Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law Volume 2: International Arbitration. The Transnationalisation of Dispute Resolution 9781509949236, 9781509949267, 9781509949250

Volume 2 of this new edition covers the transnationalisation of dispute resolution, especially arbitration, and contains

205 28 4MB

English Pages [359] Year 2022

Table of contents :
Preface to the Eighth Edition
Contents
Table of Cases
Table of Legislation and Related Documents
Part I: International Commercial Arbitration
1.1. Introduction
1.2. The Process of Legal Transnationalisation. The Operation of the Modern Lex Mercatoria as Lex Arbitri. Transnational and Domestic Public Policy Considerations in the International Arbitral Process
1.3. International Arbitration: Initial Steps and Complications
1.4. The Conduct of the Proceedings and the Award
1.5. The Role of National Courts
1.6. The New York Convention. International Recognition and Enforcement of the Awards
Part II: International Financial Arbitration
2.1. Introduction
2.2. Building Blocks of Private Law in International Finance. The Applicable Law and its Transnationalisation
2.3. Financial Arbitration, Public Policy Concerning Financial Instruments, Regulation, and Remedies
2.4. Complications in International Financial Arbitrations
2.5. The Emergence of P.R.I.M.E.
Part III: Foreign Investment Arbitration
3.1. Introduction
3.2. The Basic Foreign Investment Protections. Direct Foreign Investors' Claims and the Role of Investment Arbitration
3.3. The Applicable Law in Foreign Investments
3.4. Proprietary and Non-proprietary Takings
3.5. Dispute Resolution and the Transatlantic Trade and Investment Partnership (TTIP). The EU 2014 Questionnaire, Subsequent Action, and the EU/Canada Treaty (CETA)
Part IV: The Reasoning of International Arbitrators
4.1. Introduction
4.2. A Proper Perspective
4.3. Conclusions
Index

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DALHUISEN ON TRANSNATIONAL AND COMPARATIVE COMMERCIAL, FINANCIAL AND TRADE LAW VOLUME 2 Volume 2 of this new edition covers the transnationalisation of dispute resolution, especially arbitration, and contains a critical analysis of the main challenges to its success, continuing credibility, and effectiveness. The volume distinguishes between commercial, financial, and foreign investment arbitration and concentrates on the status, role, and reasoning of international arbitrators, their limited powers especially in matters of public policy and in property matters, the threat of judicialisation, and the need to connect with mediation and a settlement ethos. The complete set in this magisterial work is made up of 6 volumes. Used independently, each volume allows the reader to delve into a particular topic. Alternatively, all volumes can be read together for a comprehensive overview of transnational comparative commercial, financial and trade law.

ii

Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law Volume 2 International Arbitration. The Transnationalisation of Dispute Resolution Eighth Edition

Jan H Dalhuisen Emeritus Professor of Law King’s College London Chair in Transnational Financial Law Catholic University Lisbon Visiting Professor UC Berkeley Corresponding Member Royal Netherlands Academy of Arts and Sciences Member New York Bar Former ICSID Arbitrator and FCIArb

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2022 Copyright © Jan H Dalhuisen, 2022 Jan H Dalhuisen has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2022. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. ISBN: HB: 978-1-50994-923-6 ePDF: 978-1-50994-925-0 ePub: 978-1-50994-924-3 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

To my Teachers and my Students

vi

PREFACE TO THE EIGHTH EDITION This second Volume in this series deals with international arbitration. It is under considerable pressure. First, its international status is still contested by many and the significance and meaning of this status are often poorly understood. Probably more important, extreme judicialisation has made international arbitration a copy of court proceedings, which has caused it to lose its connection with mediation and settlement proceedings, and made it a substantial billing exercise for the legal profession. In finance, it has problems with property issues and preferences affecting third parties not party to the arbitration and with the status of such awards in local bankruptcy proceedings when it is likely to matter most. Arbitrators also struggle with the demands of regulation and public policy, which in foreign investment has lost them the confidence of the public in the US and the EU. It is submitted that what is needed is supervision and support of an international court, not as an appeal function but as an instance from which in appropriate cases arbitrators can ask preliminary opinions to support their credibility and legitimacy. This Volume presents a critical analysis of, and deals with, this form of dispute resolution from the perspective of the policies and choices that lie behind, promote, or impede it. In doing so it distinguishes between commercial, financial, and foreign investment arbitration and discusses their different objectives, perspectives, confines, and challenges in the international business environment. In this eighth edition of this title, now in six Volumes, international arbitration is a separate Volume and I am grateful to the Publishers. Like the other Volumes, it needs further development and younger academics or practitioners with an academic interest in the subject are invited to join in the next edition by writing to the author.

Jan H Dalhuisen Lisbon, Portugal December 2021 [email protected]

viii

CONTENTS Preface to the Eighth Edition Table of Cases Table of Legislation and Related Documents

vii xv xxv

Part I International Commercial Arbitration 1.1. Introduction 1.1.1. The Problems and Challenges of Dispute Resolution. Finality, Speed, Cost, Efficiency and Confidentiality. Structural Issues 1.1.2. Arbitration and its Nature. Difference with Ordinary Court Proceedings 1.1.3. The Importance of Defining the Dispute in Arbitrations and the Special Role of the Pleadings of the Parties and their Presentation of the Evidence. Law as Fact 1.1.4. Other Forms of Dispute Resolution: Expert Decisions, Amiable Compositeurs, Shortened Proceedings, Mediation and ADR 1.1.5. Institutional and Ad Hoc Arbitrations 1.1.6. The International Dimension 1.1.7. When is a Dispute an International Commercial Dispute? The Operation of the International Commercial and Financial Legal Order. International Commercial Arbitrations and the Difference from Domestic Commercial Arbitration 1.1.8. The Notion of the Seat in International Arbitrations and the Delocalisation Issue. Self-Styled Autonomy of International Arbitrators? 1.1.9. The Major Consequences of Delocalisation. Attitude of the New York Convention and the Model Law. The View of Article 16(4) of the LCIA Rules (2014 and 2020) 1.1.10. Powers, Status and Activity of International Commercial Arbitrators. Areas of Arbitral Autonomy. The Applicable Arbitral Law. Problems with Quantum 1.1.11. Is International Arbitration Judicial or Contractual? Is it Adversarial or Inquisitive? Jurisprudence Constante, Consistency and Precedent? 1.1.12. Legitimacy, Transparency and Accountability. Independence and Impartiality. Supervision of International Commercial Arbitration, and the Operation of an International Commercial Court 1.1.13. International Moot Competitions, Some Modern Literature on the Concept and Meaning of International Arbitration 1.1.14. Three Time Bombs under International Arbitration. Where is it Going?

