirect expropriation had taken place in the circumstances, the Tribunal remarked as follows regarding the motivations of the government in question: ‘The motivations for the actions and omissions of Ghanaian governmental authorities are not clear. But the Tribunal need not establish those motivations to come to a conclusion in the case. What is clear is that the conjunction of the stop work order, the demolition, the summons, the arrest, the detention, the requirement of filing assets declaration forms, and the deportation of Mr Biloune without possibility of re-entry had the effect of causing the irreparable cessation of work on the project.’42 (Emphases added) It has been asserted that this award comprises one of the clearest recent pronouncements in favour of the sole effect doctrine. However, it might be said with at least equal justification that the case concerns the standard of proof to be met by governments seeking to justify conduct that might otherwise be considered expropriatory. The Tribunal, in the introduction to its award, explained that, in accordance with Article 24 of the UNCITRAL Arbitration Rules under which the case was heard, each party has the burden of proving the facts upon which it relies for its claim or defence. And after the passage of its award quoted above, it added as follows: ‘In the view of the Tribunal, such prevention of MDCL from pursuing its approved project would constitute constructive expropriation of MDCL’s contractual rights in the project and, accordingly, the expropriation of the value of Mr. Biloune’s interest in

41 Tippetts v TAMS-AFFA, supra, at p 225-226. This exact wording was also used in ITT Industries Inc vlran (ITT Industries Inc v Iran, Award No 47-156-2 (26 May 1983), reprinted in 2 IUSCTR 348, at p 352). 42 Biloune v Ghana Investment Centre, 95 ILR 183 (1989) (Arbitrators: Judge Stephen M Schwebel, Don Wallace Jr and Monroe Leigh) (Biloune v Ghana). Antoine Biloune, a national of Syria, was carrying a business in Ghana through Marine Drive Complex Ltd. (MDCL), a corporation incorporated in Ghana of which he was the main shareholder. MDCL formed a de facto joint enterprise with a corporation owned by the Government of Ghana, through which MDCL was to finance and carry out a particular construction project. MDCL also entered into an investment concession with the Ghana Investments Centre. Relying on the representations of its Ghanaian joint enterprise partner, MDCL began construction despite the absence of the required permit. The municipal authorities subsequently ascertained the absence of a permit, served a stop-work order on MDCL partner and, one day prior to the stop-work deadline, ordered the destruction of the project. Mr Biloune was summoned (through the Ghanaian print and broadcast media) to appear before the National Investigations Committee. He was then arrested and held in custody for 13 days, without charge, and thereafter deported to neighbouring Togo without possibility of re-entry to Ghana. The Tribunal found that the conjunction of these events had the effect of preventing MDCL from pursuing the project, which constituted constructive expropriation of MDCL’s rights in the project and, in consequence, the expropriation of Mr. Biloune’s interest in MDCL.

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MDCL, unless the Respondents can establish by persuasive evidence sufficient justification for these events.43 (Emphases added) The Tribunal ultimately found that the Respondent had not discharged its burden of proving, by means of “persuasive evidence”, the existence of ‘sufficient justification’ for its conduct. In Compañia del Desarrollo de Santa Elena, SA v Republic of Costa Rica, the government of Costa Rica issued an expropriation decree directed at a property owned by the Claimant, a Costa Rican company, the majority of whose shares were owned by American nationals. The parties agreed that a lawful direct expropriation had occurred. The only issue to be determined was the amount of compensation due to the Claimant, specifically, the appropriate method of valuation in the circumstances. Detailed evidence was submitted by Costa Rica as to its international legal obligations to protect the environment. Those obligations, it claimed, required that Costa Rica act to preserve the unique ecology of the area in which the Santa Elena property was located, by expropriating the property for incorporation into a national park. The Tribunal stated that the purpose of the expropriation did not affect the obligation to compensate the owners, in the circumstances, ‘While an expropriation or taking for environmental reasons may be classified as a taking for a public purpose, and thus may be legitimate, the fact that the Property was taken for this reason does not affect either the nature or the measure of the compensation to be paid for the taking. That is, the purpose of protecting the environment for which the Property was taken does not alter the legal character of the taking for which adequate compensation must be paid. The international source of the obligation to protect the environment makes no difference. Expropriatory environmental measures - no matter how laudable and beneficial to society as a whole - are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.’44 (Emphases added) One truly undeniable pronouncement in favour of the sole effect doctrine is found in Metalclad v Mexico, in which, as discussed above, the Tribunal’s broad definition of expropriation was concerned solely with the effects of the governmental measure. In addition to its finding with respect to the refusal of the municipality to grant Metalclad the required permit (which was reversed by the British Columbia Supreme Court), the Tribunal also opined that a so-called Ecological Decree issued by the governor of the Mexican state where Metalclad’s property was located constituted a form of indirect expropriation. In doing so, the Tribunal clearly applied the sole effect test and held that the intent behind the adoption of the decree was extraneous to a determination under NAFTA Article 1110:

43 Biloune v Ghana, supra. 44 Compañia del Desarrollo de Santa Elena, SA v Republic of Costa Rica, ICSID Case No ARB/ 96/1, Final Award (17 February 2000) (Arbitrators: L Yves Fortier, Elihu Lauterpacht, Prosper Weil), available online: http://www.worldbank.org/icsid/cases/santaelena award. pdf, at para 71-72, p 192.

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‘The Tribunal need not decide or consider the motivation or intent of the adoption of the Ecological Decree. Indeed, a finding of expropriation on the basis of the Ecological Decree is not essential to the Tribunal’s findings of a violation of NAFTA Article 1110. However, the Tribunal considers that the implementation of the Ecological Decree would, in and of itself, constitute an act tantamount to expropriation.’45 (Emphases added)

B. Purpose (Character) of the Measure The sole effect doctrine is not, of course, the only occupier of the legal landscape. As noted earlier, there exists as well a theory that accords an important normative function to the intended purpose, or character, of an impugned governmental measure. This is referred to as the ‘purpose’ doctrine, and its test for determining the occurrence of an expropriation as the ‘purpose test.’ Proponents of this theory consider the governmental measure that is the object of the investor’s challenge in a contextual framework that allows, indeed requires, a weighing and balancing of factors that include the purpose as well as the effect of the measure. Many commentators and arbitral tribunals have posited that a determination as to the occurrence of an expropriation can only truly be undertaken on a case-by case basis, in the light of all attending circumstances. In a sense, this observation is not, of course, specific to investment disputes - it is apposite in most instances in which an adjudicator applies legal standards to a particular set of facts. However, its frequent reiteration by arbitral tribunals charged with determining whether governmental conduct constitutes expropriation or mere regulation must, it is submitted, be taken as an indication that the international law of expropriation tends to favour a contextual analysis that exceeds a narrow assessment solely of the effects of governmental measures on foreign investments and investors. The purpose test, like the sole effect test, has multiple facets. This is but a reflection of the fact that the purpose of a measure can be viewed from several angles.

45 Restatement, supra, § 712, Reporter’s Note 6, at p 211: ‘It is often necessary to determine, in the light of all the circumstances, whether an action by a state constitutes a taking and requires compensation under international law, or is a police power regulation or tax that does not give rise to an obligation to compensate even though a foreign national suffers loss as a consequence.’ TECMED v Mexico, supra, at p 43, para 43 (unofficial translation from the Spanish original): ‘[H]ave to be examined on a case-by-case basis to conclude if one such expropriation method has taken place.’ L Yves Fortier and Stephen L Drymer, ‘Caveat Investor: The Meaning of “Expropriation” and the Protection Afforded Investors Under NAFTA,’ (2003) 20 News From ICSID 1, available online: http://www.worldbank.org/- icsid/news/news 20-1 .pdf, at p 11: ‘Simply put, the determination as to whether state conduct is compensable as an expropriation under NAFTA Article 1110(1) (or similar provisions in other agreements) is, in almost all instances, based on the facts of the case in question. [...]. It inevitably falls to the adjudicator to determine, in the light of the facts at issue, whether particular conduct by a state “crosses the line” that separates valid regulatory activity from expropriation.’

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1. Enrichment of the Host State Although the idea that an expropriation requires the enrichment of the patrimony of the host State has been widely abandoned by the case law,46 notably because it negates the protection against indirect expropriation,47 there exist certain discordant recent decisions. For example, in Eudoro A Olguin v Republic of Paraguay, an ICSID Tribunal expressed the following opinion: ‘For an expropriation to occur, there must be actions that can be considered reasonably appropriate for producing the effect of depriving the affected party of the property it owns, in such a way that whoever performs those actions will acquire, directly or indirectly, control, or at least the fruits of the expropriated property. Expropriation therefore requires a theologically [sic] driven action for it to occur; omissions, however egregious they may be, are not sufficient for it to take place.’48 (Emphases added) Similarly, in Lauder v Czech Republic (US v Czech Republic), an ad hoc arbitral tribunal wrote: ‘In addition, even assuming that the actions taken by the Media Council in the period from 1996 through 1999 had the effect of depriving the Claimant of his property rights, such actions would not amount to an appropriation [sic] - or the equivalent - by the State, since it did not benefit the Czech Republic or any person or entity related thereto... .’49 (Emphases added)

2. Deliberate Targeting of the Investor Other awards have required that the governmental measure be deliberately targeted, either explicitly or implicitly, against a particular investor. At issue is the subjective intention of the State to deprive the investor concerned of his property. The 1967 OECD Draft Convention on the Protection of Foreign Property clearly adopted this view: ‘In the case of direct deprivation (“expropriation” or “nationalization”) the loss of the property rights concerned is the avowed object of the measure. By using the phrase “to deprive ... directly or indirectly ...” in the text of the Article it is, however, intended to bring within its compass any measures taken with the intent of wrongfully depriving the national concerned of the substance of his

46 In addition, generally, to the case law espousing the sole effect doctrine, the issue was considered and rejected in explicit terms by the Tribunal in, for example TECMED v Mexico at p 43, para 113 (unofficial translation from the Spanish original), which acknowledged that de facto expropriations comprise, inter alia, situations where laws or actions of the State ‘deprive persons of their ownership over such assets, without allocating such assets to third parties or to the Government.’ 47 Yves Nouvel, supra, at p 90: ‘Exiger qu’une acquisition [par I’État] fasse suite à la dépossession revient à exiger que la mesure soit identique à une expropriation. Or la relation d’équivalence n’est pas une relation d’identité. Preuve en est qu’elle n’est pas symétrique.... Par I’équivalence, on cherche à subsumer un acte sous une catégorie dans laquelle il ne figurait pas d’emblée. Cela suppose par définition que l’acte ne satisfasse pas tous les critères de cette catégorie, car sinon il s’y trouverait sans recours à la notion d’équivalence’. 48 Eudoro A Olguin v Republic of Paraguay, ICSID Case No ARB/98/5, Award (26 July 2001) (Arbitrators: Rodrigo Oreamuno, Francisco Rezek and Eduardo Mayora Alvarado), available online: http://www.worldbank. org/icsid/cases/Olgun-award-en.pdf (0lguin v Paraguay), at para 84. 49 Lauder v Czech Rep (US v Czech Rep), Final Award 203 (3 September 2001), available online: http://www. mfcr.cz/staticlArbitraz/en/FinalAward.pdf, at para 203, p 44.

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rights and resulting in such loss (e.g. prohibiting the national to sell his property or forcing him to do so at a fraction of the fair market price).’50 (Emphases in original) An example of this approach in practice can be found in Sea-Land Service Inc v Iran. In dismissing the Claimant’s expropriation claim, the majority of the Tribunal found that the deprivation of the Claimant’s investment was not demonstrated to have been caused by any ‘deliberate interference’ or ‘intentional course of conduct’ by the government directed specifically against the investor: ‘A finding of expropriation would require, at the very least, that the Tribunal be satisfied that there was deliberate governmental interference with the conduct of Sea-Land’s operation, the effect of which was to deprive Sea-Land of the use and benefit of its investment. Nothing has been demonstrated here which might have amounted to an intentional course of conduct directed against Sea-Land. A claim founded substantially on omissions and inaction in a situation where the evidence suggests a widespread and indiscriminate deterioration in management, disrupting the functioning of the port of Bandar Abbas, can hardly justify a finding of expropriation.”51 (Emphases added, references omitted) However, in the same award, a forceful separate opinion was penned by Judge Holtzmann who took ‘strong exception’ to the majority’s reliance on the ‘subjective intentions’ of the government as opposed to the ‘objective effects’ of its conduct: ‘More fundamentally, I believe that the critical question is the objective effect of a government’s acts, not its subjective intentions. Acts by a government which have the effect of depriving an alien of his property are considered expropriatory in international law, whatever the governments’ intentions.’52 (Emphases added) It bears noting that the majority decision in Sea-Land has not been followed in any subsequent case in the Iran-United States Claims Tribunal,53 and has been expressly contradicted. For example, in Phillips Petroleum Co Iran v Iran, the Tribunal acknowledged the practical reality that a finding of expropriation may be less evident where the effects of a governmental measure are ‘merely the incidental consequences of an action or policy designed for an unrelated purpose’; yet it Emphasesed in virtually the same breath that ‘a government’s liability to compensate or expropriation of alien property does not depend on proof that the expropriation was intentional.54 In sum, the approaches adopted in Olguin v Paraguay and by the majority in Sea-Land v Iran do not seem to reflect the norm. Neither the deliberate targeting of a particular investor

50 Organization for Economic Co-operation and Development (OECD), 1967 Draft Convention on the Protection of Foreign Property, reprinted in (1968) 7 ILM 117, at p 125. 51 Sea-Land Service Inc v Iran, Award No 135-33-1 (20 June 1984), reprinted in 6 Iran-US Cl Trib Rep 149 (1984) (Sea-Land v Iran), at p 166. 52 Ibid, at p 207. 53 George H Aldrich, ‘What Constitutes a Compensable Taking of Property? The Decisions of the Iran-United States Claims Tribunal,’ (1994) 88 Am J Int’l L 585, at p 603 54 Phillips Petroleum Co Iran v Iran, Award 425-39-2 (29 June 1989), reprinted in 21 Iran United States Claims Tribunal Report 79, at p 115. (Emphases added)

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nor the objective of enriching the State are generally understood to be included among the criteria for a finding of expropriation.”55

3. Promotion of the General Welfare Whether the purpose of governmental conduct is the promotion of the general welfare is more frequently viewed as a factor to be weighed in the regulation expropriation balance than either the deliberate nature of the measure or whether its objective is to enrich the State. In theory, it is easy to envisage that this factor could be invoked in appropriate circumstances either to override property rights entirely (for example in the event of war or epidemics or other emergencies) or to increase the level of interference required for a finding of expropriation. Since 2003, the purpose test, with explicit reference to whether a measure is designed to protect ‘legitimate public welfare objectives,’ has been incorporated into five free trade agreements concluded by the United States (with Singapore,56 Chile,57 Central America and the Dominican Republic”,58 Australia59 and Morocco),60 and one bilateral investment treaty (US-Uruguay).61 The terms of those instruments are identical in this respect to the wording used in the updated Draft US Model BIT, released jointly by the United States Department of State and the Office of the United States Trade Representative in February 2004.62 As set out in therein, the criteria for a finding of indirect expropriation are as follows: The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a factbased inquiry that considers, among other factors:

55 Of course, the deliberate nature of a governmental measure may be one of the elements taken into account in a contextual analysis, and may even be determinative. For instance, a regulation that would otherwise be uncompensable may be found to be an expropriatory act if it is shown that the State deliberately targeted a particular investor. This was acknowledged in the Restatement and in the Too case, referred to above. 56 United States-Singapore Free Trade Agreement and Exchange of Letters Between US Trade Representative Robert Zoellick and Singapore Minister of Trade and Industry Georges Yeo, made on 6 May 2003, ratified by Congress on 31 July 2003, and entered into force on 1 January 2004, available online: http://www.tcc.mac.doc. gov/cgi-bin/doit.cgi?204:64: 269030908:351 57 5 United States-Chile Free Trade Agreement, signed on 6 June 2003, and ratified by Congress in July 2003 [Annex 1 0-D]. See: David A. Gantz, ‘Contrasting Key Investment Provisions of the NAFTA with the United States-Chile FTA,’ in Todd Weiler (ed), NAFTA Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects (Ardsley, New York: Transnational Publishers, 2004) 58 United States-Central America Free Trade Agreement (CAFTA), signed on 5 August 2004 [Annex 10-C]. 59 United States-Australia Free Trade Agreement, signed on 18 May 2004 [Annex 11-B, Article 4(b)] 60 United States-Morocco Free Trade Agreement, signed on 15 June 2004 [Annex 10-B]. 61 Treaty Between the United States of America and the Republic of Uruguay Concerning the Encouragement and Reciprocal Protection of Investment, signed on 25 October 2004 [Annex B] 62 See: http://www.state.gov/e/eb/rls/prsrl/2004/28923.htm. The Draft US Model BIT was previously updated in 1994 and the current version is expected to be finalised in the near future

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•

the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;

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the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and

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the character of the government action63

As regards the significance of the character of the measure, the same provision goes on to establish the important presumption that: ‘Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations’. (Emphases added)

4. The Parameters of the ‘Purpose Test’ Even among proponents of the purpose test, one question remains controversial: ‘[Is there] any specific point within the spectrum of diverse effects of governmental measures on property at which and beyond which compensation is required regardless of the objective and the nature of the governmental measure?’64 According to most commentators, instances of the complete and permanent annihilation of the economic value of an investment generally give rise to a duty to pay compensation. The purpose test, however, even as but one among several considerations as expressed in the US treaties referred to above, suggests that the answer is less certain. How to define the limits of the purpose test is the challenge which commentators and arbitral tribunals face to this day. In a well-known 1962 article entitled ‘What Constitutes a Taking of Property Under International Law?’ Professor GC Christie wrote that the legitimacy of the government’s purpose may justify ‘severe’ measures whose effects would otherwise be sufficient to warrant a finding of expropriation. However, a ‘complete’ restriction on the use of property would always be subject to compensation. He stated: ‘The conclusion that a particular interference is an expropriation might also be avoided if the State whose actions are the subject of complaint had a purpose in mind which is recognized in international law as justifying even severe, although by no means complete, restrictions on the use of property.

63 These factors are the same that those identified by the United States Supreme Court in the 1978 landmark case of Penn Central Transport Co v New York City, 438 US 104 (1978). For their application by international tribunals, see, for example Organisation for Economic Cooperation and Development (OECD), ‘Indirect Expropriation and the Right to Regulate in international investment law’, Working Papers on Investment Law, Number 2004/4, September 2004, available online: http://www.oecd.org/dataoecd/22/54/33776546.pdf 64 Rudolf Dolzer, ‘Indirect Expropriations: New Developments?’ supra, at p 80. Another relevant question is whether the standard as expressed in the US free trade agreements and Draft US Model BIT declares the customary international law or departs from it. This question is left to others, or at least to other occasions.

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Thus, the operation of a State’s tax laws, changes in the value of a State’s currency, actions in the interest of the public health and morality, will all serve to justify actions which because of their severity would not otherwise be justifiable; subject to the proviso, of course, that the action in question is not what would be “commonly” called discriminatory either with respect to aliens or with respect to a certain class of persons, among whom are aliens, residing in the State in question.’65 (Emphases added) In a more recent article, Professors Thomas Waelde and Abba Kolo summarized the situation with respect to environmental regulation as follows: ‘[I]t is unlikely that courts or arbitrators will find a compensable expropriation in cases where governments issue environmental regulation for legitimate purposes, in accordance with the state of scientific knowledge and accepted international guidelines. It is only when the environment becomes a pretext for domestic protectionism and when elements of discrimination, of breach of commitments or of use of regulation to extract benefits unrelated to the legitimate purpose of the regulation can be detected that a regulatory taking would, and should, be found. In the extreme case of complete and indefinite destruction of the economic value of property by otherwise fully legitimate regulation, and if individuals are required by regulation to make

65 GC Christie, ‘What Constitutes a Taking of Property Under International Law?’ (1962) 38 Brit YB Int’l L 307, at pp 331-332.

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a special sacrifice in terms of their proprietary rights for the benefit of the society at large, compensation is also owed.’66 (Emphases added) The balancing of the public interest in the test to determine whether an expropriation occurred has been addressed by international tribunals in cases which do not involve the existence of extreme or urgent circumstances that allegedly justify the depriving measure. Those decisions reflect a nuanced approach to the balancing or juggling exercise. For example, in 1972, in International Bank v Overseas Private Investment Corp, an ad hoc Tribunal dismissed an investor’s claim on the grounds that the exercise of the State’s police powers, which allegedly deprived the Claimant of its investment in a local timber company specialising in ‘almacigo’ timber, ‘were aimed at a genuine concern with forestry

66 Waelde & Kolo, supra, at p 846. There exists an old body of case law comprising examples of seizure of property that were held to be non-compensable in exceptional circumstances where the measure was deemed necessary to protect the public from an imminent danger arising out of the property. Arguably, this constitutes a general principle of law: in a survey of the major domestic systems, Dolzer found that ‘the various domestic orders uniformly indicate, in principle, that no compensation is due when the measure is necessary in order to protect the public from a danger arising from the property; the police power in its various forms generally overrides property rights, even though certain definitional issues have plagued courts and commentators in this area.’ (Rudolf Dolzer, ‘Indirect Expropriation of Alien Property,’ supra). For example, in the 1904 Bischoff Case, Venezuela was found non liable by an ad hoc Tribunal for the seizure, during an epidemic of smallpox, of an Italian carriage allegedly contaminated with this infectious disease: ‘Certainly during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police power.’ (Bischoff Case, Venezuelian Arbitrations of 1903 (Ralston 1904) at p 581. See Gary H Sampliner, ‘Arbitration of Expropriation Cases Under US Investment TreatiesA Threat to Democracy or the Dog That Didn’t Bark?’ (2003) 18 ICSID Rev 1, at p 10). Compensation was also refused by an arbitration tribunal in a 1925 case where the American authorities in the Philippines had destroyed a stock of liquor considered dangerous: ‘[T] he destruction was a matter of police entirely within the powers of the military government and entirely justified by the circumstances.’ (Parsons (Great Britain v United States), 6 R Int’l Arb Awards 165 (1925), cited in S Friedman, supra, at p 2; and in the Restatement, § 712, Reporter’s Note 6, at p 211). In other cases, the tribunal held that no compensation is due for the confiscation (forfeiture) of property that was used in the commission of a crime (Chazen v United Mexican States, IV UNRIAA 564 (1930). State practice also contains examples of the complete prohibition of certain activities regarded as harmful, for which no compensation was paid despite the ‘resulting destruction of important corporeal and incorporeal property rights,’ the best known example being the prohibition of the manufacture and sale of alcoholic liquor introduced in 1926 by the United States. When Mexico protested against this measure, the United States Secretary of State Frank B Kellogg (who later co-authored the Kellogg-Briand Pact and served as associate judge of the Permanent Court for International Justice) replied that it was an exercise of the ‘police powers’ of the State and could not, therefore, be the subject of a diplomatic protest (S Friedman, Expropriation in International Law (London: Stevens, 1953) at pp 50-52). Similar events took place in France with the abolition of private telegraphic undertakings in 1837 and the prohibition of the manufacture of white lead by the Law of July 20, 1909. Another example is ‘the so-called nationalization of nuclear minerals and materials by the USA, a measure taken for reasons of national security and protection of health.’ (Gillian White, supra, at p 42, footnote 3)

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conservation, were not discriminatory in application and, on all occasions when pressed, provided an exemption for the less acute problem presented by almacigo.67’ A more recent illustration of the significance of the character of an impugned governmental measure, and its weight in the regulation-expropriation balance, is the decision in the NAFTA case of SD Myers v Canada. A majority of the Tribunal noted that it is unlikely that a government regulatory measure could constitute an expropriation under NAFTA Article 1110, yet it stressed the need to consider the true purpose of the measure in addition to its effect. It expressed the “purpose test” in the following terms: ‘The Tribunal accepts that, in legal theory, rights other than property rights may be “expropriated” and that international law makes it appropriate for tribunals to examine the purpose and effect of governmental measures. The Interim Order and the Final Order were regulatory acts that imposed restrictions on SDMI. The general body of precedent usually does not treat regulatory action as amounting to expropriation. Regulatory conduct by public authorities is unlikely to be the subject of legitimate complaint under Article 1110 of the NAFTA, although the Tribunal does not rule out that possibility.’ (Emphases added). It went on: ‘A tribunal should not be deterred by technical or facial considerations from reaching a conclusion that an expropriation or conduct tantamount to an expropriation

67 International Bank v Overseas Private investment Corp, 11 ILM 1216 (1972), at pp 1227- 1228. The Tribunal was required to determine an insurance claim brought by the Claimant against the United States Overseas Private Investment Corporation (OPIC), based on the alleged expropriation of its investment in Exploma, a Dominican Republic company involved in the cutting, milling and marketing of almacigo timber. In 1966, a presidential decree prohibited the export of lumber from the Dominican Republic and caused Exploma to cease operations. Ensuing negotiations were followed by a second decree, which exempted almacigo timber from the export ban. Exploma resumed its operations, but was forced to cease work on at least three separate occasions due to bureaucratic delays and other regulatory impediments to its business related to the implementation of the export ban. The Claimant argued that these measures constituted an expropriation of its investment. As noted, the claim was dismissed.

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has occurred. It must look at the real interests involved and the purpose and effect of the government measure...’68 (Emphases added) In Feldman v Mexico, another NAFTA Tribunal declared in 2002 that reasonable regulatory measures taken by the State for the purpose of protecting the broader public interest will not generally be found to constitute expropriation: ‘In the past, confiscatory taxation, denial of access to infrastructure or necessary raw materials, imposition of unreasonable regulatory regimes, among others, have been considered to be expropriatory actions. At the same time, governments must be fee to act in the broader public interest through protection of the environment, new or modified tax regimes, the granting or withdrawal of government subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and the like. Reasonable governmental regulation of this type cannot be achieved if any business that is adversely affected may seek compensation, and it is safe to say that customary international law recognizes this...’69 (Emphases added) The Tribunal in Feldman v Mexico, as so many previous international tribunals, went on to acknowledge that ‘[i]t is fair to say that no one has come up with a fully satisfactory means of drawing [the] line [between valid regulation and compensable takings]’ and that ‘[n]o one can seriously question that in some circumstances government regulatory activity

68 SD Myers v Canada, supra, at paras 281 and 285, p 69-70. The Claimant, a privately-held American corporation, was engaged in the business of PCB remediation - the extraction of PCB from contaminated equipment and the destruction of the isolated PCB - in the United States. PCB (polychlorinated biphenyl), a synthetic chemical compound with insulating properties used mainly in electrical equipment, has been recognized as a highly toxic substance for both humans and animals since the early 1970s, and its production has been banned in Canada and the United States since that time. In 1980, the United States closed its borders to the import (and export) of PCB except where approval was granted by the US Environmental Protection Agency (EPA), and in 1990 Canada banned the export of PCB waste to all countries except the United States where approved by the EPA. In 1993, the Claimant incorporated a subsidiary in Canada for exporting PCB to its conveniently-located disposal facility south of the Canada-US border. In October 1995, the EPA issued a so-called ‘enforcement discretion’ to the Claimant, effectively providing that the EPA would not enforce the ban on PCB imports. Just as the EPAs ‘enforcement discretion’ was to enter into force, Canada’s Minister of the Environment signed an Interim Order, followed shortly by a Final Order, banning the commercial export of PCB waste for disposal. The ban was eventually lifted in February 1997. The investor claimed that the Interim and Final Orders amounted to an expropriation of its investment in violation of NAFTA Article 1110. As regards the purpose of the governmental measure, the majority rejected Canada’s contention than the export ban constituted an environmental measure, finding that it was a thinly-disguised protectionist trade measure. Nevertheless, the Tribunal declined to find an expropriation since the interference caused by the measure was insufficient, notably by reason of the limited duration of the export ban. 69 Feldman v Mexico, supra, at para 103, p 37. The case concerned the application of certain tax laws by Mexico to the export of tobacco products by a Mexican company owned and controlled by the Claimant, Mr Marvin Feldman, a national of the United States. The Claimant alleged that Mexico’s refusal to rebate excise taxes applied to cigarettes exported by his company constituted an expropriation of its investment. Having considered the circumstances, the Tribunal dismissed Mr Feldman’s claim on the grounds that: neither NAFTA nor principles of customary international law require a State to permit the grey market export of cigarettes; at no relevant time did Mexican law afford cigarette resellers such as the investor’s Mexican subsidiary a ‘right’ to export cigarettes; and the Claimant’s investment remained under the complete control of the Claimant, and retained the apparent right to engage in the exportation of alcoholic beverages and other Mexican products (ibid, at para 111, pp 40–41).

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can be a violation of Article 1110.’70 It also restated the truism that many business disruptions are not expropriations, even if they result from State conduct that makes it impossible for an investor to carry out a particular business: ‘First, the Tribunal is aware that not every business problem experienced by a foreign investor is an indirect or creeping expropriation under Article 1110.... To paraphrase Azinian, not all government regulatory activity that makes it difficult or impossible for an investor to carry out a particular business, change in the law or change in the application of existing laws that makes it uneconomical to continue a particular business, is an expropriation under Article 1110. Governments, in their exercise of regulatory power, frequently change their laws and regulations in response to changing economic circumstances or changing political, economic or social considerations. Those changes may well make certain activities less profitable or even uneconomic to continue.’71 (Emphases added) After considering the circumstances surrounding the measure, including its purpose and effect on the investor’s business, and after describing a host of factors that informed its reasoning, the Tribunal concluded, in words that convey the delicate, fact-specific and difficult-to-pin-down approach typical of the case law on these matters: ‘While none of these factors alone is necessarily conclusive, in the Tribunal’s view taken together they tip the expropriation/regulation balance away from a finding of expropriation.72’ A more candid description of the decision making that goes on behind the sealed door of the arbitrators’ chambers would be difficult to imagine. The decision in TECMED v Mexico, is particularly helpful, and potentially marks a significant development in the ICSID case. In accepting the Spanish Claimant’s contention that it had been the victim of an uncompensated indirect expropriation by Mexico, the Tribunal first analysed the effect of the governmental measure on the Claimant, and found that, ‘[a]s far as the effects of such Resolution are concerned, the decision can be treated as an expropriation under Article 5(1) of the [Spain-Mexico BIT] .73 It then stated that ‘the Arbitral Tribunal deems it appropriate to examine, in light of Article 5(1) of the [BIT], whether the Resolution, due to its characteristics and considering not only its effects, is an expropriatory decision.’74 Finally, after reviewing certain basic principles applicable

70 Ibid, at para 112, p 40 71 Ibid, at para 112, p 41. 72 Ibid, at para 111, p 41. 73 TECMED v Mexico, supra, at p 45, para 117. The Claimant was the Spanish parent company of a Mexicanregistered subsidiary, Cytrar. In 1996, INE, the agency of the Mexico’s federal government responsible for ecology and environmental protection, issued to Cytrar a oneyear permit to operate a hazardous waste landfill, renewable at the applicant’s request. Cytrar’s permit was duly renewed for an additional year, however the company’s application for a further renewal was rejected. The Claimant argued that this refusal constituted an expropriation of its investment and a violation of the BIT in force between Spain and Mexico. 74 Ibid at p 45, para 118. (Emphases added)

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to expropriation in general,75 the Tribunal went on to analyse the proportionality of the measure, drawing for the first time in the ICSID case law of expropriation, it seems, on the jurisprudence of the European Court of Human Rights76 to establish the test applicable to determine whether an allegedly bona fide regulation is in fact expropriatory. The Tribunal formulated that test as follows: ‘[T] he Arbitral Tribunal will consider, in order to determine if [regulatory actions and measures] are to be characterised as expropriatory, whether such actions or measures are proportional to the public interest presumably protected thereby and to the protection legally granted to investments, taking into account that the significance of [a measure’s negative financial impact on the investment] has a key role upon deciding the proportionality.77 (Emphases added) The Tribunal specified that a finding of expropriation is dependent on ‘whether such measures are reasonable with respect to their goals, the deprivation of economic rights and the legitimate expectations of who suffered such deprivation,’ and that ‘[t]here must be a reasonable relationship of proportionality between the charge or weight imposed to the foreign investor and the aim sought to be realized by any expropriatory measure.‘78 In the event, the Tribunal in TECMED v Mexico was of the view that the effect of the measure was disproportionate to the objectives of the government, which, albeit legitimate, ‘may not be considered from the standpoint of the [BIT] or international law to be sufficient

75 The Tribunal acknowledged the ‘indisputable’ principle ‘that the State’s exercise of its sovereign powers within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever.’ (Ibid, at p 45, para 119) However, a reading of the BIT in accordance with the ordinary meaning of its terms, as mandated by Article 31(1) of the Vienna Convention on the Law of Treaties, lead the Tribunal to affirm that regulatory actions are not per se excluded from the definition of expropriation, ‘even if they are beneficial to society as a whole - such as environmental protection, particularly if the negative economic impact of such actions on the financial position of the investor is sufficient to neutralize in full the value, or economic or commercial use of its investment without receiving any compensation whatsoever.’ (Ibid, at p 46, para 121). 76 European Court of Human Rights (ECHR), In the Case ofMatos e Silva, Lda, and Others v Portugal, judgment of 16 September 1996, 92, available online: http://www.echr.coe.int/ Eng/Iudgments.htm, at p 19. On the applicability of the jurisprudence of the ECHR to ICSID investment matters, see, for example Waelde & Kolo, supra. Helen Mountfield, ‘Regulatory Expropriations in Europe: The Approach of the European Court of Human Rights,’ (2002) 11 NYU Environmental LJ 136, available online: http://www.law.nyu.edu/journals/ envdilaw/ issues/vol 11/; Elyse M Freeman, ‘Regulatory Expropriation Under NAFTA Chapter 11: Some Lessons From the European Court of Human Rights,’ (2003) 42 Columbia J of Transnational L 177; Helen Ruiz Fabri, ‘The Approach Taken by the European Court of Human Rights to the Assessment of Compensation for “regulatory Expropriations” of the Property of Foreign Investors,’ (2002) 11 NYU Envtl LJ 148, available online: http://www. law.nvu.edu/journals/envtllaw/issues/voll 1/. 77 TECMED v Mexico, supra, at p 46, para 122. 78 Ibid, at para 122, p 47 (Emphases added).

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justification to deprive the foreign investor of its investment with no compensation.’79 The Tribunal found in favour of the investor.

IV Conclusion One thing is certain: it is not for nothing that the international law of indirect expropriation, in particular, has been described as ‘very sketchy and rough,’ an area where ‘large lacunae remain.”80 The meaning of indirect expropriation and the protection afforded international investors against indirect expropriatory conduct can rightly be said, to borrow a phrase, to be clearly ambiguous. It is of course possible that this fact is a reflection of the unsettled or incomplete state of municipal law in this respect; or that, contrarily, further study may yet discern in the body of domestic legal systems further general principles of law to aid and inspire international adjudicators. The advent of the so-called -purpose test,’ as expressed for example in the Draft US Model BIT, is likely to have far-reaching impact, designed as it is to shield bonafide regulatory measures the purpose of which is to protect legitimate public welfare objectives from claims of indirect expropriation. In the event, it appears that tribunals are increasingly disinclined to adhere to extreme versions of the ‘sole effect’ or ‘purpose’ doctrines, and are wont in any case to consider both the character and the practical impact of governmental measures. The calibration of the purpose doctrine by what the TECMED v Mexico Tribunal has described as the proportionality of the measure is a helpful contribution to the evolution of the case law. In most cases, the determination of when State conduct crosses the line between noncompensable regulation and compensable indirect expropriation tends to involve a balancing of several considerations. That many of these considerations are particular to a given case may be frustrating to those who seek not only clarity but definitiveness in international legal

79 Ibid, at para 147, p 58. Mexico argued that three principal reasons justified the non-renewal of Cytrar’s permit: the company’s numerous infractions of its permit conditions; protection of the environment and public health; and community pressure and demonstrations resulting from the fact that the landfill was located near an urban centre. With respect to the first reason, the Tribunal stated that the infractions, which had been verified and sanctioned by another agency of Mexico’s federal government, did not justify the non-renewal. With respect to the second reason, the Tribunal held that there was no concrete evidence that the landfill posed a current or potential threat to the environment or public health (Ibid, at para 133, p 52; para 139, p 54; and para 144, p 57). Finally, the Tribunal weighed the political circumstances arising from the location of the landfill as against the prejudice caused by the non-renewal of the permit. It found that the socio-political difficulties facing the government were not sufficient justification to deprive the investor of its investment: ‘The actions undertaken by the authorities to face these socio-political difficulties, where these difficulties do not have serious emergency or public hardship connotations, or wide-ranging and serious consequences, may not be considered from the standpoint of the [BIT] or international law to be sufficient justification to deprive the foreign investor of its investment with no compensation, particularly if it has not been proved that Cytrar or Tecmed’s behaviour has been the determinant of the political pressure or the demonstrations that led to such deprivation, which underlie the Resolution and conclusively conditioned it.’ (Ibid, at para 147, p 58). 80 Rudolf Dolzer, ‘Indirect Expropriation of Alien Property,’ supra, at p 59.

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norms. Yet it is perhaps the only reasonable means of approaching an issue that touches both public and private interests and that can arise in such innumerable circumstances. Moreover, it is the reality of foreign investment (indeed, of any investment) in areas of genuine and legitimate public concern that both public and private interests are at play.81 So, where does this leave the foreign investor wishing to understand the state of the law with respect to protection from expropriation? How can a foreign investor know whether and which conduct by the host State that affects an investment is compensable? Given that the law is, truly, in a state of flux, the best answer to the question ‘when, how, or at what point does otherwise valid regulation become, in fact and effect, an expropriation?’ may be: ‘I know it when I see it.’82 However, even then the answer in many instances will not be crystal clear, as so much depends on the context. The law can provide a basis for answering the question; the circumstances in which the question arises, however, remain critical to the determination. Certain governmental measures, in certain instances, will almost always give rise to a finding of indirect expropriation, and hence to compensation. Certain others will not. In between lies a ‘rough and sketchy’ area of ‘large lacunae’ in the law. When it comes to understanding precisely when and how State conduct that interferes with an investment will be found to comprise an expropriation, the foreign investor would be wise to heed the credo: Caveat investor.

81 As stated at the outset, this paper examines certain issues related to the law concerning the expropriation of foreign investments, in isolation from the international law governing the many other protections granted to foreign investors, such as due process of law, minimum treatment, abuse of rights, etc, all of which comprise the regime of foreign investment protection and play a role in determining the protection afforded a particular investment in a particular context. 82 In 1964, Justice Potter Stewart of the United States Supreme Court explained what he understood to comprise ‘obscenity’ as follows: ‘I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it...’ Jacobellis v Ohio, 378 US 184, 197 (1964). (Emphasis added)

The Role of Arbitration within Today’s Challenges to the World Community and to International Law* Karl-Heinz Böckstiegel**

I. Today’s Challenges to the World Community In recent decades, arbitration has grown from a traditional dispute settlement system mostly used in certain countries into one used worldwide both for domestic and even more for international disputes. And the parties relying on arbitration in their contracts and later in their disputes are no more only private enterprises, but also states, state institutions and – as I will mention later – international organisations. In this context, if the world community now uses arbitration, the status of and new challenges to the world community tend to have a much greater impact on arbitration than in earlier times. Since the end of the Second World War, major and fundamental changes have taken place regarding the international community of states, its economic and social environment, and also regarding its legal environment and framework. Without going into a long list, one may just mention the development of so many former colonies into independent states and the formation and growth of the United Nations. The much cited ‘globalisation’ has brought about not only economic but also social and political changes in many countries, as well as regionally and internationally. A more specific illustration is my own country Germany’s role in the world community which has changed dramatically from the outlaw after the Second World War to a re-unified Germany as a respected and active major player today. And an even more obvious specific illustration is China’s growth into a major global player and the new status of Hong Kong as a part of China. Though many of these changes have brought about advantages for the states and their citizens, many old problems have remained and new problems have arisen. In Germany, we are still struggling with the consequences of re-unification. In Europe, old and new members of the Union will have to work hard to realise the potential great advantages available. You are more familiar than I with today’s difficulties in Asia and the Pacific Region. The United

* The Thirteenth Annual Goff Lecture presented on 7 February 2006 at the Hong Kong International Arbitration Centre, sponsored by the City University of Hong Kong and Freshfields Bruckhaus Deringer. Editorial note: It was originally published at (2006) 22(2) Arbitration International 165-177. ** Professor Emeritus of International Business Law; President of the International Law Association; Chairman of the board of the German Institution of Arbitration; Hon. Vice-President and former President of the LCIA; former President of the Iran–United States Claims Tribunal, The Hague; former Panel Chairman of the United Nations Compensation Commission; member of the ICC Arbitration Commission; member of the panels of arbitrators of the AAA, CIETAC, Hong Kong International Arbitration Centre, Singapore International Arbitration Centre and Kuala Lumpur Regional Centre for Arbitration, and other institutions.

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Nations has not always and everywhere been a success story. Human rights violations are still found in many states. Both industrial and developing countries face old and new challenges in their social and economic structures. Conflicts, including military conflicts, between states and inside states with certain groups in society are still found in many regions of the world. International terrorism has grown in recent years into a fundamental challenge to international peace and development. Environmental problems seem to grow in many parts of the world, as well as for the world community at large. Since contracts as well as disputes reflect the status and needs of society and its members, it is not surprising that all these changes and challenges to the world community have an impact on international arbitration.

II. Today’s Challenges to International Law But before I become more specific, let me shortly turn to the present status and challenges of international law, because international arbitration is, of course, embedded in the general framework of international law. It can be no surprise that international law reflects the challenges of the world community. Over the last decades, both by the United Nations and otherwise, the procedural and substantive legal framework of the international community has been developed into an impressive body of law. Since there is no time here to go into detail, let me mention two examples from fields with which I am personally familiar. A first example we all know is international dispute settlement, and I will return to it later. As a second example, let me at least shortly point out the entirely different field of space law. The exploration and commercial use of outer space has become a regular feature both for governments and for private enterprises from which we all already benefit by worldwide communication, weather forecasts, disaster warning, navigational systems and the like via satellites. For this area, a major body of international law by widely accepted conventions and other instruments has been created by the United Nations, the European Space Agency and similar bodies. Compared to these and other success stories of recent progressive development of international law, one must not overlook that certain positions taken by the present administration of the leading world power, the USA, in the interpretation and implementation of international law and in renegotiating treaties, have for good reason been heavily criticised. Leading authors such as Stephen Schwebel, a former US judge and President of the World Court,1 and Jan Paulsson,2 have blamed the USA for bringing about a regressive development of international law in important areas.

1 Stephen M. Schwebel, in Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum for Robert Briner (Paris, 2005), p. 815 et seq. 2 Jan Paulsson, Denial of Justice in International Law (Cambridge, 2005), particularly pp. 228, 247.

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But, while this may be a short term development due to a certain national administration, in other areas, international law has not been able to keep pace with new changes and challenges in the world community. International terrorism provides an unfortunate but obvious example in this context. The traditional rules on military action by states, within the United Nations and outside, in conventions and customary international law, did not and could not foresee this challenge in all its aspects, and it is no surprise that strong differences of opinion and conflicts arise regarding their applicability and application and their need to be reviewed and rewritten in the common interest, both for protection against the new threats and for legally satisfying rules applicable to all states. For several years, a task force of the International Bar Association (IBA)3 has tried to elaborate legal standards in this regard, but has rather achieved a better view of the difficulties. A committee of the International Law Association (ILA)4 has started its work on the use of force by states and may come up with first approaches at the forthcoming ILA Conference in Toronto next June. In any event, noting the difficulties faced by the UN Security Council in trying to reach consensus on security matters, the recently published considerations by Gasteyger5 on the feasibility of a new World Security Organisation may be rather wishful thinking than realistic expectation. Human rights violations are a continuing concern. In this context, one has to be aware that what some call the Western notion of human rights is not shared in an identical manner by all other cultures and societies in the world. But international law provides various international and regional instruments for the protection of human rights, binding either by treaty or customary international law. Using that standard, a number of states not only violate the human rights of their own citizens or certain groups thereof, but also insist on their national sovereignty against what they call interference with their internal affairs. Another challenge – but also an opportunity – for international law comes from the much discussed economic globalisation of the world. The fundamental approach of traditional international law, as seeing the world as a mosaic of separate national jurisdictions, each under the sovereignty of a state, is not sufficient to cope with the global activities of multinational enterprises which, for understandable reasons, try to use the relative advantages of each state’s jurisdiction and economic environment for their own benefit. The growing harmonisation of national laws provides a more level playing field, both for private enterprises and for the states involved. One striking example of such harmonisation is the success story of the UNCITRAL Model Law on International Commercial Arbitration which has been adopted by a great number of states throughout the world. This harmonisation needs support and continuing follow-up by a steadily increasing body of international law. For this, the Law of the Sea Convention, the new Montreal Convention for Air Transport Liability, the International Convention on the Sale of Goods,

3 See report by Adrienne Margolis in International Bar News (December 2004) p. 39. 4 ILA Committee on the Use of Force, chaired by Prof. Mary-Ellen O’Connell (US) with Dr Judith Gardam (Australia) as its Rapporteur. 5 Curt Gasteyger in Liber Amicorum Robert Briner, supra n. 1 at p. 327.

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and the various conventions on intellectual property, are stimulating examples. Equally relevant is the framework for co-operation provided by governmental organisations such as the International Monetary Fund and the World Bank, the International Civil Aviation Organisation (ICAO), the World Intellectual Property Organization (WIPO) and similar bodies. Hong Kong has just been the site of a further very important example, namely the World Trade Organisation (WTO) which made at least some progress in its Doha Round at the Hong Kong Conference last December. As, in many countries, one has become more aware of the global importance of the protection of the environment, it may be noted that the Kyoto Protocol has recently come into force, though there is still a long way to go. At the regional level, we already see a further step in international law: supranational organisations such as the European Union, to which by now 25 Member States have actually transferred important parts of their sovereignty. Also, non-governmental organisations play a major role in promoting the internationalisation of rules for the conduct of the global economy. An outstanding example is the International Chamber of Commerce which, with input from the international business community, over many decades has elaborated rules of its own such as the INCOTERMS and its Arbitration Rules, and has also initiated the elaboration, and finally ratification, of international conventions for important fields of international trade and investment. The International Air Transport Association (IATA), with its membership of most internationally active airlines, has played a similar role in initiating conventions on international aviation. The International Law Association (ILA), also a non-governmental organisation, of course, goes much further in its scope by its interest in all fields of international law, public and private. Regarding many fields of international law, the ILA has played and is playing an important role in the progressive clarification and interpretation of the law, its development, and also in the discussions regarding its unsolved challenges. This is illustrated by the long list of its committees and study groups that have presented reports and resolutions in the past. If you look at the conference proceedings of the most recent Berlin Conference in 2004, you find reports on fields and issues of the highest relevance for modern day international relations and law.

III. The Role of Arbitration in this Context (a) Wide Options for International Dispute Settlement Now, turning more specifically to international dispute settlement, we have to realise that it provides more options and is used in practice more than ever before in history for the peaceful solution of disputes. The role of the International Court of Justice today is of much more significance than earlier. Even for politically most sensitive disputes has it been possible to form and use specific judicial bodies, as I have experienced in my function at the Iran–United States Claims Tribunal at The Hague. Not every such judicial body finds general support by all major states, as the example of the International Criminal Court shows, which the present administration of the USA does not accept. But in many important fields of international law, there is wide acceptance by all relevant States. The World Trade Organisation’s dispute

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settlement machinery is widely used. And for international investment, most of the by now more than 2,400 Bilateral Investment Treaties (BITs) provide for arbitration between the host state and foreign investors, which is used in a growing number of cases administered either by ICSID of the World Bank or other mechanisms. At the non-governmental level, international commercial arbitration, such as of the ICC and the LCIA, has become the generally accepted method of dispute settlement between private enterprises and for international government contracts, including worldwide enforcement of arbitral awards by the New York Convention of 1958. At the regional level, the European Union has a fully available court system for the by now vast body of European law through the European Court of Justice in Luxembourg. The European Human Rights Convention offers legal protection to Europeans against their own and foreign states by its separate Court in Strassbourg. In Asia, the Kuala Lumpur Regional Centre for Arbitration (KLRCA) has been available for a long time. And in North America, NAFTA provides a widely used arbitration system for the protection of investors. In addition, some arbitration institutions formed at the national level play an important role not only for domestic, but also for international disputes. Examples are the Hong Kong International Arbitration Centre (HKIAC), the China International Economic and Trade Arbitration Commission (CIETAC), the Singapore International Arbitration Centre (SIAC) in Asia, as well as, in Europe, the national arbitration institutions in Austria, Germany, Sweden and Switzerland, and in the USA, the American Arbitration Association.

(b) Politically Sensitive Disputes Judicial adjudication has even been used much more than before to deal with highly politically sensitive disputes. One group of examples which cannot concern us any further here are the various criminal law tribunals, starting with the Nuremberg War Crimes Tribunal after the Second World War, to the present International Criminal Court and the various specific courts formed to deal with war and human rights crimes in Europe and Africa. This may be the only kind of judicial machinery that can deal with terrorism, though its impact on preventing that new challenge should not be overestimated. But regarding many other challenges, even if politically sensitive, arbitration may be able to help in finding a peaceful settlement. Let me briefly mention two examples with which I have become familiar as an arbitrator. The first is the Iran-United States Claims Tribunal at The Hague, formed after the Iranian Revolution of 1979 by instruments of public international law, the so-called Algiers Accords, to decide all disputes between the two states and their citizens. The Tribunal, in its almost 4,000 cases, using the UNCITRAL Arbitration Rules with some alterations, has issued a large body of decisions and awards. They are of interest not only, because – unlike in most arbitrations – they are all published, but also because they deal with most procedural problems occurring in international arbitration and with a great many substantive questions relevant in other and later international arbitrations and particularly modern investment disputes. As some of you will know, the Tribunal was not an easy institution to work in or even to lead. The fundamental political as well as cultural differences between the two

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states and between many of the persons involved presented a continuous challenge. Nothing could be taken for granted. As President of the Tribunal, my guideline was: Try hard to achieve the best, but be prepared for the worst. And indeed, procedurally, not seldom the worst case scenario did occur. Looking back, it is still astonishing that in spite of the many opposing political and economic interests and rather frequent confrontations at the Tribunal, it achieved its task to process and decide several thousand cases in an orderly manner. My second example is the United Nations Compensation Commission (UNCC) which was formed after the first Iraq War following Iraq’s invasion of Kuwait to deal with foreign claims against Iraq under the supervision of the United Nations Security Council. Again, the UNCITRAL Rules served as guidance, though the procedure had a number of specific characteristics normally not used in arbitration. Enforcement of awards running into billions of US dollars was available from the large funds coming from a portion of the income Iraq had from the oil sales permitted by the United Nations in the so-called Oil for Food Program. From my experience as panel chairman of the UNCC, it seemed to me that the adjudication worked rather well in spite of the obvious political sensitivity of the disputes and the millions of claims, such as by Egyptian workers, for which computer programs had to be developed which later were helpful in other mass claim adjudications. Furthermore, in this context of politically sensitive arbitrations, one may mention the inter-state cases after the hostilities between Eritrea and Yemen as well as between Eritrea and Ethiopia, the TABA case between Israel and Egypt, the Rann of Kutch case between India and Pakistan, and the Beagle Channel case between Argentina and Chile.

(c) Inter-State Disputes One can probably consider the Jay Treaty of 1794, which concluded the American Revolutionary War, as the beginning of modern inter-State arbitration. In any event, we find it used frequently already late in the nineteenth and throughout the twentieth centuries. Indeed, the peace movement of that period considered international adjudication and arbitration as a substitute for war in settling international conflicts. The Hague Peace Conferences of 1899 and 1907 created the Permanent Court of Arbitration (PCA). And after the League of Nations had been founded, a further step was the creation of the Permanent Court of International Justice (PCIJ). But, as we know, neither of these institutions was widely used in settling international disputes in the period up to the Second World War. After the Second World War, the United Nations replaced the League of Nations and the International Court of Justice (ICJ) replaced the PCIJ. But again, for some years, neither of them were widely used. In recent years, the situation somewhat changed, as more cases were and are submitted to the ICJ, and not only by States from Europe and the Americas, but also from States all over the world, in Africa. Important issues are often at stake, such as the use of force in international relations, boundaries of States, the law of neutrality, genocide, state and universal jurisdiction, the law of treaties, the powers of the UN Security Council, terrorism and environmental law. Furthermore, the option of creating Chambers of the ICJ with judges selected by the parties was used several times for disputes between States in procedures similar to arbitration.

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Other than the Permanent Court of Justice, the Permanent Court of Arbitration continued to be in existence and available after the Second World War. But only recently has it started playing a role in practice, as the PCA is frequently called on for the appointment of arbitrators under the UNCITRAL Rules, and also as the PCA takes an interest in matters of international arbitration through meetings and publications. Outside these institutional frameworks, a number of ad hoc inter-state arbitrations have taken place determining land and maritime boundaries, aviation rights, state responsibility and other matters.

(d) Investment Disputes between States and Private Enterprises Inter-State adjudication and arbitration cases often, in substance, dealt with interests and rights of nationals of one of the two States rather than of the state itself. However, since traditionally only States were recognised as subjects of international law and, in particular, had standing to sue another State in international proceedings, the private persons involved could not be procedural parties themselves and their home State, by way of the traditional concept of diplomatic protection, had to sue the other State. An early exception was certain concession contracts which provided mostly for ad hoc arbitration in which the private company receiving the concession, in return for its investment, was granted the right to start arbitral proceedings directly against the granting State. This led to well known arbitration cases like ARAMCO, AMINOIL and the like. Similarly, even without a concession, if States, State institutions and State enterprises concluded commercial contracts with foreign private companies on subjects such as infrastructure or construction projects, they often accepted arbitration clauses referring to commercial arbitration. In fact, over many years, up to 10 per cent of all ICC arbitrations involve such State parties. However, a fundamental change came with the rise of modern bilateral and multilateral treaties on the promotion and protection of foreign investments leading to today’s great number of investment arbitrations. The topic brings back memories of more than 40 years ago. The International Law Commission (ILC) of the UN was already then drafting texts on State responsibility, work it only concluded in recent years under the leadership of James Crawford. From the business world, the so-called Abs/Shawcross Convention on Investments Abroad 1960 was drafted for a multilateral treaty on investment protection. It failed, just as did the OECD Draft Convention decades later. New discussions are under way now in this respect. But in any event, since then, the framework for investment protection has changed considerably, both regarding the applicable substantive and procedural legal frameworks. First, there are changes regarding substantive law: much of the earlier ideological discussions stemming from the former socialist countries and continued under the auspices of the so-called ‘new international economic order’ have either disappeared or lost most of their impact on the legal discussion. The relevant public international law has been codified to a large extent, not by a worldwide multilateral convention, but in particular by the about

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2,400 BITs containing mostly the same or similar substantive protection provisions. Here it may be noted that China has concluded some 112 BITs and is second only to Germany in the number of BITs. In this context, it is to be noted that most of the earlier Chinese BITs limited investor–State arbitration to rather narrow circumstances, for example the amount of compensation owing in confirmed cases of expropriation, but that the most recent renegotiated Chinese BITs with Germany and the Netherlands provide for much wider investor–State arbitration similar to the traditional model of BITs of most other countries. Regional treaties such as the European Union and NAFTA have brought about some multilateralism of general investment protection between certain States connected by large volumes of trade and investment. The Energy Charter Treaty has added a further multilateral framework for an important specific sector. A great number of decisions of international tribunals have clarified the meaning of the most important notions and substantive protective rules. This jurisprudence includes some decisions of the International Court of Justice, many decisions of ICSID, ad hoc, ICC and LCIA tribunals which are only published with the consent of the parties, and particularly the by now 30 volumes of decisions of the Iran-United States Claims Tribunal in The Hague which are published without exception. Specific national laws have been created in many States, including many developing countries, for the promotion – and at the same time protection – of foreign investment. And finally, the much discussed economic globalisation has given greater flexibility to the international business community to provide its own protective measures by the shaping of corporate structures and contracts. I have submitted in earlier publications conclusions and suggested implementations on the specific issues arising in contracts and arbitrations between States or State enterprises on one side and foreign private enterprises on the other side.6 More recently, from my own investment cases, it seems that particularly relevant substantive law questions which still remain are the following: •

What is the substantive law applicable to contracts between the investor on one side and the State or State institutions or enterprises on the other side? What measures are tantamount to expropriation?

•

Under which circumstances does non-action of a State qualify as expropriation because the State had a duty to take protective action?

•

When does a ‘mere’ breach of contract qualify as a breach of a BIT? What is the effect of alleged corrupt practices?

•

Under what conditions may the corporate veil be lifted between a State and its institutions or enterprises with separate legal personality?

6 See, for example, K.H. Böckstiegel, ‘The Legal Rules Applicable in International Commercial Arbitration Involving States or State Controlled Enterprises’ in ICC International Arbitration, 60 Years On: A Look at the Future (Paris, 1984), p. 117; and Arbitration and State Enterprises: Survey on the National and International State of the Law and Practice (Deventer/Netherlands and Paris, 1984), p. 113S.

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•

Can the State or State institutions claim acts of State as force majeure? What amounts to ‘changed circumstances’ affecting obligations or the continuation of long-term contracts?

•

To evaluate the amount of compensation due, is the DCF method appropriate and how should it be applied?

•

Should the ‘sovereign risk’ element used in ratings of international financial markets be used to establish the quantum of lost profits?

Similarly to the substantive framework, the procedural framework for the settlement of international investment disputes has been considerably developed. Many of the substantive legal frameworks I have mentioned, treaties as well as national investment laws, at the same time provide expressly for some kind of dispute settlement beyond or to the exclusion of the national courts of the investment State. Most investment contracts contain clauses referring disputes to various kinds of ad hoc or – mostly – institutional arbitration. What dispute settlement machineries are mostly used in practice? ICSID has a fast growing number of cases from all regions of the world. Also, the number of NAFTA cases has grown, though it seems that the attitude specifically in the USA has changed towards NAFTA in a sense that some have called a new Calvo Doctrine. Be that as it may, it is to be noted that the USA has recently renegotiated a number of its BITs and limited the scope of investor–State arbitration. Park, Aguilar Alvarez7 and, more recently, Paulsson8 have published criticism on this. The arbitration procedure of the new Energy Charter Treaty already has its first cases and will probably play a considerable role in the future. While not specially created for investment disputes, the ICC, the LCIA and the UNCITRAL Rules are also frequently used for investment cases. Regarding the procedure used in practice, of course, one relies primarily on the rules provided by the arbitral institutions. However, if we look more closely at these rules, we see many similarities and often identical solutions. This is the result of the modernisation of almost all relevant arbitration rules in recent years, trying to take into account the experience and demands of arbitration practice. Additional instruments such as the IBA Evidence Rules, the IBA Conflict of Interest Guidelines, and the UNCITRAL Notes on arbitral procedure contribute as well to a global harmonisation. And finally, as most rules leave a wide margin of discretion to the arbitral tribunal to shape the procedure as it considers best fit for its case at hand, one finds that this discretion is used very similarly in practice regarding such frequent and important issues as case management in general and in particular interim measures, relying on a full written procedure including written statements by witnesses and experts, limited disclosure of documents, shortened oral hearings focussing on cross - and re-direct examination and additional questions by the arbitrators, and finally post-hearing briefs.

7 G. Aguilar Alvarez and W. Park, ‘The New Face of Investment Arbitration: Capital Exporters as Host States under NAFTA Chapter 11’ in ICCA Congress Series No. 11, p. 302 and republished with amendments in (2003) 28 Yale Law Journal 365. 8 Paulsson, supra n. 2 at p. 230.

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All this results in a global harmonisation of arbitral procedures, at least in international commercial and investment cases. Again, judging from my own recent experience as an arbitrator in investment cases, particularly relevant procedural questions are: •

Generally, what are the specific considerations in procedures between States or State institutions on one side and foreign private enterprises on the other side?

•

How does one deal with procedures and decisions of the national courts of the investment State regarding the investment?

•

Are interim measures of protection by the arbitral tribunal appropriate in this context?

•

Conversely, how does one react to injunctions by a national court addressed to the parties, their lawyers, or the tribunal itself ?

•

Does the involvement of a State as a party require a different application of rules on the disclosure of documents and other discovery measures?

•

Does submission to arbitration by the State include a waiver regarding enforcement of awards?

(c) International Law in Commercial Arbitration While arbitration has in many ways become an important feature in international relations and in the framework and enforcement of international law, and vice versa as well, international law is relevant in many ways for and in commercial arbitration. The most obvious relevance in our context comes from instruments of public international law which directly deal with or provide for international commercial arbitration. This category includes the well-known arbitration conventions and similar instruments such as the various Geneva instruments and particularly the New York Convention. For these, the relevance as such is obvious, but the concrete application may still meet many difficulties as we know from reports on the situation in many Convention States and from the present discussions on preliminary measures at UNCITRAL meetings. Quite a different type of instrument are the BITs, most of which provide for arbitration between the two States as well as for arbitration between the host state and the foreign investor. In this context, one may also mention the investment arbitration procedure provided by Chapter 11 of NAFTA which has been widely used already and is the subject of quite some discussion nowadays. Again, quite a different type is represented by the Algiers Accords which established the Iran–United States Claims Tribunal at the Hague, as I mentioned earlier. Another kind of relevance in the context of our topic can be seen where subjects of public international law provide arbitration services. Examples used to be individual socialist States when they formed specific national foreign trade arbitration courts which were mandatory for trade between socialist countries and optional for trade with Western countries. Today, arbitration services provided by intergovernmental organisations are available. Some play a prominent role in practice, such as ICSID arbitration provided by the World Bank. Other examples are the arbitration centres of WIPO, regional centres of the United Nations such

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as those in Cairo and Kuala Lumpur, and of the American States. Another kind of service is provided by UNCITRAL through its well-known instruments such as the Arbitration Rules and the Model Law, which have a wide impact throughout the world, and by UNIDROIT through its various instruments. Furthermore, in past and present practice, subjects of public international law have been and are parties in many cases of international commercial arbitration. In most of these cases, States as well as their bodies, institutions or enterprises are involved. In this context, many issues, questions and difficulties arise. But in view of my own publications on this topic, I will resist the temptation to go into more detail here. Let me only point out the less common situation where another category of subjects of public international law, namely an intergovernmental organisation, is a party in international commercial arbitration. From a case which received some publicity and thus is not fully confidential, I can report that in a commercial arbitration between a Canadian group of companies and the United Nations, we faced a number of issues rather unusual in commercial arbitration. One was the relevance of the UN Charter and the role of Member States for the issues of liability and confidentiality. Another was the applicable substantive law, since there was no choice of law clause in the respective contracts and any national law of a Member State seemed unfit so that, with the agreement of the parties, we ended up relying on the UNIDROIT Principles for international contracts. Finally, in quite a number of ways, principles of public international law can become applicable as part of the substantive law in international commercial arbitration. First, there used to be and still are (sometimes) certain contracts such as concession contracts or socalled economic development agreements which contain a choice of law clause expressly selecting public international law, or at least the General Principles of Law which are part of it according to Article 38 of the ICJ Statute. Then, there are references to public international law in the rules of certain institutions such as Article 42 of the ICSID Convention. But even without such express authorisations, as was done many years ago by the tribunals in the Lena Goldfields, Aramco and Aminoil cases, certain parts of public international law may be considered relevant as part of the applicable substantive law, particularly if States are involved as parties. Nowadays, this may particularly be true for the Convention on the Law of Treaties, mandatory decisions of the UN Security Council such as those establishing foreign trade embargoes, the European Human Rights Convention, and the competition and antitrust law of the European Union. Furthermore, the General Principles of Law or certain principles of international customary law may be applied such as those on State responsibility elaborated by the International Law Commission, or those supplying guidance on what can be considered international public policy. Finally, it may be argued that certain obligations of private law contracts are transformed into obligations under public international law either by umbrella clauses in BITs or by being covered by the property protection provisions in BITs or in customary international law.

IV. Conclusion I have aimed here to outline some major aspects of the interrelationship between today’s status and challenges to the international community and international law on the one hand and, on the other, international arbitration.

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Domestic arbitration does not exist in a vacuum but is subject to and influenced by its national political, economic and legal environment, as well as the practice of State courts and the usages of the national business community. For the different regions of the world, cultural differences will continue to play a role regarding the settlement of disputes. For the Asian region, where previously mediation and conciliation were primarily used to solve disputes, a study by the Asian Development Bank9 confirmed that, as markets expand beyond the national frontiers, informal dispute settlement mechanisms become less reliable and formal institutions and procedures with powers of decision and enforcement more important. This is confirmed by the newly renegotiated BIT between China and Germany which offers a much wider scope for investors to pursue international arbitration in case of disputes with the host State. On the other hand, the Asian tradition may have an impact on arbitration in other parts of the world in promoting arbitral procedures in which an amicable settlement is proactively sought with the consent of the parties. Some of you may know that this is also a practice in German domestic arbitration, while in many other jurisdictions this role is either forbidden to arbitrators or at least not found in practice. International law is the product and legal reflection of State and business practice in the international community. But its rule of law also provides the much needed framework for peaceful co-operation between States, for the effective functioning of the international marketplace, and the legal security needed to promote international investment. In turn, international arbitration reflects the international community as its political and economic environment, and international law as its legal environment. Their development and progress as well as their challenges have and should have an impact on the development and progress of the codification and practice of international arbitration. Good arbitration practice will have to take that into account. On the other hand, the growing codification and implementation of international dispute settlement, and particularly of international arbitration, present an important contribution and guidance, if not for a solution, at least for a peaceful and civilised processing of many challenges to today’s world community and international law.

9 See report by M.C.W. Pinto in Liber Amicorum Robert Briner, supra n. 1 at p. 640.

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Major Developments Since the Goff Lecture of 2006 Karl-Heinz Böckstiegel1 With pleasure, I accept Neil Kaplan’s invitation to add some after-thoughts to my GoffLecture of 2006 in the re-publication of the Goff-Lectures. Indeed, during these 14 years, significant developments and changes had to be noted both in the international community at large and in particular in international dispute settlement compared to the status I tried to describe in 2006. I can only address a few. The challenges to international law may have changed, but have not become less. Multilateral solutions and organisations have become more in number, including several new free trade treaties in various parts of the world. But the implementation of their rules in practice seems to be subject to many weaknesses. Examples are the limited impact of the United Nations, difficulties in the dipute settlement of the WTO, the internal problems in the European Union, withdrawals of the US from several multinational organisations and treaties, and the replacement of NAFTA. Some positive changes can be expected after US President Biden is in the process of correcting certain of his predecessor’s unilateral actions. With regard to international dispute settlement regarding trade and investment, in the period since 2006 the growing globalisation of the world economy brought about first a long and considerable increase in the volume and relevance of international arbitration. Most arbitral institutions such as the ICC, the LCIA and many national arbitral institutions such as the DIS in Germany issued new and modernised arbitration rules providing for more detailed disclosure standards, more transparency, and options for paperless proceedings by electronic means. Along these lines, ICSID is presently concluding its negotiations on new Arbitration Rules which should come into force during 2021. However, in more recent years, particularly investment arbitration has faced not only strong challenges, but also a decline in relevance. The challenges were partly political and partly based on procedural aspects such as double-hatting. They led to fundamental changes in the approach of the European Union after the Achmea judgement of the European Court with the EU’s decision to terminate all intra-EU bilateral investment treaties including their arbitration provisions. Similar developments can be seen in other parts of the world. It is telling that, while the EU and China concluded in principle the negotiations for a Comprehensive Agreement on Investment (CAI) including provisions for a State to State dispute settlement,

1 Independent Arbitrator; Professor Emeritus for International Business Law at University of Cologne; Practice as arbitrator and president of arbitration tribunals in many national and international arbitrations of ICSID, PCA, ECT, ICC, LCIA, NAFTA, CAFTA, UNCITRAL, PCA, DIS, AAA, SCC, Swiss Rules, DIAC, VIAC, disputes between states, and others. Appointing Authority in several PCA cases. Honorary Chairman (Chairman 1996-2012), German Institution of Arbitration (DIS); Patron, Chartered Institute of Arbitrators 2007-2010; President of International Law Association (ILA) 2004-2006; Chair, ‘Arbitration of the Century’, IBA Conference Amsterdam 2000. President, London Court of International Arbitration (LCIA) 1993-1997; Panel Chairman, United Nations Compensation Commission 1994-1996. President, Iran-United States Claims Tribunal, The Hague, 1984-1988. Publications: 12 books authored and 35 books edited. More than 400 articles.

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no provisions are yet included for disputes directly with investors. Rather, the EU has stated in this context that “The common objective is to work towards modernised investment protection standards and a dispute settlement that takes into account the work undertaken in the context of UNCITRAL on a Multilateral Investment Court.”2 It may be recalled that the Investment Tribunal initiated by the EU such as in CETA with Canada3 provides for judges appointed and to be re-appointed only by the States without involvement of investors. The presently ongoing negotiations on the renewal of the Energy Charter Treaty, including their dispute settlement provisions, will also be influenced by this approach. On the other hand, a new use of arbitration is found in the 1,246-page TCA between the EU and the UK on Brexit which contains hundreds of new provisions regulating trade, transport, fisheries, law enforcement, investment protection and dispute settlement. Save for some limited exceptions, the TCA is not invocable before the courts of the UK and the EU and does not create rights other than between the treaty signatories. This means that EU and UK courts will have no jurisdiction to resolve disputes under the TCA. The dispute settlement mechanism in the TCA is separate from the one contained in the Withdrawal Agreement, which addresses a wide range of issues relating to the divorce between the UK and the EU. A panel of 25 arbitrators that will hear disputes under the Withdrawal Agreement was named in late 2020.4 Finally, the COVID-19 pandemic, which started in early 2020 and the end of which cannot be foreseen presently, has a most relevant impact on the procedures of international dispute settlement, both in ongoing cases and in the context of revisions to institutional arbitration rules. In particular, the option to have only virtual hearings and other procedural meetings is used in practice, while ICCA is presently conducting a study whether parties have a right to insist on hearings in person.

2 https://trade.ec.europa.eu/doclib/press/index.cfm?id=2233 https://ec.europa.eu/commission/presscorner/detail/en/IP_20_2542 https://trade.ec.europa.eu/doclib/docs/2020/december/tradoc_159242.pdf. 3 Art 8.27 to 8.29 of CETA. 4 Decision No 7/2020 of 17 December 2020 of the Joint Committee Established by the Agreement on the Withdrawal of the United Kingdo of Great Britain and Northen Ireland from the European Union and the European Atomic energy Community.

W(h)ither International Commercial Arbitration? Charles N. Brower*

It is a great honour to deliver this Fourteenth Goff Lecture in Hong Kong, because of both its association with Lord Goff of Chieveley1 and the illustrious previous speakers in this forum. I would like to take this opportunity to offer some reflections on the state of international commercial arbitration today and certain challenges it faces for the future, and I think that the now significant corpus of existing Goff Lectures provides an eminently suitable starting point for this exercise. Indeed, taking the year in which these lectures were inaugurated by Lord Goff himself, 1990, as a reference point, it is quite clear just how the field has changed, both quantitatively and qualitatively. In 1990, the Hong Kong International Arbitration Centre (HKIAC) had been established for five years and its docket consisted of 54 cases, whereas by 2005 that docket encompassed 281 cases.2 Similarly, the number of CIETAC arbitrations increased from 238 in 1990 to 979 in 2005,3 while the Singapore International Arbitration Centre was established only in 1991.4 This Far Eastern ‘boom’ in arbitration has been part of a global phenomenon, with the International Chamber of Commerce (ICC), for example, receiving 561 new requests for arbitration in 2004, with a total of 1,110 cases pending, as compared to 365 new requests in 1990, when there were 765 cases pending.5 On a qualitative level, it is striking that as of 1990, fewer than five cases had been brought under bilateral, regional and multilateral investment treaties containing arbitration clauses, whereas by 2004, 160

* Judge, Iran-United States Claims Tribunal, The Hague; Judge Ad Hoc, Inter-American Court of Human Rights, San Jose, Costa Rica; Arbitrator Member, 20 Essex Street Chambers, London; formerly Acting Legal Adviser, United States Department of State, Deputy Special Counsellor to the President of the United States, President, American Society of International Law, and Chairman, Institute for Transnational Arbitration. This article is, with the exception of minor editorial improvements and modest updating of sources (especially the status of the work of Working Group II (Arbitration) of the United Nations Commission on International Trade Law on revision of the UNCITRAL Arbitration Rules), the text of the Fourteenth Goff Lecture, delivered by the author at the Hong Kong International Arbitration Centre on 16 January 2007. Editorial note: It was originally published at (2008) 24(2) Arbitration International 181-197. The author wishes to record, with deep appreciation, his indebtedness to his law clerk, Michael Ottolenghi, Member of the New York Bar, for his extensive and valuable contributions to the preparation of this Goff Lecture. 1 See generally, Gareth Jones and William Swadling (eds.), The Search for Principle: Essays in Honour of Lord Goff of Chieveley (2000). 2 See www.hkiac.org/HKIAC/HKIAC_English/main.htm. 3 Ibid. 4 See www.siac.org.sg/aboutus.htm. 5 Cf (1991) 2 ICC International Court of Arbitration Bulletin 3, with (2005) 16 ICC International Court of Arbitration Bulletin 5.

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such cases had been brought, and their impact is now being felt by international commercial arbitration practitioners in a number of ways, some of which I will discuss a bit later.6 As this growth has taken place, the Goff Lectures have provided an illuminating look at issues accompanying and emerging from that growth to confront international commercial arbitration. I do not intend to survey here all of the topics addressed by previous Goff Lectures, but I should mention briefly two recurring themes that certain of the lectures have addressed - themes central to the evolution of both the practice and the discourse of international commercial arbitration over the past two decades.7 Fali S. Nariinan, in the Tenth Goff Lecture, pointed out with palpable dismay that the greater involvement of national courts was contributing to making commercial arbitration ‘almost indistinguishable from litigation, which it was at one time intended to supplant’.8 In his own earlier Goff Lecture, Lord Mustill, while ultimately reaching a less sombre conclusion,9 nonetheless noted that one growing school of thought in arbitration circles held that ‘arbitration has become too legalistic’, and that ‘it is all the fault of the lawyers and of the law which they have brought with them to a field where they and their methods are not welcome’.10 In the Second Goff Lecture, the Honourable Andrew Rogers, QC, noted that in addition to arbitral proceedings themselves becoming more like national court trials, those arbitral proceedings would come more and more under judicial scrutiny, citing the fact that courts in the common law system had ‘enlarged the permissible field of arbitrability beyond all recognition’,11 to the point that ‘[a]s a result of today’s approach to arbitrability there are many problems which will require resolution by the courts’.12 In addition to this theme of greater ‘judicialization’13 of international commercial arbitration, prior Goff Lecturers also have recognised, from various perspectives, the ineluctable trend towards a uniformity of rules and laws governing international commercial arbitration. Judge Stephen Schwebel, in his Goff Lecture addressing the validity of awards rendered by truncated tribunals, noted that the arbitration rules of the ICC, LCIA, AAA, ICSID and UNCITRAL authorise a truncated arbitral tribunal to render a valid award, and

6 UNCTAD Secretariat, Issues relating to International Arrangements: Investor-State Disputes and Policy Implications (14 January 2005), p. 4. 7 See, for example, Richard B. Lillich and Charles N. Brower (eds.), International Arbitration in the 21st Century: Towards fudicialization’ and Uniformity? (1993). 8 Fali S. Nariman, ‘The Spirit of Arbitration: the Tenth Annual Goff Lecture’ in (2000) 16(3) Arb. Int’l 261 at p. 262. Editorial note: This Goff Lecture is reproduced in this volume at pp 168–182. 9 The Rt Hon. Lord Mustill, ‘The Goff Lecture, Hong Kong 1996: Too Many Laws?’ in (1997) 63 Arb. 248 at p. 258. Editorial note: This Goff Lecture is reproduced in this volume at pp 124–125. Lord Mustill ultimately answered the question posed in the title of his lecture as follows: ‘No, there are not too many laws. Arbitration is far from perfect, but the real failings are those of its participants. If all play their parts efficiently and in the right spirit only the internal laws will be needed, and the court will never be called on to enforce them’. Ibid. 10 Ibid. p. 106. 11 Andrew Rogers, ‘Arbitrability’ in (1994) 10(3) Arb. Int’l 263. Editorial note: This Goff Lecture is reproduced in this volume at pp 13–27. 12 Ibid. p. 13. 13 See Charles N. Brower, ‘Introduction’ in Lillich and Brewer, supra n. 7 at p. ix.

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that such rules ‘represent the trend of modern international arbitration’.14 For his part, Lord Mustill noted that one solution to the complexities of determining the governing procedural law or laws in an international commercial arbitration was the ‘harmonisation of national arbitration laws’, following the format set out by the UNCITRAL Model Law.15 Another Goff Lecturer, Neil Kaplan QC directed attention to the need also to update the main instruments of uniformity, namely the New York Convention and the UNCITRAL Model Law, to reflect modern developments, specifically commenting elegantly and forcefully in his Sixth Goff Lecture that their requirement of a written agreement to arbitrate was, even then, ‘outmoded’.16 As these brief selections from prior Goff Lectures highlight, the issues of judicialization and uniformity in international commercial arbitration have been underlying, recurring themes in the field. Indeed, predictions for the future of international commercial arbitration, from the days of Lord Goff’s own lecture inaugurating this series onwards, have been replete with visions of both proliferating procedural complexities and a nearly universal alignment of arbitration regimes at all levels, institutional, national and international. Perhaps I may be permitted to indulge myself to the extent of referring to what I myself said in 1993 in introducing a volume entitled International Arbitration in the 21st Century: Towards ‘Judicialization’ and Uniformity?: Two consequences of this proliferation [of international commercial arbitration] have become evident. One is the increasing ‘judicialization’ of international arbitration, meaning both that arbitrations tend to be conducted more frequently with the procedural intricacy and formality more native to litigation in national courts and that they are more often subjected to judicial intervention and control ... The other consequence is a rising preoccupation with the issue of uniformity, most currently epitomized by national debates over whether or not to adopt the Model Law on International Commercial Arbitration prepared by UNCITRAL.17 Taking stock of the state of international commercial arbitration at the start of 2007, the issues of judicialization and uniformity are ever more present than they were when the Goff Lectures were inaugurated. In short, Goff Lecturers, as trend-spotting sages, have been persistently correct. Just look at the evidence.

14 Stephen M. Schwebel, ‘The Validity of an Arbitral Award Rendered by a Truncated Tribunal’ in (1995) 6 ICC International Court of Arbitration Bulletin 1 at p. 31. Editorial note: This Goff Lecture is reproduced in this volume at pp 57–75. 15 Mustill, supra n. 9 at p. 124. 16 Neil Kaplan, ‘Is the Need for Writing as Expressed in the New York Convention and the Model Law Out of Step with Commercial Practice?’ in (1996) 12(1) Arb. Int’l 27 at p. 44. Editorial note: This Goff Lecture is reproduced in this volume at pp 77–96. 17 Brower, supra n. 13 at p. ix.

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The past two decades undoubtedly have seen an increase in uniformity of both arbitration rules and national legislation.18 The rules of major international arbitration institutions (the ICC, LCIA and AAA, for example) ‘have much more in common than one would expect taking into account their locations and the legal traditions of the host countries’.19 More particularly, certain seminal rules, such as the ICC Rules of Arbitration20 or the UNCITRAL Arbitration Rules of 1976,21 have established standards adopted throughout the field - by practitioners and other arbitration institutions alike.22 Recently, for example, the HKIAC has revised its Procedures for the Administration of International Arbitration ‘for use by parties who seek the formality and convenience of an administered arbitration while maintaining the flexibility afforded by the UNCITRAL Arbitration Rules’.23 Similarly, the Swiss Rules of International Arbitration recently were adopted by the Chambers of Commerce and Industry of Basel, Bern, Geneva, Ticino, Vaud and Zurich, and are based explicitly on the UNCITRAL Rules.24 Such uniformity also extends to national legislation on arbitration, which in the time since the First Goff Lecture has been characterised by the formation of an ‘international consensus’25 in the form of the UNCITRAL Model Law of 1985. According to the UNCITRAL website, as of 2005, 48 countries (and the Hong Kong Special Administrative Region) had enacted legislation based on the Model Law, with five countries adopting thee legislation within the preceding three years.26

18 See, for example, James H. Carter, ‘The International Commercial Arbitration Explosion: More Rules, More Laws, More Books, So What?’ in (1994) 15 Mich. J Int’l L 785 (noting the ‘marked trend toward relative standardization of a number of aspects of transnational arbitration law and procedure’). 19 Elena V Helmer, ‘International Commercial Arbitration: Americanized, “Civilized”, or Harmonized?’ (2003) 19 Ohio St. J on Disp. Resol. 35 at p.55. 20 See generally, Yves Derains and Eric Schwartz, A Guide to the ICC Rules of Arbitration (2nd edn, 2005). 21 See, for example, Howard M. Holtzmann, ‘The Impact of the UNCITRAL Arbitration Rules on Drafting the Rules of the Iran-United States Claims Tribunal’, in Wybo P. Here (ed.), International Law and The Hague’s 750th Anniversary (1999). 22 See, for example, Ben H. Sheppard, Jr and John M. Townsend, ‘Holding the Fort Until the Arbitrators are Appointed: the New ICDR International Emergency Rule’ in (2006) 61 (Jul.) Disp. Resol. J 75 at p. 78 (charting the emergence of emergency relief measures in the rules of international arbitration institutions, and noting that the ICC was ‘the first to do so’ with the promulgation, in 1990, of its Rules for a Pre-Arbitral Referee Procedure, and that the AAA and ICDR then followed suit); see also, William E. Davis et ai, ‘Creating a Commercial Dispute Resolution Center in the Palestinian Territories’ in (2006) 60 (Jul.) Disp. Resol. J 66 at p.71 (referring to the 1998 ICC Rules of Arbitration and the UNCITRAL Model Rules as the ‘international standard’ used in establishing the rules for a new arbitration institution); Alan Scott Rau and Edward F. Sherman, ‘Tradition and Innovation in International Arbitration Procedure’ in (1994) 30 Tex. Int’l LJ 89 at p. 92 (‘The degree of similarity of international arbitration procedures just described derives in part from the importance of arbitral institutions’). 23 See www.hkiac.org/HKIAC/pdf/Rules/HKIAC%20Procedures%20for%20International%20Arbitration.pdf. 24 See www.swissarbitration.ch/rules.php. These rules were also explicitly adopted in order to ‘harmonise the existing rules of arbitration’: ibid. 25 Carter, supra n.18 at p.788. 26 See www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html. For a discussion of the enactment of the Model Law in jurisdictions in South-east Asia, see Mohan R. Pillay, ‘The Singapore Arbitration Regime and the UNCITRAL Model Law’ in (2004) 20 Arb. Int’l 355.

