Hot topics in international arbitration - Arbitration Committee article, March 2020

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Jake Lowther
KCAB International, Seoul
jake.lowther@kcab.or.kr

Report on Arbitration Committee session at the 2019 IBA Annual Conference in Seoul

Thursday 26 September 2019

Session chair

Angeline Welsh Matrix Chambers, London

Speakers

Lillian Chu Tsar & Tsai Law Firm, Taipei

Nicholas Lingard Freshfields Bruckhaus Deringer, Singapore

Nania Owusu-Ankomah Sackey Bentsi-Enchill Letsa & Ankomah, Accra

Dietmar Prager Debevoise & Plimpton LLP, New York

Angeline Welsh began the session by guiding delegates onto a four-stop sightseeing tour of the hot topics in international arbitration. Much like the demilitarisedzone tour many delegates experienced while in Korea, the ‘whistle-stop’ tour had strict time allotments. Leading into the morning’s first hot topic, Welsh mentioned the British Airways £183m fine for failing to protect customer data from a cyber-attack, as well as the devastating global cyber-attack that crippled computers in hospitals across the UK and cost the NHS £92 million.

Cybersecurity in international arbitration: progression and challenges

Lillian Chu began by sharing some frightening examples of cyber intrusion. In 2015, the Permanent Court of Arbitration’s (PCA) website went offline following attacks connected to the maritime boundary dispute between China and the Philippines. In the case of Libananco Holdings v. Turkey, the respondent procured more than 2,000 privileged and or confidential e-mails exchanged between the claimant and its counsel through court-ordered surveillance. In Singapore’s worst cyber-attack, hackers infiltrated healthcare institution SingHealth and stole personal particulars of 1.5 million patients, including the prescriptions of the Prime Minister. In a three-month long cyberattack on Cathay Pacific Airways, the data of 9.4 million passengers was stolen by hackers.

Given this, Chu asked the audience to reflect on how well they were able to recognise the risk. She asked whether any audience members sent submissions or documents to an arbitrator at a free web-based email account such as Gmail or Hotmail. She then asked whether the audience was aware that, according to the American Bar Association's 2018 Legal Technology Survey Report, 30 per cent of firms with more than 100 members reported experience of a cybersecurity breach. Chu then pointed to the European Union’s much-discussed General Data Protection Regulation (GDPR), under which financial penalties for data breaches may be up to the greater of €20m or 4 per cent of global annual turnover.

Chu stated that, while one of arbitration’s most marketable advantages is confidentiality, there is an increasing risk that its reputation could be eroded. Confidential or commercially sensitive information is being sent across borders and stored by multiple players in different jurisdictions. She also referred to the poor IT literacy of practitioners and arbitrators, which poses several challenges.

Cyberattacks are difficult to predict or anticipate and any data breach may affect all parties to an arbitration. Cyber risk management is an ongoing process, but the participants have difficulties in identifying and assessing the risks as they lack sufficient capacity to determine reasonable preventative and responsive measures. There are also technology competence gaps among the arbitration participants dealing with sensitive information and using IT devices.

However, the arbitration community has sought to address cybersecurity issues by drafting protocols and guides, including:

• the draft ICCA-CPR-NYC Bar Association Protocol for Cybersecurity in Arbitration (Protocol);

• the IBA Cybersecurity Guidelines (IBA Guidelines);

• the ICC Commission Report on the Use of Information Technology in International Arbitration (ICC Report); and

• the ICC Cyber Security Guide for Business (ICC Guide).

The Protocol promotes awareness of cybersecurity issues in arbitration and provides a procedural framework that participants can consult in order to determine which reasonable cybersecurity measures should be employed. The Protocol will only apply if adopted by the parties or determined by the tribunal.

The IBA Guidelines were produced to recommend best practices to small and medium-sized firms to help protect themselves from breaches of data security and assist them to continue to operate if a breach of data security or ransom attack does occur.

The ICC Report provides an analytical framework to assist participants in evaluating whether a particular form of IT should be used and how to use it in a cost effective, fair and efficient manner.

The ICC Guide aims to help companies of all sizes manage their approach to cybersecurity and mitigate threats posed by cybercrime.