1 1 7 12 14 16 18

20 23 26 31 34 39 43 47

x Contents 1.2. The Process of Legal Transnationalisation. The Operation of the Modern Lex Mercatoria as Lex Arbitri. Transnational and Domestic Public Policy Considerations in the International Arbitral Process 54 1.2.1. The Transnationalities of International Arbitration. The Separation of the Arbitration Clause, its Meaning, and Subsequent Application of the Modern Lex Mercatoria as the Law Applicable to the Arbitral Process. The Residual Role of the Arbitration Law of the Seat 54 1.2.2. The Transnationalisation of the Applicable Substantive Law. The Modern Lex Mercatoria as the Proper Substantive Law. Differences between International Arbitrations and Proceedings in the Ordinary Courts? 58 1.2.3. The Operation of the Public Interest at the Transnational Level. International Minimum Standards and the Relationship to Local Policies and Values 62 1.2.4. Public Order and Parallel Legal Orders. The Situation in the EU 64 1.2.5. Ius Curia Novit? Do International Arbitrators Know the Law and Can they Apply it Autonomously? 67 1.2.6. Autonomous Private Law Formation Trends in Transnational Law 71 1.2.7. Principles of Transnational Contract and Movable Property Law 73 1.3. International Arbitration: Initial Steps and Complications 75 1.3.1. Introduction. Submission and Arbitration Agreements. The Requirement of a Writing. What Does the Arbitration Agreement Cover? Indirect Parties, Consolidation and Joinder 75 1.3.2. When is there a Dispute? Statute of Limitations 79 1.3.3. Ousting of the Ordinary Courts. Article II New York Convention 81 1.3.4. Interface of International Arbitration and the Ordinary Courts in the EU under Regulation 44/2001 (Brussels I) and its 2012 Amendments 82 1.3.5. Establishment of the Arbitral Tribunal. Selecting Arbitrators, Qualities, the Issue of Diversity. Compatibility, Arbitrator Fees, and Truncated Tribunals 83 1.3.6. Challenges of Arbitrators 87 1.3.7. The Jurisdiction of International Arbitrators and Challenges to Jurisdiction 88 1.3.8. The Issue of Arbitrability in International Arbitrations 90 1.3.9. The Issue of Admissibility in International Arbitrations 91 1.3.10. Other Early Incidents: Preliminary Issues and Protections 91 1.3.11. Procedural Order No 1 93 1.3.12. Terms of Reference? 94 1.3.13. The Status of Early Decisions 94 1.4. The Conduct of the Proceedings and the Award 95 1.4.1. Pleadings and Discovery 95 1.4.2. Witnesses and Hearing. Burden of Proof and Decision-Taking 97 1.4.3. The Conduct of Multi-party Arbitrations. Consolidation and Class Arbitrations?99 1.4.4. The Award 100 1.4.5. Effect of the Award, the Notion of Res Judiciata, and the Potential Impact on Third Parties and the Public 102

Contents xi 1.5. The Role of National Courts 1.5.1. Support 1.5.2. Supervision and Challenges 1.6. The New York Convention. International Recognition and Enforcement of the Awards 1.6.1. The Coverage of the New York Convention 1.6.2. Recognition and Enforcement. Article V of the New York Convention

103 103 106 107 107 109

Part II International Financial Arbitration 2.1. Introduction 115 2.1.1. Special Problems in International Financial Arbitrations 115 2.1.2. Special Arbitration Needs in International Finance. The Powers of Arbitrators and the Status of Contractual Choice of Law Clauses 118 2.2. Building Blocks of Private Law in International Finance. The Applicable Law and its Transnationalisation 123 2.2.1. Assignments and Securitisations 123 2.2.2. Set-off and Netting 127 2.2.3. Secured Transactions, Finance Sales (Repos) and Related Structures 133 2.2.4. Investment Securities and their Modern Holding in Electronic Entitlement Systems 142 2.2.5. Segregation, Ranking and Constructive Trusts 146 2.2.6. Transactional and Payment Finality 149 2.2.7. How Do We Transfer an International Commercial and Related Cash-Flow and How do We Rank Proprietary Interest Holders Transnationally?153 2.3. Financial Arbitration, Public Policy Concerning Financial Instruments, Regulation, and Remedies 154 2.3.1. Public Interest in Financial Products and Services 154 2.3.2. Conflicts of Public Policy. The Jurisdiction to Prescribe, International Minimum Standards and the Spokesperson’s Function in Respect of the Public Interest. A Role for Arbitrators? What are their Powers? 161 2.3.3. The Impact of Insolvency Laws 165 2.3.4. International Financial Arbitrations, Proprietary Matters and Issues of Ranking 170 2.3.5. International Financial Arbitration and Financial Regulation 173 2.3.6. International Financial Arbitration, Public Order Requirements and Fundamental Principles in International Finance 174 2.3.7. The Autonomy of International Financial Arbitrators 176 2.4. Complications in International Financial Arbitrations 178 2.4.1. The Reasoning of International Financial Arbitrators 178 2.4.2. Is There a Need for New Treaty Law and for Supervision of International Financial Arbitrations by an International Commercial Court to Stabilise International Financial Arbitration and Enhance its Credibility?180 2.4.3. International Financial Arbitration and the Position of Ordinary Judges Compared. The Lehman Cases 181

xii Contents 2.5. The Emergence of P.R.I.M.E. 2.5.1. Special Needs of International Financial Arbitration. The Emergence of P.R.I.M.E. 2.5.2. The Applicable Law Clause in the P.R.I.M.E. Rules 2.5.3. P.R.I.M.E. Preliminary Issues 2.5.4. P.R.I.M.E. Status, Powers and Operation of Arbitrators. Arbitrability 2.5.5. P.R.I.M.E. Procedural Issues 2.5.6. P.R.I.M.E. Contractual Issues 2.5.7. P.R.I.M.E. Proprietary Issues 2.5.8. P.R.I.M.E. Regulatory Issues 2.5.9. P.R.I.M.E. Taxation Issues 2.5.10. P.R.I.M.E. Bankruptcy Issues 2.5.11. P.R.I.M.E. Applicable Law Issues and Parties’ Choice of Law 2.5.12. P.R.I.M.E. Legitimacy of the Award. Supervision, Recognition and Enforcement Issues