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A number of other countries, including the United Kingdom and Sweden, have adopted legislation that is ‘quite obvious[ly]’ influenced by the Model Law.27 The judicialization of international commercial arbitration also has increased in the time since the First Goff Lecture, and has attracted a significant amount of commentary.28 This has occurred in a number of ways, from more intervention by local courts to an increasing procedural intricacy that has rendered the arbitral process more often akin to a formal judicial one. With regard to judicial intervention, the US Supreme Court did little, in First Options of Chicago, Inc. v Kaplan,29 as one example, to resolve the important question of who decides jurisdictional questions - the court or the arbitral tribunal - thus effectively keeping courts involved at an early stage of international commercial arbitration in the United States. It thus is not surprising that in 2002, the ICC noted an increase in legal interference of the local courts in ICC arbitrations conducted in the United States.30 The increasing procedural intricacy of international commercial arbitration also has continued apace since the First Goff Lecture,31 leading to what one of my predecessors in this forum termed the ‘tidal wave of arbitral law submerging international commercial arbitration’.32 While the twin themes of judicialization and uniformity had been accurately outlined (indeed predicted) by my predecessor Goff Lecturers, one major development that has altered the landscape of international commercial arbitration dramatically was not foreseen: the rise of international investment treaty arbitration, and its impact on international commercial arbitration. The advent of investment treaty arbitrations which, as noted above, increased from a total of five cases brought as of 1990 under bilateral, regional and multilateral investment treaties containing arbitration clauses to 160 such cases by 2004,33 is directly related to what has been termed the ‘BIT Movement’.34 While bilateral investment treaties (BITs) date back to the 1950s and the efforts of Western European countries to ‘create a basic international legal framework to govern investments by nationals of one country in the territory of another’,35 the end of the Cold War and the abandonment of centralised command economies in many States opened up vast new areas for the BIT Movement.

27 Helmer, supra n. 19 at p.64. 28 See, for example, ibid. p. 36; Rau and Sherman, supra n. 22 at p. 95; Delissa A. Ridgway, ‘International Arbitration: the Next Growth Industry’ in (1999) 54 Disp. Resol. 50; see also, Yves Dezalay and Bryant G. Garth, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order (1996), p. 57 (‘Competition and rationalization, especially as promoted by U.S. litigators, leads to the judicialization of international commercial arbitration’). 29 514 US 938 (1995). 30 See Helmer, supra n. 19 at p.144. 31 See, for example, Susan D. Franck, ‘International Arbitrators: Civil Servants? Sub Rosa Advocates? Men of Affairs?: the Role of International Arbitrators’ in (2006) 12 ILSA J Int’l and Comp. L 499 at pp. 511-514. 32 Nariman, supra n. 8 at p.263. 33 See supra n. 6 at p.4. 34 See Jeswald W. Salacuse and Nicholas P. Sullivan, ‘Do BITs Really Work?: an Evaluation of Bilateral Investment Treaties and their Grand Bargain’ in (2005) 46 Harv. Int’l LJ 67 at p.68. 35 Ibid.

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Many countries in Eastern and Central Europe, as well as parts of Latin America, Africa and Asia, actively sought to attract foreign investment, and started to enter into BITs with industrialised States.36 Thus, while 389 BITs had been concluded by the end of 1989,37 that number today surpasses 2,400.38 For the purposes of arbitration, the most relevant provision of these BITs has been the giving to investors of the right to proceed directly, and in a neutral setting, against a sovereign for relief to cure such sovereign’s breach of a BIT.39 This veritable explosion, both in the number of BITs and in investors’ resort to their arbitration clauses, has been a major development in international arbitration generally, as Professor Böckstiegel noted in his 2006 Goff Lecture.40 The remainder of my remarks focus on the impact the growing phenomenon of investment treaty arbitration is having, and will have, on international commercial arbitration and its practitioners. Necessarily, I will address three questions: How does international investment treaty arbitration differ from international commercial arbitration? What do such differences mean for commercial arbitration practitioners? Does commercial arbitration, and do its practitioners, have anything to contribute to investment treaty arbitration?

I. Main Differences Between International Commercial Arbitration and Investment Treaty Arbitration The significance of investment treaty arbitration does not lie in the number of cases brought under such treaties. Indeed, there are comparatively few investment treaty arbitrations: historically, there had been only 160 such arbitrations in total as of 2004, while, by comparison, the HKIAC alone administered 281 cases in 2005. The World Bank Group’s International Centre for the Settlement of Investment Disputes (ICSID), a prominent institution administering investment treaty arbitrations, has concluded just 134 cases since its establishment 40 years ago, with 120 currently pending.41 But what investment treaty

36 Ibid. 37 UNCTAD, Bilateral Investment Treaties 1959-1999 (2000), p. 1, available at www.unctad.org/en/docs/ poiteiiad2.en.pdf. 38 See Karl-Heinz Böckstiegel, ‘The Role of Arbitration within Today’s Challenges to the World Community and to International Law’ in (2006) 22 Arb. Int’l 165 at p.172. 39 See Susan D. Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions’ in (2005) 73 Fordham L. Rev. 1521 at pp. 1537-1538. 40 Böckstiegel, supra n. 38. 41 See International Convention on the Settlement of Investment Disputes (ICSID), List of Concluded Cases, available at www.worldbank.org/icsid.cases.htm; ICSID, List of Pending Cases, available at www.worldbank. org/icsid/cases/pending.httn; Joshua Robbins, ‘The Emergence of Positive Obligations in Bilateral Investment Treaties’ in (2006) U Miami Int’l and Comp. L Rev. 403 at p.415.

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arbitration lacks in quantity it more than makes up in publicity.42 Indeed, while investment treaty arbitration in concept has been ‘based upon a model of commercial arbitration where there are strong presumptions of confidentiality’,43 the public nature of many of the rights involved has caused parties to consent as a matter of course to the publication of numerous awards,44 and even to tolerate, if not encourage, the filing of amicus briefs, as a result of which investment treaty arbitration now enjoys ‘a level of publicity unprecedented in the annals of international arbitration’.45 The public nature of the rights involved in investment treaty arbitrations points to one of the main elements distinguishing investment treaty arbitration from commercial arbitration: the central role of public international law. Practitioners who deal with international investment arbitration must be well versed in public international law in order best to serve their clients. Because investment treaty arbitrations arise under treaties as well as out of contracts,46 questions of interpretation of such treaties, as to both jurisdictional and substantive issues, will require recourse to the Vienna Convention on the Law of Treaties,47 an utter stranger to standard commercial arbitrations based on contracts. Some public international law rights have been set out for the first time in the investment treaties themselves, for example, the obligation that a State party ‘observe its commitments’.48 The shape and scope of rights under treaty provisions have been influenced by interpretations of them by investment treaty arbitration tribunals, most notably the right to ‘fair and equitable treatment’.49 Indeed, as Professor Rudolf Dolzer recently pointed out, because no single ‘frozen version’ of the ‘fair

42 ‘It is not just the numeric increase in state-party arbitrations that is significant, but also that these arbitrations often involve large sums of money, complex issues, high-profile subject matter and a plethora of national and international interests - economic, political, and even cultural’: Barry Leon and John Terry, ‘Special Considerations when a State is a Party to International Arbitration: Why Arbitrating Against a State is Different: 12 Key Reasons’ in (2006) 61 (Apr.) Disp. Resol. J 69 at p. 70; see also, Barton Legum, ‘Investment Treaty Arbitration’s Contribution to International Commercial Arbitration’ in (2005) 60 (Oct.) Disp. Resol. J 71 at p.73. 43 Franck, supra n. 39 at p. 1544. 44 See also, Sarita Woolhouse, Transparency and Procedural Integrity of Arbitration, Transnational Dispute Management Provisional Paper (October 2006). 45 Noah Rubins, ‘Opening the Investment Arbitration Process: At What Cost, for What Benefit?’ in (2006) 3(3) Transnational Dispute Management. 46 As noted above, many BITs allow claims by an investor claiming that the State has failed to honour its obligations to the investor. But pure breach of contract claims not thus falling under the protection of a BIT must be determined under the dispute resolution provisions of the contract. See George Rosenberg, ‘State as Party to Arbitration’ in (2004) 20 Arb. Int’l 387. The intersection of treaty claims and contract claims is discussed further infra in the context of umbrella clauses. 47 See Kaj Hobér and Mannheimer Swarding, ‘State Responsibility and Investment Arbitration’ in (2005) 2(5) Transnational Dispute Management p.2 (‘Likewise, in arbitrations based on treaties - e.g. bilateral investment protection treaties (BITS) or other investment treaties - the rules and principles of international law relating to the interpretation of treaties will often be decisive. In this context the Vienna Convention on the Law of Treaties is of primary importance’). 48 Franck, supra n. 39 at p.1523. 49 See Rudolf Dolzer, ‘Fair and Equitable Treatment: a Key Standard in Investment Treaties’ in (2005) 39 Int’l Lawyer 87.

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and equitable treatment’ clause exists, ‘every clause has to be interpreted in accordance with article 31 of the Vienna Convention on the Law of Treaties, duly taking account of its context, and as appropriate, its history’.50 Furthermore, a complete and accurate understanding of a ‘fair and equitable treatment’ clause requires consideration of how the clause affects ‘other standards and concepts which are contained in BITs or are otherwise deemed relevant for the regime of foreign investment’.51 Such considerations necessarily include other aspects of public international law, such as ‘those rules of general international law which a State must always observe in its relations towards aliens’.52 The central role of public international law in investment treaty arbitration, and the approximate congruity, if not uniformity, of investment treaties’ substantive provisions, confront the commercial arbitration practitioner with a second element alien to his or her accustomed territory, namely the use of precedent. The traditionally confidential nature of most commercial arbitrations and the resulting relative paucity of published awards, added to the unique, ‘one-off’ character of most significant commercial contracts, necessarily results in precedent playing little or no role in international commercial arbitration.53 Since investment treaty arbitration, by contrast, invariably involves the interpretation and application of treaty obligations common to hundreds, if not thousands, of such treaties,54 often involving resort as well to customary international law principles, the widely published decisions and awards of prior tribunals will, at the very least, be looked to by parties and tribunals alike for guidance. On a doctrinal level, under the Statute of the International Court of Justice, ‘judicial decisions and the teachings of the most highly qualified publicists of the various nations [shall apply], as subsidiary means of determination of rules of [public international] law’,55 and international arbitral awards fall into this category.56 Furthermore, the use of precedent in investment treaty arbitrations is not an international law equivalent of common law stare decisis, but rather has its own particular features. First, treaty investment decisions and awards, technically speaking, are not precedents, hence there is no requirement that the reasoning or conclusions of one award be determinative of another one.57 Rather, there has evolved what one commentator in a related context

50 Ibid. p.90. 51 Ibid. p.91. 52 Ibid. p.92. 53 See Franck, supra n. 31 at note 59 (noting that the ‘lack of adherence to precedent has been a strength of arbitration’, although commenting that this trend may be changing). 54 Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (1995), pp. xii-x. 55 Statute of the International Court of Justice, Art. 38(l)(d). 56 Jan Paulsson, International Arbitration and the Generation of Legal Norms: Treaty Arbitration and International Law, Transnational Dispute Management Provisional Paper (September 2006). In discussing sources of international law, Prof. Ian Brownlie, for example, notes that ‘[t]he literature of the law contains frequent reference to decisions of arbitral tribunals. The quality of arbitral tribunals have [sic] varied considerably, but there have been a number of awards which contain notable contributions to the development of the law by eminent jurists sitting as arbitrators, umpires, or commissioners’: Ian Brownlie, Principles of Public International Law (6th edn, 2003), p.19. 57 See Franck, supra n. 39 at pp. 1611-1612.

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has termed the ‘monstrous disconnect between myth and reality’:58 while technically not precedents, in practice effective advocates before international tribunals must be familiar with important arbitral awards. Furthermore, it is crucial to realise that ‘the influence of international awards and judgments is highly variable’.59 Because awards are of variable quality and there is no established hierarchy, a familiarity with existing awards in the field and, very importantly, the respect particular ones have been accorded (or not), is crucial to effective practice in the field.60 The final distinction I will touch on here concerns the relative position of the parties in a commercial arbitration and in investment treaty arbitration. Commercial arbitration rests, of course, on the premise of equality of the parties before the arbitral tribunal.61 Because investment treaty arbitrations involve disputes between investors and their host States, however, this principle of equality of the parties is not in fact the same in such arbitrations as it is in arbitrations involving two strictly commercial parties. For one thing, a State has the power to interfere with an arbitration in various ways, from the negotiation of the investment treaty itself (where State interests are directly represented but those of private investors are not) to attempts to redefine its understanding of treaty obligations. In the NAFTA context, for example, the Treaty explicitly creates a Free Trade Commission comprised of ‘cabinet-level representatives’ of the three NAFTA States Parties, with the power to ‘resolve disputes that may arise regarding its interpretation or application’,62 a power that the States Parties have not shied away from using to further their governmental interests, arguably at the expense of their own investors’ interests. For example, following the Pope & Talbot Award on the Merits, which ruled that Canada had failed to meet its Treaty obligation to Pope & Talbot to give it fair and equitable treatment under Article 1105 of the Treaty, which obligation the Pope & Talbot Tribunal found to be a higher standard than that imposed by customary international law, the Free Trade Commission issued a binding ‘Interpretation’ to the effect that the treaty’s ‘concepts of “fair and equitable treatment” and

58 Raj Bhala, ‘The Myth about Stare Decisis and International Trade Law (Part I of a Trilogy)’ in (1999) 14 Am. U lnt’l L Rev. 845 at p. 847 (discussing the disconnect between the ‘myth’ that the doctrine of stare decisis does not exist in WTO adjudication and the de facto doctrine of stare decisis in international trade law as a consequence of adjudications by the WTO’s Appellate Body). 59 See Paulsson, supra n. 56, p. 3 (‘This is quite unlike the traditional concept of common law systems, where the precedent of the highest court is binding, no matter how unconvincing it may seem to lower-court judges, until it is reversed at the same level’). 60 Inconsistent awards, for example, are another feature of investment treaty arbitration that practitioners need to be aware of. See, for example, Charles N. Brower, Charles H. Brower II, Jeremy K. Sharpe, ‘The Coming Crisis in the Global Adjudication System’ in (2003) 19 Arb. Int’l 415 at pp. 424-428 (discussing the problems presented by multiple and conflicting awards in the ‘global adjudication system’, focusing on the problems created by the conflicting awards arising out of Ronald Lauder’s investment in the Czech Republic). 61 See, for example, American Arbitration Association, International Arbitration Rules, art. 16(1), (‘the tribunal may conduct the arbitration in whatever manner it considers appropriate, provided that the parties are treated with equality and that each party has the right to be heard and is given a fair opportunity to present its case’), available at www.law.berkeley.edu/faculty/ddcaron/Documents/RPID%20Documents/rp04049.html. 62 North America Free Trade Agreement, art. 2001(2)(c), available at www.sice.oas.org/trade/nafta/ chap-201. asp#A2001.

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“full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens’.63 It was particularly striking that the Free Trade Commission issued this Interpretation post hoc and while further proceedings (notably the determination of damages) were still pending in the Pope & Talbot case.64 Such potential for interference is not limited to multilateral treaty arbitrations. Indeed, States parties to BITS likewise have sought to bring their inherent advantages to bear. In an as yet unpublished ISCID jurisdictional decision under a BIT, the respondent State urged rejection of the claimant’s reliance on the most favoured nation clause of the BIT even though an earlier tribunal had ruled that that very same clause in the identical treaty supported jurisdiction in an arbitration that had been brought by a national of the said respondent against the State of nationality of the said claimant. That respondent State argued that because the other State party to the BIT had argued, unsuccessfully, in the earlier arbitration, that the most favoured nation clause did not apply, the result was that the matching litigation positions of the two constituted a ‘subsequent practice’ of the treaty parties within the meaning of Article 31(3)(b) of the Vienna Convention that should determine the tribunal’s interpretation of the most favoured nation clause.65 Happily, the attempt failed. The superior position of States parties is also manifested in more practical ways. For example, in Siemens, AG v Argentina,66 a case arising out of the Germany-Argentina BIT, Siemens was unable to obtain Germany’s travaux préparatoires or other materials relating to the negotiation of the BIT, while Argentina, of course, had no such access problems.

63 NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions (31 July 2001), available at www.international.gc.ca/tna-nac/NAFTA-Interpr-en.asp; see also, Andreas F. Lowenfeld, ‘Public Policy and Private Arbitrators: Who Elected Us and What are We Supposed to Do?’ in (2005) Appleton’s News, 2005 WL 1122660. 64 David A. Gantz, ‘International Decision: Pope & Talbot, Inc v Canada’ in (2003) 97 Am. J Int’l L 937 at p. 945. Another important instance in which states asserted their authority over the NAFTA arbitration process was the Metalclad case, in which a tribunal sitting in Vancouver, British Columbia, held that Mexico had breached its obligations to Metalclad, a US company, under NAFTA, Art. 1105 to afford Metalclad fair and equitable treatment in accordance with international law (dispute arising out of the regulatory environment concerning the construction of a landfill). Metalclad Corp. v Mexico, ICSID Case No. ARB (AF)/97/l (30 August 2000), 40 ILM 36. After Mexico petitioned the Supreme Court of British Columbia to annul the award because the decision was outside of the scope of the submission to arbitrate, Canada joined the proceedings as an intervenor, and as a respondent in NAFTA Chapter 11 arbitrations acted essentially in the interests of Mexico, arguing that ‘awards of Chapter Eleven tribunals about public measures are not supposed to be worthy of judicial deference and [are] not supposed to be protected by a high standard of review’. Outline of Argument of Intervenor Attorney-General of Canada (16 February 2001), In the Matter of Arbitration Pursuant to Chapter Eleven of NAFTA Between Metalclad Corp. and United Mexican States (BC Sup. Ct), available at www.dfait-maeci.gc.ca/tna-nac/documents/trans-Imay.pdf. Although the court ultimately rejected Canada’s interpretation of the level of deference due to a Chapter 11 arbitration, it did overrule the tribunal for grounding its determination of fair and equitable treatment in an alleged violation of transparency, hence the Metalclad case exemplifies the power states parties can exercise (at a minimum) in the NAFTA context. See Brower, Brower and Sharpe, supra n. 60 at pp. 430-432. 65 Vienna Convention on the Law of Treaties, Art. 3(3)(b). 66 Siemens, AG v Argentine Republic, ICSID Case No. ARB/02/8, available at www.worldbank.org/icsid/cases/ siemens-decision-en.pdf.

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This practical inequality of parties to investment treaty arbitrations further illustrates the fact that to be successful in investment treaty arbitration a practitioner must have certain skills that a commercial arbitration specialist may not possess. No doubt knowledge of public international law, and familiarity with the process of investment treaty arbitration and its idiosyncrasies, from the uses of precedent to the noxious aspects of inequality of the parties, are skills that can be acquired, but the examples cited illustrate just how different they are from those involved in the conventional practice of international commercial arbitration.

II. Bringing Experience to Bear: What Commercial Arbitrators Bring to the Table Despite these key differences between the practice of commercial arbitration and that of investment treaty arbitration, there is a certain amount of movement of personnel between the two fields. Indeed, a number of major international law firms include ‘international arbitration’ departments that combine commercial and investment treaty arbitration capacities. That doubtless reflects the fact, which I wish to emphasize, that practitioners with a background in commercial arbitration do have certain advantages to bring to the field of investment treaty arbitration — a field in which certain developments I will mention below may in fact compel them to become involved in even greater numbers. The main advantage that commercial arbitration practitioners have in approaching investment treaty arbitration is their experience as trained litigators, possessing all the litigation techniques that such a background entails.67 This is particularly so for those practising in common law jurisdictions, hence familiar with the adversarial system of litigation. While the bulk of commercial arbitration practitioners are likely to have entered the field after some years as litigators, this is not necessarily the case in investment treaty arbitration, which often attracts lawyers with experience principally in public international law. A background in litigation gives commercial arbitration practitioners a distinct advantage, for example, insofar as many investment treaty arbitrations do involve conflicting testimony (whether on merits or damages issues), particularly of experts, where effective cross-examination can be an invaluable tool. Furthermore, the much-lamented ‘Americanisation’ of commercial arbitration68 actually places those with the right ‘American’ litigation skills (such as procedural management, document production tactics, etc.) at a tactical advantage compared to those unschooled in such skills. Additionally, commercial arbitration practitioners, of necessity, are likely to have a good sense of commercial transactions and generally can read and understand balance sheets and technical documents relating to a transaction, whereas those practitioners principally focused on investment treaty arbitration may be less familiar with commercial transactions. While lack of familiarity with public international law may be a barrier to commercial arbitration practitioners entering the field of investment treaty arbitration, it is a barrier that

67 See Lowenfeld, supra n. 63 at p.3. 68 See, for example, Helmer, supra n. 19.

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can be overcome with relative ease. In the vernacular, ‘It is not rocket science!’. A number of international law firms, for example, are offering in-house courses on pertinent aspects of public international law.69 The investment treaty arbitration practitioner’s comparative lack of familiarity with litigation techniques and commercial transactions, however, is less easily remedied. Effective cross-examination is something that cannot be successfully learned in a classroom in short order, let alone by reading about it in a treatise. Effectively, it is learned only through observation and practice. The same is true of commercial experience. It must be ‘soaked up’ through extended exposure. The comparative advantages of commercial arbitration practitioners will, I believe, come more to the fore as commercial arbitration practitioners find their work becoming increasingly influenced by, and intertwined with investment treaty arbitration, whether or not they desire it. Take the example of ‘umbrella clauses’.70 These are BIT clauses that require States parties to respect all obligations incurred, arguably including contractual obligations, thereby opening up the possibility of commercial claims and treaty claims being heard in the same forum.71 Trans-border investment transactions usually are governed by (at least) two instruments: the contract between the foreign investor and a local party (often a State entity), and interState agreements, such as BITs, that require a host State, as already noted, to ‘adhere to a more or less fixed set of international standards’72 such as ‘fair and equitable treatment’. The contract and the inter-State agreement will provide the investor with differing dispute settlement provisions, the contract referring contractual claims to commercial arbitration or national courts, and the inter-State agreement enticing investors to bring treaty claims in venues such as ICSID. The applicability of multiple jurisdictional clauses to the same subject matter creates significant problems, as well as a point of contact between commercial and investment treaty arbitration. Thus, if an investor submits a treaty claim pursuant to a BIT to ICSID arbitration, can he in that same arbitration also raise contractual claims when the contract has a separate dispute resolution clause? Generally not, but the existence of umbrella clauses provides the possibility for commercial and investment treaty arbitration in fact to become conjoined in that single ICSID arbitration. A glaring lack of uniformity in existing jurisprudence on this issue has created significant uncertainty over where claims should be, or can be, raised. The much discussed73 conflicting decisions in SGS v Pakistan and SGS v Philippines are illustrative of the room for manoeuvre

69 See, for example, Public International Law Seminars, Freshfields Bruckhaus Deringer, available at www. freshfields.com/practice/pil/seminars/en.asp. 70 See Anthony C. Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’ in (2004) 20 Arb. Int’l 411. 71 A fairly typical umbrella clause, from the Switzerland-Pakistan BIT, reads as follows: ‘Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other Contracting Party’: Switzerland-Pakistan BIT, Art. 11. 72 Yuval Shany, ‘Contract Claims v Treaty Claims: Mapping Conflicts Between ICSID Decisions on Multisourced Investment Claims’ in (2005) 99 Am. J Int’l L 835. 73 See, for example, Franck, supra n. 39; Shany, supra n.72.

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which still exists in this area. In SGS v Pakistan,74 Pakistan initiated arbitration proceedings in Pakistan against the investor, SGS, as per the terms of the investment contract, while SGS simultaneously initiated an ICSID arbitration under the Switzerland-Pakistan BIT, which contains an umbrella clause.75 Pakistan argued that the contract’s dispute resolution clause provided the exclusive jurisdiction for binding resolution of contractual claims, and the ICSID tribunal agreed, finding that the dispute resolution clauses of both the BIT and the contract conferred exclusive jurisdiction with regard to the respective claims, and that the BIT’s umbrella clause could not reasonably be construed to include contract claims.76 The tribunal therefore exercised exclusive jurisdiction over the treaty claims and upheld the other arbitration’s exclusive jurisdiction over the contract claim. In sharp contrast, the SGS v Philippines77 Tribunal, faced with similar circumstances, reached the opposite conclusion, accepting SGS’s arguments that the umbrella clause in the Switzerland-Philippines BIT encompassed an obligation to fulfil contractual obligations, hence holding that the BIT was sufficiently broad to encompass both treaty and contract claims, and dismissing the analysis of the SGS v Pakistan Tribunal as ‘unconvincing’.78

74 SGS Société Génératè de Surveillance SA v Islamic Republic of Pakistan, Decision on Jurisdiction, ICSID Case No. ARB/01/13 (6 August 2003), available at www.worldbank.org/icsid/cases/SGS-decision.pdf. 75 See supra n. 71. 76 SGS v Pakistan, supra n. 74 at paras. 188-190. 77 SGS Société Génératè de Surveillance SA v Republic of the Philippines, Decision of the Tribunal on Objections to Jurisdiction, ICSID Case No. ARB/02/6 (29 January 2004), available at wvnv.worldbank.org/icsid/cases/ SGSvPhil-final.pdf. 78 Ibid, paras. 169-177.

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This unclear State of affairs (which subsequent tribunals have further muddied)79 illustrates one avenue by which commercial arbitration practitioners may in time be swept by events into BIT arbitrations. Other developments, whether jurisprudential (such as the argument that a most favoured nation clause in a BIT should allow an arbitral tribunal acting pursuant to the BIT to hear contractual claims)80 or logistical (such as the growing number of law firms with ‘international arbitration’ departments incorporating both commercial and investment treaty arbitration capabilities), could also lead to a greater alignment of commercial and investment treaty arbitration. As I have mentioned, this is not a development of which commercial arbitrators should be wary - quite to the contrary: with their background in litigation techniques and commercial disputes, commercial arbitration practitioners bring invaluable experience to a field where litigation skills too often quite evidently are missing.

III. Revision of the UNCITRAL Arbitration Rules: A Glimpse of the Future? The newest development likely to influence the impact of investment treaty arbitration on international commercial arbitration is the current effort to revise the UNCITRAL Arbitration

79 In Siemens AG v Argentina, ICSID Case No. ARB/02/8 (17 January 2007), the tribunal did not rely on the umbrella clause for jurisdiction because the claimant was not party to the contract at issue and the Siemens subsidiary that was party to this contract was not a party to those proceedings, but in dicta the tribunal took the view that any agreement related to an investment that qualified as such under the BIT would be part of the obligations covered under the umbrella clause: ibid, paras. 204–205. See also, Noble Ventures Inc. v Romania, ICSID Case No. ARB/01/11, para. 53 (12 October 2005) (‘An umbrella clause is usually seen as transforming municipal law obligations into obligations directly cognizable in international law’); Eureko BV v Poland, Partial Award, paras. 244–260 (19 August 2005). Other cases have taken a more restrictive view. For example, in Joy Mining Machinery Ltd v Egypt, ICSID Case No. ARB/03/11 (6 August 2004), available at www. worldbank.org/icsid/cases/joy-mining-award.pdf, the tribunal rejected the BIT claim which conflicted with a contractual clause on exclusive jurisdiction for other reasons (mainly regarding the non-investment nature of the transaction), but noted in dicta that the dispute was purely contractual in nature and did not fall within the scope of the BIT - adopting the SGS v Pakistan tribunal’s restrictive interpretation of the BIT’s umbrella clause. In Salini v Jordan, the ICSID tribunal upheld the exclusive jurisdiction of the Jordanian courts over contractual claims, and did not reach the issue of whether the BIT’s dispute resolution clause encompassed contract claims. Salini Costruttori SpA and Italstrade SpA v Jordan, Decision on Jurisdiction, ICSID Case No. ARB/02/13 (29 November 2004), available at www.worldbank.org/icsid/cases/salinidecision.pdf. The tribunal did note, however, that the narrow language of the umbrella clause in the Italy-Jordan BIT distinguished it from the clause reviewed in Philippines: ibid, paras. 126-127. In El Paso Energy International Co. v Argentina, Decision on Jurisdiction, ICSID Case No. ARB/03/15 (27 April 2006), available at www.worldbank.org/icsid/ cases/ARB0315-DOJ-E.pdf, the tribunal was not convinced that the textual variations of the various extant umbrella clauses should generally be decisive in interpreting them, but likewise considered that the expansive SGS v Philippines view would render superfluous all other substantive standards of protection of the BIT: ibid. para. 84. Thus, the umbrella clause could not itself extend the tribunal’s jurisdiction to any contract claims stemming solely from breach of a contract with Argentina, but the clause would cover any additional investment protections, such as a stabilisation clause, agreed to by the state acting ‘as a sovereign’ (rather than ‘as a merchant’) in an investment agreement (rather than in an ordinary commercial contract): ibid, paras. 82, 84. 80 See Ruth Teitelbaum, ‘Who’s Afraid of Maffezini? Recent Developments in the Interpretation of Most Favored Nation Clauses’ in (2005) 22 J Int’lArb. 225.

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Rules.81 The UNCITRAL Rules already occupy a very special place in the arbitration landscape, having been designed for use (primarily) in international commercial arbitration, although the major body of precedent available on their application is that of the Iran-United States Claims Tribunal, a mixed tribunal in which every claim has involved at least one State party.82 Proposed changes to these rules certainly have been influenced by both the history of the application of the existing UNCITRAL Rules and the concerns of States parties to arbitrations.83 And because, as noted above, these rules are widely used by institutions that administer commercial arbitrations (such as the HKIAC, Singapore International Arbitration Centre and Kuala Lumpur Regional Centre for Arbitration, for example),84 changes to the rules will have a significant impact on commercial arbitration. The issue of ‘transparency’ or ‘confidentiality’ in international arbitration is a good illustration of the different stakes involved in commercial and investment treaty arbitration, and hence of the fact that the new UNCITRAL Rules may need to address these differences. While commercial arbitration is premised on a notion of confidentiality of proceedings and awards, this is not the case in investment treaty arbitration, where, in line with my earlier remarks, one commentator has noted: Practical developments, both at the institutional level and on the part of individual treaty-based tribunals, have led to a level of publicity unprecedented in the annals of international arbitration, including consistently published awards, hearings accessible to the public, and the submission of amicus curiae briefs from non-parties.85 The emergence of these new circumstances in investment treaty arbitration has created significant pressure on the existing provisions of the UNCITRAL Rules, which currently include general provisions for the confidentiality of hearings86 and awards.87 Indeed,

81 See Jan Paulsson and Georgios Petrochilos, Revision of the UNCITRAL Arbitration Rules: A Report (6 September 2006), p. 4, available at www.uncitral.org/pdf/english/news/arbrules_report.pdf (‘This report concludes unhesitatingly that a revision is necessary in order for the Rules to continue “significantly contributing] to the development of harmonious international economic relations”’). 82 See David D. Caron, Lee M. Caplan and Matti Pellonpää, The UNCITRAL Arbitration Rules: A Commentary (2006), pp. 3-6; see also, Stewart A. Baker and Mark D. Davis, The UNCITRAL Arbitration Rules in Practice: the Experience of the Iran-United States Claims Tribunal (1992); Jacomijn J. van Hof, Commentary on the UNCITRAL Arbitration Rules: The Application by the Iran-US. Claims Tribunal (1991). 83 See Paulsson and Petrochilos, supra n. 81 at p. 3 (noting the use of the UNCITRAL Rules by States for various types of disputes, and noting that ‘claims asserting causes of action under international law will not always fit comfortably within the narrow language of article 1(1) of the Rules, which refers to ‘,’disputes in relation to [a] contract”’). 84 D.J. Howell, ‘Developments in Arbitration Law and Practice in Asia’ in (2006) 3(4) Transnational Dispute Management 3. 85 Rubins, supra n. 45 at p.1. 86 UNCITRAL Arbitration Rules, art. 25(4) (‘Hearings shall be held in camera unless the parties agree otherwise. The arbitral tribunal may require the retirement of any witness or witnesses during the testimony of other witnesses. The arbitral tribunal is free to determine the manner in which witnesses are examined’). 87 UNCITRAL Arbitration Rules, art. 32(5) (‘The award may be made public only with the consent of both parties’).

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Paulsson and Petrochilos, who as consultants to the UNCITRAL Secretariat have authored a report on the rules, noted that: there are no rules regarding the confidentiality of the proceedings as such or of the materials (including pleadings) before the tribunal. An explicit provision is overdue in any event, but now becomes essential given the pressures generated in the context of investment arbitrations.88 This language points to the clear influence the concerns of parties to investment treaty arbitration are playing in the rules revision process. But any proposed new rules cannot be understood simply as an incorporation of these investment treaty arbitration concerns. Indeed, certain of the proposed new confidentiality provisions are simply clarifications of the previous more general provisions in the rules, and some early proposed texts of the new rules caused some concern among the investment treaty arbitration community that they would limit participation in and access to arbitration proceedings.89 It appears that the present drafts under consideration are steeped in the concerns of both commercial and investment treaty arbitration. For example, a proposed new article 15(5) of the Rules would make explicit the ability of tribunals to accept amicus curiae briefs,90 and a proposed new article 15(8) would formally allow the joinder of third parties91 (as is increasingly expressly provided in leading sets of arbitration rules)92 and contribute to the expansion of access by outsiders to the arbitration proceedings. The proposed new article 15ter, on the other hand, would protect as confidential ‘all materials in the proceedings

88 Paulsson and Petrochilos, supra n. 81 at pp. 8–9. 89 See, for example, Luke Peterson in Investment Treaty News, 3 September 2006 (suggesting that ‘certain of the ... proposals could make it more difficult for observers to discover and monitor international arbitrations taking place under the UNCITRAL Rules’, and that, specifically, ‘a proposal to extend the principle of confidentiality to the very “fact” of an arbitration proceeding would mean that a large portion of arbitrations brought pursuant to international investment treaties would be subject to an effective disclosure ban’). 90 Paulsson and Petrochilos, supra n. 81 at p. 72 (‘Unless the parties have agreed otherwise, the Arbitral Tribunal may, after having consulted with the parties, and especially in cases raising issues of public interest, allow any person who is not a party to the proceedings to present one or more written statements, provided that the Tribunal is satisfied that such statements are likely to assist it in the determination of a factual or legal issue related to the proceeding by bringing a perspective, particular knowledge or insight which the parties are unable to present. The Arbitral Tribunal shall determine the mode and number of such statements after consulting with the parties’). 91 Ibid. pp. 74–75 (‘After consulting with the parties, the Arbitral Tribunal may allow, upon the application of a party, one or more third persons to be joined in the arbitration as a party provided any such third person and the applicant party have consented thereto in writing, and thereafter to make a single final award, or separate awards, in respect of all parties so implicated in the arbitration’). 92 Ibid. pp. 73–74, note 151 (citing art. 22.1(h) of the LCIA Arbitration Rules and art. 4(1) of the Swiss Rules of International Arbitration).

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which are not otherwise in the public domain’, barring a contrary agreement by the parties.93 This proposed new article is of particular significance, as it goes further, for example, than the revised ICC Rules did in 1998,94 by making explicit a general confidentiality provision. The juxtaposition of these two sets of concerns in the Paulsson-Petrochilos proposals for new UNCITRAL Rules is illustrative of the future of international arbitration as comprising certain key elements from commercial arbitration as well as the particular concerns stemming from the high-profile area of investment treaty arbitration.95

IV. Conclusion This broad overview of developments in international commercial arbitration leads me to an optimistic conclusion for the future. International commercial arbitration is not withering away because of the upsurge of investment treaty arbitration, and I am confident that it will not wither away in the foreseeable future. As I noted at the beginning of my remarks, the dockets of arbitral institutions continue to increase (although these figures do not take account of whether cases are investment treaty arbitrations or commercial arbitrations), including cases brought before the HKIAC, CIETAC and the Singapore International Arbitration Centre. Law firms engaging in international arbitration work (whether of the commercial or investment treaty variety) continue to report brisk business. The impact of investment treaty arbitration on the practice of commercial arbitrators may increase, through a broader interpretation of umbrella clauses in investment treaties, for example. But rather than view this as a cause for concern, I think that commercial arbitration practitioners should recognise that while they will require additional knowledge in various aspects of public international law, they also have a tremendous comparative advantage in their experience of actual litigation and commercial affairs. Indeed, I venture to suggest that at this moment in time the high level of publicly manifested concern on the part of host countries in relation to investment treaty arbitrations has rendered the future of investment treaty arbitration potentially less secure than that of international commercial arbitration, which already has weathered many a storm. It is an

93 Ibid. p. 79 (‘Unless the parties have agreed otherwise, all materials in the proceedings which are not otherwise in the public domain, including materials created for the purpose of the arbitration and all other documents or evidence given by a party, witness, expert, [or any other person] shall be treated as confidential, save and to the extent that disclosure may be required of a party by legal duty, to protect or pursue a legal right, and in bona fide legal proceedings before a state court or other judicial authority in relation to an award’). 94 Ibid. p. 78. 95 As of the time of writing, UNCITRAL’s Working Group II (Arbitration) had concluded ‘to revisit the issue [whether ‘provisions might need to be included to ensure transparency of the procedure for arbitration involving a state’] after it had completed its review of the revised provisions’. United Nations Commission on International Trade Law, Working Group II (Arbitration), Settlement of Commercial Disputes: Revision of the UNCITRAL Arbitration Rules, UN Doc A/CN.9/WG.II/WE147 (3 August 2007), para. 3. In addition, it had ‘agreed that no provision on confidentiality of proceedings should be included in the Rules’. United Nations Commission on International Trade Law, Working Group II (Arbitration), Report of the Working Group on Arbitration and Conciliation on the Work of its Forty-Sixth Session (New York, 5-9 February 2007), UN Doc. A/ CN.9/619 (20 March 2007), para. 133.

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exciting time to be involved in international commercial arbitration, with new developments and new opportunities presented by the challenge of investment treaty arbitration, and the (relative) security of knowing that commercial arbitration practitioners have a significant comparative advantage going forward.

National Emergencies and Necessity Defenses: Do They and Should They Relieve States of Their Investment Obligations? W. Michael Reisman*

I. Introduction Necessity is an excuse that leaps easily from the lips of sinners and transgressors of all hues and stripes. Defectors from moral codes try to excuse themselves by saying they had no choice. A tortfeasor’s defense is Roman law’s coactus (deleting, however, volui), and parties to contracts frequently claim necessity as their justification for non-performance. As for government officials, they claim that situations of emergency or necessity require and justify violating the international and national legal obligations that their states have assumed. In the United States, the Supreme Court has even said that “the Constitution . . . is not a suicide pact,”1 without indicating why complying with a constitutional imperative would result in national suicide. But the locus classicus in this genre is surely Winston Churchill’s “supreme emergency,” whose latter-day manifestation is the “ticking bomb.”2 Government officials invoking necessity have an advantage over private sinners because they can claim to be acting on behalf of large communities and not for themselves. And they are certainly not reticent about claiming that advantage. Following attacks by various terrorist groups, some United States officials defended practices in violation of international legal obligations, most notoriously the prohibition on torture, essentially on the ground that it was necessary for the protection of “the homeland.” Many governments seek to justify their violations of human rights obligations because of some form of necessity. During the last decade, in the increasingly important field of international investment, Argentina has invoked necessity as the justification for dishonoring obligations it had assumed to foreign investors through bilateral investment treaties or other forms of commitment and has claimed, moreover, that it may do this without incurring liability. Necessity, it appears, is a growth industry.

Myres S. McDougal Professor of International Law, Yale Law School. © W. Michael Reisman. Editorial note; This is a revised version of the author’s Fifteenth Goff Lecture delivered in Hong Kong on 16 December 2008 under the auspices of the City University of Hong Kong, and previously unpublished.

Kennedy v. Mendoza-Martinez, 372 U.S. 144, 160 (1963). See also Ziglar v. Abbasi, 137 S. Ct. 1843, 1883 (2017) (Breyer and Ginsburg, JJ., dissenting) (“In Justice Jackson’s well-known words, the Constitution is not ‘a suicide pact.’”) (quoting Terminiello v. Chicago, 337 U.S. 1, 37 (1949) (Jackson, J., dissenting).

See Michael Walzer, Just And Unjust Wars: A Moral Argument With Historical Illustrations (4th ed., 2006), pp 245, 251–268. But see Walzer’s reconsideration in Michael Walzer, Arguing About War (2004), p 33–50.

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The idea of a defense of necessity is certainly not alien to international law. Indeed, the very foundation of that law, which has been crafted by state elites to serve their common interests, rests on the “inherent” right of each state to take action in its self-defense. A legal system that recognizes the right of self-defense as inherent is hardly likely to require a state to comply fully with a specific investment obligation if the plausible consequence is the imminent destruction of the state itself. But life, for collectivities and individuals alike, is a series of crises, and if the threshold for invoking necessity, whether as a justification for military action taken unilaterally in self-defense or as a reason for ignoring obligations owed to other states and their nationals, is set too low, its invocation is likely to be so frequent as to undermine the credibility of many of the girders sustaining international law, if not of the international legal system itself. Contemporary international law and, especially, its sub-fields of State responsibility, human rights law, trade law and investment law, have long grappled with these conflicting policies. And as we enter a new period of global economic turbulence, the likelihood of more frequent invocation of the necessity defense looms large.

II. Some Early Cases The Argentina economic crisis of the 1990s, which is a central concern of this lecture, is hardly unprecedented. Indeed, the most frequently recurring type of necessity defense before international courts and tribunals has been one in which a state that has contracted with a foreign commercial entity and received some benefits under the contract then avers, on the ground of necessity, that it cannot and therefore need not pay.3 Consider the Socobelge case before the Permanent Court of International Justice.4 In 1925, Socobelge, a Belgian company, contracted with the Greek government to build 350 kilometers of new and refurbished railway lines and to supply the fixed and rolling stock necessary for their operation. The company also arranged the financing of the project; it lent Greece $21 million5 (U.S. dollars were then on the gold standard). Greece then issued gold railroad bonds at 8 percent,6 which were to be paid off progressively; the bonds were then sold to Socobelge at 90 percent of their value.7 As Socobelge completed a phase of the work, payment on a portion of the bonds would be made to it, from which payment Socobelge would then pay its own subcontractors. The collapse of the world economy and the comparatively uncertain prospects for the Greek economy reduced the inflow of foreign capital. In 1931, the foreign reserves of the Greek Treasury dropped precipitously. In 1932, the world financial crisis forced Greece to

See W. Michael Reisman, Supervisory Jurisdiction of the ICJ, in 258 Recueil des Cours: Collected Courses of the Hague Academy Of International Law (Academie de Droit International de la Haye ed. 1996).

Société Commerciale de Belgique (Belgium v. Greece), Judgment, 1939, P.C.I.J., Series A/B, No. 78 (June 15, 1939).

Convention du 27 août 1925, October 6, 1925, Art. 2, reprinted in Documents Filed by the Parties, Société Commerciale de Belgique (Belgium v. Greece), 1938–1939, P.C.I.J., Series C, No. 87, at 276 (May 15, 1939).

Ibid at 281 (quoting Article 13).

Ibid at 282 (quoting Article 14).

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abandon the gold standard and to default on service of its debt. In 1933, Greece itself asked the Financial Committee of the League of Nations to investigate its crisis, and over the next few years, Greece arranged complex repayment schedules for different groups of its diverse bondholders. But before we consider them, let us return to the plight of the Société Commerciale de Belgique. As grave as Greece’s predicament may have been for its economy and political stability, the defensive actions that it took were putting Socobelge in a classic contractual squeeze. It could no longer expect interest or debt amortization payments from Greece; that, in turn, meant that it could no longer pay its subcontractors. That, in turn, meant that the work they were performing would stop. That, in turn, meant that Socobelge could find itself in breach of the contract for non-performance; and that, in turn, meant that its performance bond would be forfeited. Socobelge exercised its rights to arbitration under the concession. In the circumstances, it was the most cogent offensive and defensive strategic move available to it. The tribunal found that Greece had, indeed, failed to make monthly payments and that it had also suspended the debt and principal payments required by the contract.8 Of particular interest to our inquiry is Greece’s argument of necessity. Greece invoked declarations made by the competent organs of the League of Nations as authoritative international confirmation that, “in 1932, Greece found itself in a situation in which it was impossible to effect the payments with respect to the largest part of its foreign debt.”9 That was a factual assertion of the order of res ipsa loquitur. But the arbitration tribunal refused to draw the legal consequence that Greece sought. As the tribunal put it, “the cost of the force majeure may not be imposed on the company in order to discharge the Greek government from the legal consequences of the suspension, beginning on 1 July 1932, of service on the debt to the company.”10 The arbitration tribunal behaved, as we shall see, like many contemporary international investment tribunals when they have been presented with claims of necessity. Of particular interest to our inquiry is the public international law phase of this dispute: Belgium, the state in which Socobelge was registered, commenced an action in the Permanent Court of International Justice for confirmation of the award and Greece’s state responsibility to Belgium. Greece, for its part, sought to have the award reviewed, inter alia, to take account of the League of Nations’ activities in the matter. The Permanent Court sidestepped the necessity defense: [S]ince the arbitral awards to which these submissions relate are, according to the arbitration clause under which they were made, “final and without appeal”,

Memorial of Belgium (Annex 7), Société Commerciale de Belgique (Belgium v. Greece), 1938–1939, P.C.I.J., Series C, No. 87, at 36 (July 12, 1938) (quoting Report of the Financial Committee to the Council of the League of Nations, June 30, 1933 (Doc. No. C.387.M.194.1933.II.A)) [translated from French by author].

Ibid at 38.

10 Ibid at 36.

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and since the Court has received no mandate from the Parties in regard to them, it can neither confirm nor annul them either wholly or in part.11 There is an important constitutional dimension to the Permanent Court’s decision. In contrast to the arbitration tribunal, which rejected, as a legal matter, the proposition that severe economic crises entitled a state to renege on its legal obligations to foreign investors, the Court made no finding on that issue. It did not disclaim the competence of the international legal system to intervene and change legal obligations in severe international crises but made clear that this type of decision was not within the competence of international tribunals. Under the international constitutional allocation of competences, the assignment that falls to international tribunals, including the Permanent Court of International Justice, is to uphold agreements and, by doing this in each such instance, to sustain stable expectations about both the rules and judicial comportment, upon both of which the international economic system rests. The competence for arranging orderly departures from those expectations is assigned to other, political organs. This general approach can be traced through the rest of the century. One example, this time from a renowned investment arbitration at the very end of the twentieth century, will suffice. In Himpurna v. Indonesia, a subsidiary of CalEnergy, a United States corporation, brought an action against Indonesia. The tribunal described the issues as follows: The claims arise under a so-called Energy Sales Contract signed on 2 December 1994 (hereinafter referred to as “the ESC”). The ESC contemplated the supply of electricity from the Dieng geothermal field in Java to PLN, and provided the legal foundation for a large investment by the Claimant in wells, plant and other infrastructure necessary to generate electricity from the Dieng reservoir. In particular, the ESC committed PLN to pay for electricity thus made available for a period of 30 years, and to do so in US dollars. This obligation was a crucial element in a project finance structure which, to be viable, had to satisfy a consortium of international banks. The claimant alleges that PLN has breached and repudiated the ESC, and seeks damages in the amount of some US$ 2.3 billion.12 PLN, the Indonesian State Electricity Corporation, contended that there was no breach: It contends that performance of the ESC has been suspended as a result of nondiscriminatory governmental measures taken in response to unprecedented economic adversity. Moreover, or so PLN avers, the dramatic devaluation of the Indonesian rupiah which began in the second half of 1997 has made it impossible for PLN to honour its vast US-dollar denominated obligations, and constitutes a change in circumstances which, under Indonesian law, obliges

11 Société Commerciale de Belgique (Belgium v. Greece), Judgment, 1939, P.C.I.J., Series A/B, No. 78, at 174 (June 15, 1939). 12 Himpurna California Energy Ltd. v. PT (Persero) Perusahaan Listruik Negara (Indonesia), Final Award, May 4, 1999, 12 World Trade & Arb. Materials 7, ¶ 1 (2000).

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the Claimant to accept an abatement of the contractual terms. PLN also alleges that the Claimant’s own failure of performance in a number of respects precludes liability on PLN’s part.13 The sole arbitrator quoted, with evident sympathy, what he described as the “powerful opening statement” of PLN’s counsel. PLN had argued: “The Tribunal has to address the claims which are before it against the background of the economic collapse that preceded the presidential decrees in the last quarter of 1997 and made them necessary. This collapse and its consequences are an important element of the changed circumstances affecting these contracts. I do not wish to burden you with statistics, but some are quite interesting. In 1998 to 1999, the Indonesian economy contracted by 15 per cent, resulting in more than 5 million workers losing their jobs. The rupiah, although it has been more stable in recent months or weeks, has lost more than 80 per cent of its value since the crisis first erupted. Out of a population of 200 million, the number of seriously poor people in the Indonesia is projected to reach 130 million in 1999 as a result of the impact of the decline in job opportunities and an inflation rate that exceeded 75 per cent last year.”14 Sympathy notwithstanding, the sole arbitrator observed that “the Arbitral Tribunal is nevertheless acutely conscious of the inherent limitations of its role.”15 The arbitrator reviewed the Socobelge case, which we considered earlier, and remarked: The Socobelge case illustrates that issues relating to the effect of macroeconomic events on contractual obligations, far from being “unprecedented,” have a long history. Closer to our times, one may recall numerous cases involving Nigeria, in the 1970s, and Zaire, in the 1980s; there are many other examples.16 Actors in the international economic process are fully aware of this. The tribunal continued: Parties entering into international contracts cannot claim unawareness of the risks of macro-economic adversities. Their effects may be extreme, but are nonetheless within the contemplation of the signatories. Moreover they are in the contemplation of financiers who evaluate the reliability of borrowers on the strength of contractual undertakings; and as they are in the contemplation

13 Ibid ¶ 2. 14 Ibid ¶ 386. 15 Ibid ¶ 403. 16 Ibid ¶ 410.

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of insurers who assess their willingness to provide cover to investors who also rely on such undertakings.17 Like Socobelge, the Himpurna tribunal relied on an implicit international constitutional allocation: Extreme instances test the very fabric of the myriad of contracts which are part of the foundation of international economic exchanges. It is precisely at the extremes that the test is meaningful. An international tribunal cannot disregard legitimate contractual expectations without risking harm to this fabric. Arbitrators have no more business sacrificing legal principle to perceived factual realism than a national court can disregard contractual entitlements because it has the impression that the debtor cannot factually meet its obligations. The fact that the Indonesian currency has suffered a painfully acute depreciation cannot be accepted as a basis for concluding that somehow PLN’s dollar-denominated obligations must be renegotiated on some undefined but overriding basis. The immediate answer to such a contention is that the reason for the dollar-denominated payment obligations was precisely to allocate the risk of major currency movements. A contract is made up of a complex of possibly countervailing risks; one party may accept the currency risk while the other accepts the industrial risk of resource availability. Indeed, one party may take on the full range of perceived risks in return for more advantageous terms of payment. This is a matter of party autonomy, subject only to fraud or other exceptional forms of abuse of the contractual mechanism . . . .18

III. Public International Law Analogues A. Self-Defense Necessity operates as an important justification at the most fundamental level of international law. The general prohibition in contemporary international law on the unilateral resort to armed force is set out in Article 2(4) of the United Nations Charter. It provides: All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state, or in any other manner inconsistent with the Purposes of the United Nations.19 But Article 51 of the Charter provides: Nothing in the present Charter shall impair the inherent right of individual or collective self-defence if an armed attack occurs against a Member of the United Nations, until the Security Council has taken measures necessary to

17 Ibid ¶ 411. 18 Ibid ¶¶ 412–13. 19 U.N. Charter art. 2(4).

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maintain international peace and security. Measures taken by Members in the exercise of this right of self-defence shall be immediately reported to the Security Council and shall not in any way affect the authority and responsibility of the Security Council under the present Charter to take at any time such action as it deems necessary in order to maintain or restore international peace and security.20 Practice makes two points clear: first, a situation justifying force in self-defense is limited by international law to an armed attack. Second, the determination that an armed attack has occurred, justifying the use of force in self-defense, is made, in the first instance, by the state that believes it is under attack. Third, that action is subject to review under international law with regard to (i) the justification for resorting to defensive force, i.e., its necessity, and (ii) the measure and mode of application of that force, i.e., its proportionality and compliance with the jus in bello. Given the fact that the consequences of any military action are often irreparable, this international legal arrangement is not entirely satisfactory. Moreover, it has come under considerable stress. For one thing, what should constitute the contingency for self-defense has been a matter of controversy. The claim to what has come to be known as “preemptive self-defense” is a claim to entitlement to use unilaterally, without prior international authorization, high levels of violence to arrest an incipient development that is not yet operational or directly threatening, but that, if permitted to mature, could be seen by the potential preemptor as susceptible to neutralization only at a higher and possibly unacceptable cost to itself.21 Preemptive self-defense differs from what has been called “anticipatory self-defense” in that those contemplating the latter can point to a palpable and imminent threat. Thus, anticipatory self-defense is at least akin to the armed attack requirement of Charter Article 51 because there may be palpable evidence of an imminent attack. A claim for preemptive self-defense can point only to a possibility among a range of other possibilities, a contingency. As one moves from an actual armed attack as the requisite threshold of reactive selfdefense to the palpable and imminent threat of attack, which is the threshold of anticipatory self-defense, and from there to the conjectural and contingent threat of the mere possibility of an attack at some future time, which is the threshold of preemptive self-defense, the selfassigned interpretive latitude of the unilateralist becomes wider, yet the nature and quantum of evidence that can satisfy the burden of proof resting on the unilateralist becomes less and less defined and is often, by the very nature of the exercise, extrapolative and speculative.22 The evolution of weapons systems that are ever more rapid and destructive and that may be initiated without warning or with very narrow warning windows has been invoked as a justification for preemption. But ultimately the central issue is assessment by the risk-averse security specialists of one international actor of the intentions of another actor who has or

20 Ibid art. 51. 21 The discourse has used different terms to describe this claim throughout the debate on the legality of the use of force. For an interesting discussion, see Yoram Dinstein, War, Aggression, And Self-Defence (4th ed. 2005). 22 The inherent difficulty of such exercises is apparent in Taft and Buchwald’s contention that the U.S. invasion of Iraq in 2003 was a lawful use of preemptive military self-defense. William H. Taft IV & Todd F. Buchwald, Preemption, Iraq, and International Law, 97 AM. J. INT’L L. 557, 563 (2003).

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may acquire the weapons. In an international system marked by radically different cultures, values, and, as a consequence, factual perceptions and their strategic assessments, an act of preemptive self-defense, based upon one actor’s self-perceived good faith conviction, will often look like serious or hysterical misjudgment to some actors and like either cynical or self-deluded, naked aggression to others. The criterion of necessity serves in international law as the compass for judicial and arbitral review, even in matters as vital to the survival of a state as its self-defense. Thus, in Nicaragua, the Court held that the actions taken by the United States were not necessary or proportional. In Oil Platforms, the International Court said that it was “not satisfied that the attacks on the platforms were necessary to respond to these incidents.”23 Moreover, even where the International Court has found or hypothesized the necessity for an action, it has inquired as to whether the reaction of the government invoking necessity was actually proportional to what was necessary.24 Article XI of the Argentina–U.S. BIT says nothing with respect to the consequences for the obligations in the rest of the treaty. It does not say, “When either party determines that it must apply measures . . . . , all other obligations in this treaty cease to apply to it.” If the parties had wished a formulation that exonerated them of all liability, they could have inserted it. They did not. They simply say that such measures, if necessary, are not precluded. In International Court judgments and a number of international investment arbitrations, it has been held that the lawfulness of a resort to self-defense, while an inherent right of a state and perforce applied unilaterally, is subject to international review. An unlawful use of force that had been self-described as legitimate self-defense could give rise to claims for damages.

B. Jus in Bello The concept of necessity also figures in international legal assessments of the lawfulness of the way military force is used, which is distinct from the question of whether a situation even warrants the resort to force. The lawfulness of the actual conduct of military activities, wholly apart from the lawfulness of their initiation, is assessed in terms of key international policies that are part of what is known as the jus in bello. At any moment, the jus in bello is composed of two parts: what we may call “Part A” consists of principles to be applied in determining the proper use and quantum of force in specific cases and gives considerable scope to the judgment of necessity of the warrior applying the force. “Part B” contains a set of absolute prohibitions which exclude justifications based upon necessity. Part A is quite indulgent to the specialist in violence in international conflict. As a general matter, it permits the specialist to apply violence to adversaries so long as the violence is occasioned and justified by military necessity; is proportional to that necessity; and is as discriminating with respect to combatants and noncombatants as the context allows. In

23 Oil Platforms (Iran v. United States), Judgment, Nov. 6, 2003, 2003 I.C.J. Rep. 161, ¶ 76. Editorial note: The prior reference to ‘Nicarague’ denotes Military and Paramilitary Activities in and Against Nicaragua (Nicarague v. U.S.), Merits. Judgment, June 14 1986,. 1986 I.C.J. Rep. 14. 24 Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v. Uganda), Dec. 19, 2005, 2005 I.C.J. Rep. 168, ¶ 147.

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the application of these “MNPD principles,” the warrior is allowed a significant margin of appreciation, for this part of the law recognizes and takes account of the complexity and variability of battle situations. So long as the warrior’s applications remain within the margin of appreciation delimited by the MNPD principles, unintended deaths and injuries caused to noncombatants are characterized as “collateral damage” rather than war crimes and incur neither criminal nor civil liability.25 In Part B, in contrast, the crafters of international law impose absolute limits on the use of certain instruments and modes of violence, limits that the warrior may not suspend on the ground that those instruments or modes might be demonstrated to prove militarily necessary and proportional to that necessity in a particularly urgent situation. These limitations, it should be emphasized, are militarily significant; in some circumstances, practices as diverse as perfidy, poisoning of wells, the use of poison gas or dumdum bullets, the initiation of aggressive war, or even the intentional killing of noncombatants could plausibly promise significant usefulness to the tactician or strategist. Resort to Part B’s prohibited modes and instruments is impermissible, notwithstanding their potential military advantages, and remains so even if the adversary resorts to them. Some Part B limitations, for example those that are designed to ensure protection of the environment, may recommend themselves because they promise to benefit both victor and vanquished in a temporal-extensive sense; a victory achieved at the expense of a livable habitat would be pyrrhic. Other limitations are humanitarian and entirely altruistic; though they deprive a party of military advantage, they may not be suspended even in the absence of reciprocation. It is generally assumed that the absence of fault means the absence of liability to pay compensation as a means of repairing any damage that was caused. But even in wartime, and even when the stringent requirements of necessity and proportionality may have been met, it appears that the obligation of compensation continues. Thus, Article 52 of the 1907 Hague Regulations provides: Requisitions in kind and services shall not be demanded from municipalities or inhabitants except for the needs of the army of occupation. They shall be in proportion to the resources of the country, and of such a nature as not to involve the inhabitants in the obligation of taking part in military operations against their own country. Such requisitions and services shall only be demanded on the authority of the commander in the locality occupied. Contributions in kind shall as far as possible be paid for in cash; if not, a receipt shall be given and the payment of the amount due shall be made as soon as possible.26

25 But see generally W. Michael Reisman & Robert Sloane, The Incident at Cavalese and Strategic Compensation, 94 AM. J. INT’L L. 505 (2000). 26 Regulations Respecting the Laws and Customs of War on Land, Convention Respecting the Laws and Customs of War on Land, Oct. 18, 1907, art. 52, 36 Stat. 2308, T.S. No. 539 (emphasis added).

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Where international law allows necessity as a ground for disregarding or violating other international legal obligations, it defines it strictly and narrowly and still requires compensation.

C. Articles on State Responsibility In 1949, the International Law Commission listed State responsibility as one of a number of subjects “suitable for codification.”27 In 1953, the General Assembly requested the Commission to undertake its codification.28 In the event, “suitable for codification” did not mean “ready for codification,” for it took another 48 years of work before the Commission concluded its draft articles. Even then, the subject matter was sufficiently controversial for the General Assembly to content itself with taking note of the Articles and recommending them to the attention of states.29 Of relevance to our discussion of necessity is Chapter V of the ILC’s Articles on State responsibility, which is entitled “Circumstances precluding wrongfulness.” The chapter is comprised of eight provisions, six of which deal with specific situations and two of which establish general rules. The six situations that preclude wrongfulness are (i) breaches of obligations that occur with the consent of the injured state (Article 20); (ii) breaches of obligations in self-defense undertaken in accordance with the United Nations Charter (Article 21); (iii) breaches of obligations as a result of counter-measures (Article 22); (iv) force majeure (Article 23); (v) distress (Article 24) and (vi) necessity (Article 25). To complete our survey of Chapter V, let us consider the two general provisions that conclude it. The first of the general rules relates to compliance with peremptory norms (Article 26), and the second (Article 27), of especial relevance to our inquiry, bears the title “Consequences of invoking a circumstance precluding wrongfulness.” Article 27 states: The invocation of a circumstance precluding wrongfulness in accordance with this chapter is without prejudice to: (a) compliance with the obligation in question, if and to the extent that the circumstance precluding lawfulness no longer exists;

27 United Nations, Yearbook of the International Law Commission 1949 49–50 (1956), available at http://legal. un.org/ilc/publications/yearbooks/english/ilc_1949_v1.pdf. It is important to point out that the ILC’s project concerned the relations between states but, at least formally, not the relations between a state and a foreign corporation or individual investor. See BG Group PLC v. Argentina, UNCITRAL Trib., Final Award, IIC 321, ¶ 408 (2007), available at https://www.italaw.com/sites/default/files/case-documents/ita0081.pdf (“Article 25 [of the ILC Draft Articles on State Responsibility] may relate exclusively to international obligations between sovereign States. From this perspective, Article 25 would be of little assistance to Argentina as it would not disentitle BG, a private investor, from the right to compensation under the Argentina-U.K. BIT.”) Its possible relevance to investment disputes will be examined later. 28 See Request for the Codification of the Principles of International Law Governing State Responsibility, G.A. Res. 799(VIII), U.N. GAOR, 8th Sess., at 52, U.N. Doc. A/2630 (1953). 29 See Report of the International Law Commission on the work of its Forty-Ninth Session, U.N. GAOR, 52nd Sess., Supp. No. 10, U.N. Doc. A/52/10 (1997).

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(b) the question of compensation for any material loss caused by the act in question.30 Article 27 applies to every situation in Chapter V and reflects the ILC’s conception of this aspect of State responsibility: a circumstance precluding the wrongfulness of a breach of an international obligation (i) does not eliminate or obviate the obligation but merely defers performance of the obligation and does so only so long as the circumstance precluding wrongfulness persists; and (ii) even with respect to the period of deferral, compensation may be owing, but, the commentary explains laconically, it is a lesser measure, limited to “material loss,” as contrasted with the damages that would be ordinarily required. This latter provision seems to be an attempt to accommodate the need of a state in a situation in extremis with the interests of the states whose rights are going to be violated because of the situation, as well as the interest of the rest of the international community in the credibility and reliability of legal arrangements. It is, moreover, consistent with more recent trends that contemplate compensation for otherwise lawful activities that cause injury – for example, liability without fault31 or the practice in the modern law of war to compensate victims of collateral damage.32 But the general principles of Article 27 also raise some questions. It is a general principle of international law, codified in Chapter II of the ILC’s Articles, that a state committing an internationally wrongful act is obliged to make reparation, be it restitution, compensation or some other form of satisfaction. If international law requires that an internationally wrongful act be compensated, but a breach of an international obligation that is not deemed wrongful also requires compensation, is the level of compensation for both acts the same? I will return to this complex and very current problem later. Let us look more closely at Article 25: 1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a) is the only way for the State to safeguard an essential interest against a grave and imminent peril; and (b) does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole.

30 Articles on Responsibility of States for Internationally Wrongful Acts [hereafter ILC Articles on State Responsibility], in Report of the International Law Commission on the Work of Its Fifty-Third Session, U.N. GAOR, 56th Sess., Supp. No. 10, UN Doc. A/56/10, art. 27 (2001), available at http://legal.un.org/ilc/ documentation/english/reports/a_56_10.pdf. 31 Survey of Liability Regimes Relevant to the Topic of International Liability for Injurious Consequences Arising Out of Acts Not Prohibited by International Law (International Liability in Case of Loss from Transboundary Harm Arising Out of Hazardous Activities), Prepared by the Secretariat, at 111–34, U.N. Doc. A/CN.4/543 (2004), available at http://legal.un.org/ilc/documentation/english/a_cn4_543.pdf. 32 See generally, for example, W. Michael Reisman & Robert Sloane, The Incident at Cavalese and Strategic Compensation, 94 AM. J. INT’L L. 505 (2000).

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2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) the international obligation in question excludes the possibility of invoking necessity; or (b) the State has contributed to the situation of necessity.33 Curiously, Article 25 provides no real definition of necessity; rather it devotes its various parts to indicate what “necessity” is not. Paragraph 2(a) states as a general matter that some international obligations preclude the lodging of a necessity defense. A prime example would be conventional human rights obligations that are non-derogable. Article 55 of the Draft Articles, which appears in Part Four under the chapeau “General Provisions,” can be considered an addendum to Article 25(2)(a). Article 55, with the rubric “Lex specialis,” provides: These articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or implementation of the international responsibility of a State are governed by special rules of international law.34 Paragraph 2(b) of Article 25 also states that necessity may not be invoked if the state seeking to use it as a defense has itself contributed to the situation for which it now invokes necessity. The basic principle here is clear. Where a state has created or caused the situation that is the predicate of the necessity claim, it can hardly use that situation to evade its legal responsibilities. “Contributing,” however, sets a lower threshold than words such as “responsible for.” The latter would have meant that only when the state seeking to use the necessity defense had been the causa causans of the situation would it be precluded from relying on the defense of necessity. “Contribution,” by contrast, imports that other factors besides state action may also have contributed to the situation for which the necessity defense is invoked, yet the state is still precluded from claiming necessity. In the GabčíkovoNagymaros case, the International Court may have set the standard somewhat higher than the ILC, to a threshold of “help[ing], by act or omission,” to bring about the situation.35 Whatever the precise point at which the standard is located, the state seeking to invoke necessity has the burden of proving that it has not contributed to a situation of necessity before it can claim any benefits from the defense. Paragraph 1(a) imposes four cumulative requirements for a valid invocation of the necessity defense. First, it requires that the interest to be protected be “essential.” This adjective is not defined, but Paragraph 1(b) makes clear that the “essentiality” of the interest of the state trying to invoke necessity neither is to be self-defined by the state invoking it nor is to be considered absolute; it is relative to the essentiality of other states’ interests that are likely to be affected.

33 ILC Articles on State Responsibility art. 25. 34 Ibid art. 55. 35 Gabčíkovo-Nagymaros Project (Hungary/Slovakia), Judgment, 1997 I.C.J. Rep. 7, ¶ 57 (1997), available at https://www.icj-cij.org/files/case-related/92/092-19970925-JUD-01-00-EN.pdf.

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Thus the act supposedly taken to address the state of necessity will be deemed wrongful if it “seriously impair[s]” an essential interest of other states “or of the international community as a whole.”36 Second, Paragraph 1(a) requires that the threat or “peril” to that interest be “grave.” Third, it requires that the grave peril be “imminent.” And, fourth, it requires that breach of the international obligation in question be “the only way” for the state invoking necessity to safeguard its essential interest. All this adds up to a forbiddingly high standard. Commentators have equated “grave and imminent peril” with circumstances that threaten the “very existence of the State.”37 Nor should it surprise that the plea of necessity has seldom, if ever, been sustained by an international tribunal.38 An investment that was presented with the claim of necessity remarked that Article 25 “is a most exceptional remedy subject to very strict conditions because otherwise it would open the door to elude any international obligation.”39 Bin Cheng, surely the Dean of the “general principles of international law,” wrote: If, after every conceivable legal means of self-preservation has first been exhausted, the very existence of the State is still in danger, and if there exists only one single means of escaping from such danger, the State is justified in having recourse to that means in self-preservation, even though it may otherwise be unlawful.40 Popular dissatisfaction over the performance of a government in general or in a particular sector and demands for its replacement would not amount to a threat to the existence of a state. The fall of a government or the fall of serial governments does not equate to the fall of a state; actions taken by a government that are designed to stave off being replaced by another government within the constitutional structure but which are in violation of treaty obligations can hardly be considered as fulfilling the requirements of necessity in customary international law. That is not to say that there are never grave crises facing states. Recall Greece’s plight in the Great Depression. And consider Argentina, whose economic and political crisis has been the basis for the necessity defense in five recent cases.

36 ILC Articles on State Responsibility art. 25(1)(b). 37 See, for example, Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals 71 (2006). But see Roberto Ago, Special Rapporteur, United Nations, Addendum to the Eighth Report on State Responsibility 17, U.N. Doc. A/CN.4/318/ADD.5–7 (1980), available at http://legal.un.org/ilc/ documentation/english/a_cn4_318_add5_7.pdf (“On the other hand, it must be noted—and this is the aspect we consider the most important— that, even in cases of ‘necessity’, the concept of self-preservation can only be used to explain actions taken with a view to averting an extreme danger threatening the very existence of the State, whereas, according to the opinion that predominates today, the concept of state of necessity can be invoked above all to preclude the wrongfulness of conduct adopted in certain conditions in order to protect an essential interest of the State, without its existence being in any way threatened.”). 38 See James Crawford, The International Law Commission’s Articles On State Responsibility: Introduction, Text, And Commentaries 179–82 (2002). 39 Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award, May 22, 2007, ¶ 304, available at http://ita.law.uvic.ca/documents/Enron-Award.pdf. 40 Cheng, supra note 37, at 74.

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IV. The Rise and Fall and Rise of the Argentine Economy By the late 1980s, the Argentine government’s interventionist model for its economy and public utilities and services had proven a failure. Inflation was running at 5000% per annum. The Argentina oil, gas and electricity sectors, which had been monopolized by the government, were performing dismally from supply to customer service. Oil reserves were dwindling due to lack of investment, and exploration was stymied due to lack of capital in the government-operated company, the existence of price controls and the obligation of private companies to deliver all crude oil production to the State-owned company. Electricity blackouts and shortages were commonplace due to a lack of power capacity, which was further aggravated by mismanagement and lack of investment. Lack of investment made it impossible to maintain and update facilities and services. In order to resuscitate the economy and the failed oil and gas and electricity sectors, the Government introduced a dramatic policy change in 1989. It privatized the previously State-run oil and gas exploration and production company, YPF, as well as the State-run distribution and transportation company, Gas del Estado (“GdE”). In order to attract investors from across the world to its oil and gas and electricity sectors, the government designed new regulatory frameworks that offered investors strong legal rights and guarantees. Since (with only one exception) many necessity awards have concerned this industry, it will be useful to consider Argentina’s regulatory innovations. For the oil and gas sector, the government created an innovative “Oil and Gas Regulatory Framework” that was designed to create a market-driven deregulated environment that would be appealing to foreign investors. Through these measures, the government made the following guarantees to potential investors in the oil and gas sector: •

Hydrocarbon imports and exports were exempted from all existing or future duties or withholdings and were also given protection from discriminatory taxes. These rights were generally incorporated into the Hydrocarbons Concessions and Contracts.

•

Liquid and gaseous hydrocarbons extracted through production concessions would be subject to a maximum royalty rate of 12% of the prices received for gas at the wellhead. This guarantee was generally incorporated into the Hydrocarbons Concessions and Contracts.

•

Prices of crude oil and byproducts could be freely agreed on by contracting parties. To further this freedom to set prices, the government deregulated the prices of crude oil and byproducts as of December 1, 1991, and the prices of natural gas at the wellhead as of January 1, 1994. And, as part of this development, the government agreed to gas-distribution licenses with the gas-distribution companies, which included the right to a pass-through to tariffs of the prices paid by distributors to producers for their purchases of natural gas. These distribution tariffs were to be calculated in U.S. dollars and adjusted biannually in accordance with the U.S. Producer Price Index.

•

Hydrocarbon producers could freely sell their production. Also, hydrocarbon producers could freely dispose of a percentage of their production per the foreign

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exchange sale prices established in the relevant contracts and bidding terms. This right was generally incorporated into the Hydrocarbons Concessions and Contracts. •

Hydrocarbon producers could freely export crude oil and byproducts. To this end, if restrictions were imposed on crude oil exports in the future, producers, refiners and exporters would be entitled to receive, per unit of production, a value not lower than the value of petroleum in similar condition.

•

For hydrocarbons sold in the domestic market, producers could acquire the freely transferable foreign exchange equivalent of such percentage, which could not exceed 70% of the value of each transaction.

To further induce foreign investment, the government sent representatives abroad on “road shows,” in which the representatives promoted the newly privatized sectors to potential investors. The government also promoted the newly privatized sectors in public speeches, through the media, and even in personal meetings with potential investors. Thus, then-President Menem stated: Argentina needs to satisfy its domestic economic and social needs. For that purpose, it has to enter with determination into the competitive international context including new technology and attracting capital and risk, gaining investors in order to optimize the exploration and production of its subsoil. My government is giving the entire world ample evidence of clear and transparent rules of the game in order to receive capital inflows for production purposes. . . . We want this national commitment to reach the whole world by means of specialized publications which demonstrate that Argentina has definitely understood that its last chance for greatness lies in its assimilation into the ideals of free countries. We are convinced that the national transformation has been launched and it is irreversible. We want this to be known by those who aspire to find in Argentina the necessary environment for an integral development of the process of creation.41 In other speeches, the President stated that with respect to the Argentina privatization process: For the private sector we are establishing clear and stable rules, for both domestic and foreign capital. . . . I want you to convey, in addition, as a vital message to every one of your towns and governments that the process initiated in Argentina is irreversible. That transparent, predictable and stable rules of the game cannot be negotiated, or sold . . . .42 ***

41 Carlos Saúl Menem, Ultima Oportunidad para la Grandeza, Actualidad Energética, Edición Latinoamerica, No. 27 (1990) [translated by author]. 42 Carlos Saúl Menem, Discurso al Inaugurar las Primeras Jornadas Internacionales sobre Privatización, Desregulación y Competencia (Nov. 14, 1989), available at http://lanic.utexas.edu/larrp/pm/sample2/ argentin/menem/890343d.html [translated by author].

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. . . [W]e aspire that the whole producing State shall pass to private hands within a framework of stability, legal certainty and competition. That is why we have recently dramatically deregulated our economy. We will continue to take significant steps within this field, where the participation of American capital would be very significant to us. We endeavor, in addition, to strengthen investments, both domestic and foreign. We offer economic stability [and] national legislation that, complemented with numerous bilateral agreements, tends to provide solid and serious guarantees. We offer not only stability, but also the opportunity to make profitable investments.43 President Menem gave several other speeches inviting foreign investors to Argentina and highlighting how the reforms had transformed Argentina into a safe and dependable environment for foreign investment: My government wished to achieve economic stability, which is essential in order to project a solid basis for the development and growth of our country. Today, that stability has been firmly rooted and we have started perceiving its first benefits: •

Greater certainty in transactions.

•

The possibility of granting certain guarantees to national and foreign investors.

•

The spectacular recovery of the capital markets.

•

General confidence.44 ****

We have accelerated the privatization of railroads and the gas and energy sectors. We have promoted the complete deregulation and opening of the hydrocarbon sector. And we aspire that the whole producing state shall pass to private hands within a framework of stability, legal certainty and competition. . . . We will continue to take significant steps within this field, where the participation of American capital would be very significant to us.

43 Carlos Saúl Menem, Discurso del Señor Presidente de la Nación, Doctor Carlos Saúl Menem, en los E.E.U.U., en el Almuerzo Ofrecido por el National Press Club (Nov. 15, 1991), available at http://lanic. utexas.edu/larrp/pm/sample2/argentin/menem/911366d.html [translated by author]. 44 Carlos Saúl Menem, Discurso del Señor Presidente de la Nación, Doctor Carlos Saúl Menem, en los E.E.U.U., en Ocasión de la Comida Ofrecida por el Consejo de Relaciones Exteriores (Nov. 18, 1991) [translated by author].

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We endeavor, in addition, to strengthen investments, both domestic and foreign. We offer economic stability [and] national legislation that, complemented with numerous bilateral agreements, tends to provide solid and serious guarantees.45 **** We have conducted an economic reform based on three pillars: inflation control by means of a strong fiscal and monetary discipline; profound state reform; liberalization of the economy in order to achieve a competent market. All these have enabled Argentina to insert itself into the world market. The public sector reform contemplates a privatization process that we consider essential. The state controlled a large number of inefficient companies with the privatization policy we have: incorporated new technologies to increase productivity and return, promoted the inflow of new capital to create modern and efficient companies. We have given foreign capital a stronger legal stability; we have changed the legislation with respect to foreign investments; we have removed the requirements of prior authorization and special taxes to provide extraordinary benefits in order to open the road to foreign investment. Come to Argentina, come to corroborate the real investment possibilities, come to discover the new country that we offer.46 Then-Minister of Economy Domingo Cavallo assured potential investors that devaluations would no longer occur and that foreign investors would thrive in the new Argentina economy, as evidenced in his public statements: Get out of your minds the idea of a devaluation . . . There was legal uncertainty when it was decided to take away money’s value, when the most elemental principle of trust didn’t exist, when there was fraud, although that will not exist any longer in this country.47 **** It is astonishing that some short-sighted people think that the Government could make an arbitrary change in the value of our currency. Today, with the convertibility law, it is impossible. Legal uncertainty existed before, when the president or a minister could decide on a devaluation taking away from the Argentina people 10, 20, 30, 40 or 50% of the value of their money. That was a swindle and a violation of property rights.48 To reinforce Argentina’s commitment not to do that, President Carlos Menem stated: “We will never give up the current economic model which is producing a structural

45 Menem, National Press Club, supra note 43. 46 Carlos Saúl Menem, Address Before the Federation of Belgian Entrepreneurs (Feb. 13, 2002) [translated by author]. 47 Cavallo Negó una Eventual Devaluación, LA NACIÓN, Sept. 16, 1992, at 1 [translated by author]. 48 Duras Acusaciones Disparó Cavallo Contra los Dirigentes Empresarios, CLARÍN, Sept. 16, 1992, at 18 [translated by author].

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transformation for the Argentina people.”49 The government also signed bilateral investment treaties, or BITs, with numerous countries with potential investors, including a BIT with the United States. Despite these efforts, by the end of the 1990s, the Argentina economy again experienced recession. The value of assets was falling, unemployment was rising, and the peso had become overvalued. Argentina’s country-risk premium hit levels that effectively shut it out from the international credit market. In 2000 the government convinced the licensees in the gas industry to accept two postponements in the adjustment of tariff rates because “Argentina considered that the pending tariff adjustments based on the U.S. rate were unreasonable because they would result in a significant increase in utility rates within a recessionary and deflationary context.”50 In 2001 the “crisis deepened,” and the government encountered trouble paying its external debt, leading to general panic about the security of deposits.51 On January 6, 2002, the legislature enacted the Public Emergency and Foreign Exchange System Reform Law (the Emergency Law), which abrogated the Convertibility Law, mandating renegotiation of public contracts and abolishing all tariff adjustments in U.S. dollars.52 Presidential Decree No. 311/03, on July 4, 2003, began the renegotiation process “under threat of rescission of contract” in which “the Government has not offered

49 Menem: El Plan Económico Se Mantendrá a Rajatabla, LA NACIÓN, Sept. 3, 1992, at 1 [translated by author]. 50 LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, Oct. 3, 2006, ¶ 56, available at https://www.italaw.com/sites/ default/files/case-documents/ita0460.pdf. 51 Ibid ¶ 63. 52 Ibid ¶¶ 64–65.

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to restore the legal guarantees that were eliminated by the Emergency Law, or compensate Claimants for any losses.”53 The decision to “pesify” affected a broad range of foreign investors. But that was not the only measure that the Argentina government undertook to deal with the crisis. As the Tribunal in LG&E v. Argentina described it: On 12 February 2002, Argentina announced the renegotiation of all public service contracts. By Decree No. 293/02, licenses for transport and distribution of natural gas were subject to mandatory renegotiation by a Renegotiation Committee within the Ministry of Economy. Under the Decree,

53 The crisis was vividly and sympathetically described in the Decision on Liability of the LG&E case: A new economic crisis developed in Argentina in the late 1990s. In the third quarter of 1998, the Argentina economy plunged into a period of recession that was to last four years and triggered, in Respondent’s opinion, the worst economic crisis since Argentina’s inception in 1810. In 1999, Argentina’s Gross Domestic Product (“GDP”) decreased causing a dramatic fall in domestic prices. Private consumption and investments began falling in August 1998 and Argentina entered a deflationary period. The period was marked by widespread decline in the value of assets located in Argentina. By the end of the 1990s, many economists considered the peso as overvalued, and predicted that the currency board would have to be abandoned, which would inevitably devalue the peso. Argentina’s country risk premium increased, gradually excluding the country from the international credit market. These economic indicators were accompanied by social problems— unemployment, poverty and indigence levels began to increase. On 10 December 1999, Mr. Fernando de la Rúa took office as the President of Argentina. His administration tried to maintain the peg of the Argentina peso to the U.S. dollar as mandated by the Convertibility Law. Ibid ¶¶ 54–55 (internal citations omitted). But these difficult times were only prelude to a much a deeper crisis: Argentina’s crisis deepened at the end of 2001. The Government experienced increased difficulties in repaying its foreign debt. As poverty and unemployment soared, Argentinas feared that the Government would default on its debt and immobilize bank deposits. Therefore, savings were massively withdrawn from the banks. In response, the Government issued Decree No. 1570/01, known as “Corralito,” on 1 December 2001, restricting bank withdrawals and prohibiting any transfer of currency abroad. Amid widespread discontent and public demonstrations, including violence that claimed tens of lives, President De la Rúa and his Cabinet resigned on 20 December 2001. A succession of presidents took office and quickly resigned. Finally, President Eduardo Duhalde took office and implemented a new economic plan, which contained measures that form the additional claim submitted by Claimants. On 6 January 2002, Congress enacted Law No. 25,561, the Public Emergency and Foreign Exchange System Reform Law (known as “the Emergency Law”). The Emergency Law abrogated the Convertibility Law so that the one-to-one peg of the Argentina peso to the United States dollar no longer existed. The Emergency Law provided for the switch into Argentina pesos of debts owed to the banking system, debts arising from management contracts governed by public law, and debts under private agreements. The law further provided for the renegotiation of private and public agreements to adapt them to the new exchange system. The Emergency Law adopted measures modifying public-service contracts, such as establishing that tariffs and prices for public services were to be calculated in pesos, instead of U.S. dollars; abolishing all clauses calling for tariff adjustments in U.S. dollars or other foreign currencies; eliminating all indexing mechanisms; and directing the Executive Branch to renegotiate all public-service contracts. By Presidential Decree No. 214 of 3 February 2002, the Government adopted a currency conversion scheme under which all obligations payable in dollars existing on the date of enactment of the Emergency Law would be converted into pesos at the fixed one-to-one exchange rate. Ibid ¶¶ 63–66.

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the Government could either sign a renegotiated agreement or rescind the contract. By Resolution No. 38/02, issued on 9 March 2002, ENARGAS was ordered to discontinue all tariff reviews and to refrain from adjusting tariffs or prices in any way.54 On April 26, 2003, new elections were held in Argentina, and Dr. Nestor Kirchner was elected President.55 He continued the renegotiation process but did not offer to restore any of the legal guarantees that previous governments had eliminated in response to the crisis.56 The combined impact of these governmental measures on foreign investors was considerable and has led to some 30 international investment arbitrations against Argentina. In all of the arbitrations, the claimants have contended that the measures Argentina took violated commitments made either in or under pertinent bilateral investment treaties. In some of the arbitrations, Argentina invoked necessity and/or national emergency under either the governing BIT or under customary international law.

V. Article XI of the Argentina — United States BIT Five of the published awards that have addressed the necessity defense arose out of the economic crisis we have just reviewed. Four of the cases fell under the Argentina–United States Bilateral Investment Treaty. Article XI of that treaty provides: This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests.57 Before considering the awards, let us analyze this important provision. Article XI deals with three categories of events, which we may take up in order of interpretive clarity: one of them, the phrase “fulfillment of its obligations with respect to the maintenance or restoration of international peace and security,” is authentically interpreted in paragraph 6 of the Protocol that is attached to and part of the treaty: The Parties understand that, with respect to rights reserved in Article XI of the Treaty, “obligations with respect to the maintenance or restoration of international peace or security” means obligations under the Charter of the United Nations.58

54 Ibid ¶ 68. 55 Ibid ¶ 70. 56 Ibid ¶ 71. 57 Treaty Between the United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment, U.S.–Arg. [hereafter Argentina–U.S. BIT], art. XI, Nov. 14, 1991, S. Treaty Doc. No. 103-2 (1993), 31 I.L.M. 124 (1992), available at https://tcc.export.gov/Trade_ Agreements/All_Trade_Agreements/exp_000897.asp. 58 Argentina–U.S. BIT, Protocol, ¶ 6.