Chu asked whether we have consensus on the management of cybersecurity risks in arbitration. Things to consider here include: 

• the roles of the various participants, including third parties, and who should take the lead;

• how parties should deal with the increased time and costs;

• whether arbitrators can or should order cybersecurity measures, impose sanctions and how these could be implemented;

• what should constitute ‘reasonable’ cybersecurity measures; and

• what level of IT capability should be required of an arbitrator and whether this will affect future appointments.

Chu then discussed how to work out individual risk profiles and stated that there can be no single fit approach. Arbitrators can be reluctant to take an active role on cybersecurity issues and there is no reasonable standard. Arbitrators can determine issues on the merits but have less capacity as individuals with limited resources to safeguard against cyberattacks. Chu stated that institutions and the ICC in particular should play a greater role in devising reasonable cybersecurity measures to help protect arbitrators.

Jennifer Permesly was asked about the IBA’s new guide to Technology Resources for Arbitration Practitioners, which provides a list of things that arbitrators can do to ensure that the arbitration runs securely. Julie Bedard made the point that arbitration is the area of law with the second-highest number of cyberattacks after finance. She also made the point that GDPR regulators will likely be looking to make an example of a large law firm affected by a cyberattack and that any sanctions for stolen personal data could be very impactful.

Liability of arbitrators: A precarious balancing act?

Nania Owusu-Ankomah Sackey considered the extent to which arbitrators are liable and whether that liability is civil or criminal. She summarised how arbitration remains a viable method of dispute resolution for the parties who choose to arbitrate their disputes and the arbitrators who hear the disputes and issue the awards. A clearer liability regime helps to integrate the two stakeholders’ competing interests. A precarious balancing act is needed to allow both parties to feel safe in their choice to arbitrate and the arbitrators to work without fear of the consequences.

Sackey’s speech was divided into three sections:

• the what: what is the current state of civil and criminal liability across jurisdictions;

• the why: why is arbitrator liability a hot topic; and

• the how: how can we strike a desirable balance between protecting arbitrators and preserving the confidence of the parties?

Sackey pointed out that there are different standards globally in respect to the civil and criminal liability of arbitrators. She first considered civil liability and the standards in England & Wales and Ghana. There, arbitrator immunity applies unless there is ‘bad faith’.^[1] She then pointed to terms found elsewhere, such as ‘gross negligence’, ‘intentional misconduct’, ‘unjustifiable resignation’ and ‘deliberate excess of power’.

Other jurisdictional differences include in Greece, where parties can claim for the damage incurred as a result of misconduct, or in Austria, where the award must have been set aside due to the arbitrator’s misconduct. Rule 38.1 of the Singapore International Arbitration Centre (SIAC) Rules 2016 excludes the arbitrator’s liability for any negligence, act or omission in connection with any arbitration administered by the SIAC in accordance with those rules. In contrast, Article 31 of the London Court of International Arbitration (LCIA) Arbitration Rules 2014 limits liability to where the arbitrator’s act or omission constituted ‘conscious and deliberate wrongdoing’.

Moving on to criminal liability, Sackey referred to the criminal law of Argentina, Germany and Spain,^[2] where arbitrator immunity applies unless there is fraud or corruption. A similar provision applied in Swiss and Norwegian criminal law, but these were repealed in 2000 and 2003 respectively. In China, where an arbitrator ‘intentionally runs counter to facts and laws and twists the law when making a ruling in arbitration’ and ‘the circumstances are serious’, they could be imprisoned up to three years’ prison and up to seven years’ prison ‘if the circumstances are especially serious’.^[3] The question then of course is what amounts to ‘twisting’? Such vague terms might prompt an arbitrator to reconsider accepting an appointment.

Sackey then considered the safeguards available to parties. In respect to the award, it can be set aside. In respect to the arbitrator, they can be removed, suffer reputational damage and even be subject to criminal sanctions such as imprisonment. In respect to fees, these can be forfeited or reduced, depending on the extent of the liability. Ultimately, she concludes that there is a high standard before an arbitrator will lose their immunity, leaving scant remedy for a party that has wasted its time with an arbitrator who has behaved with misconduct.