185 185 187 188 189 190 190 191 191 191 191 192 192

Part III Foreign Investment Arbitration 3.1. Introduction 3.1.1. Proceedings Against States 3.1.2. Foreign Investments and their Protection. Host Country Investment Statutes and Investment Agreements. The Calvo Doctrine. The Washington Convention (ICSID) and BITs 3.1.3. Bilateral Investment Treaties (BITs). Extra Protections 3.1.4. The Concept of Foreign Investment and Foreign Investor. Treaty Arbitration and Jurisdiction 3.1.5. The Complications Deriving from the Nature of the International Flows, the Overlap between Trade and Foreign Investments Laws. Different Dispute Resolution Technique 3.1.6. Status and Powers of Foreign Investment Arbitrators 3.1.7. Initial Steps and Conduct of Foreign Investment Arbitrations 3.1.8. The Supervision of Foreign Investment Arbitration. Annulment Proceedings Compared 3.2. The Basic Foreign Investment Protections. Direct Foreign Investors’ Claims and the Role of Investment Arbitration 3.2.1. Investment Agreements and Treaty Law Protections 3.2.2. Concurrent Investment Agreement and BIT Arbitration Jurisdiction. Umbrella Clauses 3.2.3. The Issue of Compensation 3.3. The Applicable Law in Foreign Investments 3.3.1. Introduction 3.3.2. The ICSID and NAFTA Approaches Distinguished 3.3.3. How Far Does a Choice of Law by the Parties Reach? Statute of Limitations 3.3.4. The Characterisation Issue: Contract, Administrative Agreements and Treaties. The Umbrella Clause, its Meaning and Effect 3.3.5. Public Law and Private Law 3.3.6. International Law and a Party Choice of Law

195 195 198 203 205 207 209 211 213 214 214 218 218 219 219 220 222 224 226 228

Contents xiii 3.3.7. The Applicable Law in the Absence of an Investment or Arbitration Agreement230 3.3.8. Conclusion 231 3.4. Proprietary and Non-proprietary Takings 232 3.4.1. Introduction 232 3.4.2. Takings and Expropriation 233 3.4.3. Public Welfare and Non-expropriatory Takings 236 3.4.4. Incidental Government Takings as Non-expropriatory Takings 239 3.4.5. Lawful and Unlawful Expropriations. Non-expropriatory Takings and the Meaning of the F&E Clause 241 3.4.6. Remedies 244 3.4.7. The Public Interest Discounted in the Quantum of the Damages? 247 3.4.8. Conclusion 247 3.5. Dispute Resolution and the Transatlantic Trade and Investment Partnership (TTIP). The EU 2014 Questionnaire, Subsequent Action, and the EU/Canada Treaty (CETA) 248 3.5.1. Introduction 248 3.5.2. The Dispute Resolution Options. Investment State Dispute Settlement (ISDS) 250 3.5.3. The EU Questionnaire. What are Investments? 256 3.5.4. What Protections are Justified and How do they Relate to Evolving Public Interest Concerns of Host Governments? 256 3.5.5. Investment Arbitration and the Suitability of Investor State Dispute Settlement (ISDS) through Arbitration 259 3.5.6. The EU Concept Paper of May 2015, Overall Assessment 261 3.5.7. The November 2015 EU Proposal for Investment Protection and Resolution of Investment Disputes. An International Court. 261 3.5.8. Foreign Investment Protection and Dispute Resolution under the December 2014 Canada-EU Comprehensive Economic and Trade Agreement (CETA) and under the 2020 US-Mexico-Canada Agreement (USMCA or ‘New NAFTA’) 263 Part IV The Reasoning of International Arbitrators 4.1. Introduction 4.1.1. The Importance of Legal Reasoning 4.1.2. Formal and Substantive Aspects of Legal Reasoning 4.1.3. Modern Theories on Legal Reasoning 4.1.4. Sources of Law and Interpretation 4.1.5. Sources of Law and the Confining Concept of Codification Thinking in Civil Law 4.1.6. Law as a System? 4.1.7. Normative Interpretation. The Meaning of Good Faith. Consumer Law Influences in the Professional Sphere 4.1.8. Objectivity in Interpretation. The Effect of Public Policy, Public Order, and Values 4.1.9. Sources of Law in Transnational Professional Dealings 4.1.10. The Powers of International Arbitrators

267 267 268 274 275 278 280 283 285 288 292

xiv Contents 4.1.11. The Issue of Consistency and the Meaning of Precedent 4.1.12. Relevance and Materiality of Evidence 4.2. A Proper Perspective 4.2.1. Conclusions So Far 4.2.2. The Situation in Foreign Investment Disputes 4.3. Conclusions

296 298 299 299 303 307

Index311

TABLE OF CASES Australia Esso/BHP v Plowman (1995) 11 Int’l Arb 235�� 7 IATA v Ansett [2005] VSC 113, [2006] VSCA 242, [2008] HCA38��64, 121, 146, 169, 189 Austria Supreme Court, ICC Case No 3131, (1984) IX Yearbook Commercial Arbitration 159�� 59, 292 Belgium Supreme Court, Sart-Tilman [1995–96] RW 1395�� 143 Canada Fiza Developers & Inter-Trade (P) Ltd v Amci (I) (P) Ltd (2009) 17 SCC 796�� 48 Quebec Supreme Court, Case 2008 5903�� 70 European Commission Ioan Micula, Viorel Micula, Sc European Food SA, Sc Starmill SRL and SC Multipack SRL v Romania (I)�� 65 European Court of Human Rights Bosphorus Hava Yollari Turism ve Ticaret Anonim Sirketi v Ireland, 45036/98 (2005) Series A, no 440 para 304�� 66 European Court of Justice Case 62/70 Coditel v Ciné-Vog Films [1980] ECR 881�� 238 Case 33/76 Rewe v Landswirtschaftskammer fur das Saarland [1976] ECR 1989�� 291