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Plainly the reference here is to decisions of the Security Council acting under Chapter VII. In Sempra v. Argentina, which we will review in more detail below, the tribunal held, with respect to this aspect of the BIT: “the Treaty does not contain a definition concerning either the maintenance of international peace and security, or the conditions for its operation. Reference is instead made to the Charter of the United Nations in Article 6 of the Protocol to the Treaty.”59 Now Chapter VII decisions are binding on all member-states of the United Nations by virtue of Article 25 of the Charter. Moreover, they override contrary treaty obligations by operation of Charter Article 103. So this part of the BIT confirms the priority of the Charter over this treaty. Even without such an explicit reference, Charter Article 103 would operate for the parties to this BIT, both being members of the United Nations. Imagine, for example, a Chapter VII decision by the Security Council prohibiting all economic transactions with nationals of State A. If State A and B are parties to a BIT modeled on the Argentina–U.S. BIT, State B’s compliance with the Council’s decision would not constitute a violation of the BIT by virtue of Article XI of the BIT. Thus, acts in breach of international obligations caused by implementation of a Chapter VII decision of the Security Council but intra vires the Council’s decision would not be wrongful. Nor would a court or arbitral tribunal be competent to review them, notwithstanding ECHR decisions to the contrary.60 Yet this would not mean that the state relying on a necessity argument would be making a decision that could free it from its BIT obligations. The state would simply be implementing the decision of the Security Council. The Protocol does not provide a comparable authentic interpretation for the phrase “the Protection of its own essential security interests,” but the facts that (i) the phrase follows the words “international peace or security” and (ii) the phrase uses the word “Protection,” which imports action taken in defense against something coming from without, both suggest that the reference is to the right to take actions in self-defense. Here, again, this is confirmative of rather than additive to international law, for the right of self-defense is characterized in Article 51 of the Charter as “inherent.” The third category of events to which Article XI refers is “the maintenance of public order.” Unlike the other two categories, both of which relate to matters regulated by the United Nations Charter, the maintenance of public order is not a Charter term. Nonetheless, it is also not a neologism in international law, where it has a specific international legal

59 Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Award, Sept. 28, 2007, ¶ 376, available at http://ita.law.uvic.ca/documents/SempraAward.pdf. For a more detailed discussion, see id. ¶ 51. 60 See, for example, Cases C-402/05 P and C-415/05 P, Yassin Abdullah Kadi and Al Barakaat International Foundation v. Council of the European Union and Commission of the European Communities, 2008 E.C.R. I-06351, ¶ 326 (“[T]he Community judicature must, in accordance with the powers conferred on it by the EC Treaty, ensure the review, in principle the full review, of the lawfulness of all Community acts in the light of the fundamental rights forming an integral part of the general principles of Community law, including review of Community measures which, like the contested regulation, are designed to give effect to the resolutions adopted by the Security Council under Chapter VII of the Charter of the United Nations.”), available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A62005CJ0402.

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meaning and, moreover, recurs in other treaties to which Argentina and the United States are party. In the Covenant on Civil and Political Rights,61 to which both Argentina and the United States are party, Article 19(1) and (2) provide: 1.

Everyone shall have the right to hold opinions without interference.

Everyone shall have the right to freedom of expression; this right shall include freedom to seek, receive and impart information and ideas of all kinds, regardless of frontiers, either orally, in writing or in print, in the form of art, or through any other media of his choice.62

Article 19(3) provides: 3.

The exercise of the rights provided for in paragraph 2 of this article carries with it special duties and responsibilities. It may therefore be subject to certain restrictions, but these shall only be such as are provided by law and are necessary: (a) For respect of the rights or reputations of others; (b) For the protection of national security or of public order (ordre public), or of public health or morals.63

Article 22 of the Covenant provides: 1.

Everyone shall have the right to freedom of association with others, including the right to form and join trade unions for the protection of his interests.

No restrictions may be placed on the exercise of this right other than those which are prescribed by law and which are necessary in a democratic society in the interests of national security or public safety, public order (ordre public), the protection of public health or morals or the protection of the rights and freedoms of others. This article shall not prevent the imposition of lawful restrictions on members of the armed forces and of the police in their exercise of this right.

Nothing in this article shall authorize States Parties to the International Labour Organisation Convention of 1948 concerning freedom of association and protection of the right to organize to take legislative measures which would prejudice, or to apply the law in such a manner as to prejudice, the guarantees provided for in that Convention.64

In his commentary on these two articles of the Covenant, Professor Nowak addresses the meaning of ordre public: “[I]n addition to prevention of disorder and crime, it is possible to

61 International Covenant on Civil and Political Rights [hereafter ICCPR], G.A. Res. 2200A(XXI), 21 U.N. GAOR, 21st Sess., Supp. No. 16, at 52, U.N. Doc. A/6316 (1966), 999 U.N.T.S. 171, available at https:// treaties.un.org/doc/publication/unts/volume%20999/volume-999-i-14668-english.pdf. 62 Ibid art. 19(1)–(2). 63 Ibid art. 19(3) (emphasis added). 64 Ibid art. 22 (emphasis added) (internal citation omitted).

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include under the term ordre public all of those ‘universally accepted fundamental principles, consistent with respect for human rights, on which a democratic society is based’.”65 Nowak’s commentary on Article 22 considers the meaning of “necessity” in the exercise of rights: Restrictions on freedom of association and trade unions must be “prescribed by law” (“prévues par la loi”), i.e., set down in a general-abstract parliamentary act or an equivalent unwritten norm of common law with sufficient definitiveness. They must furthermore be “necessary in a democratic society” (“nécessaires dans une société démocratique”) for attaining one of the defined purposes, i.e., they must be proportional and be oriented along the basic democratic values of pluralism, tolerance, broadmindedness and peoples’ sovereignty. . . . The dissolution of an association or the prohibition of its formation as the severest restriction on freedom of association is possible ultima ratio only when milder measures for restricting the sphere of activities are insufficient. . . . Finally, restrictions must serve one of the purposes justifying interference listed in Art. 22(2) . . . . In the interest of public order (ordre public), States Parties are entitled to issue ordinances to control the lawfulness of the formation and activities of associations and trade unions.66 The American Convention on Human Rights (ACHR) (Pact of San José),67 to which Argentina but not the United States is party, also refers to public order. For example, its Article 13 provides, 1.

Everyone has the right to freedom of thought and expression. This right includes freedom to seek, receive, and impart information and ideas of all kinds, regardless of frontiers, either orally, in writing, in print, in the form of art, or through any other medium of one’s choice.

The exercise of the right provided for in the foregoing paragraph shall not be subject to prior censorship but shall be subject to subsequent imposition of liability, which shall be expressly established by law to the extent necessary to ensure: a. respect for the rights or reputations of others; or b. the protection of national security, public order, or public health or morals.

The right of expression may not be restricted by indirect methods or means, such as the abuse of government or private controls over newsprint, radio broadcasting frequencies, or equipment used in the dissemination of information, or by any other means tending to impede the communication and circulation of ideas and opinions.

65 Manfred Nowak, UN Covenant On Civil And Political Rights: CCPR Commentary 356 (1993). 66 Ibid at 394–95 (emphases in original, internal citations omitted). 67 American Convention on Human Rights [hereafter ACHR], 1144 U.N.T.S. 123, 9 I.L.M. 99 (1969), available at http://www.oas.org/dil/treaties_B-32_American_Convention_on_Human_Rights.pdf.

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Notwithstanding the provisions of paragraph 2 above, public entertainments may be subject by law to prior censorship for the sole purpose of regulating access to them for the moral protection of childhood and adolescence.

Any propaganda for war and any advocacy of national, racial, or religious hatred that constitute incitements to lawless violence or to any other similar action against any person or group of persons on any grounds including those of race, color, religion, language, or national origin shall be considered as offenses punishable by law.68

In its advisory opinion on the Compulsory Membership in an Association Prescribed by Law for the Practice of Journalism, the Inter-American Court of Human Rights examined the meaning of “public order” within the Convention: In fact it is possible, within the framework of the Convention, to understand the meaning of public order as a reference to the conditions that assure the normal and harmonious functioning of institutions based on a coherent system of values and principles. In that sense, restrictions on the exercise of certain rights and freedoms can be justified on the ground that they assure public order.69 But that hardly provided a clear formulation: The Court must recognize, nevertheless, the difficulty inherent in the attempt of defining with precision the concepts of “public order” and “general welfare.” It also recognizes that both concepts can be used as much to affirm the rights of the individual against the exercise of governmental power as to justify the imposition of limitations on the exercise of those rights in the name of collective interests.70 The critical point was that “public order” could not be used to override the other rights guaranteed in the Convention. “In this respect,” the Court continued, the Court wishes to emphasize that “public order” or “general welfare” may under no circumstances be invoked as a means of denying a right guaranteed by the Convention or to impair or deprive it of its true content. (See Art. 29(a) of the Convention) Those concepts, when they are invoked as a ground for limiting human rights, must be subjected to an interpretation that is strictly limited to the “just demands” of “a democratic society,” which takes account of the need to balance the competing interests involved and the need to preserve the object and purpose of the Convention.71

68 ACHR art. 13. 69 Advisory Opinion OC-5/85, Compulsory Membership in an Association Prescribed by Law for the Practice of Journalism (Articles 13 and 29 of the American Convention on Human Rights), Inter-Am. Ct. H.R., Series A, ¶ 64 (Nov. 13, 1985), available at http://www.oas.org/en/iachr/expression/showDocument. asp?DocumentID=27. 70 Ibid ¶ 67. 71 Ibid

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Using those criteria, the Court concluded that public order reasons that might justify a regime of compulsory licensing of some professions could not be invoked with respect to journalism; in that activity, a requirement of compulsory membership “would have the effect of permanently depriving those who are not members of the right to make full use of the rights that Article 13 of the Convention grants to each individual. Hence, it would violate the basic principles of a democratic public order on which the Convention itself is based.”72 Professor Davidson provides a cogent analysis of the holding: following an examination of the comparable provisions of the European Convention on Human Rights and the Civil and Political Covenant, the Court ruled that the “necessity” of any restrictions, and hence their legality under Article 13(2), depends upon a demonstration that the restrictions are “required by a compelling governmental interest”. They must also be “proportionate and closely tailored to the accomplishment of the legitimate governmental objective necessitating it.” Interestingly, there is no mention of any allowance to states of a “margin of appreciation” when they decide on the need for a restriction in the public interest.73 Licensing requirements for journalists plainly failed these tests: While it was acknowledged that the requirement of compulsory membership restricted the dissemination of information and ideas by certain classes of person, it was nevertheless argued that this was justifiable under Article 13(2) (a) for the maintenance of professional and ethical standards and to prevent employer interference with the independence of journalists. The Court was not convinced by this argument and stated that any justification must be rooted in Article 13(2)(b) on grounds of “public order” or as a “just demand of the general welfare in a democratic society” as permitted by Article 13(2) of the Convention.74 The definition of public order and the standard of judicial review applied by the Court under Article 13(2) were subsequently affirmed by the Inter-American Human Rights Commission in a report on the so-called desacato laws that are to be found in the legal systems of many Latin American states. In this Report, the Commission noted that the rationale behind desacato laws reverses the principle that a properly functioning democracy is itself the best guarantee of public order, since they seek to preserve public order by “restricting a fundamental human right which is recognized internationally as a cornerstone upon which democratic society rests”. Commenting upon Articles 13(2) and (3), the Commission stated that

72 Ibid ¶ 76. 73 Scott Davidson, ‘The Civil and Political Rights Protected in the Inter-American Human Rights System’, in The Inter-American System of Human Rights 213, 264 (David J. Harris & Stephen Livingstone eds., 1998) (emphasis added, internal citations omitted). 74 Ibid.

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these provisions recognise that the zone of legitimate State intervention begins at the point where the expression of an opinion or idea interferes directly with the rights of others or constitutes a direct and obvious threat to life in society. The Commission observed that in a democratic society the threshold should be high, given the pivotal role which freedom of thought and expression plays.75 Article 16 of the American Convention on Human Rights (ACHR) provides: 1.

Everyone has the right to associate freely for ideological, religious, political, economic, labor, social, cultural, sports, or other purposes.

The exercise of this right shall be subject only to such restrictions established by law as may be necessary in a democratic society, in the interest of national security, public safety or public order, or to protect public health or morals or the rights and freedoms of others.

The provisions of this article do not bar the imposition of legal restrictions, including even deprivation of the exercise of the right of association, on members of the armed forces and the police.76

The commentary on the meaning of public order under Article 16(2) refers back to the Compulsory Membership advisory opinion. Professor Davidson observes that “Article 16(2) permits restrictions on certain listed public interest grounds. It can be taken that, as with the comparably worded restrictions in Article 13, ‘the restriction must be proportionate and closely tailored to the accomplishment of the legitimate governmental objective necessitating it’.”77 One might add to Professor Davidson’s reading the Court’s own “absolute restriction”: “‘public order’ or ‘general welfare’ may under no circumstances be invoked as a means of denying a right guaranteed by the Convention or to impair or deprive it of its true content.”78 Thus, in the relevant treaty practice, it is clear that while “public order” is a broad term, the protection or maintenance of public order as a ground for derogating from other treaty obligations may be taken by a state-party only in limited circumstances and never with the effect of neutralizing other rights guaranteed in that treaty. Moreover, each invocation is reviewed at the international level, not simply as to its good faith but as to its proportionality and necessity. Thus, only one of the grounds specified in Article XI – compliance with Chapter VII decisions of the Security Council – is, by virtue of its superordinated legal status, insusceptible to review for its necessity and proportionality by arbitration tribunals or national courts. Are the other grounds subject to such review? Article XI states, it will be recalled, that “[t]he

75 Ibid at 265–66. 76 ACHR art. 16. 77 Ibid at 269. 78 Advisory Opinion OC-5/85, Compulsory Membership in an Association Prescribed by Law for the Practice of Journalism (Articles 13 and 29 of the American Convention on Human Rights), Inter-Am. Ct. H.R., Series A, ¶ 67 (Nov. 13, 1985), available at http://www.oas.org/en/iachr/expression/showDocument. asp?DocumentID=27.

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Treaty shall not preclude the application by either party of measures necessary for . . . .” Does Article XI assign the determination of (i) the existence of a situation necessitating measures; (ii) the design of the measures; and (iii) their mode of application by the stateparty concerned exclusively to that state without any review by the judicial and arbitral instances established by the treaty? When there is an intention to assign an absolute power, the language is explicit. Following the financial meltdown in the U.S. in 2008, the administration prepared a bill entitled “The Troubled Asset Relief Program.” The original draft provided: Decisions by the Secretary [of the Treasury] pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.79 Such efforts to secure absolute power are always resisted, as was this one. Given such political and legal “resistance,” may such an absolute power be implied, when it has not been explicitly granted? In the Enron award, the ICSID tribunal undertook a rigorous interpretative exercise with regard to this question. It observed that the object and purpose of the Treaty [the Argentina/U.S. BIT] is, as a general proposition, to apply in situations of economic difficulty and hardship that require the protection of the international guaranteed rights of its beneficiaries. To this extent, any interpretation resulting in an escape route from the obligations defined cannot be easily reconciled with that object and purpose. Accordingly, a restrictive interpretation of any such alternative is mandatory.80 The tribunal held that “[t]ruly exceptional and extraordinary clauses such as a self-judging provision normally must be expressly drafted to reflect that intent.”81 But in the case of the Treaty nothing was said to this effect, and the elements invoked in support of a self-judging character originated for the most part in congressional discussions in the United States concerning broader issues or indirect interpretations. In the Gabčíkovo–Nagymaros case, the International Court of Justice, referring to the conditions defined by the International Law Commission, held that “the State concerned is not the sole judge of whether those conditions have been met.”82 And the tribunal observed that the GATT, Nicaragua and Oil Platform cases “confirm that the language of a provision has to be very precise in order to lead to a conclusion about its self-judging nature.”83

79 Text of Draft Proposal for Bailout Plan, N.Y. TIMES, Sept. 20, 2008, https://www.nytimes.com/2008/09/21/ business/21draftcnd.html. 80 Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award, May 22, 2007, ¶ 331, available at http://ita.law.uvic.ca/documents/Enron-Award.pdf. 81 Ibid ¶ 335. 82 Gabčíkovo-Nagymaros Project (Hungary/Slovakia), Judgment, 1997 I.C.J. Rep. 7, ¶ 51 (1997), available at https://www.icj-cij.org/files/case-related/92/092-19970925-JUD-01-00-EN.pdf. 83 Enron, ICSID Case No. ARB/01/3, ¶ 336. To similar effect, see Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Award, Sept. 28, 2007, ¶ 376, available at http://ita.law.uvic.ca/ documents/SempraAward.pdf.

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Other investment tribunals have reached substantially the same conclusion. In Sempra, the tribunal allowed that, there is nothing that would prevent an interpretation allowing for the inclusion of economic emergency in the context of Article XI. Essential security interests can eventually encompass situations other than the traditional military threats for which the institution found its origins in customary international law. However, to conclude that such a determination is self-judging would definitely be inconsistent with the object and purpose noted. In fact, the Treaty would be deprived of any substantive meaning.84 We are not speaking of a standard so high that it can never be attained. When the United States wishes to reserve the determination of a term under a treaty to its exclusive and non-reviewable decision, it has found no difficulty in formulating a text that achieves this objective. Consider the so-called Connally reservation in the Truman Declaration, by which the United States subscribed to the optional jurisdiction of the International Court of Justice. The Truman Declaration recited in relevant part: [T]he United States of America recognizes as compulsory ipso facto and without special agreement, in relation to any other state accepting the same obligation, the jurisdiction of the International Court of Justice in all legal disputes hereafter arising . . . Provided, that this declaration shall not apply to . . . (b) disputes with regard to matters which are essentially within the domestic jurisdiction of the United States of America as determined by the United States of America . . . .85 The intention is manifest in the language of the Declaration. Now the pertinent words in Article XI certainly do not say anything akin to the Connally reservation. Given the fact that the United States plainly knows well how to formulate such a retention of the power of interpretation, there is no justification in trying to read into a clear text that does not use such language something that is not there but could have been put there if the parties had wished it. The more persuasive interpretation of this part of Article XI that is faithful to the text is that, at least with respect to the “public order” and “essential interest” categories of events, the word “necessary” means that the state applying the measures deems them necessary, but it does not mean that the determination of actual necessity and the proportionality of the measures taken to address that necessity escape the review otherwise available under the BIT. In sum, there are categories of measures that may be insusceptible to judicial or arbitral review under international law. The jurisprudence of the International Court teaches that

84 Sempra Energy International, ICSID Case No. ARB/02/16, ¶ 374. 85 United States Declaration of Aug. 14, 1946, 61 Stat. 1218, T.I.A.S. No. 1598, 1 U.N.T.S. 9 (final emphasis added).

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measures taken under the authority of the United Nations Security Council are not susceptible to judicial review86 but that actions taken in self-defense are susceptible to judicial review.87 The practice of human rights bodies teaches that measures for the maintenance of public order that violate non-derogable rights are susceptible to international judicial or arbitral review.88 These reviews are not a violation or infringement of sovereignty because the states concerned, in the exercise of their sovereignty, have consented to it. As the Enron tribunal put it, [j]udicial determination of the compliance with the requirements of international law in this matter should not be understood as if arbitral tribunals might be wishing to substitute for the functions of the sovereign State, but simply responds to the duty that in applying international law they cannot fail to give effect to legal commitments that are binding on the parties and interpret the rules accordingly, unless this derogation is expressly agreed to.89 And Article XI does not derogate: “[w]hat is relevant is the intention the parties had in signing the Treaty and this does not confirm the self-judging interpretation.”90 The LG&E award reached the same conclusion through a different analysis. After setting forth each Party’s interpretation of the provision, the tribunal concluded: Certainly, the language of the BIT does not specify who should decide what constitutes essential security measures—either Argentina itself, subject to a review under a good faith standard, or the Tribunal. Based on the evidence before the Tribunal regarding the understanding of the Parties in 1991 at the time the Treaty was signed, the Tribunal decides and concludes that the provision is not self-judging.91 The tribunal’s reason for this decision was the following: the United States did not begin to consider essential security measures provisions as self-judging until the ratification of the

86 See Question of Interpretation and Application of the 1971 Montreal Convention Arising from the Aerial Incident at Lockerbie (Libyan Arab Jamahiriya v. United Kingdom), 1992 I.C.J. Rep. 3. See also W. Michael Reisman, The Constitutional Crisis in the United Nations, 87 AM. J. INT’L L. 83, 93–94 (1993). 87 Military and Paramilitary Activities in and Against Nicaragua (Nicaragua v. U.S.), Jurisdiction and Admissibility, 1984 I.C.J. Rep. 392, ¶¶ 92–98 (June 27, 1986), available at https://www.icj-cij.org/files/caserelated/70/070-19841126-JUD-01-00-EN.pdf; Armed Activities on the Territory of the Congo (Democratic Republic of the Congo v. Uganda), 2005 I.C.J. Rep. 168, ¶¶ 143–47 (Dec. 19, 2005), available at https:// www.icj-cij.org/files/case-related/116/116-20051219-JUD-01-00-EN.pdf. 88 See supra notes 62–78 and accompanying text. 89 Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award, May 22, 2007, ¶ 340, available at http://ita.law.uvic.ca/documents/Enron-Award.pdf (internal citation omitted). 90 Ibid ¶ 337. 91 LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, Oct. 3, 2006, ¶ 212, available at https://www.italaw.com/sites/ default/files/case-documents/ita0460.pdf.

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Russia–U.S. BIT in 1992; that occurred only after the ratification of the Argentina-U.S. BIT in 1991: It is not until 1992 . . . that the United States begins to consider that the application of the essential security measures are self-judging; both instruments post-date the bilateral treaty between the United States and the Argentine Republic and, in both cases, this change was explicitly clarified. Were the Tribunal to conclude that the provision is self-judging, Argentina’s determination would be subject to a good faith review anyway, which does not significantly differ from the substantive analysis presented here.92 It is thus clear that the concept of protecting public order in those international conventions that incorporate it is not a license for a unilateral and what will often prove to be self-serving determination that the obligations in the instrument in which it appears may be ignored by the state-party simply by invoking certain words. It is subject to the arbitral review provided by the treaty.

VI. Criteria For Review If Article XI calls for a review, what are the criteria to be applied in such a review? Article XI states explicitly that the application of measures must be “necessary.” This is an objective standard and a high one; because it is objective, it cannot be discharged by a demonstration of good faith. “Good faith” is subjective and has to do with the intentions of the actors concerned; necessity is objective and has to do with whether, good (or bad or indifferent) intentions notwithstanding, the measures that were designed and applied were, among available alternatives, objectively necessary and proportional to that necessity. A decision may have been taken in good faith and have been animated by the best of intentions yet fail an objective test of necessity. In sum, a rigorous textual analysis reveals that Article XI of the BIT allows states-parties to apply measures necessary for the three designated categories of events. The necessity and proportionality of the measures applied with respect to two of those categories are subject to arbitral jurisdiction; measures taken under only one of those categories are insusceptible to arbitral review, other than certification that there was a Security Council decision under Chapter VII and that the national action for which Article XI protection is sought was in implementation of that Security Council decision. When one provision of a treaty is being interpreted, the VCLT defines the “context” of a treaty as the rest of the treaty, its preamble and its annexes. We have already examined the relevant provision of the Protocol to the Argentina–United States BIT: it provides an authentic interpretation of one of the phrases in Article XI. The body of the BIT itself is concerned with imposing obligations on each state when it acts as host to a foreign investor or investment by a national of the other with respect to, inter alia, national treatment, non-

92 Ibid ¶¶ 213–14.

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discrimination, fair and equitable treatment and compensation for expropriation. These enforceable assurances were designed and are expected to induce more private direct investment. The Preamble recites: Recognizing that agreement upon the treatment to be accorded such investment will stimulate the flow of private capital and the economic development of the Parties; Agreeing that fair and equitable treatment of investment is desirable in order to maintain a stable framework for investment and maximum effective use of economic resources; . . .93 These “context” provisions would appear to be relevant to the construction of Article XI. It stands to reason that neither party to this particular BIT wanted an instrument that would prevent either of them from taking measures it deemed essential to its public order, international peace and security or its essential security interests. Yet neither state would have taken the trouble to negotiate, ratify and encourage its nationals to invest in the other on the basis of a treaty that included a gap broad enough, as the common law colorfully puts it, “to drive a coach and four through.”94 Article XI cannot reasonably be construed to exonerate the host State of liability and responsibility based on its own assertion, even in good faith, of a need to take “measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the Protection of its own essential security interests.”95 Thus the compact of the BIT genre is simple in this regard: the host State may take the measures necessary to discharge its essential governmental responsibilities, which may include, indeed, the expropriation of foreign investment, but subject to the non-derogable conditions that it do it in ways prescribed by the BIT and, above all, that it compensate covered foreign investors if those measures or their mode of application violate rights guaranteed to investors by the BIT. To find, as the LG&E and CCC tribunals effectively did in decisions I will consider below, that one article of a bilateral treaty permits a party unilaterally to terminate the other crucial obligations of that treaty and escape responsibility for it seems implausible in the absence of explicit language making this unmistakably clear. The Argentina–United States BIT includes no such language, neither in Article XI nor elsewhere in the treaty. Absent such language, it would be peculiar, to say the least, for a treaty explicitly to require a state to compensate if it expropriated for a public purpose while discharging that state from a duty to compensate if it expropriated for “necessity.” As we will see, none of the other awards took this view.

93 U.S.–Argentina BIT, Preamble. 94 For example, Foster v. Reiss, 112 A.2d 553, 560 (N.J. 1955) (quoting In re Hughes, 59 L.T. (N.S.) 586 (1888)). 95 U.S.–Argentina BIT art. XI.

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VII. The Search for a Coherent Jurisprudence In the course of the past five years, six ICSID tribunals have been presented with claims of necessity by Argentina. Five of the arbitrations arose under Article XI of the Argentina– United States BIT, which we analyzed. A sixth arose under the Argentina–United Kingdom BIT. Because the latter has no provision corresponding to Article XI in the Argentina–U.S. BIT, Article 25 of the ILC’s Articles on State Responsibility was put directly in issue. I propose to review the decisions briefly. 1. CMS v. Argentina96 was the first award to have occasion to analyze Article XI of the Argentina–United States BIT. The case involved a dispute between CMS, a U.S. corporation, and Argentina, in connection with CMS’ purchase of state-owned shares in Transportadora de Gas del Norte (TGN). In its award on the merits, the tribunal held that a state of necessity, whether defined under customary international law or Article XI of the BIT, had not existed when Argentina took the measures complained of. Despite the fact that Article XI is a lex specialis, and the Articles on State Responsibility provide in Article 55 that its provisions do not apply if there is a lex specialis, the tribunal did not turn to Article XI of the BIT until after it had concluded that the requirements of Article 25 of the International Law Commission’s Articles on State Responsibility had not been satisfied. In its analysis of Article XI, the tribunal decided that its “first issue” was “whether the object and purpose of the Treaty exclude necessity.”97 It held that [t]he Treaty in this case is clearly designed to protect investments at a time of economic difficulties or other circumstances leading to the adoption of adverse measures by the Government. The question is, however, how grave these economic difficulties might be. A severe crisis cannot necessarily be equated with a situation of total collapse. And in the absence of such profoundly serious conditions it is plainly clear that the Treaty will prevail over any plea of necessity.98 As a matter of fact, the tribunal found that Argentina’s situation during the relevant period did not rise to the level of “total economic and social collapse” required for a finding of state of necessity.99 Although that finding was dispositive of the claim, the tribunal still proceeded to a second issue: whether, as discussed in the context of Article 25 of the Articles on State Responsibility, the act in question does not seriously impair an essential interest of the State or States towards which the obligation exists. If the Treaty was made to protect investors it must be assumed that this is an important interest of the States parties.100

96 CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Award, May 12, 2005, available at https://www.italaw.com/sites/default/files/case-documents/ita0184.pdf. 97 Ibid ¶ 353. 98 Ibid ¶ 354. 99 Ibid ¶ 355. 100 Ibid ¶ 357.

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The tribunal found that no essential interest of other States parties or of the international community was impaired.101 The third issue was whether an economic emergency, even if it did not extend to “total economic and social collapse,” might yet qualify as an “essential security interest” within the meaning of Article XI of the Treaty. The tribunal found that an economic crisis could qualify as an essential security interest. “It must also be kept in mind,” the tribunal explained, that the scope of a given bilateral treaty, such as this, should normally be understood and interpreted as attending to the concerns of both parties. If the concept of essential security interests were to be limited to immediate political and national security concerns, particularly of an international character, and were to exclude other interests, for example, major economic emergencies, it could well result in an unbalanced understanding of Article XI. Such an approach would not be entirely consistent with the rules governing the interpretation of treaties.102 But the instant case did not rise to that level. Finally, as will be recalled from our earlier discussion, the tribunal concluded that the first clause of Article XI is only initially selfjudging. Quite evidently, in the context of what a State believes to be an emergency, it will most certainly adopt the measures it considers appropriate without requesting the views of any court. However, if the legitimacy of such measures is challenged before an international tribunal, it is not for the State in question but for the international jurisdiction to determine whether the plea of necessity may exclude wrongfulness. It must also be noted that clauses dealing with investments and commerce do not generally affect security as much as military events do and, therefore, would normally fall outside the scope of such dramatic events.103 Argentina lodged a request for annulment of the CMS award on a number of different grounds and was successful on some of them.104 The ad hoc Committee annulled the tribunal’s finding that the Argentine Republic had violated the umbrella clause of Article II(2)(c) of the BIT due to its failure to state reasons, but it dismissed the Respondent’s remaining claims for annulment, including, in particular, the claim that the CMS tribunal’s finding under Article XI both constituted a manifest excess of power as well as failed to state reasons. In dicta, however, the Committee indicated that the tribunal had made two “manifest errors” of reasoning in its analysis of Article XI, neither of which rose to the level

101 Ibid ¶ 358. 102 Ibid ¶ 360 103 Ibid ¶ 373 (internal citations omitted). 104 CMS Gas Transmission Company v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic, Sept. 25, 2007, available at https:// www.italaw.com/sites/default/files/case-documents/ita0187.pdf.

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of a Washington Convention Article 52 violation.105 The tribunal’s first error, according to the ad hoc Committee, was its conclusion that the conditions of necessity under Article XI of the BIT had not been satisfied because these conditions had not been met under Article 25 of the ILC’s Articles on State Responsibility. The second error concerned the absence of any discussion of the relationship between Article XI of the BIT and Article 25 of the ILC’s Articles on State Responsibility: These two errors made by the Tribunal could have had a decisive impact on the operative part of the Award. As admitted by CMS, the Tribunal gave an erroneous interpretation to Article XI. In fact, it did not examine whether the conditions laid down by Article XI were fulfilled and whether, as a consequence, the measures taken by Argentina were capable of constituting, even prima facie, a breach of the BIT. If the Committee was acting as a court of appeal, it would have to reconsider the Award on this ground.106 In addressing the question of compensation for state of necessity, the Committee found that the tribunal had committed an error of law: [H]ere again the Tribunal made a manifest error of law. Article 27 concerns, inter alia, the consequences of the existence of the state of necessity in customary international law, but before considering this Article, even by way of obiter dicta, the Tribunal should have considered what would have been the possibility of compensation under the BIT if the measures taken by Argentina had been covered by Article XI.107 2. The dispute in LG&E v. Argentina had facts similar to those of the CMS case. The tribunal concluded that Argentina had validly imposed a state of necessity for a certain period and that, moreover, Argentina was exempt from liability with regard to the losses that the foreign investors incurred as a consequence, in spite of the BIT. The tribunal applied a “twofold” analysis to determine the applicability of Article XI of the BIT. First, the Tribunal must decide whether the conditions that existed in Argentina during the relevant period were such that the State was entitled to invoke the protections included in Article XI of the Treaty. Second, the Tribunal must determine whether the measures implemented by Argentina were necessary to maintain public order or to protect its essential security interests, albeit in violation of the Treaty.108 Although the tribunal stated that it would first consider the Treaty’s lex specialis, it actually took up customary international law first.

105 Ibid ¶ 158. 106 Ibid ¶ 135. 107 Ibid ¶ 146. 108 LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, Oct. 3, 2006, ¶ 205, available at https://www.italaw.com/sites/ default/files/case-documents/ita0460.pdf (internal citation omitted).

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Even more puzzling was the tribunal’s examination of the events that Argentina claimed had given rise to a state of necessity. The tribunal began by asserting its conclusion: “In the judgment of the Tribunal, from 1 December 2001 until 26 April 2003, Argentina was in a period of crisis during which it was necessary to enact measures to maintain public order and protect its essential security interests.”109 The tribunal did not engage in analysis of the meaning of Article XI’s phrases “maintain public order” and “essential security interests.” Nor did it explain how the economic measures undertaken by the government of Argentina during that period fell within the scope of those terms. The tribunal simply stated that it reject[ed] the notion that Article XI is only applicable in circumstances amounting to military action and war. Certainly, the conditions in Argentina in December 2001 called for immediate, decisive action to restore civil order and stop the economic decline. To conclude that such a severe economic crisis could not constitute an essential security interest is to diminish the havoc that the economy can wreak on the lives of an entire population and the ability of the Government to lead. When a State’s economic foundation is under siege, the severity of the problem can equal that of any military invasion.110 For the tribunal, the “existence of serious public disorders” seemed decisive.111 After finding, as a factual matter, that “from 1 December 2001 until 26 April 2003, Argentina was in a period of crisis during which it was necessary to enact measures to maintain public order and protect its essential security interests,”112 the LG&E tribunal concluded summarily that “Argentina is excused under Article XI from liability for any breaches of the Treaty [the BIT]” during that time period.113 After further analysis of the facts, Article XI of the BIT, and Article 25 of the ILC’s Articles on State Responsibility, the tribunal concluded with a remark of breathtaking scope and implication: “Article XI of the Treaty,” it held, “exempts Argentina of responsibility for measures enacted during the state of necessity.”114 Of course, Article XI says only that nothing in the BIT shall preclude the application of measures necessary for the maintenance of public order or to protect the host State’s essential security interests. The provision says nothing whatsoever about excusing from liability or exempting from responsibility. The tribunal assumed, without explanation, that no compensation is required when “necessary measures” are found to have been taken by a party under Article XI of the Treaty. No reasons were vouchsafed for this far-reaching conclusion.

109 Ibid ¶ 226. 110 Ibid ¶ 238. 111 Ibid ¶ 228. 112 Ibid ¶ 226. 113 Ibid ¶ 229 (emphasis added) 114 Ibid ¶ 257 (emphasis added).

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3. The third award to consider the interpretation of Article XI of the Argentina–U.S. BIT in the context of the same economic crisis was Enron Corporation and Ponderosa Assets, L.P., v. Argentine Republic.115 Enron and Ponderosa Assets, the claimants, had invested in Transportadora de Gas del Sur (TGS). Enron alleged that the elimination of the Producer Price Index, or PPI, adjustment from 1999 onwards and the enactment of the Emergency Law breached various BIT provisions. The tribunal held that Argentina had breached its obligations of fair and equitable treatment under Article II(2)(a) of the Treaty and its obligations under Article II(2)(c) of the Treaty. As for Argentina’s claim of a state of necessity, the tribunal first inquired whether an economic emergency could fall within the ambit of Article XI of the BIT. It concluded that it could but that its decision was subject to arbitral review: While there is nothing that would prevent an interpretation allowing for the inclusion of economic emergency in the context of Article XI, to interpret that such a determination is self-judging would be definitely inconsistent with the object and purpose noted. In fact, the Treaty would be deprived of any substantive meaning.116 But curiously, the tribunal’s route to Article XI was through Article 25 of the ILC Articles on State Responsibility. As the Tribunal has found above that the crisis invoked does not meet the customary law requirements of Article 25 of the Articles on State Responsibility, thus concluding that necessity or emergency are not conducive to the preclusion of wrongfulness, there is no need to undertake a further judicial review under Article XI as this Article does not set out conditions different from customary law in this respect.117 4. The fourth award, Sempra v. Argentina, like CMS and LG&E, also arose out of events following the privatization of the gas industry.118 In this instance, Sempra, a U.S. company, had invested in Sodigas Pampeana S.A. and Sodigas Sur S.A., Argentina companies that owned two gas-distribution companies, Camuzzi Gas Pampeana and Camuzzi Gas del Sur. Sempra alleged that Argentina’s various legislative and regulatory enactments violated its commitments to foreign investors. Here, again, the tribunal held that Argentina had breached its obligation of fair and equitable treatment under Article II(2)(c) of the Treaty. The Sempra tribunal’s discussion of Argentina’s plea of necessity was quite thorough. It comprised five subsections: (1) necessity and emergency under the Argentina Constitution; (2) the plea of necessity under customary international law; (3) the plea of necessity under Article IV(3) of the Treaty; (4) the plea of necessity under Article XI of the Treaty; and (5) temporality and compensation.

115 Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award, May 22, 2007, available at http://ita.law.uvic.ca/documents/Enron-Award.pdf. 116 Ibid ¶ 332. 117 Ibid ¶ 339. 118 Sempra Energy International v. Argentine Republic, ICSID Case No. ARB/02/16, Award, Sept. 28, 2007, available at http://ita.law.uvic.ca/documents/SempraAward.pdf.

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In its analysis of necessity under Argentina law (subsection 1) the tribunal found, as a matter of fact, that “the constitutional order was not on the verge of collapse” and that “legitimately acquired rights could still have been accommodated by means of temporary measures and renegotiation.”119 Under subsection (2), the tribunal relied on Article 25 of the ILC Articles on State Responsibility as an accurate codification of the state of necessity in customary international law. Applying Article 25, the tribunal held that the three conditions for finding a state of necessity had not been satisfied by the particular facts of the case. The tribunal quickly dismissed the Respondent’s claim of necessity under the minimum treatment clause of Article IV(3) of the BIT. Article IV(3) provides: Nationals or companies of either Party whose investments suffer losses in the territory of the other Party owing to war or other armed conflict, revolution, state of national emergency, insurrection, civil disturbance or other similar events shall be accorded treatment by such other Party no less favorable than that accorded to its own nationals or companies or to nationals or companies of any third country, whichever is the more favorable treatment, as regards any measures it adopts in relation to such losses.120 The tribunal said: While there is no reason to exclude from this Article’s scope economic emergency measures taken in circumstances of particular gravity, allowing for such inclusion would still not allow derogation from Treaty rights since the Article refers to a different matter. Even less so can the Article be read as a general escape clause from treaty obligations.121 The tribunal’s analysis of Article XI is reminiscent of Socobelge and Himpurna, in that it too addresses the appropriate standard of judicial review and interpretation. In weighing this discussion, the Tribunal must first note that the object and purpose of the Treaty is, as a general proposition, for it to be applicable in situations of economic difficulty and hardship that require the protection of the internationally guaranteed rights of its beneficiaries. To this extent, any interpretation resulting in an escape route from the defined obligations cannot be easily reconciled with that object and purpose. Accordingly, a restrictive interpretation of any such alternative is mandatory. The Tribunal considers that there is nothing that would prevent an interpretation allowing for the inclusion of economic emergency in the context of Article XI. Essential security interests can eventually encompass situations other than the traditional military threats for which the institution found its origins in customary law. However, to conclude that such a determination is self-judging

119 Ibid ¶ 332 120 Argentina-U.S. BIT art. IV(3). 121 Sempra Energy International, ICSID Case No. ARB/02/16, ¶ 363.

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would definitely be inconsistent with the object and purpose noted. In fact, the Treaty would be deprived of any substantive meaning. In addition, in view of the fact that the Treaty does not define what is to be understood by an “essential security interest,” the requirements for a state of necessity under customary international law, as outlined above in connection with their expression in Article 25 of the Articles on State Responsibility, become relevant to the matter of establishing whether the necessary conditions have been met for its invocation under the Treaty. Different might have been the case if the Treaty had defined this concept and the conditions for its exercise, but this was not the case. . . . In the light of this discussion, the Tribunal concludes that Article XI is not selfjudging and that judicial review is not limited in its respect to an examination of whether its invocation, or the measures adopted, were taken in good faith. The judicial control must be a substantive one, and concerned with whether the requirements under customary law or the Treaty have been met and can thereby preclude wrongfulness. Since the Tribunal has found above that the crisis invoked does not meet the customary law requirements of Article 25 of the Articles on State Responsibility, it concludes that necessity or emergency is not conducive in this case to the preclusion of wrongfulness, and that there is no need to undertake a further judicial review under Article XI given that this Article does not set out conditions different from customary law in such regard.122 Finally, the tribunal turned to the issue of compensation under a state of necessity, described in Article 27 of the ILC Articles on State Responsibility. The language of Article 27, the tribunal noted, does not exclude the possibility of an eventual compensation for past events. The 2007 agreements between the Respondent and the Licensees appear to confirm this interpretation insofar as they cover, as noted, the period running from January 6, 2002 until the end of the License. . . . This being said, however, the manner in which the law has to be applied cannot ignore the realities resulting from a crisis situation, including how a crisis affects the normal functioning of any given society. . . . The Tribunal will accordingly take into account the crisis conditions affecting Argentina when determining the compensation due for the liability found in connection with the breach of the Treaty standards.123 Thus, the tribunal found that although “crisis conditions” may factor into a determination of the level of adequate compensation for breaches of a BIT, the existence of “crisis conditions” does not exclude compensation.

122 Ibid ¶¶ 373–75, 388. 123 Ibid ¶ 394, 397.

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5. BG Group PLC v. Argentina, decided on December 24, 2007, like the others arose out of the vicissitudes of a foreign investor in the energy field, in this instance a United Kingdom corporation, following the measures taken by Argentina in the course of its economic crisis.124 The Argentina–United Kingdom BIT, in contrast to its American cousin, does not have a provision like Article XI. But Article 4 of the Argentina–United Kingdom BIT provides: Investors of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, revolution, a state of national emergency, revolt, insurrection or riot or resulting from arbitrary action by the authorities in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favourable than that which the latter Contracting Party accords to its own investors or to investors of any third State. Resulting payments shall be freely transferable.125 The tribunal construed Article 4 as addressing an entirely different issue: Applying the interpretive principles of Article 31 of the Vienna Convention, this Tribunal concludes that Article 4 of the BIT does no more than ensure that the State does not treat the foreign investor less favorably than its own investor or investors of any third State with regard to “restitution, indemnification, compensation or other settlement” in case the foreign investor suffers losses due to, inter alia, a state of national emergency. Article 4 of the BIT provides for a specific expression of the national treatment and most favored nation standard in relation to the compensation of losses resulting from certain actions. Article 4 is merely concerned with the situation where nationals of the host State are indemnified or compensated, or benefit from a settlement. In this context, foreign investors should not be treated less favourably. Liability and compensation are thus expressly mandated, not excused.126 The tribunal noted that several of the prior awards had construed the comparable article in the Argentina–U.S. BIT in the same fashion. The tribunal also rejected Argentina’s argument that “in the absence of an express provision, Article XI of the Argentina-U.S. BIT should automatically be read into the Argentina-U.K. BIT.”127

124 BG Group PLC v. Argentina, UNCITRAL Trib., Final Award, IIC 321 (2007), available at https://www. italaw.com/sites/default/files/case-documents/ita0081.pdf. 125 Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Argentina for the Promotion and Protection of Investments, U.K.– Arg. [hereafter U.K.–Argentina BIT], art. 4, Dec. 11, 1990, T.S. No. 41 (1993), available at https://assets. publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/273129/2278.pdf (emphasis added). 126 BG Group, ¶ 382 (emphasis in original) (internal citation omitted). 127 Ibid ¶ 386.

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The BG tribunal rejected Argentina’s defense under Article 25 of the ILC Articles. Indeed, at the very outset of its discussion, the tribunal questioned whether that provision related exclusively to international obligations between sovereign states and, as such, “would be of little assistance to Argentina as it would not disentitle BG, a private investor, from the right to compensation under the Argentina-U.K. BIT.”128 Moreover, the tribunal felt that the customary international law defense of necessity would be precluded “where the international obligation in question explicitly or implicitly excludes reliance on necessity.”129 As the tribunal put it: Thus, Argentina would not be entitled to invoke necessity to unilaterally revoke vested rights (for example, a dollar denominated tariff and economic equilibrium) designed precisely to operate in situations where a run on the currency would lead to a situation of necessity. There is no question that Argentina is entitled to adopt such measures as it deems appropriate to emerge from the state of emergency. However, it remains obligated to pay compensation. This is one view as to how bilateral investment treaties operate to induce foreign investment. Assuming that necessity were to justify some fair and non-discriminatory measure by Argentina, an obligation to compensate would still obtain by virtue of the BIT.130 As for the severity of the conditions under which Argentina suffered, the tribunal emphasized the high threshold and restrictive conditions required before such a defense could be made out. In the specific facts of the case: The Tribunal does not believe that Argentina has met the “very restrictive conditions”, given that measures adopted by Argentina included: (i) luring BG and other investors to accept a temporary suspension of the dollar denominated tariff and the adjustment mechanism by indicating that the measures would be temporary; (ii) threatening companies that resorted to arbitration; (iii) attempting to force investors which commenced arbitration to withdraw these proceedings as a condition to negotiations; and (iv) setting up a mechanism for the revision of the concessions that was never intended to restore the conditions of Argentina’s initial representations.131 In sum, the result was the same for the BG tribunal whether it accepted the application of Article 25 or rejected it. 6. Unlike the previous cases, all of which concerned the energy industry and in all of which there were explicit agreements between the government of Argentina and the claimant foreign investor, Continental Casualty Company v. Argentina concerned a United States insurance company with which Argentina had concluded neither concessionary agreements

128 Ibid ¶ 408. 129 Ibid ¶ 409 (quoting the International Law Commission). 130 Ibid (internal citation omitted). 131 Ibid ¶ 411.

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nor explicit regulatory regimes that had induced it to invest.132 Continental was the owner of CAN ART, an Argentina company that provided workers’ compensation insurance in Argentina. Continental, through CNA, maintained a portfolio of investment securities that were denominated in pesos then fully convertible into U.S. dollars at the rate of one peso to the dollar; after March 2001, Continental moved into low-risk U.S. dollar-denominated assets for a total value of over $100 million. In the course of its economic crisis, Argentina enacted a series of measures that Continental alleged had caused a loss in the value of its assets of over $46 million. Continental sued under the Argentina–U.S. BIT, for, inter alia, alleged failure by Argentina (i) to fulfill its obligations; (ii) to afford it fair and equitable treatment; (iii) to permit transfers; and (iv) to compensate for expropriation. “Continental,” the tribunal observed, “relies on the convertibility regime as representing a standard of treatment to which it was entitled and the abolition of which, especially as to how it was carried out through the Measures, breached various BIT provisions to its financial detriment.”133 Continental relied on many of the awards that we have reviewed. But the tribunal correctly noted that there was a major factual difference between those cases and Continental’s: [I]n most cases invoked by Continental as “precedents,” specific undertakings were at issue, legislative, administrative or contractual (some of them by local authorities) directed or agreed with the investor, on the basis of which and in reliance upon the aggrieved investor had actually made its investment and committed long term resources. Without here entering into an evaluation of those cases, there are significant factual and contextual differences with the present case as to the application of the abstract concept of “reasonable legitimate expectations.”134 The tribunal compared various types of governmental undertakings, each creating different levels of expectations on the part of foreign investors.135 General legislative enactments are the weakest compared to “unilateral modification of contractual undertakings by governments, notably when issued in conformity with a legislative framework and aimed at obtaining financial resources from investors.”136 With respect to these measures, the tribunal observed, “they generate as a rule legal rights and therefore expectations of compliance.”137 In my view, this is largely a correct statement of international investment law and a complete reason for dismissing Continental’s claim on the merits. Moreover, it rendered the defensive claim of necessity moot, for if Argentina had not violated any rights of Continental,

132 Continental Casualty Company v. Argentine Republic, ICSID Case No. ARB/03/9, Award, Sept. 5, 2008, available at https://www.italaw.com/sites/default/files/case-documents/ita0228.pdf. 133 Ibid ¶ 101. 134 Ibid ¶ 260 (internal citation omitted). 135 Ibid ¶ 261. 136 Ibid ¶ 261(iii). 137 Ibid.

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there was neither need nor place for the necessity defense. Yet, paradoxically, the tribunal developed an elaborate explication of Article XI of the BIT and, to an extent, Article 25 of the Articles on State Responsibility. On the one hand, it opined that if Article XI applied, it would “render superfluous” Article 25 of the Articles on State Responsibility.138 Finding that Article XI did apply, it then turned to Article 25 for illumination of Article XI. Without textual analysis, it asserted that if Article XI applied, the claimant could not succeed in its claim for damages,139 even though Article XI does not address that issue. The absence of wrongfulness in international law does not preclude an obligation to compensate for material injury. The Continental tribunal follows the others in holding that Article XI is not self-judging and that essential interests may cover grave economic crises. But in a surprising innovation, the tribunal turns to Article XX of the GATT, dealing with necessity for a list of specific issues for which a state wishes to suspend its GATT obligations, to illuminate a provision dealing with relations under a bilateral investment treaty between a foreign investor and a host State. The two issues are entirely different, as are the remedies provided by each instrument. Nor has any GATT or WTO decision invoked Article 25 of the Articles on State Responsibility.

VIII. Clarifying Law in the Light of Policy Let us turn to the issue of compensation. Article XI of the Argentina–United States BIT is silent on the subject. Some of the cases concluded that on a finding of necessity no compensation was owing. But Article 25 of the ILC Articles speaks of compensation “for material loss,” indicating that even when a necessity defense is well founded, international law does not contemplate a complete discharge from a duty to compensate. But “material loss” could, it would seem, be less than would be required in the absence of a valid necessity defense. Thus there may be tangible benefits to prevailing in an investment dispute with a necessity defense under customary international law. If the necessity defense succeeds, the State may defer payment or perhaps make a lower payment. But is it all “upside” for the host State that tries to defend violations of a BIT or customary international law with the necessity defense? Is there any cost incurred by the host State for failing to persuade a tribunal of the defense? Since only the LG&E and CCC tribunals made an affirmative finding on Argentina’s necessity claim and proceeded to compensation, the issue is barely treated in the case law. Now, clearly, in circumstances in which a necessity defense is sustained, significant benefits are vouchsafed the respondent State. It may defer an obligation until such time as the crisis passes. It may do this without being deemed to be in violation of its obligations under the BIT. But in any normative scheme, improper invocation of a defense has downside consequences for the State improperly trying to shelter behind it.

138 Ibid ¶ 162. 139 Ibid ¶ 164.

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In many ways, the Argentina–United States bilateral investment treaty is an archetypal modern international investment treaty. The treaty contains two types of obligations: first, obligations to refrain from doing certain things, for example, the obligation not to discriminate or not to act unfairly or inequitably; and second, obligations to do certain things in a particular way, for example, to expropriate in a prescribed fashion and to pay compensation. Contrast, for example, Article II(a) and (b), on the one hand, with Article IV(1) on the other. Article II(a) and (b) provide: 2.

a) Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law. b) Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments. For the purposes of dispute resolution under Articles VII and VIII, a measure may be arbitrary or discriminatory notwithstanding the opportunity to review such measure in the courts or administrative tribunals of a Party.140

Article IV(1) provides: Investments shall not be expropriated or nationalized either directly or indirectly through measures tantamount to expropriation or nationalization (‘expropriation-[sic]) except for a public purpose; in a non-discriminatory manner; upon payment of prompt, adequate and effective compensation; and in accordance with due process of law and the general principles of treatment provided for in Article II(2). Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken or became known, whichever is earlier; be paid without delay; include interest at a commercially reasonable rate from the date of expropriation; be fully realizable; and be freely transferable at the prevailing market rate of exchange on the date of expropriation.141 Now there is no way for a host State to “lawfully” violate Article II(a) or (b); that would be a contradiction in terms and there is only one measure of damages for such violations. Obligations in the category of Article IV, however, are different. A state-party may expropriate the investment of a qualifying foreign investor, but it must do so in certain ways. If it is done as prescribed by Article IV(1), then the expropriation is lawful; nonetheless, the host State is still obliged to pay compensation. But it is only obliged to pay compensation “equivalent to the fair market value of the expropriated investment.” If, however, the expropriation is accomplished in violation of the prescribed modalities in Article IV(1) – if it is, let us say, a discriminatory seizure or if it is not for a public purpose – one cannot say that all that is required is the same compensation “equivalent to the fair market value of the expropriated

140 Argentina–U.S. BIT art. II 141 Ibid art. VI(1).

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investment,” which would be forthcoming for an expropriation accomplished in ways that complied with those prescribed modalities. To say such a thing would make meaningless the treaty’s explicit requirements of public purpose and non-discrimination in Article IV(1). In the Chorzów Factory case, the Permanent Court of International Justice said [t]he action of Poland which the Court has judged to be contrary to the Geneva Convention is not an expropriation—to render which lawful only the payment of fair compensation would have been wanting; it is a seizure of property, rights and interests which could not be expropriated even against compensation, save under the exception conditions fixed by Article 7 of the said Convention.142 The point that Chorzów was making can be illustrated by a hypothetical period. Imagine that the European Union has formally agreed with Kosovo to grant recognition and assistance to Kosovo on condition that Kosovo not expropriate any of the Serbian inhabitants of the territory for a period of 20 years. Plainly the immediate objective of the Treaty is to maintain the presence of Kosovo Serbs and to provide them with a degree of security with respect to the tenure of their property. The broader objective is to assure Serbia that its co-ethnics will be protected in a territory seceding from its sovereignty. Now assume that one year after independence, Kosovo expropriates the Serbian inhabitants but says to the European Union that it will pay “full” compensation. Plainly that promise, which might apply in an ordinary investment treaty, is not a satisfactory remedy in this hypothetical Treaty. The point was elaborated in the ADC v. Hungary case,143 which involved a dispute over the Respondent’s alleged unlawful expropriation of the Claimant’s concession to modernize and manage the Budapest Ferihegy Airport. The tribunal found that the expropriation of the Claimants’ interest constituted a depriving measure under Article 4 of the BIT and was unlawful as: (a) the taking was not in the public interest; (b) it did not comply with due process, in particular, the Claimants were denied of “fair and equitable treatment” specified in Article 3(1) of the BIT and the Respondent failed to provide “full security and protection” to the Claimants’ investment under Article 3(2) of the BIT; (c) the taking was discriminatory and (d) the taking was not accompanied by the payment of just compensation to the expropriated parties.144 Given the tribunal’s conclusions that (1) the expropriation was unlawful and (2) the BIT lacked an express standard of compensation for unlawful expropriation, the tribunal had to determine the applicable standard of compensation under customary international law: “Since the BIT does not contain any lex specialis rules that govern the issue of the standard

142 Factory at Chorzów, Merits, 1928, P.C.I.J., Series A, No. 17, at 46 (Sept. 13th, 1928), available at https:// www.icj-cij.org/files/permanent-court-of-international-justice/serie_A/A_17/54_Usine_de_Chorzow_ Fond_Arret.pdf. 143 ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award, Oct. 2, 2006, IIC 1 (2006), available at https://www.italaw.com/sites/default/files/ case-documents/ita0006.pdf. 144 Ibid ¶ 222 (emphasis in original).

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for assessing damages in the case of an unlawful expropriation, the Tribunal is required to apply the default standard contained in customary international law in the present case.”145 This “default standard” is that set forth in the Chorzów Factory decision and calls for “payment of a sum corresponding to the value which a restitution in kind would bear.”146 The ADC tribunal found that the date of valuation should be the date of the Award and not the date of the expropriation, as the Claimant’s investment continued increasing in value after the expropriation. In support of its view, the tribunal cited jurisprudence from various fora in support of compensating the Claimant the fair market value as of the date of the Award. In ADC, the same result might have been secured by application of the DCF method. But the point that Chorzów teaches and that ADC tried (correctly or not) to apply is that there are two types of compensatory standards in international investment law. The first is unitary: action by the State in violation of a treaty calls for only one type of compensation. Compensation for the second type is contingent on how the violation is accomplished: if it is simply a taking, one measure of damages is forthcoming, but if it is a taking in violation of the prescribed modalities for taking, a different and higher level of compensation is forthcoming. Articles IV(2) and XI of the Argentina–U.S. BIT are of the second type of compensatory standard. Like Article IV(2), which allows the host State to expropriate a foreign investor subject to compensation, Article XI allows the host State, for prescribed states of necessity, lawfully to apply measures that may violate the rights of a foreign investor under the BIT, subject, however, to compensation. Like Article IV(2), which compels the payment of a higher compensation if the expropriation is accomplished in ways violative of the BIT in that they are discriminatory and not for a public purpose, Article XI compels the payment of a higher compensation if the measures applied are deemed unnecessary. If the host State applies measures it deems necessary for one of the three permitted categories, and the measures and their mode of application meet the criteria of necessity, the only compensation that the host State is required to pay to the investor is compensation “equivalent to the fair market value of the expropriated investment.”147 But if the measures and the modalities of their application do not meet the objective necessity test, then a higher level of compensation is required. The important point is that in instances in which States plead the right to violate treaty obligations on the ground of necessity, the question is not whether the State owes compensation, but rather what level of compensation it owes: compensation for lawful applications of a necessity provision, such as Article XI, or some measure of higher compensation for unlawful applications of that provision.

145 Ibid ¶ 483. 146 Factory at Chorzów, at 46 (emphasis added). 147 U.S.–Argentina BIT art. VI(1).

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IX. Conclusion When a case of necessity is well founded, it does not mean a discharge from responsibility to compensate foreign investors who rely on international protections. Rather, it should afford the State a chance to defer payment until the crisis has passed, at which point compensation should be paid. If a state of necessity should, in the most exigent of circumstances, liberate a State from the obligations it has assumed to foreign investors, Socobelge and Himpurna teach that that decision should be made not by the judicial or arbitral institutions whose jurisdiction the host State has promised to the foreign investor, but rather by any authoritative international political processes. In international law, each application of the necessity defense by any other institution undermines that credibility of investment guarantees that is the heart of this important area of the law.

The Small, the Useful and the Impossible: The Experience of UNCITRAL in Revising its Rules David D Caron1 As I give this lecture, the climate change conference is under way in Copenhagen.2 An essential characteristic of the challenge of climate change is change itself, and change is a central focus of my remarks tonight. At times it feels as though international arbitration is in a process of constant revision: one set of rules is changing, and another set of rules has just finished completion. Apart from rules, there are guidelines popping up everywhere, and we must keep track. Change is not, in itself, a bad thing. It all depends on the perspective taken when examining that change. Does one focus on what is lost, or on what might be gained? Does one see the future as diminished or enhanced? The change I will focus on is to the UNCITRAL Arbitration Rules. In 2006, two coauthors and I published a commentary on the 1976 UNCITRAL Rules (“1976 Rules”) with Oxford University Press.3 A gentleman from the US State Department remarked to me: “Well, you’re too late. I’ve got bad news, we’re going to start revising the rules.” From his perspective, it was a bad thing that the rules were changing. From my perspective, it was a good thing—I had another book coming! So, these things are all relative. I do think, though, that there’s something of concern for counsel and for arbitrators, who want some constancy. They wonder what we are trying to accomplish with all this revision. Does the state of the art really keep getting better? What is it that’s happening? In this lecture I will first provide an introduction to UNCITRAL itself, and to the 1976 Rules, and will then turn to the current effort to revise those rules. There are many changes in play, and I’m going to talk about the small, the useful and the impossible. I will address these

1 This is the edited text of the Sixteenth Goff Lecture, which was delivered at the School of Law of the City University of Hong Kong on 10 December 2009. At the time of its delivery, David D Caron was C William Maxeiner Distinguished Professor of Law, Berkeley Law, University of California at Berkeley. At the time of his unexpected death on 20 February 2018, he was a Judge of the Iran-United States Claims Tribunal and a Judge ad hoc at the International Court of Justice. Sadly, Professor Caron had not drafted a complete text of this lecture. When he delivered it on 10 December 2009, he spoke from notes and slides. He later approved a summary of his remarks for reporting purposes. These materials, along with a partial transcript of the recording, have formed the basis for this text. The views expressed are all Professor Caron’s, and the mode of expression largely follows the conversational tone of the lecture. Any errors or inaccuracies are those of the editor (Cian Murphy, with thanks to Professor Caron’s collaborator on the UNCITRAL Rules, Lee Caplan, for his comments). 2 The 2009 United Nations Climate Change Conference (COP15) took place in Copenhagen, Denmark, 7 December 2009-18 December 2009. 3 David D Caron, Matti Pellonpää & Lee M Caplan, The UNCITRAL Rules (1st Edition): A Commentary (2006). Caron and Caplan produced a 2nd Edition in 2013.

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in terms of three clusters of changes. The first cluster is catching the rules up; the second relates to different approaches to procedure; and the third cluster relates to administration, arbitrators and trust.

I. UNCITRAL and its work on arbitration UNCITRAL, the United Nations Commission on International Trade Law, was created in 1966 by the United Nations General Assembly.4 Its creation was in part as a component of the effort at that time to change the direction of the international economic order, to open it up to more actors. Its mandate was to include “… preparing or promoting the adoption of new international conventions, model laws and uniform laws”.5 Arbitration was only a small part of what it was thought UNCITRAL would address. The membership of UNCITRAL is not the entire membership of the UN. At the time of drafting of the 1976 Rules, it was only 36 countries. Today it is 60 countries. The UNCITRAL members today who remember that earlier process say it was a much easier drafting process the first time around. Drafting with 60 countries is harder. The drafting is not a political process – it involves technical delegations who really know their stuff. So, it’s not that efforts to revise the 1976 Rules are being politicized, but it’s a harder task with a larger number of perspectives to bring together. UNCITRAL operates through working groups. There are six of them. UNCITRAL’s earlier work on arbitration was done as a whole, but as we’ll see, since 2000 they’ve had a specific working group, Working Group II, dedicated to arbitration. In addition to the 1976 Rules on arbitration, UNCITRAL has adopted a range of other measures.6 One practice we see with UNCITRAL is that, unlike a private institution, when UNCITRAL starts revising its rules, it feels a little more bound by all the other documents it’s created. The new rules are informed by, educated by, and limited by, all the other work UNCITRAL has done. This is particularly the case with the work done on the Model Law. The Model Law greatly influences what happens in the rules. A number of the arguments in the current process to revise the 1976 Rules ask about staying consistent with the Model Law – or not implying that the Model Law is incorrect. But I am getting ahead of myself.

The 1976 UNCITRAL Rules Let’s go back for just one moment—I don’t know how many of you know Pieter Sanders? Pieter Sanders is still active today at, I think, 97 years old.7 He’s in Rotterdam. And he

4 United Nations General Assembly Resolution 2205 (XXI) of 17 December 1966. 5 Resolution 2205, Article 8(c). 6 Editorial note: Professor Caron’s list was: 1980 UNCITRAL Conciliation Rules, 1985 UNCITRAL Model Law on International Commercial Arbitration, 1996 UNCITRAL Notes on Organizing Arbitral Proceedings, 2002 UNCITRAL Model Law on International Commercial Conciliation, and the 2006 Amendments to the 1985 Model Law on International Commercial Arbitration. 7 Professor Sanders passed away on 27 September 2012, a week after his 100th birthday.

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prepared the discussion drafts of the 1976 Rules—something that wouldn’t happen today. After negotiation, and modifications (some of which were extensive), the final rules were adopted by UNCITRAL on 28 April 1976 and, in a resolution of 15 December of that year, the UN General Assembly recommended their use.8 The motives of UNCITRAL are different from those of institutions or centers in thinking about rules. One of the main differences is that, unlike private centers and institutions, UNCITRAL is not thinking about how to get the rules used more. Centers and institutions are trying to offer a product that will generate cases, and in turn revenue, for those organizations. That sometimes leads to revision in and of itself, because a center can say “we have better rules than before”. UNCITRAL is not driven in that way. There is a sense of status. UNCITRAL likes that their rules are employed. I certainly don’t think they’re out to make them and not have them used. But the original driver was a sense that the institutions in the early 1970s were not responsive to parts of the world other than Europe, and particularly not Asia or Africa. There was a sense in which the UN and UNCITRAL would have more legitimacy in developing a set of rules worldwide. There was also a sense that the primarily European system was a costly one—that the institutions were too expensive. A basic structural idea in the UNCITRAL rules is that they are not administered. I think the best way to think about this is as if you’re selling a home. Sometimes, when some people sell a home, they hire an agent to help them sell the home, and pay the agent. If a seller is really confident, they sell the home without an agent. A lot of money can be saved by doing that. Similarly, the idea for UNCITRAL was to design a set of rules that did not require an agent. Obviously some agent is needed, far in the background, and we’ll see how that works out (for example in relation to the appointment of arbitrators). But that was the basic sense of what motivated this in the beginning—to develop this set of rules that could be used worldwide, more cheaply, and somehow be more open to the global community.

The growth and significance of the UNCITRAL Rules It took a little while for the UNCITRAL Rules to grow in use and significance. There was no use immediately after 1976. But, in time, three developments led to their increasing popularity. First, surprisingly, came the Algiers Accords.9 The Accords were agreed to resolve the Iranian hostage crisis in 1980.10 They established the Iran-US Claims Tribunal, an international arbitral tribunal to consider claims which arose out of the crisis and related matters. The Parties had to decide what rules they were going to use for the tribunal. They turned to the 1976 Rules. As a result, the Rules were taken down off the shelf, and applied in, 3,000 cases, all of which were public. The public nature of the process is important because the procedural orders were public. Those orders formed the basis for a lot of commentary

8 UN General Assembly Resolution 31/98 of 15 December 1976. 9 Algiers Accords, 19 January 1981. 10 See, in general, D Caron & J Crook (Eds), The Iran-United States Claims Tribunal and the Process of International Claims Resolution (2000).

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on the 1976 Rules – for example the book that my co-authors and I wrote. As we all know, arbitration rules are rather bare bones, which afford arbitrators a lot of discretion. Public decisions and commentary allow for practice to be looked at – arbitrators could consider how actually to handle procedure in their cases by reference to how others had done so before them.11 Second, again unanticipated, arbitration centers and institutions starting appearing all over the world—for example, here in Hong Kong in 1985. Some centers adopted the UNCITRAL Rules, or a modified version of them, and offered the center as the administrator. As a result, the UNCITRAL Rules were no longer unadministered, they became administered rules within particular centers.12 Third, and again surprisingly, bilateral investment treaties (BITs), and the North American Free Trade Agreement (NAFTA), gave claimants the choice of either ICSID or UNCITRAL arbitration. This all led to growth in use and in significance.

A footnote of caution Here, I include a significant footnote, of caution. There is, within the NGO community, strong pressure for ICSID to revise its rules, to make them more transparent, to allow for public amicus briefs, and so on. There have been mixed reactions – and some acceptance of these proposals. The consequence has been that claimants have begun to choose UNCITRAL more and more for investor-State arbitrations. And so the NGO community now pushes for the UNCITRAL Rules to follow ICSID down the path of transparency. The reaction of UNCITRAL has been twofold. The first part has been to say “we’re not going to talk about that now”. Rather, once UNCITRAL is done with the Rules revision, the next topic for Working Group II will be to consider if there should be a variation on the rules for investor-State arbitration. That’s very good because, as those involved in commercial arbitration will know, the shift towards transparency doesn’t make sense in commercial arbitration. The second part of the reaction relates to the question of which rules will be applicable if an instrument simply says “UNCITRAL Rules”. The revision group has considered this, and the common approach is that the applicable rules, unless the parties say otherwise, will be those in force at the time the agreement to arbitrate is formed. That’s the time when there is mutual intent about which rules should apply. There will therefore be a transition period where the applicable rules may be the old rules – the 1976 Rules. But then, and this will probably be very quick in the contractual world, we’ll move over to the new set of rules. For investor-State arbitrations, things may be different. A BIT is an agreement between two governments, who are making an open offer to investors to arbitrate. The offer is not

11 In addition to the Commentary by Caron and Caplan, n 3 above, see also S Baker & M Davis, The UNCITRAL Arbitration Rules in Practice: The Experience of the Iran-United States Claims Tribunal (1992); J van Hof, Commentary on the UNCITRAL Arbitration Rules: The Application by the Iran-U.S. Claims Tribunal (1991). 12 Professor Caron’s examples here were the Hong Kong International Arbitration Centre (HKIAC), the International Centre for Dispute Resolution (ICDR) and the Kuala Lumpur Regional Centre for Arbitration (KLRCA).

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concluded until the investor actually agrees. You might think, then, that we would again move quickly to the new set of rules. However, States are indicating that their position is that they offer the set of rules at the time the BIT is concluded. They are, in essence, saying they will offer the old UNCITRAL Rules, which do not address transparency. So we see that States are reluctant to open up the transparency side of the equation and the pressure to do so may have unanticipated consequences.

A personal footnote A second footnote is that there’s a personal side to all of this for me. I was one of the first Legal Assistants to the American arbitrators at the Iran-US Claims Tribunal. I was not, as I hope is obvious, present for the drafting of the 1976 Rules. I’m more a sibling of that first set of UNCITRAL Rules—we both grew up together in the Iran-US Claims Tribunal. That Tribunal, at that time, was a very combative institution. In fact, I would say that that early experience has continued to influence the mindset. It tested the rules very strongly – in particular in relation to arbitrator conduct – which was very difficult. We had arbitrators who would not show up at deliberations because of a sudden health problem. They would resign shortly before signature was to be done on the award. Or they would allow several awards to build up and then resign. They would disclose the content of the award to the party that nominated them just prior to its release, inducing a settlement that would then obviously make the award moot. This gives you a sense of how the rules were tested. In one incident in particular, two Iranian arbitrators physically assaulted a Swedish arbitrator, which led to a challenge. The rules say that an arbitrator must, obviously, be independent and impartial. The question was whether getting angry and punching someone means that an arbitrator is not independent or not impartial. It’s not clear. The 2006 ICSID Arbitration Rules say you must be of “high moral character”.13 The question, in this example, is what is the correct response if an arbitrator says “I’m sorry, I just got carried away – I couldn’t help myself, and I won’t do it again”? So you see, at the Iran-US Claims Tribunal, all of a sudden, we had problems as to how the rules worked. Situations that the drafters hadn’t anticipated became more apparent. With revisions, and new scenarios, we’ll see some of that come back.

Learning from existing variations Even as we enter this revision process, the UNCITRAL Rules are being used in different ways. This contrasts with certain institutions – for example, the ICC Rules from a certain period won’t vary until the next revision. Centers already adopt the UNCITRAL Rules with adjustments. Indeed, the Iran-US Claims Tribunal did just that.14 The UNCITRAL Model Law has a default set of arbitration rules, the UNCITRAL Rules, which are themselves modified. Even though the Swiss Rules of International Arbitration are based on UNCITRAL, they are

13 2006 ICSID Arbitration Rules, Rules 14(1) and 40(2). 14 Iran-US Claims Tribunal, Tribunal Rules of Procedure, 3 May 1983.

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significantly different.15 So there are already a lot of variations of the UNCITRAL Rules to inform the process of revision.

II. Revising the UNCITRAL Rules I have spoken about the origins of UNCITRAL, the 1976 Rules, and their growth. Now we have the conversation about revision. How did we get to the point of change? Interestingly, it’s Pieter Sanders who comes back into the story. In 2004—he’s still very productive— he published an article encouraging revision.16 In 2006 a study document was published, commissioned by UNCITRAL, and written by Jan Paulsson and Georgios Petrochilos.17 Then the current effort of Working Group II began in the Fall of that year. Working Group II meets twice a year and is now seven sessions into the work.18 There’s an expectation that the work will be completed in the Spring.19 This is the revision process that the US State Department gentleman warned me of - and the reason for another book!

The principles guiding the revision effort At the outset, Working Group II made some statements about what their guiding principles were going to be. This brings us back to the theme of how we think about revision and what it is that is to be accomplished. Remember, Working Group II is not an institution that is trying to appear modern simply to increase its caseload. That motivation isn’t there. Rather, it has been a long time since the adoption of the 1976 Rules, and there is a need for an update. And, to the Working Group’s credit, there is recognition that people can have an insatiable desire to revise. If you give lawyers a pen they will start adding sentences and adding complexity. The Working Group’s members are trying to restrain themselves but they don’t always succeed. Still, the intention to be restrained has been there, and there was recognition in the Working Group’s report of its September 2006 session that:

15 Swiss Rules of International Arbitration, 1 January 2004. Editorial note: At the time of publication of this compendium, the current Swiss Rules are those which took effect as of 1 June 2021. 16 Pieter Sanders, ‘Has the Moment Come to Revise the Arbitration Rules of UNCITRAL?’ (2004) 20 Arbitration International 243. 17 Jan Paulsson and Georgios Petrochilos, Revision of the UNCITRAL Arbitration Rules (2006). 18 There has not always been a Working Group devoted to arbitration. At a UN Conference celebrating the 50th anniversary of the New York Conference, a possible work plan was laid out for UNCITRAL, in the area of arbitration. At the 1999 session of UNCITRAL, a work plan was adopted, and Working Group II was tasked with addressing it. 19 The 2010 Rules ultimately became effective on 15 August 2010 and were subsequently the subject of UN General Assembly resolution 65/22 of 6 December 2010.

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“…any revision of the UNCITRAL Arbitration Rules should not alter the structure of the text, its spirit and drafting style and should respect the flexibility of the text rather than make it more complex…”20 I will return to flexibility at the end of this lecture. Another principle which might be said to be important is consistency – for example, with the 1985 UNCITRAL Model Law.21 However, the Working Group concluded that: “…harmonizing the provisions of the UNCITRAL Arbitration Rules with the corresponding provisions of the Model Law should not be automatic but rather considered only where appropriate.”22

Principles in operation – interim measures The revision of the UNCITRAL Model Law in 2006 shows how revision principles can operate. That was Working Group II’s work prior to the current process. In the 2006 amendment of the Model Law, the interim measures provision in Article 17 has gone from a being a short paragraph, to being several pages long. Essentially, in the 2006 draft, the whole logic of interim measures has been spelled out with a lot of detail, contrary to the principle of flexibility. The justification for this increase in detail was said to be the particular nature of the goal of that provision. The goal is to make interim measures by a arbitral tribunal enforceable in a national court. A national court, it was said, would be reluctant to enforce the measures— indeed, many are reluctant to enforce them—unless they understood more about them. So there was said to be a need for more detail. I think that’s a little difficult, as a justification, because the same kind of argument could be made about enforcement of awards. That could be a slippery slope which, if adopted in this process, would lead to a lot more detail in the Rules. And, as you’ll have seen, I have a preference against a lot of detail. I guess it depends on which side you’re on. As counsel, you want more control and therefore you think about detail in the rules. As an arbitrator, you prefer flexibility and discretion. But those objectives might not be as divergent as they seem – we’ll see more as we go along. We are, now, close to the end of the revision process – the new rules will be with us next year. What I want to do in the remainder of this lecture is examine some of the changes that we are likely to see as a result. The caution is that there are many revisions – and none of them are final yet.

20 Report of the Working Group on Arbitration and Conciliation on the work of its forty-fifth session (Vienna, 11-15 September 2006), UN Doc A/CN.9/614, paragraph 15. 21 UNCITRAL Model Law on International Commercial Arbitration (1985). 22 Report of the Working Group on Arbitration and Conciliation on the work of its forty-fifth session (Vienna, 11-15 September 2006), UN Doc A/CN.9/614, paragraph 21.

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III. The revisions: clusters of change I will talk now about three clusters of change. As I have said, a caveat at the outset is there are many changes, certainly more than I’m going to describe. It can be difficult to keep track. One of the best sets of commentaries I have found on the ongoing process is from the Asia Pacific Regional Arbitration Group, which sends observers. No one else is doing that sort of reporting. The UNCITRAL Secretariat produces a report at the end of each session. It is not as helpful a report as was done when UNCITRAL was drafting the 1976 Rules. Then, there was a transcription, of sorts, of what was said. It would tell you that, say, Howard Holtzmann from the US stood up and said this or Sergei Lebedev from Russia said that. You could really get a grasp on what they were arguing about. What the Secretariat publishes now is much more sanitized. You can get a sense of what is going on but you have to read between the lines. And, again, I stress that anything could change. Having said that, there are three clusters that I will address: catching the rules up, different approaches to procedure, and arbitrators, unadministered arbitration, and trust.

Catching the rules up The first cluster of changes is about catching the rules up. My point here is that these are actually not real changes; they are getting the rules to catch up with the world that has changed. The rules are changing, but it’s merely to catch up with what’s out there. For example, Article 1(1) of the 1976 Rules provides that the agreement to arbitrate must be in writing. Nothing is in writing anymore. My mail at the university has gone down dramatically; everything is email at this point. So what does it mean to say “in writing” in Article 1(1) of the 1976 Rules? We have to change that. Similarly, “mailing address”, in Article 2(1) of the 1976 Rules is anachronistic. It is also necessary, in that Article, to think about what it means to have an “address,” and what it means to “deliver”. All that terminology requires changes to catch up with the world. A little bit more substantive, back in Article 1(1) is the language “disputes in relation to the contract”. That needs to be changed, in part, to recognise the significance of BITs. The necessary language is not actually all that new. It’s in the New York Convention, where Article II refers to “differences…. in respect of a defined legal relationship”.23 We can now speak of “disputes in relation to a legal relationship”. There is scope for further definition, so long as we bear in mind the potential tension between detail and flexibility. What I find interesting about those examples, just from Article 1 and 2 of the 1976 Rules, is that the 2008 revisions to this Center’s rules all updated those terms.24 I’ve enjoyed revisiting the new rules that you have here because they anticipate so much of what is happening in the UNCITRAL revision process.

23 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 10 June 1958. 24 Hong Kong International Arbitration Centre, 2008 HKIAC Administered Arbitration Rules (“2008 HKIAC Rules”).

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In some respects, HKIAC has done better than UNCITRAL. For example, I think UNCITRAL has failed in relation to the “place” of arbitration, referred to in Article 16 of the 1976 Rules. There were suggestions to get rid of the word “place” because it is something of an insider’s term. We imply from the word “place” that there is a legal system governing that arbitration. But that isn’t clear to outsiders. There were suggestions that the term used should indicate more clearly that it is about more than the physical place. The 2008 HKIAC Rules, in Article 15, uses the phrase “the seat of arbitration”. That has a more legal connotation and there was a failed attempt to insert that into the new UNCITRAL Rules. The failure was partly because the word “place” is used throughout the UNCITRAL Model Law and consistency was a consideration. Still, congratulations to the drafters of the 2008 HKIAC Rules, for being progressive.

Different approaches to procedure Let me talk now about the second cluster: different approaches to procedure. Obviously this is where many of the changes lie. Probably all of the rules will change at least a little bit. They will change in small ways. Many of the changes will be very useful. Some of these changes are extremely difficult to bring about, because when there are efforts to change rules at UNCITRAL, we start to see different divides on how procedure is approached. One thing I really enjoy about the meeting of the Institute for Transnational Arbitration in Dallas is that we have people come in from around the world. When I was young, I used to watch speakers talk about decision-making and think that they had got it wrong, they hadn’t quite seen how things were done. Now I’ve come to appreciate that, although rules may converge globally, there are a number of circles of arbitration folk. If we’re a little too quick, we think we’re talking the same language, but actually we have different views, or the language can mean different things to us. You could say there is an International Chamber of Commerce group, who have a slightly different view from the London Court of International Arbitration group, which is different again from the International Centre for Dispute Resolution group. And I’m not saying any of those views are wrong—in fact, I think they’re all right; they just have a different approach or perspective. Similarly, there are some national cultural differences. We see some differences in Asia, maybe more on the value of mediation than in other areas, which leads to some differences of view about decision-making as well. How do these different views impact on the process of revision? Take the question of how the three arbitrators in an arbitration finally make their decision. The 1976 Rules, in Article 31, follow the approach of the American Arbitration Association, which is that you decide by a majority of the arbitrators. The theoretical concern is that the chair could be unable to form a majority. The chair could ask one arbitrator, for example the claimant-appointed arbitrator, who could say I agree on liability, but I don’t agree that damages should be low. And the chair could get the opposite response from the other party-appointed arbitrator. That could lead to deadlock. Is this really a problem, though, in practice? The question reflects a fundamental problem in efforts to revise the rules. Whether or not there is any problem relies on anecdotal evidence. We have no examples of a deadlock happening. But there is potentially a problem.

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And the potential problem creates an opening for the ICC approach, whereby if there is no majority, the chair should decide.25 The current revision process, though, has had the guiding principle not to change the spirit of the 1976 Rules. So, without any evidence of a problem, we have stuck with the original version of the rule. This example, then, shows the challenge of revision when there is not more evidence from inside the arbitration process. Another area in which procedure differs relates to the role of local law. For example, some jurisdictions prohibit parties or their employees from serving as witnesses in an arbitration. If arbitration rules on witnesses become too specific they may create a problem for enforcement in jurisdictions with strict rules of inclusion or exclusion. Some rules of evidence, for example the International Bar Association’s, explicitly allow employees as witnesses.26 However, to avoid local law playing a blocking role, arbitration rules need to stay vague, and allow arbitrators to accommodate variations. This is also related to the question of complexity. I’m very happy to note that UNCITRAL has been pretty good at avoiding complexity, understanding the practicality of arbitration, and the costs of decisions. So, in relation to the applicable law, Article 33 of the 1976 Rules provides that the parties shall designate the applicable law. If the parties fail to designate the law, then “the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable”. As a result, there can be a costly exercise to decide the applicable conflict of laws rules, an exercise which really may not be worth the candle. With the new rules, Working Group II will put trust in the arbitrators, at least on this question. If the arbitrators want to use a conflict of laws rule, they can do that. If they do not, they can just decide on the applicable law. It goes back to discretion. Finally, in respect of procedural differences, we have a problem that has bedeviled all the institutions as multiparty arbitration increases: how to deal with a third party. There is one set of Rules, the London Court of International Arbitration (“LCIA”), which deals with this. It’s in Article 22.1(h) of the 1998 LCIA Rules, which provides that, unless the Parties agree otherwise in writing, the Arbitral Tribunal will have the power “… to allow, only upon the application of a party, one or more third persons to be joined in the arbitration as a party provided any such third person and the applicant party have consented thereto in writing, and thereafter to make a single final award, or separate awards, in respect of all parties so implicated in the arbitration…” The LCIA example drove a long discussion about whether there should be such a rule included by UNCITRAL. The drafters tried to find what the practice has been. Again, we see a desire to have the process informed by practice, but evidence may only be anecdotal.

25 At the time of publication of this lecture in this compendium, the most recent version of the ICC Rules of Arbitration is the 2021 edition, Article 32(1) of which provides: “When the arbitral tribunal is composed of more than one arbitrator, an award is made by a majority decision. If there is no majority, the award shall be made by the president of the arbitral tribunal alone”. 26 Article 4, IBA Rules on the Taking of Evidence in International Commercial Arbitration (1999 at the time of delivery; 2020 at the time of publication).

