Striking a Balance: Confronting Tensions in International Arbitration
This article was originally published in Global Arbitration Review and is reproduced here with permission.
Double recovery discussed at Columbia
May 02, 2017
The latest Columbia Arbitration Day addressed complex issues of double recovery, the admission of “illegally” obtained evidence, conflicting “supranational” obligations, and the differing ethical regimes to which arbitration practitioners are bound – and featured a keynote address on third-party funding by White & Case’s Carolyn Lamm.
Moderated by O Thomas Johnson, judge of the Iran-US Claims Tribunal in The Hague and adjunct professor at Columbia Law School, the first panel discussed how the pervasive practice of instituting multiple proceedings over the same facts brings new challenges to the worldwide rejection of double recovery and the tools available to arbitrators to address those challenges.
Dietmar Prager, partner at Debevoise & Plimpton in New York, and Mohamed Shelbaya, partner at Shearman & Sterling in Paris, debated the merits and demerits of simultaneous or sequential proceedings arising out of the same set of facts. Prager pointed to the seminal Chorzów Factory case as an early example of parallel proceedings in which compensation for the same expropriation event was sought.
Prager went on to provide an analysis of case law rejecting jurisdictional defenses based on the risk of double recovery and addressing double-recovery at the quantum phase of the proceedings.
Shelbaya expressed concern that given the lack of proper delimitation between contract and treaty claims in arbitral practice, investors are sometimes allowed, at their discretion, to submit the same conduct of a host state to different fora (commercial or investment arbitration) in reliance on different instruments (contract or treaty).
In extreme cases, which are increasingly frequent, investors are allowed to initiate simultaneous or subsequent proceedings before different fora in connection with the same set of facts. Shelbaya observed that this has various undesired effects, including the risk of double recovery. The investor’s chance of a favorable decision on the merits is also artificially increased, since it only has to win in one of the proceedings to obtain compensation while the state has to win them all to avoid liability.
Shelbaya further observed that the solution of confining double-recovery considerations to the damages phase is unsatisfactory since it fails to tackle double-counting problems that may result from different valuation methods and does nothing to address the other problems arising from multiple proceedings.
Elliot Friedman, partner at Freshfields Bruckhaus Deringer in New York, discussed how principles of res judicata and collateral estoppel could help regulate some double recovery issues affecting parallel proceedings, along with related principles. Setting out the evolution of the res judicata, Friedman noted how the decisions in RSM v Grenada and Ampal v Egypt represent an example of tribunals’ approach to issues of privity between claimants, notably investor companies and shareholders.
Friedman went on to analyse unresolved questions, like the role of res judicata in claims brought within different dispute resolution systems, the limits of the concept of privity and the legitimacy of a rule favoring one tribunal’s finding on the merits simply because it was the first.
Marinn Carlson, partner at Sidley Austin in Washington, DC, discussed the role that jurisdictional tools such as “fork-in-the-road,” “no U-turn,” and waiver clauses may have as indirect devices to avoid double recovery in investment treaty arbitrations.
“Fork in the road” and “no U-turn” provisions were strictly speaking conceived to address parallel proceedings and not double recovery, Carlson noted – but they have not proved able to impose limits on such proceedings due to tribunals’ frequent reliance on the res judicata triple-identity test.
On the other hand, waiver clauses have more potential to limit multiple proceedings, and hence limit the risks of double-recovery, by requiring claimants to forgo a wider range of proceedings.
Hackers, whistleblowers, and other illegally obtained evidence in arbitration
After briefly introducing the issues that arise when considering the admission of illegally obtained evidence in international arbitration, Kabir Duggal, senior associate at Baker McKenzie and lecturer at Columbia Law School, led panelists through a hypothetical investor-state arbitration. During this, he asked them to imagine how counsel, arbitrators, and national courts would deal with parties’ requests to admit or suppress illegally obtained evidence.