xvi Table of Cases Joined Cases 110/78 and 111/78 Van Wesemael [1979] ECR 35�� 238 Case 279/80 Alfred John Webb, Re [1981] ECR 3305�� 238 Case 102/81 Nordsee Deutsche Hochseefisherei GmbH v Reederei Mond Hochseefischerei Nordstern AG [1982] ECR 1095�� 65 Case 205/84 Commission v Germany [1986] ECR 755�� 238 Case C-180/89 Commission v Italy[1991] ECR 709�� 238 Case C-190/89 Marc Rich Co AG v Societa Italiana Impianti PA (1992)�� 83 Case C-353/89 Mediawet [1991] ECR I-4069�� 238 Case C-204/90 Bachman [1992] ECR 249�� 238 Case C-275/92 Schindler [1995] ECR I-1039�� 238 Case C-55/93 Van Schaik [1994] ECR I-4837�� 238 Case C-384/93 Alpine Investments BV v Minister van Financien [1995] ECR I-1141�� 238 Case C-55/94 Reinhard Gebhard v Consiglio dell’Ordine degli Avvocati e Procuratori di Milano [1995] ECR I-4165�� 238 Case C-272/94 Guiot [1996] ECR I-1095�� 238 Case C-3/95 Reisebüro Broede v Gerd Sandker�� 238 Case C-391/95 Van Uden Maritime v Deco-Line (1998)�� 83 Case C-126/97 Eco Swiss v Benetton [1998] ECR I-3055��49, 65, 68, 83, 111, 176, 251 Case C-38/98 Regie nationale des usines Renault SA v Maxicar SpA and Orazio Formento [2000] ECR I-2973�� 65 Case C-144/04 Mangold [2005] ECR I-19981�� 61, 173, 279, 291 Case C-168/05, Elisa Maria Mostaza Clarov Centro Movil Milenium SL [2006] ECR I-10421�� 65 Joined Cases C-402/05P & C-415/05P Kadi and Al Barakaat International Foundation v Council and Commission [2008] ECR I-6315�� 66 Case C-185/07 Allianz SpA and Another v West Tankers Inc (2009)�� 82 Case C-40/08 Asturcom Telecommunicationes SL v Cristina Rodriguez Nogeira [2009] ECR I-9579�� 65 Case C-101/08 Audiolux a.o v Groupe Bruxelles Lambert SA a.o [2009] ECR I-9823�� 61, 173, 279, 291 Case C-115/08 Land Oberoesterreich v Cez [2009] ECR I-10265��61, 291 Case C-196/09 Miles and Others v Ecoles Européennes (2011)�� 65 Case C-604/11 Genil 48 SL and Comercial Hostelera de Grandes Vinos SL v Bankinter SA and Banco Bilbao Vizcaya Argentaria SA, 30 May 2013�� 164 Case C-284/16 Slowakische Republik v Achmea BV��66, 263 Finland Supreme Court, Werfen Austria v Polar Electro, KKO 2008:77�� 70 France Cour de Cassation BKMI and Siemens v Dutco, 7 January 1992 Bull Civ 1 (1992)�� 79 Compania Valenciana de Cementos Portland SA v Primary Coal Inc Cass Civ (1) 22 October 1991, 1991 Bull Civil I, no 275��59, 292 Ste PT Putrabali Adyamulia, Cour de Cass. Civ 1, 29 June 2007��25, 44–45, 171, 293

Table of Cases xvii Ste SNF SAS c/ Ste Cytec Industries BV, Cass Civ, 4 June 2008, Bull Civ I no 162, Gaz Pal No 52�� 65 Paris Court of Appeal 22 October 1983 [1984] Revue de l’Arbitrage 98.l�� 78 30 March 1999�� 118 18 November 2004, SA Thales Air Defense v GIE Euromissile�� 112 3 December 2009, Engel Austria GmbH v Don Trade, RG 08/13618�� 70 25 March 2010, Caribbean Niquel v Overseas Mining, 08/23901�� 177 Societe VRV v Pharmachim, 1998 Rev Arb, 684ff�� 177 Germany Appellate Court Frankfurt am Main 10 May 2012, case 26 SchH 11/10�� 66 BGH 38 BGHZ 254 (1962)�� 129 BGH 11 July 1985 [1985] NJW 2897�� 129 BGH 1 March 2007, III ZB 7/06, 25 ASA Bulletin 2007, 810�� 6 International ADC Affiliate Limited and ADC & ADMC Management Limited v Republic of Hungary (ICSID Case No ARB/03/16)�� 245 ADF Group Inc v USA (2003) 18 ICSID Review�� 243 AES Corporation and Tau Power v Republic of Kazakhstan, ICSID Case No ARB/10/16 (2013)�� 223 AES Summit Generation Ltd & AES-Tisza Eromii Kft v Republic of Hungary, ICSID Case No ARB/07/22 (23 September 2010)�� 66–67, 239 AES v Argentine Republic, ICSID Case No ARB/02/17�� 306 Alan Craig v Ministry of Energy of Iran ICSID Case No ARB/98/4 (2000)�� 223 Albert Jan Ooostergetel and Theodora Laurentius v the Slovak Republic, UNCITRAL Case of April 23 2012�� 69 Alex Genin, Eastern Credit Ltd, Inc v Republic of Estonia, Award ARB/99/02 (ICSID)�� 228 Amoco International Finance Corp v Government of the Islamic Republic of Iran [1987–1988] Award 310-56-3 and 27 ILM 1314 (Iran-US CTR)�� 235 Antoine Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government of Ghana [1989] Award on Jurisdiction and Liability of 27 October 1989��216 Aroa Mines (Ltd) case on merits, 9 RIAA, 402 (1903)��11, 52, 197 Asia Corporation and others v Republic of Indonesia Arb/81/1 Resubmission (Amco II)�� 305 Asian Agricultural Products Ltd v Republic of Sri Lanka [1990] Award Case ARB/87/3 (ICSID)�� 219 Autopista Concesionada de Venezuela, CA v Bolivarian Republic of Venez [2003] Award, Case ARB/00/5 (ICSID)�� 219 Azurix Corp v Argentina [2006] Case ARB/01/12 67 (ICSID)��216, 219, 246–47, 304 Barcelona Traction Case (1970) ICJ Rep 3�� 163 Bayindir Insaat Turizm Ticaret Ve Sanayi AS v Islamic Republic of Pakistan, ICSID Case No ARB/03/29, Decision on Jurisdiction 14 Nov 2005�� 199 BG Group Plc v Republic of Argentina [2007] Final Award paras 89–97 (UNCITRAL)�� 228