Turning to ‘the why’, Sackey referred to four recent developments of concern. First, the Egyptian Chevron case in which an Egyptian criminal court sentenced three arbitrators to three years’ imprisonment in connection with the issuance of a $18bn ‘sham’ award against the US oil company. The court ruled that the arbitrators had a criminal purpose, namely to misappropriate the victims’ funds. The sentence of misappropriation by fraudulent means and forgery against arbitrators and others, including the executive director of the Cairo-based International Arbitration Centre, was recently upheld by an Egyptian appeals court. Meanwhile, a judge in California recently denied enforcement of the relevant award due to a lack of agreement to arbitrate and the lack of jurisdiction of the court. Is it unfair that Chevron be permitted to recover its costs?

Second, a court in Doha, Qatar sentenced three arbitrators to three years’ imprisonment in October 2018 in connection with their role on a tribunal that issued an award against a relative of the Qatari royal family.^[4] To the shock of the arbitration community, the arbitrators were convicted for transferring the dispute from the Qatar International Centre for Conciliation and Arbitration to ad hoc proceedings seated in Tunisia. Allowing a party to pursue criminal sanctions can therefore be a volatile balancing act.

Third, following the award in the Puma v Estudio 2000 arbitration, the Spanish Supreme Court declared two of the arbitrators professionally liable for excluding their colleague from the deliberation procedure. The two arbitrators met without notifying the third, amended the award, signed it and notified the parties that same day. The court ordered them to reimburse part of their fees, plus interest. The decision was considered to constitute an international landmark in relation to the deliberation process. Accordingly, it may be possible to recover fees in the case of misconduct by an arbitrator.

Fourth, in October 2016. the United Arab Emirates legislature amended^[5] Article 257 of the UAE Penal Code. In doing so, it criminalised an arbitrator’s failure to act objectively. This led to a reluctance among arbitrators to accept appointments in the UAE. However, this amendment was repealed in September 2018.^[6] This demonstrates how changes to this balance of liability can have unintended consequences.

Finally, Ankomah Sackey turned to ‘the how’. When the parties are better protected, there is an increased likelihood of abuse. She summarised the consequences of lowering the standard of liability in favor of the parties. It can lead to the removal of finality, an increase in vexatious claims and of course increased time and expense. It can also deter and intimidate good arbitrators from accepting appointments. In her view, there is currently a proper balance between the two interests. It is not perfect and not all cases are covered. Nevertheless, parties must also be seen to accept the risks of arbitration and there are ways for parties to hedge.

One questioner asked about the finality of an award in the event that new facts emerge. In Ghana, an award can only be set aside on certain grounds and not on the basis of new facts. However, in respect to fraud or corruption, this could be possible. A party is not precluded from raising this objection.

Unsurprisingly, the threat of criminal sanctions for arbitrators drew the majority of questions from the audience. The first question asked how arbitrators should protect themselves. Sackey responded by saying that she was not quite sure, but that it is an issue that the profession should not simply sit on. Harry Lui commented that in respect to Chinese law, Article 399A imports a factor of intention, not a mere misunderstanding. Further, the provision is triggered by corruption or some special relationship giving rise to a lack of independence and impartiality, so there would be no reason to worry.

The relationship between Hong Kong and China, and whether an arbitrator sitting in Hong Kong might be subject to the criminal sanction, was also discussed. Winnie Lim confirmed that under the ‘one country, two systems’ rule, the Chinese rule would not apply. In Hong Kong, an arbitrator would not be held liable, with the exception of cases of corruption.

Welsh made the point that arbitrators resisting a court-ordered injunction to pause proceedings could face criminal liability. This could then lead to issues surrounding extradition proceedings. While this is serious, this is a rare problem.

An update on the UNCITRAL Working Group on improving the efficiency and quality of arbitration proceedings

Dietmar Prager provided an update on the discussions of the United Nations Commission on International Trade Law(UNCITRAL) Working Group II (WGII). In July 2018, UNCITRAL agreed that WGII should develop a text on expedited arbitration. A WGII session to begin the discussion took place in New York in February 2019, and in July 2019 the Secretariat issued a note on draft provisions on expedited arbitration. WGII held its seventieth session in September 2019 in Vienna to discuss those draft provisions.

Prager shared some statistics, including that one-third of ICC cases in 2018 had an amount in dispute of less than $2m and that the amount in dispute in 50% of Korean Commercial Arbitration Board (KCAB) cases was under ?500m (approximately $420,000). In such cases, the institutions’ respective expedited proceedings rules will automatically apply. He then began to consider the issues that can arise in respect to expedited arbitration, particularly in circumstances where the rules apply by default if certain trigger criteria are met.