Cleary Gottlieb Steen & Hamilton partner Howard Zelbo took on the role of counsel for the foreign investor, seeking to suppress diplomatic cables obtained from WikiLeaks but admit communications between the opposing party and its counsel, disclosed through a leak similar to that of the Panama Papers.
Arguing for the admissibility of the WikiLeaks cables, Zelbo emphasised the traditional inviolability of diplomatic communications and the fact they belonged to a non-party, while pointing to the many circumstances under which attorney-client privilege is implicitly waived in domestic courts as justification for admitting law firm documents. Above all, he emphasised the materiality of the leaked evidence on which he sought to rely.
Natalie Reid, partner at Debevoise & Plimpton in New York, took on the role of counsel for the state. Like Zelbo, she argued primarily that the materiality of the diplomatic cables to the facts should weigh in favor of their admissibility. On the other hand, Reid emphasised the tendency among tribunals to treat attorney-client privilege as “sacrosanct,” arguing that confidential legal advice is not relevant to determining whether the state has met is legal obligations.
Taking on the role of arbitrator, Paula Hodges QC, global head of international arbitration at Herbert Smith Freehills, said she would admit both kinds of leaked evidence. Noting the “broad discretion” given to arbitrators under ICSID and other institutional rules, Hodges was guided by existing practice and by general principles of “due process,” “fairness,” and “equality of arms” as well as “materiality.”
She also noted the more context-specific considerations of “protection of diplomatic immunity” and “confidentiality in the international sphere.
Arbitrators must try to achieve “a fair determination of the evidence available,” while also recognising the reality that this information is already in the public domain, she said. Each party must have the opportunity to test the evidence presented.
During the session, Ian Binnie CC, QC, retired justice of the Supeme Court of Canada and counsel at Lenczner Slaght in Toronto, described his court’s approach to evidence over the course of his 14-year tenure. He noted that when judges and arbitrators are confronted with difficult questions about a piece of evidence’s admissibility, they often choose to admit it and resolve lingering issues by limiting the weight they accord such evidence.
Conflicting supranational obligations
A panel moderated by moderated by Columbia Law School Professor George Bermann addressed a variety of circumstances in which a state’s obligations under international law overlap and explored how these obligations are interpreted and occasionally come into conflict with one another.
Sophie Nappert, a London-based arbitrator and lawyer who practices from 3 Verulam Building, argued that the European Commission’s insistence on the supremacy of European Union law, largely endorsed by the European Court of Justice, frustrates the functioning of international law. Using Micula v Romania as an example, she criticised the commission’s vigorous intervention in investment arbitrations as a non-party and its attempts to direct the decision of the tribunal by invoking its own, supposedly authoritative interpretation of EU law.
Aníbal Sabater, partner at Chaffetz Lindsey in New York, discussed the challenges of parallel World Trade Organization and investment-treaty arbitration proceedings. Different parties, drawing on different sources of law, may challenge the same state action, creating the risk of judgments and obligations which at least appear inconsistent.
Sabater noted that arbitral tribunals have rarely conflicted openly with WTO rulings on related subject-matter, but, since Occidental v Ecuador in 2004, investment tribunals have become more circumspect in applying WTO interpretations of “like product” to decide “equal treatment” issued under investment treaties.
Cooley partner Mark Beckett addressed the intersection of investment treaties with international law in the fields of health, environment, and human rights, noting arbitral tribunals’ reluctance to accept defences based on these other international law obligations but their increasing integration into “new generation” investment treaties.
Beckett highlighted the differing approaches of tribunals in Copper Mesa v Ecuador, Philip Morris v Uruguay and Urbaser v Argentina, to show the different ways investors might be bound by international law, though not traditionally thought to be its “subjects.”
Coralie Darrigade, partner at Shearman & Sterling in Paris, looked at the consideration of national law by arbitral tribunals in investor-state disputes, laying out several times when this happens.
Determining what is covered by the investment treaty will often require reference to national law, while the protection of eligible investments is determined by the treaty itself, Darrigade said. For example, the nationality of investors, the rights which constitute the investment, and the legality of the investment, are all questions of national law.