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The LCIA pointed out that there’s only been one instance of that happening. And so, at the moment, it appears unlikely that there will be anything about joinder in the new rules.27

Administration and trust in the arbitrators The final cluster of changes, where there has been a lot of controversy, relates to administration of arbitrations, including a potentially greater role for the Permanent Court of Arbitration (PCA). Here is where the question of trust in the arbitrators really comes to the fore. As I said earlier, the UNCITRAL Rules are meant to work without an institution to administer them. Nevertheless, in the current revision process there is the potential for there to be a much greater role for an institution. Let me start with the appointment of arbitrators. Even with unadministered rules, it is necessary to have a body with the task of appointing arbitrators, or deciding on challenges to them. In the 1976 Rules, the body to do that is the PCA.28 The PCA was chosen because it had absolutely nothing to do, and (in 1976) had had almost nothing to do, ever since World War I. It had been created by the first Hague Peace Conference in 1899. World War I ended that series of conferences and, after the war, work on the pacific settlement of disputes led to the creation of the Permanent Court of International Justice (PCIJ). The PCIJ, and its successor the International Court of Justice, eclipsed their older sister, the PCA.29 However, since its designation by UNCITRAL in the 1976 Rules, the PCA is now a very busy institution. But its role in relation to UNCITRAL arbitrations remains limited. The 1976 Rules, in Article 6, say the PCA shall designate the appointing authority. The PCA is not, itself, the appointing authority – it merely designates. There has been a move in negotiations over revision of the rules to make the PCA the appointing authority in all UNCITRAL arbitrations – globally. The various arbitral institutions and centers have, as you can imagine, responded rather robustly. I think that the idea to develop the PCA role in this way will not succeed and that it will (correctly) not succeed. Some rules can be global. Nevertheless, the institutions and centers have made a very good argument. They are the ones who know counsel, and who know local conditions, around the world. It’s far too complex and diverse a world for one institution to try to administer such a set of appointments or challenges. This is where we can say that some proposed revisions are neither small nor useful – they are impossible. It may be, though, that the PCA becomes the principal appointing authority in investment arbitration using the UNCITRAL Rules. That would make some sense. It would be a much smaller set of cases and would involve a specialized group of people.

27 Editorial note: Ultimately, Article 17(5) of the 2010 UNCITRAL Rules did include the power to join a third party, at the request of any party to the arbitration, so long as certain criteria are met. 28 1976 Rules, Article 6(1). 29 David D Caron, ‘War and International Adjudication: Reflections on the 1899 Peace Conference’ (2000) 94(4) American Journal of International Law 4, p.24.

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So that – appointment of arbitrators – is one way in which some administration is necessary. We have also found, in some other areas, that it is difficult for the UNCITRAL Rules to be unadministered. Four examples are: multiparty situations, approving fees, fees for post-award proceedings and questions of the number of arbitrators. The upshot is that, if there is no administering institution, it’s necessary to rely on, and to trust, the arbitrators even more. There is some unease at that. For example, in relation to approving fees, it is likely that arbitrators will not be able to set their own fees, which is the current situation under UNCITRAL.30 This has led to some rather strong complaints about fees being set after appointment and after establishment of the tribunal. Under the proposed revisions, there will be a process whereby a party can appeal the setting of the fee to the appointing authority, which can make necessary adjustments. That will be an interesting development to see. The sort of frustration which has led to those revisions is also reflected in the discussion about fees for post-award proceedings. Those proceedings can arise in a few ways – asking for a correction of an award, or for an interpretation of an award, for example. Should the arbitrator be able to ask for fees for those few hours of work? This question has been the subject of a long discussion in the revision process. There is a sense that there is a conflict of interest for the arbitrators: on the one hand between production of a final award; and on the other hand the potential for further fees. Some make the point that if there need to be post-award proceedings then it is the arbitrators that are at fault. They consider that, but for the arbitrators’ failure to complete the work correctly, there would be no need for postaward proceedings. It’s an interesting discussion, although it may seem a smaller matter in comparison with a challenge to the fee structure itself. It will likely not go through.31 Next, in relation to the number of arbitrators, there was a proposal to do something like you have here at the HKIAC, to have a way to drop back to one arbitrator instead of three. There was a proposal for the PCA to do that. However, if that were to come to pass, it would be a fundamental change of structure. The revisions would, again, be sliding into what is impossible under the current structure of the UNCITRAL Rules as a set of unadministered rules. Finally, there are questions in relation to disclosure, resignation, replacement and liability of arbitrators. There is a question as to whether or not a tribunal can render an award with only two of the three arbitrators. We may see answers to some of these questions. Again, it comes back to what is appropriate discretion for the arbitrators, where there is no institution, and what the level of trust is. Under the current structure, the changes may well stick to what is small and useful.

30 1976 Rules, Article 39, addresses fees. 31 Editorial note: The 2010 Rules did, ultimately, include the following in Article 40(3) on costs: “…In relation to interpretation, correction or completion of any award under articles 37 to 39, the arbitral tribunal may charge the costs referred to in paragraphs 2 (b) to (f), but no additional fees.”

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IV. Closing comments I have a few closing comments. I want to return to this word “flexibility”. What does it mean for rules to be ‘flexible’? We always say, as counsel, that arbitration is desirable because it’s flexible. I question that. Arbitration is totally flexible at the moment you’re drafting your contract. You can design any type of arbitration you want—almost. But, actually, once you sign the contract, and it’s concluded, and the dispute arises, what you have in the contract is actually quite hard to alter. It was flexible at the time of drafting but now it’s no longer flexible – unless the proposed change is so meaningless that both sides can agree to the change. The task for counsel, which is a hard one, is to design an arbitration specific to the dispute that will arise. But, unfortunately, counsel don’t know in advance what dispute will arise. That’s a hard problem to get around. There do seem to be some ways to get around the problem, though, and to maintain some flexibility. One is to have a variation in the arbitration that turns on some factual trigger. Here, again, the 2008 HKIAC Rules are really exemplary. Article 38 of those Rules provides for an expedited procedure which turns on the amount in dispute. This makes a lot of sense as a way to approach the question. But what if there is no factual trigger? Then it becomes necessary to give discretion, to someone, to adapt the rules to the particular dispute. The rules have to be a little open-ended so that they can then be adapted to the particular dispute. Who is the discretion to be given to? It will have to be given either to an institution or to the arbitrators. For me, arguments for flexibility in the rules are really about authorization of that discretion, so that the rules can be adapted to the particular dispute, as the parties want in any given scenario. So flexibility comes back to discretion, and trust in decision-making. In general, the next steps for the revision process will come in February [2010], and I think we will be pleased. I’ve been very pleased with how cautious the Working Group members have been with their pen. It’s a very tempting thing, to rewrite rules, and I think we’ll be happy in the end.

A Proposed Model Procedural Order on Confidentiality in International Arbitration: A Comprehensive and Self-Governing Code* Michael Hwang S.C.** & Nicholas Thio*** The obligation of confidentiality and the scope of its exceptions is one of the intractable problems in international arbitration because there is no uniformity of practice among national laws and also the rules of arbitral institutions. The problem with the latter is also that, although many institutional rules provide for the confidentiality of the proceedings, virtually all have framed the exceptions to confidentiality in absolute terms, with no referee to decide when a particular exception applies or when a new exception ought to be created. The centrepiece of this article is a Model Procedural Order on confidentiality which is designed as a framework to address, among other things, that defect. Based on a survey of the rules of the various arbitral institutions, it also sets out in a practical manner the various situations in which an exception to confidentiality may need to be invoked, thus making it suitable for implementation as a customizable solution to confidentiality (since the Model Procedural Order is in the form of a template which may be tailored to meet the particular requirements of the case) in either ad hoc arbitrations or where the provisions on confidentiality contained within the rules of the arbitral institution are replaced wholesale. The Model Procedural Order raises important legal issues associated with its implementation for consideration – these include questions going to the jurisdiction of the arbitral tribunal to make procedural directions directing the preservation of confidentiality upon terms, whether parties continue to be bound by the arbitral tribunal’s directions on confidentiality even after the termination of the arbitration and the limit of the powers of the arbitral tribunal to sanction breaches of confidentiality. These and other concerns are addressed below.****

** ***

This article is based on the Goff Lecture delivered by the principal author on 7 December 2010 at the City University of Hong Kong, and the text is as revised in 2022. was first published in the Journal of International Arbitration as Michael Hwang and Nicholas Thio, A Proposed Model Procedural Order on Confidentiality in International Arbitration: A Comprehensive and Self-Governing Code, (2012) 29(2) J Int’l Arb 137, and permission has been obtained for its publication here. See also footnote 1. Dr Michael Hwang S.C., Senior Counsel and Independent Arbitrator at Michael Hwang Chambers LLC, Singapore, michael@mhwang.com. Nicholas Thio (LLB (Hons) (UCL)), Advocate & Solicitor, Singapore.

**** The authors would like to acknowledge gratefully the helpful assistance of Kevin Tan (LLB (Hons) (LSE)), a Practice Trainee in Michael Hwang Chambers LLC, in updating this article for re-publication.

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1. Introduction1 In an article previously written by the principal author and Katie Chung, Defining the Indefinable: Practical Problems of Confidentiality in Arbitration (Defining the Indefinable),2 it was explained, after a review of the law of confidentiality in arbitration in various jurisdictions around the world, that the scope of the duty of confidentiality in arbitration is problematic in the sense that there are very few definitions of the duty at the legislative and institutional levels (i.e., in the rules of the various arbitral institutions worldwide). For this reason, the International Law Association, in its report on this topic, made (among other things) the following finding: Many users of international commercial arbitration assume when choosing arbitration that arbitration is inherently confidential. This assumption is not warranted because many national laws and arbitral rules do not currently provide for confidentiality and those that do vary in their approach and scope (including the persons affected, the duration and the remedies).3 It is hoped that the reader would have taken away the following key points or themes from Defining the Indefinable (which form the basis and provide the raison d’être of the present article). (1) It is well-established that at common law (at least in England and Singapore),4 there is an implied duty of confidentiality.5 The problem is not so much in defining the obligation of confidentiality in arbitration itself, but rather in defining the exceptions to that duty of confidentiality where such a duty is recongnised by the law of the seat of arbitration.6 (2) The main reasons for this are that: (a) it is difficult in practice to find a universally acceptable solution (indeed, there is no general consensus), and (b) it is (by definition)

1 This article is based on the Goff Lecture delivered by the principal author on 7 December 2010 at the City University of Hong Kong. It was originally published at (2012) 29(2) Journal of International Arbitration 137169. 2 Michael Hwang, Defining the Indefinable: Practical Problems of Confidentiality in Arbitration, 26 J. Intl Arb. 609–645 (2009). 3 International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 19. 4 See AAY and others v. AAZ [2009] SGHC 142, a landmark decision of the High Court of Singapore in which the court conducted a comprehensive review of the common law jurisprudence on the duty of confidentiality in arbitration and the scope of its exceptions. It was held there that the implied duty of confidentiality in arbitration applies (as a default rule) at common law to all arbitrations seated in Singapore, unless the parties have expressly provided for the confidential nature of their arbitration in the arbitration agreement or through the applicable arbitration rules, in which case those provisions would govern. 5 For an express duty of confidentiality which gives rise to a cause of action if breached, see Rule 26 of the Scottish Arbitration Rules, found at Schedule 1 of the Arbitration (Scotland) Act 2010. 6 See International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 16: ‘Even where an obligation of confidence does exist, it will normally be subject to exceptions. All rules on confidentiality, whether contained in statutes, arbitral rules or in the pronouncements of courts, contemplate exceptions to the duty, although there is less agreement as to what the exceptions are and as to their scope. Actually, the difficulty in defining the exceptions is one of the reasons given to explain why certain legislators [sic] and arbitral institutions have so far abstained from adopting rules on the subject.’

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impossible to define, in a comprehensive or exhaustive manner, all the potential exceptions to confidentiality that may arise in situations in the future.7 (3) It follows from this that the categories of exceptions to confidentiality are never closed. This means that a court or arbitral tribunal determining the issue of potential disclosure ought to consider the particular circumstances of the case to determine whether an exception to the principle of confidentiality should apply, or if disclosure should nevertheless be permitted on an ad hoc basis. (4) Where the arbitral tribunal cannot perform this function (e.g., after it has become functus officio), that function should be performed by the appropriate court at the seat of the arbitration. (5) Following from (2) and (3) above (and in the absence of any comprehensive clause on confidentiality embedded in the applicable arbitration rules addressing these issues), it is proposed that the only sensible solution for now would be for the specific needs of confidentiality in each case to be addressed at an early stage by means of a meeting between the parties and the arbitral tribunal, and for a custom-made solution to be implemented by means of a procedural order on confidentiality handed down by the arbitral tribunal.8 (6) The order should provide for a blanket rule of confidentiality, while at the same time allowing the parties to apply to the arbitral tribunal for an exception to or modification of that rule, depending on the circumstances of the case, with a fallback to the court should the arbitral tribunal be unable to act. This would, in effect, allow the arbitral tribunal to operate as a common law court to develop sensible and fair exceptions to the blanket rule.

7 See Defining the Indefinable, 612. It was held by the English Court of Appeal in Emmott v. Michael Wilson & Partners [2008] EWCA Civ 184 that, although there are established exceptions to the duty of confidentiality in arbitration where disclosure would be permissible, the content of the obligation of confidentiality in arbitration may depend on the context in which it arises and on the nature of the information or documents in question; accordingly, the limits of the obligation are still in the process of development on a case-by-case basis. 8 The International Law Association makes the same recommendation – see International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 20: ‘In the absence of contractual provisions on confidentiality, arbitrators should consider drawing the attention of the parties to confidentiality and, if appropriate, addressing the issue in terms of reference or a procedural order at the outset of the proceedings.’ See also UNCITRAL, 1996 Notes on Organising Arbitral Proceedings, http:// www.cnudmi.org/pdf/english/texts/arbitration/arb-notes/arb-notes-e.pdf (accessed Nov. 21, 2011): ‘there is no uniform answer in national laws as to the extent to which the participants in an arbitration are under the duty to observe the confidentiality of information relating to the case. Moreover, parties that have agreed on arbitration rules or other provisions that do not expressly address the issue of confidentiality cannot assume that all jurisdictions would recognize an implied commitment to confidentiality. Furthermore, the participants in an arbitration might not have the same understanding as regards the extent of confidentiality that is expected. Therefore, the arbitral tribunal might wish to discuss that with the parties and, if considered appropriate, record any agreed principles on the duty of confidentiality.’ Art. 22(3) of the new ICC Rules of Arbitration (in force as from 1 Jan. 2012) also contemplates this possibility, although it does not appear to clothe the tribunal with any additional powers or authority which would not otherwise exist in the absence of this provision. It states as follows: ‘Upon the request of any party, the arbitral tribunal may make orders concerning the confidentiality of the arbitration proceedings or of any other matters in connection with the arbitration and may take measures for protecting trade secrets and confidential information.’

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(7) If institutional rules containing provisions on confidentiality are already applicable, those rules would have to be modified by a consent order (which is the only way that those rules may be so modified) so that the arbitral tribunal would have the residual or inherent power to conduct the proceedings as described in (5) above. In this regard, it is noted that although arbitral institutions, in their arbitration rules, generally provide to some extent for confidentiality, the exact provisions vary significantly.9 Consequently, there is no uniformity of practice10 and they all suffer from one defect, which is that the exceptions are framed in absolute terms, with no arbiter to decide when the exception does or does not apply.11 (8) In sum, the only way to create a comprehensive and self-governing confidentiality regime is to design one. What is needed is a form of code on confidentiality by which the parties to the arbitration will be bound. The points in (5) and (6) above are most easily and best addressed by crafting a procedural order on confidentiality binding on the parties by their mutual consent (for the reason given in (7) above).12 This would be a truly bespoke or custom-made solution, tailored to the individual circumstances of the dispute in question. The strength of this solution is that it would allow the parties and arbitral tribunals to deal appropriately with the myriad situations (many of which are unforeseeable) which would inevitably arise and which would need to be accommodated so as to override the default confidentiality regime, to a greater or lesser extent. For the reader who is fresh to the subject, a short summary of the current state of English law on confidentiality in arbitration, which can chiefly be found in the English Court of Appeal decision of Emmott v Michael Wilson & Partners,13 is provided below:14 1. The obligation of confidentiality in arbitration is a substantive rule of law arising out of the nature of arbitration.

9 See Defining the Indefinable, 637–641. 10 See International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 3:‘The solutions adopted by national legislators [sic] and courts and by arbitral institutions vary substantially and today there is no uniform approach regarding confidentiality in commercial arbitration. Often the issue is addressed directly by the parties in their agreements. Consequently, whether some or all aspects of any given arbitration engage confidentiality obligations varies considerably depending on the arbitration agreement, the substantive contract in dispute, the applicable rules of arbitration and the applicable laws.’ 11 The only exception is Rule 39.2(e) of the Arbitration Rules of the Singapore International Arbitration Centre (6th ed., Aug. 1, 2016), which allows an arbitrating party to disclose matters relating to the arbitration if authorized to do so by an order of the tribunal made on application by a party with proper notice to the other parties. 12 A contractual solution to confidentiality in arbitration was considered in Defining the Indefinable at 644, but it was said there (and also maintained here) that it would be highly unrealistic to expect contractual parties to draft an arbitration clause that would address all the concerns raised above. Indeed, if arbitration clauses are ‘midnight clauses’, then any clause on confidentiality would have to be relegated to become the ‘dawn clause’. In short, it would not be practical to expect transactional lawyers to be able to draft a satisfactory clause on confidentiality when they are unlikely to understand the law sufficiently to be able to foresee all the scenarios which might present themselves during the life of an arbitration. 13 [2008] EWCA Civ 184. 14 See Defining the Indefinable.

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2. The obligation of confidentiality in arbitration requires parties not to disclose or use for any other purpose any documents prepared for and used in the arbitration, or disclosed or produced in the course of the arbitration, or transcripts or notes of the evidence in the arbitration or the award, and not to disclose in any other way what evidence has been given by any witness in the arbitration. 3. The exact scope and content of the obligation of confidentiality in arbitration may depend on the context in which it arises and on the nature of the information or documents sought to be kept confidential. The principal exceptions to the obligation of confidentiality in arbitration are when: a.

both parties have consented (expressly or impliedly) to disclosure;

a court has ordered disclosure or given leave to disclose;

it is reasonably necessary for the protection of the legitimate interests of a party; and

the public interest or the interests of justice require disclosure.

The subject of this article, and what follows immediately below, is therefore a proposed Model Procedural Order on Confidentiality (“MPO”),15 intended as a starting point, which may then be modified on a case-by-case basis, depending on the degree or extent of confidentiality required and the other requirements of the case. It is suggested that the best time for setting a customized confidentiality regime is usually after the close of pleadings when the issues are known, and the parties have had the chance to consider which aspects of the arbitration need to remain confidential (and how such confidentiality ought to be protected). Indeed, this might well be the only practical time when the parties can properly address the requirements of a confidentiality regime that would be binding on both sides. There is no reason in theory why parties should not, as between themselves, agree on a form of confidentiality agreement or consent order; but in practice, this is much more easily done with the guidance of an experienced arbitrator who starts with a template, and who then discusses with the parties how much of it is appropriate for the case at hand. The arbitral tribunal can then proceed to issue a procedural order to establish the applicable confidentiality regime using the template with such modifications as the particular case might require.

15 Two Commonwealth countries, viz., Australia and New Zealand, have introduced statutory codes on confidentiality in arbitration which are intended to be comprehensive in nature, but only apply locally (i.e., where Australia or New Zealand is designated as the seat of the arbitration). In New Zealand, see secs. 14A to 14I of the Arbitration Act 1996 (introduced with effect from Oct.2007); in Australia, see secs. 23C to 23G of the International Arbitration Act 1974 (introduced with effect from July 2010). In New Zealand, the provisions on confidentiality apply to every arbitration seated there unless the parties agree otherwise (i.e., on an opt-out basis), whereas for an arbitration seated in Australia, the position is the reverse and the relevant provisions apply only if the parties so agree (i.e., on an opt-in basis). In Hong Kong, similar (but less detailed) provisions are to be found in sec. 18 of the Arbitration Ordinance (Cap 609).

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2. Model Procedural Order On Confidentiality With that background, the MPO is set out below in its entirety, followed by a brief explanation of its legal context and a commentary on its individual provisions.

Model Clause (1) (1) Except as Parties expressly agree in writing (whether in the arbitration agreement or otherwise) or leave is given by the Tribunal, Parties undertake to keep confidential all Confidential Information and the award. Additionally, the provisions of this Procedural Order will continue in force notwithstanding the termination of the arbitration.

Model Clause (2) (2) In this Procedural Order, “Confidential Information” is defined as information that relates to the proceedings or to an award made in the proceedings and includes: a.

the existence of the proceedings;

the statement of claim, statement of defence, and all other pleadings, submissions, and statements;

any evidence (whether documentary or other) supplied to the Tribunal;

any notes made by the arbitral tribunal of oral evidence or submissions given before the Tribunal;

any transcript of oral evidence or submissions given before the Tribunal;

any rulings of the Tribunal; and

any award of the Tribunal,

but excludes any matter that is otherwise in the public domain.

Model Clause (3) (3) Subject to (4) below, a party may disclose Confidential Information – a.

for the purpose of making an application to any competent court of any State to recognise, enforce or challenge the award;

pursuant to the order of, or a subpoena issued by a court of competent jurisdiction;

for the purpose of pursuing or enforcing a legal right or defending a claim;

where disclosure is made to a third party for the purpose of satisfying any legal obligation of disclosure owed (under any applicable law) to that third party;

in compliance with the request or requirement of any competent regulatory body or other authority;

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if a party wishes to disclose information or documents already in that party’s possession prior to the commencement of the arbitration;

with the consent of all the other parties to the arbitration;

pursuant to an order by the Tribunal on application by a party with proper notice to the other parties; or

as permitted under any other exception recognised by the applicable law.

Model Clause (4) (4) Subject to (6) below, before a party discloses Confidential Information as authorised in (3) above, that party must provide to the other party/parties seven (7) days’ prior written notice of its intention to disclose, giving: a.

written details of the Confidential Information to be disclosed;

the party/parties to whom disclosure is intended to be made; and

the reasons for the disclosure.

Model Clause (5) (5) Where the disclosure of Confidential Information is sought to be made pursuant to (3) above, the information to be furnished to the other party need only contain a general description of the Confidential Information sought to be disclosed and the classes of persons to whom disclosure is to be made (without identification of those persons). The disclosing party must use its best endeavours to obtain an undertaking of confidentiality, given in favour of the party opposing disclosure, from any individual or entity to whom disclosure of any Confidential Information may be made. The terms of such undertaking should be agreed in advance of such disclosure by the party opposing disclosure (who will not be entitled to the names of the parties to whom disclosure is to be made). If there is a dispute in relation to the terms of the undertaking, this should be referred to the Tribunal for determination. If no such undertaking of confidentiality can be obtained, seven (7) days’ notice is to be given to all other parties identifying the individual or entity concerned. If any objection is raised by any other party within the period of notice, the matter should be referred to the Tribunal to determine the extent of the Confidential Information that may be disclosed and any other steps that should be taken to preserve confidentiality.

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Model Clause (6) (6) None of the requirements of (4) above is to apply in the following situations: a.

where disclosure of Confidential Information is made pursuant to (3)a above; and

where the party seeking to disclose Confidential Information obtains the written consent (both to the particulars and extent of Confidential Information which is sought to be disclosed) of all other parties to the arbitration to do so.

Model Clause (7) (7) If the other party/parties object(s) to disclosure pursuant to (4) above within the period of seven (7) days, no disclosure may be made until the issue has been resolved by the Tribunal in the manner set out in (8) below.

Model Clause (8) (8) If a question arises in the arbitral proceedings as to whether any Confidential Information should be disclosed, and at least one of the parties requests the Tribunal to determine that question, the Tribunal, after giving each of the parties an opportunity to be heard, may in its discretion make or refuse to make an order allowing all or any of the parties to disclose Confidential Information.

Model Clause (9) (9) After the Tribunal has become functus officio, its functions under this Procedural Order are to be exercised by the appropriate supervisory court at the seat of the arbitration.

Model Clause (10) (10) The orders in this Procedural Order replace the provisions of [Rule 39 of the SIAC Rules 2016].16 [Note: Because certain countries have enacted legislative provisions on confidentiality, special wording will be needed for arbitrations seated in Hong Kong (Sections 5, 18, Arbitration Ordinance); Australia (Section 22(3), International Arbitration Act of 1974); Dubai International Financial Centre (DIFC Courts Practice Direction No. 2 of 2013); or New Zealand (Section 14, Arbitration Act 1996 (amended 2007))].

16 This reference to Rule 39 of the SIAC Rules 2016 is merely a placeholder. The rule number and applicable institutional rules would depend on the rules already chosen by the parties and the particular rule within that deals with confidentiality.

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3. Legal Status of a Procedural Order on Confidentiality One issue which might arise at the outset is whether the consent of (either or both) the parties is required for the MPO to be binding on them. In principle, this should not be necessary since procedural orders are conventionally understood to be decisions of an arbitral tribunal (often dealing with administrative and logistical matters) that are given after considering the respective positions of the parties, and which may go against the wishes of one party and in favour of the other, even though they are not denominated as awards of any sort.17 However, in the case of institutional arbitration (or where the rules of arbitration have been agreed by the parties in advance and contain provision(s) on confidentiality), it would be necessary for the reason given in (7) above to have the consent of both parties to Model Clause (8).18 The issue of consent may present less difficulty in practice than in theory. It is suggested that any preliminary meeting between the arbitral tribunal and the parties in this regard ought to be consultative innature since an astute arbitral tribunal would have, foremost on its mind, the following consideration: ‘What are the confidentiality requirements that would best serve the common interests of the parties in the present case?’19 When framed as such, it is more likely that the parties will actually agree to (and therefore abide by) any Procedural Order on confidentiality eventually issued.

17 See Gary B. Born, International Commercial Arbitration, 2354 (vol. II, Kluwer Law 2009). 18 See commentary on Model Clause (10), below. 19 See Meg Kinnear & Aïssatou Diop, Arbitration Advocacy in Changing Times (ICCA Congress Series, Albert Jan van den Berg ed. 2010); 15 Rio 48–49 (2011): Biwater Gauff v.Tanzania, ICSID Case No.ARB/05/22 (a dispute concerning the cancellation of a contract for water in Dar Es Salaam, Tanzania) is an example of a case where the tribunal adopted a customized solution which partially addressed the interests of both parties. Both parties complained to the tribunal that the opposing party had launched media campaigns which aggravated the dispute and undermined its procedural integrity. The claimant sought a provisional order on confidentiality, asking that the parties discuss all publications on a case-by-case basis, and that they refrain from publishing pleadings, documents and correspondence in respect of the arbitration except by mutual agreement. In its Procedural Order No. 3 dated Sept. 29, 2006, the tribunal recongnised the following considerations: (1) there was a need to balance the transparency of the proceedings with the procedural integrity of the arbitration; (2) there is no general duty of confidentiality in ICSID arbitration absent an agreement between the parties on the issue; and (3) actual harm need not be established to justify a provisional order regulating the disclosure of information in the arbitration; accordingly, some form of control would be warranted where a sufficient risk of harm or prejudice exists. Based on these considerations, the tribunal ruled as follows: (i) it allowed the parties to publish their own documents and the tribunal’s decisions as long as these did not exacerbate the dispute; (ii) it refused to allow the publication of documents produced by the opposing party and of correspondence between the parties; and (iii) it allowed general discussion about the case in public so long as such discussion was not used to antagonize the parties, exacerbate their differences, unduly pressure either party or render resolution of the dispute more difficult.

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However, the more interesting issue is a conceptual one, viz., does the arbitral tribunal have the jurisdiction and power to prohibit or allow future disclosures of matters and documents raised in the arbitration to third parties? Here, an important distinction has to be drawn between the following: (i) a provision on confidentiality in the underlying contract between the parties and (ii) the issue of disclosure arising as a result of the arbitration clause under which the parties arbitrate. In the case of (i), it is clear that the arbitral tribunal would be restricted by the parties’ agreement and cannot (by way of a Procedural Order or otherwise) prohibit or allow future disclosures to third parties (i.e., anyone other than the contracting parties themselves) beyond or contrary to what the parties have agreed. In the case of (ii), this is likely to fall within the jurisdiction of the arbitral tribunal because the issue of such disclosure would not arise but for the fact of the arbitration itself. It is generally accepted that the procedural jurisdiction of the arbitral tribunal extends to all matters in connection with the reference to arbitrate,20 i.e. every arbitral tribunal has the inherent power to govern the manner in which the arbitration is conducted.21 It is therefore only a logical extension (and application) of this principle that the arbitral tribunal should be able to lay down rules governing (at least for the duration for the arbitration) the regime of disclosure to third parties. In other words, matters coming under (ii) above are only candidates for confidentiality by reason of them being raised in the arbitration, therefore it follows that it must be within the arbitral tribunal’s jurisdiction to hold (even against one party’s wishes) that such matters will be confidential upon such terms as the arbitral tribunal sees fit. That the arbitral tribunal has the power to regulate the conduct of its own proceedings is, for present purposes, subject only to two general limitations: (i) any laws of the seat or laws of other countries which would otherwise have mandatory application in the instant case and (ii) any rules which the parties have agreed are to bind the arbitral tribunal. The second is self-explanatory and commonly includes the rules of arbitral institutions, which are typically incorporated by reference in the agreement to arbitrate.22 The primacy of the law of the seat is well-established, and was described in the following terms by the International Law Association in its report: The first law to consider in order to determine the existence of confidentiality obligations will usually be the law of the seat of the arbitration, since this law governs most aspects relating to the conduct of the arbitration and the duties of the parties and the rights and duties of the arbitrators. The law of the seat is arguably the first source of the rules dictating the extent to which the parties, and where relevant the arbitral institution, are free to lay down specific rules on the subject as well as the default rules governing confidentiality in the absence of party agreement.23

20 See Simon Crookenden Q.C., Who Should Decide Confidentiality Issues? 25 Arb. Intl. 603, 608 (2009). 21 In England, this power is to be found in sec. 34 of the Arbitration Act 1996; in Singapore, see art. 19(2) of the UNCITRAL Model Law on International Commercial Arbitration, which has the force of law by virtue of sec. 3(1) of the International Arbitration Act (Cap 143A). 22 See commentary on Model Clause (8), below. 23 International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 11.

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It was also recongnised by the International Law Association in its report that, in addition to the law of the seat, the laws of other jurisdictions would have to be taken into account in certain situations where they would apply mandatorily: Regardless of the confidentiality regime of the law of the seat of the arbitration and of the law governing the arbitration confidentiality agreement, confidentiality obligations may often be affected by the laws of other countries, particularly when it comes to mandatory exceptions to confidentiality. The law governing the corporate obligations of a party, the law of country where a party’s securities are traded or where a party is engaged in certain types of activities or transactions or regulatory obligations and, of course, the law of the place of enforcement of the award are some obvious examples.24 One example of a case where procedural directions on confidentiality made by an arbitrator were set aside by the courts at the place where the arbitration was seated is Commonwealth of Australia v. Cockatoo Dockyard Pty Ltd.25 There, the Commonwealth sued Cockatoo Dockyard, claiming that it had breached a lease granted to it to keep, maintain and yield up Cockatoo Island (located near Sydney) in good repair and condition. The Commonwealth claimed that it was entitled to damages from Cockatoo Dockyard based on the cost of repairing the island to a standard suitable for future residential use. The case was referred to arbitration pursuant to the parties’ agreement, and Cockatoo Dockyard applied to the arbitrator for directions to secure the confidentiality of documents relevant to the arbitration. This application was resisted by the Commonwealth, which challenged the arbitrator’s power to make the directions sought. The arbitrator subsequently made a blanket confidentiality order in the following terms (subject to a proviso allowing disclosure to the parties’ legal advisers, etc.): 1.

Direct that neither party to the proceedings disclose or grant access to: (a) any documents or other material prepared for the purposes of this arbitration; (b) any documents or other material, whether prepared for the purposes of this arbitration or not, which reveal the contents of any document or other material which was prepared for the purposes of this arbitration; (c) any documents or material produced for inspection on discovery by the other party for the purposes of these proceedings; (d) any documents or material filed in evidence in these proceedings.

It was ordered by the Court of Appeal of New South Wales26 that procedural directions numbers 1(a), 1(b) and 1(d) (above) on confidentiality issued by the arbitrator be set aside on the ground that the arbitrator had no power to issue the said directions. Kirby P (with whom Priestley JA agreed on these points) held that, by making the said procedural directions,

24 International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 12. 25 (1995) 36 NSWLR 662. 26 Comprising Kirby P, Priestley JA and Meagher JA (dissenting).

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the arbitrator ‘failed to take into account the limits of the procedural powers afforded to him both by the contract and by s 14 of the [Commercial Arbitration Act 1984]’.27 Whilst Kirby P’s reasoning is couched in the language of an arbitrator having acted in excess of his jurisdiction, it is clear that the directions issued by the arbitrator were unlawful because the arbitrator failed to have proper regard to the public interest considerations which arose in that case: Where an arbitrator, in the course of giving a procedural direction, goes beyond the establishment of procedures necessary for the commercial arbitration between the parties and makes orders which impinge upon the public’s legitimate interests, the arbitrator goes outside the arbitration. […] [W]here the Court concludes that the direction made has gone beyond the purpose of the arbitration proceedings, and is thus extra-jurisdiction and unlawful, it will, in a proper case, provide relief. In my view, this is such a case. In my view, [the order made by the arbitrator] is impermissibly wide. Effectively, it puts a lid on the direct or indirect use of material prepared for the arbitration, no matter how significant that material may be to the public at large. For all this Court knows, it is both significant and urgent that the material should be made available, for the protection of public health and the restoration of the environment, both to the State Environmental Protection Authority and to other Federal and State agencies or even to the public generally. […] The arbitrator’s directions go beyond the control of the use of documents produced under the obligations of the arbitration. They extend to controlling the use by the Commonwealth of its own documents. They had the effect of limiting the operation of the Freedom of Information Act in a way which is contrary to, and in my view larger than, that envisaged by s 46 of that Act. They purport to remove from public debate matters of legitimate public concern.28 Some of these considerations were also foreshadowed in the slightly earlier decision of the High Court of Australia in Esso Australia Resources Ltd and others v. Plowman (Minister for Energy and Minerals) and others,29 where it was recongnised that competing public interest values might prevent certain kinds of disputes from being kept confidential (although this discussion did not take centre stage in that case because the remarks in question were made by way of obiter dicta).30 The Cockatoo Dockyard case involved the setting aside by the courts at the seat of arbitration of procedural directions made by an arbitrator in excess of his jurisdiction and

27 (1995) 36 NSWLR 662, 680. 28 (1995) 36 NSWLR 662, 679–681. 29 (1995) 128 ALR 391. 30 (1995) 128 ALR 391, 402–403, per Mason CJ; 407–408, per Brennan J.

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powers.31 However, it is submitted that the facts of the case also lend themselves to the possibility of an arbitral tribunal seated outside of Australia having to consider the effects of the Freedom of Information Act and any other laws (whether contained in statute or otherwise) which would be binding on or otherwise constrain the actions of an Australian public sector party to the arbitration. On that basis, similar orders on confidentiality made by a foreign-seated arbitral tribunal (even if contained in an award) would still not be recongnised and enforced in Australia since the same public interest considerations would arise. For the foregoing reasons, the application of a tight confidentiality regime is likely to be neither practical nor lawful in the vast majority of cases where public sector parties are concerned. Any directions or orders on confidentiality in such a situation would have to make provision (whether by way of exceptions to the rule of confidentiality or otherwise) for any mandatorily applicable laws. In practice, most national legal systems would compel disclosure of particular aspects of the arbitration (including its existence and outcome) where public sector or government organizations (and even listed companies) are involved – Model Clauses (3)d and (3)e of the MPO already contemplate the possibility that such disclosure may have to be made by a party to the arbitration, either spontaneously or upon request from an appropriate authority. In sum, our conclusion is that in the absence of: (i) any positive or mandatory law which would prevent an arbitral tribunal from declaring that confidentiality shall govern its proceedings (or particular aspects of it); and (ii) any provisions on confidentiality contained within the rules of the arbitral institution to which the parties have agreed (and assuming the parties have not agreed to waive their application), and arbitral tribunal may direct that confidentiality shall govern its proceedings. The next question which logically arises for consideration is whether the law of the seat would prohibit or otherwise constrain an arbitral tribunal from granting an exception to its own order directing the preservation of confidentiality. We answer this question in the negative. First, a typical procedural order directing the preservation of confidentiality would (from its inception) contain exceptions within that order (as is the case with the MPO), so confidentiality is effectively directed upon terms. Second, national laws on confidentiality in arbitration are (with a few exceptions)32 generally undeveloped,33 so (subject to exceptions)

31 One noted commentator has interpreted the decision in Cockatoo Dockyard as standing for the proposition that ‘arbitral tribunals do not have jurisdiction to lay down rules as to confidentiality that are to apply to the particular arbitration’: see Crookenden Q.C., Who Should Decide Confidentiality Issues? 25 Arb. Int’l 603, 604 (2009). It is suggested that the better view is that this case does not establish a blanket rule (i.e., one which prohibits a tribunal from making procedural rulings on confidentiality) as such, but merely demonstrates that such directions may be set aside where they are contrary to the law of the seat of arbitration or the laws of another jurisdiction which would have a mandatory effect on one or more of the parties. 32 See supra n. 13. 33 See International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration Annex 1, “A. Summary of National Laws” (2010).

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it is difficult to conceive of any national law that would preclude an arbitral tribunal from giving permission to a party to the arbitration to disclose information to a third party.34 As an example, in England (and also in Singapore, where the English common law position has been followed),35 case law has established that there is an implied term of confidentiality in the agreement to arbitrate which is subject to certain exceptions – in this regard, it has been observed by the English Court of Appeal in Emmott that ‘disputes about [the limits of the obligation of confidentiality in arbitration] are within the scope of the arbitration agreement and should be determined by the arbitral tribunal’.36 As is apparent from the following passage in Emmott, this is understood to mean that the arbitral tribunal would in fact be working as a common law court in defining the limits and exceptions to the obligation of confidentiality in any particular case (and would therefore have the power to authorize disclosure in accordance with the law of the seat, i.e. English law): It follows from this way of developing the law through implied obligations, that a dispute in relation to scope of the implied term of confidentiality and privacy between the parties relates to the interpretation of the terms of the arbitration agreement, in exactly the same way as would a dispute over the scope of an express term incorporated for example through an institutional rule. It follows from this that the decision on the ambit of the obligations as between the parties to the arbitration agreement should ordinarily, during the currency of the arbitration, primarily be one for the arbitral tribunal.37 Finally, for the avoidance of doubt, although an English or Singaporean arbitral tribunal is unlikely to have the power or a free hand to override the implied obligation of confidentiality in the sense of creating new exceptions (in advance of an application by a party based on specific facts before the arbitral tribunal) where none currently exists,38 the exceptions to the general rule of confidentiality set out in Model Clause 3 are likely to be accepted in common law countries. This is because they are all adapted from the confidentiality provisions in the New Zealand Arbitration Act 1996 as amended in 2007 (“NZAA”)39 and the Australian International Arbitration Act 1974 as amended in 2010 (“AIAA”),40 and in any event are all eminently sensible exceptions. Each of the nine exceptions to confidentiality set out in Model Clause (3) is considered individually below.

34 There may of course be laws relating to national security or official secrecy which might prevent such disclosure. 35 See supra n. 4. 36 [2008] EWCA Civ 184 at [84], per Lawrence Collins LJ. 37 [2008] EWCA Civ 184, 1387–1388, per Thomas LJ. 38 See Defining the Indefinable, 622: ‘the question remains as to whether or not a court or tribunal order for disclosure overrides the obligation of confidentiality’. 39 The New Zealand Arbitration Act 1996 was amended in 2007 by the Arbitration Amendment Act 2007 (2007 No 94) to include sections 14-14I. 40 The Australian International Arbitration Act 1974 was amended in 2010 by the International Arbitration Amendment Act 2010 (No.97, 2010) to include sections 23C-23G.

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4. Commentary on the Individual Provisions of the Model Procedural Order Model Clauses 1 & 2 (1) Except as Parties expressly agree in writing (whether in the arbitration agreement or otherwise) or leave is given by the Tribunal, Parties undertake to keep confidential all Confidential Information and the award. Additionally, the provisions of this Procedural Order will continue in force notwithstanding the termination of the arbitration. (2) In this Procedural Order, “Confidential Information” is defined as information that relates to the proceedings or to an award made in the proceedings and includes: a.

the existence of the proceedings;

the statement of claim, statement of defence, and all other pleadings, submissions, and statements;

any evidence (whether documentary or other) supplied to the Tribunal;

any notes made by the arbitral tribunal of oral evidence or submissions given before the Tribunal;

any transcript of oral evidence or submissions given before the Tribunal;

any rulings of the Tribunal; and

any award of the Tribunal,

but excludes any matter that is otherwise in the public domain. These are the basic provisions of the MPO which establish and define the obligation of confidentiality. Model Clauses (1) and (2) need to be read together, since the first states the duty of confidentiality and the second defines the scope or breadth of that duty (i.e., to which documents and materials the duty of confidentiality extends). The last sentence of Model Clause (1) (enclosed in square brackets above) contemplates that the provisions of the MPO are to continue to bind the parties to the arbitration even after its termination. However, this wording is optional and should only be used in the case where the MPO is adopted with the consent of the parties – only in that situation would all the provisions of the MPO continue to remain in force (since the MPO would then be binding by virtue of mutual agreement). In all other cases (i.e., where the MPO is not adopted by consent), alternative steps41 would have to be taken to ensure that the provisions in the MPO remain binding on the parties subsequent to the termination of the arbitration. Model Clause (2), in its present form as shown above, provides for the maximum scope of confidentiality over the materials that would be generated in the course of the arbitration.

41 See commentary on Model Clause (11), below.

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It is adapted from Article 39 of the Arbitration Rules of the Singapore International Arbitration Centre (6th ed., Aug. 1, 2016) (“SIAC Rules”) and section 15(1) of the AIAA. However, a high degree of confidentiality is not always sought by the parties or required by the circumstances of the dispute. The paradigm is investor-State arbitration, where there is clearly a public interest in any arbitration by an investor against a government, especially if the claim is for a large sum of damages.42 It is for this reason that investment arbitrations are often reported relatively freely; their awards are rarely secret and inevitably find their way into the public domain.43 In such cases (as well as arbitrations involving a party which is in the public sector or a government organization, e.g. the Cockatoo Dockyard case), where a lower level of confidentiality is required, Model Clause (2) can be tailored accordingly.44 For the avoidance of doubt, Model Clause (2) contains a rider that ‘any matter that is otherwise in the public domain’ does not amount to Confidential Information. This provision is necessary so that material which would not otherwise fall within the definition of Confidential Information does not so become by virtue of one (or both) parties producing it in the arbitration.

Model Clause 3 (3) Subject to (4) below, a party may disclose Confidential Information – For the reasons given earlier, the difficulty lies not with defining the rule of confidentiality but in enumerating all its exceptions. Model Clause (3) therefore sets out the principal exceptions which are likely to recur most often, but is not (and does not purport to be) an exhaustive list of all possible exceptions. As referenced below, these are adapted from legislation and the rules of various arbitral institutions. Model Clause (3) contains, at the beginning, a qualification that any disclosure pursuant to the MPO would have to be done in accordance with the procedure for disclosure as set out in Model Clause (4), which is elaborated on further below. No attempt is made to define ‘disclosure’ in the MPO, but it is noted that section 15(1) of the AIAA refers to its plain meaning: ‘disclose, in relation to confidential information, includes giving or communicating the confidential information in any way’. a.

for the purpose of making an application to any competent court of any State to recognise, enforce or challenge the award;

42 See Meg Kinnear & Aïssatou Diop, Arbitration Advocacy in Changing Times (ICCA Congress Series, Albert Jan van den Berg ed. 2010); 15 Rio 40–51 (2011), where the authors observed, inter alia, that: ‘the single most significant development in international investment arbitration is the increasing transparency of the process’ and that there is jurisprudence in the form of ‘a long line of investment awards [which] clearly [state] that there is no presumption of confidentiality in investment arbitration. That said, tribunals usually pair this acknowledgement with an admonition to the parties that public disclosure, including interaction with the media, should not jeopardize the orderly unfolding of the individual case’. 43 See Defining the Indefinable, 618. 44 See also the Singapore High Court case of Republic of India v Vedanta Resources PLC [2020] SGHC 208 for an example of the impact of confidentiality on investment treaty arbitrations.

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This is a clear exception to the confidentiality rule since the winning party in an arbitration must be allowed to disclose the contents of the award if it has to proceed with enforcement action to obtain its rights under the award. This was recongnised in the English case of Hassneh Insurance Co. of Israel v. Stuart J. Mew,45 where Colman J held that the duty of confidentiality is subject to the following exceptions: (i) Disclosure of the award (including its reasons) is permitted where it is reasonably necessary for the protection of an arbitrating party’s rights vis-à-vis a third party. (ii) An arbitrating party may bring the award and reasons into court for the purpose of invoking the supervisory jurisdiction of the court over arbitration awards and for the purpose of enforcement of the award itself. In Emmott, Lawrence Collins LJ likewise recongnised that: ‘It is plain that there are limits to the obligation of confidentiality. An award may fall to be enforced, or challenged, in a court.’46 Model Clause (3)a is adapted from Article 39.2(a), SIAC Rules; Article 30.1 of the London Court of International Arbitration Rules 2020 (“LCIA Rules”); Article 44(1) of the Swiss Rules of International Arbitration 2012 (“Swiss Rules”); Article 75(a) of the World Intellectual Property Organization Arbitration Rules 2020 (“WIPO Rules”); Article 22.2(a) and (b) of the Australian Centre for International Commercial Arbitration Rules 2016 (“ACICA Rules”); Article 45.3(a)(ii) of the Hong Kong International Arbitration Centre Administered Arbitration Rules 2018 (“HKIAC Administered Rules”); section 23D(6), AIAA; and Article 3(13), IBA Rules on the Taking of Evidence in Commercial Arbitration, 2010 edition (“IBA Rules”). b.

pursuant to the order of, or a subpoena issued by, a court of competent jurisdiction; Although the scenario described by this provision does not (strictly speaking) fall under any of the four principal exceptions to confidentiality established at English common law,47 Thomas LJ in Emmott noted that a ‘clear instance’ in which the obligation of confidentiality would not apply is where a party to the arbitration exercises its right to ‘provide information about the arbitration which it is compelled by law to provide’.48 Model Clause (3)b is adapted from Article 39.2(b), SIAC Rules; Article 74(a), WIPO Rules; Article 18(2)(c), ACICA Rules and section 23D(8), AIAA.

for the purpose of pursuing or enforcing a legal right or defending a claim; This provision is derived from Potter LJ’s fourth principal exception to the obligation of confidentiality in Ali Shipping Corporation v. Shipyard Trogir.49 His Lordship described that exception in the following terms:

45 [1993] Lloyd’s Rep 243, 249. See Defining the Indefinable, 613. 46 [2008] EWCA Civ 184 at [85]. 47 See supra n. 38. 48 [2008] EWCA Civ 184 at [129]. 49 [1999] 1 WLR 314.

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[…] disclosure when, and to the extent to which, it is reasonably necessary for the protection of the legitimate interests of an arbitrating party. In this context, that means reasonably necessary for the establishment or protection of an arbitrating party’s legal rights vis-à-vis a third party in order to found a cause of action against that third party or to defend a claim, or counterclaim, brought by the third party.50 (emphasis added) However, it is doubtful whether the qualification referring to a ‘third party’ is necessary (or indeed desirable) since legal proceedings may be brought by or against the opposing party in the arbitration itself (as opposed to a third party who is not involved in the arbitration). For example, this is typically the case in construction or project management contracts where there may be multiple contracts between two parties. These words are therefore omitted from Model Clause (3)c.51 Model Clause (3)c is adapted from Article 39.2(c), SIAC Rules; Article 44(1), Swiss Rules; Article 30.1, LCIA Rules; Article 77(iii), WIPO Rules; section 23D(5), AIAA; and section 14C(b)(i)(B) of the NZAA.52 The text of the first three precedents does not contain any such qualification, i.e. the exception to confidentiality is not limited to the pursuance or enforcement or a legal right against a third party. d.

where disclosure is made to a third party for the purpose of satisfying any legal obligation of disclosure owed (under any applicable law) to that third party;

As stated above, the position in England as articulated by Thomas LJ in Emmott is that disclosure may be permitted when an arbitrating party is compelled by law to do so, or would otherwise be under a legal duty to make such disclosure.53 A typical example of the latter scenario (specifically recongnised in Emmott)54 is an insurance contract, to which the doctrine of uberrimae fide (i.e., utmost good faith) applies; this means that the insured party must disclose all material facts to the insurer. Model Clause (3)d is a well-recongnised exception to confidentiality, and is adapted from Article 39.2(c), SIAC Rules; Article 30.1, LCIA Rules; Article 44(1), Swiss Rules; Article 42(2) of the Japan Commercial Arbitration Association Commercial Arbitration Rules 2019 (“JCAA Rules”); Article 75(b) WIPO Rules; Article 18.2(d), ACICA Rules; Article 45.3(a)(i), HKIAC Administered Rules; and section 23D(9), AIAA. e.

in compliance with the request or requirement of any competent regulatory body or other authority;

50 [1999] 1 WLR 314, 327. 51 See also, Defining the Indefinable, 624–625. 52 As amended by the Arbitration Amendment Act 2007. 53 See commentary on Model Clause (3)b, above. 54 [2008] Bus LR 1361, 1380, per Lawrence Collins LJ: ‘The existence and details of an arbitration claim may need to be disclosed to insurers, or to shareholders, or to regulatory authorities.’

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Model Clause (3)e is based on the same underlying principle as Model Clause (3)d, i.e. disclosure should be permitted when an arbitrating party is under an obligation to do so. However, Model Clause (3)(e) is necessary because some competent regulatory authorities do not derive their powers from statutory sources (e.g., those with only contractual sanctions). This exception to the obligation of confidentiality was also recongnised in Emmott.55 This provision is likewise adapted from Article 39.2(d), SIAC Rules; Article 42(2), JCAA Rules; Article 75(a), WIPO Rules; Article 22.2(e), ACICA Rules; Article 45.3(b), HKIAC Administered Rules; and section 23D(9) AIAA. f.

where disclosure is necessary to ensure that a party to the arbitral proceedings has a full opportunity to present its case and the disclosure is no more than reasonable for that purpose (which may include disclosure to legal and other advisers as well as potential witnesses and other parties assisting in the preparation of the case); This exception is intended to allow a party to the arbitration to conduct its case strategically, and is adapted from section 23D(4), AIAA and section 14C(b)(i)(A), NZAA. Although there is no express provision as such in the English cases, it is clear as a matter of common sense that a party may disclose Confidential Information to third parties (which could include potential witnesses or anyone who would be able to provide factual information on the matters in issue) if this is required for the party to prepare its case.56 In addition, the exception would (due in part to necessity) also extend to a broader category of persons encountered in everyday situations so as to include the taking of advice from persons who may not be professionals (e.g., friends or relatives); service providers like the managers of the hearing room (e.g., Maxwell Chambers or the hotel business centre); the party’s insurers; or even the printing shop to which documents prepared for the arbitration are sent for printing.57

The key is that any disclosure under Model Clause (3)f would have to go towards preparation of one’s case, and must be reasonable for that purpose. Accordingly, there is a requirement of proportionality which controls under Model Clause (3)f – this was contemplated by Potter LJ in Ali Shipping (albeit in the slightly different context of an exception to confidentiality where disclosure is necessary to protect the legitimate interests of an arbitrating party):

55 Ibid See also [2008] EWCA Civ 184, 1391, per Thomas LJ: ‘A clear instance is the right of a party to provide information about the arbitration which it is compelled by law to provide, such as to a regulator or in annual accounts.’ 56 See Defining the Indefinable, 627: ‘Where the disclosure of arbitration documents is made to professional or other advisers and persons assisting in the conduct of the arbitration, this should be treated as a legitimate exception to the obligation of confidentiality. Any disclosure to lawyers who are not involved in the arbitration should not be a problem because lawyers are subject to legal professional privilege in any case. Any disclosure made to persons assisting in the conduct of the arbitration should also be an exception to the obligation of confidentiality.’ 57 See Defining the Indefinable, 626: ‘The authorities do not discuss everyday situations which would most certainly be exceptions to the obligation of confidentiality, but one can conceive of a myriad of such everyday situations.’

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English law has recognised the following exceptions to the broad rule of confidentiality: (iv) disclosure when, and to the extent to which, it is reasonably necessary for the protection of the legitimate interests of an arbitrating party. I do not think it is helpful or desirable to seek to confine the exception more narrowly than one of ‘reasonable necessity’ I would not detach the word ‘reasonably’ from the word ‘necessary’, When the concept of “reasonable necessity” comes into play in relation to the enforcement or protection of a party’s legal rights, it seems to me to require a degree of flexibility in the court’s approach. For instance, in reaching its decision, the court should not require the parties seeking disclosure to prove necessity regardless of difficulty or expense. It should approach the matter in the round, taking account of the nature and purpose of the proceedings for which the material is required, the powers and procedures of the tribunal in which the proceedings are being conducted, the issues to which the evidence or information sought is directed and the practicality and expense of obtaining such evidence or information elsewhere.58 The concept of proportionality or ‘reasonable necessity’59 is also recongnised in the AIAA. Section 23D states, in material part, as follows: (4) The information may be disclosed if it is necessary to ensure that a party to the arbitral proceedings has a full opportunity to present the party’s case and the disclosure is no more than reasonable for that purpose. (5) The information may be disclosed if it is necessary for the establishment or protection of the legal rights of a party to the arbitral proceedings in relation to a third party and the disclosure is no more than reasonable for that purpose. (6) The information may be disclosed if it is necessary for the purpose of enforcing an arbitral award and the disclosure is no more than reasonable for that purpose. (7) The information may be disclosed if it is necessary for the purposes of this Act, or the Model Law as in force under subsection 16(1) of this Act, and the disclosure is no more than reasonable for that purpose. A condition for disclosure under Model Clause (3)f is that the disclosing party must, pursuant to Model Clause (4), use its best endeavours to obtain undertakings of confidentiality (i.e., not to disclose the information in question) from the persons to whom disclosure of Confidential Information is to be made, the terms of such undertakings to be agreed in

58 [1999] 1 WLR 314 at 326–328. 59 See also art. 75,WIPO Rules, which states in material part as follows: ‘(a) Except to the extent necessary in connection with a court challenge to the arbitration or an action for enforcement of an award, no information concerning the existence of an arbitration may be unilaterally disclosed by a party to any third party unless it is required to do so by law or by a competent regulatory body, and then only: (i) by disclosing no more than what is legally required’ (emphasis added).

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advance between the parties to the dispute. This is not framed as an absolute obligation to secure undertakings of confidentiality simply because in some situations (especially where fact witnesses are concerned) it might be impossible to do so.60 g.

if a party wishes to disclose information or documents already in that party’s possession prior to the commencement of the arbitration;

This provision is only logical since a party cannot be banned from disclosing a document which is: (i) in that party’s possession prior to the arbitration; and (ii) not confidential prior to the arbitration, simply because it is submitted as evidence in the arbitration. However, if the document in question is otherwise already in the public domain, then it would not be regarded as Confidential Information in the first place (as defined in Model Clause (2) above) – in those cases, the exception to confidentiality in Model Clause (3)g would not even have to be invoked. h.

with the consent of all the other parties to the arbitration;

This provision is uncontroversial, and is recognised (in some form or another) by the following: Article 30(1), LCIA Rules; Article 32(5) of the UNCITRAL Arbitration Rules (1976 edition);61 Article 48(4), ICSID Rules of Procedure for Arbitration Proceedings; Article 44(1), Swiss Rules; Article 77(i), WIPO Rules; Article 22.1, ACICA Rules; Article 45.1, HKIAC Administered Rules; and section 23D(2), AIAA. However, what may be tricky is the interpretation of consent, since consent may be either express or implied. For example, in a case before the Singapore High Court, AAY and others v. AAZ,62 the plaintiffs alleged that the defendant was in repudiatory breach of the arbitration agreement because the defendant disclosed confidential information pertaining to the arbitration to the authorities and certain individuals. The defendant argued, inter alia, that the plaintiffs had waived the right to confidentiality because they had commenced, in open court, an Originating Motion to challenge the impartiality of the arbitrator. After considering the respective positions of the parties, Chan Seng Onn J concluded that: the parties agreed by their conduct not to insist on confidentiality in the arbitration from the time the [Originating Motion] was commenced, and that the plaintiffs did not then again assert their right to confidentiality until the commencement of the present suit. Indeed, this mutual waiver would also fall within the category of exceptions to confidentiality based on consent […] Thus

60 See International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 21: ‘expert witnesses, stenographers and other non-parties who enter into a contract or engagement letter are often prepared to accept a confidentiality commitment in that document. The situation may be more complicated with fact witnesses or other non-parties who participate in the arbitration without any form of agreement.’ 61 However, the 2013 edition of the UNCITRAL Arbitration Rules does not contain any provisions on the confidentiality of the arbitration. 62 [2009] SGHC 142 at [110]-[137].

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even if the mutual waiver was only suspensory, the defendant’s disclosure fell within this suspensory period and was thus not in breach of confidentiality.63 i.

pursuant to an order by the Tribunal on application by a party with proper notice to the other parties; or

This provision sets out the residual power of the arbitral tribunal to grant permission to disclose Confidential Information on an ad hoc basis after considering the respective positions of the parties on the issue. It seeks to address the issues raised earlier, i.e. the categories of exceptions to the obligation of confidentiality are not hermetically sealed, and provision should be made for an arbitral tribunal to consider each application for disclosure on a case-by-case basis.64 The Model Clause on confidentiality proposed by the International Law Association (which is intended to operate on the basis of consent between the parties) contains a similar provision: The arbitral tribunal may permit further disclosure of Confidential Information where there is a demonstrated need to disclose that outweighs any party’s legitimate interest in preserving confidentiality.65 This aspect of the MPO is designed to address a shortcoming concerning confidentiality which is present in virtually all the institutional rules and national legislation (save for those which are referenced below in this paragraph), i.e. these do not say who will determine whether disclosure ought to be permitted in a case which does not fall within the defined exceptions to confidentiality.66 Similar provisions are to be found only in Article 39.2(3), SIAC Rules; section 23E(1), AIAA; and section 14D(2), NZAA. Model Clause (3)i is intended to be read in conjunction with Model Clause (6), which sets out the basic procedure for the arbitral tribunal to deal with an application for the disclosure of Confidential Information. j.

as permitted under any other exception recognised by the applicable law.

While confidentiality obligations are not mandatory as a matter of law in most jurisdictions, parties typically intend the default rules of the applicable procedural law, i.e. the law of confidentiality in arbitration of the seat (and any relevant exceptions under that law), to apply to the arbitration. In such cases, this Model Clause (3)j will simply serve as an express acknowledgement of the foregoing default rule.

63 [2009] SGHC 142 at [137]. 64 See Emmott v. Michael Wilson & Partners, [2008] EWCA Civ 184 at [107], per Lawrence Collins LJ: ‘In my judgment the content of the obligation may depend on the context in which it arises and on the nature of the information or documents at issue. The limits of that obligation are still in the process of development on a case-by-case basis.’ (emphasis added). 65 International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 21. 66 On the issue of who should be the arbiter of disputes as to confidentiality, see the commentary on Model Clause (6), below.

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Model Clauses 4 & 5 (4) Subject to (6) below, before a party discloses Confidential Information as authorised in (3) above, that party must provide to the other party/parties seven (7) days’ prior written notice of its intention to disclose, giving: a.

written details of the Confidential Information to be disclosed;

the party/parties to whom disclosure is intended to be made; and

the reasons for the disclosure.

(5) Where the disclosure of Confidential Information is sought to be made pursuant to (3) above, the information to be furnished to the other party need only contain a general description of the Confidential Information sought to be disclosed and the classes of persons to whom description is to be made (without identification of those persons). The disclosing party must use its best endeavours to obtain an undertaking of confidentiality, given in favour of the party opposing disclosure, from any individual or entity to whom disclosure of any Confidential Information may be made. The terms of such undertaking should be agreed in advance of such disclosure by the party opposing disclosure (who will not be entitled to the names of the parties to whom disclosure is to be made). If there is a dispute in relation to the terms of the undertaking, this should be referred to the Tribunal for determination. If no such undertaking of confidentiality can be obtained, seven (7) days’ notice is to be given to all other parties identifying the individual or entity concerned. If any objection is raised by any other party within the period of notice, the matter should be referred to the Tribunal to determine the extent of the Confidential Information that may be disclosed and any other steps that should be taken to preserve confidentiality. The provisions in these Model Clauses (4) and (5) provide for a mechanism for the invocation of a permitted exception to be tested before it is exercised, in the sense that the party seeking to make disclosure would be required to give notice to the other side, and also to allow the other side to object before the matter is argued before the arbitral tribunal pursuant to Model Clause (8). Model Clause (5) provides that, where disclosure is sought to be made pursuant to Model Clause (3)f, the party seeking disclosure must use its best endeavours to obtain an undertaking of confidentiality from any individual or entity to whom disclosure of Confidential Information is to be made. However, as is evident from the text in Model Clause (5), it does not follow that permission to disclose ought to be denied automatically where the disclosing party is unsuccessful in obtaining such undertakings. Model Clause (5) provides for recourse to the arbitral tribunal in such circumstances. This is intended to cover the situation where a witness of fact refuses to give an undertaking of confidentiality – it may not be appropriate that an arbitrating party should, for that reason, be precluded from calling that person as a witness. Rather, it should be possible for the witness to appear by the giving of appropriate directions as to what information can be given to the witness and how that witness’s evidence is taken to preserve confidentiality. A similar process would apply for a witness testifying under subpoena.

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Model Clause (6) (6) None of the requirements of (4) above is to apply in the following situations: a.

where disclosure of Confidential Information is made pursuant to (3)a above; and

Understandably, parties would be reluctant to agree to the provisions in Model Clause (4) in many situations since the requirement of seven days’ notice prior to disclosure may add to the delay and costs of the arbitration (where disclosure is challenged). These provisions could also be problematic in cases where it is contemplated that disclosure may need to be made at short notice on a regular basis (e.g., to a related entity in the same group of companies as the party to the arbitration). Accordingly, this Model Clause (6) makes allowance for the following kinds of situations, which would not be subject to the notice period stipulated in Model Clause (4): (i) the disclosure of Confidential Information pursuant to Model Clause (3)a, since any party would be legally entitled to do so without giving notice; and (ii) the disclosure of Confidential Information where the party seeking to disclose Confidential Information has (after providing the opposite side with both the particulars and extent of Confidential Information which is sought to be disclosed) obtained the written consent of all other parties to the arbitration to do so – a situation in which there is unlikely to be a dispute.67

Model Clause (7) (7) If the other party/parties object(s) to disclosure pursuant to (5) above within the period of seven (7) days, no disclosure may be made until the issue has been resolved by the Tribunal in the manner set out in (8) below. This Model Clause (7) simply ensures that the system of notification envisaged by Model Clauses (4), (5) and (8) work properly in practice, by prohibiting disclosure of Confidential Information where opposed by one or more parties until the Tribunal has decided the issue.

Model Clause (8) (8) If a question arises in the arbitral proceedings as to whether any Confidential Information should be disclosed, and at least one of the parties requests the

67 This provision overlaps with Model Clause (3)h, but the latter provision is broader and is also intended to include situations where consent is implied – this is not always plain on the facts, and may require a determination by the tribunal.

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Tribunal to determine that question, the Tribunal, after giving each of the parties an opportunity to be heard, may in its discretion make or refuse to make an order allowing all or any of the parties to disclose Confidential Information. This provision applies where there is a contentious application for the disclosure of Confidential Information, and is primarily intended to provide for the situation referred to in Model Clause (3)i, but would also be applicable to that described in Model Clause (5). Model Clause (8) should therefore be read in conjunction with the latter two provisions. The pertinent question to ask here is who should be the arbiter of disputes as to confidentiality during the course of the arbitration. The most practicable solution is that the arbitral tribunal before which the dispute is brought should deal with issues of confidentiality and disclosure arising in the arbitration. The real concerns here are with: (i) the enforceability of orders on confidentiality made by the arbitral tribunal (and the related question of the jurisdiction of the arbitral tribunal to make such orders);68 and (ii) what happens after the arbitral tribunal becomes functus officio (i.e., how should disputes as to confidentiality be resolved after the termination of the arbitration). The second question is dealt with separately below.69 On the first question, the English position in Emmott70 is that the arbitral tribunal seized of the dispute would have jurisdiction (and indeed would be the appropriate arbiter) to determine the limits of the obligation of confidentiality between the parties because such obligation arises only as a result of the agreement to arbitrate and subsequent referral of the dispute to arbitration. Australia and New Zealand have also adopted the same position in their recent legislation: see section 23E(1), AIAA and section 14D(2), NZAA respectively – both of which empower an arbitral tribunal to allow (or deny) the disclosure of confidential information pursuant to an application by a party to do so.71 Model Clause (8) may therefore be invoked not only in cases where it is uncertain whether the intended disclosure of Confidential Information by a party falls within a recongnised or pre-defined exception to confidentiality, but also allows an arbitral tribunal to permit disclosure where the justice of the case requires or where it would be otherwise appropriate to do so. In other words, the arbitral tribunal would be able to tailor the exact scope of the obligation of confidentiality and its exceptions to the case in question, so there is indeed no ‘one-size-fits-all’ definition of the confidentiality rule or its exceptions.

68 See International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 17: ‘As with all legal obligations, one of the fundamental questions relates to the possibility of enforcement. This raises the issue of who has the power to adjudicate on the existence and the extent of a confidentiality obligation in a given circumstance, to authorize or prohibit the disclosure of certain information and to decide on the consequences and remedies in case of breach. This is an area on which the sources are mostly silent’ (emphasis added). 69 See commentary on Model Clause (11), below. 70 See supra n. 36. 71 On the applicability of these provisions, see supra n. 13.

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We now examine the theoretical basis of the arbitral tribunal’s jurisdiction to determine issues of confidentiality. Simon Crookenden Q.C., has argued that, in order to answer the question of who decides the issue of confidentiality (an issue concerning the arbitral tribunal’s jurisdiction), the source of the obligation of confidentiality first needs to be identified.72 The answer to this question suggested by Mr Crookenden (with which we agree) is as follows: English law treats the obligation of confidentiality as being an implied contractual obligation arising out of the nature of arbitration itself. the confidentiality obligation arises under the particular reference to arbitration rather than under the agreement to refer. No obligation of confidentiality can arise unless and until there is a reference to arbitration. The tribunal’s substantive jurisdiction is limited to disputes referred, whereas the procedural jurisdiction extends to all matters in connection with the reference which, in accordance with the applicable curial law, are within the powers of the tribunal to determine. The tribunal has power (subject to any specific agreement of the parties) to decide all procedural and evidential matters. It is suggested that, despite the lack of examples in the case law, the obligation of confidentiality is best regarded as an implied obligation of the particular reference to arbitration that gives rise to a substantive and not merely a procedural contractual right which, if breached, can give rise to a claim for damages and, in an appropriate case, can found a claim for a declaration or an injunction. Such a claim would, it is suggested, be within the scope of most common form agreements to refer. Breach of an agreement to refer that forms part of but has an existence independent of the principal contract are usually within the scope of the agreement to refer. In the same way, breaches of the contractual obligations that arise on a particular reference, which arise out of but have an existence independent of the agreement to refer, would, it is suggested, be within the scope of agreements to refer all disputes ‘arising out of’ or ‘in connection with’ the principal contract containing the agreement to refer.73 (citations omitted) In sum, and for the reasons given above, it is submitted as follows: (i) The English common law position is that the obligation of confidentiality is implied in every agreement to arbitrate. (ii) Since the obligation of confidentiality arises out of the nature of the arbitration itself, the arbitral tribunal would be competent to rule on all aspects of the duty

72 See Simon Crookenden Q.C., Who Should Decide Confidentiality Issues? (2009) 25 Arb. Int’l 603, 606. 73 Ibid, at 606–609.

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of confidentiality in a case where the standard form of arbitration agreement is adopted.74 (iii) The jurisdiction of the arbitral tribunal includes, inter alia, the making of procedural directions to facilitate the preservation of confidentiality and permissible disclosures since the procedural jurisdiction of the arbitral tribunal extends to all matters connected with the arbitration.75 (iv) The arbitral tribunal would additionally have the jurisdiction to award sanctions for the breach of confidentiality since English law recognizes the doctrine of confidentiality (of which confidentiality in arbitration is one facet) as generally giving rise to substantive rights and obligations as between the party entitled to confidentiality and those under an obligation to preserve confidentiality.76

Model Clause (9) (9) After the Tribunal has become functus officio, its functions under this Procedural Order are to be exercised by the appropriate supervisory court at the seat of the arbitration. This provision is essentially a forum selection clause since it confers jurisdiction on the courts at the seat of the arbitration to adjudicate disputes in relation to confidentiality and its exceptions arising from the MPO. For this reason, Model Clause (9) has to be consented to

74 See also International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration 17 (2010): ‘Insofar as such obligations arise directly or by implication from the arbitration agreement it would seem that they fall within the jurisdiction of the arbitrators, although it cannot be excluded that proceedings can also be brought before a national court in parallel to those before the arbitral tribunal. Of course, the powers of the arbitrators in this respect will reach only as far as the assumed breaches of the duties of confidentiality are attributable directly to the parties – since only they are bound by the arbitration agreement’; 19: ‘If the parties have agreed to arbitral confidentiality, the arbitral tribunal has jurisdiction over disputes between the parties regarding the agreed confidentiality.’ 75 In this regard, art. 19(2) of the UNCITRAL Model Law on International Commercial Arbitration provides that: ‘Failing [agreement between the parties on the procedure to be followed by the arbitral tribunal in conducting the proceedings], the arbitral tribunal may, subject to the provisions of [the Model Law], conduct the arbitration in such a manner as it considers appropriate’. See Howard M. Holtzmann & Joseph E. Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary 564 (Kluwer Law and Taxation Publishers, 1989): ‘The UNCITRAL Secretariat observed that Article 19, along with Article 18, was the “Magna Carta of Arbitral Procedure” and said that these Articles might be regarded as “the most important provision[s] of the model law.” Moreover, this principle is at the heart of modern systems of arbitration; it expresses a profound confidence in the ability of parties and arbitrators to conduct the arbitration in a fair and orderly manner so as to arrive at a just resolution of a dispute.’ See also Nigel Blackaby & Constantine Partasides with Alan Redfern & Martin Hunter, Redfern and Hunter on International Arbitration para. 5.14 (5th ed. 2009): ‘In general terms, the arbitral tribunal enjoys a very broad power to determine the appropriate procedure. Indeed, this broad power is one of the defining features of arbitration over courts where a fixed procedure exists.’ 76 See commentary on Model Clause (9), below, where possible sanctions for breach of confidentiality are discussed.

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by all parties to the dispute.77 However, we foresee that, once the parties accept the arbitral tribunal as being the appropriate referee of all disclosure and confidentiality disputes within an arbitration, it will not be difficult to persuade them that they need to agree on an external party to fulfil that role after the end of the arbitration so that any dispute as to confidentiality arising after the award is issued may be resolved. We pause at this juncture to consider the duration of any obligation of confidentiality because Model Clause (9) presupposes that duty to preserve confidentiality continues to remain in force even after the end of the arbitration. As far as English and Singapore law are concerned, the obligation of confidentiality is indefinite (assuming none of the exceptions apply), so the question of duration would not arise if the issue is brought before English or Singaporean courts. However, the position is less certain under other legal systems; this has therefore led the International Law Association to the following conclusion in its report: The duration of confidentiality obligations, as regards both the moment when it arises and when it ends, is equally the subject of uncertainty and is not dealt with in the sources.78 It is for this reason that the words in Model Clause (1) set out within the square brackets were inserted – this sentence provides that the obligation of confidentiality shall bind the parties even after the termination of the arbitration. Since this amounts to an agreement between the parties to preserve confidentiality, this order can only be made with the consent of all the parties to the arbitration. The interplay between the forum in which the dispute as to confidentiality is heard (after the arbitration has come to an end) and the duration of the confidentiality obligation requires us to consider what would happen in each of the following four situations: (i) where Model Clause (9) is adopted (by consent) and an application is brought before the courts at the seat of the arbitration; (ii) where Model Clause (9) is adopted (by consent) and an application is brought before the courts elsewhere;

77 The model clause proposed by the International Law Association is likewise effective only with the consent of all parties to the arbitration. See International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration 21 (2010): ‘This confidentiality provision survives termination of the contract and of any arbitration brought pursuant to the contract. This confidentiality provision may be enforced by an arbitral tribunal or any court of competent jurisdiction and an application to a court to enforce this provision shall not waive or in any way derogate from the agreement to arbitrate.’ 78 International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration 18 (2010). For this reason, the International Law Association has made the following recommendation at 18–19: ‘Due to the current absence of universally recongnised standards and to the variety of sources that may impact on the situation, these and other uncertainties will often be largely unavoidable. Parties will simply have to take stock of this state of things and be prepared for different outcomes, also having regard to the different rules that may reasonably be held to apply. The parties can, however, by agreement provide for confidentiality and determine the scope, extent and duration of the obligation as well as the available remedies.’

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(iii) where Model Clause (9) is not adopted and an application is brought before the courts at the seat of the arbitration; and (iv) where Model Clause (9) is not adopted and an application is brought before the courts elsewhere. Scenarios (i) and (ii) above are the most straightforward – since Model Clause (9) is effectively a forum selection clause, the courts at the seat or arbitration are likely to accept jurisdiction (to act as the arbiter of confidentiality in accordance with the provisions of the MPO) in the case of (i), and courts in a state other than the seat of arbitration would typically decline jurisdiction in the case of (ii).79 In scenario (iii), if the seat of arbitration is England or Singapore,80 the obligation of confidentiality would continue to subsist even after the termination of the arbitration, and the courts there would therefore be able to determine any disputes as to confidentiality. These disputes would be determined in accordance with the position at common law and not the provisions in the MPO since Procedural Orders (by definition) do not continue to bind the parties after the arbitration has come to an end.81 Accordingly, there would not be difficulty either in enforcing the obligation of confidentiality or in seeking permission to disclose confidential information in such a situation. As for scenario (iv), there is no certainty at all that the courts of a foreign country (i.e., not the courts at the seat of the arbitration) would continue to recognize and uphold the obligation of confidentiality since the laws of that country may not even provide for confidentiality in arbitration in the first place. This is especially so if the words in Model Clause (1) marked in square brackets82 are not adopted (e.g., because one or more parties have withheld their consent to the inclusion of those words). In that case, if confidentiality is to be preserved even after the termination of the arbitration, the arbitral tribunal should enshrine the confidentiality order in its award. It is submitted that an order made as to confidentiality in the arbitral tribunal’s award may be recognised and enforced pursuant to

79 Sir Lawrence Collins (Ed.), Dicey Morris and Collins on the Conflict of Laws, 513–514 (vol. 1, 14th ed. Thomson, Sweet & Maxwell 2006). 80 The obligation of confidentiality is also likely to subsist after the termination of the arbitration for an arbitration seated in Australia or New Zealand, provided the statutory provisions on confidentiality are applicable to the dispute: see supra n. 13. 81 However, this is unlikely to give rise to a different result in practice since the provisions of the MPO are drafted based on the common law exceptions to confidentiality. 82 See commentary on Model Clause (1), above.

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Article III of the New York Convention.83 The arbitral tribunal’s decision on confidentiality, once encapsulated in the award, constitutes a binding determination as between the parties – as opposed to procedural directions, which do not have the status of an award and may not be binding once the final award has been made.84 Accordingly, the parties would be bound to maintain the obligation of confidentiality (subject to exceptions similarly stipulated in the award) even after the arbitral tribunal has become functus officio. However, before any such award can be made, it must be considered whether an arbitral tribunal would be acting within its jurisdiction in making an award containing orders directing the preservation of confidentiality as well as the scope of that duty. Where the parties have chosen a seat of arbitration, the laws of which ensure the confidentiality of the arbitration (e.g., England or Singapore, and perhaps also Australia or New Zealand),85 an arbitral tribunal has the inherent power to make an award on the issue of confidentiality as a natural consequence of the substantive duty of confidentiality contracted for (through their choice of the seat) by the parties. The reason is straightforward – the jurisdiction of an arbitral tribunal is not restricted to the granting of substantive remedies; procedural reliefs may also be granted in the award provided these are made in accordance with the law of the seat of the

83 Article III of the New York Convention states as follows:‘ Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles. There shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards to which this Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards.’ It is submitted that, in cases where the obligation or scope of the duty of confidentiality is disputed, any award containing the tribunal’s orders on confidentiality will be recongnised and enforced in accordance with Article III of the New York Convention. See Domenico Di Pietro, Enforcement of Arbitration Agreements and International Arbitral Awards: The New York Convention in Practice (Emmanuel Gaillard & Domenico Di Pietro eds., Cameron May 2008), 150:‘It is advocated that only orders which finally settle one or more of the issues which have validly come within the jurisdiction of the arbitral tribunal should qualify for recognition and enforcement under the [New York Convention]. According to the so-called “finality test”, the awards that qualify for recognition and enforcement under the [New York Convention] are all the awards which finally adjudicate one of the several likely disputes which have been submitted to the jurisdiction of an arbitral tribunal’ (citations omitted). In cases where there is no dispute as to confidentiality, the tribunal may issue a consent award on confidentiality which would equally be capable of recognition and enforcement under Article III of the New York Convention. 84 See Nigel Blackaby & Constantine Partasides with Alan Redfern & Martin Hunter, Redfern and Hunter on International Arbitration, para. 9.19 (5th ed., 2009). 85 See supra n. 13.

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arbitration86 (whereas the law applicable to the merits determines what substantive reliefs may be granted).These orders on confidentiality would be in the nature of a declaratory relief, which is generally understood as establishing the legal position definitively and has a binding effect on the parties as such.87

Model Clause (10) (10) The orders in this Procedural Order replace the provisions of [Rule 39 of the SIAC Rules 2016]. As noted above, the reference in this Model Clause (10) to the SIAC Rules 2016 is merely a placeholder, and parties should refer to the arbitral rules they are using when adopting this MPO. The MPO is designed as a substitute for the applicable rules of the arbitral institution (assuming one has been agreed between the parties) since most arbitral institutions do not have rules which address the issue of confidentiality and its exceptions comprehensively. As explained earlier, this provision has been inserted to guard against a dispute in the event that the orders contained within the MPO are inconsistent with the rules of the arbitral institution selected by the parties. In other words, it would be preferable to start with a clean slate since the MPO is intended to be comprehensive. The wording in Model Clause (10) would therefore be a necessary pre-condition for the application of the orders contained within the MPO in those cases. Although any modification to institutional

86 See Broches, Recourse Against the Award; Enforcement of the Award, UNCITRAL’s Project for a Model Law on International Commercial Arbitration (ICCA Congress Series No 2, 1984), 208 cited in Nigel Blackaby & Constantine Partasides with Alan Redfern & Martin Hunter, Redfern and Hunter on International Arbitration para 9.05 (5th ed. 2009):‘“Award” means a final award which disposes of all issues submitted to the arbitral tribunal and any other decision of the arbitral tribunal which finally determines any question of substance or the question of its competence or any other question of procedure but, in the latter case, only if the arbitral tribunal terms its decision an award.’ See also Julian D.M. Lew, Loukas A. Mistelis & Stefan M. Kröll, Comparative International Commercial Arbitration paras. 24–70 (Kluwer Law International 2003): ‘A wide range of remedies are available to arbitrators. The prevailing view is that every remedy that is available in litigation should be available in arbitration as well. The issue as to the classification of remedies as procedural or substantive will determine whether the relevant applicable law is the law governing the arbitration or the law applicable to the merits’ (citations omitted). For example, see sec. 12(1)(a), NZAA, which permits an arbitral tribunal (unless otherwise agreed by the parties) to ‘award any remedy or relief that could have been ordered by the High Court if the dispute had been the subject of civil proceedings in that court’. 87 See Nigel Blackaby & Constantine Partasides with Alan Redfern & Martin Hunter, Redfern and Hunter on International Arbitration para. 9.63 (5th ed. 2009), and Julian D.M. Lew, Loukas A. Mistelis & Stefan M. Kröll, Comparative International Commercial Arbitration paras. 24–76 (2003): ‘A tribunal may be asked to make a declaratory award or an award which contains a declaration about the rights of the parties. This may happen as a matter of the law governing the arbitration proceedings or as a result of an agreement of the parties’ (citations omitted).

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rules usually requires careful consideration,88 the MPO has been crafted as a standalone framework on confidentiality which could supplement (without being inconsistent with) the rules of virtually any arbitral institution.

Model Clause (11) (11) The Tribunal has the power to take appropriate measures including issuing an order or award for sanctions or costs if a party breaches any of the orders set out in this Procedural Order. Any duty to preserve confidentiality (whether for the duration of the arbitration or subsequent to the termination of the arbitration) would be toothless if the arbitral tribunal did not have the appropriate powers to sanction breaches of that duty. In every case where an arbitral tribunal has jurisdiction over a dispute as to confidentiality, it would be able to exercise the full range of powers conferred upon it by law.89 Model Clause (11) therefore merely describes those powers of the arbitral tribunal which are already extant in law. For an arbitration seated in England or Singapore, it is submitted that an arbitral tribunal (or even a court, if such an issue arises before it) would be able to award damages for breach of confidentiality in the arbitration,90 provided that the harm so caused is monetarily ascertainable.91 The effectiveness of Model Clause (11) in other jurisdictions where the duty of confidentiality is not recongnised is uncertain since this provision does not clothe an arbitral tribunal with powers beyond those existing in law. In other words, an arbitral tribunal may only make an order or award to pay damages for the breach of confidentiality where this

88 See Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing, 59 (3rd ed., Kluwer Law International, 2010): ‘It is usually possible to modify aspects of an institution’s arbitration rules by agreement. For example, subject to mandatory law, parties can generally alter time limits, provide expressly for certain types of discovery (or for no discovery), prohibit the arbitrators from granting certain kinds of relief, and the like. Beyond this, however, great care should be exercised in adopting and drafting modifications to institutional rules. Leading institutional arbitration rules are the product of detailed consultation and review by experienced practitioners and institutional administrators. Adopting changes to their products can either disrupt existing mechanisms or produce unforeseen results. Moreover, there are elements of institutional arbitration rules which may not be subject to modification by the parties’ agreement (for example aspects of the role of the ICC International Court of Arbitration). Finally, when drafting an arbitration agreement that modifies institutional rules, care should be taken to ensure that the modifications produce a clear and specific change, rather than merely creating a confusing or unworkable conflict between any additional provisions and the text of the institutional rules themselves.’ 89 See commentary on Model Clause (8), above. 90 See supra n. 70. 91 See Ileana M. Smeureanu, Confidentiality in International Commercial Arbitration 181 (Kluwer Law International 2011).

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is permissible under the law of the seat of arbitration.92 However, it is far less controversial (and indeed generally accepted) that an arbitral tribunal has the power to allocate costs at the end of the arbitration. Model Clause (11) provides that an arbitral tribunal may punish a breach of confidentiality by means of a costs sanction;93 this part of Model Clause (11) is unlikely to be problematic.94 Model Clause (11) is derived from Article 39.4 of the SIAC Rules, which states as follows: ‘The Tribunal has the power to take appropriate measures, including issuing an order or award for sanctions or costs, if a party breaches the provisions of this Rule’ (emphasis added). The words ‘including making an order to pay damages’ have been substituted for the italicized text because of the difficulties associated with the imposition of penal sanctions95 (as opposed to general damages for the breach of confidentiality, which are intended to compensate quantifiable loss caused by such breaches).