The first issue he considered was the parties’ consent to expedited arbitration. Prager noted two broad schools of thought on consent to expedited proceedings. First, some institutional rules apply the expedited procedure rules only after the express consent of the parties. This approach accords greater respect to party autonomy and consent – the cornerstones of arbitration.

Prager noted a trend towards a standalone text to express consent. For example, the Stockholm Chamber of Commerce (SCC)’s separate expedited arbitration rules (2017) only apply on the express agreement of the parties. There are also some outlying institutions such as the LCIA, which only provides for the expedited formation of the tribunal on the application of a party in cases of exceptional urgency.

However, under the more common approach, other institutions deem the parties’ choice to arbitrate under their rules as presumed consent to the expedited arbitration procedure contained in those rules. In such cases, trigger criteria such as the ICC and KCAB’s financial threshold might apply. Prager questioned whether it might be prudent to raise this threshold.

Elsewhere, the expedited arbitration procedure will apply automatically on the application of a party to the institution if the amount of the dispute falls under the financial threshold, among others. At the Hong Kong International Arbitration Centre (HKIAC), that threshold is HK$25m (approximately $3.2m), with 47 expedited proceedings from 69 applications taking place since 2014. At SIAC, that threshold is SG$6m (approximately $4.3m), with 291 expedited proceedings from 499 applications since 2010.

As UNCITRAL is not an arbitral institution, there are different considerations for the WGII drafters. Prager noted a hesitancy on financial thresholds and a preference to leave the choice to expedited arbitration to the parties.

Another issue arises in respect to the number of arbitrators. In cases where the expedited arbitration rules apply by default, the arbitral tribunal will typically consist of a sole arbitrator. Prager asked whether this should override the parties’ express choice of three arbitrators? In respect to the constitution of the arbitral tribunal, the SIAC and ICC rules expressly provide that they override the arbitration agreement. However, other institutions such as HKIAC and KCAB emphasise party autonomy and will invite or encourage the parties to agree to refer the case to a sole arbitrator.

Prager briefly touched on several more key issues of expedited arbitration currently being considered by WGII. These included whether:

• flexibility should be preserved or there should be fixed time frames;

• there should be provision for early dismissal and preliminary determination or whether these risk additional delays;

• there should be page limits;

• there should be no hearing, such as may be permitted in Sweden, and whether hearings delay or expedite the arbitration;

• there should be rules for streamlining evidence;

• document production should be limited or left to the tribunal’s discretion; and

• there should be a summary award and at what point an award is sufficiently reasoned.

Prager then asked: ‘will UNCITRAL be successful?’ During the questions, reference was made to ICC statistics from Ana Serra e Moura which record 41 cases of expedited arbitration and nine court decisions on whether the expedited rules apply. This suggests that expedited arbitration needs support. However, there are due process considerations, particularly when considered in light of the grounds for setting aside under the New York Convention.

The point was also made that expedited arbitration is very much an institution-driven mechanism and the institution plays the key role. This will be a hurdle for UNCITRAL. Given the designating authority provisions in the UNCITRAL Arbitration Rules 2010, it may need to adopt the express consent model. However, it takes time to appoint an authority and the discussion in Vienna has considered how to avoid two-step processes.

The Report on WGII’s 70th session is now available. The seventy-first session took place between 3–7 February 2020 in New York, while the next session is scheduled for 21–25 September 2020 in Vienna. Many practitioners will undoubtedly be following the next developments with interest.

Who makes international investment law?

Nicholas Lingard shifted the session’s focus to the public international law space and to the question of who makes international investment law. Lingard suggests that local courts make international investment law, at least in part. He then asked the audience whether local courts will engage more with treaties and international investment law.

Mr. Lingard proceeded to outline the traditional tension between domestic courts and investment arbitration and referred to two prominent commentators. In Schreuer’s view, ‘one of the main purposes of investment arbitration is to avoid the use of domestic courts.’^[7] But as Roberts states, ‘both have a basis in the sources doctrine and each one has different strengths and weaknesses.’^[8]

Mr. Lingard noted that times have changed. He quoted Lord Bingham of the UK House of Lords, who observed that national courts are routinely ‘called upon to consider and resolve issues turning on the correct understanding and application of international law’. This development would have been ‘almost unimaginable’ 30 years ago. Yet the lack of judicial review in investment arbitration discourages parties from agreeing to arbitrate their disputes arising from international investment, particularly as ‘anecdotal evidence abounds where an arbitrator has made an award contrary to the facts or the law’.^[9]

Mr. Lingard referred to a ‘paradigm shift’ in international investment law, which may be merely the beginning. As evidence of this paradigm shift, Mr. Lingard referred to cases in Singapore and in England as well as to potential reform.