Ethical code roulette
A further panel asked how arbitral tribunals can consistently apply ethical rules, if at all. Alejandro Garro, adjunct professor at Columbia Law School and senior research scholar at the Parker School of Foreign and Comparative Law, moderated a lively discussion of the practical and theoretical challenges of choosing which rules to apply: international standards, the national rules of the seat of arbitration, or, controversially, no binding rules at all.
Diane Desierto, professor of business law at the University of Hawaii at Mānoa considered how an arbitral tribunal should determine which ethical rules apply — through “comparativism,” or considering different sources of potentially applicable law, or by replying on existing codification efforts?
After reviewing three seminal cases involving allegations of ethical violations by counsel, she observed that both approaches have pitfalls. Tribunals must be transparent in their selection of applicable ethical rules and counsel ought be cautious in determining which to follow.
Catherine Rogers, professor at Penn State Law and at Queen Mary, University of London, highlighted the difficulty of following the rules of state bar associations such as that of Washington, DC, which makes applicable to counsel the local rules of the jurisdiction “where the tribunal sits.”
She previewed the American Law Institute’s ongoing work on the Restatement of the US law on international commercial arbitration. This interprets the UNCITRAL model rules’ choice-of-law provision as allowing a tribunal to impose international standards and would allow arbitral tribunals to rule directly on counsel conduct issues that arise in international arbitral proceedings.
Addressing the perception that party-appointed arbitrators are inherently conflicted, Tai-Heng Cheng, chair of Quinn Emanuel Urquhart & Sullivan’s international arbitration group in New York, argued for the “libertarian imperative” that parties should be free to constitute tribunals with party-appointed arbitrators and a chair selected by the two co-arbitrators, if they believed that such a tribunal would best advance their interests.
Cheng explained that arbitrator disclosures do not guarantee the platonic ideal of bias-free adjudication because they cannot possibly identify the entire universe of actual or perceived bias. However, they do ensure that certain red lines are not crossed. In this way, the system of party-appointed arbitrators balances party autonomy in designing the structure of an arbitration with the need for arbitral awards to be “sufficiently legitimate” so that they are enforceable in national courts.
Charles Adeyemi Candide-Johnson, president of the Lagos Court of Arbitration, spoke of the importance of propogating rules and best practice in rapidly growing legal markets like Nigeria. He described his institution’s mandate and noted cases of misconduct and corruption he has encountered, both in his jurisdiction and in arbitrations seated abroad. Candide-Johnnson also stressed the need to regulate ethics relating to arbitration in Nigeria in a way that is recognisable and admissible across the world.
Follow the money to a conflict of interests
In a keynote address, Carolyn Lamm, partner at White & Case in Washington, DC, discussed tensions in the evolving legal and regulatory framework around third-party funding of international arbitration. This is increasingly popular and accepted in jurisdictions around the world, creating ethical and practical challenges for clients, counsel and arbitrators, she said.
One concern is that funding gives rise to myriad conflicts of interest, which are frequently undiscoverable without robust disclosure requirements, Lamm said. She pointed out the inconsistent standards set out in the International Bar Association Guidelines, the rules of arbitral institutions and new investment treaties like the EU-Canada Comprehensive Economic and Trade Agreement [CETA].
Lamm also discussed the variety of ethical and legal risks involved in securing funding. Involvement of funders has the potential to undermine counsel’s ability to direct a case in the best interests of the client, she said. Meanwhile, the sharing of privileged and confidential information with funders could result in it losing privilege, becoming discoverable, or becoming public in future disputes with the funder.
This year’s Columbia Arbitration Day took place on March 3 and was chaired by Columbia Law School students Paris Aboro, Michael Lemanski, Arianna Rosato, Mauricio Salguiero, Seri Takahashi and Logan Wright. Now in its eighth year, the day drew 200 participants.
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Posted on May 5, 2017