92 See Ileana M. Smeureanu, Confidentiality in International Commercial Arbitration 181 (2011). See also International Law Association, The Hague Conference, Confidentiality in International Commercial Arbitration (2010), 20: ‘Where an arbitral tribunal has jurisdiction over an arbitral confidentiality dispute, it may make use of the entire range of powers conferred on it by law, rules or agreement. For example it may order injunctive or declaratory relief, award damages, bar the introduction into the record of evidence derived from a confidentiality breach, treat the breach as a breach of the underlying contract or grant any other remedies appropriate in the circumstances and available to it. However, such power would not extend to making awards or orders against persons who are not party to the arbitration.’ 93 See, for example Meg Kinnear & Aïssatou Diop, Arbitration Advocacy in Changing Times (ICCA Congress Series, Albert Jan van den Berg ed., Kluwer Law International 2010), 15 Rio 49 (2011): ‘Ultimately, a tribunal might award costs against a party whose conduct with respect to media communications and confidentiality orders is inappropriate. In one case, Pope & Talbot v. Canada, a NAFTA tribunal awarded costs against claimants where claimants’ counsel provided the media with a document that had been sent in error by an administrative officer of the respondent and where this error should have been obvious to counsel. In that case, the tribunal ordered the claimant to pay $10,000 forthwith and expressed its wish that claimants’ counsel voluntarily pay this sum personally’ (citations omitted). 94 On a related point, it has also been suggested that a tribunal may draw adverse inferences against the disclosing party based on the disclosures made in breach of confidentiality, but that ‘this would require a very particular set of circumstances to fall within the correct ambit of the doctrine of adverse inferences’: see Meg Kinnear & Aïssatou Diop, Arbitration Advocacy in Changing Times (ICCA Congress Series, Albert Jan van den Berg ed., 2010), 15 Rio 49 (2011). 95 See Ileana M Smeureanu, Confidentiality in International Commercial Arbitration, 181 (2011): ‘Few jurisdictions recognize, for instance, punitive damages. Assuming that this option would be available under domestic legislation, the case for punitive damages for gross or outrageous breaches of confidentiality has been rarely recognised in legal literature. It is well-established that punitive damages cannot be granted for breach of contract, but this is precisely what a breach of confidentiality would entail. It is nonetheless hard to imagine what would make a breach of confidentiality so egregious as to require such a drastic sanction. Plus, punitive damages per se are not recongnised in civil law jurisdictions’ (citations omitted). See also Nigel Blackaby & Constantine Partasides with Alan Redfern & Martin Hunter, Redfern and Hunter on International Arbitration, paras. 9.46 to 9.51(5th ed. 2009).

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5 Conclusion The reader is now aware that existing institutional rules do not adequately address the problems associated with confidentiality and its exceptions. In particular, virtually all of these do not provide a holistic solution capable of dealing with unexpected situations where a hitherto unrecongnised exception to confidentiality needs to be created. The MPO is intended as a practical and effective solution that can be taken by arbitrating parties to address these shortcomings. The advantage of this solution is that the parties may now tailor the scope of the obligation of confidentiality to the circumstances of the case so as to meet their particular requirements. Most importantly, parties who adopt the MPO will no longer be constrained to justify disclosure by attempting to fit a given situation into the limited exceptions to confidentiality which are currently provided for in institutional rules or national legislation. In time to come, it is hoped that both counsel and arbitrators will appreciate that a code on confidentiality in international arbitration needs to be developed through a collaborative effort (similar to how the International Bar Association’s Rules on the Taking of Evidence in International Commercial Arbitration were created and are now accepted as ‘soft law’). Our MPO is intended to be the first contribution towards the development of that code, but it is certainly not the last word.

6 Afternote The proposed MPO is an attempt to create a self-contained and comprehensive confidentiality regime that is suitable for an international arbitration that may be characterised as a normal commercial dispute. However, there are certain categories of disputes where it is in the interest of both parties to favour much stronger confidentiality rules and narrower exceptions; the main category that comes to mind is intellectual property disputes. In such cases, where the parties know best what kind of confidentiality restrictions meet their needs, the tribunal would be wise to take seriously counter-proposals agreed between the parties as a suggested replacement for the MPO. In cases where there is a real concern that information and documents disclosed in the arbitration contain highly sensitive commercial secrets, access to such documents may have to be restricted to a very limited number of persons. One common example is to create a “confidentiality club”, sometimes known as an “Attorney’s Eyes Only” (“AEO”) classification, where documents and information are categorised by varying degrees of sensitivity, and only certain classes of a party’s legal and supporting team will be allowed access to defined categories of documents and information. This procedure was discussed in the Singapore case of China Machine New Energy Corp v Jaguar Energy Guatemala LLC, in both the High Court96 and Court of Appeal.97 The tribunal’s order in that case that documents be produced on an AEO basis was found by both courts to be valid despite curtailing the appellant’s ability to present its case, as that order represented a compromise between the appellant’s and respondent’s interests.98 However, this conclusion

96 [2018] SGHC 101. 97 [2020] SGCA 12. 98 [2020] SGCA 12, at [113].

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is necessarily a fact-specific one. Parties seeking such an order and tribunals making such an order should ensure that their proposed confidentiality regime does not in practice cross the line into unduly preventing a party from having a reasonable opportunity to present its case in the actual carrying out of the order, however justified it might appear to be at the time of making the order. The principal author notes that, in a recent case where he sat as Presiding Arbitrator, he was content to accept a confidentiality clause jointly proposed by the parties that provided for only four exceptions: (1) with the tribunal’s permission upon consulting both parties; (2) as authorised by the law of the seat; (3) documents that were already publicly available; and (4) documents disclosed in accordance with a non-disclosure agreement already in force between the parties. If it is appropriate for parties to tailor the MPO, it is not a much larger leap to suggest that they can also remove whichever exceptions they wish.

The Case for Better, and Better-armed Arbitrators Dr Jacques Werner*

At the heart of the arbitration system... Is the arbitrator, as was constantly repeated by our colleague Serge Lazareff (who added “usually”): “and arbitration is [sic] as good as are the arbitrators”? Arbitrators have since the Middle Ages gone through three phases, and are now entering a fourth.

The time of the commercial men Since the 15th Century, merchants-turned-arbitrators in the main European seaports had prided themselves on contributing to the public good by settling the trade disputes of their particular industry, be it maritime, insurance, grain or other commodities. These disputes, involving parties from diverse countries and revolving often on the particulars of the trade, appeared to be settled best by the disputants’ peers, who performed such services at no or token remuneration. They settled, in the least disruptive ways, disputes which otherwise might have damaged the whole industry. This was the time of the commercial men of the trade - no lawyers admitted. They survive in maritime and commodities contracts.

The great hijack In the 1920s’ the lawyers took over. International trade was getting more complicated, and the call for legal certainty was getting louder. Awards started to be scrutinised by the courts, and it was felt that commercial men would have difficulty making their awards meet these increased legal standards. First came the legal academics. It was a time when proceedings went at a rather leisurely pace, and academics could fit the arbitration sessions within their summer recess. Then in the 1970s’ came the international law firms, mainly English and American. It was felt that all-round commercial lawyers were best equipped to understand the nuts and bolts of business transactions, and Anglo-American lawyers seemed particularly well-equipped in this respect, alongside their Continental European colleagues. We are now entering the time of the proteiform arbitrators. They are best defined by the following challenges that they have to face.

* This is the revised text of the Eigthteenth Goff Lecture delivered by the author on 21 November 2011 at the City University of Hong Kong. It has been augmented from previous articles written by him. It was originally published in (2012) 13(6) Journal of World Investment & Trade 1014-1021. International commercial arbitrator, chairman, sole arbitrator or co-arbitrator in more than 100 international arbitration cases. Principal, Werner & Associés, Geneva, Switzerland. Chairman, Geneva Global Arbitration Forum. Editor, The Journal of World Investment & Trade.

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On call seven days a week They may be on call seven days a week. More and more cases start with a request for interim measures. The arbitrators, who may not even have met and got acquainted, are requested to make urgent decisions as to the freezing of assets, disposal of goods and the do’s and don’ts. The problem has become so important that the new 2012 ICC Rules Arbitration even provide for an Emergency Arbitrator for the cases where the arbitral tribunal has not yet been constituted.

Time management requirements An efficient arbitrator will balance the requirement of speed - justice delayed is justice denied - with the opposite necessity that due process be upheld, that the parties have their day in court and are able to argue their case fully, and that the arbitrator takes the time necessary to reach the right decision. The arbitrator, as time manager, goes beyond that: he or she uses the time element in order to create the optimum rhythm for the arbitration proceedings to advance harmoniously. And he or she will not be misled by the old Roman adage, Veritas filia temporis, or truth is the daughter of time. Truth is not the daughter of time, but the daughter of hard and diligent work. Despite their great age, which may lend them the allure of authenticity, some centuries-old adages are just plainly wrong for our time.

Anyone for algorithms? In a world getting more technical, the facts of cases are also getting more difficult to grasp. I sit now in a case concerning a large industrial project where at the heart of the dispute are algorithms - mathematical formula needed for having the machinery working. It has become a battle of experts but at the end, the arbitrator must go deep into the matter himself - there is no other way, which means that, by his background of formation, he must have the basic necessary knowledge. The easy way out consisting in the appointment of a third expert means that the arbitrator is unloading his responsibility on someone else.

The ever thicker legal sandwich The time when one substantive law applied to a dispute is becoming a thing of the past. More and more cases have several layers of applicable laws. I sat recently in a case where the arbitration clause provided that the provisions of French law would apply which were not contrary to Egyptian laws and to the Sharia - the Islamic law. In another instance, Quebec laws applied but were subject to the EU laws dealing with the free movement of goods and competition. These examples can be multiplied, and today a competent arbitrator must be at ease with quite diverse legal systems, and be able to find his or her way through them.

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Ever heard of Adam Smith and David Ricardo? The relief usually asked for in international commercial arbitration cases is damages sometimes it may be specific performance, or a declaratory judgment. While arbitrators are quite good at adjudicating the liability issue, the quantum issue i.e. the damages, is another story. This is because their skills are mainly legal, and their experience in economics as well as their exposure to business life has quite often been minimal only. I recall a deliberation in a case where at issue were positive damages, namely loss of future profit due to the breach of contract. The aggrieved party was a trading company in commodities operating worldwide, and assessing the loss of future profit necessitated some basic understanding of how market economies work, of Adam Smith and his “invisible hand” theory (his famous quote in The Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest”), and of Ricardo’s theory of comparative advantage, whereby international welfare will be maximized through free international trade when each country specializes in producing and exporting goods in which it has the greatest comparative advantage, and importing goods in which its comparative advantage is the smallest. Our chairman, former dean of a prestigious European law school, had not heard either of Adam Smith or David Ricardo. His view of how international trade functioned had only to do with the mercantilism of Colbert and, closer to us, the planified economic activity very much in favour under the various socialist governments in post-war Europe. My coarbitrators and I did our best to introduce him to market economy principles, with limited success only. Finding their ways in discounted cash flow methods, fixed costs v. variable costs, delay analysis and the like is just too much for many arbitrators schooled strictly in legal concepts: they may pretend to understand them, but quite often doubt remains.

The facts, the facts, the facts If we think of the new generation arbitrator as being proteiform, will he or she be required to have actual experience as a business executive or as a business owner? And have an MBA? And what about former CEOs? This boils down to understanding the facts of business life. A famous English maritime arbitrator, Cedric Barclay, used to say: “To be a really good maritime arbitrator, one must have gone through a £3 million loss in a shipping downturn, withstood the loss, and made £5 million in the following upturn.” It was a caricature, and if the test were to be applied not many of the international arbitrators most busy today would remain in business. But, as with all caricatures, it contained a core of truth: breadth of actual business experience is paramount to understanding the facts of a case. Let me here recount a memory in this respect, showing that having business experience by proxy only may not be enough. This was a the case of a joint venture for a large industrial project which had turned sour. My co-arbitrators and I were interrogating the claimant’s main witness, a flamboyant,

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tycoon-type executive. At issue was whether the defendant, one of the venture partners, had discharged its obligation to sell the output. One of my co-arbitrators, a good professor who was also senior partner of his law firm and sat on boards of various companies, was insisting in his questions that the defendant had actually performed sales, the adequacy of the sales prices being for him a totally different issue. Looking at him in disbelief, this witness leaned forward and merely said: “Mr. Arbitrator, any fool can sell a dollar for ninety-nine cents.” Concerning former CEOs as arbitrators, this had been tried long ago by the ICC Court under the chairmanship of Mr. Gaudet, with mixed success. There is a cultural hurdle here. CEOs usually do not have much patience for the lengthy process of briefs of claim, reply rebuttals, which may last for a year or more, and the many intervening procedural questions to be dealt with prior to going into the merits of the dispute. What they like is to have a problem laid out before them and to solve it - and this in an efficient process lasting a few weeks at best. On this point a nice story: The ICC had appointed as chairman of an arbitral tribunal a well-known president-director general of one of the largest French industrial companies who had just retired. After having received the file, he called the general counsel of his former company, telling him: “Look. I just have this thick file on my desk. Can you relieve me from the law, so I am able to focus on the facts”! But certainly more should be done to bring former business executives into the ranks of arbitrators, such as special workshops for them. Lawyers may not be enthusiastic about this prospect as they would be new competitors, but it would definitively enrich the arbitral process.

Managing the frailty of the arbitral process As efficient as it is - thanks to the New York Convention, industrial and commercial awards may be easier to enforce than state court judgments - the arbitral process remains a fragile institution for a number of.

The case of vanishing arbitrators A few years ago I was the chairman of an ad hoc Arbitral Tribunal in a large investment case involving a construction dispute between a European consortium and the State agency of a country governed by a brutal dictatorship, where the seat of the Arbitral Tribunal was situated. During the course of the first arbitral session the Arbitral Tribunal was, out of the blue, served with an injunction from the local court enjoining it from proceeding with the case until the Engineer, as defined then in the FIDIC (Fédération Internationale des IngénieursConseils) conditions, had carried out further efforts to settle the dispute amicably, which for all practical purposes meant the suspension of the arbitral proceedings. Faced with these rather dark developments, the Arbitral Tribunal, using the escape clause to that effect in the governing contract, decided to transfer its seat to Geneva on the ground that the local court’s injunction evidenced that the freedom necessary to its proper functioning was obviously endangered if the original seat was maintained.

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At the following arbitration session, held in Geneva, the arbitrator appointed by the State agency of the host country - legal advisor of the supervising ministry and a distinguished, world-educated lawyer - asked me to walk with him along the windy shores of the lake so as to be certain not to be wiretapped. He told me that he had managed to come to Geneva to attend this arbitral session at great personal risk, out of respect for his two colleagues and the arbitral process, but would not be able to come again as otherwise he would be considered a traitor. Consequently, he would be absent from the remainder of the proceedings, namely the witness hearings and the deliberations. Although truncated, our Arbitral Tribunal continued the proceedings and issued an award on the merits which was thereafter executed - not through the mechanisms of the New York Convention, I hasten to say, but through the quite often more efficient (even if not taught in the arbitration textbooks) channels of bilateral negotiations between the two countries concerned in the dispute. Soon after we had rendered our award, I learned that our unfortunate colleague had actually been shot a few weeks after his return from our walk along the shores of Lake Geneva. Although he apparently had been the victim of an ethnic purge, there always remained some suspicion that he may have taken excessive risks in contriving to attend our arbitration session in Geneva, in defiance of his national court’s injunction enjoining us from proceeding, and that his courageous gesture may have played some role in his unfortunate ultimate fate.

Monitoring the integrity of the arbitral process how to protect witnesses First situation: this was the case of a nuclear power plant in an Asian country, which the government claimed to be deficient. The builder of the plant called as defence witness an engineer who had worked on the site, and who was now a professor in the engineering school of the host country. A few weeks prior to the hearing he advised the arbitral tribunal that he had been advised that his academic career might be endangered if he came to testify against his own government, that he could not take such a risk, and consequently would not appear. The arbitral tribunal viewed this as an encroachment on the integrity of the arbitral process, and issued a protection letter to the witness, countersigned by both parties, advising him that the parties had confirmed that he would not suffer adverse consequences from his testimony, and that the arbitral tribunal would monitor the matter closely. This was however, not enough for the witness, who did not show up. Second situation: I chaired last year in Paris an arbitral tribunal in a dispute between two Middle East and a German company. A Middle East witness called by the German defendant, although he had arrived in Paris for the hearing, refused to appear as he had received in his Paris hotel death threats against him and his family back home should he testify. We immediately asked the parties to confirm in writing that they had no part in this, which they did. We advised the ICC, but they had no clues. And calling the police was obviously not an option, as the witness had immediately left Paris and flown back home. The

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only weapon we had was drawing adverse inference from these events, but against whom? The integrity of the arbitral process has been endangered, and we felt quite powerless to defend it. Other situations involved a Swiss colleague, whoes garbage had been systematically searched, and a so-called ‘courtesy’ visit by a lawyer from a former USSR republic to the chairman of the arbitral tribunal, telling him in passing that those who had opposed him had, by coincidence, all ended up with their throats cuts - he wondered why! It should be up to the arbitral institutions to address the question of witness protection. Maintaining the integrity of the arbitral process they manage part of to their raison d’etre.

Beware of false good ideas! In this well-functioning world of international commercial arbitration strange ideas sometimes take flight. This is all the more surprising when they originate with a well-known and well-experienced arbitrator. In 2010, Jan Paulsson gave a speech at the University of Miami where he called for the abolition of party-appointed arbitrators as being a system in which “moral hazard” was inherent. I beg to disagree. Party-appointed arbitrators are at the root of the whole arbitral system. Arbitration exists because merchants want a justice system in which they can have their say in the constitution of the adjudicative body, by contrast with State courts, where the judges are chosen by the State without input from the parties. Hence the arbitral tribunal in which each party appoints an arbitrator, ensuring that its views will at least be taken into consideration, if not accepted. Conferring the constitution of the whole arbitral tribunal on arbitral institutions would just destroy the system. And next to the ruins would spring up a new arbitral system with party-appointed arbitrators, because this is what the commerce requires. Besides, too much fuss is made about the so-called ‘partiality’ of the party-appointed arbitrators. From my experience of more than 100 cases, mainly as chairman of the arbitral tribunal, I have found party-appointed arbitrators to be most useful, as they make sure, if they do their job right, that no aspect of the position of their appointing party will be overlooked. And at decision time, if the deliberating process is properly managed by the chairman, they may prove to be quite co-operative.

Telling a good story The arbitral tribunal process culminates in an award. How to write it? Many awards are verbose and unduly lengthy. To do better, a clue might be taken from that great English judge Lord Denning, explaining his thinking behind his judgments: “I try to make my judgment live - so that it can be readily understood... I start my judgment, as it were, with a prologue - to introduce the story. Then I go on from act to act as Shakespeare does - each with its scenes drawn from real

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life ... I draw the characters as they truly are - using their real names ... I avoid long sentences like the plague because they lead to obscurity It is no good if the hearer cannot follow them. I strive to be clear at all costs. Not ambiguous or prevaricating. I refer sometimes to previous authorities - I have to do so because I know that people are prone not to accept my views unless they have support from the books ... But never at much length. Only a sentence or two. I avoid all references to pleadings and orders. They are mere lawyers’ stuff they are unintelligible to anyone else. I finish with a conclusion - an epilogue - again, as the chorus does in Shakespeare. In it I gather the threads together and give the result.”1

1. Editorial note: See Lord Denning, The Family Story (1981, Butterworths).

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Some Reflections on the Frailty of the Arbitral Process in Cases Involving Authoritarian States Dr Jacques Werner It was 1980. I was the chairman of an ad hoc arbitral tribunal in a large construction case opposing a European consortium and the State agency of a country governed by a brutal dictatorship, where the seat of the arbitral tribunal was situated. During the course of the first arbitral session the Arbitral Tribunal was, out of the blue, served with an injunction from the local Court enjoining it from proceeding with the case until the Engineer, as defined then in the FIDIC conditions, had carried out further efforts to settle amicably the dispute, which for all practical purposes meant the suspension of the arbitral proceedings. Faced with these rather sombre developments, the arbitral tribunal, using the escape clause to that effect in the governing contract, decided to transfer its seat to Geneva on the ground that the local Court’s injunction evidenced that the freedom necessary to its proper functioning was obviously endangered if the original seat was maintained. At the following arbitration session held in Geneva, the arbitrator appointed by the State agency of the host country – legal advisor of the supervising Ministry and a distinguished, world-educated lawyer – asked me to walk with him along the windy shores of the lake, so as to be certain not to be wiretapped. He told me that he had managed to come to Geneva to attend this arbitral session at great personal risk out of respect for his two colleagues and the arbitral process, but would not be able to come again as otherwise he would be considered a traitor and consequently would be absent from the remainder of the proceedings, namely the witness hearings and the deliberations. Although truncated, our Arbitral Tribunal continued the proceedings and issued an award on the merits which was thereafter executed – not through the mechanisms of the New York Convention but through the quite often more efficient, even if not taught in the arbitration textbooks, channels of bilateral negotiations between the two countries mainly concerned in the dispute. Soon after we had rendered our award, I learned that our unfortunate colleague had actually been shot a few weeks after his return from our walk along the shores of Lake Geneva. Although he apparently had been the victim of an ethnic purge, there always remained some suspicion that he may have taken excessive risks in contriving to attend our arbitration session in Geneva, in defiance of his national Court’s injunction enjoining us from proceeding, and that his courageous gesture may have played some role in his unfortunate ultimate fate.

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I was at that time a young chairman and much distressed that something like that could happen to one of my co-arbitrators. It was an ad hoc case and consequently no arbitral institution was involved, but I thought that here something much more important was at stake, namely the integrity of the international arbitral system as such and that arbitral institutions and associations should feel concerned. I told the story to officials at the ICC, but they felt that as it was not an ICC case, there was nothing they could really do about it. The ICC was at that time engaged in a sort of Realpolitik, deploying great efforts in order to convince both Eastern European Communist countries and oil-producing countries to embrace international commercial arbitration, and was not eager to take up such unpleasantness. I spoke to my colleagues at the Swiss Arbitration Association, but although appalled by the story they felt it was really outside the province of the Association. While in New York I told the story to officials of the American Arbitration Association. “This is what you get when you think you can do without arbitral institutions”, was their reaction; they viewed this horror story mainly as a selling point for administered arbitration. And then came the sands of time, which covered over the case.

The Rise of Treaty-based Investment Arbitration in Asia A Summary of the 2013 Goff Lecture Kaj Hobér1

The 19th Goff Lecture, organised by the City University of Hong Kong School of Law, was held at the School of Law on the evening of 13 March 2013. Our guest of honour was Professor Kaj Hobér, Partner in Mannheimer Swartling, Stockholm, and Professor of International Investment and Trade Law at Uppsala University, Sweden. The title of Professor. Hobér’s lecture was ‘The Rise of Treaty-based Investment Arbitration in Asia’. He intrigued the audience by pointing out that the title in fact needed a question mark at the end, as the rise of investment treaty arbitration in Asia apparently remains in question. Although a large number of bilateral investment treaties (BITs) and free trade agreements (FTAs) with investment protection chapters have been entered into by Asian States, this has so far not resulted in any explosion in the number of arbitration cases. In Asia, we have not yet seen anything like the ‘floodgate’ effect of investment treaty claims that Eastern Europe experienced following the initial wave of privatisations after the collapse of the Soviet Union. Yet, given the different socio-economic conditions of the Asian countries, it would be a hasty generalisation to answer the question in a simple way. Professor Hobér focused particularly on foreign investments in China and outbound Chinese investments, pointing out that China’s outbound investments today are growing very fast, making claims by Chinese investors a reality. Having discussed a number of reasons for the small number of investment arbitration cases relating to China, Professor Hobér remarked that China was still a relative newcomer to the world of international business, and Chinese investors would need some time to adapt to the applicable rules and practice. However, this was just a matter of time and it was foreseeable that more and more Chinese investors would appear as claimants.

1 International arbitrator, Partner, Mannheimer Swartling, Stockholm, Sweden, Professor of International Investment and Trade Law at Uppsala University and a former Chairperson of the Board of the Arbitration Institute of the Stockholm Chamber of Commerce. He is on the lists of arbitrators of ICSID, CIETAC (Beijing), HKIAC (Hong Kong), the Ukrainian Chamber of Commerce, the Kuala Lumpur Regional Centre for Arbitration (KLRCA), the Singapore International Arbitration Centre (SIAC), the Russian Chamber of Commerce and Industry and other arbitral institutions. The original text of the lecture no longer being available, this is an edited version of a summary written by Ms Agnes Kwok of the School of Law of the City University of Hong Kong. The School of Law would like to thank Professor Hobér for his time and generosity in sharing his unique views on international arbitration with over 80 scholars and practitioners in the field of international arbitration who attended the event.

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Professor Hobér then discussed a number of criticisms of the existing investment dispute resolution system. He maintained that arbitral tribunals have often succeeded in treating the State issue in a balanced way. After discussing the solutions so far offered to resolve existing problems, he concluded that they were not realistic in their own ways and counter-proposed a more realistic approach, that is, a gradual development of case law and improvement of the investment treaty system. While there was a great potential for more claims in Asia, it was likely that the rise of treaty-based investment arbitration in Asia would be gradual. Editorial note: Commenting briefly on the summary by e-mail to the editors on 23 February 2022, Professor Hobér observed that “ … by and large, … I think it is fair to say that my predictions have largely materialized.”

The Right to Arbitrate: Historical and Contemporary Perspectives Gary B Born1

Introduction It is commonplace to observe that arbitration is a preferred – and increasingly preferred – means of dispute resolution. Drawing on deep historical roots, arbitration is used in many domestic legal systems to provide a dispute resolution mechanism for numerous categories of disputes – including, among others, commercial, construction, insurance, maritime and commodities. Internationally, arbitration is used for the resolution of commercial disputes in all of the foregoing categories, and more. In both domestic and international settings, the numbers of arbitrations filed annually with leading arbitral institutions have increased, very materially and steadily, over the past 40 years; in particular, annual case filings at leading international commercial arbitral institutions have increased by nearly five-fold over the past twenty years. During the same time period, arbitration has been adopted in a wide and increasing range of new international settings, including for investor-State, sports, intellectual property, double taxation, trusts and financial services disputes.

Reasons for the popularity of arbitration Arbitration has been chosen in part by businesses, individuals, State entities and others to resolve their disputes because it is generally the most cost-efficient, least slow and most enforceable available means of dispute resolution. Also in part for these reasons, States from all parts of the world have, over the past four decades, adopted robustly ‘pro-arbitration’ legal instruments, including the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the ‘New York Convention,’ which now has 154 Contracting States) and national arbitration legislation that is often derived from the UNCITRAL Model Law on International Commercial Arbitration (the ‘UNCITRAL Model Law’, which has been adopted in nearly 100 jurisdictions). Again, this robust use and support for arbitration, particularly in international matters, continues long historical trends.

1 This article explores the right to arbitrate, from both historical and contemporary perspectives, and its role in societies committed to the rule of law. The author vigorously challenges assertions that arbitration is incompatible with the rule of law. The article is based in part upon the 20th Goff Arbitration Lecture, entitled The Right to Arbitrate – Historical and Contemporary Perpectives, which the author delivered at the City University of Hong Kong on 14 January 2015. Professor Gary B Born is a partner in Wilmer Cutler Pickering Hale and Dorr LLP and is Chair of its Arbitration Practice Group. This article is based in part upon the Twentieth Goff Lecture, entitle The Right to Arbitrate – Historical and Contemporary Perspectives, which the author delivered at the City University of Hong Kong on 14 January 2015. Editorial note: See also Gary B Born, Keynote Address: Arbitration and the Freedom to Associate, 38:7 Ga J Int’l & Comp L 7 (2009).

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Challenges to the use of arbitration Despite the enduring and increasing popularity of arbitration, particularly in international matters, recurrent challenges have arisen, and continue to arise, to its use. These challenges take various forms – ranging from outright refusals to enforce arbitration agreements, to the imposition of substantial obstacles (both formal and otherwise) to the enforcement of arbitration agreements, to the imposition of mandatory procedural requirements on the arbitral process.

Challenges based on the rule of law Whatever form they take, these challenges rest on the same essential critique: namely, that arbitration undermines the rule of law and the individual rights of citizens by substituting an inferior form of decision-making for that of national courts. This view was expressed in 1843, with characteristic eloquence, by Joseph Story, one of the landmark figures in early American jurisprudence: “Now we all know, that arbitrators at the common law, possess no authority whatsoever, even to administer an oath, or to compel the attendance of witnesses. They cannot compel the production of documents, and papers and books of account, or insist upon a discovery of facts from the parties under oath. They are not ordinarily well enough acquainted with the principles of law or equity, to administer either effectually, in complicated cases; and hence it has often been said, that the judgment of arbitrators is but rusticum judicium.”2 Based on that rationale, Story adopted the then-prevailing US position that agreements to arbitrate were not subject to specific enforcement and were, therefore, effectively unenforceable.3 Similar, if differently-accented, views were expressed in 1843 by the French Cour de cassation in an early decision under the Napoleonic Code, Compagnie l’Alliance c/ Prunier, in which the court held an arbitration clause invalid on the ground that it provided an inferior form of rough justice, administered by persons who might not “be able to deal with the matter and … worth the confidence the parties would entrust with them.”4 More recently, some critics of arbitration have suggested that arbitration undermines public confidence in the rule of law, and the rule of law itself, by producing ill-reasoned or unreasoned awards, not subject to judicial review, and rendered in private by untrained arbitrators whose independence is suspect.5

2 Joseph Story, in Tobey v County of Bristol, 23 F Cas 1313, 1321-23 (CCD Mass, 1845). Editorial note: The expression rusticum judicium refers to rough, rude or rustic justice. 3 Gary B Born, International Commercial Arbitration (2nd Edn, 2014), para 1.01[B][5]. 4 Compagnie l’Alliance c/ Prunier (judgment of 10 July 1843), 1843 Dalloz 561 (Cour de cassation, Civil Chamber). 5 PJ McConnaughay, The Risks and Virtues of Lawlessness: A ‘Second Look’ at International Commercial Arbitration, 93 NwU L Rev 453 (1998).

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Constitutional support for arbitration and the rule of law The thesis of this article is that these critiques are not merely wrong, but profoundly wrong. Most importantly, they ignore the fundamental importance of the right of citizens in any free and developed State to decide the manner in which disputes arising out of their relationships will be resolved. This right to arbitrate is no less important, and no less deserving of respect, than the related freedoms of contract and association, which are at the centre of the rule of law in contemporary societies. Put simply, the right of parties to contracts, community organisations, religious groups and other types of relationship to choose how to mend and preserve their relationships through amicable resolution of disputes that inevitably arise from free association is no less important than the right to decide whether to enter into and structure those relationships. The fundamental importance of this right to arbitrate to the rule of law and individual liberties has been recognised, in widely diverse settings, by courts and legislatures around the world. For example, the Constitution of Year One,6 in 18th century Revolutionary France, recognised the foregoing principles in article 86, which provided that “[n]o encroachment can be made upon the right of citizens to have their matters in dispute decided upon by an arbitrator of their own choice.” That article gave constitutional status to the right of citizens to resolve their disputes by arbitration, selected by the citizens themselves. Notwithstanding the Prunier decision referred to above, France in due course returned to the principles expressed in art 86, first by ratifying the Geneva Protocol of 1923 and later adopting a vigorously pro-arbitration approach to the enforcement of agreements to arbitrate.7 “...[T]he right of parties to contracts, community organisations, religious groups and other types of relationship to choose how to mend and preserve their relationships through amicable resolution of disputes that inevitably arise from free association is no less important than the right to decide whether to enter into and structure those relationships.” Likewise, in Germany, the 1877 German Code of Civil Procedure prescribed a liberal, pro-arbitration regime, while 19th century and early 20th century German courts issued decisions embracing the separability of arbitration agreements with a similar pro-arbitration orientation.8 Despite these authorities, the German National Socialist regime, with its totalitarian bent and mistrust of individual autonomy, issued in 1933 the so-called Guidelines of the Reich Regarding Arbitral Tribunals (the Reich Guidelines), declaring that “from a state-political point of view a further spread of arbitration would shatter confidence in state jurisdiction and the State itself.”9

6 Editorial note: Year One of the Revolutionary calendar ran from 22 September 1792 to 21 September 1793, but was in fact so designated retrospectively, the calendar having been introduced in Year Two. The calendar was abolished by Emperor Napoleon I in 1806. 7 Born, op cit (note 3 above), para 1.04[B][1][b]; Municipalité de Khoms El Mergeb v/ Dalico (20 December 1993), JDI 1994 (Cour de cassation, First Civil Chamber France). 8 Born, op cit (note 3 above), para 1.01[B][6]. 9 Richtlinien des Reiches über Schiedsgerichte, 95 Deutsche Justiz 52, 821 (1933).

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As in France, however, the later 20th century saw Germany renounce this position. In 1963, the German Federal Labour Court cited article 2(1) of the German Basic Law, which guarantees “the right to free development of [a citizen’s] personality,” as the foundation for the validity of arbitration agreements: “The right to agree upon submitting a matter to arbitration is contained in the fundamental right to freedom of contract under Article 2. The restriction of state jurisdiction occurring as a result of the agreement to arbitrate is a result of parties’ exercise of freedom to contract.”10 Early in the 21st century, the German Federal Tribunal adopted the same analysis, resting the validity of arbitration agreements on basic constitutional protections. It stated: “Article 2(1) of the Basic Law guarantees personal freedom and private autonomy. This fundamental right requires that the arbitrability of the matter and the resulting waiver of the right of access to national courts must be based on the parties’ voluntary agreement.”11 Other jurisdictions have recognised a constitutional right to arbitrate, rooted in the principles of individual liberty and private autonomy, in the same terms. Notwithstanding Joseph Story’s mistrust for arbitration, a 20th century US decision from Hawaii declared: “The recognized autonomy of parties to enter into an arbitration agreement … is directly correlated to and stems from the constitutionally protected right of freedom of contract”.12 In so doing, the Hawaii court gave a constitutional foundation to the US Federal Arbitration Act’s pro-arbitration treatment of arbitration agreements (and awards). Likewise, a recent Canadian decision applying the UNCITRAL Model Law reasoned: “Arbitration is a fundamental right of citizens and an expression of their contractual freedom. It should not be considered as an infringement upon the monopoly of state justice. Rather, arbitration should be perceived as a means of alternative dispute resolution that, depending on the circumstances, achieves certain goals pursued by the parties – eg, speed, decision by peers, cost efficiency, etc.”13 Most recently, Panama’s Constitution was amended to provide, that “[t]he administration of justice may also be exercised by the arbitral jurisdictions as determined by the law.”14 A recent Panamanian Supreme Court decision cited the amended art 202 in holding:

10 Judgment of 23 August 1963, 1 AZR 469/61, para 2. 11 Judgment of 3 April 2000, II ZR 373/98. 12 Kona Village Realty, Inc v Sunstone Realty Partners XIV, LLC, 123 Haw 476, 478 (Haw 2010). 13 Laurentienne-vie, compagnie d’assurances inc v Empire, compagnie d’assurance-vie [2000] CanLII 9001 (Quebec Court of Appeal.). 14 Constitution of the Republic of Panama (1972, as amended), art 202.

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“Arbitrators are judges by the sole application of the Law, and their decisions have coercive force towards the rest of the judicial administrative community, thus giving the parties greater security that their claims, are recognized through arbitral awards, shall be honored [sic]. This legal certainty in society will promote the choice of alternative dispute resolution mechanisms, to the benefit of all: faster and expeditious justice; decongestion of courts; increased access to justice.”15 Other decisions from diverse jurisdictions are to the same effect.16 International tribunals, as well as national courts and legislatures, have affirmed the fundamental importance of the right to arbitrate in societies based on the rule of law. Among other things, several investorState tribunals have held that refusals by States to give effect to valid arbitration agreements and arbitral awards amount to “denials of justice” or violations of similar internationallyprotected rights. In Saipem v Bangladesh, for example, an ICSID tribunal held that the purported revocation of an ICC arbitral tribunal’s mandate (and related annulment of the tribunal’s award) by the Supreme Court of Bangladesh was a wrongful denial of justice, notwithstanding the fact that the tribunal was seated in Bangladesh and was subject to the supervisory authority of the Bangladeshi courts.17 The tribunal relied on art II of the New York Convention in holding that the Bangladeshi court’s decision had been abusive and arbitrary. Other decisions by investment tribunals have reached similar conclusions,18 as has the European Court of Human Rights, which held that refusals to enforce an arbitration agreement or award amounted to denials of access to justice under art 6 of the European Convention on Human Rights.19

15 Greenhow Associates Ltd v Refinería Panamá SA, 14 February 2005 (Supreme Court of Panama). 16 “It is well recognized that arbitration does not subtract any constitutional guarantees from domestic proceedings, on the contrary, it implies fulfilling these [constitutional rights and guarantees]” Judgment of 9 April 2008 No. 11.308 - DF (2005/0212763-0) ¶16, referring to Judgment of 11 April 2003 No. 450.881 – DF (2002/00793421) (Brazilian Superior Tribunal de Justiça); “Hence, the principles of competence-competence and autonomy of the arbitration agreement are essential elements in the statutory regime of arbitration, guaranteeing the ‘fundamental right to use alternative means of dispute resolution, including, obviously, arbitration.’” Judgment of 3 November 2010, Astivenca Astilleros de Venezuela, CA v Oceanlink Offshore III AS, XXXVI YB Comm Arb’n (2011) 496, para 5. 17 Saipem SpA v The People’s Republic of Bangladesh, ICSID Case No ARB/05/07, Award of 30 June 2009. 18 ATA Construction, Industrial and Trading Co v The Hashemite Kingdom of Jordan, ICSID Case No ARB/08/2, Award of 18 May 2010; White Industries Australia Limited v The Republic of India, UNCITRAL case, Final Award of 30 November 2011. 19 Case of Stran Greek Refineries and Stratis Andreadis v Greece (Application no 13427/87), judgment of 9 December 1994, [1994] ECHR 48 (European Court of Human Rights); Case of Kin-Stib and Majki v Serbia (Application no 12312/05), judgment of 4 October 2010 (European Court of Human Rights)

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Conclusion In summary, courts and tribunals from around the globe have repeatedly recognised the central importance of the right to arbitrate to the rule of law. That right has properly been founded on constitutionally-protected liberties – freedom of contract, freedom of association and other individual rights. Denials of the right of citizens to arbitrate their disputes is no less a threat to the rule of law and individual liberties than denials of the freedom to contract or associate. A number of practical implications flow from recognition of the right to arbitrate. These include the lack of any justification for (1) heightened standards for the substantive and formal validity of arbitration agreements,20 (2) restrictive rules of interpretation of the scope of arbitration agreements,21 and (3) most mandatory procedural requirements (such as those concerning mandatory appellate review, public conduct of arbitral proceedings and governmental selection of arbitrators).22 With regard to each of these issues, it is fundamental that the parties’ choice of arbitral procedures be given full effect. Doing so does not detract from the rule of law but, on the contrary, ensures its preservation. It is often said that those who ignore history are condemned to relive it. That is true here, as elsewhere. Those who ignore the right to arbitrate, and its constitutional foundation, are condemned to the denials of justice occasioned by the Napoleonic Code and the Reich Guidelines. Those denials of justice not only mandate that parties endure more costly, more protracted and less informed legal proceedings but, most fundamentally, also their individual rights and rights to freedom of contract and community association.

20 Compare Nokia Corp v AU Optronics Corp (In re TFT–LCD (Flat Panel) Antitrust Litgation), 2011 WL 2650689, at *5 (ND Cal) with Simula, Inc v Autoliv, Inc, 175 F 3d 716, 720 (9th Cir 1999). 21 Compare Gangel v De Groot, 393 NYS 2d 698, 699 (NY 1977) with Fiona Trust & Holding Corp v Privalov [2007] 1 All ER (Comm) 891 (Court of Appeal, England & Wales). 22 See Born, op cit (note 3 above), paras 11.03[C][vi]-[vii]; 12; 15.04[B]; 20, esp 20.01; 25, esp 25.05[A][1]-[3].

Arbitration and Public Policy Robert French*

I. Introduction The man in whose name this Goff Lecture is presented, Lord Goff of Chieveley, has an honoured place in the pantheon of great lawyers of the common law world. I thank the City University of Hong Kong for inviting me to present this address, which is the 21st in the series, the first having been delivered by Lord Goff in 1990. The involvement of the University and the sponsors of the lecture, King & Wood Mallesons and the Building and Construction Industry Council, reflect the worlds of the academy and practice as well as that of the judiciary, in all of which Lord Goff made signal contributions. This lecture concerns the external public policy environment which underpins and informs the legal regimes that govern arbitration and the internal public policy constraints expressly and impliedly embedded in the legal criteria for setting aside and refusing recognition and enforcement of awards.

II. The external public policy environment Commercial arbitration is contractually based and, to that extent, underpinned by private law. It derives efficacy from public law, which provides for the recognition and enforcement of awards and a degree of judicial supervision. That is because it is seen as serving a legitimate public interest in the efficient resolution of commercial disputes. That ‘external public policy’ support also renders it susceptible to scrutiny and challenge about its costs and benefits. New and evolving applications of arbitration may enliven debates about its proper scope and the criteria for its legislative support. Changes in its scale and volume alongside litigation may also enliven public policy concerns. One very large question in that category is the effect of commercial arbitration upon the development of commercial law in the courts. In Westport Insurance Corp v Gordian Runoff Ltd,1 the High Court of Australia set aside an award for inadequacy of reasons in proceedings under the former Commercial Arbitration Act 1984 (NSW). Four Justices observed that the provisions of that Act giving final and binding effect to an award indicated that the making of the award was more than the contractual outcome of private contractual arrangements. Their Honours said,

* Chief Justice, High Court of Australia. This is the text of the Twenty-First Goff Lecture, entitled Arbitration and Public Policy, which the author delivered at the City University of Hong Kong on 18 April 2016. It was originally published at (2016) 24(1) Asia Pacific law Review 1-15. 1 (2011) 244 CLR 239.

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That statutory regime involves the exercise of public authority, whether by force of the statute itself or by enlistment of the jurisdiction of the Supreme Court. It also … displays a legislative concern that the jurisdictions of the courts to develop commercial law not be restricted by the complete insulation of private commercial arbitration.2 There is a basis for legislative concern about the development of commercial law. Arbitration, by its very nature, has a limited capacity to contribute to the open and public development and coherence of international and domestic commercial law. Militating against its influence is the absence of a doctrine of precedent the generally private nature of arbitral processes. There is little evidence that arbitrators in commercial arbitration make much reference to past awards. In the 2006 Freshfields Lecture on the topic of ‘Arbitral Precedent’, Dr Gabrielle Kaufmann-Kohler concluded, by reference to empirical evidence, that there was no meaningful precedential value attached to international commercial awards. The position is different with sports arbitration and investment arbitration, in which arbitral awards are frequently published.3 My predecessor as Chief Justice, the Hon Murray Gleeson, stated the position with respect to precedent with his customary clarity in a lecture he delivered to the Chartered Institute of Arbitrators in October 2014 on writing awards in international commercial arbitration. Contrasting the function of arbitrator and judge, he said, Because of the significance of precedent, judgments of a court may serve the purpose of clarifying, or developing, or, on occasion, altering the law. Arbitral awards serve no such purpose. They do not create precedents, and because they are almost always intended to remain private, they have no educational function.4 There is pressure for greater transparency and consistency in international commercial arbitration. In a book of essays published in 2013 and making the case for at least anonymous publication of arbitral awards, one of the contributors, Alexis Mourre, warned, If arbitration is to remain, according to the sacramental formula the mode commun de réglement des différends du commerce international, it needs to provide the business community with greater predictability of the possible outcome of trade disputes. In turn, better knowledge of arbitral jurisprudence would allow the business community to have a clearer idea of the realities and advantages of arbitration.5

2 Ibid, 261 [19] (French CJ, Gummow, Crennan and Bell JJ). 3 Gabrielle Kaufmann-Kohler, ‘Arbitral Precedent: Dream, Necessity or Excuse?’ (2007) 23 Arbitration International 357,372–73. 4 The Hon Murray Gleeson AC, ‘Writing Awards in International Commercial Arbitrations’ (Speech delivered at the Chartered Institute of Arbitrators (Australia) Ltd, Sydney, 31 October 2014). 5 Alexis Mourre, ‘The Case for Publication of Arbitral Awards’ in Alberto Malatesta and Rinaldo Sali (eds), The Rise of Transparency in International Arbitration—The Case for Anonymous Publication of Arbitral Awards (Huntington, New York, 2013) 62.

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The position with respect to commercial arbitration may be contrasted with that of investment arbitration. International Centre for Settlement of Investment Disputes (ICSID) awards can be, and frequently are, published with the agreement of the parties. Awards of the Court of Arbitration for Sport are also public. Awards so published provide precedential guidance, although whether they engender consistency and predictability may be another matter. It must be said, however, that even if all international commercial arbitral awards were to be published in full and a comity-based convention analogous to stare decisis evolved, there would still be a fundamental difference between arbitral and judicial decision making. Judicial proceedings and arbitration have the common function of determining particular disputes between particular parties. But the courts have a special and constitutional role in publicly maintaining and affirming the rule of law as they make their decisions. It is an aspect of that role that, in publishing their judgments, they facilitate the flow of information about legal questions and their resolution within their home jurisdictions. Importantly, they can also contribute to the development of the law on similar questions arising in other national jurisdictions. Chief Justice Bathurst, the Chief Justice of New South Wales, made the point in an address he delivered in Singapore in 2013, when he observed that the lack of transparency in arbitration can act as a counterweight to legal convergence in the development of transnational commercial law.6 Lord Neuberger made the same point in a speech he delivered at the Chartered Institute of Arbitrators Centenary Conference in Hong Kong in March 2015.7 And in a speech made in March this year, Lord Chief Justice Thomas in similar vein made specific reference to the effect of arbitration on the role of the commercial courts in the United Kingdom (UK): As arbitration clauses are widespread in some sectors of economic activity, there has been a serious impediment to the development of the common law by courts in the UK, particularly through the Commercial Courts in London … and on appeal from them.8 There are legitimate concerns held by jurists about the impact of commercial arbitration on the development of the law. Those concerns do not displace the unarguable benefits of arbitration. They are mitigated, albeit to a limited extent, by provisions for judicial involvement in questions of law arising in arbitral proceedings, as with s 27J of the Commercial Arbitration Acts of the Australian States or by the limited provisions for appeal on questions of law in s 34A of those Acts, reflecting the terms of s 69 of the Arbitration Act 1996 (UK).

6 Bathurst CJ, ‘The Importance of developing convergent commercial law systems, procedurally and substantively’ (Speech delivered at the 15th Conference of Chief Justices of Asia and the Pacific, Singapore, 28 October 2013). 7 Lord Neuberger, ‘Arbitration and the rule of law’ (Speech delivered at the Chartered Institute of Arbitrators Centenary Conference, Hong Kong, 20 March 2015) 12 [24]. Editorial note: Published at [2015] Asian Dispute Review 180-191; (2015) 81(3) Arbitration: The International Journal of Arbitration, Mediation and Dispute Management 276-287. 8 The Right Hon The Lord Thomas of Cwmgiedd, ‘Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration’ (Speech delivered at The BAILII Lecture 2016, London, 9 March 2016) [5].

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Another path is to ensure that the judicial process offers commercial disputants in appropriate cases benefits which equal or exceed those of arbitration in speed, efficiency, economy, neutrality and expertise. Enhanced provision for party autonomy under an international agreement enabling and giving effect to the choice of court agreed to by parties to a contract and enforcing the judgment of that court is another positive measure. The Hague Convention on Choice of Courts Agreement 2005 offers that possibility. And if a significant multilateral agreement on the recognition and enforcement of foreign judgments can be achieved through the Hague Judgments Project, the gap may be narrowed between the enforceability of arbitral awards and the enforceability of judgments in which arbitral awards enjoy an advantage. Another more ambitious response to concerns about the development of international commercial law is the creation of international commercial courts hosted by national jurisdictions but offering commercial adjudication to all comers. Examples are the Dubai International Financial Centre Courts, the Qatar International Court, the Singapore International Commercial Court and the new Abu Dhabi Global Market Courts. The Dubai Courts and the Singapore Court allow parties to opt into their jurisdictions to resolve disputes. Both incorporate certain features of international arbitration, including limited disclosure processes, the ability of parties to use foreign counsel and panels comprising local and foreign judges. Also of interest in this connection is the recent proposal in Europe, potentially transformative of the arbitral process between investors and States, for the establishment of an Investment Court. The Court would have jurisdiction to hear investor-State disputes arising under free trade agreements, such as the proposed Transatlantic Trade and Investment Partnership.9 The interactions between external public policy and arbitral regimes established by law are not necessarily in stable equilibrium. Public policy changes according to shifting societal values and priorities. Changes in public policy or policy responses to developments in the arbitral process may be expressed in alterations to the legal rules governing arbitration and the enforceability of awards. New applications of the arbitral process with public policy implications unimagined when existing legal regimes were put into place may also lead to changes in those regimes. A particular area of contention at the present time concerns compulsory arbitration clauses in common form consumer contracts which preclude resort to the courts or other forms of dispute resolution. Here, the important element of party autonomy may be present in a formal sense but in substance may be much diminished, if not entirely absent on the consumer side of the bargain. A considerable body of literature and passionate debate have developed on the topic, particularly in the United States. The judgment of an Alabama court reflected a deeply felt position about such clauses with the following statement:

European Commission, ‘European Union’s Proposal for Investment Protection and Resolution of Investment Disputes’ (European Commission, 12 November 2015) <http://trade.ec.europa.eu/doclib/docs/2015/ november/tradoc_153955.pdf>.

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The reality that the average consumer frequently loses his/her constitutional rights and right of access to the court when he/she buys a car, household appliance, insurance policy, receives medical attention or gets a job rises as a putrid odor which is overwhelming to the body politic.10 The scope of the debate about such provisions was set out in an article in the Stanford Law Review in 2005 by Professor Jean Sternlight, who acknowledged the advantages of voluntary binding arbitration and the benefits of international arbitration, but made two important points about compulsory arbitration in contracts of adhesion: •

there is a problem in permitting the most powerful actors in a society to craft a dispute resolution system that is best for them but not necessarily their opponents or the public at large;

•

justice requires that disputants should have access to a dispute resolution process that is transparent and open to public scrutiny. While they may, in particular situations resort to private processes, it would be improper for a society to establish entirely private dispute resolution processes.11

The two sides of the policy debate were reflected in the closely divided decision of the Supreme Court of the United States in AT&T Mobility LLC v Concepcion.12 AT&T’s standard cellular telephone contract provided for arbitration of all disputes and precluded a classwide arbitration. The Federal Arbitration Act, which was enacted in 1925, makes arbitration agreements irrevocable and enforceable save upon such grounds as exist at law or in equity for the revocation of any contract. The Concepcions sued AT&T and their suit was consolidated with a class action claiming false advertising involving the charging of sales tax on allegedly ‘free’ phones. The Ninth Circuit Court of Appeals held that the Federal Arbitration Act did not pre-empt a State Court ruling that the preclusive clause was unconscionable. The Supreme Court overturned that decision by a 5/4 majority. The late Justice Scalia, for the majority, described the Federal Act as embodying a national policy favouring arbitration and also observed that there were difficulties in adapting arbitration to class action procedures. Justice Breyer, for the dissentients, argued that when the Federal Arbitration Act was enacted it may have been directed to disputes of fact between merchants under the customs of their industries where the parties possessed roughly equivalent bargaining power. He posed the pointed question: What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim? … In California’s perfectly rational view, nonclass arbitration over such sums will also sometimes have the effect of depriving claimants of their claims.13

10 Knepp v Credit Acceptance Corp 229 BR 821, 827 (Bankr ND Ala 1999), cited in Jean R Sternlight, ‘Creeping Mandatory Arbitration: Is it just?’ (2005) 57 Stanford Law Review 1631, 1632. 11 Ibid, 1635. 12 31 S Ct 1740 (2011). 13 Ibid, 9–10.

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It has been suggested that, in reliance upon Concepcion and other decisions,14 firms in the United States are engaging in arbitration ‘boot strapping’ – inserting into arbitration clauses provisions shortening limitation periods, reducing recoverable damages and preventing recourse to injunctive relief.15 Ultimately, exploitation of expansive interpretations to the disadvantage of consumers and employees may lead to a public reaction giving rise to a change in the law. Such a reaction would be no more than a particular example of the way in which public policy plays a part in the history of arbitration. There are many published accounts of the history of arbitration which demonstrate the significance of public policy to its development. It is perhaps sufficient for present purposes to refer to the early connections between arbitral and judicial processes developed in the 17th century.16 While the enforceability of arbitral awards could be supported by covenants on indenture, conditional obligations and parol contracts, it seems the most effective mechanism was to commence a proceeding in the court and have it referred to arbitration. Thus, the submission to arbitration was a rule of court and a party not abiding by the award could be prosecuted for contempt. That form of submission was made easier by the English Arbitration Act 169817 which did not require the prior commencement of proceedings in the Court. It was described by Lord Mansfield in 1759 as designed ‘to put submissions to Arbitration in cases where there was no cause depending upon the same foot as those where there was a cause depending’.18 The early close connection between the efficacy of arbitration and the judicial system is striking. By the 17th century, a system of arbitration law had emerged. Its elements were outlined by G Malynes in Consuetudo, Vel, Lex Mercatoria, (The Ancient Law Merchant) around 1670. An award had to be given in writing within the time limited by the agreement made between the parties.19 The arbitrators had to determine all the points of difference referred to them. They could not require any of the parties to perform any unlawful act nor could they make an award inconsistent with any court order or judgment. The character and purpose of arbitration was described in terms reflecting an enduring public policy as a means of resolving disputes between merchants: by way of Arbitrement, when both parties do make choice of honest men to end their causes, which is voluntarie and in their own power, and therefore called Arbitrium, or free will, whence the name Arbitrator is derived; and these men (by some called Good men) give their judgments by Awards, according to Equitie and Conscience, observing the Custome of Merchants, and ought to be

14 American Express Co v Italian Colors Restaurant 133 S Ct 2304 (2013); D’Antuono v Service Road Corp (2011) 789F Supp 2d 308; Kaltwasser v AT&T Mobility LLC (2011) 812F Supp 2d 1042. 15 CR Leslie, ‘The Arbitration Boot Strap’ (2015) 94 Texas Law Review 266. 16 An elegant and succinct history was set out in a lecture delivered by Lord Parker in 1959: Lord Parker, The History and Development of Commercial Arbitration: Recent Developments in the Supervisory Powers of the Courts over Inferior Tribunals: Lectures (Magnas Press, Hebrew University, 1959) 14. 17 Statute 9 & 10 Will III c 15. 18 Lucas ex de Markham v Wilton (1759) 2 Burr 701, cited in Parker (n 16) 14. 19 Ibid.

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void of all partialitie or affection more nor lesse to the one, than to the other, having onely care that right may take place according the truth, and that the difference may bee ended with brevitie and expedition ….20 That rationale has informed public policy down the centuries and across many different national jurisdictions. The consensual character of arbitration and its associated flexibility was recognised by the General Assembly of the United Nations in its Resolution on the United Nations Commission on International Trade Law (UNCITRAL) Model Law in 1985, as supporting its acceptability to States with different legal and social economic systems. Also recognised in that Resolution were the indispensable requirements of fairness and efficiency. An important question in the history of arbitration has been who should decide contested questions of law? In an age where non-consensual review for error of law is precluded or restricted, the question is still of importance. It feeds into the larger debate about the function of arbitration in connection with the rule of law and the place of judicial power. Historically, the Courts of England developed the notion of judicial review of awards for error of law on the basis that they were the ultimate arbiters of the content of the common law and the interpretation of statutes. The review jurisdiction was definitively asserted by the Kings Bench judges sitting en banc in Kent v Elstob21 in 1802. An arbitral award could be set aside for mistake of law if it were apparent on the face of the award or from a statement of reasons in writing given by the arbitrator at the time of the award.22 That power was seen as an aspect of the inherent power of the Court. The English Arbitration Act 1889 established a ‘systematic code of law … amending and consolidating previous practice’.23 It provided a statutory basis for courts to require an arbitrator to state the award in the form of a special case so that point of law arising in the reference could be determined.24 The inherent power to review for error of law on the face of the award was left in place. History demonstrates the practical difficulties that could arise when arbitrators decided questions of law and judges reviewed them. The answer to those difficulties sometimes depended upon institutional perspectives. In 1958, Lord Goddard pointed out that a matter could go to an arbitrator, then to the Appeal Committee of the relevant Association which could reverse the arbitrator, then to a judge who could reverse the Appeal Committee and then to the Court of Appeal which could reverse the judge.25 He said sardonically, and perhaps revealing an antipathy to arbitration, ‘that is one of the beauties, and shows the “economy”, of going to arbitration’.

20 G Malynes, Consuetudo, vel, Lex Mecatoria, quoted in Doug Jones, Commercial Arbitration in Australia (2nd edn Thomson Reuters, Australia 2013) [1.160]. 21 (1802) 3 East 18; [102 ER 502]. 22 Ibid, approved in Hodgkinson v Fernie (1857) 140 ER 712. 23 Parker (n 16) 19. 24 Ibid. 25 Kyprianou v Cyprus Textiles Ltd (1958) 2 Lloyds List Rep 60.

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In the new era of the Arbitration Act 1979 (UK), which abolished judicial review for error of law on the face of the award26 and withdrew the power of an arbitrator to accede to a party request to state a case for the court, appeal from an arbitral award was limited by a leave requirement with constraints on successive appeals to the Court of Appeal and the House of Lords. The new regime was first considered by the House of Lords in 1981 in Pioneer Shipping Ltd v BTP Tioxide Ltd27 concerning a charterparty for the ship ‘Nema’. The arbitrated dispute in that case involved a question of frustration and what was characterised in the House of Lords as a ‘one-off clause’ in the charterparty. Lord Diplock emphatically set a new direction of public policy in favour of arbitral finality which significantly limited the scope for judicial review: it is not self-evident that an arbitrator or arbitral tribunal chosen by the parties for his or their experience and knowledge of the commercial background and usages of the trade in which the dispute arises, is less competent to ascertain the mutual intentions of the parties than a judge of the Commercial Court, a Court of Appeal of three Lords Justices or even an Appellate Committee of five Lords of Appeal in Ordinary.28 That observation reflected the earlier comment of Lord Denning in the Court of Appeal in the same proceedings, that a commercial arbitrator was better placed to interpret the contract than a judge.29 It was Robert Goff J who had granted leave at first instance in the Nema case and had also granted leave to appeal to the Court of Appeal from his own decision. He was reversed in the Court of Appeal and the House of Lords upheld the decision of that Court. Lord Diplock did not spare the judge at first instance in whose honour this lecture is given. Not only should he have not granted leave, but he had got the construction question wrong. Lord Diplock raged on: it is one of the ironies of the instant case that if the judge’s initial error in granting leave to appeal to the High Court had not been compounded by his also giving a certificate and leave to appeal to the Court of Appeal … (which a fortiori in such a “one off” case he never should have done), the owners would have been left with a decision against them which, although it is not one of general public importance, both the Court of Appeal and this House have held unanimously to be wrong.30 Speaking of that decision in his speech delivered in March 2016, Lord Chief Justice Thomas, who regarded it as a wrong turning prejudicial to the role of the commercial courts in the development of commercial law, said,

26 Arbitration Act 1979 (UK), s 1(1). 27 [1982] AC 724. 28 Ibid, 736. 29 Pioneer Shipping Ltd v BTP Tioxide Ltd [1980] QB 547. 30 [1982] AC 724, 740.

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Before the case reached the House of Lords, a very great commercial judge, Robert Goff J (later Lord Goff) pointed out in unanswerably correct terms the fallacies in the approach of Lord Denning. It was to no avail. In the House of Lords Lord Diplock set out guidelines for the very strict approach by what was clear judicial legislation implementing the ideas which he had foreshadowed in his Alexander Lecture.31 There is no doubt that judicial involvement in the arbitral process can lead to procedural complexities and delays of the kind adverted to by Lord Goddard and Lord Diplock. Whether there is a binary choice between enhanced finality for the arbitrator or disposition by a commercial court may depend upon institutional perspectives. The remarks of Lord Goddard and Lord Diplock, which seem to have come at the problem from different directions, may be compared with those of Heydon J in Westport Insurance Corporation v Gordian Runoff Ltd.32 Those proceedings had begun with points of claim in an arbitration commenced in 2004 and ended with a judgment of the High Court in 2011. Heydon J observed, A commercial trial judge would have ensured more speed and less expense. On the construction point it is unlikely that the arbitrators had any greater relevant expertise than a commercial trial judge. Secrecy was lost once the reinsurers exercised their right to seek leave to appeal. The proceedings reveal no other point of superiority over conventional litigation. One point of inferiority they reveal is that there have been four tiers of adjudication, not three. Comment on these melancholy facts would be superfluous.33 Arbitration cannot be quarantined from the judicial system. It relies upon the courts to enforce its awards. The law sets limits on enforcement. But the more intrusive the courts are, the greater the risk that the legitimate benefits which parties seek from arbitration will be compromised. On the other hand, as already observed, the displacement of the courts from commercial dispute resolution will diminish their role in the development of commercial law with implications for transparency, consistency and predictability. It may be a case of horses for courses. The extent to which arbitration is adapted to particular kinds of disputes informs party choices. The PwC and Queen Mary University of London 2013 Survey of Corporate Choices in International Arbitration showed that across all sectors, respondents referred as many disputes to arbitration as they did to litigation. The incidence of choices for arbitration varied across industry sectors. For entirely understandable reasons, arbitration was overwhelmingly favoured by the construction industry and preferred by the energy sector. On the other hand, the courts tended to be favoured by the financial services sector. There was a general background concern noted in the Report about costs and delay and increasing formality tending to make arbitral proceedings more like litigation, a phenomenon referred to in the Report as the ‘judicialisation of arbitration’. Such concerns

31 Thomas (n 8) [19] (footnotes omitted). 32 Westport Insurance Corporation (n 1). 33 Ibid, 288 [111] (emphasis in original).

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can engage the choice-making mechanisms of the free market. It should not be thought, however, that market trends affected by private judgments about the utility of arbitration can be quarantined altogether from the public policy underpinnings of the regimes which support it. Arbitration, which continues to serve its historic purposes, will no doubt continue to be seen as serving the public interest in the fair and efficient conduct of commercial transactions. To the extent that any of those benefits are diminished, the market may respond and, in extremis, regulatory or supervisory measures may be invoked to protect the process itself and to ensure that it continues to serve the public interest. There is nothing particularly novel in that observation. Lord Parker, former Lord Chief Justice of England and Wales, in a very fine lecture in 1959 on the history and development of commercial arbitration, reflected upon the changeable character of public policy and the public interest when he said ‘laws and legal systems are not immutable systems of logic, but the living creatures of the society whose functioning they have to serve’.34 He described the history of commercial arbitration as a reminder that the task of lawyers of any generation is not only to administer and apply the law, but to reflect on it, and to mould it to the needs of the time and to leave it vigorous and flexible for the accommodation of problems which are to come.35 The High Court considered the policy basis of Australia’s statutory support for international commercial arbitration in TCL Air Conditioner (Zhongshan) Co Ltd v Judges of the Federal Court of Australia.36 Castel Electronics Pty Ltd had applied under the International Arbitration Act 1974 (Cth) to the Federal Court of Australia to enforce an arbitral award in its favour. TCL applied to the High Court to quash a decision of the Federal Court that it had the requisite jurisdiction and for a constitutional writ of prohibition against the Judges of the Federal Court. The High Court dismissed TCL’s application. Enforcement of the arbitral award gave effect to the parties’ agreement to submit their dispute to arbitration. It did not therefore involve the enforcement of the rights and liabilities which were the subject of the dispute submitted to arbitration. Contrary to TCL’s submission, the award by the arbitral tribunal was not an exercise of judicial power. Its authority was founded on the agreement of the parties. The inability of the Federal Court to review the award for error of law was not incompatible with the institutional integrity of that Court. The joint judgment of Hayne, Crennan, Kiefel and Bell JJ acknowledged the modern policy, reflected in the objects of the International Arbitration Act, of recognising and encouraging private arbitration as a valuable method of settling disputes arising in international commercial relations. Their Honours also recognised the way in which parties from different legal systems could agree to arbitration and in so doing choose both the law or laws to be applied and the processes to be followed.37

34 Parker (n 16) 24. 35 Ibid. 36 (2013) 251 CLR 533. 37 Ibid, 559 [45].

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Gageler J and I referred to the way in which ‘at every stage’ of its development, English law and the law governing arbitration in Australia, approached the relationships between the parties to arbitration, inter se, and between those parties and the arbitrator, unequivocally in terms of private law.38 We also stated, however, that arbitration was not purely a private matter of contract and that it was not ‘wholly divorced from the exercise of public authority’.39 The external public policy so far discussed informs legislative support for arbitration as reflected in objects provisions and the schemes of international and legislative regimes. Another less altruistic strand, not necessarily reflected in the stated objects of the statutes, is recognition of the benefit of attracting commercial dispute resolution business to national jurisdictions. That object was made explicit in the consultation paper published by the Department of Justice of Hong Kong on the draft Arbitration Bill, which became the Arbitration Ordinance 2011 unifying the international and domestic commercial arbitration regimes. The purposes of the reform were described in the consultation paper as follows: •

to make the law of arbitration more user-friendly to arbitration users, both in and outside Hong Kong;

•

to enable the Hong Kong business community and arbitration practitioners to operate an arbitration regime which accords with widely accepted international arbitration practices and development as the Model Law is familiar to practitioners from both civil law and common law jurisdictions;

•

to attract more business parties to choose Hong Kong as the place to conduct arbitral proceedings, as Hong Kong will be seen as a Model Law jurisdiction; and

•

to promote Hong Kong as a regional centre for dispute resolution.40

There are two ways of looking at those objectives. One is that they are an appropriate response to the requirements of international markets for legal and dispute resolution services. Another is that, if given undue priority, they may elevate the demands of private actors in the market placed for dispute resolution services above what is best for the development of the law – a theme reflected in Lord Chief Justice Thomas’ speech.

III. Internal public policy criteria This article has been concerned largely with what I have called public policy external to the operation of arbitral regimes. Public policy criteria internal to the operation of arbitration regimes are embedded in important conventions and domestic statutes giving effect to them. Articles 34 and 36 of the UNCITRAL Model Law provide respectively for applications for setting aside arbitral awards and for the grounds upon which recognition or enforcement of arbitral awards may be refused. Article 34(2)(b) provides that an arbitral award may be set aside by the relevant court if the court finds that-

38 Ibid, 546 [9], citing Mustill and Boyd, Commercial Arbitration (2nd edn Butterworths, London 1989) 4. 39 Ibid, 546 [9], citing Westport Insurance Corporation (n 1), 261–262 [20]. 40 Department of Justice of the HKSAR, Consultation Paper: Reform of the Law of Arbitration in Hong Kong and Draft Arbitration Bill (Department of Justice of the HKSAR, December 2007) ix [3].

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(i) the subject matter of the dispute is not capable of settlement by arbitration under the law of this State; or (ii) the award is in conflict with the public policy of this State. Article 36(1)(b) sets out the same criteria as grounds for refusing to recognise or enforce an arbitral award. It is said to set neither standards nor limits for the courts of the State where the award was rendered for their decision-making process as to setting aside or suspending the award. Applications to set aside an award in its country of origin under the New York Convention are governed by the domestic law of the seat State.41 Article V of the Convention sets out grounds for refusal to recognise and enforce an arbitral award in terms similar to those in Article 36(1)(b) of the UNCITRAL Model Law. The first ground upon which an award may be set aside or recognition refused under those articles necessarily involves such public interest considerations as are embraced in the concept of arbitrability. The second ground extends to potentially wider ranging considerations. The term ‘public policy’ is not defined in either Convention. There are few domestic statutes which expand upon it. The content given to it may understandably vary from jurisdiction to jurisdiction. Perhaps the most important question to be asked with respect to any jurisdiction is the extent to which public policy criteria, whether going to arbitrability or enforcement, are applied restrictively or expansively. In October 2015, the International Bar Association (IBA)’s Sub-committee on the Recognition and Enforcement of Arbitral Awards released a Report on the public policy exception in Article V of the New York Convention.42 The first observation in the Report was that in none of the 44 reporting jurisdictions which it covered was public policy statutorily defined, apart from Australia and the United Arab Emirates. The IBA reporters concluded that in the vast majority of national jurisdictions, a violation of public policy implies a violation of fundamental or basic principles. In many jurisdictions, it covers both procedural and substantive matters. The ground is differently expressed by courts and academic commentators in civil law and common law jurisdictions. Civil law jurisdictions refer to the basic principles or values upon which the foundations of society rest. Common law jurisdictions are said to invoke broad values such as justice, fairness or morality. In most of the countries surveyed, it was not enough to say that an award offended or violated public policy. The violation had to be of a certain nature or level. A colourful array of intensifying epithets used in the various jurisdictions was set out. They included ‘clear’, ‘concrete’, ‘evident’, ‘patent’, ‘blatant’, ‘manifest’, ‘obviously manifest’, ‘flagrant’, ‘particularly offensive’, ‘severe’, ‘intolerable’, ‘unbearable’ and ‘repugnant to the legal order’. Perhaps encouragingly from the point of view of arbitrators, the intensifying epithets do suggest a general acceptance that public policy criteria are to be applied with

41 Reinmar Wolff (Ed), The New York Convention: Convention on the Recognition and Enforcement of Foreign Arbitral Awards—Commentary (Beck/Hart, 2012) [379]. 42 International Bar Association Subcommittee on Recognition and Enforcement of Arbitral Awards, ‘Report of the Public Policy Exception in the New York Convention’ (October 2015) <http://www.ibanet.org/LPD/ Dispute_Resolution_Section/Arbitration/Recogntn_Enfrcemnt_Arbitl_Awrd/publicpolicy15.aspz>.

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restraint consistently with the objectives of the New York Convention and the UNCITRAL Model Law. Against that background, some reference should be made to the concept of arbitrability expressed in the terminology ‘subject matter incapable of settlement by arbitration …’.

IV. Arbitrability The history of the term ‘subject matter incapable of settlement by arbitration under the law of the country in which the award is sought to be relied upon’ goes back to the Geneva Convention on the Execution of Foreign Judicial Awards 1927. It was discussed by Allsop J in Comandate Marine Corp v Pan Australia Shipping Pty Ltd.43 He identified as nonarbitrable matters in which there was a sufficient legitimate public interest rendering the enforceable, private extra-curial resolution of disputes concerning the matter inappropriate. That judgment made the important distinction, reflected in a number of other judgments, between arbitrable subject matter and non-arbitrable remedies which may arise out of that subject matter. Judgments about what is arbitrable and what is not vary from jurisdiction to jurisdiction, although there seems to be a significant degree of overlap or common ground. The Arbitration Law of China, in Article 3, expressly provides that certain disputes will not be submitted to arbitration. They are as follows: (1) disputes over marriage, adoption, guardianship, child maintenance and inheritance; and (2) administrative disputes falling within the jurisdiction of the relevant administrative organs according to law. These are not altogether dissimilar from grounds of non-arbitrability developed in the courts of other jurisdictions. Generally speaking, Australian courts have taken a narrow approach to arbitrability.44 Recently, Bathurst CJ in the New South Wales Court of Appeal in Rinehart v Welker,45 which concerned arbitrability of disputes under a trust deed, reaffirmed that it was ‘only in extremely limited circumstances that a dispute which the parties have agreed to refer to arbitration will [be] held to be non-arbitrable’. The mere fact that a dispute involves statutory rights subject to a statutory regime does not take it out of the scope of arbitral matters. By way of example, in Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd,46 Hammerschlag J held that while an arbitrator could not grant a patent or make a declaration of eligibility in

43 (2006) 157 FCR 45. 44 Government Insurance Office of New South Wales v Atkinson-Leighton Joint Venture (1981) 146 CLR 206, 246–47 (Mason J); Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160, 167 (Gleeson CJ). 45 [2012] NSWCA 95 [16]. 46 (2011) 279 ALR 772.

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relation to an inventor, he or she could be authorised to resolve disputes about rights and entitlements in relation to a patent application or invention. He identified as non-arbitral matters criminal prosecutions, determinations of status such as bankruptcy or divorce, the winding up of corporations in insolvency and disputes about intellectual property, such as whether or not a patent or trade mark should be granted. As he said, ‘[t]hese matters are plainly for the public authorities of the state. Patents and trade marks are monopoly rights that only the state can grant’.47 The distinction between arbitrable subject matter and non-arbitrable remedies was considered by the English Court of Appeal in Fulham Football Club (1987) Ltd v Richards.48 The question was whether a member of the football club could bring oppression proceedings under the Companies Act 2006 (UK) against the Club chairman or was constrained to arbitration by an arbitration clause in the Club Rules. Patten LJ observed that the Arbitration Act 1996 (UK) left open the possibility of an application for a stay on the ground of lack of arbitrability, but did little to identify the basis of any such application. He observed, quoting Mustill and Boyd, that English law has never arrived at a general theory for arbitrability. I interpolate that given the way in which arbitrability is informed by the numinous concept of public policy, that it is hardly surprising. Patten LJ accepted that there were public policy limits on the remedies which an arbitrator appointed by private parties could award. Those limits were expressed in terms similar to those expressed in the Australian cases. His Lordship held that members of a company could submit disputes inter se to a process of arbitration. He said, A dispute between members of a company or between shareholders and the board about alleged breaches of the articles of association or a shareholder’s agreement is an essentially contractual dispute which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties.49 However, the question whether a company should be wound up was not arbitrable because it was within the exclusive jurisdiction of the courts. Longmore LJ in the same case reaffirmed the public policy purposes of the Arbitration Act 1996 that ‘the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest’ and concluded that public policy had a part to play only as a ‘safeguard … necessary in the public interest’.50 Lord Justice Rix agreed with both Lord Justices Patten and Longmore.51 The Supreme Court of the United Kingdom dismissed an application by the petitioner for permission to appeal against that decision.

47 Ibid, 783 [64] (citation omitted). 48 [2012] Ch 333, 343 [38]. 49 Ibid, 355 [77]. 50 Ibid, 361 [98]. 51 Ibid, 362 [106].

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The distinction between arbitrable disputes about rights and obligations and nonarbitrable remedies restricted to the courts or other public institutions is well illustrated by cases involving intra-company disputes of the kind considered in the Fulham Football Club decision. There have been a number of such cases in Singapore, Hong Kong and Australia.52 Questions of arbitrability sometimes involve the reconciliation of the fields of operation of arbitration legislation and some other statutory scheme. This is reflected in the judgment of VK Rajah JA in Larsen Oil and Gas Pte Ltd v Petroprod Ltd,53 where he said, we accept that there is ordinarily a presumption of arbitrability where the words of an arbitration clause are wide enough to embrace a dispute, unless it is shown that parliament intended to preclude the use of arbitration for the particular type of dispute in question (as evidenced by the statute’s text or the legislative history), or that there is an inherent conflict between arbitration and the public policy considerations involved in that particular type of dispute.54 A legislative intention to preclude arbitration may appear from the text, context and purpose of a statute specifically dealing with a particular subject matter and making exhaustive provision for resolution of disputes arising out of it.

V. Public policy grounds The express public policy grounds for setting aside or refusing to recognise or enforce an award have already been discussed in general terms. They embrace, under the Australian Acts, unfairness and fraud or corruption. The concept of unfairness gives effect to Article 18 of the Model Law, which requires that ‘[T]he parties shall be treated with equality and each party shall be given a full opportunity of presenting his case’. As Allsop CJ pointed out in a paper presented in November 2014, fairness involves both the hearing rule and the bias rule. The hearing rule requires that the arbitrator hears from a party before making a decision on an issue affecting that party’s interests. There may be a question whether it imports a requirement of diligent attention to all the claims made and material advanced by each party. However, as he also pointed out, judicial restraint applies. The hearing rule cannot be invoked as a means of revisiting the factual merits of an arbitration decision. And the bias rule requires that the arbitrator be impartial as between the parties. It is also important that arbitral tribunals do not conduct themselves so as to compromise the appearance of neutrality. A question of that kind arose in Hong Kong in Gao Haiyan v Keeneye Holdings Ltd.55 In that case, Saunders J held that basic notions of morality and

52 A Best Floor Sanding Pty Ltd v Skyer Australia Pty Ltd [1999] VSC 170; Trident Inc v Trident Australia Pty Ltd [2002] NSWSC 896; Re Quicksilver Glorious Sun JV Ltd [2014] HKLRD 759; Tomolugn Holdings Ltd v Silicor Investors Ltd [2015] SGCA 57. 53 (2011) 3 SLR 414. 54 Fulham Football Club (n 47), 354 [75], citing Larson Oil and Gas Pte Ltd v Petroprod Ltd (2011) 3 SLR 414 [44]. 55 [2010] HKEC 1694.

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justice in Hong Kong could not permit private communications between a member of the tribunal and a party when the arbitration had commenced. In so doing, the judge had regard to the leading authority in Hebei Import and Export Corp v Polytek Engineering Co Ltd,56 which equated the term ‘contrary to the public policy of that country’ with ‘contrary to the fundamental considerations of morality and justice in the Forum’.

VI. Conclusion The decisions of courts applying concepts of arbitrability and public policy have sometimes been designated as pro-arbitration or anti-arbitration, depending upon the outcome. It is necessary to be cautious about those designations, which can be indicative of advocacy rather than assessment. Arbitration is not like a football code attracting the rule that if you are not for us you are against us. And while healthy competition between jurisdictions is important for the development of innovative approaches to dispute resolution, public policy should not just be about attracting business. Nor can judicial decision-making be about attracting labels such as ‘pro-arbitration’ or ‘arbitration-friendly’ and thereby attracting non-judicial business to the jurisdiction. Clearly, there is a lot of room for movement in the public policy judgments which inform the structure and content of legal regimes supporting and governing arbitration and their interpretation and application. There is a powerful international public policy reflected in that of many countries which strongly support arbitration as a dispute resolution mechanism. In such countries, there is for the most part a recognition that countervailing public policy considerations may properly limit the scope of the arbitral process and require a degree of supervision of it. Coupled with that is a recognition that public policy criteria in relation to arbitrability recognition and enforcement must be applied with care and restraint. It is, of course, a responsibility of all those engaged in the practice of commercial arbitration to ensure that they and the process in which they engage not only serve its users but continue to be sensitive to and to respect the public interest. That is its greatest assurance of its long-term future.

56 (1999) 2 HKCFAR 111.

Making the Best of Arbitration David Hope* It is a very great honour to have been invited to give this Goff Lecture. This is because I had the privilege of sitting as a member of the Appellate Committee of the House of Lords for three years from 1996 to 1998, when Lord Goff was the senior Law Lord. He was the most charming companion you could imagine. He combined a superb legal mind with two qualities which he thought were essential for a judge but are not universally met with in the judiciary ‒ diffidence and modesty. He did not throw his weight around or try to force his opinions on others. He always listened carefully to what you had to say in our discussion after each hearing, even though he did not always agree with you. He was, you might say, the ideal arbitrator, although I think that it was many years since he last sat in that capacity. Lord Goff became a judge in 1975. That excluded him from the practice of arbitration for the rest of his career until retirement. In the United Kingdom (UK), serving judges cannot accept appointment as private arbitrators. But, like so many judges who had been practitioners at the Commercial Bar in London, he was very familiar with the system. He admired it for all its best qualities, with which his own approach to his work as a commercial judge was very much in sympathy. It was his interest in arbitration which gave rise to this series of lectures. He delivered the first lecture here in 1990 under the title ‘Future Imperfect’. This is the 22nd lecture in the series. Many very distinguished arbitration practitioners have followed in his footsteps, most of them much more experienced in the art than I am. But I think that I can claim to be the last in the line of those who sat as judges with Lord Goff. So few of those who did so are still with us, and I am by some years the youngest of them. That is why I am especially grateful for this invitation. I have given my lecture the title ‘Making the best of arbitration’. I hope that you have not misunderstood what I meant by this. I am not trying, to use the familiar expression, to make the best of a bad job. It is not my intention to suggest that, as a means of settling disputes, arbitration is second best. Quite the reverse. What I am hoping to do is to draw attention to some of its merits and advantages, and to suggest ways in which those who use the system, whether as lawyers or as arbitrators, can get the best out of it. Of course, the title I have chosen for myself begs a lot of questions. What is the purpose of arbitration? How should one set the process up to get the best out of it? How should the process itself best be conducted? What best qualifies someone to be an arbitrator? Are judges better at this than other professionals? If you have a choice, what are the differences

* Lord Hope of Craighead, formerly Deputy President of the UK Supreme Court, London, UK. Lord Justice General of Scotland and Lord President of the Court of Session, 1989-1996; Lord of Appeal in the House of Lords, London, 1996-2009; Deputy President of the UK Supreme Court 2009-2013; Chief Justice of Abu Dhabi Global Market Courts since 2015. Editorial note: This is the text of the Twenty-Seconf Goff Lecture delivered on 12 February 2018 at the City University of Hong Kong. It was originally published at (2018) 26(1) Asia Pacific Law Review 1-13.