xviii Table of Cases Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania [2007] 464 Case ARB/05/22 (ICSID)�� 234 BP Exploration Company (Libya) Ltd v Government of the Libyan Arab Republic [1979] 53 ILR 297 (Trib Arb)�� 201, 224, 232, 245 Bureau Veritas; Inspection, Valuation, and Control, BIVAC BV v Republic of Paraguay, ICSID Case No ARB/07/9�� 306 Burlington Resources Inc v Republic of Ecuador, ICSID Case No ARB708/5 of Dec. 2012 (no 179)��69, 215, 240 Canadian Cattleman for Fair Trade v USA, UNCITRAL Award on Jurisdiction (June 28 2008) No 144�� 205 Caratube International Oil Company v Republic of Kazakhstan ICSID Case No ARB/13/13 (2017), 114�� 223 Cargill Inc v United States of Mexico, ICSID Case no ARB(AF)/05/02 (Sept 18 2009)��205, 208 Certain Phosphate Lands in Nauru (Nauru v Australia), Preliminary Objections, Judgment ICJ Reports 1992, 253�� 223 Ceskoslovenska Obchodni Banka AS v The Slovak Republic, ICSID Case No ARB/97/4, IIC 49 (1999)�� 207 Chemtura v Canada, UNCITRAL Award August 2 2010�� 235 Chevron and Texaco Petroleum Company v Republic of Ecuador, UNCITRAL PCA Case No 34877, Interim, Award Dec. 1 2008, 179�� 226 CMS v Argentina [2005] (ICSID)�� 219, 246, 253 Compania de Aguas Aconquiija SA & Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/03, Award July 3 2002�� 199 Compania de Aguas Aconquiija SA & Vivendi Universal v Argentina (Decision on the Challenge to the President of the Committee), 3 Oct 2001�� 41 Compania de Aguas Aconquiija SA & Vivendi Universal v Argentina, Second Annulment Proceedings 10 Aug 2010��41, 178 Compañía de Desarrollo Santa Elena SA v Costa Rica [2000] Award 39 ILM 317 para 64 (ICSID)��219, 237 Czech Republic BV (the Netherlands) v Czech Republic Partial [2001] IIC 61��199, 243 Daimler Financial Services AG v Argentine Republic, ICSID Case No ARB/05/1��69, 306 Desert Line Projects LLC v The Republic of Yemen, ICSID Case No ARB/05/17, Award Feb 6 2008��219, 226 DOW Chemical France v ISOVER Saint Gobain, ICC 4131/1982, (1983) 110 Journal du Droit International 899�� 78 Duke Energy Electroquil Partners v Republic of Ecuador [2008] Award Case 04/19 (ICSID)�� 219 Eastern Sugar BV v Czech Republic, Stockholm Chamber of Commerce no 088/2004 (2007)��65–66 EDF International v Argentine republic, ICSID Case No ARB/03/23�� 306 Emilio Agustin Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, IIC 85 (2000)�� 217 Enron Corp & Ponderosa Assets, LP v Argentina Republic [2007] Award Case ARB/01/3 paras 206–09 (ICSID)�� 219 Enron Creditors Recovery Corp v Argentine Republic, Decision on Application for Annulment, ICSID Case No ARB/01/3, IIC 441 (2010)�� 222 Enron v Argentina, ICSID Case No ARB/01/3, IIC 92 (2004)�� 217 Ethyl Corporation v Canada [1999] 38 ILM 708�� 246 Eureko BV v Slovak Republic, PCA Case no 2008-13�� 66–67, 238 Federal Republic v Iceland of July 25 1974�� 69

Table of Cases xix France v USA, ICJ, (1952) Case Concerning Rights of Nationals of the United States of America in Morocco�� 204 Franck Charles Arif v Republic of Moldova, ICSID Case No ARB/11/23, IIC 585 (2013)�� 219 GAMI Investments, Incorporated v Mexico Final Award, IIC 109 (2004), 15 November 2004, Ad Hoc Tribunal (UNCITRAL)�� 216 Gavazzi v Romania ICSID Case No ARB/12/25 Decision on Jurisdiction (2015), 52�� 223 Generation Ukraine, Inc v Ukraine [2005] Award Case ARB/00/9 44 ILM 404 (ICSID)��215, 242 Glamis Gold Ltd v United States of America [2009] NAFTA/UNCITRAL Award�� 234, 242–43, 252, 269, 280, 306 Government of Kuwait v American Independent Oil Company (Aminoil) [1984] Award of 24 March 1982 66 ILR 518 and 21 ILM 976��200, 224–25, 228, 232 Hilmarton Ltd v Omnium de Traitement et de Valorisation (1997) XXII Yearbook of Commercial Arbitration 696��45, 107 Himpura California Energy Ltd v PT (Perrsero) Perrusahaan Listruik Negara, Arbt’l Award1999 (2000) XXV Yearbook of Commercial Arbitration�� 69 Himpurna v Indonesia, TDM 2 (2004)�� 106 ICC Case 1110 (1994) 10 Arbitration International 286�� 69 Industria Nacional de Alimentos SA (Lucchetti) v the Republic of Peru, ICSID Case No ARB/03/04, Decision on Annulment, 5 September 2007�� 304 Lanco v Argentina, ICSID Case No ARB/97/6, IIC 148 (1998)�� 218 Lemire v Ukraine ICSID Case No ARB/06/18, Jan 14 2010 no 263; earlier ICSID Case No ARB/01/3, May 22 2007, nos 154, 279�� 48 Lena Goldfields v USSR 1930�� 27 LESI SpA et ASTALDI Spa v People’s Democratic Republic of Algeria, ICSID Case No ARB/05/3, IIC 205 (2001)�� 206 LFH Neer and Pauline Neer (USA) v United Mexican States [1926] 4 RIAA 60 21 AJIL (1927) 555 (US–Mexico General Claims Commission)�� 243 LG&E v Argentina [2006] Award on Damages Case ARB/02/1(ICSID)��199, 219, 228, 244–46 Maritime International Nominees Establishment v Republico of Guinea [1989] Decision on Annulment Case ARB/84/4 (ICSID)�� 219 Marvin Roy Feldman Karpa (CEMSA) v United Mexican States [2003] Case ARB (AF) 99/1, 42 ILM 625 (ICSID)�� 237 Merrill & Ring Forestry LP v Government of Canada, ICSID Administered Case, 31 March 2010�� 86, 242–43, 308 Metal-Tech Ltd v Republic of Uzbekistan ICSID Case No ARB/10/3, Award (4 October 2013)�� 50 Metal-Tech Ltd v Uzbekistan, ICSID Case No ARB/10/3, 4 October 2013�� 69 Metalclad Corporation v Mexico [2001] Case ARB(AF)/97/1 40 ILM 36 (ICSID)��237, 242, 246 Methanex Corp v United States of America [2005] Award 44 ILM 1345�� 216, 236–37, 242–43, 246, 306 Micula v Romania, ICSID Case No ARB/05/20, Award of 11 December 2013�� 67 Middle East Cement Shipping and Handling Co v Egypt [2002] Case ARB/99/6�� 245 Mihaly International Corporation v Sri Lanka, ICSID Case No ARB/00/2, IIC 170 (2002)�� 207 MINE v Guinea, ICSID Case N° ARB/84/4 Decision on Annulment, 22 December 1989�� 180, 302, 305 Mobil Oil Iran, Inc v Government of the Islamic Republic of Iran [1987] Award 311-74/76/81/150-3 (Iran-US CTR)�� 235