Singapore

In respect to Singapore, Mr. Lingard cited two cases, Sanum Investments v Laos (Sanum Investments) and Swissborough Diamond Mines v Lesotho (Swissborough), both comprised of five judges, which demonstrate Singapore’s robust approach and sensitivity to issues of international law. In each case, two international law experts were appointed as amici curiae and each of the judgments contained a detailed analysis of the treaty provisions and awards.

In Sanum Investments, the Singapore High Court found that the China-Laos bilateral investment treaty (BIT), which was signed in 1993, also applies to Macau (over which China resumed sovereignty in 1999). It also found that the words ‘dispute involving the amount of compensation for expropriation’ contained in Article 8(3) of the BIT should be interpreted broadly such that any dispute over the amount of compensation for expropriation may be submitted to arbitration. Sanum Investments also restored the Singapore-seated arbitral tribunal’s decision to accept jurisdiction over the investor’s expropriation claims. Commentators consider it an influential decision of global significance.

In Swissborough, the Singapore Court of Appeal found that a Permanent Court of Arbitration (PCA) tribunal did not have jurisdiction because there were no qualifying investments under the Southern African Development Community (SADC) Protocol on Finance and Investment that could be submitted to arbitration. The court also set aside the investment arbitration award against Lesotho, which had held the state liable for facilitating the shutting down (or ‘shuttering’) of the SADC tribunal without providing an alternative forum. Lingard cited Sundaresh Menon CJ, whose judgment began with the following: ‘international investment law is a hybrid legal construct uniquely placed at the crossroads of domestic and international law and of private and public law’.

England

Lingard then turned to England, which adopts a somewhat different approach. He referred to section 67 of the Arbitration Act 1996 (England & Wales) (AA) which permits a substantive review of an arbitral award. The UK High Court case of GPF GP v Poland, was a ‘re-hearing’, or de novo hearing, of a 2014 SCC case. Although no amici curiae were called, Bryan J’s judgment defers to international law similarly to the Singapore cases: ‘it is for me to interpret the arbitration agreement in the BIT in accordance with international law, and the principles of interpretation contained in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (1969).’^[10]

According to Bryan J, the Arbitral Tribunal was wrong in its interpretation of Article 9.1(b) of the BLEU-Poland BIT, and it ‘failed to give meaning and effect’ to all the words of the clause.

Lingard also introduced section 69 of the AA. Section 69 permits a party to arbitral proceedings to appeal to the court on a question of law arising out of an award made in the proceedings, unless the parties to the proceedings have agreed otherwise.

Reform

Turning to reform, Lingard referred to the public consultation in Singapore on proposed amendments to its International Arbitration Act to allow appeals to the High Court on questions of law, similar to section 69 of the AA. However, the Singapore proposal is for the provision to be available on either a contract-in or opt-in basis. Lingard also considered the Singapore Academy of Law’s (SAL) draft report on the right of appeal against international arbitration awards on questions of law and to define questions of law as including international law.

According to SAL, while Singapore was initially reluctant to stray from international norms, it is now unafraid to make ‘pioneering’ changes to accommodate the requirements of arbitration users. Given that complex international arbitrations do raise questions of international law, the Singapore court should be empowered to consider such questions.

Lingard then asked the audience to imagine that states might soon be drafting international investment agreements with a seat in Singapore to take advantage of this opt-in appeal mechanism to the Singapore court. This could then lead to a considerable wave of cases on investment treaty interpretation, cementing the role of domestic courts in the making of international investment law.

Following Lingard’s presentation, a questioner asked about resolving the difficulty when a dispute gives rise to conflicting decisions from both the court and the arbitral tribunal. If the decisions are then cited in a future dispute, should the adjudicator follow the approach of the court or the arbitral tribunal? In response, Lingard acknowledged that there was no clear answer but pointed out that neither investment arbitration awards nor decisions of the International Court of Justice (ICJ) create binding precedent.

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