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between the judicial and the arbitral processes? What is one to make of third-party funding, which Hong Kong now permits? What does one expect of the award? Is dissenting, if you are one of three arbitrators, a worthless gesture? You may think that there are other questions too. I shall do what I can to answer at least some of them, but I hope that you will think about the answers too. There is room for differences of opinion. Arbitration is not a precise science, after all. I must first say something about my own background and my own experience of arbitration practice from which lessons can be learned. My career can be divided into three phases. The first was when I was in practice at the Scottish Bar. The second phase was my career as a judge, first in Edinburgh as Lord President of the Court of Session and Lord Justice General of Scotland, then as a Lord of Appeal in the House of Lords and finally as a Justice of the UK Supreme Court. And the third phase is my career as an international arbitrator since my retirement from the UK Supreme Court. Each of these phases brought something to my attention which is relevant to my theme of making the best of arbitration. When I was in practice at the Scottish Bar, I appeared before arbitrators as counsel, usually in disputes arising out of building or engineering contracts. The standard forms which have been developed to serve the needs of that industry are invariably supplemented by arbitration clauses which provide for the appointment of architects or engineers as arbitrators. These are men of skill, thought to be better equipped to adjudicate on the kind of disputes that such contracts give rise to. So there was no opening for people like me to sit in that kind of case as an arbitrator. We were employed instead as counsel. But there were other opportunities for arbitrating outside the field of building and engineering contracts, and I did sit from time to time as a sole arbitrator in cases where the point at issue was one of law. Even at this early stage in my career I was impressed by how varied the issues were that may go to arbitration. But I also saw that the skills that were needed for someone to be an arbitrator were varied too. What, then, is the purpose of arbitration? The simple answer is that it is to provide a means of resolving disputes other than through the courts. Alternative dispute resolution, or ‘ADR’ as it is called for short, is not a new idea. It has been with us almost since the start of civilisation itself, when there were no courts to which one could go at all. Today, there are quite a number of places where there are courts but where, for a variety of reasons, they are best avoided. There are other places – and Hong Kong is certainly one of them – where one can be confident that one can obtain well-informed and impartial justice. But considerations of time and cost may suggest that you would be better to resolve your dispute outside the court system. Then, there is the fact that arbitrations are conducted in private. Commercial organisations may prefer that to the publicity that litigation in court will attract. So the law usually allows them to make that choice. Freedom of contract, one of the cardinal principles of the rule of law, permits parties to opt out of the court system if they agree to do so. But what can and what cannot go to arbitration is not a matter about which the parties, or even the arbitrators themselves, have the last word. This is a matter of law too. There is no point in taking something to arbitration if the award cannot be recognised or enforced because the courts regard the issue in dispute as not arbitrable. National laws vary, but there are things about which they are all agreed. Issues of criminal law and issues that affect

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someone’s status – issues about the relationships of husband and wife and of parent and child, for example – cannot be referred to arbitration. It is common too to find that courts will refuse to recognise or enforce an award if to do so would be contrary to the public policy of the country. This is one of the grounds on which recognition and enforcement will be denied under Article V2(b) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). What amounts to public policy for this purpose is not capable of precise definition. In countries which are subject to the Sharia law, for example, it might seem that the fact that the public policy objection under that system may extend to the protection of moral and social values is unlikely to affect arbitration. But it has been held that it can extend to protecting the weak by insisting on due process too, and even to protecting the economy of the country. So its application in a given case may be hard to predict, especially as in those jurisdictions the judges can raise the issue even if the parties have not done so. I do not wish to over-dramatise the point. As a general rule, any dispute that falls within the umbrella of commercial law will be arbitrable. But you should bear in mind that this rule may be less certain of its application in some countries than in others, especially where state entities are involved. What about the skills that one should expect of the arbitrator? I think that there is a lot to be said for taking the subject matter of the dispute as the best guide to the skills that are needed. The field of professional skills that can be called upon is very wide, after all. This is one of the things that gives arbitration as a method of resolving disputes an advantage over a court process presided over by a judge. One can call upon actuaries, architects, engineers or others of that kind who are not trained lawyers but are better able than lawyers to grasp the technical issues. That may save time and cost, as there is that much less need for expert evidence. So it is common for arbitration clauses in standard form building or engineering contracts to provide that the choice of arbitrator, failing agreement, is to lie with the president of the relevant professional institution. Lawyers may have a look in here too, as the choice under a standard form may lie with the president of the relevant law society if issues of law are those that are most likely to arise. The arbitration institutions, such as the International Court of Arbitration of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA) and the Hong Kong International Arbitration Centre (HKIAC), have a wide range of people on their lists to whom they can turn if they are chosen by the parties as the appointing authority. In the case of one-off, ad hoc arbitrations where there is no pre-existing arbitration clause, the parties will have to form their own judgement. They will have to make their own inquiries as to whom to appoint. In the case of a tribunal of three, the third arbitrator will act as the presider and usually take on the responsibility of preparing the draft award. So the choice here, which usually rests with the other two, is especially important. Those most suited to this task are often very busy, but it is well worth going to some trouble to find them. Setting up the process involves thinking of other things when drafting an arbitration clause, or a reference in an ad hoc case. Let me give an example. In my early days, I appeared as counsel in an arbitration in which my clients were a Scottish company. The claimants were a company from England. Premises near Glasgow owned by the English company were being converted for the storage and maturation of whisky. My clients had been carrying out some of the conversion work under one of the earlier and, by today’s standards, rather primitive

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standard forms of contract issued by the Royal Institute of British Architects (RIBA). One of the walls which they had built was said by the employer to be defective. So, there was a dispute between the parties, and the arbitration clause was invoked. All that the clause said was that any dispute arising from the contract was to be decided by a person appointed by the President of the RIBA. It said nothing about where the arbitration was to be held or which system of law was to be applied – was it the Scottish system or the English system? The UK, you should remember, is one country with two systems of law. So we had to work this out for ourselves. The obvious place for the hearing was Glasgow, where the building work had been done. The arbitrator whom the President of the RIBA appointed was an architect based in Glasgow, and the proceedings were dealt with throughout under Scots procedure with Scottish counsel on both sides. Now, one of the features of Scots law at that time was that the arbitrator was final on both fact and law. This was significant, as by the end of the hearing, it had become fairly obvious that we had the arbitrator on our side and that we were going to win. The other side appreciated that too because, just as the hearing was about to end, they sprang a surprise on us. They asked the arbitrator to issue his award in the form of a stated case for the opinion of the High Court in England. That remedy was not available in Scotland. It had not occurred to anyone on my side of the case that the arbitration which we were engaged under Scots procedure in Glasgow was being held under English procedural law or that we would subjected to the English stated case procedure. Our immediate impression, as we seemed to be on the winning side, was that this was just a tactic to thwart the enforcement of an award in our favour. But the other side objected to the idea that the arbitrator was final in law as well as on fact under Scots law. That was not so under the procedural law of England with which they were familiar. What had seemed to us to be a rather routine domestic affair had been transformed into what we would now think of as an international arbitration, as there was a conflict between two legal systems. We were being confronted too for the first time with the phenomenon that is familiar in arbitration circles the world over today. It is one thing to secure an award in your favour. Whether you will actually be able to enforce it is something else. The opportunities for disputes at that stage are so much greater than is the case with a judgment issued by a court. And they are even greater where the parties come from different jurisdictions, with different systems of law. Various problems which would never have arisen in the context of a domestic arbitration were suddenly exposed for scrutiny. Our case underwent a see-saw process through the courts in England, resulting finally in an appeal to the House of Lords. It was not an easy case, and we lost on the question whether the contract in the RIBA form was governed by the law of Scotland even though Scotland had been chosen as the place for the performance of the arbitration agreement – its seat, in other words. But we won on the crucial issue, which was that the law governing the proceedings, the curial law, could be different from the law governing the contract to go to arbitration. The House of Lords held that in our case the parties’ conduct showed that the proceedings were governed by the law of Scotland.1 So, the arbitrator’s decision was

1 James Miller & Partners v Whitworth Street Estates (Manchester) Ltd [1970] AC 583.

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final in law after all. And as a result of that and subsequent cases the proposition is now firmly established that more than one national system of law may bear upon an international arbitration.2 Of course, we could have avoided these problems if the arbitration clause had dealt with them expressly in the first place, as one would expect an arbitration agreement to do today. To address one’s mind to this issue at the outset is the lesson to be got out of that case. I should have thought that no-one framing a cross-border agreement today would omit a choice of law clause, and that the question as to what procedural law is to be applied would have been solved before the arbitration process was entered into. But I was surprised to hear at a conference in London that I attended recently, and to read in a recently published textbook, that parties rarely choose the law that is applicable to the arbitration agreement.3 If this is so, it is a great pity. I would encourage you, if you are framing agreements in such cases, to make a practice of addressing this question to avoid time-wasting disputes in the future. If the parties do take the trouble to choose the law that is to be applied and to write that choice into the arbitration clause, their choice will in all but the most unusual case be given effect both by arbitrators and by the courts. All that is needed is clear and precise drafting. That will be an end of the matter. It could avoid a prolonged dispute if there is a choice between systems whose laws differ materially as to how the dispute should be decided. When, many years and several arbitrations later, I became a judge I took a particular interest in appeals which raised issues about arbitration law. Of course, hearing an appeal on a distinct issue of arbitration law is not the same as being engaged on the ground as an arbitrator or as an arbitration practitioner. The judge does not know the full story. The judge does not experience all the challenges and frustrations of those who are doing the work on the ground. Nor, unless he makes a much greater effort to remain in touch than I had time for, is he aware of how practice is changing and how it is reacting to new challenges. But those of us in the judiciary with previous experience of arbitration work do our best, when sitting as judges, to support that system of resolving disputes. Some jurisdictions are more arbitration-friendly than others. There are some who think arbitration is in some way inferior to the court process. There are others who think that parties should not be allowed to avoid the dispute resolution system provided by the state. But that is not how I and my colleagues in the House of Lords saw it. The global market for dispute resolution is huge and far-reaching. Loss of confidence in court systems is widespread, due to the cost and delay in some jurisdictions and the suspicion of corruption or state interference in others. A well-run arbitration conducted by arbitrators of undoubted integrity and ability, supported by the New York Convention when it comes to enforcement, can provide just as good a service as a commercial court in the leading jurisdictions in the common law world. In some places where business is done, it may be the only practicable way of obtaining a just result. So we welcomed the opportunity to promote arbitration whenever it came our way.

2 Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334, 357, per Lord Mustill. 3 Renato Nazzini, ‘The law governing the arbitration agreement: a transitional solution?’, in Renato Nazzini (ed), Transnational Construction Arbitration (Informa Law from Routledge, 2017) para 2.1.

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A case which best illustrates how judges can give effect to that policy is one in which I was involved called ‘Fiona Trust’.4 It was concerned with a preliminary dispute about the reach of the contractual machinery. It was alleged that the agreement which contained the arbitration clause had been procured by bribery. The question was whether the alleged invalidity extended to the arbitration clause, with the result that it would not be open to the arbitration tribunal to rule on the objection. It was quite a narrow point, and like any other case which turns on policy grounds, the decision could have gone either way. But it was plain that to uphold the objection would have been quite damaging. As it was, the judgment of the House of Lords established the important point that an arbitration clause is separable from the other provisions of the contract of which it forms part. It is now quite common for this to be laid down expressly by legislation, especially in jurisdictions which are seeking to make themselves attractive as a place for parties to arbitrate. You will find the same point made in Article 23 of the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, as revised in 2010. But, even if this is not provided for by legislation, the doctrine of separability is now clearly established as a general principle in international arbitration law. The significance of the decision in Fiona Trust is that it avoided the need for two sets of proceedings, with all the delays and risks that this would involve. Bear in mind too that, in default of its being dealt with under the arbitration clause, the dispute about the validity of the agreement might have to be decided by a court whose jurisdiction, for good reasons, the contracting party which had invoked the arbitration clause was most anxious to avoid. Had the decision gone the other way, it would have opened the door to mischiefmaking on quite a large scale. That would have defeated the object of choosing arbitration as the means for resolving disputes. My short career as an arbitrator between my retirement from the UK Supreme Court and my election as Convenor of the Crossbench group in the House of Lords, which has put a stop to it for the time being, has brought me for the first time in touch with international arbitration. Coincidentally, the last two decades have seen a very significant increase in resort to this process internationally. Much of this is due to a significant rise in the amount of business of all kinds that is done across continents as well as across borders, and to the uncertain legal climate in places where much of that business is now being done. The attraction of arbitration as an alternative means of resolving disputes to that of resorting to the courts is even more evident in that context. It is a context which gives rise to problems that require the arbitration agreement between parties in different jurisdictions to be framed with even more caution than usual as to its consequences. The elementary clause that we had in the Scottish case that I mentioned earlier is simply not good enough in the international context. This phase of my career introduced me to the fact that is quite common for standard forms to have embedded within them the choice of an institution and the rules that the institution has laid down. Of course, the parties are free to abrogate the imposition of any institutional rules and to adopt their own ad hoc procedures. There is no particular difficulty, given experienced counsel and arbitrators, in devising a procedural timetable and negotiating a package for

4 Premium Nafta Products Ltd v Fili Shipping Company [2007] UKHL 40.

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safeguarding the remuneration of the arbitrators which will create the right background for the timely and efficient resolution of the dispute. But the majority of commercial arbitrations are conducted under the rules of an arbitration institution which is regarded as relevant to the transaction that the parties have entered into or gives sufficient international coverage for their case. So I have found myself operating as an arbitrator in three different situations: in an ad hoc arbitration conducted under the UNCITRAL Arbitration Rules alone; in an arbitration conducted under the UNCITRAL Rules in conjunction with an institution as the appointing authority; and under an agreement which required the arbitration to be conducted under the much more demanding Rules of Arbitration of the ICC. There are various institutions throughout the world located in the most significant commercial centres, including the excellent HKIAC5 with which many of you will of course be familiar. The aim of these institutions is to provide a set of contractual rules to supplement the local law as to how the procedure of the arbitration is to be conducted. The HKIAC has the advantage in this jurisdiction of being a home grown institution with a strong knowledge of how things are done here and in the People’s Republic of China. But I can speak from my own knowledge of two others which are, perhaps, less often seen here – the ICC, whose base is in Paris and is the institution of choice in the Middle East, and the LCIA, which is based, as its name indicates, in London. The ICC’s system is based on the requirements of French law, among which is the drawing up of a fresh arbitration agreement in each case in the form of terms of reference designed to meet the needs of the particular case. Rules designed to achieve a universal system of recognition and enforcement have also been drawn up by UNCITRAL. The UNCITRAL Rules are no more than rules, with no accompanying institution. Most institutions have adopted the UNICTRAL Rules, which can also be adopted by the parties themselves where the arrangement is for an ad hoc arbitration. But the ICC has its own set of arbitration rules, which involve acceptance of its governing and regulating powers. They can result, in my admittedly rather limited experience, in a lot of extra work and much delay in comparison with what is the case when the arbitration is ad hoc. The ICC insists on scrutinising draft awards for its approval before they are issued to the parties.6 It is, as I understand it, the invariable practice where institutions are involved for awards to be delivered to them before they are transmitted to the parties.7 But practice varies as to what the institution does at this stage. In practice, some checking may be carried out, but I think that only the ICC insists on a rigorous process of scrutiny. This is valuable if the arbitrators are unskilled or unexperienced. But in other cases, it can result in prolonged delay, with no very obvious benefit in return. In my case, the draft award was sent in to the ICC in November 2014. It was not until the end of April of the following year, a period of more five months, that the draft was sent back to us with the ICC’s comments. They were confined for the most part to the correction of a few minor typing errors which we ourselves

5 The Hong Kong International Arbitration Centre, established in 1985. 6 See ICC Rules, Article 33. 7 Article 26.5 of the LCIA’s Arbitration Rules requires delivery of the award, when it has been signed, to the LCIA Court, which then sends certified copies of it to the parties.

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might well have picked up on a further reading of our draft. Attempts at our end to find out what was causing this delay were met by single line and wholly uninformative replies. I should add, in fairness to the ICC, that it has been taking significant steps since then to improve its performance. My experience several years ago should not be taken as a guide to how such matters would be handled today. But I cannot help feeling that the ICC’s system, which is noted for its rigidity, does not compare very well with the system I was used to in the UK Supreme Court. All its judgments are scrutinised by a member of a team of law reporters before they are released by the court for publication. But this process takes days, not months, for much the same result as that achieved by the ICC. In my ad hoc arbitration, we were able to issue our final award within three months of the end of the oral hearing, notwithstanding delays caused by the parties themselves in providing us with information about costs. The ICC has, quite rightly, been complimented on the success it has achieved in promoting the resolution of disputes by means of arbitration throughout the world. It can also be said that there is value in the process of careful scrutiny, as the quality and experience of arbitrators is bound to vary from case to case. But my impression overall is that the use of that institution may be an unnecessary complication in a case where there are no grounds for doubting the quality and ability of those who are to make up the panel of arbitrators. There have been calls for greater flexibility on the part of the ICC with a view to allowing its scrutiny requirements to be relaxed where the parties are satisfied that they are not necessary. So far as I am aware, however, they have not been heeded so far. As for the lesson to be taken from this phase in my career, it is that you should think carefully before writing words into an arbitration clause that will require the arbitration to be conducted according to the rules of an institution. There is no doubt that arbitration rules, whether through a contractually agreed institution or the application of the UNCITRAL Rules, perform a very important function. They allow the arbitration tribunal, if there is no agreement, to lay down the basic parameters by which the proceedings will be guided. This may include the place where they are to be held, the language to be used and perhaps also, if this has not already been agreed, the system of law that is to guide the procedure. I have no reason to doubt the service that the HKIAC provides here in Hong Kong. But what about cases where the seat of the arbitration will be elsewhere? You should ask yourself whether the kind of scrutiny that the ICC insist on is really necessary. Much will depend on the experience and quality of the persons you can expect to be chosen as arbitrators. That in turn may depend on the kind of people you are dealing with, and the jurisdictions they come from, when you are negotiating the contract. The safe option may well be to stipulate that the ICC Rules are to apply. But if there is good reason to expect that each party will go for the best when choosing their arbitrator, the safe option may prove to be more irksome than it needs to be. What then, about third party funding? The possibility that a litigant may need to be funded by a third party to obtain access to justice is not confined to arbitration. From time to time, domestic courts have to deal with the situation that someone other than a party to the case is controlling it in his own best interests. That may affect how the case is conducted, especially if the third party believes that he is immune from liability for costs. So, domestic courts are astute to make a finding for costs against a third party if its participation as controller is

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evident or admitted. But a phenomenon has grown up in the arbitration world which is that of third parties seeking to make money by offering their services and resources in return for a share of any award or settlement. Opinions are divided about this in the UK, where the industry has been growing steadily for more than a decade. On one view, it is beneficial, if the party concerned could not otherwise risk engaging in arbitration resulting in a lack of access to justice. A former Lord Justice of Appeal, Sir Stephen Sedley,8 said that it was an accepted and judicially sanctioned activity. It was in the public interest because it made justice more accessible. On another view, it is open to abuse, especially if the third party can conceal its involvement from the tribunal. It risks aggravating an already exploding case load, which could impose a disproportionate burden on some states. Lord Faulks QC9 called the practice parasitic. There was a risk that the whole thing would be about a commercial transaction with a desire for profit. It is certainly now big business. Litigation finance investors raised about ten billion US dollars worldwide last year for investment in legal claims. As you will know, the Legislative Council here in Hong Kong passed a law in June last year allowing third-party funding in arbitration, subject to the drawing up of an appropriate code of conduct.10 There is no doubt that this development, which had long been anticipated, is very much in the best interests of Hong Kong in its drive to enhance its status as one of the most popular seats for international arbitration. Singapore had taken that step a few months earlier, so the reform could not be delayed any longer. Although it was widely welcomed, I know of one arbitrator in this jurisdiction who is uneasy. His concern is mainly about how an arbitrator can enforce a duty of disclosure, a duty which is fundamental to the proper operation of the system. There are other points too, such as the extent to which the thirdparty funder can control the way the arbitration is conducted. Rules developed by the Paris Bar in February last year require counsel instructed for the funded party to act solely in their client’s interest, not to offer information or advice about the case to the third-party funder and to encourage their client to disclose the existence of the funding to the other party and to the court. They are supported by the profession’s disciplinary system in the event of any breach. Rules to that effect would go quite a long way to answering my friend’s concern, although they will, of course, be inapplicable in a case where the funded party is not represented. So, a code which is directed to the conduct of the third-party funder may be the better way of dealing with the matter. I have not seen the code of conduct that it is being developed here, but I am confident that account will be taken of the best international standards in its formulation. It is in Hong Kong’s best interests, after all, that its reputation should not be undermined by suggestions that by making this change in the law it has opened the door to unscrupulous operators who would be keen to exploit any loopholes. How, then, does it feel for someone like me to be sitting as an arbitrator after having sat as an appellate judge for 24 years? One is immediately struck by the fact that arbitrators sit much closer to the parties in the room than a judge usually does and by the more amicable and benign relationship which one strives to maintain throughout the process. The common

8 The Daily Telegraph (18 January 2018). 9 The Times (15 January 2018). 10 Arbitration Ordinance (Cap 609), Part 10A, sections 98E-98W.

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form of a general submission to arbitration in Scotland still refers to awards as the ‘amicable decision’ of the arbitrators. Jan Paulssson, in his well-known book The Idea of Arbitration, makes the same point. As he has observed,11 ultimately the arbitrator’s interest in the arbitrants is personal and benign – approachable and encouraging, rather than the interest that a judge takes in the litigants who appear before him, which is distant and authoritarian. Arbitrators do not wear robes, and they sit at the same level as the parties and their representatives. That was our practice in the House of Lords and in the UK Supreme Court anyway when I was sitting there. So for me, in that respect, there was no difference. But it does make it easier to relax into a state of relative informality during the hearing. As is indeed obvious, an arbitral tribunal is not to be equated with a panel of judges. Judges are not nominated or chosen by the parties. Judges sit in public. Their judgments are delivered in public too. They are addressed to a wide audience. And judges serve from week to week, month to month, hearing a succession of cases in the same court. In their case, there is continuity of employment. Arbitrators, on the other hand, are appointed ad hoc. They sit together once only, and once the case is over they are functus officio. Their business is done. They may never sit together again. Furthermore, arbitration is, by its very essence, a private arrangement. The award is addressed to the parties only, not to the public in general. So, for the arbitrators as compared with judges, it is a different environment. And, when one is drafting the award, one is addressing a much more limited audience. Reasons for the decision must be given. But citation of authority, for example, can be kept to a minimum. The award is not setting a precedent for the guidance of other judges, which students may wish to learn from and which eager academics may seek to criticise. As everyone knows, like judges, arbitrators do not always agree. I have found myself in that position too as an arbitrator. This has long been recognised as one of the hazards of referring a dispute to only two arbitrators. The unilateral nomination system which enables each party to choose its own arbitrator produces a situation that is quite different from what happens in a court. The parties do not choose their judges. They are chosen for them by the court administrator. Is it possible, then, that those who have been nominated by each of the parties will, for whatever reason, be suspected of favouring the party by whom they have been nominated? Many of you, if you have experience of the trade, will know the answer to that question much better than I do. In most cases, as has been observed judicially, such suspicions are unworthy.12 The modern consensus is that commercial arbitrators should in principle be independent and impartial. That is the standard that I set for myself. So I find it remarkably easy to forget by which of the parties I was appointed.13 But the appointing party wants to win. He is not interested in impartiality. So he chooses someone in whom he has confidence – who, because of his background or reputation, is likely to understand, and preferably favour, the case he seeks to present. The fact that it is commonplace for arbitration agreements to provide for two unilateral nominees suggests that each side expects that this arrangement will produce a different, and hopefully, more favourable tribunal than one

11 Jan Paulsson, The Idea of Arbitration (Oxford University Press, Oxford 2013) 8. 12 Norjarl A/S v Hyundai Heavy Industries Ltd [1991] 3 WLR 1025, per Leggatt LJ at 1036B-C. 13 Paulsson (n 11) 154.

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which depends on joint or neutral nominations. Disagreements are to be expected once the arbitrators get down to work. So the system allows for this by making provision for a third arbitrator as part of the contract. And it is the third arbitrator who chairs the proceedings from the outset, presides at the hearing and takes the lead in drafting the award. I have found myself in that position too. The possibility that even two joint nominees might disagree occupied the courts in Scotland on a number of occasions in the 19th century. Cases were brought by one side or the other asking for a declaration that they were bound to appoint an oversman or umpire in the event of a disagreement.14 There is Roman Dutch authority dating from at least the middle of the 16th century that, in some situations, a judge could compel two jointly appointed but dissenting arbitrators to appoint a third whose opinion, concurring with one or other of them, would make a good award.15 Nowadays, this is dealt with by institutional rules. But the fact is that disagreements among a plurality of arbitrators, and ideas about how to avoid the hazard of the whole procedure becoming abortive for want of an award, are very far from being a new phenomenon. What, then, if you are one of three arbitrators, find you yourself in dispute with your colleagues? Should you consider issuing a dissenting opinion? At first sight, the reasons that might persuade a judge that he should take that step are not those that should have any part to play in the decision of an arbitrator. The award will be the product of a private arrangement. It is not to be expected, if that principle is respected, that your dissent will carry any authority in a court of law or that it will be referred to in any subsequent arbitration proceedings as a precedent. Nor need it trouble the legislators, however wrong the dissenter thinks the award may be. The majority will not be making law in the way that judges do. That having been said, some of the reasons that may prompt dissents among the judges could be said to be relevant here too, and the effect of having a dissenter among your number is much the same too. In my own experience as a judge, the knowledge that there is to be a dissent against you sharpens up one’s approach to the case. You look again at what you propose to say in your own judgment. You check it over, again and again, to see that it stands up to scrutiny in the face of your colleagues’ judgment which is to the contrary. In the same way a strongly worded dissent by an arbitrator may have the effect of improving the reasoning which is set out in the award by the majority. In this way a thoughtful dissent may contribute to a more complete understanding of their decision and a better award. It may also reassure the losing party that its argument has not been overlooked. It is sometimes said that this will be of little comfort – perhaps may even enhance the sense of disappointment, because it shows how close that party came to success. But at least the losing party will not be left wondering whether its case was ever really put across properly. There may be occasions, however, where a dissent on a point of law makes a real difference to the result. One has to assume, for this to be so, that there will be an opportunity

14 Merry and Cunninghame v Brown (1860) 22 D 1148; Cochrane v Guthrie (1861) 23 D 865; John Montgomerie Bell, Treatise on the Law of Arbitration in Scotland (2nd edn, T. & T. Clark, Edinburgh 1877) 51. 15 Lord Cooper (ed.), Regiam Majestatem and Quoniam Attachiamenta (Stair Society, 1947), Book II, section 5. In McCallum v Robertson (1826) 4 S 68, it was held that an award in such circumstances was a good award.

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for the award to be set aside on the ground that it was wrong. For that to happen, the law of the arbitration has to provide for the award to be made the subject of an appeal. Systems vary, of course, as to whether or not an award is open to this procedure. Our own systems in the UK have swung backward and forward on this point. Paulsson says that the general modern rule is that there is no appeal.16 But in England the matter has been settled, for the time being at least, by section 69 of the Arbitration Act 1996, which provides that, unless otherwise agreed by the parties, a party to arbitral proceedings may appeal to the court on a question of law arising out of an award made in the proceedings.17 That was the background to Transfield Shipping Inc v Mercator Shipping Inc,18 which came before an appellate committee of the House of Lords of which I was a member in May 2008. That was an appeal against an award by a majority by two arbitrators out of a panel of three in a case which, as the name suggests, arose out of a charterparty between two shipping companies. The award was in favour of the owners. The time charterers were the appellants. This is not the occasion to examine the rights or wrongs of that decision, which was about the way damages for delay should be calculated. What I think is worth reflecting on is the effect that a written dissent issued by one of the three arbitrators had on the eventual outcome of the case. It seems likely that the fact that the dissenting arbitrator gave a fully reasoned opinion to explain why he dissented was a factor in the decision of the judge in the High Court to give permission for the appeal to be brought. It almost certainly was a factor in the decision of the appeal committee in the House of Lords to give permission to appeal to the House, despite the concurrent findings below and especially the judge’s strong endorsement of the decision of the majority arbitrators. It would certainly have been much more difficult to make progress if the time charterers had been faced with a unanimous award in the owners’ favour. The dissent had the great advantage, from their point of view, of showing that there was a live question of general public importance that had to be resolved in order to determine the amount of the award. In the event when it came to the appeal, the owners lost. The time charterers were successful. The dissenting arbitrator’s decision to dissent was vindicated. The current practice in the Supreme Court of the UK, where the justices sit in panels of not less than five, is to try wherever possible to avoid a plurality of judgments all arriving at the same conclusion. There has to be some give and take if that practice is adopted, and that is every bit as much true for arbitrators as it is for our judges. So, please do not think that I am encouraging dissents. All I am doing is suggesting that the issue of whether or not to dissent, which is unavoidable in our prevailing system in international cases of making unilateral appointments to a tribunal presided over by as third member, may help to produce a better award. Indeed, the presider should encourage frank discussion, and the possibility of disagreement in a difficult case, if he or she is to get the best out of the team. That is another way, if I may return to the title of this lecture, of making the best of arbitration.

16 Paulsson (n 11) 14. 17 See also the Arbitration (Scotland) Act 2010, section 13(2) and section 9 of the Scottish Arbitration Rules in Schedule 1 to that Act. 18 [2009] AC 63.

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To sum up, let me say this. At its best, arbitration is expeditious, whereas trying to resolve the dispute through the courts can be very slow. Arbitration, at its best, is relatively inexpensive, whereas going to court can be costly. At its best, the procedure is simple, whereas the procedure in courts can be cumbersome and technical. And the process, if truly amicable, may prove to be a peacemaker in place of strife. Those are the ideals. The ideal standards are not always achieved. But they are worth striving for, whatever part you play in the system. I hope that you will do what you can to promote and uphold them. There is just one other point which I must mention before I finish. By whom was the dissenting arbitrator in the Transfield case appointed? It is an intriguing question. You will not find the answer to it in any of the judgments in that case. You have to go to the library in Lincoln’s Inn in London, which holds the case papers on disc, if you want to do so. I did just that recently and I was able to examine the award. I am sure that I am not giving away any secrets when I tell you that the dissenter was the arbitrator appointed by the time charterers who, in the end, won in the House of Lords. Why the time charterers chose him, and why it was that he saw their case as they hoped he would, I must leave to your imagination.

Arbitral Autonomy and Applicable and Overriding Law The Right Honourable Lord Mance*

It is an honour to give a talk in memory of the late Lord Goff of Chieveley, Robert Goff - a towering intellectual and judicial figure, as well as a man of great personal charm, courtesy and consideration. I first met him some 55 years ago, when arranging to do pupillage in his chambers shortly before departing to do an internship with a Hamburg law firm. He asked me to ensure that the Hamburg arbitration clause did not affect the popularity of London maritime arbitration. I do not think it has done, or that this had anything to do with me. But I joined his chambers, and was often fortunate enough to be led in some memorable cases by Robert Goff QC. It was a formative experience, especially for anyone accustomed to eat at normal hours. After court finished at 4.15, we would return to chambers to discuss the twists and turns of the current scuttling case, or to complete demurrage calculations undertaken in those distant days on a hand-cranked calculating machine (wind one way for multiplication, the reverse for division, etc). Robert and his juniors would work through to near midnight, when his juniors would return home to recover, only to find, next morning, their leader arriving in chambers with fresh ideas and submissions, developed it appeared during the small hours. A more balanced experience was the Sunday mornings spent in the study of his Holland Park house, ending at midday when Robert would play a Mozart piano piece, followed by a very handsome lunch prepared by his loyal wife, Sarah, who obviously appreciated that we were likely to be hungry. Robert’s early life as an Oxford academic saw him set out to become the father of a whole new subject: Restitution, or – as for arcane reasons his modern editors have now renamed it - Unjust Enrichment. On the bench, the measured perfection of Robert’s judgments combined with his academic pre-eminence made it a huge pleasure to appear in front of him and saw him rise rapidly through the system to become the Senior Law Lord, The title of his famous Maccabaean Lecture in Jurisprudence, The Search for Principle, (1983) encapsulates the professional and personal life of a remarkable man, who influenced and continues to influence so many in ways extending well beyond the field of law. I turn to my subject: Arbitral Autonomy and Applicable and Overriding Law. The hallmark of arbitration is autonomy. Parties choose that their disputes shall be determined by an arbitrator or arbitrators, rather than in a court to which, whether in accordance with or against their will, it could otherwise be taken. There are a variety of reasons for such choice. Choice of forum is usually possible in both arbitration and litigation. But, when it comes to enforcement, arbitration awards enjoy the benefits of the remarkably successful New

* Editorial note: This paper by Lord Jonathan Mance was delivered as the Twenty-Third Goff Lecture at the School of Law, City University of Hong Kong on 9 July 2018. It was originally published at (2019) 27(1) Asia Pacific Law Review 1-13.

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York Convention 1958 (now 60 years old, with some 150+ parties). Judgments, in contrast, are enforceable on a much more limited basis, depending on local law, bilateral treaties, or within Europe under the Brussels regimes. The only instrument with potentially worldwide scope comparable to the New York Convention is the Hague Choice of Court Convention 2005. It is admirable in itself, but has as yet only the EU, Denmark, Singapore and Mexico as ratifying states. Hopefully, it will achieve more adherents – indeed, with Brexit, one of them will be the UK in its own right, which will be able to apply the Convention against its former fellow EU members. So, enforcement is clearly one important factor. But there are others. They can include a belief that it is easier to rest assured about the expertise and quality of arbitrators chosen by the parties or by some reliable institution than that of some judges in some jurisdictions; or a belief that parties agreeing to arbitration can exercise greater control over the applicable law and procedure than they can in litigation. But in many cases a decisive consideration may well be that, while arbitration proceedings may be no cheaper than a trial, arbitration is usually a one-stop shop, without possibility of appeal. That seems attractive to many parties, at least until after an award reveals that they have lost. I want to examine how far parties can choose the principles governing the dispute which they agree to arbitrate. There are at least two and sometimes even three aspects to this question. The first concerns the substantive subject-matter, or as I shall call it business, in respect of which the parties agree to arbitrate, commonly some relationship or transaction between them. The second concerns their agreement to arbitrate. This is now generally accepted as separate from, even if embodied in, the same document as governs the business which is the agreed subject-matter of arbitration: see, for example, Fiona Trust & Holding Corp v Privalov [2007] UKHL 40. The third concerns the procedure to be followed in the arbitration. This may in some respects be mandated by an arbitration law at the place of the seat. In other respects, it may be agreed by the parties. Normally, however, the law governing the arbitration agreement will coincide with the law of the seat and will also be the law which the parties have, at least implicitly, chosen to govern procedure. It is something of a recipe for confusion to choose a different law to govern procedure from that governing the agreement to arbitrate. How far can parties choose the principles which will govern the determination of disputes relating to the business, the subject of arbitration? Normally, parties intend that their disputes shall be determined in accordance with law, whether this be domestic law or, as commonly in the case of bilateral investment treaty or ICSID arbitration, international law. In theory, however, parties can choose any principles they like to determine disputes between them, ranging from tossing a coin to the conferral on arbitrators of the power to act as aimables compositeurs or ex aequo et bono - that is, equitably without reference to any legal principles at all. No doubt, they would in all such cases be bound by the outcome. It is not sensible to describe tossing a coin as arbitration at all. But the English Arbitration Act 1996 does expressly permit parties to agree on arbitration by reference to principles which are not strictly legal. In particular, s.46(1) reads: “Rules applicable to substance of dispute.

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(1) The arbitral tribunal shall decide the dispute— (a) in accordance with the law chosen by the parties as applicable to the substance of the dispute, or (b) if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunal.” The one case in which I have been involved where the contract seemed to confer a power which might now fall within s.46(1) was Home and Overseas Insurance Co v Mentor Insurance Co (UK), [1989] 1 Lloyd’s Rep 473. The contract there provided that arbitrators should “interpret this reinsurance as an honourable engagement”, and that their award should effect “the general purpose of this reinsurance in a reasonable manner, rather than in accordance with a literal interpretation of the language”. The Court of Appeal held that these provisions did no more than confirm that arbitrators should give the contractual provisions what we would now call a purposive construction, and did not permit arbitrators to depart from the law itself. Assuming that the parties wish their dispute to be decided by law, the question arises: what law and how is it ascertained? The position is relatively simple if the parties have expressly chosen a particular law. The Arbitration Act 1996 makes clear that such a choice “shall be understood to refer to the substantive laws of that country and not its conflict of laws rules”: s.46(2). Otherwise, one could embark on an endless circle or voyage, with the arbitration agreement referring to law A, that law referring to law B and law B referring back to law A or on to law C. Where the parties have chosen a law, the arbitrators will be expected to apply it. If they do not, but elect to apply some other law, they will commit an error of law, which may, in a system like the English, constitute the basis for an appeal to the court, if the court thinks the error both sufficiently obvious and significant for the outcome: Arbitration Act 1996, s.69(3). What however if the arbitrators have not expressly chosen a law? The arbitration agreement may provide its own guidance, a private set of choice of law rules, to cater for this situation. It may for example tell the arbitrators to apply the law of the jurisdiction with the closest connection to the subject-matter of the business or to the actual dispute which has arisen. Alternatively, it may tell the arbitrators to look at the choice of law rules of all potentially relevant jurisdictions, in the hope that these may all agree or at least point in a clear direction, or it may direct the arbitrators to internationally accepted principles. The approaches adopted by a number of sets of institutional rules1 is that “In the absence of any such agreement, the Arbitration Tribunal shall apply the rules of law which it determines to be appropriate”. The English Arbitration Act adopts a slightly different formula, providing that: “If or to the extent that there is no such choice or agreement, the tribunal shall apply the law determined by the conflict of laws rules which it considers applicable.”

1 E.g., the ICC Rules of Arbitration and the HKIAC Administered Arbitration Rules, article 35(1).

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It is open to doubt far either approach leaves arbitrators with a completely free hand. The former (applying the rules of law which the tribunal determines to be “appropriate”) appears to enable arbitrators to invent their own choice of law scheme, whether this involves applying the law with the closest connection to the subject-matter of the business or to the actual dispute which has arisen, or applying the choice of law rules of all potentially relevant jurisdictions, or proceeding directly to apply a particular law as a matter almost of instinct. The law with the closest connection to the business gives a stable solution, but the other possibilities all present. To take the law with the closest connection to the dispute is tenuous and suspect, since the applicable law will then vary according to the precise nature of the dispute which arises. To look at the choice of law rules of all potentially relevant jurisdictions is ultimately fruitless. If they all reach the same result, the exercise is unnecessary, and, if they differ, some means of choosing between them has to be found. In either event, the exercise may have involved quite substantial effort, to no purpose. An appeal to internationally accepted principles suffers from the same problem as appeals to the lex mercatoria generally: whatever idealists may maintain, it never proves easy to identify any uniform principles at that level. A fourth suggested possibility, which is to forego any choice of law rules and to proceed directly to apply whatever law the arbitrators think appropriate, appears to involve a process of divination, rather than law.2 In the last analysis, the conventional approach, where no particular law has been either directly or indirectly chosen, still appears to be to revert to the choice of law rules of the law governing the arbitration, the law of its legal seat, wherever it may in fact sit. That may well also be the correct interpretation of s.46(3) of the English Arbitration Act 1996, which, as you will recall, requires the arbitrators, where there is no choice or agreement on the relevant law, “to apply the law determined by the conflict of laws rules which it considers applicable”. In other words, the choice of an English seat may ultimately involve - indeed require the choice of English conflict of laws rules, which is certainly the traditional common law approach. The current English choice of law rules in respect of contractual obligations are found in the Rome Regulation (EC) No 593/2008, article 9(3). The Regulation does not apply to arbitration agreements or choice of court clauses: article 1(2)(e), but it can apply to determine the law applicable to the business, the subject-matter of an arbitration agreement. Thus, if the choice of law rules applicable in an arbitration refer to those of the lex arbitri and if the lex arbitri is the law of a European Union Member State, the Regulation will apply to determine the law applicable to determine the substantive dispute submitted to arbitration. That being so, it would be open to an English court, in the restricted circumstances in which any appeal to the court is possible, to review the correctness of arbitrators’ understanding and application as a matter of law of such conflict of laws rules. If such rules pointed to English law as the law applicable to the substantive dispute, an appeal could also lie, under the same restricted conditions, in respect of any point of law involved in the substantive award. But, if such rules pointed to, for example, French or Hong Kong law,

2 Sir Sydney Kentridge QC once wrote in the context of interpretation: “If the language used by the law giver is ignored in favour of a general resort to values the result is not interpretation but divination: State v. Zuma 1995 (4) BCLR 401, para. 18, cited in Matadeen v. Pointu [1999] 1 AC 98, p.108.

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no appeal would be possible to the English court against the arbitrators’ findings, because, at least in common law eyes, these would strictly be findings of fact, about the content of French law or about its application on the facts. The parties can therefore choose the law applicable to their substantive dispute, failing which the arbitrators will, on one approach or another, determine it for them. But, paradoxical though it may at first sight appear, the process of selecting a law may actually limit the parties’ agreement. The law selected may itself contain provisions which cannot be derogated from by agreement, and which will therefore override some aspect of their parties’ agreement: see, for example. Gary Born, International Commercial Arbitration (2nd ed), pp. 2707-2708. The suggestion, there floated, that selection of a governing law, will not import mandatory provisions of that law, such as competition law rules, trade controls, etc, seems to me unconvincing. Thus, if a common law system is chosen, the rules regarding penalties may override an agreement as to amounts otherwise payable on breach. At common law, the legality of the agreement may also fall to be determined by reference to the legal position in another country, where the agreement falls to be or is performed. If the agreement necessarily involves the performance abroad of an act unlawful by the law of the place where the act is to be performed, the contract will to that extent be unlawful and unenforceable: Ralli Bros v Co Nav Sota y Aznar [1920] 2 KB 287. That was a case where the agreement required payment in Spain of additional freight which it was unlawful under Spanish law to demand. The agreement was pro tanto unlawful. If the agreement could be performed legally, but the parties in fact intend it to be performed in a manner which is unlawful under the law of the place where they in fact intend it to be performed, it will again be unlawful and unenforceable pro tanto: Foster v Driscoll [1929] 1 KB 470; Regazzoni v K C Sethia [1944] 2 KB 490. The facts in Foster v Driscoll are irresistible to recount. They involved five over-ambitious joint venturers entertaining the project of smuggling a boat-load of whisky into the Prohibition-bound USA. The financier was a Knight of the Realm and MP, two other participants were shipbrokers, the whisky supplier was, as one might expect, an Edinburgh distiller, but the fifth, entrusted with the disposal of the whisky in the USA was for unstated reasons not obviously associated with his career, a retired schoolmaster living in Worthing. Unsurprisingly the five fell out and the joint venture had no success, save to clarify English law. The common law principles contained in all these cases are now preserved and permitted in the United Kingdom, though not required, by the current European regime on the law applicable to contractual obligations: the Rome Regulation (EC) No 593/2008, article 9(3). This provides: “3. Effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those overriding mandatory provisions render the performance of the contract unlawful. In considering whether to give effect to those provisions, regard shall be had to their nature and purpose and to the consequences of their application or non-application.” The law of the place of performance of a contract thus remains important in common law contracts. But there is no European law requirement to that effect. Other legal systems may

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see the matter differently, and enforce contracts irrespective of their legality at the place of performance. So much for the law of the place of performance. The Rome Regulation also identifies further significant qualifications on the application of the parties’ agreement and of the law they select. These relate to the law of the forum. The Regulation is concerned with court proceedings, so it means the forum of any court before which a matter comes. But, as will appear, that can have an indirect relevance for arbitration. Recital (37) of the Regulation points out that considerations of public interest can in exceptional circumstances justify the application by courts of “exceptions based on public policy and overriding mandatory provisions”. By this are meant exceptions to the law which would otherwise be applied to the relevant contractual obligations. Thus, with regard to overriding mandatory provisions, article 9(1) and (2) state: “Overriding mandatory provisions 1. Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation. 2. Nothing in this Regulation shall restrict the application of the overriding mandatory provisions of the law of the forum.” With regard to public policy, article 21 is in similar, or at least parallel, terms, providing that: “The application of a provision of the law of any country specified by this Regulation may be refused only if such application is manifestly incompatible with the public policy (ordre public) of the forum.” The Rome Regulation focuses, as I have said, on the law applicable in court. But, viewing the matter through common law eyes, it seems likely that a modern arbitration tribunal would, and would be well-advised, to take account of the mandatory overriding rules and public policy of the law of its seat, whether or not the Rome Regulation there applied. If the substantive dispute is subject to the law of the seat, then, as I have already suggested, it seems unconvincing to suggest that an arbitration tribunal could ignore the mandatory provisions of that law. If the seat of the arbitration and the law governing the dispute are both within the European Union, and the tribunal fails to take account of mandatory provisions of European Union law, (e.g. protective employment law or consumer law rules, competition law principles or anti-trust laws), the case law of the European Court of Justice establishes that it is for the courts of the law of the seat to correct the position on review, irrespective of the position under purely domestic substantive law: Case C-126/97, EcoSwiss China Time Ltd v Benetton International NV. The Court of Justice did however, concede that a party’s failure to apply in time to challenge an award under domestic procedural rules could mean that the award became unchallengeable, even though the result was to overlook an infringement of mandatory European law rules.

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That being the position, where the laws of the seat and of substantive issues coincide, it is difficult to think that a different result could be achieved by adopting the simple device of making the parties’ relationship or transaction subject to the law of a jurisdiction outside the European Union. Thus, an arbitration tribunal sitting in Hong Kong could hardly ignore domestic competition law or protective consumer legislation, simply because the parties had determined that their disputes should be arbitrated by the law of Canada. In this context, even the rules in Ralli Bros, Foster v Driscoll and Reggazoni v Sethia may arguably be overriding mandatory rules, which the common law would apply, even if the substantive dispute was not subject to the common law. The conceptual basis for such a conclusion at common law is less obvious. One rationale of such a conclusion is that the parties cannot have intended the law generally applicable to their substantive dispute to exclude consideration of mandatory provisions or the public policy of the law of the seat, since this would render any award liable to be set aside, or not enforced, in the courts of the seat. That of course postulates the existence of an arbitration agreement in general form, or at least wide enough in terms to encompass such matters. But that raises the question what the position would be if the parties were unwise enough to include in their arbitration agreement a provision, not only selecting a governing law outside Hong Kong, but also expressly excluding consideration of any mandatory provisions or public policy of the law of the seat. There is at least a body of opinion that maintains that, in the interests of the survival of arbitration as an institution as well as in the general interest, arbitrators should, if necessary, be prepared to override the parties’ agreement even in that situation: see generally Gary Born, International Commercial Arbitration (2nd ed), pp. 2706-2707. That is however, controversial. The French idea of an arbitral legal order floating free of any particular national law may encourage such thoughts. But it is a further step to suggest that an arbitration can float free from not only domestic law, but also from the very agreement giving rise to the arbitration. Not even arbitrators enjoy powers of levitation. In domestic terms, if England were the seat of arbitration, any award would be vulnerable to challenge for want of jurisdiction or irregularity (excess of power), and in international terms it would fall outside or contain a decision on matters beyond the scope of the submission to arbitration: see article V(1)(c) of the New York Convention. So I doubt whether an award could survive with a scope extending beyond the parties’ agreement. The more likely position is that the arbitration agreement would be vulnerable to challenge under the law of the seat, if it purported to exclude consideration of the public policy or overriding mandatory principles of that law. Even in the French legal tradition, where international arbitration is regarded as floating free of any particular legal system, French courts have, it appears, annulled arbitration awards made under French law in circumstances where the award violated fundamental public policies of the French legal system. In a European Union context, a basis for taking account of the law of the seat is a problems which can be found in article 3(4) of the Rome Regulation, which provides: “Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties’ choice of applicable law other than that of a Member State shall not prejudice the application

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of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement.” The limitation of this provision is that it only applies where “all other elements relevant to the situation”, that is all elements other than the choice of law, are located in one or more EU Member States. On the other hand, “provisions which cannot be derogated from by agreement” are commonly understood to be a wider category of case than mandatory overriding or public policy provisions. In relation to the latter, the Court of Justice therefore went understandably further in Case C-381/98, Ingmar GB Ltd v Eaton Leonard Inc. It there held that a mandatory scheme, like the EU’s Commercial Agency Regulations, could not be evaded “by the simple expedient of a choice-of-law clause” in favour of a non-EU jurisdiction. So far, I have addressed the position of mandatory provisions and public policy of (a) the law governing the business the subject of arbitration and (b) the law of the arbitral seat. But still more sensitive questions arise when an arbitration tribunal is asked to take account of the mandatory provisions or public policy of a law which not that of the business being arbitrated nor that of its seat. Such a law may nevertheless have a real connection with the issues being arbitrated, or may be the law of a place where one or other party might wish to enforce any award. What are arbitrators then to do? What are courts to do? An example of such a case came before the English courts in Accentuate Ltd v Asigra Inc [2009] EWHC 2655 (QB). It concerned an arbitration in Canada of a dispute subject to Canadian law but involving the activities of a commercial agent acting within the EU for a Canadian principal. The claimant, an English company, agreed to act as a commercial agent in England distributing software belonging to the defendant licensor, a Canadian company. The contract contained a choice of law clause in favour of Ontario law and an arbitration clause in favour of Toronto. The claimant gave notice in September 2006 of a claim under the Commercial Agents (Council Directive) Regulations 1993, which it quantified at £1.75m on 5 June 2017. In riposte, on 21 June 2007 the licensor started a Toronto arbitration, in which the distributor participated, submitting that its claim under the Regulations was outside the scope of the arbitration clause (a submission which the arbitration tribunal rejected), but in the alternative seeking to rely on it by way of counterclaim. The arbitrators decided that a claim under the Regulations was within the scope of the arbitration clause, but that the claim failed because the parties’ rights and obligations must be decided as agreed by Ontario law. So they issued awards against the distributor in late 2007 and March 2008. They contented themselves by noting in passing that: “18. There may be interesting academic and intriguing domestic and international policy reasons why an arbitral tribunal should or should not apply lex non contractus [i.e. a law other than that chosen by the parties]. But this is not a debate for this tribunal. ….. 19. … {W]hile a principal purpose of the English Regulation [sic] according to the European Court of Justice may be to ‘protect, for all commercial agents, freedom of establishment and operation of undistorted competition in the internal market, …. this does not justify restricting the parties’ freedom to choose a desired governing law in Ontario.”

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The Canadian arbitration tribunal therefore took a firmly restricted view of its jurisdiction, noting that there were “interesting academic and intriguing domestic and international policy reasons” for a different approach, but refusing to go there. Not all arbitral practice is, it appears, so restrained. According to Born, at pp. 2712-2714, some tribunals have looked variously at other laws. Their mandate may of course have opened a more obvious route to doing this, than did the mandate of the Canadian arbitrators in Accentuate. But the principles on which they do this are certainly not settled. What the decision in Accentuate highlights is that, however justified arbitrators may be in ignoring any law other than that governing the dispute or that of their seat, their award will be vulnerable to challenge if and when it comes before another court in another jurisdiction, whose mandatory overriding principles or public policy the award infringes. The distributor in Accentuate commenced proceedings in England, claiming that the Commercial Agency Regulations applied in England as a matter of overriding mandatory law, and so that it was entitled to be paid compensation in England. The judge, Tugendhat J, accepted the distributor’s case.3 In the eyes of English law, the arbitration clause in favour of Toronto fell to be regarded as null and void or inoperative, in so far as it purported to submit to arbitration in Ontario under Ontario law a claim which involving Regulations which were under EU and so UK law mandatorily applicable within the EU, whatever the governing law of the agency relationship. Nevertheless, the judge recognised the different position which applied looking at the matter from the arbitrators’ viewpoint, since he concluded that nothing in his judgment “should be taken as a criticism by me of the conduct or reasoning of the arbitral tribunal”. Tugenhat J’s reasoning on the application of mandatory legal provisions was later followed by Mann J in Fern Computer Consultancy Ltd v Intergraph Cadworx & Analysis Solutions Ltd [2014] EWHC 2908 (Ch). Both these cases have a famous precursor in the US Supreme Court: Mitsubishi v Soler Chrysler-Plymouth.4 Misubishi, as a car manufacturer, entered into a sales agreement with Soler, a Puerto Rican distributor, expressed to be subject to Swiss law and providing for arbitration in Japan. Soler asserted claims against Mitsubishi under the US anti-trust Sherman Act in the US Federal Court. Mitsubishi claimed that any such claims could and should be remitted to arbitration in Japan. The Supreme Court had no more difficulty than Tugendhat J in finding that statutory claims of this nature fell within the scope of a generally worded arbitration provision. But the United States and the International Chamber of Commerce as amici curiae raised the possibility that the application of Swiss law in a Japanese forum would exclude the application of the US Sherman Act. The United States Supreme Court was able to duck this difficulty, on the basis that Mitsubishi had conceded the application of the US Sherman Act in the Japanese arbitration. But it gave a strong pointer to its attitude,

3 Tugendhat J’s reasoning would be unexceptional in all respects, had he been concerned with essentially negative resistance to some attempt to enforce the Ontario award in E gland. Whether it justified the positive step of service out of the jurisdiction of an English claim on foreign defendants is a different matter, which depends on the rules regarding such service. What matters, however, is Tugendhat J’s conclusion that an English court will in English proceedings ignore an arbitration clause or award in so far as the arbitration tribunal would fail or has failed to give effect to mandatory provisions of UK law. 4 473 US 614 (1985), at pp. 636-637 and footnote 19.

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were it to be asked to enforce a clause in favour of an arbitration which would not respect US mandatory principles: “[I]n the event that the choice-of-forum and choice-of-law clauses [had] operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for anti-trust violations, we would have little hesitation in condemning the agreement as against public policy. That last comment fits neatly with Tugendhat J’s reasoning. In summary, a court cannot ignore the mandatory overriding principles or public policy of its own legal system when considering a foreign arbitration award. It is one thing for courts to review an arbitration agreement or award on the grounds that it is in actual conflict with the public policy or mandatory rules of the law governing the dispute or the law of the seat or of a jurisdiction before which the arbitration or award comes for consideration. It is another to treat as unlawful an arbitration agreement which may well lead to the correct application of such rules, simply because of a risk that the tribunal may err in their application. All human activity is prone to error. Error in arbitration is either a price of certainty and finality, or, if absolute accuracy is regarded as an overriding principle, appropriate means of review should be developed. Neither of these approaches was however, taken by the European Court of Justice in its recent decision relating to investment arbitration in Case C-284/16, Slowakische Republik v Achmea BV. In its judgment in that case, the Court declined to follow a meticulous opinion of Advocate General Wathelet, and in 5½ pages of reasoning arrived at some dramatic conclusions. The case arose from an old bilateral investment treaty (“BIT”) made between Czechoslovakia (to which the Slovak Republic was a successor) before accession to the European Union and the Netherlands. Achmea invoked the protection of the treaty terms in respect of a ban on the distribution of profits and transfers of payments affecting its Slovak health insurance subsidiary, and issued arbitration proceedings which the tribunal determined should be held in Frankfurt in English. The BIT provided for the tribunal to “decide on the basis of the law, taking into account in particular though not exclusively: the law in force of the Contracting Party concerned; the provisions of this Agreement, and other relevant agreements between the Contracting Parties; the provisions of special agreements relating to the investment; [and] the general principles of international law.” The issue before the tribunal was clearly capable of impinging on European Union law – particularly the principles governing state aid. But it was equally clearly open to the tribunal to take into account and decide the dispute by reference to European Union law. However, the Court of Justice viewed the matter much more broadly. It rejected the Advocate General’s view that BIT tribunals could be seen as a statist dispute resolution mechanism which would enable them to make a reference to the Court of Justice on any

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issue of European Union law. Then, moving in what some might think an opposite direction, it went on to treat the establishment of such tribunals between EU States (or logically by any EU State in favour of investors from another EU State) as a breach of the principle of sincere co-operation under article 4(3) TEU, whereby the Union and the Member States shall, in full mutual respect, assist each other in carrying out tasks which flow from the Treaties. Such tasks include ensuring the full and uniform application of EU law in all Member States. In that connection, the autonomy and primacy of Union law received further, now increasingly familiar, endorsement. The upshot was that the intra-EU BIT arbitration agreements, and so in practice the intra-EU BITs as a whole, were held contrary to the European Treaties and invalid. The Court was careful to distinguish intra-EU BITs from the international trade agreements entered into by the EU on behalf of all EU States. It said (paragraph 57) that the EU’s international competence and capacity to conclude such agreements “necessarily entail the power to submit to the decisions of a court which is created or designated by such agreements as regards the interpretation and application of their provisions”. But it added the important rider: “provided that the autonomy of the EU and its legal order is respected”, referring, potently, to its previous decisions on the EEA, the agreement creating a unified patent system and accession of the EU to the ECHR. References to these previous decisions introduce a certain chill. And proceedings have indeed been taken before the CJEU to test the validity of the new Investment Court System proposed under the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), agreed in December 2016. Unlike in Achmea, the Commission will certainly not be arguing for the invalidity of this System, since it is its own brainchild. The System seeks to avoid the major criticism that it may involve determination of EU law by treating EU law as a matter of fact: article 8.31(2). How the CJEU will address this System in its Opinion, expected in 2019, remains to be seen. The Commission will certainly not be arguing for the extension of the Achmea principle beyond the fields of intra-EU BITS where its arguments triumphed in the Achmea judgment. The CJEU also went out of its way expressly to distinguish commercial arbitration from the scope of the Achmea judgment – with the proviso that commercial arbitration awards must be open to review in court to the extent necessary to enable a reference to the Court of Justice on any fundamental provisions of European Union law arising (paras 54-55). The distinction drawn between commercial and investment arbitration is highly important, but, one must say, it is also weak. The whole point of BIT treaties is to protect private commercial interests. The commencement of a BIT arbitration is the start of a bipartite dispute which in essential respects is a commercial arbitration procedure. Leaving aside different ICSID arbitration procedures, an investment arbitration award is and is deliberately structured to be enforceable like a commercial award under the New York Convention. Further, the system of commercial arbitration depends in reality on state support for enforcement. The arbitration statutes in all modern states bear witness to this, and to the aim of giving autonomy to parties’ wishes and to the system of arbitration as a whole. If states can set up commercial arbitration systems which take issues outside the ordinary courts, why not investment arbitration procedures? I am not of course drawing attention to the possible weakness of the distinction drawn by the Court of Justice, with a view to encouraging the extension of its thinking in Achmea to commercial arbitration. On the contrary, I suggest

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that it might not have been necessary to react quite so aggressively to investment treaty arbitration. A possible alternative course would have been either to allow references from investment treaty arbitrations to the Court of Justice (as Advocate General Wathelet advised in his Opinion) or to insist on more effective court review of their awards for compliance with EU law. Where then does the Achmea judgment leave us? First, the Court of Justice’s decision creates a difficult tension for parties contemplating and international arbitrators engaged in investment treaty arbitrations involving EU Member States. It is far from clear that the impact of the Achmea decision is limited to investment arbitration agreements in treaties between states which are or become Member States. It is certainly arguable that it extends to such agreements in treaties between a Member and non-Member State. The duty of sincere co-operation with the European Union and its institutions could well be seen as infringed by a single Member State’s agreement with a third state to submit issues which could potentially involve the application of EU law to investment arbitration. That is most obviously the case if one considers a claim by a third state investor in a Member State of unfair treatment in that Member State. The Court of Justice has on occasions shown itself somewhat Eurocentric in its approach to the interests of third parties outside any Member State. Second, the Achmea judgment is likely to encourage any future investment arbitration tribunals to choose a seat outside the European Union - if and when such a choice is open to them. We may thus envisage further issues like those raised in the Commercial Agency cases of Accentuate and Fern Computer. Post-Brexit, if and when its impact is really felt, London may itself also become an even more attractive forum in which to pursue investment arbitration claims outside the European Union. So long as any award can be enforced in London or outside the EU, the public policy and mandatory overriding provisions that would apply within the EU could then arguably be irrelevant. Thirdly, however, there is, from a private international law or conflict of laws viewpoint, a clear case for more developed rules about the circumstances in which both international investment and commercial arbitrators, and indeed courts, should take account of the public policy or overriding mandatory provisions of any legal system other than (i) that whose law governs the substantive dispute which they are determining or (ii) that of the forum in which the arbitration is taking place. I would in this connection make three final points. First, it is interesting to recall the common law rules, preserved by the Rome Regulation as I mentioned earlier, invalidating any aspect of the parties’ relationship or transaction, which is contrary to the law of the place of contractually agreed performance or which the parties intend it to perform in a manner contrary to the law of the place where they intend it to perform it. Invalidation is however, a crude tool. Might it not be possible to develop an alternative rule whereby arbitrators and courts were at least entitled to take account of and apply the public policy and overriding mandatory provisions of the contractual or intended place of performance? In the modern world, where choice of forum is relatively easy, this could assist better integration of different legal systems.

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Second, within the European Union, article 3(3) and article 3(4) of the Rome Regulation go some way toward indicating a more coherent approach to the application of mandatory provisions or public policy of the law of the seat. Article 3(4) I have already mentioned. Article 3(3) provides: “3. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.” Again, this is like article 3(4) limited to situations where all the elements involved are connected with a country other than that chosen. The International Law Institute sought to give some guidance in this area in 1991, in these terms: “If regard is to be had to mandatory provisions …. of a law other than that of the forum or that chosen by the parties, then such provisions can only prevent the chosen law from being applied if there is a close link between the contract and the country of that law and if they further such aims as are generally accepted by the international community.” Unfortunately, this illustrates, rather than solves, the difficulty of deciding when it may be appropriate to take account of a law other than that of the forum or that chosen. Arbitrators can never ensure, and should never aim to ensure, that their award will be valid in every jurisdiction of the world. But a test of a close link and aims generally accepted internationally gives only limited guidance. We must hope that the International Law Institute or some other body may try to be more specific. Thank you for your attention!

Isn’t 700 Years Long Enough? Time to Think Again about Costs Neil Kaplan CBE, QC, SBS*

Introduction It is a great pleasure and honour to be invited to give the Twenty-Fourth Goff Lecture sponsored by the City University of Hong Kong. It is a particular pleasure for me for two reasons. Firstly, I was intimately involved in the setting up of this lecture series. At the time of Lord Goff’s visit to Hong Kong in 1990, I was the Judge in charge of the Arbitration List High Court and also the Chairman of what was then the Hong Kong Branch of the Chartered Institute of Arbitrators (CIArb). Lord Goff was at that time the President of the CIArb. When my good friend Professor Derek Roebuck, the then Dean of the Faculty of Law at City University, heard of Lord Goff’s impending visit he suggested a lecture to be given by Lord Goff which turned out to be the first in this series of what is now twenty-four. So, it is an honour to be involved with a lecture series dedicated to the memory of Lord Goff, one of the giants of the common law in the 20th and 21st centuries. The second pleasure is that I delivered the Sixth Goff Lecture in 1996 and I am delighted to be invited again. Either the first one was no good and the Dean has generously given me a second chance to redeem myself, or it was so good that he expects a repeat performance. I will let you be the judges of that. The Sixth Lecture dealt with the question whether the requirement of writing for the arbitration agreement as set out in article II of the New York Convention was outmoded and inconsistent with modern methods of doing business.1 The genesis of the lecture was a seemingly simple case that came before me in May 1994. In H Smal Ltd v Goldroyce Garment Ltd,2 the parties had enjoyed previous commercial dealings. Although not stated in the judgment, I seem to recall that the plaintiff ordered denim jeans from the defendant. The plaintiff sent the defendant a signed written purchase order which contained an arbitration clause but the defendant never returned a signed copy. Nonetheless, the defendant delivered the jeans in accordance with the purchase order. They were paid for. When delivered, they were the wrong colour and the plaintiff commenced an

* International Arbitrator, Arbitration Chambers, Hong Kong. A judge of the former Supreme Court of Hong Kong(1990-1994). A Past Chairman of Hong Kong International Arbitration Centre (1991-2004). A Past President of the Chartered Institute of Arbitrators (1999-2000). This is an edited version of the Twenty-Fourth Goff Lecture delivered by the author at the Hong Kong International Arbitration Centre on 2 April 2019. It was originally published in edited form at [2019] Asian Dispute Review 144-153.

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arbitration in Hong Kong. Because no agreement could be reached as to the identity of the arbitrator, the plaintiff applied to me for the appointment of an arbitrator effectively pursuant to article 7 of the UNCITRAL Model Law.3 However, because the plaintiff could not produce a copy of the agreement signed by the defendant, I was bound under the then (1985) version of article 7 of the Model Law to decline to appoint an arbitrator. That struck me as a very strange result. There was no doubt that there was a contract between the parties, but because article 7 then required the written contract to have been signed by both parties, there was no way to compel the defendant to arbitrate. That lecture, together with other commentary, attracted considerable attention and much discussion and, in short, ignited the debate that led to many amendments to arbitration legislation around the world (particularly in Hong Kong) and led later to the amendments to the Model Law that provided a much wider definition of ‘writing’ in accordance with modern ways of doing business. So now, when a salvor says to the captain of a sinking ship over the ship’s radio, “Do you agree to the Lloyds salvage form?”4 and the captain of the ship says, “Yes of course I do - please hurry”, the arbitration5 clause contained in that form binds both parties.

Costs of dispute resolution: some causes and criticisms In this lecture, I want to concentrate on a subject close to everyone’s hearts, and that is costs. Most parents would be happy and proud when their child embarks upon a career in the law. Yet, lawyers have come in for much criticism over the centuries. We can ignore Shakespeare’s “Let’s kill all the lawyers”6 as being a little extreme. However, there are many other anti-lawyer comments, most of which relate to the cost of conducting adversarial proceedings. Henry Brougham,7 a 19th century Lord Chancellor, said: “A lawyer is a learned gentlemen who rescues your estate from your enemies and keeps it for himself.” One of the strongest condemnations came from Timothy Dwight, the President of Yale, when he said to the graduating seniors in 1776:8 “That meanness, that infernal knavery, which retards the operation of justice, which from court to court [and] which upon the most trifling pretenses, postpones trial to glean the last emptying of a client’s pocket, for unjust fees of everlasting attendance, which artfully twists the meaning of law to the side we espouse, which seized unwarrantable advantages from prepossessions, ignorance, interests and prejudice of a jury, you will shun rather than death or infamy.” Bringing matters more up to date, in 1994 the then Sir Thomas Bingham said the fact that the resolution of civil disputes should be so costly was not merely a wart on the face of the administration of justice but a cancer eating into it.9

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In the same year, Lord Woolf said:10 “A system of justice which a very substantial section of its own citizens cannot afford, is a system which contains a fundamental flaw and leaves them vulnerable to exploitation.” Now I accept that these powerful statements were made in the context of state court litigation, whereas I am speaking about arbitration, to which possibly different considerations apply.

The ‘costs follow the event’ (or ‘cost shifting’) rule on the allocation of costs History Most of us in this room have been brought up in jurisdictions where costs follow the event, otherwise known as the ‘cost shifting’ rule. It has to be recognised that this rule is of ancient origin, having been introduced by the Eastern Roman Emperor Zeno in 487 AD/CE. This rule became part of the Code of Justinian in the first half of the sixth century. The rule did not reach England until the Statute of Gloucester of 1275, which provided for recovery of the successful plaintiff’s costs. It was not until Costs Act of 1607, however, that a statute was passed which put the successful defendant in the same position as a successful plaintiff. These statutes remained the law on the subject of costs until the Supreme Court of Judicature Act of 1875, which set up a procedure with which most of us are familiar but which still retained the rule.

Applications of the rule in arbitration rules When it comes to arbitration, many sets of rules provide a rebuttable presumption that costs follow the event. For example, rule 42(1) of the Permanent Court of Arbitration (PCA) Arbitration Rules 2012 states: “The costs of arbitration shall in principle be borne by the unsuccessful party or parties. However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case.” Similar provisions can be found in the rules of UNCITR AL and the LCIA.11

The American rule on allocation of costs As we all know, the United States went in a different direction. The issue came before the Supreme Court as early as 1796 in the case of Arcambel v Wiseman.12 The lower court had ordered the losing party to pay $1600 toward the successful party’s costs. In reversing, the Supreme Court said:

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“We do not think that the charge ought to be allowed. The general practice of the United States is in opposition to it and even if that position were not strictly correct in principle, it is entitled to the respect of the Court until it was changed or modified by statute.” An explanation for this view might be an American reluctance to kick a man while he was down. Another might have been the fear that the risk of paying the other side’s costs if unsuccessful would act as a disincentive to bringing an action, and could thus be seen as a possible bar to access to justice. Interestingly the English view is the opposite, namely the fear of not being able to recover your costs if successful would be a possible bar to access to justice. By 1829 in New York, counsel’s fees were recoverable if successful. In that year, the recoverable sum was fixed at $3.75. That fixed fee was never altered and as lawyers’ fees increased over the years, the recovery was tantamount to nil. Interestingly in the USA, the issue of costs recovery in arbitration depends on whether the case is domestic (under the American Arbitration Association Commercial Arbitration Rules 2013 (AAA Rules)) or international (under the International Center for Dispute Resolution Arbitration Rules 2014 (ICDR Rules), which are the international rules of the AAA). Under the AAA Rules, it is provided that the award may include:13 “an award of attorney’s fees if all parties have requested such an award or it is authorized by law or their arbitration agreement.” The ICDR Rules give more discretion to the arbitrators by providing:14 “The arbitral tribunal shall fix the costs of arbitration in its award(s). The tribunal may allocate such costs among the parties if it determines that allocation is reasonable, taking into account the circumstances of the case. “Such costs may include: … d. the reasonable legal and other costs incurred by the parties; …”

Re-examining ‘costs follow the event’ Relevant factors influencing possible change So I guess the crucial question I need to address is why mess with something that has been around in England for 700 years? Posing that question reminds me of the tetchy English judge who, when he heard ‘law reform’ mentioned, exploded: “Reform? Reform? Aren’t things bad enough already?”15 The law often lags behind social change. For example, it was proposed in Simon de Montfort’s reforming parliament in 1258 that the subsequent marriage of the parents should legitimate a child. Although this change would have been in line with canon and civil law and

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was therefore supported by the bishops, the earls and barons opposed it, possibly because of an antipathy to civil law or an adverse impact on rights of succession.16 The measure was therefore rejected. Despite the rule applying in Europe and beyond, it did not become law in England for 700 years, until the Legitimacy Act of 1926. So, my point is that we should not necessarily be hoodwinked by the age of a law but should re-examine it in the light of current circumstances. I need hardly point out the differences in the legal, social and political climate between 1275 and 2019. Things have changed and rules made then do not necessarily fit in with modern conditions - just as article II of the New York Convention of 1958 and article 7 of the Model Law needed updating in the light of modern methods of doing business. So, what are the changes that have occurred that justify a reconsideration of the cost shifting rule? (1) Society has become incredibly more complex, which in turn impacts upon the complexity of disputes. (2) The areas in which the law intervenes have increased enormously. (3) Arbitration has become the preferred method for resolving disputes between entities from different jurisdictions. (4) Arbitral awards are far easier to enforce as a result of the widespread adoption of the New York Convention. (5) Arbitral awards are hard to challenge. (6) The conduct of arbitrations is aping state court litigation. (7) Arbitration has become an important mainstay of commercial law firms’ practice. (8) Fees for arbitration cases have increased sharply, as have the number of lawyers and paralegals assigned to such cases. (9) Modern technology has facilitated longer and more detailed pleadings, submissions, document production and witness statements, and has added significantly to the cost and complexity of arbitration.

The nature and effects of large claims for costs The combined effect of all the above is to place a huge burden on counsel as well as the arbitral tribunal. The fact that costs are so considerable gives the claim for costs a life of its own. Everything is thrown in, so that success is more likely and no stone left unturned. The result is that we have seen combined claims for costs at the end of an arbitration as high as US$80m but frequently in the US$20m-$40m bracket. In my opinion, these all too common large claims for costs cause two problems. First, because cost recovery becomes so important, everything is thrown in - the good, the bad and the very bad. This has the effect of exacerbating delay and cost.

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Second, I believe that the claim for costs acts as a disincentive to settlement. Settling a claim can sometimes be achieved but the settlement breaks down when one party insists on its costs and the other refuses emphatically. When the ratio of costs to the amount initially in dispute is too high, there is typically no range in which a mutually agreeable settlement is feasible. I now return to the issue whether the non-recovery of costs can act as a disincentive to bringing an arbitration or whether we should take the American line that the prospect of having to pay the successful party’s costs is just as important a disincentive. In considering this question, one has to draw a distinction between state court litigation and arbitration. It might seem offensive that an injured plaintiff who is forced to seek redress in the courts should have its recovery cut down by having to pay its own lawyers’ fees. If this were the rule, my guess is that damages awards would be increased to take this into account. I think it is arguable, however, that very different considerations apply to arbitration, and international arbitration in particular. Of course, we sometimes see the David and Goliath situation and are able to deal with it, though most cases that come before international tribunals are between entities that can afford to bring and defend the proceedings and which have a mutual desire to keep the costs of dispute settlement within reasonable limits. Another important factor to throw into the mix is the advent of third party funding (TPF). In Hong Kong, recent legislation has confirmed the view that champerty and maintenance do not apply to arbitration in Hong Kong. Thus, parties with financial problems who have good cases can get funding, albeit at a cost. We are also seeing well-heeled companies using TPF to lay off risk. Unlike Hong Kong, England & Wales allows conditional fees. This enables lower fees to be agreed, but subject to an uplift in the event of success. For reasons that are not clear to me, there is opposition to this in Hong Kong, and this places Hong Kong practitioners at a disadvantage in international arbitration. It seems to me that rather than having a rebuttable presumption that clearly raises recovery expectations, we would be far better off without one. Instead, the tribunal should start with the conduct of the parties and the reasonableness of their stance. A successful party who may only succeed partially would increase the costs by virtue of the non-successful part of its case. I can see great advantage in parties not knowing that if they win they will in all probability recover at least part of their costs. This, I think, would give them more skin in the game. They would be more circumspect about spending money that they may not recover. This may limit the ‘kitchen sink’ approach and thus save on costs and time.

The pros and cons of the cost shifting rule and some possible alternative approaches to the allocation of costs In many cases, it is not easy to ascertain what is the ‘event’ that costs should follow. Assume a case in which a claimant claims US$10 million. This sum comprises five claims of $2 million each. The hearing lasts five days. The claimant wins on one head of claim only that

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takes a day to hear. Should the claimant recover all its costs or only a proportion, say one fifth? (1) Some arbitrators might say that, in the absence of an acceptable offer, the claimant had to go to arbitration to get $2 million and the fact that it claimed more is irrelevant. I call these ‘bottom liners’! Others would say that four fifths of the hearing time was wasted and would award costs accordingly, ie deprive the claimant of four fifths of its costs. (2) Others might say that as the respondent won on four fifths of the issues, it should get its costs on the issues upon which it succeeded. (3) Others yet might say that as both parties had some success, there should be no order and each party should bear its own costs. Uncertainty as to which view would be taken adds uncertainty in settlement negotiations. If I took a poll of you right now, I am pretty confident that there would be a multitude of views. Accordingly, I believe far more attention needs to be addressed as to the way in which the successful party has presented its case. Over-lawyering should be penalised, as should unreasonable procedural behaviour. How you win should become more important than just winning alone. It seems to me more appropriate that at the first meeting with the parties, the tribunal should set out explicitly that these factors will be the determinant for costs recovery, not just the result. I am, of course, conscious that two eminent lawyers - Sir Thomas Bingham and Lord Woolf - have considered whether the cost shifting rule should remain.17 However, they did so in the context of state court litigation, not arbitration. It is interesting to note that over 25 years ago, Lord Woolf recognised some of the points I am making.18 He considered that there were two advantages in keeping the rule. First, he considered it fairer that a successful party should recover a major proportion of its own costs from the unsuccessful party. Second, he considered that the rule deters unmeritorious litigation and encourages earlier settlement. Lord Woolf was also able to discern three reasons for abandoning the rule. First, it can deter meritorious claims. Second, it favours the wealthy party and third party funder. Third, once litigation is under way, the costs at stake may be so great that the parties feel impelled to press on. Lord Woolf went on to say that: “the adverse consequences which flow from the problems in relation to costs contaminate the whole civil justice system. Fear of costs deters some litigants from litigating when they would otherwise be entitled to do so and compels other litigants to settle their claims when they have no wish to do so. It enables the more powerful litigant to take unfair advantage of the weaker litigant.”19 Lord Woolf then balanced the conflicting arguments and, in the context of litigation but not arbitration, favoured maintaining the cost shifting rule. He so concluded on the basis that in the future, courts should make more focused costs orders and that they would better case manage so as to keep costs down.

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A thorough review of costs in litigation was conducted more recently by Sir Rupert Jackson. In considering the cost shifting rule, his conclusions were as follows:20 “The existing cost shifting regime should not be regarded as ‘a sacred cow’ but on the other hand its complete abolition does not appear to be a realistic option for the foreseeable future. Some of the main issues on which I would particularly welcome views are as follows: (1) whether there are any further discrete areas of litigation where the cost shifting rule should be effectively abolished altogether; (2) whether there is a case for a presumption of one-way cost shifting, either in personal injury litigation or across the board, and what issues and options should be considered under such a regime; (3) if cost shifting ‘one way or two ways’ is retained, on what principles should it operate? ‘Loser pays’ is not the only option. Other options which are more directly based on encouraging earlier and appropriate resolution of claims, including ADR, may well be worthy of further consideration. (4) in cases where cost orders are made, whether the rules should mitigate the full impact of such orders, by forms of cost protection either (a) in favour of claimants or (b) in favour of individuals generally.” Sir Rupert introduced costs budgeting for litigation. This involves the parties and the judge agreeing a budget for the case and attempting to stick to it so far as possible. I am not sure what he would have recommended had he only been asked to consider the rule in the context of arbitration. On 20 September 2018, Sir Rupert gave a talk on costs at the Hong Kong International Arbitration Centre in which he suggested that costs budgeting might be appropriate for arbitration. I am a little sceptical as to whether this would be acceptable in international arbitration. For instance, I could see civil lawyers advocating low costs budgets based on the way they conduct cases and common lawyers having a different perspective. Whereas judges have coercive power and are backed up by rules of court, arbitrators can only suggest. In this regard, it is pertinent to note that section 65 of the UK Arbitration Act 1996 contains a power given to arbitrators to cap recoverable costs.21 However, I believe that its use is minimal and I have never come across even its mention in cases I have conducted since that time; this is also the anecdotal evidence of my colleagues. So, is it time for the sacred cow to be abandoned in arbitration? In my view, the arguments against its continuance are becoming more powerf ul as the complexit y and costs of cases increase. I do not want to be too dogmatic about this, but I do think the time has come for there to be a full debate about this question solely in the context of arbitration. It may even be that different conclusions might be arrived at as between domestic and international arbitration. The need for a debate on this issue becomes even more pressing when one looks at the results of a study conducted by Snyder and Hughes on the impact of the cost shifting rule on litigation in Florida.22 Florida is an interesting case study as the English rule was used

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there from July 1980 to September 1985 before reverting to the US rule. Snyder and Hughes analysed 10,325 medical malpractice cases. They revealed that during the time the cost shifting rule applied, 58% of those cases were litigated, as against only 42% under the US rule. Moreover, the expenditure required to achieve settlement or trial was between 40% and 60% higher in cases proceeding under the cost shifting rule than in those proceeding under the US rule. Although these figures seem to imply that the use of the cost shifting rule led to fewer settlements, Snyder and Hughes explained that when dropped cases were taken into account, the rule made a case that had been commenced less likely to go to trial. The study went on to conclude that: “more cases of low merit tend to be commenced under the US rule than under the English rule. Cases proceeding under the English rule are more likely to be settled or abandoned before trial than cases proceeding under the US rule. Those cases which progress to trial under the English rule are likely to be stronger than those which proceed to trial under the US rule.” Interestingly enough, the study also revealed that litigation costs were higher under the cost shifting rule. In light of this analysis, it looks like the cost shifting rule deters more claimants with weak claims or limited resources. If the cost shifting rule were to be abolished, an issue might arise as to whether there should be retained a residual discretion to award costs against either party if that party’s conduct both before and during the arbitration were such that it would be offensive to justice not to award some costs against that party. I have set the bar high so that it is clear that only the most egregious circumstances would be caught. I would favour this approach. There is a good example in the case of Essar v Norscot,23 where both the distinguished arbitrator and the English Commercial Court on review confirmed that a successful party with the benefit of TPF could recover as part of its costs the premium paid to the funder. The reason for this was because the losing party’s conduct was such that it attempted to destroy the claimant, who was forced to obtain TPF because the losing party had ensured that no other form of funding would be available. This was an exceptional case. If the cost shifting rule were to be abolished and these facts were to be repeated, the residual discretion should cover this sort of unusual situation. I accept that many may think that neither of the two regimes is perfect, to say the least. So let me conclude by offering another alternative if it be thought that the abolition of the cost shifting rule is a step too far. In arbitrations conducted under the rules of several institutions, arbitrators are remunerated on an ad valorem basis. The idea is that the greater the value of a claim and a counterclaim, the more deposits are requested by the institution, and thus the higher the remuneration of the arbitrators. It seems to me that this is a flawed approach. We all know that low value cases can be extraordinarily complicated and huge claims easy. So, injustice is inbuilt to the system. When you add to this that not all institutions stick to the ad valorem system but engineer it to control fees in different ways, a justifiable sense of injustice is felt by many arbitrators. This is particularly so when we know that the expenses of the arbitral tribunal are minor compared to the legal and experts’ costs.

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I therefore ask, has the time not come when the recovery of legal costs (if ordered) should be on the basis of an ad valorem system? On this basis, a party can spend what it likes but will know from day one that its costs recovery (if any) would be limited to the scale. Wouldn’t this also be a disincentive to the ‘kitchen sink’ approach and give rise to internal cost budgeting?

Conclusion In conclusion, I think we can do better in dealing with costs in arbitration. More triage, less prolixity, less procedural argumentation, better case management, shorter and more focused submissions, and shorter and more succinct awards would keep them down. But the knowledge that, if you win, you may not recover a substantial portion of your costs may be the oxygen that is needed to achieve these results. Cost is still the major criticism of the system. If the system is to continue flourishing, as it has for the last 40 years or so, we have to take note of this criticism and change practices accordingly. Every system is in need of a periodic health check! I end by repeating my thanks to City University for this generous invitation, to HKIAC for offering us these splendid premises and, most importantly, to you all for your attention. I hope very much that I will be invited to give this lecture again in 26 years’ time. I hope even more that I’ll be able to attend and be capable of delivering it!

Endnotes 1 Editorial note: See Is the need for writing as expressed in the New York Convention and the Model Law out of step with commercial practice? The Sixth Goff Lecture (1996) 5 APLRev 1-23. 2 H Smal Ltd v Goldroyce Garment Ltd [1994] 2 HKC 526. Editorial note: Available at http://neil-kaplan.com/ wp-content/uploads/2013/08/H.-Smal-Limited-v-Goldroyce-Garment-Limited-HCMP908-of-1994.pdf. 3 Editorial note: The application was made under s 12 of the now repealed Arbitration Ordinance (Cap 341) but was objected to on the ground that there had been no compliance with art 7 of the Model Law. 4 Editorial note: The Lloyds Standard Form of Salvage Agreement, or Lloyds Open Form (LOF). 5 If Option 2 of article 7 applies, the agreement can take any form. However, if Option 1 applies, the parties have to record their agreement “in any form, whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means.” 6 Henry VI, Part 2, Act IV, scene 2. 7 1st Baron Brougham and Vaux (1778-1868), The Mirror of Literature, Amusement and Instruction, 19 October 1844, p 268. 8 Timothy Dwight, A Valedictory Address to the Young Gentlemen, Who Commenced Bachelors of Arts at Yale College, July 25th, 1776, reprinted in Amercan Magazine (January 1788), p 101. 9 Sir Thomas Bingham, The price of justice: lecture to the Holdsworth Club, University of Birmingham (18 March 1994). 10 See Ministry of Justice (England & Wales), Access to Justice: Final Report by Lord Woolf (July 1996). 11 See article 42 of the UNCITRAL Arbitration Rules 2013 and article 28.4 of the LCIA Arbitration Rules 2014. 12 US Supreme Court, Arcambel v Wiseman, 3 US 3 Dall 306, 306 (1796).

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13 AAA Rules, Rule R-47(d) ii. 14 ICDR Rules, article 34. 15 An outburst attributed to, among others, Mr Justice Astbury, a judge of the Chancery Division from 1913 to 1929: see Lord Justice Bean in a paper of this title delivered at Middle Temple Hall on 19 July 2018, available at https:// s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/ uploads/2018/07/Sir-DavisBean-Speech-July-2018.pdf [sic], at p 1. 16 See JD White, in Legitimation by Subsequent Marriage (1920) 36 LQR 255 et seq. 17 Editorial note: See, respectively, notes 9 and 10 above. 18 See note 10 above, at Chapter 7. 19 Lord Woolf, op cit (note 10 above) Chapter 7, para 3. 20 Rupert Jackson, Ministry of Justice (England & Wales), Review of Civil Litigation Costs: Preliminary Report, Vol 2, p 476 (2009). 21 Editorial note: A similar power is set out in section 57 of the the Hong Kong Arbitration Ordinance (Cap 609). 22 See E Snyder & J Hughes, The English Rule for Allocating Legal Costs: Evidence Confounds Theory, 6 Journal of Law, Economics and Organisation (1990) 345-380; J Hughes & E Snyder, Litigation and Settlement Under the English and American Rules: Theory and Evidence, 28 Journal of Law and Economics (1995) 225250. 23 [2016] EWHC 2361 (Comm).