xx Table of Cases Mohsen Asgari Nazari v Islamic Republic of Iran (24 August 1994)�� 303 MTD v Chile [2004] (ICSID)��219, 246 Nicaragua v US (Merits) para. 29 [1986] ICJ Rep. 24��70, 180, 277 Norsolor (Pabalk Ticaret Sirketi (Turkey) v Ugilor/Norsolor SA, ICC Case 3131 26 October 1979(1984) IX Yearbook Commercial Arbitration 109��59, 292 Panevezys-Saldutiskis Railway (Estonia v Lithuania) (1939) PCIJ Reports Series A/B 76�� 196 Patrick Mitchell v Democratic Republic of the Congo, ICSID Case No ARB/99/7, IIOC172 (2006)��206, 216 Petroleum Development (Trucial Coast) Ltd and the Sheikh of Abu Dhabi (Award in the Matter of an Arbitration between) (1952) 1 Int’l & Comp LQ 247, 18 ILR 144 (1951)�� 222 Pope & Talbot Inc. v Canada [2000] Interim Award 122 ILR 316 s 102 (UNCITRAL)�� 216, 234, 243 Quiborax SA and Non Metalic Minerals SA v Plurinational State of Bolivia ICSID Case No ARB/06/2 of Sept 16 2015 (no 92)�� 69 Ronald S Lauder v The Czech Republic, UNCITRAL Rules, IIC 205 (2001)�� 217 Saba Fakes v Turkey ICSID Case No ARB/07/20 (2010)�� 205 Saipem SpA v The People’s Republic of Bangladesh, ICSID Case No ARB/05/07, Decision on Jurisdiction March 21 2007�� 226 Salini Costruttori SpA and Italstade SpA v Kingdom of Morocco, ICSID Case No ARB/00/4, Award July 31 2001��199, 205 Saluka Investments BV v Czech Republic, UNCITRAL Rules Partial Award, IIC 210 (2006)�� 207, 235, 239, 242 Saudi Arabia v Arabian Am Oil Co (ARAMCO) 27 ILR 117, 164 (Arb Trib 1963)�� 200–1, 224 SD Myers v Canada [2000] (NAFTA)�� 228, 242, 247 Sedco, Inc v National Iranian Oil Co [1985] 248–75 (9 Iran-US CTR)��216, 235 Sedelmayer v Russia, Award of 7 July 1998, Chamber of Commerce Stockholm�� 245 Sempra Energy International [2005] Case ARB/02/16 (ICSID)��216, 218–19, 222, 234 SGS v Pakistan (2003) 42 ILM 1290�� 218 SGS v Philippines, ICSID Case No ARB/02/6, IIC 224 (2004)�� 218, 225–26 Siemens AG v Argentine Republic ic [2007] Award Case ARB/02/08 paras 78–79 (ICSID)�� 228 Suez, Sociedad General de Aguas de Barcelona, SA and Vivendi Universal, SA (formerly Aguas Argentinas, SA, Suez, Sociedad General de Aguas de Barcelona, SA and Vivendi Universal, SA) v The Argentine Republic (II) (2003) ICSID Case No ARB/0�� 216, 253, 306 Tecmed v Mexico [2006] Case ARB (AF)/00/2 10 ICSID Reports 54 para 115��199, 207, 216, 234, 237, 243 Telenor Mobile Communications AS v The Republic of Hungary (2006) Final Award, 13 September 2006, ICSID Case No ARB/04/15��215–16 Texaco Overseas Petroleum Co & Cal Asiatic Oil Co v The Governmentt of the Libyan Arab Republic (1979) 4 YB Com Arb 177��200, 224 Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab Republic [1977] 53 ILR 389�� 201, 232, 245 Tippetts, Abbett, McCarthy, Stratton and TAMS-AFFA Consulting Engineers of Iran v Islamic Republic of Iran [1984] 219–25 (6 Iran-US CTR)�� 216, 234–35 Tokios Tokeless v Ukraine, ICSID Case No ARB/02/18, IIC 258 (2004)�� 207 Too v Greater Modesto Insurance Associates [1989] Award 378 (23 Iran-US CTR)�� 235 Total SA v Argentina, ICSID Case No ARB/04/01 (2010)�� 235 TSA Spectrum de Argentina SA v Argentine Republic, ICSID Case No ARB/05/5, IIC 358 (2008)�� 207

Table of Cases xxi UK v Iceland (Merits) [1974] ICJ Rep 9�� 180 Venezuela Holdings et al. v Venezuela, ICSID Case No ARB/07/27 Award 9, 2014�� 235 Vito G Gallo v Government of Canada UNCITRAL, PCA Case No 55798 (2009)�� 40 Vivendi Universal SA v Argentine Republic [2007] Case ARB/97/3��219, 234, 246, 304, 306 Wena Hotels Limited v Egypt, ICSID Case No ARB/98/4, 8 December 2000��69, 219, 223, 228, 245 World Duty Free Co Ltd v Kenya, ICSID Case No ARB/00/7, 4 October 2006�� 69 World Duty Free Company Ltd v The Republic of Kenya ICSID Case No ARB/00/7, 148–55, Award (4 October 2006)�� 50 World Duty Free v Kenya ICSID Cao ARB/00/7, 4 October 2006, nos 139 and 157�� 56 Netherlands HR 19 May 1989 [1990] NJ 745�� 132 HR 19 January 2007 (PontMeyer), NJ 575 (2007)�� 284 HR 29 June 2007 (Derksen/Homburg), NJ 576 (2007)�� 284 HR 9 April 2009 (UPC/Land), JOR 179 (2010)�� 284 New Zealand Gallway Cook Allen v Carr [2013] NZCA 11�� 6 Russian Federation Ansell S.A. v OOO MedBusinessService-2000 Highest Arbitration Court Ruling No. VAS8786/10, 3 August 2010�� 112 Spain Audiencia Provincial de Barcelona, Seccion 15a, Auto de 29 Abr 2009, Rec. 708/2008�� 166 Switzerland Federal Supreme Court Case 4A-254/2010�� 70 Case 4A-400/2008�� 70 Dame Y v Z, [2008] ASA Bulletin, 742ff�� 177 KS AG v CC SA, XX Yearbook of Commercial Arbitration 1995, 762�� 112 United Kingdom ABB AG v Hochtief Airport GmbH, Athens International Airport SA, [2006] 2 Lloyds Rep. 1�� 177