Arbitrator ‘Temperance’: David Caron’s Rule of X1 Lucy F Reed

I. Introduction The City University of Hong Kong instituted the Goff Lecture in 1990 to celebrate the commencement of the Master of Arts in Arbitration and Dispute Resolution. The first lecture was delivered by Lord Goff of Chieveley, Lord of Appeal, who consented to the Lecture Series bearing his name. There have been 24 Goff Lectures since then. According to the City University website, on the occasion of the 24th Lecture by Neil Kaplan CBE QC SBS in 2019, the Goff Lecture “provides an excellent opportunity for discussion and exchange of ideas among practitioners and academics in the arbitration field.” It was almost exactly one year ago, on 11 October 2019, that I received the kind invitation from Neil Kaplan and Dean Tan Cheng-Han to deliver the 25th Goff Lecture, scheduled for the week of the Vis East moot competition in March 2020. Vis East did not happen in March 2020. The Goff Lecture did not happen in March 2020. A great deal did not happen in March 2020 and has not happened since March 2020. And so I have the honor of being the first to deliver the Goff Lecture remotely, from my study in Charlestown, Rhode Island. I am pleased that some 20 friends and colleagues are able to gather in socially-distanced configuration in the offices of HKIAC, so familiar to me, and are therefore enjoying the traditional “excellent opportunity for discussion and exchange of ideas among practitioners and academics in the arbitration field” in person. I mention that I am in Charlestown, Rhode Island, for a reason. Unlike the late Johnny Veeder QC and other Goff Lecturers, I did not have the privilege of knowing the exceptional Lord Goff. Having thought about that, I concluded that perhaps my closest connection to Lord Goff and the English judiciary is that Charlestown, incorporated in 1738, was named after King Charles II. The surroundings are international, though, with neighboring towns bearing names such as Jerusalem and Galilee and, after our indigenous peoples, Quonochontaug, Misquamicut and Narragansett.

1 Lucy Reed is an independent arbitrator with Arbitration Chambers (New York), currently President of the International Council for Commercial Arbitration. This is an edited version of the Twenty-Fifth Goff Lecture delivered virtually for the first time on 27 October 2020 under the joint auspices of the School of Law of the City University of Hong Kong and Hong Kong International Arbitration Centre. An earlier but shorter edited version appears at [2021] Asian Dispute Review 50-59. The author records, with appreciation and admiration, the research provided by her daughter, Dr Madeleine Reed Glennon, on Greek philosophy and ethics, the research provided by her former student, Mr YIU Kai Tai, on modern social science and ethics, and the editing assistance from Arbitration Chambers senior counsel Ms Lindsay Gastrell. The author also thanks all those from City University of Hong Kong and the Hong Kong International Arbitration Centre who made this lecture possible.

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I have a second honor this evening, that of being the first woman to deliver the Goff Lecture. I smile as I share Neil’s words in his email invitation of last October: We just do not know how this happened but can think of no one better to redress this egregious error. It will be no consolation but your predecessors are Lord Goff, Rogers, Lord Bingham, Marriott, Schwebel, NK, Lord Mustill, Paulsson, Lalive, Nariman, Veeder, Fortier, Bockstiegel, Brower, Reisman, Caron, Hwang, Werner, Hober, Born, French, Lord Hope, Lord Mance and me again. An egregious error it has been; I am pleased to be the first to correct it, and I know many women will follow. I disagree with Neil on one point. It is actually consolation of a sort to read the list of prior Goff Lecturers. Having read the prior published lectures, it magnifies the honor – and the challenge – to be at this (virtual) podium. I find it poignant that the two Goff Lectures I found most relevant to my topic to be those delivered by two giants recently lost to us: Johnny Veeder and Professor Pierre Lalive. Professor Lalive wrote that the honor of delivering his Lecture in 1998 was “certainly matched by the exceptional difficulty to follow eight distinguished lecturers.”2 With the even more exceptional difficulty of following more than 20 distinguished lecturers, I will proceed to my topic – ‘Arbitrator ‘Temperance’: David Caron’s Rule of X’.

II. Introduction to the Topic In September 2018, the University of California School of Law at Berkeley held a conference entitled ‘The Elegance of International Law’ in commemoration of my dear friend – and another giant – Professor David Caron, I was kindly invited to deliver the pre-luncheon keynote, on a topic to be substantive rather than in memoriam. Thinking about the one time we wrote something together, I decided to see what David’s latest research interests had been, On SSRN, I found the text – “as delivered” and not finalized for publication – of the Opening Lecture he gave on 28 September 2017 to the then-entering class of the prestigious Masters in International Dispute Settlement program at the Graduate Institute in Geneva (MIDS).3 I was intrigued by the title – ‘Arbitrators and the Rule of X’ – and became more than intrigued by the content, which resonated with my growing experience as an arbitrator, I took note that David stated at the outset that “this discussion is only starting and in [his] view presents a much deeper agenda than currently set out.”4 I knew that if David were still

2 Pierre Lalive, ‘Irresponsibility in International Commercial Arbitration’, 7 Asia Pacific Law Review 2, 161-176 (1999), p 161 (hereinafter Lalive). Editorial note: This lecture is reproduced in this volume at pp 14–163. 3 David D Caron, ‘Arbitration and the Rule of X’, King’s College London, Dickson Poon School of Law Legal Studies Research Paper No. 2017-41 (Sept. 28, 2017), https://ssrn.com/abstract - 3062537 (hereinafter Caron), 4 Caron, p 3.

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with us, I surely would have proposed that we co-author something again. As he is not, I decided to develop his ‘Rule of X’ on my own. And as I said at Berkeley, I had ambitions beyond a paper version of the keynote,5 namely to have the ‘David Caron Rule of X’ become part of our international arbitration lexicon – like the (Alan) Redfern Schedule, the (Neil) Kaplan Early Opening, and the (less well-known) Reed Retreat. Hence, the second half of the title for this Lecture – ‘David Caron’s Rule of X’. I will illuminate the first half – ‘Temperance’ – shortly.

III. The David Caron Rule of X David introduced his MIDS lecture topic to “the far-flung array of individuals who serve as international adjudicators, arbitrators, commissioners and judges,” whom he found to be “the most difficult group in international courts to predict, to give a logic to.”6 David did not agree with other academics that the primary driver for international arbitrators is reappointment in and of itself, and so focused his research on their being “reappointed by virtue of their reputation.”7 After noting and contesting the “overstated claim” that international arbitrators are a mafia or club or cartel, David focused on the “disruptive practice” of over-commitment as underlying much of the current criticism of international arbitrators. It is over-trading that can make it impossible for a tribunal to find an available hearing date in less than two years’ time, and cause arbitrators to arrive at hearings unprepared and depart without time for deliberations. It is over-trading that can force parties to wait months or even years for awards, and can lower the overall quality of international arbitration. David was quick to explain that this situation is “more nuanced and widespread” than the particularly packed schedules of particularly busy arbitrators:8 It includes the practitioner who has only two arbitrations he or she sits on but which are difficult to mix with the unrelenting demands of clients. It likewise includes the academic who has only one or two arbitrations he or she sits on but which are difficult to accommodate within teaching schedules. David noted the external responses to the evils of over-commitment. The HKIAC, ICC, ICSID and other arbitral institutions now require arbitrator candidates to document their anticipated availability or capacity, for example by disclosing exactly how many cases they have and filling in calendars three years out. One wonders how robust these disclosures are in practice. Regardless, in David’s view, these external requirements – although important –

5 As published, Lucy Reed, ‘The David Caron Rule of X’, 37 Berkeley Journal of International Law 163 (2019); 46 Ecology Law Quarterly 9 (2019) (hereinafter Reed). 6 Caron, p 3. 7 Caron, p 3. 8 Caron, p 10.

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serve only to provide a minimum of information to the appointing parties, and are not “what arbitrators professionally should demand of themselves and each other.”9 What is needed, according to David, is an internal control, In David’s words, central to this lecture:10 [A]rbitrators need to reflect on the amount of appointments they are reasonably able to handle. For the issue posed by over commitment, the needed internal commitment is gained by what I call the Rule of X. Specifically, David suggested that: “all of us, and particularly existing arbitrators set a number – X – as the upper limit of cases that he or she is capable of responsibly sitting on at the same time.”11 The purpose is to facilitate a reputation for excellence. David emphasized that there is no uniform number X. Given that “the individual circumstances and capacities of arbitrators vary tremendously”.12 X is necessarily subjective and necessarily varies with individual circumstances: experience, age, energy, full-versus part-time arbitrator status, the nature of other work – practice or academic?, legal culture, use of tribunal secretaries. X should vary over time and over a career. David identified one critical variable of X to be the number of presiding arbitrator appointments, which can exponentially increase the work required. In my talk at Berkeley, I added this:13 If [David] had had more time, no doubt he would have expressly elaborated on more variables: treaty vs. commercial cases, complex vs. modest cases, personal factors like family-life balance, intellectual challenge, the sheer fun that can come with sitting with certain other arbitrators and hearing certain counsel. However many the variables and however subjective the exercise, David considered the consequences of actually having an X benchmark to be profound. First, having an X forces an arbitrator to assess each prospective appointment more carefully, especially when one is at X minus-1. Speaking personally, David said:14 I began to think very seriously about the characteristics of the arbitrations I most seek to be part of – is a state or government agency a party, who are the other arbitrators, the counsel, what is the issue? Second, if an arbitrator at X turns down additional appointments, the “good news for arbitration and the parties in the X arbitrations is that [he or she] will have a clear strong

9 Caron, p 3. 10 Caron, p 11. 11 Caron, p 11. 12 Caron, p 11. 13 Reed, 37 Berkeley Journal of International Law 163, 166; 46 Ecology Law Quarterly 9, 12, 14 Caron, p 12.

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incentive to more promptly finish some of the X arbitrations.”15 Third, following a personal Rule of X leads arbitrators to serve with “a more robust conception” of the role, and thereby to improve the quality of their own arbitration work and international arbitration in general.16 David connected this to the true cost of over-commitment, namely that “over commitment in the number of arbitrations is under commitment to any particular arbitration.”17 At the surface, it may seem that the Rule of X is relevant only to well-established arbitrators who enjoy the extraordinary privilege of being approached often enough to be able to afford to decline appointments, as I do. However, David observed that when arbitrators at X, or close to X, turn down arbitrations that are relatively small or of less interest to them, those arbitrations can go to younger and more diverse arbitrators.18 He concluded his lecture in Geneva with a description of the virtuous circle that could be unleashed with the Rule of X: “[fewer] cases in the hands of a few, and a few cases in the hands of many, with new arbitrators rising from more diverse backgrounds.”19 It will take more than the Rule of X to achieve greater diversity in the international arbitrator pool, but do I hope that David’s optimism proves warranted and that those appointments I and others turn down go to diverse up-and-coming arbitrators. I will elaborate shortly on Rule of X variables in addition to presiding-versus-wing appointments, and make related suggestions on how to implement the Rule of X. For now, I want to focus on the nature of the David Caron Rule of X.

IV. Temperance David Caron’s Rule of X is a rule of self-discipline. It is a discipline of honest self-assessment in responsibly managing a caseload, ideally in balance with life outside arbitration, It is a discipline of restraint. As self-discipline is often overlooked and undervalued in our commercial market, I decided to go beyond David as a source and look to classical moral and ethical philosophy. Not surprisingly, the Greeks provide a foundation.20 (I admit that, in embarking on my

15 Caron, p 13. 16 Caron, p 13. 17 Caron, p 13. 18 Caron, p 13. 19 Caron, p 13, citing Susan D. Franck et al., ‘The Diversity Challenge: Exploring the ‘Invisible College’ of International Arbitration,’ 53 Columbia Journal of Transactional Law 429 (2015); and Chiara Giorgetti, ‘Who Decides Who Decides in International Investment Arbitration?’ 35 University of Pennsylvania Journal of International Law 431 (2014). 20 As main sources: Richard Parry, ‘Ancient Ethical Theory’, in The Stanford Encyclopedia of Philosophy (Fall 2014 Edition), Edward N. Zalta (ed.), https://plato.stanford.edu/entries/ethics-ancient/; H. North, Sophrosyne: self-knowledge and self-restraint in Greek literature (Ithaca, New York, Cornell University Press, 1966); Adriaan Rademaker, Sophrosyne and the Rhetoric of Self-Restraint: Polysemy and Persuasive Use of an Ancient Greek Value Term. Mnemosyne Suppl. 259 (Leiden, Brill, 2005).

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Classics refresher course, I had the benefit of a daughter – Dr Madeleine Reed Glennon – with a PhD in Ancient Greek archeology and art history.) To refresh us all, the main ancient Greek philosophers – Socrates, Plato and Aristotle – questioned what it meant to be “good” and how to reach eudaimonia (εὐδαιμονία), roughly translated as “happiness” or “well-being.” This comes through examination of virtues such as justice, moderation and courage. Eudaimonia is different than our modern definition of “happiness,” in that it is related to purpose and correctness rather than emotion. To have eudaimonia, one is fulfilling one’s life in the correct way in accordance with nature. The Greek philosophers focused on virtue as a means to eudaimonia. In Aristotle’s Nicomachean Ethics, written circa 350 BCE, one of the main points is that virtue is essential in and of itself, as opposed to a means to an end. So, “honor, pleasure, intelligence, and excellence in its various forms” are chosen not only for their own sakes also for the sake of securing eudaimonia, or well-being.21 Now there do appear to be several ends at which our actions aim; but as we choose some of them—for instance wealth, or flutes, and instruments generally—as a means to something else, it is clear that not all of them are final ends; whereas the Supreme Good seems to be something final. Consequently if there be some one thing which alone is a final end, this thing—or if there be several final ends, the one among them which is the most final—will be the Good which we are seeking. In speaking of degrees of finality, we mean that a thing pursued as an end in itself is more final than one pursued as a means to something else, and that a thing never chosen as a means to anything else is more final than things chosen both as ends in themselves and as means to that thing; and accordingly a thing chosen always as an end and never as a means we call absolutely final. Now happiness above all else appears to be absolutely final in this sense, since we always choose it for its own sake and never as a means to something else; whereas honor, pleasure, intelligence, and excellence in its various forms, we choose indeed for their own sakes (since we should be glad to have each of them although no extraneous advantage resulted from it, but we also choose them for the sake of happiness, in the belief that they will be a means to our securing it. But no one chooses happiness for the sake of honor, pleasure, etc., nor as a means to anything whatever other than itself. Stoic philosophy, founded by Zeno around the third century BCE, goes further. The central tenet of Stoicism – different than the modern definition of the term – is that the only thing necessary for goodness and happiness is moral virtue. Stoics believed that eudaimonia could be achieved through adherence to the virtues only, whereas Plato and Aristotle believed that external things, such as health and wealth, also contribute to happiness. I venture to say that international arbitrators, who need both health and reasonable wealth, would rule for Plato and Aristotle.

21 Arist. Eth. Nic. 19.1097b3-6, trans. H. Rackham, Cambridge, Mass., 1934.

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But seriously, Plato, Aristotle and Zeno all considered self-control a central virtue. Much of Hellenistic moral and ethical philosophy is concerned with the concept of sophrosyne (σωφροσύνη), roughly translated as “temperance” – in Latin, temperantia. Sophrosyne means temperance in the sense of inner balance or moderation, and control over the self, not measured against outside responsibilities or compliance with external laws or codes. I detour to say that I am not speaking of temperance in connection with the social movement for abstinence from alcohol. Being myself a moderate drinker, I think too much temperance in that regard could impede tribunal collegiality. As many here will know, Plato’s Republic, written circa 375 BCE, is a series of didactic dialogues between Socrates and various Athenians about how to form an ideal city-state. In Plato’s Republic, sophrosyne is translated as “sobriety,” a “kind of beautiful order” linked to self-control, Socrates at first takes issue with self-control, as “being master of one’s self” suggests that one can be both master and subject, which is absurd. Socrates goes on, however, to define the two parts within a person’s soul and mind: the smaller, good part, and the larger, bad part. In a city-state, the good part can be and is the master over the bad part, which creates a harmonious balance that results in sophrosyne. I do not have time to share the full colorful dialogue, but, as the first woman Goff Lecturer, I cannot resist offering one detail. Recall that the Republic is a debate about a perfect society, so Socrates/Plato extends this good-and-bad metaphor of sophrosyne to the people living within it. The larger “bad part” consists of those who have low self-control, that is the “mob of motley appetites, pleasures and pain” of women, children, slaves and freemen in name. The smaller “good part,” of course, is the ruling class of citizen males, who must have control over the others. Enough said.22 Soberness is a kind of beautiful order and a continence of certain pleasures and appetites, as they say, using the phrase ‘master of himself’ I know not how; and there are other similar expressions that as it were point us to the same trail. Is that not so?” “Most certainly.” “Now the phrase ‘master of himself’ is an absurdity, is it not? For he who is master of himself would also be subject to himself, and he who is subject to himself would be master. For the same person is spoken of in all these expressions.” “Of course.” “But,” said I, “the intended meaning of this way of speaking appears to me to be that the soul of a man within him has a better part and a worse part, and the expression self-mastery means the control of the worse by the naturally better part. It is, at any rate, a term of praise. But when, because of bad breeding or some association, the better part, which is the smaller, is dominated by the multitude of the worse, I think that our speech censures this as a reproach, and calls the man in this plight unselfcontrolled and licentious.” “That seems likely,” he said. “Turn your eyes now upon our new city,” said I, “and you will find one of these conditions existent in it. For you will say that it is justly spoken of as master of itself if that in which the superior rules the inferior is to be called sober and

22 Pl. Resp. 431a-432b, trans. P. Shorey, Cambridge, Mass., 1969.

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self-mastered.” “I do turn my eyes upon it,” he said, “and it is as you say.” “And again, the mob of motley appetites and pleasures and pains one would find chiefly in children and women and slaves and in the base rabble of those who are freemen in name.” “By all means.” “But the simple and moderate appetites which with the aid of reason and right opinion are guided by consideration you will find in few and those the best born and best educated.” “True,” he said. “And do you not find this too in your city and a domination there of the desires in the multitude and the rabble by the desires and the wisdom that dwell in the minority of the better?” “I do,” he said. “If, then, there is any city that deserves to be described as master of its pleasures and desires and selfmastered, this one merits that designation.” “Most assuredly,” he said. “And is it not also to be called sober in all these respects?” “Indeed it is,” he said. “And yet again, if there is any city in which the rulers and the ruled are of one mind as to who ought to rule, that condition will be found in this. Don’t you think so?” “I most emphatically do,” he said. “In which class of the citizens, then, will you say that the virtue of soberness has its seat when this is their condition? In the rulers or in the ruled?” “In both, I suppose,” he said. “Do you see then,” said I, “that our intuition was not a bad one just now that discerned a likeness between soberness and a kind of harmony?” “Why so?” “Because its operation is unlike that of courage and wisdom, which residing in separate parts respectively made the city, the one wise and the other brave. That is not the way of soberness, but it extends literally through the entire gamut throughout, bringing about the unison in the same chant of the strongest, the weakest and the intermediate, whether in wisdom or, if you please, in strength, or for that matter in numbers, wealth, or any similar criterion. So that we should be quite right in affirming this unanimity to be soberness, the concord of the naturally superior and inferior as to which ought to rule both in the state and the individual. There is relevance in another passage, this one from Plato’s Charmides, about the significance of self-knowledge in temperance, at least once read, re-read and digested:23 Socrates: Then only the temperate person will know himself, and be able to discern what he really knows and does not know, and have the power of judging what other people likewise know and think they know, in cases where they do know, and again, what they think they know, without knowing it; everyone else will be unable. And so this is being temperate, or temperance, and knowing oneself—that one should know what one knows and what one does not know. Is that what you mean? This rings true for the self-aware and humble international arbitrator. So, how do the philosophical concepts of eudaimonia, as well-being, and sophrosyne,

23 Pl. Chrm. 167a, trans. W. R. M. Lamb, Cambridge, Mass., 1955.

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as temperance, inform David Caron’s Rule of X? Recalling that David was addressing the disruptive practice of over-commitment, these concepts underscore the personal responsibility of an arbitrator to determine X, as “the upper limit of cases that he or she is capable of responsibly sitting on at the same time.”24 In speaking of temperance in this context, it is worth remembering that, as lawyers and arbitrators, we are members of a learned profession. The legitimacy of a profession, and what distinguishes it from a trade or craft, is that professionals, as individuals, bear a sense of responsibility to the greater public, above and beyond material incentives. In this regard, I refer you to the work of Professor Richard Morehead, in particular his 2014 lecture on “Precarious Professionalism” inaugurating the Centre for Ethics and Law at the University College London Faculty of Laws.25 It is not surprising that Associate Professor George Beaton of Melbourne Law School, in an article on the relevance of professionalism, refers back to the Greeks:26 Professionalism as set forth in the early Dialogues of Plato holds that the true professional not only possesses the practical skills and knowledge of his or her trade but is also disciplined in moral excellence. In our specific profession, an accepted norm is that arbitrators, like judges, are to apply reasonable diligence and expedience in discharging their functions, including by issuing awards in a timely fashion. This norm is echoed in the 2002 Bangalore Principles of Judicial Conduct and modern judicial codes of conduct.27 To cite just one example, in deference to our venue, the Hong Kong Guide to Judicial Conduct provides, in paragraphs 26 and 33, respectively, that judges “should be diligent in the performance of their judicial duties [and] endeavour to be punctual and to perform their judicial duties with reasonable promptness” and “should deliver reserved judgments within a reasonable time, taking into account the complexity of the matter and other work commitments.”28 To revert to the ancients, the Twelve Tables of Rome, ratified by the Centuriate Assembly in 449 BCE, recognized the virtue of timely decision-making by enacting Table 1, Law IX: “The setting of the sun shall be the extreme limit of time within which a judge must render

24 Caron, p 11. 25 Richard Morehead, ‘Precarious Professionalism – Some Empirical and Behavioural Perspectives on Lawyers’, University College London Faculty of Laws, Centre for Ethics and Law Inaugural Lecture (2014). 26 George Beaton, ‘Why Professionalism is Still Relevant’, Melbourne Law School Legal Studies Research Paper No 445 (2010), p 2. 27 The Bangalore Draft Code of Judicial Conduct, adopted by the Judicial Group on Strengthening Judicial Integrity, as revised at the Round Table Meeting of Chief Justices held at the Peace Palace. The Hague, November 25-26, 2002, endorsed by the UN Commission on Human Rights during its 59th session in April 2003, included the UN Compendium of UN Standards and Norms relating to the Administration of Justice. 28 Guide to Judicial Conduct, Judiciary, Hong Kong Special Administrative Region, October 2004, Article 26.

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his decision.”29 Similar exhortations can be found in ancient Chinese law, the Old Testament and Islamic Law. David Caron’s Rule of X is a tool to assist arbitrators in fulfilling their professional responsibilities in general, and the norm of expediency in particular.

V. Implementing the David Caron Rule of X I now turn to positive suggestions on how to implement David Caron’s Rule of X. This is something I have been developing, with a look at modern day social science, since my keynote at Berkeley. In case I have lost you in BCE, I repeat that the problem David was researching is arbitrator over-commitment. Over-commitment is disruptive because it can lead to delayed hearings and delayed awards, and hence reputational risk. If over-trading risks an arbitrator’s reputation, why does he or she take on too many cases? David observed, based on frank admissions from colleagues, that it is often simply paranoia that underlies over-trading: an arbitrator is reluctant to turn down a new appointment, for fear of not being asked again, being side-lined and losing reputation, not to mention his or her living. That is not my experience. When I turn down an appointment, explaining that I lack capacity to handle that case as it deserves to be handled, I may sometimes be crossexamined but I am always thanked. In addition to paranoia, another reason for over-trading may just be an arbitrator’s reluctance or inability to say “no” to an appointment. Immediate acceptance of any and all appointment invitations may be, for the fortunate ones, a form of habit, developed in the early stages of building an arbitrator practice. Of help here might be the interesting work of Charles Duhigg, the Pulitzer Prize winning Harvard and Yale-educated New York Times reporter, in his book “The Power of Habit”.30 In short, Duhigg’s advice is to exercise and use the muscle of will-power to break habits. Here, to say “no” to arbitration X+1. The most helpful approach, in my view, is for an arbitrator to take concrete steps to calculate his or her own X, at that specific stage of his or her career, and then apply it strictly. Calculating a personal X will require, for some, accepting fewer rather than more appointments. There is some overlap between David Caron’s Rule of X and Greg McKeown’s “essentialism.” In his New York Times best-selling book “Essentialism: The Disciplined Pursuit of Less”, McKeown describes the essentialist’s path as the pursuit of less but better,

29 The Twelve Tables, Law X, in Immanuel Kant. The Philosophy of Law: An Exposition of the Fundamental Principles of Jurisprudence as the Science of Right, p 58. 30 Charles Duhigg. The Power of Habit: Why We Do What We Do in Life and Business (New York, Random House 2012), Chapter 7.

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undertaken in a disciplined way.31 In his words:32 By definition, applying highly selective criteria is a trade-off; sometimes you will have to turn down a seemingly very good option and have faith that the perfect option will soon come along… Like any Essentialist skill, it forces you to make decisions by design, rather than default. McKeown also makes the point that “[w]hile we may not always have control over our options, we always have control over how we choose among them.”33 In the present context, this translates to the reality that, while we arbitrators cannot control which parties, coarbitrators or institutions may reach out to appoint us, and for which cases, we can control which ones we choose to accept, and perhaps how we let it be known that we have capacity for more appointments or not. In the process of calculating one’s own X factor, it is critical to be unflinchingly realistic. Without venturing too far into the realm of heuristics. I mention the “planning fallacy” heuristic: the human tendency to underestimate how long a task will take. This applies directly to the possibility that a new arbitration, supposedly not requiring substantial attention for many months, may open with a barrage of emergency interim measures applications. It was the social scientist Daniel Kahneman, together with Amos Tversky, who coined the phrase “planning fallacy” in 1979.34 Many of you will know Dr Kahneman’s best-selling book Thinking, Fast and Slow.35 For an arbitrator to apply David Caron’s Rule of X is to think, slow (or, to be grammatically correct, slowly). In brief, the relevant behavioral science is that human beings have two types of cognitive functions: System 1, which is fast, automatic, and intuitive; and System 2, which is slow, calculative, and deliberative. For our purposes, System 1 is an arbitrator, upon receiving an inquiry to take a new case, responding immediately “I’ll take that case, with thanks!”, perhaps thinking “Might be my last.” System 2 is an arbitrator, in the same situation, thinking carefully about how the new case would fit in with his or her existing and prospective caseload; in David Caron Rule of X language, asking “Am I below X now? If I am at X-1, is this appointment more interesting and/or lucrative than another invitation that might come next week, next month, or even next year?” One way to do this could be to draw up checklists, Many of you will be familiar with the work of Dr Atul Gawande, a chaired Professor of Surgery at Harvard Medical School,

31 Greg McKeown, Essentialism: The Disciplined Pursuit of Less (New York, Crown Business 2014) (hereinafter McKeown). 32 McKeown, Chapter 9, p 97. 33 McKeown, Chapter 2, p 36. 34 Daniel Kahneman and Amos Tversky, ‘Intuitive prediction: biases and corrective procedures’, 12 TIMS Studies in Management Science 12, 313–327 (1979). 35 Daniel Kahneman, Thinking, Fast and Slow (New York, Farrar, Straus and Giroux, 2011).

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and specifically with his book The Checklist Manifesto: How To Get Things Right.36 In this best-seller, Dr Gawande first narrates his personal story of creating and implementing a “safe surgery” checklist as part of the World Health Organization’s initiative to reduce avoidable harm and death from surgery, and then details the proven benefits of checklists in the medical, aviation, construction and financial sectors, He builds on the two reasons for human fallibility identified by philosophers: ignorance and ineptitude, the latter being instances in which “the knowledge exists, yet we fail to apply it correctly.”37 In Dr Gawande’s words:38 Avoidable failures are common and persistent, not to mention demoralizing and frustrating across many fields … We need a different strategy for overcoming failure, one that builds on experience and takes advantage of the knowledge people have but somehow also makes up for our inevitable human inadequacies. And there is such a strategy – though it will seem almost ridiculous in its simplicity, maybe even crazy to those of us who have spent years developing ever more advanced skills and technologies. It is a checklist. Checklists, he writes, seem to provide protection against failure, because they “remind us of the minimum necessary steps and make them explicit.”39 Good checklists are precise, to the point, and easy to use even in difficult situations. Good checklists do not spell everything out, but provide reminders of the most critical steps, which even experienced professionals may miss. In focusing attention on necessary issues for consideration, good checklists instill self-discipline – temperance. No, Dr Gawande did not get to international arbitration in his Checklist Manifesto, But I will. Here are two illustrative checklists: CHECKLIST 1: FACTORS IN CALCULATING X 1

Overall time frame: 3 years? 5 years? Retirement?

Financial needs and wants

Overall amount of time available for arbitrator work

Anticipated family and/or other personal commitments

Desired balance of presiding and co-arbitrator roles

Desired intellectual challenge? Commercial vs treaty cases?

Desired travel – How much? Where?

Risk tolerance – Parties and geography

Existing backlog

Other

36 Atul Gawande, The Checklist Manifesto: How to Get Things Right (New York: Metropolitan Books, 2009) (hereinafter Gawande). 37 Gawande, p 5, 38 Gawande, p 6 (emphasis added). 39 Gawande, p 11.

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CHECKLIST 2: FACTORS IN EVALUATING NEW APPOINTMENTS, AGAINST X 1

Presiding or co-arbitrator appointment?

Identity of co-arbitrators, including reputation?

Identity of counsel? Experts?

Commercial or treaty case?

Apparent complexity?

Amount in dispute, as proxy for complexity?

Compensation factors?

Intellectual challenge: apparently new or repeat issues?

Anticipated calendar?

Likelihood of applications for provisional measures?

Anticipated level of contentiousness?

Drafting backlog?

Risk: Legal seat? Likely hearing venue?

Overall: Will the case add interest or fun?

Other

No doubt many here could add, or subtract, factors. That is the point, As David Caron underscored: “Admittedly, coming to a value for ‘X’ is an entirely subjective exercise.”40 Once an arbitrator has his or her X factor, the process of strictly applying that factor falls roughly into the category of the social scientist’s “nudge.” I am here referring to the work of Nobel prizewinner economist Richard Thaler and legal scholar Cass Sunstein, authors of yet another New York Times best-seller Nudging: Improving Decisions About Health, Wealth and Happiness.41 I find the title misleading, as it is a serious and challenging book against the backdrop of choice architecture, In the authors’ defense, they are not far from Plato’s and Aristotle’s health, wealth and happiness – eudaimonia. This comes through more in Professor Sunstein’s 2015 article on the ethics of nudging.42 For those not familiar with the concepts, nudges are “interventions that steer people in particular directions but that also allow them to go their own way.”43 In other words, “[t]o qualify as a nudge, an intervention must not impose significant material incentives (including disincentives) [and] must fully preserve freedom of choice.”44 Choice architecture refers to the inevitable framework, generally a regulatory framework, influencing how people make

40 Caron, p 12. 41 Richard H. Thaler and Cass R. Sunstein, Nudging: Improving Decisions About Health, Wealth and Happiness (Penguin Random House, 2008), 42 Cass R. Sunstein, ‘The Ethics of Nudging’, 32 Yale Law Journal on Regulation 413 (2015) (hereinafter Sunstein). 43 Sunstein, p 417. 44 Sunstein, p 417.

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decisions.45 David Caron’s Rule of X would be closest to a self-initiated “educative nudge”, aimed at informing better personal choices of conduct.46 In David’s words:47 I believe that if an arbitrator has mentally settled on an upper limit of appointments, then it is probable that he or she will at least be hesitant to accept any appointment that puts her or him above X, at X+1, or X+2, Importantly, arbitrators that benchmark themselves will be less likely to take on an irresponsible number of appointments, far beyond what they are able to handle, from which they must then dig themselves out. This focus on ‘freedom of choice’ and self-initiation naturally gives rise to the question of the role of external codes of conduct in regulating arbitrator behavior.

VI. External Codes of Conduct As we speak, due largely to controversy around investment treaty arbitration, international arbitrator conduct is under the microscope. Ranging from conflicts of interest to issue conflict, the focus is on repeat party-appointments by States and investors; so-called “double-hatting” by one person as arbitrator, counsel and/or expert; lack of gender diversity and other forms of diversity; civility; as well as arbitrator availability and timeliness. In the wake of soft codes of conduct for party representatives in international arbitration, efforts are underway to craft targeted arbitrator codes of conduct.48 The most advanced and most visible is the “Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement,” prepared jointly by the Secretariats of ICSID and UNCITRAL.49 Public comments are due to ICSID and UNCITRAL by 30 November 2020.50 There is much to be said about this Draft Code of Conduct for ISDS arbitrators. My focus today, however, is only on Article 8.2. This draft article raises the possibility – the text remains in brackets, for comment – of limiting an ISDS arbitrator to an absolute number of arbitrations, designated for now as [X], explicitly to expedite decisions:51

45 Sunstein, p 418. 46 Sunstein, pp 427-428. 47 Caron, p 12. 48 In his 2007 Goff Lecture, Judge Charles Brower noted the recurring theme in the Goff Lectures of the “ineluctable trend towards a uniformity of rules and laws governing international commercial arbitration.” Charles N. Brower, ‘W(h)ither International Commercial Arbitration’, 24 Arbitration International 181, 182183 (LCIA, 2008). Editorial note: This lecture is reproduced in this volume at pp 247–264. 49 United Nations Commission on International Trade Law and the International Centre for Settlement of Investment Disputes, ‘Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement’ [available at https://icsid.worldbank.org/sites/default/files/Draft_Code_Conduct_Adjudicators_ISDS.pdf and https:// uncitral.un.org/en/codeofconduct] (hereinafter Draft ISDS Code). 50 United Nations Commission on International Trade Law and the International Centre for Settlement of Investment Disputes, ‘ICSID and UNCITRAL Release Draft Code of Conduct for Adjudicators’, Press Release, 1 May 2020. 51 Draft ISDS Code, Article 8.2.

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[Adjudicators shall refrain from serving in more than [X] pending ISDS proceedings at the same time so as to issue timely decisions]. It will not surprise you that I am dead-set against any fixed case limit of [X] for ISDS arbitrators, for all the reasons that I am in favor of David Caron’s Rule of X. I am absolutely confident that David would join me in opposing a uniform case limit on ISDS arbitrator service, whether it be two, five, ten, 20 or more cases. Recall David’s warning that a practitioner or academic arbitrator with a single case may cause as much delay in tribunal progress as another arbitrator with many appointments. I emphasize again that the algebra of X is individual and subjective. For the legendary Professor Lalive, X was five or six cases.52 I sit with some arbitrators with more than 20 cases, and find they always respond quickly and in an informed way. I sit with others who, whether they have few or many other cases, clearly are not doing the hard work themselves. I find others are attentive but slow, making me wish they had lighter caseloads. To me it is clear that the field would lose a great deal of expertise by arbitrarily limiting arbitrators to two or five or any fixed number of ISDS cases, without necessarily opening the door to additional qualified arbitrators. Lest I be misunderstood, I am not against soft codes of conduct for international arbitrators in general. Such codes are perhaps overdue. One can even argue that some subset of arbitrators – whether large or small, it is hard to tell – has brought this situation on itself, by being notoriously and unconscionably late in scheduling hearings and issuing awards. It is telling that, in his 1998 Goff Lecture – entitled ‘Irresponsibility in International Commercial Arbitration’ – Professor Lalive predicted that externally imposed arbitrator responsibility would increase, as “‘irresponsibility’ (ie, the lack of legal liability – civil and criminal – of arbitrators and of arbitral institutions) will attract more and more attention” in both a narrow juridical perspective and “in a broader, ethical or social sense”.53 Professor Lalive observed:54 There was a time when an arbitrator’s activity was not only much simpler than what it is in most international cases today, but rather in the nature of an honour and of a public service rendered to the community. And if fees were provided at all, they were more or less symbolic, as a partial compensation for the time devoted. Moreover, many if not all members of the arbitral community were successful men or lawyers, enjoying private resources of their own and far from imagining that arbitral activity might become a profession. Tempi passati!

52 ‘Q&A with Professor Pierre Lalive’, Global Arbitration Review, no. 5, p 3 (November 2008) [available at: https://globalarbitrationreview.com/article/1027734/q-a-with-professor-pierre-lalive]. 53 (1999) 7(2) Asia Pacific Law Review, p 162. For Professor Lalive’s lecture, see pp 149–163 of this volume. 54 Supra., Lalive, pp 157–158 (emphasis added), Professor Lalive cited both Ph. Fouchard, ‘Final Report on the Status of the Arbitrator’ (May 1996) 7(1) ICC International Court of Arbitration 27 (Working Group of ICC Commission on International Arbitration) and Julian Lew. The Immunity of Arbitrators (Lloyds of London in conjunction with the School of International Arbitration, 1990).

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This also brings to mind Johnny Veeder, who was among those who warned that arbitration practitioners would face external regulation if they did not regulate themselves, Johnny deserves great credit for focusing – and acting – on the need for codes of conduct for counsel in international arbitration, as a lead proponent of the LCIA’s pioneering ‘General Guidelines for the Parties’ Legal Representatives’ annexed to the Arbitration Rules.55 In his 2001 Goff Lecture, entitled ‘The Lawyer’s Duty to Arbitrate in Good Faith’, Johnny elegantly – as always – observed:56 In the field of international arbitration, like State litigation, there are many fish competing in the same sea. Clear rules and self-policing are an essential part of any solution. With international arbitrators as well as arbitration counsel, clear rules should and can be complementary to self-policing, or self-restraint. In my view, however, a rule setting a universal maximum [X] case number is far too blunt a tool to correct the disruption caused by arbitrator over-commitment. Far more effective would be arbitrator self-discipline – sophrosyne or temperance – in managing individual caseloads and to achieve the norm of expedient decision-making. This does not mean a return to that ‘golden age’ of pure self-regulation, when mostly older white European men developed and practiced modern international commercial arbitration. They had a near monopoly on the practice, mostly well-deserved in my view, given the time and circumstances. We are told that they all followed the unwritten code of upstanding arbitrator conduct because each trusted the others to do the same. As Pierre Lalive pronounced: ‘Tempi passati’! And that golden age is not the province of David Caron’s Rule of X. Although the whole arbitrator community obviously benefits if arbitrators follow the Rule of X, it is at heart an individual regime. Remember that David’s hope was that the impact of his Rule of X would be expansion rather than contraction in the number and diversity of international arbitrators.

55 LCIA Arbitration Rules (latest, effective 1 October 2020). 56 V.V. Veeder, ‘The Lawyer’s Duty to Arbitrate in Good Faith’, 18 Arbitration International 431, 439 (LCIA 2002). Editorial note: This lecture is reproduced in this volume at pp 183–202. Other memorable observations in Johnny’s Goff Lecture include these: “Lawyers are not musicians or ballet dancers; a lawyer’s training, skills and ethics are still essentially rooted in a national legal system; and it is far from clear how and to what extent national procedural rules apply abroad to the transnational lawyer in the international arbitration practice.” (ibid at 431); and “ …practitioners in the field of international commercial arbitration extend over the full rainbow colours of human diversity around the world; the legal representatives of parties do not usually share the same national legal culture or practise subject to the rules of the same professional body. This does not mean that international practitioners are pirates sailing under no national flag; it means only that on the high seas, navigators need more than a coastal chart.” (ibid at 438), On the topic of lawyer selfregulation, see also Paul D. Paton, ‘Between a Rock and a Hard Place: The Future of Self-Regulation – Canada between the United States and the English/Australian Experience’, Journal of the Professional Lawyer (Fall 2008). Editorial note: Available at SSRN: https//ssrn.com/abstract=1226802.

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VII. Conclusion It is not my goal to see David Caron’s Rule of X included in codes of international arbitrator conduct. The David Caron Rule of X, unlike the [X] factor in the Draft ICSID/UNCITRAL ISDS Code, is a personal compass, at best complemented by the external guidelines to come. Nor is it my goal for the Rule of X to become an international arbitrator norm of practice. That would be not only overly ambitious but also presumptuous. The Rule of X must be selfimposed and self-monitored. As I said in my introduction, my goal instead is to shepherd the David Caron Rule of X into the international arbitration lexicon. My goal is to encourage the process of calculating and applying the Rule of X becoming routine in our role as international arbitrators, becoming an integral part of our thinking as we answer the availability and capacity questions posed by appointing parties and arbitral institutions, to underlie a personal checklist for appointment evaluation, to become a nudge to ourselves. I have to concede that, to an extent, I am describing a norm. I envision a sufficiently sound and shared foundation of temperance – sophrosyne – to foster a mutual sense of obligation, appealing to each arbitrator’s self-interest and the well-being – eudaimonia – of the international arbitral community. Given that the thesis in David’s MIDS lecture was that most arbitrators seek reappointment “by virtue of reputation,” the question arises for each of us: Do I want to have the reputation of being someone who accepts any appointment or someone who is selectively exclusive, known not to accept all appointments but to manage my caseload well? The question answers itself. I expect you also want an answer to one more question before I close: What is my X factor? When I spoke at Berkeley in 2018, as an NUS professor and director of the international law research center, it was a maximum of eight to ten cases. That proved overly ambitious, because too many of those cases started at the same time and so too many of the hearings – and award drafting obligations – came at the same time. Now that I am a full-time arbitrator, I am setting X at ten to 15 cases, in different stages and permutations. I closed my keynote at Berkeley with these words:57 There may be many permutations for “X” – but all require the type of selfawareness, self-discipline, and professional pride that David flagged in his lecture.Going forward, I will be raising the “David Caron Rule of X”, in terms, with colleagues. This does not mean asking others for a numerical “X” – that is understandably variable and private – but instead urging potential arbitrators to identify the relevant factors and run their own “X” equations. This will be my way to honor David’s intentions, expressed in his MIDS lecture, to develop his concept of the “Rule of X” in international arbitration. I cannot improve on this in closing this 25th Goff Lecture. Thank you.

57 Reed, 37 Berkeley Journal of International Law 168-169, 166; 46 Ecology Law Quarterly 14-15,

The Complexification of Disputes in the Digital Age1 Sundaresh Menon2

I. Introduction Good evening to all of you. Let me first thank my old friend, Cheng-Han, for his generous introduction. Let me also take this opportunity to thank Professor Neil Kaplan and the City University of Hong Kong for inviting me to deliver this year’s Goff Lecture. This is certainly a great honour. Few can claim to have made such significant contributions to the law in as many capacities as Lord Goff; first as a scholar, then as a practitioner, and last and perhaps most famously, as a judge. Over the years, the Goff Lecture has become a much anticipated fixture on the international arbitration calendar, and I am deeply grateful for the opportunity to make a modest contribution to this series. Today, as Cheng-Han has said, I wish to speak to you about the “complexification” of disputes and to discuss the implications that this might have for our approach to dispute resolution. Those involved in the practice of arbitration will, of course, be familiar with the growing complexity of cases and the challenges that this poses to their efficient disposal. Much has already been said about the problems of undue delay and expense, and I do not propose to add to that already saturated discourse. Instead, I would like, this evening, to focus on what appears to be a growing class of disputes that are so factually rich and complex that they may be virtually impossible to adjudicate properly. This has been referred to as the “complexity problem”.3 The complexity of such disputes manifests itself in a number of ways, most commonly in the number of documents tendered, the number of witnesses and parties involved and ultimately in the sheer length of the trial. Consider the Bell Group litigation in Western Australia, which was commenced in the wake of the collapse of a massive government-linked conglomerate. The proceedings culminated in a trial that lasted 404 days, in the course of which over 86,000 documents were tendered in evidence and over 37,000 pages of written submissions were filed. The resulting judgment took two years to draft and consisted of almost ten thousand paragraphs.4 In another large contractual dispute litigated in New South Wales, 160 witnesses were called, who between them produced approximately 280 witness statements.5 And, in a growing number of

1 This is the text of the Twenty-Sixth Goff Lecture delivered at Hong Kong International Arbitration Centre on 9 November 2021 under the auspices of the City University of Hong Kong. 2 The Honourable Chief Justice Sundaresh Menon, Supreme Court of Singapore. 3 Jörg Risse, ‘An inconvenient truth: the complexity problem and limits to justice’ (2019) Arbitration International 291–307 (“Risse”). 4 Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239 at [956], [960]; see Anna Olijnyk, ‘Justice and Efficiency in Mega-Litigation’ (October 2014): https://digital.library. adelaide.edu.au/dspace/bitstream/2440/91442/3/02whole.pdf (“Olijnyk”) at p 40, fn 1. 5 Idoport v National Australia Bank Ltd [2001] NSWSC 868 (“Idoport”).

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jurisdictions, most notably in the United States, class actions involving thousands, and even hundreds of thousands, of plaintiffs are not unheard of.6 Up to a point, complexity can be mitigated by keeping a firm and steady hand on the evidence or by placing limits on the length of written submissions. But cases like the ones just mentioned arguably go beyond the bounds of complexity that even robust case management can properly control. There are, after all, finite limits on an adjudicator’s cognitive ability to process complex and voluminous information, and the concern is that some disputes are now so massive and complex that they have become extremely difficult for the adjudicator fully and properly to understand, much less decide. If this is the case with at least some disputes, we ought to consider just how serious the complexity problem is, and what might perhaps be done to address it. This is the subject of my lecture today, and I propose to approach my discussion in three parts: First, I examine the origins of the complexity problem, for before we can assess the scope of the problem and its likely future trajectory, we must first understand what drives it. I suggest that the complexity of disputes is, in part, hitched to the inexorable advance of science and technology, and if this is right, we might expect that the complexification of disputes will only intensify with time. Second, I discuss the consequences that the complexity problem is likely to have for our ability to resolve such disputes properly, in terms not only of its impact on the quality of judicial and arbitral decision-making, but also the severe strain that it threatens to place or perhaps already places on our justice systems. The point is that these problems arise because there are finite limits to the degree of complexity that we – as individual adjudicators and stewards of our justice systems – can realistically deal with. Solutions that enhance the efficiency of court and arbitration processes can help stretch those limits, but there will come a point when they cannot be stretched any further, and this will, I think, require that we turn to consider more radical responses which entail re-imagining the way we approach the resolution of complex disputes. And finally, I offer some suggestions for how we might light our way forward. Specifically, we might consider tackling the problem on three fronts: first, by re-examining our philosophical approach to the resolution of complex disputes; second, by considering the use of novel procedures aimed at containing and downsizing large disputes; and third, by empowering and equipping people – stakeholders in the administration of justice – to address the challenges that complexity poses.

6 3M faces a suit involving over 229,000 US military veterans with hearing problems which they claim are linked to faulty earplugs produced by the company: Rose L Thayer, Stars and Stripes, ‘Trials begin for veterans in massive lawsuit over 3M’s military-issued earplugs’ (29 March 2021): https://www.stripes. com/Migration/2021-03-29/Trials-begin-for-veterans-in-massive-lawsuit-over-3M’s-military-issuedearplugs-1518327.htm. See also the Bayer AG ‘Roundup’ litigation, which involved nearly 15,000 lawsuits over allegations that the ‘Roundup’ herbicide produced by the company caused cancer: Tom Hals, Reuters, ‘Bayer settles thousands of US Roundup cases with trial attorneys’ (16 September 2020): https://www.reuters. com/article/bayer-lawsuit-idUSL1N2GC163.

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II. The Origins of the Complexity Problem Let me first examine the drivers of complexity in dispute resolution. There are of course more factors at play than I deal with, but in the interest of time, I focus on two related forces driving what I see as two distinct aspects of complexity: first, technical complexity – which is concerned with the increasing technical difficulty of the evidence with which judges and arbitrators must today grapple; and second, evidential complexity – which is concerned with the sheer volume of both documentary and oral evidence with which adjudicators are regularly inundated. I discuss each in turn.

A. Technical complexity Let me begin with technical complexity. We now live in a golden age of scientific discovery.7 As our understanding of the world and how it works has become more nuanced and complex, so too have our disputes. Scientific advances have progressed our technical understanding of the physical world in a multitude of fields, and this has broadened the potential scope of the factual and legal inquiry that adjudicators must undertake. Take, for an easy example, the impact that advances in the field of psychiatry have had on the complexity of criminal proceedings involving mentally-disordered defendants. As early as the mid-13th century, English law already recognised a category of offenders who, by virtue of what was then referred to as “insanity”, had not the “will to harm” and ought therefore to be exempted from criminal punishment. One might draw parallels between the rather rudimentary understanding of mental disorders prevailing at the time and the simplicity of their legal description, which one leading authority described as manifesting in the “furious man… not much above the beasts which lack reason”.8 Legal proceedings involving such defendants were fairly simple and straightforward: declarations of insanity were made by a jury selected for their familiarity with the defendant and indeed with the fact that he was “insane”, and the legal result was almost invariably the receipt of a royal pardon and exemption from punishment.9 Today, nearly eight centuries on, advances in psychiatry have equipped us with a far more nuanced and sophisticated, albeit persistently incomplete, understanding of how the

7 The growth of knowledge has been exponential; in the year 1900, 9,000 scientific articles were published. In 1950, there were 90,000 and by 2000, 900,000 scientific articles had been published: David A Bray, ‘Information Pollution, Knowledge Overload, Limited Attention Spans, and Our Responsibilities as IS Professionals’ (2007): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=962732. Editorial note: The initialism ‘IS’ denotes ‘information science’, which essentially is the study and practice of the effective collection, storage, retrieval and use of information. 8 J Higgins, ‘The Origins of the Homicide Act 1957’ (1986) 12 Journal of Medical Ethics 8 (“Higgins”) at p 9, citing Bracton, Woodbine ed, De legibus et consuetudinibus Angliae (Yale University Press, 1915). 9 Higgins at p 8: “The disposal at this time was therefore, first a decision by a jury, who knew the defendant well, and that he was insane, followed by a royal pardon and exemption from punishment”.

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human mind works, and with that, the ability to undertake more nuanced and sophisticated analyses of the effect of different mental disorders on moral and legal culpability. As a result, the factual inquiry in cases involving such defendants has become far more complex. Proof of the existence of a mental disorder, for instance, often involves adducing expert testimony from psychiatrists on, among other things, diagnoses of any mental disorders that the defendant suffers from and how these might have impaired his judgment,10 with corresponding nuance in the legal consequences that might attach to that defendant.11 Putting advances in existing science aside, the advent of completely new technologies – which concern novel science and create entirely new spheres of knowledge – is another engine of technical complexity. Take, for example, the leaps that science has made in the fields of biogenetics. These have opened the doors to entire fields of new technological possibilities, such as genetic modification and cloning; and with them, minefields of thorny ethical and legal issues.12 Likewise, our increasing reliance on artificial intelligence and computer algorithms for decision-making seems yet another potential source of technically and legally complex questions. With computer algorithms, for instance, there are on the one hand deterministic algorithms, which produce output according to a programmed, predetermined path,13 and for which legal responsibility may therefore be ascribed to a human programmer; and on the other hand, non-deterministic, machine learning algorithms capable of autonomously developing their own decision-making processes, which present a litany of potential complications pertaining to causation, intentionality and remoteness.14 Our increasing reliance on expert witnesses is a sure sign of the technical complexification of disputes. The technical depth of seemingly simple and everyday disciplines has significantly expanded the scope of matters which require specialised knowledge lying beyond the professional experience of judges and arbitrators. Today, expert witnesses are

10 See Ho Mei Xia Hannah v PP and another matter [2019] 5 SLR 978 at [38], where the Court noted that “[a]ssessing the extent and nature of an alleged contributory link between an offender’s mental condition and the commission of the offences invariably requires that the court consider the expert opinion of a psychiatrist.” [Emphasis added]. 11 See section 84 of the Singapore Penal Code (Cap 224, 2008 Rev Ed). For example, the difference between cognitive impairment, which affects one’s ability to tell right from wrong, and volitional impairment, which affects one’s ability to control or choose her actions. 12 Some years ago, the Singapore Court of Appeal heard an appeal concerning a claim for damages arising from an in vitro fertilisation procedure gone wrong where the couple involved realised only after the baby had been born that the wife’s ovum had been fertilised using sperm from an unknown third party instead of sperm from the husband: ACB v Thomson Medical Pte Ltd and others [2017] 1 SLR 918. 13 B2C2 Ltd v Quoine Pte Ltd [2019] 4 SLR 17 at [82], defining deterministic algorithms as software which “produces the exact same output when provided with the same input”. 14 See Zhao Yan Lee, Mohammad Ershadul Karim & Kevin Ngui, ‘Deep learning artificial intelligence and the law of causation: application, challenges and solutions’ (2021) 30 Information & Communications Technology Law, noting that the “cognitive process of the deep learning AI… is not decipherable. This presents a fundamental legal / constitutional problem for most jurisdictions across the world, where any errors or mistakes made by the concerned AI algorithm, are attributable to none other than itself.”

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increasingly called upon to give evidence on a whole range of disciplines, from accident reconstruction to statistics, and even social media.15 Besides being called upon to give evidence in legal proceedings, experts are also regularly tapped to brief advocates and adjudicators on technically challenging subjects. In the United Kingdom, the Judiciary, in partnership with the Royal Society, publishes primers aimed at getting judges up to speed on the technical aspects of various relevant technologies, including forensic DNA analysis.16 And in Singapore, in the Court of Appeal, we recently convened a “technology tutorial” in an appeal involving highly specialised and technical questions pertaining to a diamond manufacturing process.17 A written primer on the technical issues was prepared by the parties, after which the parties’ experts, in the presence of counsel, orally addressed the court on the technical issues and their significance to the dispute. Some of this pertains to what Professor Mirjan Damaška refers to as the “scientization of proof”.18 This is the observation that testimony derived directly from sensory perception appears to have declined in importance in favour of expert testimony based on scientific methods and analysis. This is so not just because disputes increasingly concern technical issues outside the ordinary experience and expertise of judges and lawyers, but also because we now have access to tools capable of augmenting and even supplanting human sensory perception. We see this, for instance, in motor accident cases, with in expert testimony on perception-reaction timings and frame-by-frame analyses of traffic camera footage are used to supplement (or even to correct) the motorist’s account of what transpired.19 In these ways, the “scientization of proof” seems certain to complexify the evidential process further.

15 In 2017, a US court allowed a social media expert witness to testify on how information is disseminated through social media and its potential impact on a person’s reputation: Sean Topping, Norton Rose Fulbright Social Media Law Bulletin, ‘Expert Witnesses May (Still) Be Used in US Litigation to Explain Basic Social Media Use’ (31 May 2017): https://www.socialmedialawbulletin.com/2017/05/expert-witnesses-may-stillused-u-s-litigation-explain-basic-social-media-use/. In Singapore, an expert witness was relied on to advance arguments concerning the scope and speed of the onward transmission on social media of defamatory material in a recent case: Lee Hsien Loong v Leong Sze Hian [2021] SGHC 66. 16 The Royal Society, ‘Courtroom science primers launched today’ (22 November 2017): https://royalsociety. org/news/2017/11/royal-society-launches-courtroom-science-primers/. Similar efforts have been undertaken in Argentina, China, Canada and the US: David Baltimore, ‘Science primers in the courtroom’ (2016) 532 Nature 313. 17 CA/CA 41/2020 and CA/CA 96/2020 (Ila Technologies Pte Ltd v Element Six Technologies Limited). 18 Mirjan R Damaška, ‘Evidence Law Adrift’ (Yale University Press, 1997) at pp 143-144, 151: “To consider the future, in the closing years of the twentieth century, is largely to talk about the creeping scientization of factual inquiry. In the wake of stupendous scientific and technological advances made over the past fifty years, new methods of establishing facts have begun to compete with traditional fact-finding… With increasing frequency, then, courts are confronted with complex scientific and technical information… Let there be no mistake. As science continues to change the social world, great transformations of factual inquiry lie ahead for all justice systems.” 19 See, for example, PP v Tubbs Julia Elizabeth [2001] 2 SLR(R) 716. The motorist faced a charge of criminal negligence, having knocked over and killed a pedestrian. Expert evidence was led on, amongst other things, the normal perception and reaction time of a driver under those circumstances (see at [12(d)]).

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And aside from the increasing complexity of proof, the complexification of legal regulations and rules, as seen in the sheer number of laws and regulations that are promulgated, is yet another engine of technical complexity. Professor Richard Susskind wrote nearly 25 years ago that the advent of technology may be driving regulatory complexity, a phenomenon he referred to as “hyperregulation”. There seem to be at least two forces driving this. First, the need to regulate and address the legal and ethical concerns arising from these new and emerging spheres of activity enabled by technology. And second, the fact that the practical constraints that once existed on the quantity and the complexity of the law, and the regularity with which it could be changed, have gradually been eroded in this digital age. In other words, technology has enabled the easy creation, revision and dissemination of rules and regulations, and there is a sense that this might at least in part be responsible for the proliferation of regulatory content.

B. Evidential complexity The second aspect of complexity I touch on is evidential complexity, which has exploded following the development of technologies that make data cheaper and easier to generate and obtain. This has significantly expanded the universe of potential evidence that advocates and adjudicators alike must consider and review. Moore’s Law posits that computer processing capacity will double about every two years.20 Our appetite for information and data seems to have kept pace with – if not outstripped – that growth in capacity. In 1999, the world generated as much as 1.5 billion gigabytes of data in a year; today, that same amount of data is produced about every 18 hours;21 and, by 2025, it is estimated that that quantity of data will be created approximately every 5 minutes.22 The popularity of email and instant messaging have resulted in the creation and archival of an almost exhaustive documentary record of written communication. Even video and audio calls can be recorded and saved. Added to this is the data that is constantly generated by all manner of ‘smart’ gadgets connected to the ‘Internet of Things’.23 There is also the data about the data – or metadata – such as information as to the size of an electronic file, or when

20 David Rotman, ‘We’re not prepared for the end of Moore’s Law’ (24 February 2020): https://www. technologyreview.com/2020/02/24/905789/were-not-prepared-for-the-end-of-moores-law/. 21 A 2000 study found that the world produced in 1999 about 1.5 exabytes of unique information: R Devakunchari, ‘Analysis on big data over the years’ (2014) 4 International Journal of Scientific and Research Publications at p 4. By 2018, more than 2.5 quintillion bytes of data – or just over 2 exabytes – were produced every day: Bernard Marr, Forbes, ‘How Much Data Do We Create Every Day? The Mind-Blowing Stats Everyone Should Read’ (21 May 2018): https://www.forbes.com/sites/bernardmarr/2018/05/21/how-much-data-do-we-createevery-day-the-mind-blowing-stats-everyone-should-read/?sh=3a4a6a8460ba. 22 By 2025, the world will create 463 exabytes per day: Amanda Greenwood, Webbiquity, ‘Big Data: What It Is, Why We Need It, and How to Use It’ (19 January 2021): https://webbiquity.com/marketing-technology-bigdata-what-it-is-why-we-need-it-and-how-to-use-it/. 23 Some forecasts estimate that ‘Internet of Things’ devices will generate close to 80 zettabytes of data in 2025 (a zettabyte is 1021 bytes): Eden Estopace, FutureIOT, ‘IDC forecasts connected IoT devices to generate 79.4ZB of data in 2025’ (22 June 2019): https://futureiot.tech/idc-forecasts-connected-iot-devices-to-generate-79-4zbof-data-in-2025/.

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it was created. Today, nearly everything is recorded, almost nothing is deleted, and anything can be shared with anyone with a click or two. The ease with which data can be electronically generated, stored and shared has meant that the volume of potential evidence available is now far beyond anything that existed in the 20th century, when records were predominantly created and stored on paper.24 This surge of cheaply available information and data has been dubbed the “information explosion” and has driven an increase in the evidential complexity of disputes in at least two ways. First, it has led to an unprecedented expansion in the scope of the available evidence that could be considered. Evidence may now be found everywhere, whether in the form of message logs, call logs, GPS location data, connections to wireless networks, and the like, so long as one knows where to look and is inclined to look hard enough.25 Second, advances in technology have effectively removed the physical and logistical limits to the quantity of documents and other evidence that can be produced in court.26 And the increasing use of eDiscovery, which was intended to ameliorate the problem, can instead exacerbate it. One 2011 decision of the US Federal District Court concerned the predicament of a party which had inadvertently taken on the obligation of reviewing and producing some 65 million documents dredged up by eDiscovery search terms that it had agreed to. The court ultimately relieved the party of its ill-advised agreement, citing concerns over the cost of such an exercise, which would have run into the millions of dollars.27 But this illustrates the sheer volume of evidence that adjudicators, counsel and the parties can potentially be called upon to consider.

24 Ronald Sackville, ‘Mega-litigation: towards a new approach’ (2008) 27 CJQ 244 (“Sackville”) at p 248, citing Judge Shira A Scheindlin, ‘E-Discovery: The Newly Amended Federal Rules of Civil Procedure’ in Moore’s Federal Practice (2006) at p 2. It is estimated that more than 90% of new information is created in an electronic format: see David Earnest, et al, ‘Four Ways to Sharpen the Sword of Efficiency in International Arbitration’, Young ICCA Group Paper: https://cdn.arbitration-cca.org/s3fs-public/document/media_document/four_ ways_to_sharpen_the_sword_of_efficiency_yicca_group_paper.pdf at p 28, citing the Sedona Principles, 2nd Edition, ‘Best Practices Recommendations & Principles for Addressing Electronic Document Production’ (2007) at p 1. Electronically-stored information now accounts for 95% of all information stored by businesses in the US: Sackville at p 248. 25 The ubiquity of potential electronic evidence is illustrated by the practice of some divorce lawyers in the United States who subpoena electronic toll-booth records in the hope of finding relevant (and potentially incriminating) information relating to the opposing spouse’s whereabouts: Richard L Marcus, ‘E-Discovery and Beyond: Toward Brave New World or 1984?’ (2006) 25 Rev Litig 633 at p 659 26 Information that would once have required reams of paper to print can now be handily stored in thumb-sized drives or even invisibly in the cloud. As early as 1997, one case filed in the Supreme Court of Victoria involved the production of an estimated 1.5 million electronic documents. It is doubtful if the parties would have been able to assemble such a formidable evidential record were it not for the availability of e-filing technology; indeed, one lawyer involved in the case estimated that the documents would have required approximately 400 metres of four-level shelving to contain if printed: Olijnyk at pp 194 and 195, referring to the Estate Mortgage trial. 27 Cloudnine, ‘eDiscovery Case Law: Plaintiff Not Required to Review Millions of Pages of Unallocated Space’: https://cloudnine.com/ediscoverydaily/case-law/ediscovery-case-law-plaintiff-not-required-to-reviewmillions-of-pages-of-unallocated-space, citing I-Med Pharma, Inc v Biomatrix Inc, No 03-3677 (DRD), (DNJ, December 9, 2011).

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Clearly, technology plays a significant role in the complexification of our disputes. But I do not suggest at all that we should therefore reverse our course on the integration of technology within our legal and judicial processes.28 Technology, after all, holds tremendous potential in enhancing efficiency and access to justice. My narrower point is that rapid advances in information and communications technology appears to be driving – even supercharging – the complexity of our disputes. If this is right, and the pace of technology’s advance is showing no signs of slowing down, then we must expect that our disputes will, over time, only get even more complex. And if we are therefore nowhere near the crest of the wave of complexity, then surely we should at least begin to consider the consequences that this emerging reality is likely to have on our justice systems, and what we ought to do about it.

III. The Consequences of Complexity I turn to consider these potential consequences on our ability to administer justice fairly and efficiently at two levels: (i) first, at the level of the individual adjudicator; and (ii) second, at a broader, systemic level.

A. The individual adjudicator: justice as between the parties I begin with the impact that complexity has on the quality of individual decision-making and, therefore, on our ability to do justice as between the parties. In a fascinating article, Professor Jörge Risse describes the complexity problem in the following way. Consider an arbitration in which 10,000 pages of written submissions are filed. Assuming the arbitrator takes six minutes to read a page, and therefore reads 10 pages an hour; it would take 1,000 working hours, or, by Professor Risse’s reckoning, some six months of concentrated reading just to read the submissions through once.29 And this does not account for the time the arbitrator would need to refresh his or her memory of what had been read perhaps weeks or months earlier, to verify what had been said against the mountain of transcripts and documents, and to weigh it all against the equally hefty material on the other side before coming to a decision. Professor Risse’s point is that the demands that complex cases like these place on the adjudicator are next to impossible to meet. This is not for want of trying or lack of competence; the reality is that there are physical limits to our ability to process voluminous amounts of

28 See, for example, Sundaresh Menon CJ, ‘Technology and the Changing Face of Justice’, speech at the Negotiation and Conflict Management Group (NCMG) ADR Conference 2019 (14 November 2019) (“NCMG Speech”). 29 Risse at pp 292-293: On the footing that many major law firms tend to expect 150 billable hours per month from their lawyers, Professor Risse calculates that 1000 “billable” working hours would amount to six months of work.

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complex information. We can try to stretch those limits, but there will come a point where the quantity or difficulty of the material exceeds that which the human brain can properly process. What happens thereafter is what psychologists call “information overload”,30 and studies have found that this may have at least three consequences for decision-making. The first is that the difficulty and quantity of the evidence in complex cases can render it extremely difficult to understand, as Professor Risse’s examples show. There is some evidence that judges do in fact feel this way about complex litigation. Speaking extrajudicially, a former judge of the Federal Court of Australia observed that “[o]ne of the problems with [complex cases] is the feeling … that it is big, and that it can’t be mastered.”31 This is a very real problem. To decide a case, the adjudicator must be able to follow the evidence and understand it, in order to be able to weigh it and forensically assess it. Extreme complexity threatens the adjudicator’s ability to do each of these things properly, such that the biggest cases may become impossible to humanly comprehend, much less decide. The second consequence of information overload is that decision-makers may become more prone to error. When useful and relevant information is buried in a mass of other information, this increases the chance that the relevant information is overlooked.32 Take, for instance, electronic health records (or “EHRs”). These provide physicians with quick and easy access to a wealth of detailed information on the patient, ranging from past test results to detailed medical histories. In the belief that greater access to relevant information would increase the quality and efficiency of clinical decision-making, much was invested into developing EHR systems in hospitals and clinics in the United States. Yet, several studies have found that EHRs have failed to meet those objectives, and worse, they might even be contributing to errors in clinical decision-making.33 For instance, one 2013 study found that over a third of physicians reported that they had missed test results while looking at the EHR system because they were “simply overwhelmed by the amount of information [there].”34

30 See, for a quick overview, Interaction Design Foundation, ‘Information Overload, Why it Matters and How to Combat It’: https://www.interaction-design.org/literature/article/information-overload-why-it-matters-andhow-to-combat-it. 31 Olijnyk at pp 34-35. As part of her study, Dr Olijnyk conducted interviews with former judges on their experiences dealing with what she terms “mega-litigation”. The source of the first quote cited is Robert McDougall of the New South Wales Supreme Court. The source of the second quote is Malcolm Lee QC, a former Federal Court judge. 32 See Jonathan B Spira, ‘How Too Much Information is Hazardous to Your Organization’ (Wiley, 2011) (“Spira”) at p 103, noting that “when something is harder to find, our accuracy in identifying it drops significantly” 33 Lauren F Laker, et al, ‘Quality and Efficiency of the Clinical Decision-Making Process: Information Overload and Emphasis Framing’ (2017) 27 Production and Operations Management 2213 (“Laker”) at p 2214. 34 See Laker at p 2214, citing a study that found that “over one-third of physicians reported missing test results in an HER system because they are simply overwhelmed by the amount of information contained in these systems”, thus highlighting a ‘significant problem facing physicians today: information overload’: citing H Singh et al, ‘Information overload and missed test results in electronic health record-based settings’ (2013) 173 JAMA Internal Medicine 702.

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Other studies have found that information overload can decrease the accuracy of decisionmaking in many other contexts, from detecting dangerous items at a baggage check,35 to making purchasing decisions in a supermarket aisle.36 What these studies demonstrate is that the most-informed decision may not necessarily be the best-informed decision. The availability of relevant information is a crucial ingredient in good decision-making, but an overload of information, even relevant information, can result in poor decision-making. Judicial decision-making is of course different in many important respects. Unlike physicians, for whom decisions might have to be made in the span of minutes or even seconds, judges and arbitrators will generally have more time to make a more considered decision. But judicial decision-making can also be more complex, and I do not think that we have any basis for thinking that judges and arbitrators will somehow be immune to the effects of information overload. A third, related consequence of information overload is that decision-makers, especially when pressed for time and overwhelmed by data, may come to rely more heavily on heuristics and mental shortcuts. Human beings have an inherent need to simplify the complex world around them, and we do so every day through cognitive heuristics.37 These mental shortcuts help us filter out some things and focus on others and they are essential to navigating the avalanche of information with which we are bombarded each day. But the problem with the mental frames we adopt is that they can also distort reality.38 One study found that jurors faced with complex cases tended to take mental shortcuts to reduce the cognitive load of the decision, for instance, by assessing the merits of a position based on the attractiveness of the communicator, or the communicator’s credentials, or the number of arguments rather than their quality.39 Other studies, albeit not in the context of

35 In one study, subjects looked at X-ray scans of checked baggage and tried to identify the presence of guns and knives. In the first trial, a gun or knife was present in 50% of the bags, and subjects missed the weapons only 7% of the time. In the second trial, guns and knives were in only 2% of the bags, and the subjects missed the weapons 30% of the time. The conclusion drawn was that when something is harder to find, perhaps because relevant results are buried in a mass of irrelevant results, our accuracy in identifying it drops significantly: Spira at p 103. 36 Jacob Jacoby, Donald E Speller and Carol Kohn Berning, ‘Brand Choice Behavior as a Function of Information Load: Replication and Extension’ (1974) 1 Journal of Consumer Research 33 (“Jacoby”), finding that consumers who were provided with more information felt more satisfied and less confused, but made poorer decisions than did consumers given less product information; and that providing substantial amounts of package information can result in poorer purchase decisions. Research subjects were asked to rank prepackaged rice dinner product characteristics (as to price, container size, nutritional components) according to those characteristics most important to them, and later asked to select the “best” product out of a range of options, given information as to the various product characteristics. The accuracy of the subjects’ decisionmaking was assessed in relation to their stated preferences. 37 Paul JH Schoemaker, ‘Forecasting and Scenario Planning: The Challenges of Uncertainty and Complexity’ in Derek J Koehler & Nigel Harvey, eds, Blackwell Handbook of Judgment & Decision Making (Blackwell Publishing, 2004) (“Schoemaker”) at p 278. 38 Schoemaker at p 278. 39 Joseph Sanders, ‘Scientifically Complex Cases, Trial by Jury, and the Erosion of Adversarial Processes’ (1998) 48 DePaul Law Review 355 at pp 363-364.

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judicial decision-making, have found that decision-makers tended to react to “too much” information by ignoring a lot of it.40 In short, when faced with more information than we can evaluate in an allotted time, human decision-makers tend to try and find various ways to get by, thereby compromising the quality of the decision-making involved.41 And this can be a dire concern in adjudication, where accuracy is surely greatly valued. Judges and arbitrators are of course trained to resist such impulses, but these mental frames can operate subconsciously, and may influence our decision-making without our even realising it.42 This, I think, is the real danger we face in pushing ourselves beyond the limits of human cognitive capacity. For when confronted with an extremely difficult or even impossible case, the natural (and seemingly noble) thing to do is not to give up, but to do one’s best and soldier on. But in doing so, and though we may not realise it, we run the risk that because of the complexity of the material we cannot properly grasp it; that we miss important issues in the deluge of evidence and argumentation; that forensic analysis and logic give way to heuristic biases, and consequently, that decision-making devolves into what is, at best, informed guesswork. I suggest that those of us who hold a stake in our systems of justice must be alive to these possibilities. The old assumption that the most-informed decision is necessarily the bestinformed decision needs to be reconsidered. In a world where impossibly large quantities of evidence can be obtained and adduced cheaply, the most valuable commodity in a court or tribunal may no longer be information, but adjudicative time, focus and attention. Inundating adjudicators with evidence, even conceivably relevant evidence, may serve to hinder rather than help them decide the case justly if they just cannot make sense of the flood of material.

B. Our justice systems: public justice and efficiency I turn to the second point on the consequences of complexity – which is its impact on our systems of justice. I have argued that extreme complexity can, in some cases, make it impossible or at least very difficult for the adjudicator to decide the dispute properly and therefore do justice as between the parties. Yet, one might argue that impossibly complex cases are rare, and that

40 See Jacoby at p 40. One study observed that students, having pulled up hundreds of articles in response to a Google search, often simply print out the first several articles – making no effort to evaluate their quality: David M Levy, ‘Information Overload’ in Kenneth Einar Himma and Herman T Tavani, eds, The Handbook of Information and Computer Ethics (New Jersey: John Wiley & Sons, 2008) (“Levy”) at p 510. “A choice which involves… many comparisons is likely to be regarded as hopelessly complex. When a choice is that difficult, there may be a tendency to give up trying to compare the alternatives. Instead, the choice may be made impulsively.” 41 Levy at p 510. See also Jeffrey J Rachlinkski, ‘Heuristics, Biases, and Governance’ in Derek J Koehler & Nigel Harvey, eds, Blackwell Handbook of Judgment & Decision Making (Blackwell Publishing, 2004) (“Rachlinski”) at p 568. 42 Astrid Groenewegen, ‘Kahneman Fast and Slow Thinking Explained’: https://suebehaviouraldesign.com/ kahneman-fast-slow-thinking, explaining Daniel Kahneman’s concept of fast and slow thinking in Thinking, Fast and Slow (Farrar, Straus and Giroux, 2011).

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the vast majority of complex cases can be resolved, if only the requisite time and effort were put into resolving them. Leaving aside the correctness of this premise, let me make two points. First, even those complex cases which are not impossible but merely very difficult to adjudicate will place an increasingly unsustainable strain on the system as a whole because adjudicative resources are limited. This may take a variety of forms. (a) First, there is the financial cost. In the Bell Group litigation, additional funding in excess of $4m had to be provided solely to handle the appeals. Such expenses carry heavy opportunity costs. Discussing the Bell Group appeals, the then-Chief Justice of the Supreme Court of Western Australia remarked in an interview some years later that electronic filing could have been introduced for a fraction of the amount spent dealing with those appeals.43 (b) Then, there is the systemic cost in terms of judicial time. During the life of a complex case, the judge in charge will usually have very little time for other matters, and this reduces the aggregate amount of judicial time available across the system for other cases and litigants.44 This is true not just for the duration of the trial, but also the usually lengthy pre-trial process and the considerable time that will be needed to write the judgment. In this way, a single complex case may displace many hundreds of other smaller matters, thus becoming an impediment to access to justice for the numerous others who must, as a result, wait in the queue. (c) And there is, also, the personal toll that complex cases take on adjudicators. The prolonged stress, isolation and the weight of responsibility that adjudicators shoulder when dealing with such cases should not be underestimated.45 This affects not just the individual adjudicator, but can also have system-wide effects if judicial burnout leads to the early retirement of experienced adjudicators,46 thus further compounding existing shortages of such resources. In sum, complexity can result in real costs being imposed on our justice systems, even where that complexity does not cross the notional threshold of impossibility in the individual case.

43 Olijnyk at p 43. In a subsequent interview, the then-Chief Justice of the Western Australia Supreme Court, Chief Justice Wayne Martin, remarked that the injection of funds for the Bell Group appeal was “money that I could have spent very usefully elsewhere in this system. For example … for a fraction of that we could have got full electronic filing.” 44 Olijnyk at p 44, citing Justice Steven Rares, ‘What is a Quality Judiciary?’ (2011) 20 Journal of Judicial Administration 133 at p 143: “[I]f these enormous cases continue to enter the court system, judges will become dedicated, sometimes for years, to hearing them while other litigants must wait for that case to be decided before the judge will become available again for other work”. 45 Olijnyk at p 42: As Justice Neville Owen, who spent over five years devoted almost exclusively to the Bell Group litigation, recalled in a subsequent interview: “You get this feeling of oppression, that you’re locked in and you can’t escape. … You’re there, you’re trapped, there’s no way out, you’ve just got to finish it.” 46 See Olijnyk at p 42, noting that one interview participant had said that one of the biggest challenges of hearing mega-litigation was “not to burn out”.

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Beyond these costs to the system, there is a second, more fundamental reason why we must consider the consequences of complexity. Even if one takes the view that complexity is not yet of existential concern to our justice systems, that cannot mean that we should wait until it has become so. If, as I have argued, complexity is hitched to the inexorable advance of science and technology, then we must expect that the category of complex cases will continue to grow, and that these cases will become ever more complex. There are already examples of such cases, and we should surely consider how we might best address them before they impose a debilitating burden on our justice systems.

IV. Looking Ahead: Reimagining our models of justice Let me pause to take stock of what we have covered thus far. (a) We began by discussing the sources of complexity in modern dispute resolution. I argued that technical and evidential complexity has largely been driven by advances in science and technology. Those driving forces are not slowing down, and this must mean that complexity is likely to feature increasingly in dispute resolution. In short, the complexity problem is set to get worse. (b) We then examined the consequences of complexity. I argued that, at a systemic level, complexity can place a heavy strain on adjudicative resources, while at the level of the individual adjudicator, the complexity problem in some cases is threatening our ability to decide such disputes properly and fairly. Together, these present what one might call a problem of finite limits: there are finite limits to the adjudicator’s cognitive ability to understand and grasp complex issues and evidence; and there are finite limits to the resources that can be allocated to dispute resolution. We can try to stretch those limits, but, taken together, it seems likely that it will only be a matter of time before the degree of complexity reaches the absolute limits of what our justice systems can accommodate. This has, I suggest, two implications at least for how we think or ought to think of the way forward. First, it means that responses which focus on stretching those limits cannot offer a lasting response to the complexity problem. Take, for example, tools and techniques which improve the efficiency of legal proceedings, such as encouraging the use of written statements,47 setting strict procedural timetables,48 and employing the use of videoconferencing or other remote methods of hearing,49 to name a few. These are undoubtedly helpful, but they can only take us so far. The use of Scott Schedules, for instance, makes the parties’ cases easier to digest, and may, in this way, stretch the limits of the quantities of evidence and arguments that an adjudicator may reasonably be expected

47 See Olijnyk at p 178. 48 ICC Commission on Arbitration and ADR, Commission Report, ‘Controlling Time and Costs in Arbitration’ (2007): https://iccwbo.org/content/uploads/sites/3/2018/03/icc-arbitration-commission-report-on-techniquesfor-controlling-time-and-costs-in-arbitration-english-version.pdf (“ICC Commission Report”) at pp 10-11. 49 ICC Commission Report at p 14.

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to consider. But they cannot make an indigestible case digestible; a case so voluminous that it must be presented in thousands of rows in a Scott Schedule is not ultimately more manageable than if it had been presented in thousands of paragraphs of prose. The point is that while such techniques can help expand our limits, these can at best offer only a part of the answer. My contention is that the problem is more fundamental, and seems rooted in certain longstanding beliefs we have held about what justice entails and, therefore, what the role of the adjudicator ought to be. In particular, I argue that the problem stems from the assumption that justice requires, in every case, a full and exhaustive determination of the facts, and that the role of the adjudicator is, therefore, to determine the truth without compromise. Such a paradigm of justice may have served us well in an earlier, simpler time. But the complexification of disputes has raised serious questions as to whether it remains desirable or indeed feasible to insist that justice always and invariably requires, in each case, an exhaustive search for the truth. This brings me to the final part of my lecture, in which I offer some thoughts on a way forward. We might view this in terms of a need for change on three broad fronts. (a) First, a large part of this will require a change in philosophy. I suggest we need to shift our approach to the resolution of complex disputes by moving from a narrower view of justice as always requiring an exhaustive search for the truth, to one which pursues the more realistic objective of facilitating the fair and orderly resolution of the dispute. (b) The second is procedure. This will entail embracing processes and practices which can help contain the dispute wherever possible, and to downsize it where necessary. (c) The third concerns people and it involves equipping adjudicators with due awareness of the unique challenges that extreme complexity poses and arming them with the skills and knowledge that they will need if they are to address these challenges.

A. Philosophy Let me begin with philosophy, by which I mean our real quest in the resolution of complex disputes. Doing justice, it has been said, means applying the substantive law correctly to true findings of fact.50 This is the essence of our traditional, adjudicative conception of justice, under which disputes are decided by an independent third party, bound to apply the law to the facts. Because the facts are often disputed, the role of the adjudicator, as Lord Denning had put it, “is to find out the truth, and to do justice according to law.”51 Over time, this seems to have given rise to the assumption that the principal aim of adjudication is a search for the truth. Justice Peter Cory of the Supreme Court of Canada

50 Ho Hock Lai, A Philosophy of Evidence Law: Justice in the Search for Truth (Oxford University Press, 2008) (“Ho”) at p 69. 51 Jones v National Coal Board [1957] 2 QB 55 at p 63, cited in Ho at p 69.

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has it in these terms, “[t]he ultimate aim of any trial, criminal or civil, must be to seek and to ascertain the truth.”52 Accuracy in judicial decision-making is undoubtedly important. After all, public confidence in any system of justice depends in part on its ability to produce accurate decisions that cohere with the law and the objective facts. But important as accuracy is, I am not sure that this fully supports the claim that justice invariably and uncompromisingly requires a full and exhaustive determination of the facts. Let me illustrate this with two points. The first is a point of practicality. While a “truth-seeking” paradigm of justice may have worked well in earlier times, the complexity of modern disputes raises questions as to whether it remains feasible to insist on that defining objective. The claim of the complexity problem is that it will, in some cases, be either impossible or impracticable for us to achieve this end fully and accurately. Consider, for instance, a claim for damages in respect of thousands of defects in road works performed by a contractor. A “truth-seeking” paradigm of justice would require that each defect be individually verified and documented in evidence. Yet the cost of investigating, documenting and eventually particularising a claim in respect of each defect may end up exceeding the cost of rectifying them. That cannot, on any measure, be considered a just outcome. And the second is a point of principle. While the accuracy of judicial and arbitral decisions is a worthy and important goal, this seems on its own to be an incomplete conception of what justice is and requires. The search for truth must be and often is balanced against other values. (a) We see this in action in various contexts. Take for instance the operation of the rules on legal professional privilege, which restrict the disclosure of potentially relevant and probative evidence in order to protect the sanctity of and candour within the solicitor-client relationship.53 (b) The search for truth must also be balanced against considerations of efficiency. Most jurisdictions, including England & Wales and the United States, expressly recognise this in their civil procedure rules. The very first provision in the English Civil Procedure Rules, for example, states that the “overriding objective” of procedure is to enable the court to deal with cases “justly and at proportionate cost.”54 The same is true for arbitration. Article 22(1) of the 2021 ICC Rules of Arbitration obliges both the tribunal and the parties to “make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute.”55 These provisions are clearly intended to be more than aspirational;

52 R v Nikolovski [1996] 3 SCR 1197 at p 1206 per Cory J, cited in Ho at p 52. 53 Jimmy Yim SC, ‘Developments in Legal Privilege – A Review of the Decisions in The Three Rivers Case’ (May 2005): https://v1.lawgazette.com.sg/2005-5/May05-feature1.htm. 54 Civil Procedure Rules (England & Wales), r 1.1. Likewise, section 37M of the Federal Court of Australia Act 1976 provides that one of the “overarching purpose[s]” of civil procedure is to facilitate the resolution of disputes “as quickly, inexpensively and efficiently as possible”: as cited in Olijynk at pp 115-117. 55 ICC Rules of Arbitration 2021, Art 22(1).

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Article 38(5) of the ICC Rules permits the tribunal to take this “efficiency obligation” into account when making decisions on costs.56 And so, an exhaustive search for the truth is by no means an overriding, uncompromising imperative of justice. In fact, an insistence on such proof might, in certain contexts, be inappropriate. For example, an exhaustive investigation into the truth might not be appropriate in the context of family justice if it succeeds only in increasing acrimony between the divorcing spouses to the child’s detriment.57 This realisation has actually reshaped our philosophy and approach toward family justice from one geared to fact- and fault-finding to one that is directed towards healing and constructive collaboration. The broader point is that justice is not amenable to procrustean definition; what it entails and therefore requires in each case depends on context. Accuracy is an important aspect of justice, and adjudication will, to a considerable extent, be concerned with ascertaining the truth. But an exhaustive search for truth is not always essential, and may in fact sometimes be inappropriate. Yet if adjudication is not a search for the truth, then what is it? I suggest that we are already seeing a shift toward a more holistic view of what it means to adjudicate disputes – one that welcomes the use of legal processes which have as their end not just the determination of the truth, but the resolution of the dispute in a manner that is fair and acceptable to the parties; and that embraces procedures which, while not as thorough, are nonetheless capable of producing reasonably accurate and broadly acceptable decisions more quickly and at far lower cost.