xxii Table of Cases Abu Dhabi Gas Liquefication Co Ltd d v Eastern Bechtel Co [1982] 2 Lloyd’s Rep 425�� 100 Ali Shipping Corporation v Shipyard Trogir [1998] 1 WLR 314�� 6 Arenson v Arenson AC 405 (1977)�� 35 Balearis, The [1993] 1 Lloyd’s Rep 215�� 14 Bechuanaland Exploration Co v London Trading Bank [1898] 2 QBD 658�� 143 Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38�� 183 Bloom v Pensions Regulator [2011] EWCA Civ 1124�� 183 Bloom v Pensions Regulator [2013] UKSC 52�� 183 British Airways Board v Laker Airways Ltd [1985] 3 WLR 413, [1985] AC 58 (HL)�� 101 British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390�� 121, 131, 169, 189 Chrysalis, The [1983] 2 All ER 658�� 14 Compania de Neviera Nedelka SA v Tradex Internacional SA, The Tres Flores [1974] QB 264�� 150 Deutsche Schachtbau- und Tiefbohrgesellschaft mbH v Ras al-Khaimah National Oil Co [1987] 3 WLR 1023��37, 59, 62, 118, 270, 292 Dolling-Baker v Merret [1990] 1 WLR 1205�� 6 Eagle Star v Yuval [1978] 1 Lloyd’s Rep 357��59, 292 Fiona Trust & Holding Corp v Yuri Privalov [2007] UKHL 40��28, 77 Fondazione Enasarco v Lehman Brothers Finance SA [2015] EWHC 1307 (Ch)�� 185 Halpern v Halpern [2007] EWCA Civ 291�� 59 Hassneh Insurance v Mew [1993] 2 Lloyds Rep 243�� 6 Heyman and Another v Darwins Ltd [1942] AC�� 27 Homburg Houtimport BV v Agrosin Private Ltd, The Starsin [2003] 1 Lloyd’s Rep 571�� 150 Interbulk Ltd v Aiden Shipping Co Ltd (The Vimeira), [1984] 2 Lloyd’s Rep, 66�� 177 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433�� 284 K/S Norjarl A/S v Hyundai Heavy Industries Co Ltd [1991] 1 Lloyd’s Rep 260�� 87 Lehman Brothers International (Europe), Re [2009] EWCA Civ 1161�� 183 Lehman Brothers International (Europe), Re [2009] EWHC 2545 (Ch)�� 183 Lehman Brothers International (Europe), Re [2010] EWCA Civ 917�� 183 Lehman Brothers International (Europe), Re [2011] EWCA Civ 1544�� 183 Lehman Brothers International (Europe), Re [2012] EWHC 2997 (Ch)�� 183 Lehman Brothers International (Europe), Re [2012] UKSC 6�� 183 Lehman Brothers International (Europe) In Administration) aka Pierson v Lehman Brothers Finance SA, Re EWHC [2010] 2914 (Ch)�� 138 Lehman Brothers International (Europe) v Lehman Brothers Finance SA [2013] EWCA Civ 188�� 183 Lomas & Ors v JFB Firth Rixson Inc & Others [2012] EWCA Civ 419��182–83 Maritime Insurance Co Ltd v Assecuranz-Union Von 1865 [1935] 52 L1 LR 16��59, 292 Orion v Belfort [1962] 2 Lloyd’s Rep 251 (QB Com Ct)��59, 292 Oxford Shipping Co v Nippon Yusen Kaisha [1984] 3 All ER 835�� 6 Perpetual Trustee Co Ltd, Belmont Park Investments PTY Ltd v BNY Corporate Trustee Services Ltd, Lehman Brothers Special Financing Inc [2009] EWCA Civ 1160�� 183 Syska and another v Vivendi and others [2008] All ER (d) 34�� 168 Three Rivers District Council and Others v Governor and Company of the Bank of England [2000] 2 WLR 1220�� 118 Trustees of Lehman Brothers Pension Scheme v Pensions Regulator [2013] EWCA Civ 751�� 183

Table of Cases xxiii Vallejo v Wheeler [1774] 1 Cowp 143 (KB)�� 150 Zahnrad Fabrik Passau GmbH v Terex Ltd 1986 SLT 84�� 133 Zermatt Holdings SA v Nu-Life Upholstery [1985] 2 EGLR 14�� 14 United States Advanced Micro Devices (AMD) v Intel Corp, (1994) 9 Cal.4th 362��32, 177 Austern v Chicago Board Option Exchange 716 F Supp 121 (SDNY 1989)�� 34 Bevill, Breslett and Schulman Asset Management Corporation and SS Cohen v The Savings Building and Loan Co, In the matter of USCA 3rd Cir, 896 Fed Rep 2d, 54(1990)�� 135 Boraks v American Arbitration Association 517 NW 2d 771 (1994)�� 34 Bremen (The) et al v Zapata Off-shore Co 407 US 1 (1972)��63, 165 Chromalloy Airoservices Inc v Arab Republic of Egypt, 937 FSupp 907 (DDC 1996)��45, 107 Cohen v Army Moral Support Fund (In re Bevill, Breslett and Schulman Asset Management Corp) 67 BR 557 (1986)�� 135 Commonwealth Coating Corp v Continental Casualty Co 393 US 145 (1968)�� 40 Corporación Mexicana de Mantenimiento Integral, S de RL de CV v Pemex-Exploración y Producción, No 10 Civ 206 (AKH), 2013 US Dist LEXIS 121951 (SDNY 27 August 2013)�� 107 Daimler AG v Bauman 134 S Ct 746 (2014)�� 112 Daniewicz v Thermo Instrument Systems, 992 SW 2d 713 (Texas 1999)��32, 177 Green Tree Financial Corp v Bazzle 539 US 444 (2003)�� 100, 121, 295 Hall Street v Matell, 552 US 576 (2008)�� 6 Intel Corp v Advanced Micro Devices, Inc, 542 US 214 (2004)�� 105 Jonas v Farmers Bros Co (In re Comark) 145 BR 47, 53 (9th Cir, 1992)�� 135 JSC BTA Bank, Debtor in a Foreign Proceedings, In re, 434 BR 334 (2010)�� 169 Koehler v Bank of Bermuda Ltd 12 NY 3d 533 (2009)�� 112 Lauritzen v Larson 345 US 571 (1953)�� 26 Lombard-Wall, In re 23 BR 165 (1982)�� 135 Lombard Wall Inc v Columbus Bank & Trust Co, No 82-B-11556 Bankr. SDNY 16 Sept 1982�� 135 LTV Steel Co, Inc v US 215 F3d 1275 (2000)�� 156 McCarthy, Kenney & Reidy, PC v First National Bank of Boston 524 NE 2d 390 (Mass 1988)�� 150 Mannington Mills Inc v Congoleum Corp (1979) 595 F2d 1287�� 163 Micula et al v The Government of Romania, N0 15 MISC 107, 2015 WL 4643 180 (SDNY 5 August 2015) United States�� 67 Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc 473 US 614 (1985)�� 49, 65, 111, 165, 251 National Gypsum, In the matter of 118 F3d, 1070 (1997)�� 166 Nebraska Dept of Revenue v Loewenstein 115 SCt 557 (1994)�� 135 Pero’s Steak and Spaghetti House v Lee 90 SW 3d (Tenn 2002)�� 150 Poe v Ulman 367 US 497 (1960)�� 280 Prima Paint Co v Flood Conklin Manufacturing Corp 388 US 395 (1967)�� 27 Scherk v Alberto-Culver Co 417 US 506 (1974)��63, 165 Servotronics Inc v Rolls-Royce cert. granted March 22 2021, Supreme Court Dkt. No. 20-794.�� 105