B. Processes The leads me to the second front of change, which pertains to the processes and procedures by which disputes are resolved. There are a number of legal processes and procedures which embody the new ethos of dispute resolution I have just outlined. On a previous occasion,58 I have suggested that these may be categorised in terms of two broad strategies we might take to deal with the challenges of complexity in dispute resolution: (i) first, containing disputes; and (ii) second, downsizing them.

i. Containing disputes The first strategy involves containing disputes before they become too large and complex to handle. This lends itself best to dealing with seemingly large disputes which are in reality

56 ICC Rules of Arbitration 2021, Art 38(5). 57 See Sundaresh Menon CJ, ‘Through the Eyes of a Child’, speech at the 8th Family Law & Children’s Rights Conference: World Congress 2021 (12 July 2021), observing that the fundamental pursuit of family justice, especially where children are involved, should not be a single-minded inquiry into who is in the right and ought therefore to win. 58 Sundaresh Menon CJ, ‘The Role of Commercial Courts in the Management of Complex Disputes’, speech at the 7th Annual Conference of the International Academy of Construction Lawyers (9 April 2021) (“IACL Speech”) at paras 12-20.

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not much more than the sum of their smaller, discrete parts. Such disputes are complex not because they involve any particularly technical subject matter or require the resolution of interlocking and interrelated issues. Disputes of this kind become large and complex mainly because the resolution of their individual parts was not promptly pursued. Here, there may be considerable scope for the adoption of procedures which offer a truncated or much streamlined process capable of producing a “good enough” decision much more quickly and cheaply, so as to nip incipient disputes in the bud instead of leaving them to fester and grow and assume unmanageable size. I can outline three such procedures. (a) Dispute boards are the embodiment of this sort of process, and their use has been gaining traction in construction projects, particularly in North America.59 They involve the establishment of a standing panel of neutrals, whose task it is to prevent disputes from arising and escalating by proactively identifying potential differences and disagreements with a view to resolving these quickly and informally, whether by mediating the dispute, or by issuing a non-binding or temporarily binding decision.60 There is some statistical evidence to suggest that dispute boards are a cost-effective means of containing such disputes. Various surveys indicate that in 60% of the projects for which a dispute board was empanelled, no disputes crystallised;61 and where they did, more than 90% of matters referred to the board were settled without the need for further recourse to litigation or arbitration.62 And this is all accomplished at relatively low cost – on average, for just a fraction of a percentage point of the overall project costs.63 (b) Statutory adjudication has also seen considerable success in a number of jurisdictions, most notably in the United Kingdom, where it has become the most

59 IACL speech at para 14, citing Robert Gaitskell, Speech at the Society of Construction Arbitrators Annual Conference 2005, ‘Current Trends in Dispute Resolution – Focus on ICC Dispute Resolution Boards’ (14 May 2005) (“Gaitskell”) at paras 8.5-8.6. See also Arcadis 2020 Global Construction Disputes Report (“Arcadis 2020”) at pp 20 and 23. 60 IACL speech at para 14, citing Gaitskell at paras 8.1-8.3. 61 IACL speech at para 14, citing Thomas J Stipanowich, ‘Managing Construction Conflict: Unfinished Revolution, Continuing Evolution’ (2014) 34 The Construction Lawyer (“Stipanowich”) at fn 42, citing Carol Menassa & Feniosky Pena Mora, ‘Analysis of Dispute Review Boards Application in US Construction Projects from 1975 to 2007’ (2010) 26 J Manage Eng 65, stating that more than 90% of cases heard by dispute review board panels settled in the wake of panel recommendation, and that no disputes were ever heard by the panel in 50% of projects; see also Michael Patchett-Joyce, ‘Specialist Techniques for Construction Dispute Resolution: How Many Ways Can the Cat Be Skinned?’ (2017) 4 BCDR International Arbitration Review 73 (“Patchett-Joyce”) at p 84, noting that one survey found that in 60% of projects with a dispute board, no dispute was experienced. 62 IACL speech at para 14, citing Gaitskell at para 8.4, which notes that “[e]xperience shows that Dispute Boards are successful, that is, they deal with and finally dispose of virtually all the disputes that come before them. Broadly, it seems that something in the order of 97% of disputes referred to a DB will not go beyond that procedure into arbitration or litigation”. See also Ann McGough, Dispute Resolution Board Foundation, ‘Growth of Dispute Boards Around the World: DRBF Database’, stating that over 98% of matters going to a dispute board do not proceed later to arbitration or litigation. 63 See Patchett-Joyce, referring to a DRBF survey indicating that dispute boards cost, on average, about 0.15% of overall construction costs. See also Gaitskell, noting that some practitioners calculate that dispute boards generally cost in the order of 0.2% of project costs.

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common dispute resolution method for construction disputes.64 Adjudication offers the parties a “rough and ready” means of obtaining a decision more quickly and cheaply, with a considerably streamlined evidentiary process.65 While adjudication produces decisions that are only temporarily binding, experience suggests that in most cases the decision is treated as final and is not subsequently challenged by the losing party.66 (c) Mediation too deserves mention. It has in recent years been increasingly used to complement adjudicative methods of dispute resolution. In the 2021 International Arbitration Survey, close to 60% of respondents expressed a preference for using arbitration in combination with other forms of ADR such as mediation to resolve cross-border commercial disputes. Significantly, this represented a significant increase over the 49% and the 34% who held that view in the 2018 and 2015 surveys respectively.67 As the cost of arbitrating complex disputes continues to rise, the popularity of international commercial arbitration will likely wane, and I believe that international commercial mediation might well, in time, take its mantle as the preferred means for resolving cross-border commercial disputes.68 And the Singapore Convention on Mediation, which provides for the international enforceability of

64 IACL Speech at para 13, citing Arcadis 2020 at p 18. 65 IACL Speech at para 13, citing Thomson Reuters Practical Law, ‘Adjudication: A quick guide’: https://uk.practicallaw.thomsonreuters.com/8-381-7429?transitionType=Default&contextData=(sc. Default)&firstPage-true. 66 IACL Speech at para 13, citing Gaitskell at para 7.2; Rashda Rana, ‘Is Adjudication Killing Arbitration?’ (2009) 75 Arbitration: The International Journal of Arbitration, Mediation and Dispute Management 223 at p 226; John Uff, ‘Dispute Resolution in the 21st Century: Barriers or Bridges?’ (2001) 67 Arbitration: The International Journal of Arbitration, Mediation and Dispute Management 4 at p 15: “The availability of an impartial ‘first round’ decision will usually be sufficient to deter further more costly disputes”; Jackson J, ‘Address by Jackson J to TECBAR, TeCSA and SCL’ (2005) 21 Construction Law Journal 265 (“Jackson”) at p 271. 67 Sundaresh Menon CJ, ‘Setting the Stage for Mediation’s Golden Age’, speech at the India-Singapore Mediation Summit (17 July 2021) at para 21 (‘Mediation’s Golden Age’), citing the 2021, 2018 and 2015 editions of the Queen Mary University of London International Arbitration Surveys. 68 Mediation’s Golden Age at para 12. This is true not just for the resolution of our most complex cases, but also of those on the other end of the spectrum – high-volume, low-complexity and low-value disputes such as consumer disputes of the sort commonly dealt with by Online Dispute Resolution (or “ODR”). Such platforms commonly integrate assisted negotiation or mediation with a truncated adjudicatory process, facilitated by predictive technologies. Predictive tools have been used in mediation, for instance, not to decide where the truth lies, but to assist with assessing the needs and interests of each party, and then with helping parties discover their best and worst alternatives to a negotiated agreement (or BATNA and WATNA): see Jeremy Barnett & Philip Treleaven, ‘Algorithmic Dispute Resolution – The Automation of Professional Dispute Resolution Using AI and Blockchain Technologies’ (2018) 61 The Computer Journal 399 at p 406. Similar platforms exist for the mediation of matrimonial disputes; Amica, a programme developed with the support of National Legal Aid of Australia and the Legal Services Commission of South Australia, advises on property distribution in Australian matrimonial disputes, and includes a machine learning algorithm that provides a suggested division of the matrimonial assets: John Zeleznikow, ‘Using Artificial Intelligence to provide Intelligent Dispute Resolution Support’ (2021) 30 Group Decision and Negotiation 789 at p 798.

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mediated settlements, will undoubtedly boost mediation’s prospects in the years to come.69 Procedures like these may not allow for as thorough a fact-finding process as a fullblown trial or arbitration. But their growing popularity, even in the resolution of construction disputes – for which complexity is a common, if not definitional feature70 – seems a validation of the view that justice is sometimes better served by procedures which favour speed and economy over an exhaustive search for the truth.

ii. Downsizing disputes A strategy of containment works well when applied early in the life of a dispute. But where the dispute has already become so complex as to be practically unmanageable, a different, more drastic approach may be appropriate to downsize the dispute aggressively to a more manageable size. This might be done by placing firm limits on document disclosure, written submissions, time for oral submissions, and even on the time for cross-examining witnesses,71 or by encouraging the use of preliminary determinations, which can help to narrow significantly the list of issues in dispute.72 Measures like these may initially draw cries of a breach of natural justice. But the question we should ask ourselves is whether justice really is better served by doing away with such limits and allowing adjudicators to be inundated with evidence and submissions that we cannot reasonably expect will be exhaustively reviewed, understood and evaluated. If some disputes are becoming so large and complex, it is perhaps better we acknowledge that reality and consider what can be done about it, instead of imagining that they are being dealt with exhaustively when they perhaps aren’t.

69 Mediation’s Golden Age at paras 14-15. The SCM already counts 55 signatories, and entered into force just last year: UNCITRAL, ‘Status: United Nations Convention on International Settlement Agreements Resulting from Mediation’: https://uncitral.un.org/en/texts/mediation/conventions/international_settlement_agreements/ status. 70 See IACL Speech at para 4, citing the 2019 Queen Mary University of London International Arbitration Survey entitled ‘Driving Efficiency in International Construction Disputes’ at p 10, stating that “factual and technical complexity”, “large amounts of evidence” and the presence of “multiple claims and/or multiple parties” were selected by respondents as the most defining features of international construction arbitration. 71 Idoport at [75], cited in Olijnyk at p 181. Mid-way through the trial, the trial judge, Einstein J, announced his intention to place strict limits on cross-examination for the remainder of the trial. This was justified on the basis that were the limits not imposed, the cross-examination of 160 witnesses would have consumed some 3.8 years of court time, on Einstein J’s reckoning. 72 Francis Hornyold-Strickland & Duncan Speller, Kluwer Arbitration Blog, ‘Preliminary Determinations – Path to Efficiency or Treacherous Shortcut?’ (21 April 2016): https://arbitrationblog.kluwerarbitration. com/2016/04/21/preliminary-determinations-path-to-efficiency-or-treacherous-shortcut. This might be facilitated by the practice sometimes adopted in arbitration of shifting the parties’ opening prior to the main hearing – referred to by some as the “Kaplan Opening” – which allows the tribunal to gain a better understanding of the case sooner, which facilitates its preparation: see Neil Kaplan, ‘If it Ain’t Broke, Don’t Change It’ (2014) 80 Arbitration 172.

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And if we accept this, we might consider other, more radical means of downsizing these disputes. One such method entails the use of representative sampling.73 In a dispute involving thousands of defects, it may be practically impossible to insist on proof of each and every defect. In recognition of these difficulties, some have considered an approach where the result obtained in relation to a smaller, representative sample may be extrapolated to the wider set. This was considered by the English High Court in Amey LG Limited v Cumbria County Council.74 There, the Council claimed damages against a roadworks contractor for thousands of defects in patching and surfacing works. The Council’s claim was advanced on the basis of a sample set of the works revealing a certain rate of defects, which, it argued, could be extrapolated to the whole of the works. While the damages in respect of the sample were worth some £22,000, that figure would rise to £1.69m if extrapolated to the entire works. The larger claim was ultimately dismissed on the basis that the sample evidence was found to be insufficiently representative, but the significance of the decision perhaps lies in the Court’s acceptance, at least in principle, of the Council’s argument that the substantial quantities of patching and surfacing works made it “completely impractical” for the employer to have inspected each and every item of work.75 Another way in which disputes may be downsized is by the adoption of voluntary protocols under which the parties agree to carve out a set of “excluded” individual lowvalue claims in respect of which recovery is pegged to the percentage eventually recovered in respect of the remaining “non-excluded” claims. Such a protocol is available for use in cases placed on the Singapore International Commercial Court’s Technology, Infrastructure and Construction List,76 and may help to disaggregate further an otherwise unmanageable dispute such that it is only the crux of the issue that is dealt with in exhaustive detail. And a further, and perhaps even more radical way in which disputes may come to be downsized is through the use of outcome prediction tools which can support legal decisionmaking in various ways. Magistrates dealing with bail applications, for instance, often have to dispose of a high volume of matters within a short period of time, and some US courts have employed predictive tools which assist the human decision-maker by providing an indicative assessment as to the likelihood that a bailee would abscond or re-offend, based

73 IACL Speech at para 17. 74 [2016] EWHC 2856 (TCC) (“Amey”). 75 Amey at 1.23. 76 Singapore International Commercial Court, ‘The Technology, Infrastructure and Construction List’: https:// www.sicc.gov.sg/guide-to-the-sicc/the-technology-infrastructure-and-construction-list. See, in particular the Simplified Adjudication Process Protocol, which streamlines the resolution of smaller-value claims in cases containing a large number of distinct claims: available at: https://www.supremecourt.gov.sg/docs/defaultsource/default-document-library/2021-08-024---sicc-practice-directions-full.pdf#page=267.

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on algorithms developed from datasets comprising hundreds of thousands of cases.77 Similarly, e-commerce dispute resolution platforms – such as the eBay Resolution Center, which sees over 60 million disputes each year – face the challenge of having to deal with an extraordinary volume of cases quickly. The development of tools and algorithms able to predict the outcomes of such cases, and so assist human agents in adjudicating such cases more quickly, is already under way.78 There are, of course, technical and ethical limitations to the use of such programs for legal decision-making,79 and these limitations will have to be carefully debated and considered. But as the accuracy and accessibility of the technology improves, and the discourse as to where and how such technologies may be meaningfully and appropriately employed matures, the use of predictive technology could, in time, prove to be a powerful assistive tool in the management of these complex disputes. Some of these protocols or proposals may be said to detract from the orthodox view that adjudication requires that the facts first be proved. But if we accept that adjudication is ultimately about resolving the dispute fairly, then we should be more open to procedures like these, which pave the way toward a fair and acceptable settlement of the parties’ differences.

C. People And the last front of change concerns people – this speaks to the need to change mindsets and equip adjudicators with the tools needed to navigate a future in which complexity is a fixture. And I make just two brief points. First, more should be done to raise awareness of our limitations – what I have referred to as the limits of our cognitive ability. We would surely benefit from more empirical research on the effects of information overload, not just on adjudicators and decision-making, but

77 See Arnold Ventures’ Public Safety Assessment tool, which identifies nine factors, narrowed down from hundreds, that most effectively predict the likelihood of successful pre-trial outcomes. The algorithm was developed using a dataset of some 750,000 cases from almost 300 jurisdictions within the United States, and was further tested and validated against a further dataset of over 500,000 cases: see ‘About the Public Safety Assessment’, Public Safety Assessment, https://advancingpretrial.org/psa/about; see also New Jersey Courts, Public Safety Assessment: New Jersey Risk Factor Definitions 1–4 (December 2018), https://njcourts.gov/ courts/assets/criminal/psariskfactor.pdf; and Cary Coglianese and Lavi M Ben Dor, ‘AI in Adjudication and Administration’ (2021) Faculty Scholarship at Penn Law 2118. 78 See David Tsurel et al, ‘E-Commerce Dispute Resolution Prediction’, Association for Computing Machinery (23 October 2020): www.hyadatalab.com/papers/ecommerceCKIM20.pdf. 79 See Maxi Scherer, ‘Artificial Intelligence and Legal Decision-Making: The Wide Open?’ (2019) 36(5) Journal of International Arbitration 539. Technical limitations include the non-availability of sufficient nonconfidential case data with which to train the algorithm, as well as the fact that most algorithms work best in relatively simple decision-making contexts which involve repetitive patterns and binary outcomes. Ethical limitations include the risk of bias inherent in datasets transferring to algorithms trained on those datasets, as well as the ‘black box problem’ – difficulties with the explainability of artificial intelligence-supported decision-making, which is of especial concern since reasoned decision-making is a fundamental feature of legal adjudication.

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also on counsel and the way cases are prepared.80 Change will only come if there is general acceptance of the serious consequences that complexity can have on our ability to do justice. Counsel and the litigants they represent must genuinely come to believe that their best interests are not served by flooding the adjudicator with information. And adjudicators too, must accept that robust measures may have to be taken to contain the quantities of material placed before them. And, in the case of arbitration, supervisory courts need to understand these constraints and make sensible decisions when deciding due process challenges against arbitral awards.81 Such acceptance of our limitations will more readily open us to solutions that bite the bullet and address these limitations, even if these might seem radical at first. And second, there is a need for more training and sharing of best practices among adjudicators. There is an enormous reservoir of judicial and arbitral experience in handling complex cases and this needs to be consolidated, organised and shared.82 Otherwise it will be lost as members of the profession retire.

V. Conclusion Ladies and gentlemen, the complexity problem is still evolving. Its severity and extent remain to be seen. But the challenges it poses, I suggest, are best tackled prophylactically. As with many other ills, prevention will be better than cure. I hope that the suggestions I have put forward, while not pretending to be anything like a master plan for dealing with the issue, might offer us some basis upon which we might begin to think seriously about the complexity problem. The final point I want to leave with you is the idea of “creeping normality”, which describes the process by which even major changes come to be accepted as normal and acceptable so long as they happen slowly through small, often unnoticed, increments of change. The problem of complexity seems to fit the bill – as the world becomes increasingly complex, things get just a little bit worse each year than the year before, but not bad enough for us to notice or protest. And this leads us to think we are coping, and we continue to underscore our achievements in handling complex cases, managing gargantuan disclosure exercises, and writing judgments and awards that run into the thousands of paragraphs.

80 Some have suggested that the complexity of large disputes has led to ‘lawyer dysfunction’, or the inability of counsel to perform the formulational task of marshalling the evidence, shaping the legal arguments and presenting those arguments. The complexity of the facts might, for example, prevent the case from being prepared for trial within a reasonable period, or it might make the process of evidence-gathering so costly that the litigant is unable to afford to obtain information critical to reasoned judgment: Jay Tidmarsh, ‘Unattainable Justice: The Form of Complex Litigation and the Limits of Judicial Power’ (1992) 60 Geo Wash L Rev 1683 at pp 1757-1758. 81 IACL Speech at para 24, suggesting that national courts, including international commercial courts, can continue to support arbitration by, among other things, “applying sensible standards of due process when considering applications to set aside or enforce arbitral awards”. See also Sundaresh Menon CJ, ‘Dispelling due process paranoia: Fairness, efficiency and the rule of law’, speech at the Chartered Institute of Arbitrators Australia Annual Lecture 2020 (13 October 2020) at para 24. 82 Cranston at p 205.

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The problem is that as we let the problem creep up on us, without realising the real danger, we might, like that proverbial frog, end up being boiled alive. The cauldron of evidential and scientific complexity is already beginning to heat up and it is becoming uncomfortable. Experiments show that real frogs do, in fact, jump out of a hot pot.83 The question is – will we have the wisdom and courage to do so? Thank you so very much for your attention.

83 See James Fallows, The Atlantic, ‘The boiled-frog myth: stop the lying now!’ (16 September 2006): https:// www.theatlantic.com/technology/archive/2006/09/the-boiled-frog-myth-stop-the-lying-now/7446.

Independence and Apparent Bias: Judicial and Arbitral Confidence: Halliburton v Chubb James Allsop1 Commerce is built on trust. That trust is not incautious wishful thinking. It is the requisite degree of trust in the circumstances, usually circumscribed by practical reality, including the mutual advantage of a continuing relationship, a body of information, and a degree of familiarity with the context. Just as commerce is built on the requisite degree of trust, so it is important that the agency of adjudication, which is chosen to resolve disputes that cannot be resolved by mutually agreeable compromise, be able to engender the requisite degree of trust in the parties, including as to honesty and fairness, and most importantly, impartiality. By using the phrase “requisite degree of” I am not intending to water down the important underpinning place of honesty, fairness, impartiality, independence and trust. What I intend is to recognise that definitions, rules and moral absolutes have their limitations, along with their importance, in the real world. Dispute resolution, including adjudication, takes place in the real world with imperfect institutions and humans, acting in good faith. The subject of this evening’s discussion is the decision of the United Kingdom Supreme Court in late 2020 in Halliburton Co v Chubb Bermuda Insurance Ltd (Halliburton).2 It contains important development and clarification of the common law of England on arbitration, recognising and incorporating real world realities in practice, but holding firm to a demand for the highest level of impartiality in arbitrations governed by English law.

1 Chief Justice of the Federal Court of Australia. I am grateful to my associate Lucy Nason for her assistance in research and discussion in the preparation of this paper. This is the text of the Twenty-Seventh Goff Lecture delivered at Hong Kong International Arbitration Centre under the auspices of the City University of Hong Kong on 3 November 2022. The lecture was previously published on the Federal Judicial Scholarship database (citation: [2022] Fed J Schol 19; https://www.austlii.edu.au/cgi-bin/viewdoc/au/journals/FedJSchol/2022/19. html). 2 [2021] AC 1083. See by way of commentary Charles Kimmins, Nigel Rawding, Luke Pearce and Olivia Valner, ‘The Test for Apparent Bias and Arbitrators’ Duties of Disclosure Following Halliburton v Chubb: Welcome Clarification, but Questions Remain’ (2021) 38(3) Journal of International Arbitration 359 and Daze C Nga and Peace O Adeleye, ‘The English Supreme Court’s Decision in Halliburton v Chubb: An Examination of the Issues Arising from Arbitrators’ Acceptance of Multiple Appointments in Related Arbitrations and Arbitrator’s Duty to Disclose’ (2022) 88(1) Arbitration: The International Journal of Arbitration, Mediation and Dispute Management 201.

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It is first necessary to say something of the differences and similarities of judicial adjudication and arbitration to appreciate the existence and content of the legal duty of disclosure of the arbitrator or prospective arbitrator, and the duties of independence and impartiality of the judge and arbitrator. The fundamental underpinning feature of judicial adjudication is the imposition of, or subjection of the disputant parties to, a form of state power: judicial power. Judicial resolution of a controversy is the state using its compulsory powers to resolve disputes brought to the jurisdiction3 of its courts by one party. Usually, this involves full public disclosure of all issues, and an appellate structure of one, possibly two, layers. The moving or claiming party in curial adjudication may have a choice of courts, but only within recognised limits of conflict of laws. For the responding party the venue is compulsory. Once in the hands of the court, the structure and application of procedure is by reference to the law of the relevant polity. Part of that imposed structure and law will be the institutional choice and imposition of the judge and an accompanying expectation of complete independence and impartiality. The arbitral process, of its nature, contains within it a greater degree of choice: Arbitrators of chosen identity and known skill can be provided for; and trusted institutions, with known and understood rules, and seat courts of known skill can be chosen to supervise the resolution of the dispute. The two concepts of independence and impartiality are not easily disentangled by verbal formula. It is doubtful whether the attempt to define them separately is worthwhile,4 other than by a recognition of their core meanings: impartiality is an absence of bias or of partiality to one side or its case; independence is a lack of control or of influence from relevant external sources.5 An exploration of circumstances that may lead to one being undermined or compromised generally assists in the consideration of whether the other is as well. The interconnection or relationship between the two concepts is not assisted by definition or seeking exhaustively to set out what may lead to, or be seen to lead to, an undermining of independence or a compromising of impartiality, although guidelines help.6 But guidelines often, over time, become seen as rules, with defined content, something unhelpful in a context-specific, fact-rich evaluation.7 It can be said that, ultimately, it is impartiality that matters. That was the view of the English Departmental Advisory Committee on Arbitration

3 “Jurisdiction” in the sense of the authority to decide. 4 Gary Born, International Commercial Arbitration (3rd ed, Kluwer Law International, 2021), pp 1908-9 and footnote 857. 5 See Abaclat v. Argentina, Decision on the Proposal to Disqualify A Majority of the Tribunal in ICSID Case No. ARB/07/05 of 4 February 2014 at paragraph 75 as quoted in Born, International Commercial Arbitration, at footnote 857. 6 See the IBA Guidelines on Conflicts of Interest in International Arbitration (2014). 7 Also, guidelines can, by their length and any attempt at exhaustive listing, create uncertainty and confusion. Text has its limits as well as its strengths. Sometimes, the more guidelines, the more text, the more construction and interpretation, and the greater the degree of confusion or uncertainty. Cf W Ltd v M Sdn Bhd [2016] EWHC (Comm) 422 at [27]-[41] (Knowles J); I McGilchrist, The Master and his Emissary (Yale University Press, 2009); and J Allsop ‘Thinking about the Law: The importance of how we attend and of context’ (paper delivered to the Middle Temple, 18 July 2022).

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Law leading to the drafting of the Arbitration Act 19968 and remains the, at least provisional, view of the Law Commission in its current review of the Act.9 Definition of ethical values, principles and states of affairs underpinning trust and confidence, and honesty and fairness, risks arid debate and unhelpful distinctions, which likely pay insufficient regard to the importance of context and the necessary indeterminacy of meaning. This is not to promote uncertainty; rather it is to recognise the central place of the implicit and the contextual in the requisite degree of certainty in the application of principles of a behavioural or ethical kind. That is why the conjoined expression “independence and impartiality” is helpful.10 The expression may perhaps be seen as, or as similar to, a hendiadys: a figure of speech in which a single complex idea is expressed by two words connected with “and” without subordination of one to the other or without parts of separate and equal standing.11 The importance of the trust and confidence of the members of the polity served by the court, and of litigants who come before the court, is basal. This leads to the need to express the legal rule by reference to which a judge must decide that he or she cannot be independent or impartial, both by reference to the fact of independence and impartiality, and of their appearance externally. The fact of impartiality involves an examination of conscience. That may involve the contemplation of personal circumstance and attitude and an exploration of the possibility of subconscious bias. Of greater subtlety and practical importance is the rule or test for “apparent bias”. This requires the expression in words of an evaluative assessment: necessarily by reference to the practical human context in which the question is being posed. Hence, the necessary anthropomorphous (of human form) nature of relevant tests: trust and confidence are human and emotional conceptions, linked to rational thought. Thus the test is best couched in human terms. In English law the test for apparent bias in decision-making was settled in 2002 and 2008, in Porter v Magill and Helow v Secretary of State for the Home Department: whether a “real possibility” exists that a decision-maker is biased. A “real possibility” exists where the circumstances would lead a fair-minded and informed observer to conclude that there

8 UK Departmental Advisory Committee on Arbitration Law, Report on the Arbitration Bill (1996) at paragraphs 102-104. See also Born, International Commercial Arbitration, at 1909 and footnote 860. 9 Law Commission, Review of the Arbitration Act 1996: A consultation paper (Law Commission Consultation paper 257), September 2022 at [3.3]. I respectfully agree with Rozas that the distinction can be overemphasised. Fernández Rozas, ‘Clearer Ethics Guidelines and Comparative Standards for Arbitrators’ in M Fernández-Ballesteros & D Arias (eds), Liber Amicorum Bernardo Cremades (2010) at 414, as quoted in Born, International Commercial Arbitration, at footnote 861 10 See, for example, Article 12 of the UNCITRAL Model Law 1985 with amendments as adopted in 2006; Article 11 of the UNCITRAL Arbitration Rules 2021; Article 11 of the ICC Rules of Arbitration 2021; Article 5 of the LCIA Rules 2020; Article 11 of the HKIAC Administered Arbitration Rules 2018; Article 13 of the SIAC Rules 2016; Article 32 of the CIETAC Arbitration Rules 2015; Article 14 of the ICDR Rules 2021; Article 21 of the ACICA Rules 2021. 11 Fowler’s Dictionary of Modern English Usage (3rd ed, Clarendon Press, 1996), 357-8.

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was a real possibility that the decision-maker was biased.12 This replaced (or modified) Lord Goff’s expressions “real danger” and “real likelihood” in the sense explained by Lord Goff in R v Gough13 as in terms of possibility not probability, which had been criticised by the High Court of Australia as being too stringent, over-emphasising the court’s view and under-emphasising the public perception of the circumstances, and not followed in Canada and New Zealand.14 In Porter v Magill, Lord Hope described as a “modest adjustment”15 the introduction of the fair-minded and informed observer concluding that there was a real possibility of bias.16 Given Lord Goff’s explanation17 that the court’s perspective was the reasonable man observing and that the perception was one in terms of possibility not probability, and given the view of Lord Phillips of Worth Matravers MR in In re Medicaments18 that “real danger” was the same as “real possibility” (thereby removing the connotation of immediacy as in “clear and present danger”), that was a fair comment by Lord Hope, even though his Lordship discarded the phrase “real danger” as not useful. In Australia, the reasonable apprehension test, at least for non-arbitral bias, is whether “a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide.”19 A different formulation applies, however, to arbitration under both Commonwealth and State and Territory arbitration Acts. The relevant provisions give content to Article 12 of the Model Law (“justifiable doubts as to [the arbitrator’s] impartiality or independence”) by such being satisfied “only if there is a real danger of bias”.20 This statutory formulation, taken from R v Gough, was advocated strongly by those who saw the need for a higher threshold in adjudicators who were not public officials.21

12 Porter v Magill [2002] 2 AC 357 at 494 [103] (Lord Hope); Helow v Secretary of State for the Home Department [2008] 1WLR 2416 [1]-[3]. 13 R v Gough [1993] AC 646 at 670. 14 By the High Court of Australia in Webb v The Queen (1994) 181 CLR 41 at 50 as noted by Lord Hope in Porter v Magill [2002] 2 AC 357 at 493 [100]. 15 Porter v Magill [2002] 2 AC 357 at 494 [103]. 16 This was the human construct preferred in Australia and elsewhere. 17 R v Gough [1993] AC 646 at 670. 18 Director General of Fair Trading v Proprietary Association of Great Britain; Re Medicaments and Related Classes of Goods (No 2) [2001] 1 WLR 700 at 726-727 [85]. 19 Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at 344 [6] (Gleeson CJ, McHugh, Gummow and Hayne JJ). 20 See section 18A of the International Arbitration Act 1974 (Cth). All uniform Commercial Arbitration Acts in s 12 employ the language of the Commonwealth Act. 21 S Luttrell, Bias Challenges in International Commercial Arbitration: The Need For a “Real Danger” Test (Kluwer, 2009) and N Brown and S Luttrell, Submission on the Review of the International Arbitration Act 1974 (Cth) at page 13 as referred to in D Jones and J Walker, Commercial Arbitration in Australia (3rd ed, Thomson Reuters) at 143-144 [5.220]).

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Neither the English nor the Australian non-arbitral test requires certainty, only a “real possibility” or “reasonable apprehension” of bias. These standards support the fundamental principle that justice must be both done and be seen to be done. The qualifiers “real” and “reasonable” import the notion that the human construct must consider that the potential for bias is material, that it logically or experientially arises from the surrounding circumstances, for a judge to be disqualified from hearing a matter. As to the nature of the human subject, in the English test, the fair-minded observer is an independent person, not a person in the position of a litigant before the judge.22 Further, the fair-minded English observer appreciates the context of the material before them, and reserves judgment until they have fully understood both sides of the argument.23 In the Australian non-arbitral test, the fairminded observer is a lay person, who is not unduly sensitive or suspicious, and who has an understanding of the relevant circumstances of the case and ordinary judicial practice.24 The need for this degree of detachment from the special knowledge and expertise of judges and lawyers reflects the constitutional importance of the judicial process as the open and public exercise of state power. As will be seen in Lord Hodge’s judgment in Halliburton, the context of the arbitral process perhaps lessens the need for emphasis on public confidence, but heightens the need for emphasis on participant confidence and general confidence in the system of arbitration, as part of an international system of justice.25 The institutional integrity of a court should not be able to be impugned too lightly. At the same time, the challenge should not be so onerous as to permit judges to adjudicate in circumstances where a reasonable human perception would call that into question. The textual expressions of the test in England and Australia reflect the difficulty of this balance. There is a lack of equivocation in the English test: there is a real possibility of bias, because the circumstances would lead to the fair-minded and informed observer to that conclusion. The non-arbitral test in Australia may perhaps be seen as more attenuated: the observer might reasonably apprehend that the judge might not bring an impartial or unprejudiced mind to bear. Though not to be viewed in a mathematical way, two “mights”, even if “firmly established” as they have to be26 seem less stringent and more open to equivocation than one “would” leading to a “real possibility”. All this said, one needs to be careful of over-precise linguistic expression when the proposition involves the implicit, the less than certain, the intuitive and human feeling, albeit derived from rational thought. The underlying notion is elegantly expressed in the

22 Helow v Secretary of State for the Home Department [2008] 1 WLR 2416, at [2] (Lord Hope); Harb v Aziz [2016] EWCA Civ 556 at [69]. 23 Helow v Secretary of State for the Home Department [2008] 1 WLR 2416, at [2]-[3] (Lord Hope). 24 Johnson v Johnson (No 3) (2000) 201 CLR 488 at [12]-[13]; British American Tobacco Australia Services Ltd v Laurie (2011) 242 CLR 283 at [46]-[48]. 25 See Allsop, ‘International Arbitration and Conformity with International Standards of Due Process and the Rule of Law’ (Speech, XXIIIrd ICCA Congress, Mauritius, 10 May 2016) and Allsop and S Walpole, ‘International Commercial Dispute Resolution as a System’ in S Menon and A Reyes (eds), Transnational Commercial Disputes in an Age of Anti-Globalism and Pandemic (forthcoming, Bloomsbury, 2023). 26 Re JRL, Ex parte CJL (1996) 161 CLR 342 at 352

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Model Law: are there justifiable doubts about independence or impartiality? That is a factual question that is to be examined contextually. The two contexts of a public judicial institution, and of a private panel of people partly chosen by the parties are very different. That difference does not necessarily entail the need for a differently framed question; but, rather, the recognition of a different factual context in which to answer it. So, is the arbitral test in Australia higher than that for Australian judges and other public decision-makers? Those advocating for, and making, the change certainly thought so, as a way of stopping what was seen as an increasingly common procedural tactic in high value international commercial arbitrations.27 The Explanatory Memorandum to the Act amending the Commonwealth Act expressly referred to the decision of Lord Goff in Gough, as a different (and more stringent) standard to that derived from cases such as Ebner.28 Yet, as Lord Goff himself made clear, the test of danger or likelihood was one by reference to possibility, not probability. Australia’s arbitral test is clearly linked to R v Gough. The real question is whether it will be construed as modestly adjusted and explicated in and by Porter v Magill, Helow v Secretary and In re Medicaments. Debates about refinements of degrees of possibility are likely to be arid and unhelpful. This is why Lord Hodge’s judgment, with its emphasis on the arbitration context, rather than textual comparisons, is very valuable. It is important to recall that the apprehension is one of bias or partiality or pre-judgment29: not of loss of the adjudication. Litigants often fail to grasp this. The fact that a judge has decided a legal point before is not, of itself, a ground of objection. The apprehension must be of not being able to bring an open mind to bear on the arguments, not that the judge is more likely to follow precedent perceived to be unfavourable. But some kinds of prior decisions can reasonably be seen by the hypothesised human construct to be more difficult to eradicate, consciously or subconsciously, from even the trained judicial mind. An earlier finding of fraud or dishonesty may be impossible to remove from the mind.30

27 N Brown and S Luttrell, Submission on the Review of the International Arbitration Act 1974 (Cth) at page 12 as referred to in D Jones and J Walker Commercial Arbitration in Australia (3rd ed, Thomson Reuters) at 143144 [5.220]). 28 See International Arbitration Amendment Bill 2009 Explanatory Memorandum [88]-[92] 29 The word ‘bias’ is a loaded term, sometimes connoting ill-will. Its legal breadth, especially in its apprehended form, involves, as Deane J said in Webb v The Queen (1994) 181 CLR 41 at 80, “prejudice, partiality or prejudgment”. 30 See, for example, British American Tobacco Australia Services Ltd v Laurie [2011] HCA 2; 242 CLR 283 cf [2009] NSWCA 414.

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Such prejudicial earlier findings raise the issue of unconscious bias.31 There is a growing body of literature which, drawing on modern psychology, addresses the impact of subconscious forces upon the judicial (and arbitral) mind.32 This includes dealing with the operation of confirmation bias and the role of intuitive first perceptions and ordinary human prejudices.33 The risk of unconscious bias may rise to the level of apparent bias.34 Related to any formulation of apparent bias is the question of disclosure of matters to parties. Many judges feel more comfortable in approaching the question of disclosure

31 (I was tempted to remark on the appropriateness of dealing with subconscious bias in a footnote.) Unconscious bias refers to the influence of cognitive shortcuts or heuristics on how we perceive the world around us and make decisions. In its most objectionable form, unconscious bias can constitute subconscious favouritism towards or prejudice against people of a particular group that influences one’s actions or perceptions. For recent commentary see: Chris Guthrie, Jeffrey Rachlinski and Andrew Wistrich, ‘Blinking on the Bench: How Judges Decide Cases’ (2007) 93 Cornell Law Review 101; Australian Law Reform Commission (ALRC), Without Fear or Favour: Judicial Impartiality and the Law on Bias (Report No 138), 2021; Edna Sussman, ‘Arbitrator Decision-Making: Unconscious Psychological Influences and What You Can Do About Them’ (2013) 24(3) The American Review of International Arbitration 487; Natalie Allen et al, “If Everyone is Thinking Alike, Then No One is Thinking’: The Importance of Cognitive Diversity in Arbitral Tribunals to Enhance the Quality of Arbitral Decision Making’ (2021) 38(5) Journal of International Arbitration 601; Stepan Puchkov, ‘Subconscious Bias as a Factor Influencing Arbitral Decision-Making’ (2018) 84(1) Arbitration: The International Journal of Arbitration, Mediation and Dispute Management 52. 32 According to the so-called ‘System 1’ and ‘System 2’ conceptualisation of the way humans process information (with ‘System 1’ being constantly alert, fast and intuitive and ‘System 2’ being slow, analytical and high effort), it is theorised that we fall into irrationality and unconscious bias when we fail to engage our System 2 thinking or where System 2 does not detect errors made by System 1. Intuitive, subconscious, System 1 judgments can stem from the influence of one’s cultural background, prior experiences and personal inclinations. There are also certain identifiable cognitive and heuristic errors often described as ‘blinders’ that the processes of System 1 tend to produce, including the ‘confirmation blinder’ (the tendency when one forms an initial view to interpret or even seek out subsequent information to support the initial view and disregard information that is inconsistent with it) and the ‘hindsight blinder’ (the tendency to overestimate the probability that an event will occur after the fact). For the application of this theory to judicial and arbitral practice see, for example, Puchkov, ‘Subconscious Bias as a Factor Influencing Arbitral Decision-Making’, 54-55; Sussman, ‘Arbitrator Decision-Making: Unconscious Psychological Influences and What You Can Do About Them’ at 495; Allen et al, ‘If Everyone is Thinking Alike, Then No One is Thinking’, 609, 613-614; The Hon Justice K Mason AC, ‘Unconscious Judicial Prejudice’ (2001) 75 Australian Law Journal 676, 679-680 quoted in ALRC, Without Fear or Favour: Judicial Impartiality and the Law on Bias at [11.52]. 33 Judges and arbitrators are not immune to the influence of unconscious bias, constrained as they are by the bounds of human rationality and fallibility. The fact that judges and arbitrators may be influenced by unconscious bias does not mean that a judge or arbitrator cannot be meaningfully impartial. Nonetheless, the potential for (potentially pernicious) unconscious prejudice to influence judges and arbitrators demands vigilance. The Australian Law Reform Commission suggested in its recent report on judicial impartiality and the law on bias in Australia that the potential operation of confirmation bias on the minds of judges is one reason why it may generally be appropriate for a judge to recuse himself or herself from hearing a case involving a person against whom he or she has previously made an adverse credibility finding. See Benjamin N Cardozo, The Nature of the Judicial Process (Yale University Press, 1921); Rebecca Helm, Andrew Wistrich & Jeffrey Rachlinski, ‘Are Arbitrators Human?’ (2019) 13(4) Empirical Legal Studies 666; Allen et al, “If Everyone is Thinking Alike, Then No One is Thinking’, 610; ALRC, Without Fear or Favour: Judicial Impartiality and the Law on Bias at [2.61] 62, [4.26] 114 and [4.82] 133-134; Lord Neuberger, “Judge not, that ye be not judged’: judging judicial decision-making’ (38th F A Mann Lecture, London, 29 January 2015), [29]. 34 See, for example, in a judicial context, GetSwift Ltd v Webb [2021] FCAFC 26; 283 FCR 328 and, in an arbitral context, Cofely Ltd v Bingham and another [2016] EWHC 240 (Comm).

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broadly, disclosing matters of connection that may not justify recusal; but they do so to ensure confidence and trust in the parties of the process, given that one party will always lose. It is part of bolstering the institution, rather than complying with any legal duty expressed as an incident of judicial power. In Australia, the High Court has said35 that where a judge is unclear whether he or she should recuse him or herself, disclosure of the circumstances should be made as a matter of prudence and professional practice, saying that it was neither useful nor necessary to describe this practice in terms of rights and duties. The place of disclosure and, for arbitrators, the legal duty attending it, was at the centre of Halliburton. Legislation governing arbitration, model laws and arbitral rules generally express independence and impartiality as core tenets of the arbitral process,36 variously, but similarly, dealing with the test for them and with questions of disclosure.37 It is to be noted that some of the tests relating to disclosure are explicitly directed to what would be thought by the parties.38 The reference to the perspective of a participating

35 Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337 at [69]-[70] 36 Rule 1 of the IBA Rules of Ethics for International Arbitrators 1987, entitled the “Fundamental Rule” is that “arbitrators shall proceed diligently and efficiently to provide the parties with a just and effective resolution of their disputes, and shall be and shall remain free from bias”. 37 Some institutional rules and arbitration laws contain general provisions mandating the independence and impartiality of arbitrators. For example, Article 5.3 of the LCIA Rules 2020 provides that “all arbitrators shall be and remain at all times impartial and independent of the parties” and Article 11(1) of the ICC Rules of Arbitration 2021 provides that “every arbitrator must be and must remain impartial and independent of the parties involved in the arbitration.” See also s 33(1)(a) of the English Arbitration Act 1996 (which provides that the tribunal shall “act fairly and impartially as between the parties…”) and Article 11.1 of the HKIAC Administered Arbitration Rules 2018 (“an arbitral tribunal confirmed under these Rules shall be and remain at all times impartial and independent of the parties”). The test for whether an arbitrator is independent and impartial is often expressed in the context of provisions concerning challenge to arbitrators. For example, Article 12 of the UNCITRAL Model Law 1985 (with amendments as adopted in 2006) provides that an arbitrator may be challenged if circumstances exist that “give rise to justifiable doubts as to his impartiality or independence.” This formulation of the test is echoed in Article 12 of the UNCITRAL Arbitration Rules 2021, which provides: “any arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence.” Section 24(1)(a) of the English Arbitration Act 1996 is similarly worded, providing that a party may apply to a court to remove an arbitrator where “circumstances exist that give rise to justifiable doubts as to his impartiality.” The “justifiable doubts” formulation in provisions on challenge is also present in Article 11 of the HKIAC Administered Arbitration Rules 2018; Article 14 of the SIAC Rules 2016; Article 14 of the ICDR Rules 2021; and Article 21 of the ACICA Rules 2021. Some provisions on disclosure, however, go further. While Article 11 of the UNCITRAL Arbitration Rules 2021 provides that an arbitrator “shall disclose any circumstances likely to give rise to justifiable doubts as to his or her impartiality or independence”, Articles 13.4 and 13.5 of the SIAC Rules 2016 provide that nominated arbitrators and arbitrators respectively must disclose “any circumstances that may give rise to justifiable doubts as to his impartiality or independence” (emphasis added). 38 Article 5.4 of the LCIA Rules 2020 provides that candidates for nomination as arbitrator must sign a declaration stating whether there are any circumstances “which are likely to give rise in the mind of any party to any justifiable doubts as to his or her impartiality or independence” (emphasis added). Similarly, Article 11(2) of the ICC Arbitration Rules 2021 provides that prospective arbitrators shall disclose “any facts or circumstances which might be of such a nature as to call into question the arbitrator’s independence in the eyes of the parties, as well as any circumstances that could give rise to the reasonable doubts as to the arbitrator’s impartiality” (emphasis added).

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party is a distinct feature of these tests, as compared with tests for judicial bias and may be appropriate in the context of arbitrations where considerations of the exercise of public power and the interest of the public at large are absent, and the confidence of the parties is paramount. The reality of the place of party autonomy in choice and the role of the party-appointed arbitrator should be confronted. The different institutional contexts of curial and arbitral adjudication are, again, important. In the case of a litigant before a court, a judge is allocated to a case because the state has identified a particular judicial resource is suitable. The parties have no choice in the matter. Therefore, a challenge to a judge involves an argument that the state’s process of allocation of a judge to be imposed on the parties should be overturned as a matter of law: This is a legal right to demand of the state that a particular person should not remain allocated. In contrast, in arbitration, the question is whether the parties will consent to submit their dispute before a particular person or persons. Disclosure is thus not merely a question of confidence; it goes to the very foundation of whether the parties will choose this person or persons to adjudicate their dispute. The first point of disclosure arises at the point of choice of arbitrator. Especially because of the confidentiality of arbitration, matters of importance may not be public knowledge and may therefore suggest disclosure. Thus, there must be some scope for parties to communicate with a prospective appointee in order that the party ascertain the suitability of the person for nomination by the party. Institutional rules reflect this freedom.39 Although it is generally accepted that party-appointed arbitrators must be independent and impartial, as required by national laws and institutional rules,40 the requisite degree of impartiality required of a party-appointed arbitrator remains a vexed question in international arbitration. Indeed, the contested role of the party-appointed arbitrator has led some, most notably Jan Paulsson, to call for the abandonment of party-appointed arbitrators altogether.41 The epicentre of the contemporary debate appears to be whether party-appointed arbitrators do or should play a particular role, sometimes dubbed a ‘special role’ in an arbitration as compared with a neutral, presiding arbitrator. For Raymond Bishop and Lucy Reed, a ‘special role’ arises because of the “natural distinction between [parties’] expectations for

39 See, for example, Article 11.5 of the HKIAC Administered Arbitration Rules 2018; Article 14.6 of the SIAC Rules 2016; Article 14(6) of the ICDR Rules 2021 and Article 20.4 of the ACICA Rules 2021. 40 Formally different standards for party-appointed arbitrators are certainly the exception rather than the rule. See, for example, the LMAA’s published guidance on the LMAA Terms 2021, which states that it is the duty of every member of an arbitral tribunal to attend to all matters with strict impartiality except in the rare case where the arbitration clause requires otherwise: LMAA, ‘Notes on London Arbitration and Frequently Asked Questions’, accessible at: https://lmaa.london/notes-on-london-arbitration/. As is well-known, the 1977 AAA/ ABA Code of Ethics for Arbitrators in Commercial Disputes took the position that party-appointed arbitrators were permitted to be “pre-disposed” to their appointing party’s case. However, the revised version of the Code published in 2004 moved away from this standard, stating that it is “preferable” for all arbitrators to abide by the same formal ethical standards. For a discussion of this shift see Alfonso Gomez-Acebo, Party-Appointed Arbitrators in International Commercial Arbitration (Kluwer Law International, 2016), 357. 41 Jan Paulsson, ‘Moral Hazard in International Dispute Resolution’ (2010) 25(2) ICSID Review – Foreign Investment Law Journal 339.

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the party-appointed arbitrators and the presiding arbitrator.”42 By virtue of being selected by a party, and consequently being likely to share a similar national, linguistic, cultural and legal background to that party, a party-nominated arbitrator may be seen to have a particular obligation to understand their appointing party’s case, ensure that the presiding arbitrator is not biased against their appointing party, and ‘translate’ their appointing party’s case when language, cultural or legal background may be distorting the other tribunal members’ understanding of their claims.43 Redfern and Hunter describe such a function as “useful” in ensuring “due process for the party that nominated him or her, without stepping outside the bounds of independence and impartiality.”44 Bishop and Reed contend that a distinctive role for the party-appointed arbitrator is the prevailing practice in international arbitration.45 From one perspective, these views are not a denial or qualification of the duty of impartiality;46 rather they reflect how practically that duty should be seen to operate in the real world. It is not partiality for one party; it is ensuring that that party’s case is well understood by the whole tribunal. The distinction is subtle, but perhaps real, although the danger of sliding towards partiality can be recognised.47 Others are opposed to any recognition of a ‘special role’ for party-appointed arbitrators on the basis that so doing inevitably introduces confusion as to the expected standards of impartiality and independence.48 The Chief Justice of Singapore wrote in 2017 that he was “fundamentally uncomfortable” with the suggestion that party-appointed arbitrators owe their appointing party any special duty.49 Chief Justice Menon stressed that all arbitrators are obliged to consider carefully the cases presented by both sides and cautioned that “the line between driving a lively discussion to ensure that a party’s case is fully understood and urging that party’s position upon the arbitral tribunal may be so fine that it is impossible to

42 Raymond Doak Bishop and Lucy F Reed, ‘Practical Guidelines for Interviewing, Selecting and Challenging Party-Appointed Arbitrators in International Commercial Arbitration’ (1998) 14(4) Arbitration International 395, 404. 43 Ibid, 405. See also Nigel Blackaby and Constantine Partasides QC with Alan Redfern and Martin Hunter, Redfern and Hunter on International Commercial Arbitration (6th ed, Oxford University Press, 2015) at [4.30], 239. 44 Blackaby, Partasides, Redfern and Hunter, Redfern and Hunter on International Commercial Arbitration at [4.30], 239. 45 Bishop and Reed, ‘Practical Guidelines for Interviewing, Selecting and Challenging Party-Appointed Arbitrators in International Commercial Arbitration’, 405. 46 Ibid, 405-406. 47 Antonino Albert de Fina described the role as “delicate”: ‘The Party Appointed Arbitrator in International Arbitrations – Role and Selection’ (1999) 15(4) Arbitration International 381, 382. 48 Gomez-Acebo contends that the role of ‘cultural translator’ amounts to nothing more than carrying out one’s duties as an arbitrator diligently and that cultural misunderstandings where perceived ought be corrected regardless of whether the clarification aids the appointing party’s case. Further, he contends that accepting a particular role for the party-appointed arbitrator brings with it an unavoidable risk of imbalance between the parties because reasonable minds may differ on the content of that particular role, resulting, perhaps, in one party’s case receiving more time and care than another’s. See Gomez-Acebo, Party-Appointed Arbitrators in International Commercial Arbitration, 103-106. 49 Sundaresh Menon, ‘Adjudicator, Advocate or Something in Between? Coming to Terms with the Role of the Party-Appointed Arbitrator’ (2017) 34(3) Journal of International Arbitration 347, 363-364.

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work with in practice.”50 Chief Justice Menon’s driving concern was the maintenance of confidence in the institution of arbitration, and the perception that it is a procedurally fair process of dispute resolution.51 It is difficult, however, to avoid the recognition that, as Gary Born says, party-appointed arbitrators are an important pillar supporting the trust and confidence of commercial parties in international arbitration.52 As an incident of the centrality of party autonomy in international arbitration, and as a matter of practical reality,53 the ability for parties to name a person of their choice to the arbitral tribunal engenders an arbitration with legitimacy for them.54 Such legitimacy may be seen as crucial to the parties’ investment in the fairness of the process of the arbitration and their respect for its outcome, whether favourable to them or not.55 It may be better to say that the characteristics of party-appointed arbitrators may differ from those of presiding arbitrators without offending the basal requirement that all arbitrators be independent and impartial. As Born notes, co-arbitrators may have qualities such as a shared nationality with an appointing party, particular experience, philosophical outlook and professional ties that may be desirable for a party-appointed arbitrator but inappropriate for a presiding arbitrator. Such characteristics can be seen to bring the necessary cultural and conceptual diversity to the resolution of a complex case which might involve cultural, or legal or other diversity.56 I now turn to Halliburton. The case concerned a large insurance claim arising from the explosion and fire on the Deepwater Horizon drilling rig in the Gulf of Mexico in 2010. Various parties were liable for damages and penalties, including a BP company which leased the rig, Transocean which owned the rig and provided crew and drilling teams, and Halliburton which provided cementing and other services to BP in relation to relevant activities. Halliburton had taken out liability insurance with Chubb. It made a claim for the amount of money it had paid in the settlement of private claims of US$1.1bn. Transocean settled the private claims for US$212m. Later, in 2014, after the settlements, the Federal Court apportioned blame between these three parties in the proportions of BP 67%, Transocean

50 Ibid. 51 Ibid, 359. 52 Born, International Commercial Arbitration, 1767, 1941-1946. 53 Empirical studies show that the ability for parties to have input into the composition of the tribunal’s expertise and experience is perceived as a significant benefit of arbitration compared with litigation: Born, International Commercial Arbitration, 30. 54 Veeder describes party-appointed arbitrators as the “historical keystone” of international arbitration, without which parties would not be (and historically would not have been) incentivised to arbitrate: V.V. Veeder, ‘The Historical Keystone to International Arbitration: The Party-Appointed Arbitrator from Miami to Geneva’ (2013) Proceedings of the ASIL Annual Meeting, 107, 387, 401-402. Brower and Rosenberg contend that parties are more likely to hold confidence in an arbitral tribunal “that they themselves had a say in constituting”: Charles N Brower and Charles B Rosenberg, ‘The Death of the Two-Headed Nightingale: Why the Paulssonvan den Berg Presumption that Party-Appointed Arbitrators are Untrustworthy is Wrongheaded’ (2013) 29(1) Arbitration International 7, 13. 55 Born, International Commercial Arbitration, 1767. 56 Ibid, 1945-1946.

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30% and Halliburton 3%. Chubb declined Halliburton’s insurance claim on the basis, inter alia, that it was not a reasonable settlement. Transocean also made insurance claims against its liability insurers, which included Chubb. Chubb contested its liability to Transocean on substantially the same grounds as its defence to Halliburton’s claims. Both Transocean and Halliburton had arranged their cover under the Bermuda Form with an ad hoc arbitration provision. Both their policies were layered, with Chubb the top layer of each policy, and the policies were, relevantly in identical terms. The policies were governed by New York law and the arbitration clause in each provided for arbitration in London by a tribunal of three arbitrators, two party-appointed, the third chosen by agreement of the two party-appointed arbitrators, or failing agreement, by the High Court in London. Halliburton nominated Professor Park of Boston University, an experienced arbitrator; Chubb nominated Mr Cole, an accomplished insurance executive, counsel and arbitrator. They could not agree upon a chair. After a contested hearing, on 12 June 2015, the High Court appointed Mr Kenneth Rokison QC whom Chubb had proposed (amongst others) to the Court. Halliburton’s objections to all Chubb’s proposed arbitrators were that they were English lawyers or former judges known to Chubb. Mr Rokison had disclosed to the Court and to Halliburton that he had previously acted as an arbitrator in arbitrations where Chubb was a party, including some as a party-appointed arbitrator nominated by Chubb and that he had two pending references in which Chubb was a party. There was no suggestion that this disclosure was in any way deficient. The matter before the High Court in which Mr Rokison was appointed can be referred to as it was in the decision as reference 1. Six months later, in December 2015, Mr Rokison accepted appointment by Chubb in an arbitration concerning an excess liability claim by Transocean arising out of the same incident. This second arbitration was referred to as reference 2. Before accepting appointment in reference 2, Mr Rokison disclosed his appointment in reference 1 and the other Chubb arbitrations which he had disclosed to Halliburton in reference 1. There was no objection to Mr Rokison by Transocean. Mr Rokison did not, however, then disclose to Halliburton in reference 1 his proposed appointment in reference 2. Later, in August 2016, Mr Rokison accepted appointment in another Deepwater Horizon arbitration on the joint nomination of parties, Transocean and another insurer on the same layer of insurance as Chubb’s layer in reference 2. This was referred to as reference 3. The proposed appointment to reference 3 was also not disclosed to Halliburton. In both references 2 and 3 there was a preliminary issue of policy interpretation on uncontested facts which was potentially dispositive of both claims. This was heard in November 2016. In November 2016, Halliburton learned of Mr Rokison’s appointments in references 2 and 3. Halliburton’s attorney wrote to Mr Rokison, referring to the IBA Guidelines on Conflicts which contemplated a continuing duty of disclosure of matters in the “Orange List”. In explanation (accepted by Halliburton as truthful) Mr Rokison said that it had not occurred to him that he was under a duty to disclose the later appointments and that he did not believe that the IBA Guidelines had been breached; but he said that with the benefit of

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hindsight it would have been prudent to inform Halliburton; and he apologised. He offered to resign from references 2 and 3 if the preliminary issue did not bring the arbitrations to an end. Halliburton’s lawyer repeated his concern and called for Mr Rokison’s resignation. (Mr Justice Popplewell described some of the terms of the attorney’s correspondence as “grossly offensive”.) Chubb would not, however, agree to Mr Rokison’s resignation. Mr Rokison again wrote, repeating his views that the IBA Guidelines had not been breached, but again accepting that, with hindsight, it would have been prudent to have made disclosure. He said that he had not learnt of any facts about the incident in references 2 and 3 that were not public knowledge. He said that he would resign if it were only up to him and suggested that the parties agree upon a substitute chair. On 21 December 2016, Halliburton sought Mr Rokison’s removal as arbitrator in the High Court under s 24(1)(a) of the 1996 Act. The application was heard by Mr Justice Popplewell who dismissed it on 3 February 2017. The hearing in reference 1 meanwhile took place between 27 January and 6 February 2017. On 1 March 2017, awards were issued in references 2 and 3 deciding the preliminary issues in favour of Chubb and the other insurer. This brought an end to the claims, without the need to consider any relevant evidence or submissions. On 5 December 2017, the Tribunal in reference 1 issued its final award on the merits, deciding in Chubb’s favour. The award was signed by all three arbitrators, though Professor Park qualified his signature with “separate observations” to confirm his participation; but he expressed an inability to join in the award because of his “profound disquiet about the arbitration’s fairness”. The separate observations did not, however, dissent from any finding of fact, statement of applicable law, process of reasoning or final conclusions. Interestingly, for the discussion of party-appointed arbitrators, the evidence in the High Court challenge revealed that Professor Park had been Halliburton’s party-appointed arbitrator in three references against different insurers in Deepwater Horizon claims, without formal disclosure. The Halliburton attorney who had confronted Mr Rokison in the correspondence suggested in evidence that Professor Park was in a different position as a party-appointed arbitrator: to be distinguished from Mr Rokison’s position as a chair or umpire. The use of the word “umpire” implied an advocacy role for a party-appointed arbitrator beyond any notion of cultural translation. From these facts the Supreme Court dealt with the questions of disclosure, confidentiality and apparent bias. In (if I may be permitted to say) a thoughtful and sophisticated judgment, Lord Hodge JSC for the Court (with additional insightful comments from Lady Arden JSC) clarified a number of important aspects of the English common law in relation to apparent bias and disclosure in the context of arbitration under English law. In summary, the conclusions were: (1) The obligation of impartiality is a core principle and the duty applies equally to party-appointed arbitrators and the presiding arbitrator or chair. This resolves, for English law, the debate about the role of the party-appointed arbitrator, though in the operation of the duty to disclose and of the test of apparent bias, the existence of the debate and differences of views were recognised to be important.

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(2) The relevant human construct to assess both whether a duty of disclosure arises and whether there is a real possibility of bias is the fair-minded and informed observer and the test of bias is whether the observer would consider there was a real possibility of bias, assessed objectively. This assessment is made having regard to the customs and practices of international arbitration in any particular field. This equates, as Lord Goff had urged in R v Gough, to expression of the test for apparent bias in arbitration with that of curial adjudication. (3) There is a legal duty of disclosure which is a component of, or drawn from, the statutory and contractual duty to act fairly and impartially. The duty of disclosure is wider than matters that would give rise to an apprehension of bias and extends to matters that would or might give rise to an apprehension of bias. The duty of disclosure is a continuing one. This can be seen to distinguish the position of arbitrator from that of judge if, as in Australia, the similar disclosure is a matter of prudence and professional practice. (4) The duty of disclosure does not override the arbitrator’s duty of privacy and confidentiality, but absent a contract restricting disclosure, certain matters can be disclosed without breach of the duty of privacy and confidentiality and without obtaining specific or express consent: the identity of the common party in multiple references; whether a proposed appointment to another reference was to be a partyappointment or as nomination as the third arbitrator; a statement of the fact that the other reference arises from the same incident or had the same or overlapping subject matter; and a high-level statement about whether similar issues were likely to arise in the other reference. Consent to such disclosures can be inferred. (5) A failure by the arbitrator to make disclosure which should have been made is a factor to be taken into account by the fair-minded and informed observer construct as to whether there is a real possibility of bias. (6) The relevant dates to evaluate whether the duty of disclosure has been complied with or whether there is a real possibility of bias are different. For the former, the test is prospective: by reference to facts and circumstances at the time the duty arose. For the latter, the test is by reference to facts and matters known at the date of the relevant application to the Court, such as to remove the arbitrator. Time does not permit detailed examination of the reasons of Popplewell J or the Court of Appeal. Neither found a basis for apprehended bias, but the Court of Appeal said that Mr Rokison had failed to comply with a legal duty of disclosure. The appeal to the Supreme Court by Halliburton attracted interventions by the LCIA, the ICC and CIArb that the Court of Appeal’s judgment was out of step with international standards in their discussion of multiple common appointments. Other interventions were made by LMAA,57 GAFTA58 and ARIAS (UK),59 which were anxious to see unimpaired

57 The London Maritime Arbitrators Association. 58 The Grain and Feed Trade Association. 59 The Insurance and Reinsurance Arbitration Society (UK).

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the ability to appoint common arbitrators to chain or string, supply, transport, shipping and reinsurance arbitrations. Halliburton’s case was one of unconscious apparent bias: by taking the benefit of paid appointments in references 2 and 3, Mr Rokison gave Chubb an unfair advantage in being a common party in related arbitrations where (to the ignorance of Halliburton) he could be influenced by evidence and submissions in references 2 and 3 which could affect his approach in reference 1; Chubb would know of his responses to evidence and submissions in references 2 and 3, but Halliburton would not; the failure to disclose deprived Halliburton of forming its own view about the position; and Mr Rokison was said not to have paid proper regard to Halliburton’s interests in the fairness of procedure.

The duty of impartiality – discussion of principle60 Lord Hodge applied in the arbitral context the relevant test for apparent bias in judicial proceedings taken from Porter v Magill61 and Helow v Secretary of State for the Home Department.62 Without going into detailed textual comparison (and, if I may say, rightly so), he said that the English common law test was “similar” to the test of “justifiable doubts” in the UNCITRAL Model Law.63 This test was held to apply to judges and all arbitrators. However, the importance of the reasons of Lodge Hodge can be found in his Lordship’s emphasis on context and his helpful discussion of the contextual differences between judicial and arbitral adjudication.64 First, frank disclosure in arbitration is crucial because of the privacy of consensual arbitration. There may be no public record to which to have regard in evaluating an arbitrator, which makes it difficult or impossible for an arbitrator’s participation in multiple references and the submissions and evidence led in them to be known by those not participating in those references. Secondly, there is usually no appeal from an arbitral award, and there are very limited powers of review. Therefore, the choice of the arbitrator is of critical importance. Thirdly, the judge holds public office and is paid by the state; the arbitrator is chosen by one or both parties or by an institution and is remunerated by the parties, and ultimately, by the losing party. An arbitrator in practice has an interest in future appointments. This may give rise to an interest in avoiding action that may alienate the parties, such as assertive case management. Fourthly, there is a diverse range of persons who may be appointed as arbitrators, coming from many jurisdictions and different legal traditions, with potentially diverging views on ethically acceptable conduct.

60 Halliburton [2021] AC 1083 at 1110-1117 [49]-[69]. 61 [2002] 2 AC 357. 62 [2008] 1 WLR 2416. 63 And also to the tests contained in the IBA Guidelines General Standard 2(c) and Article 10.1 of the LCIA Rules 2014. 64 Halliburton [2021] AC 1083 at 1112-1117 [56]-[68].

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Fifthly, and importantly, Lord Hodge recognised the differing understandings of the obligations of the party-appointed arbitrator. His Lordship referred to the “lively debate” as to the role of party-appointed arbitrators, referring to the articles and writings of Paulsson, van den Berg, Brower and Rosenberg, Born, and Redfern and Hunter, discussed above. Lord Hodge rejected the nuances involved in the debate: No allegiance or duty is owed; no representative role is undertaken. Once appointed, independence and impartiality are unqualified. 65 Lord Hodge was expressly influenced by the place of London in arbitral adjudication, and the English legal system’s reputation for guaranteeing neutrality and impartiality.66 His Lordship drew from Chief Justice Menon’s article that the requirement that all arbitrators had the same undifferentiated duty reflects an increasingly widespread legal norm. Whilst recognising that the view was not universal, and that some legal systems do accept that the party-appointed arbitrator has a special role in relation to his or her appointing party, this was not so in English law. So, in applying the relevant test, one does not have regard to the characteristics of the party including whether one or more was foreign. The contrast in the approach in different legal systems was illuminated by the discussion of the 2018 Second Circuit decision in Certain Lloyd’s Underwriters v Florida67 which expressly recognised a distinction between party-appointed arbitrators and “neutral” arbitrators and that party-appointed arbitrators were expected to espouse the view of the appointing party and serve as de facto advocates. Lord Hodge then sought to reconcile this international divergence in the perception of the role of party-appointed arbitrator in a subtle and important discussion of the attribution of knowledge to the human construct: The fair-minded and informed observer would be credited with the knowledge that some, perhaps many, parties and arbitrators have the view reflected in the Second Circuit’s reasons, and that there is a debate within the arbitration community as to the role of the party-appointed arbitrator and the compatibility of that role with the requirement of impartiality.68 This was not to recognise a different obligation within the application of the test in England; rather, it is to understand the context in which the objective judgment (by the Court through the human construct) will be made.

65 Lord Hodge said at 1114 [63]: “Notwithstanding this perception of the reality in some quarters, a partyappointed arbitrator in English law is expected to come up to precisely the same high standards of fairness and impartiality as the person chairing the tribunal. Popplewell J correctly summarised the position in English law, and I would venture to say also in Scots law, when he stated in his judgment (para 19): “the duty to act independently and impartially involves arbitrators owing no allegiance to the party appointing them. Once appointed they are entirely independent of their appointing party and bound to conduct and decide the case fairly and impartially. They are not in any sense . . . a representative of the appointing party or in some way responsible for protecting or promoting that party’s interests.”” 66 Ibid, at 1114 [63]. 67 Certain Underwriting Members of Lloyds of London v Florida 892 F3d 501 (2nd Cir 2018), importantly a decision under the Federal Arbitration Act 1925, 9 USCA 10(a)(2). 68 Halliburton [2021] AC 1083 at 1115-1117 [66]-[68].

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The duty of disclosure: discussion of principle 69 The Court of Appeal was, in Lord Hodge’s view, correct to hold that there is a legal duty to disclose in English law. In arbitration, it arises from the obligation under the 1996 Act to act fairly and impartially, which gives rise to an implied term for the need to disclose matters. To align or reconcile the duty to disclose with the duty of privacy and confidentiality, it becomes necessary to obtain the consent of relevant parties to disclosure, failing which consent the offered appointment must be declined. However, the context of particular trades or institutions (such as dealt with by the LMAA and GAFTA) may found an implied consent to multiple appointments. Importantly also, there was the recognition of the entitlement to disclose, confidentially, the existence of a current or past arbitration involving the common party and the identity of the common party, but not the identity of other parties without obtaining consent from all such parties. Such entitlement comes from common practice. Jurisprudentially this can be seen, as Lord Hodge said,70 as the law recognising the realities of accepted and acceptable commercial and arbitral practice as a guide to the formulation of legal rules. Further, there was a public interest in upholding the integrity of arbitration as a system of dispute resolution calling both for proper disclosure and for the giving of certainty to the legal standing of established arbitral practice. Thus, at least in Bermuda Form arbitrations, an arbitrator may (subject to contrary agreement) make disclosure on a confidential basis of the existence of the arbitration and the identity of the common party without the express consent of other parties. Consent of the common party is inferred. As to the content of the duty, Lord Hodge considered that with one qualification the duty as expressed by the Court of Appeal was correct: …Disclosure should be given of facts and circumstances known to the arbitrator which … would or might give rise to justifiable doubts as to his impartiality … [which] means facts or circumstances which would or might lead the fairminded and informed observer, having considered the facts, to conclude that there was a real possibility that the arbitrator was biased.71 The qualification of Lord Hodge was to what was “known”. Generally there is no duty to inquire; one must disclose what one knows. However, Lord Hodge would not rule out circumstances raising a duty to make reasonable inquiries, noting that the IBA Guidelines, Part 1, General Standard 7(d) provide for a duty to make reasonable inquiries.72 His Lordship thus left to future cases the development of the question by reference to arbitral practice and rules.

69 Ibid, at 1117-1130 [70]-[116]. 70 Ibid, at 1126 [103]. 71 Ibid, at 1127 [107]. 72 Ibid, at 1127 [107].

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Lord Hodge then discussed the phrase “would or might”.73 Any obligation to disclose something that “might” give rise to justifiable doubts can only arise, his Lordship said, where the matter might reasonably give rise to such doubts. Lord Hodge discussed the human contextual reality: the existence of matters that, if unexplained, would give rise to justifiable doubts, thus the necessity to disclose and explain; or matters, more than trivial, which could, by themselves or with other facts, give rise to justifiable doubts, if later discovered. This analysis, necessarily less than precise, begins to explain the wider notion of disclosure and its relationship to the test for apparent bias, by reference to appropriate human conduct to maintain trust in the particular tribunal members and in the institution and process of arbitration as a whole.74 As the discussion of Lord Hodge makes clear, the good sense of this approach comes from the consensual character of the process and the central value of party autonomy. It is the parties’ process. That is the attraction of arbitration: the existence of matters that might reasonably found a justifiable doubt as to impartiality, then or later, calls forth a sense of entitlement in the parties to know of the matter and to consider their positions for themselves. Reasonable minds can, and often do, differ about these sorts of questions. To recognise that and the policy of supporting trust and confidence in a consensual relationship built on party choice and autonomy justifies this wider penumbra of the obligation to disclose. The development of English law to impose this duty was seen to be consistent with developments elsewhere.75 Whilst the expression of the obligation under English law is not directed, as many arbitral rules are,76 to the perceptions of the parties, the distinction is unlikely to be sharp in practice. As expressed in summary form by Lord Hodge77 it is sufficient if matters are such that they are relevant and material to an assessment of the arbitrator’s impartiality and could reasonably lead to such an adverse conclusion. In practice, and in the context of the reality of the parties before the arbitrator, it is difficult to see how the objectively perceived

73 Ibid, at 1128-1130 [108]-[115]. 74 Lord Hodge noted the disagreement in major English texts on the subject: both Redfern and Hunter (Law and Practice of International Commercial Arbitration (6th ed, 2015) at paras 4.79-4.80) and Merkin and Flannery (Merkin & Flannery on the Arbitration Act 1996 (6th ed, 2019) at 286-287) expressing the views that an arbitrator should disclose on the “could reasonably” or “would or might” basis, whilst Russell (Russell on Arbitration (24th ed, 2015) at para 4-131) restricted any legal obligation to disclose to the “would” basis. Like the Court of Appeal, Lord Hodge favoured the former rather than the latter that had been favoured by Popplewell J. It is at this point perhaps that one can see the difference between the Australian ‘two mights’ and the English would lead to a real possibility. ‘Two mights’ (that is might lead to the real possibility) can be seen to circumscribe disclosure in England as wider than would lead to a real possibility. But again the potential aridity of such a linguistic debate is to be recognised: The ‘two mights’ in the context of recusal in Australia is to be firmly established; and the might lead to a real possibility in England is assessed in the context of reasonably debatable disclosure. 75 Halliburton [2021] AC 1083 at 1129-1130 [112]-[114], with Lord Hodge referring to Article 12 of the UNCITRAL Model Law and the laws of Scotland, Germany, Belgium, Sweden, Austria and Switzerland. 76 See the discussion and references at footnote 37 above. 77 Halliburton [2021] AC 1083 at 1130 [116].

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relevance to the parties is not central to the objective assessment by the fair-minded and informed observer. The duty of disclosure is continuing and subject to changing circumstances.78 Its fulfilment is to be tested prospectively, and not retrospectively by reference to matters known later to the fair-minded and informed observer at the point of assessing bias. However, the question of whether justifiable doubts exist is to be assessed by reference to the fact as they exist at the time of the application.79 Against that detailed discussion, Lord Hodge concluded that Mr Rokison should have disclosed to Halliburton the multiple references, but that in all the circumstances, by the time the matter came before the Court, the fair-minded and informed observer would not reach a conclusion of apparent bias.80 Particular relevant circumstances to that evaluation included that Mr Rokison gave an explanation of his failure to disclose his appointments in references 2 and 3 which was accepted by Halliburton’s lawyers as a genuine oversight, Mr Rokison was of the view that there was no material overlap between the references and had offered to resign if the separate issues in references 2 and 3 did not dispose of those references, and Mr Rokison at all times adopted courteous and measured responses.81 Where does all this leave us? Halliburton highlights, with clarity, the intimate relationship between the duties of impartiality and of disclosure. Parties are only equipped to make a judgment upon whether they are satisfied that an arbitrator is sufficiently impartial notwithstanding a potential lack of complete independence if they are aware of all of the relevant circumstances, including multiple or overlapping appointments.82 An explicit duty of disclosure is a necessary incident of the private and confidential nature of most arbitrations, which may prevent the parties from ascertaining a complete picture of the circumstances from their own inquiries alone. In what may be seen as a welcome development supporting the all-important trust of parties in the arbitral process, the legal obligation to disclose a wider range of matters than those which would found a conclusion of apparent bias can now be taken to be recognised not just in many arbitral institutional rules, but also by the common law of England.

78 Ibid, at 1131 [120]. 79 Ibid, at 1131-1132 [121]-[122]. See also R v Gough [1993] AC 646 at 670 (the court must ascertain the relevant circumstances “from the available evidence, knowledge of which would not necessarily be available to an observer in court at the relevant time”) and AT&T Corporation v Saudi Cable Co [2000] 2 Lloyd’s Rep 127 at [42] per Lord Woolf (“the court considers on all the material which is placed before it whether there is any real danger of unconscious bias on the part of the decision maker”) (emphasis added) and at [63] per Lord Potter (the court’s task embodies the standards of the informed observer viewing the matter at the relevant time, “which is of course the time when the matter comes before the court”). 80 Ibid, at 1138-1139 [149]-[150]. 81 Ibid, at 1138-1139 [147]-[149]. 82 As recognised by the Law Commission in its recent paper published in connection with a review of the English Arbitration Act 1996: Law Commission, Review of the Arbitration Act 1996: A consultation paper (Law Commission Consultation paper 257), September 2022 at 20 [3.8].

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Commentary on the Supreme Court’s decision has canvassed areas for further development of the common law of England with respect to disclosure and remaining issues for debate.83 That does not reveal an omission in the judgment. Rather, it reflects that decision-making, in the context of concrete problems rather than exhaustive rule-making, is the foundation of the common law’s support for honest good sense in commerce. The emphasis (with respect, correctly) placed by Lord Hodge on context may contain the key for those in Australia who may have to determine, as a matter of statutory construction, whether there really is any practical difference (at least in likely result) between the Gough test introduced into Australian arbitration legislation, with or without its “modest adjustment” in Porter v Magill of a fair-minded and informed observer (bearing in mind Lord Phillips’ view as to the identity of “real possibility” and “real danger”, removing any connotation of the immediacy of the threat from the word “danger”, and Lord Hodge’s view of the “similarity” of the Model Law “justifiable doubts” to the English test) and the Australian judicial test if applied in the context of arbitral adjudication in the relevant field of commerce in which the arbitration takes place, and if firmly established. An issue that is perhaps under-explored in the commentary to date is the impact of the decision on the position of the party-appointed arbitrator. I make several final observations in this regard. First, English law has set its face against recognition of any form of special duty or role of a party-appointed arbitrator, or of the chair. That said, secondly, there is a recognition of the legitimacy of other views and other approaches about this in other jurisdictions. Thirdly, it is not clear how taking these matters into account as part of context in the appreciation of the fair-minded and informed observer’s task will play out. That, perhaps, is only an aspect of the intensely factual and contextual nature of the relevant evaluation. Fourthly, the use by Lord Hodge of the Second Circuit decision in the Florida case may not, with respect, fully deal with the subtleties involved. The American position, even after

83 Those issues include the extent of the duty of disclosure (is an arbitrator obliged to disclose only those matters of which he or she has knowledge, or must an arbitrator actively make inquiries?), and the extent to which the parties’ choice of a particular set of institutional rules to govern their arbitration may modify the common law position (for example, the potential application of more onerous disclosure requirements when doubts as to independence and impartiality are assessed from the perspective of the parties rather than an objective bystander, as is the case under the LCIA Rules 2020 and the ICC Rules of Arbitration 2021). Commentary has also discussed a matter of particular relevance to arbitral practice: the relationship between potentially competing imperatives of disclosure and confidentiality and how compliance with those two duties may or should be achieved in non-Bermuda Form arbitrations, an issue left open in Halliburton. See Halliburton [2021] AC 1083 at 1126 [105], 1127 [107], 1140 [153]-[154] (Lord Hodge) and 1141 [162] (Lady Arden); Kimmins et al, ‘The Test for Apparent Bias and Arbitrators’ Duties of Disclosure Following Halliburton v Chubb: Welcome Clarification, but Questions Remain’ at 368-369 and 370-372; Nga and Adeleye, ‘The English Supreme Court’s Decision in Halliburton v Chubb: An Examination of the Issues Arising from Arbitrators’ Acceptance of Multiple Appointments in Related Arbitrations and Arbitrator’s Duty to Disclose’ at 216-217; and Law Commission, Review of the Arbitration Act 1996: A Consultation paper at 26-27 [3.52][3.54].

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the change of the AAA/ABA Code of Ethics in 2004 towards recognition that all arbitrators should abide by the same formal ethical standards, is expressed, partly by reference to pre2004 prevailing authority in the Supreme Court84 discussed in Florida, in language accepting the place of advocacy on the part of a partyappointed arbitrator. The views of others as to the importance of the party having an impartial, but culturally and conceptually aware nominee, can be seen as more subtle than the American position. The confidence of parties in the arbitral process is crucial. That confidence is bolstered by an ultimate demand for honesty and impartiality; but it also may be seen to be bolstered by parties being happy with their informed choice of arbitrator to decide their dispute with the other side’s appointee and a chair chosen by them or appointed independently. There is already a qualification to independence: the arbitrator is chosen not imposed. But there need not, and should not, be a qualification to impartiality, unless the parties wish to choose a system and supervising court that finds impartiality to be legitimately qualified by a duty to advocate one side’s case. Fifthly, whether one personally agrees with the views of Chief Justice Menon and Jan Paulsson, or with those of Gary Born, Raymond Bishop and Lucy Reed, may not matter. Different arbitral laws, statutory and general, may express themselves differently, as the Second Circuit and the Supreme Court did in Florida and Halliburton. This displays a choice that is given to parties and their advisors about the law of the arbitration and the seat. Parties can choose the approach they wish to have taken. Sixthly, and finally, the debate about party-appointed arbitrators may underscore the distinction between institutional and ad hoc arbitration. A denial of the right of partyappointment would throw into high relief the need for integrity of the institution appointing the arbitration panel or the pool from which the panel is chosen. Reliance on the institution may simply push the relevant questions of independence, impartiality and disclosure further away from the knowledge of the parties and from the operation of party autonomy. Or, it may give institutions the opportunity to fashion bespoke solutions to any perceived problems of compromise of impartiality by partyappointment, such as by ‘blind’ appointments, where the arbitrators do not know whether they are party-appointed or not.

84 Particularly Commonwealth Coatings Corp v Continental Casualty Co 393 US 145 (1968).

Goff Lecture Cover output 2024-3-6 new.pdf 1 6/3/2024 下午4:13

Lord Goff of Chieveley

1991

Arbitrability

Justice Andrew Rogers

1992

Arbitration: 1979 and All That

The Right Honourable Sir Thomas Bingham

1993

The Role of ADR in the Settlement of Commercial Disputes

Arthur Marriott

1994

The Validity of an Arbitral Award Rendered by a Truncated Tribunal

Stephen M. Schwebel

1995

Is the Need for Writing as Expressed in the New York Convention and the Model Law Out of Step with Commercial Practice?

Neil Kaplan QC

1995 Addition Arbitration Agreement in Writing: Where do we Currently Stand? A 2021 Postscript to the 1995 Goff Lecture

Neil Kaplan QC

1996

Too Many Laws?

The Right Honourable Lord Mustill

1997

Enforcing Arbitral Awards Notwithstanding Local Standard Annulments

Jan Paulsson

1998

Irresponsibility in International Commercial Arbitration

Pierre Lalive

2000

The Spirit of Arbitration

Fali S. Nariman

2001

The Lawyer’s Duty to Arbitrate in Good Faith

V. V. Veeder

2004

Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor

L. Yves Fortier and Stephen L Drymer

2006

The Role of Arbitration within Today’s Challenges to the World Community and to International Law

Karl-Heinz Böckstiegel

CMY

Karl-Heinz Böckstiegel

2007

W(h)ither International Commercial Arbitration?

Charles N. Brower

2008

National Emergencies and Necessity Defenses: Do They and Should They Relieve States of Their Investment Obligations?

W. Michael Reisman

2009

The Small, the Useful and the Impossible: The Experience of UNCITRAL in Revising its Rules

David D. Caron

2010

A Proposed Model Procedural Order on Confidentiality in International Arbitration: A Comprehensive and Self-Governing Code

Michael Hwang and Nicholas Thio

2011

The Case for Better, and Better-armed, Arbitrators

Jacques Werner

2011 Addition When Arbitration Becomes War

Jacques Werner

2013

The Rise of Treaty-based Investment Arbitration in Asia

Kaj Hobér

2015

The Right to Arbitrate: Historical and Contemporary Perspectives

Gary B. Born

2016

Arbitration and Public Policy

Robert French

Feb 2018

Making the Best of Arbitration

David Hope

July 2018

Arbitral Autonomy and Applicable and Overriding Law

Jonathan Mance

2019

Isn’t 700 Years Long Enough? - Time to Think Again about Costs

Neil Kaplan QC

2020

Arbitrator ‘Temperance’: David Caron’s Rule of X

Lucy F. Reed

2021

The Complexification of Disputes in the Digital Age

Sundaresh Menon

2022

Independence and Apparent Bias: Judicial and Arbitral Confidence: Halliburton v Chubb

James Allsop

Edited by Neil Kaplan KC, CBE, SBS and Robert Morgan JP

2006 Addition Major Developments Since the Goff Lecture of 2006

The Goff Arbitration Lectures

Future Imperfect

1990–2022

1990

The Goff Arbitration Lectures 1990–2022

Edited by Neil Kaplan KC, CBE, SBS and Robert Morgan JP