xxiv Table of Cases Sonatrach (Algeria) v Distrigas Corp 1995 (US District Court Mass), XX Yearbook of Commercial Arbitration 1995, 795�� 112 TermoRio SA ESP et al v Electranta SP, et al, 487 F3d 928, 939 (DC Cir 2007)�� 107 Timberlane Lumber Co v Bank of America (1976) 549 F 2d 597�� 163 United States v Aluminium Company of America (Alcoa) 148 Fed 2d 416 (1945)�� 163 United States v Imperial Chemical Industries (ICI) (1952) 105 F Supp 215�� 163 United Steel Workers of America v Enterprise Wheel Corp 363 US 593 (1960)�� 267 US v Panhandle E. Corp 118 FRD 346, 349–51 (D. Del. 1988)�� 7 Zimmerman v Continental Airlines, Inc 712 F2d 55 (3d Circuit 1983)�� 166

TABLE OF LEGISLATION AND RELATED DOCUMENTS Albania Albania-Lithuania BIT�� 254 Belgium Moniteur Belge 28.934 [1998], Art 30�� 143 China Arbitration Act, Art 19�� 295 European Union Brussels Convention on the Recognition and Enforcement of Judgments in Civil and Commercial Matters, 1968�� 19 Art 16(5)�� 133 Directive 77/780/EEC (First Banking Directive)�� 118 Directive 98/26/EC concerning settlement finality�� 144, 146, 151, 160 Art 3(1) and (2)�� 144 Directive 2002/47/EC on financial collateral arrangements��132, 140–41, 144–45, 160, 183 Art 9�� 145 Directive 2004/39/EC on Markets in Financial Instruments (MiFID I)�� 131, 161, 164, 183, 238, 254 Directive 2011/61/EU on alternative investment fund management (AIFMD)�� 161 Directive 2014/65/EU on Markets in Financial Instruments (MiFID II) Art 16(9)��131–32 Art 16(10)�� 132 Draft Common Frame of Reference (DCFR)��61, 72–73, 122, 138, 140–41, 151, 154, 279, 284 Art I-1:102(3)(c)�� 150 Art II-7:212�� 151 Art II-7:303�� 151 Art III-5:104�� 124 Art III-5:118(2)�� 151 Art IVA-2:101�� 151

xxvi Table of Legislation and Related Documents Art VII-2:101(2)�� 151 Art VII-5:101�� 151 EC Treaty, Art 81�� 68 Proposal for a Regulation concerning a Common European Sales Law (CESL)�� 72 Regulation (EC) 1346/2000 on bankruptcy�� 166, 168, 182, 192 Art 2(g)�� 170 Regulation (EC) 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (Brussels I)��8, 18–19, 109, 168, 182 Art 1(2)�� 82 Art 22(5)�� 133 Regulation (EC) 2201/2003 on the Recognition and Enforcement of Judgments in Civil and Commercial matters, 2008 (Brussels II)�� 19 Regulation (EC) 864/2007 on the law applicable to non-contractual obligations (Rome II), Art 4(1)�� 164 Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome I)��37, 136 Art 9��37, 163, 290 Art 12(1)(d)�� 130 Art 14�� 125 Regulation (EC) 1060/2009 on rating agencies�� 164 Regulation (EC) 648/2012 on European Market Infrastructure (EMIR)��132, 159 Regulation (EC) 1215/2012, Preamble 12�� 83 Rome Convention on the Law Applicable to Contractual Obligations, 1980��125, 130 Art 10(1)(d)�� 130 Treaty on the Functioning of the European Union (TFEU) Art 18�� 65 Art 36�� 237 Art 52�� 237 Art 62�� 237 Art 218(2)�� 263 Art 344�� 66 France CCM, Art 1195(2)�� 57 CCP, Arbitration Law��25, 171 Art 1504��21–22 Art 1509�� 57 Art 1511�� 59 Art 1522�� 24 Code Civil, 1804�� 278 Germany Arbitration Act, s 1030(1) and (2)�� 77 Civil Code (Bürgerliches Gesetzbuch/BGB), 1900��278, 281 s 313(1)�� 57

Table of Legislation and Related Documents xxvii Code of Civil Procedure s 293�� 176 s 599(1)�� 299 Germany-Israel BIT�� 254 Germany-Pakistan BIT��203, 208 India Arbitration and Conciliation Act 1996�� 48 Code of Civil Procedure and Evidence Act�� 48 International AAA Rules s 20(6)�� 298 s 21�� 92 s 22(1)�� 98 ASEAN Agreement for the Promotion and Protection of Investments�� 204 Basel Accords on Capital Adequacy��128, 160 Canada-EU Comprehensive Economic Agreement (CETA)�� 42–43, 51, 53, 88, 204–5, 210–11, 213–14, 248, 255–56, 261, 307, 309 Art 8.21�� 264 Art 8.31.2�� 263 Cape Town Convention on International Interests in Mobile Equipment 2001�� 140 Art 2�� 137 Art 2(3)�� 137 Art 15�� 137 CIETAC Rules, Art 5(4)�� 295 Convention of 1971 on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters�� 19 Convention on the Peaceful Resolution of International Disputes�� 196 Dutch-Belgian Mutual Enforcement Treaty 1925�� 8 Energy Charter Treaty 1994��66, 204 European Convention on Human Rights, 1950�� 66 European Convention on International Commercial Arbitration 1961�� 60 Geneva Convention, 1927�� 8, 77 Geneva Protocol 1923�� 77 Hague Convention, 1907, Art 37(1)��11, 197 Hague Convention on Choice of Court Agreements, 2005��20, 182 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary, 2002�� 133, 143–44 Hague Convention on the Law Applicable to Trusts and on their Recognition 1985�� 139 Hague-Visby Rules for bills of lading�� 23 IBA Rules on the Taking of Evidence in International Commercial Arbitration�� 302 Art 3�� 96 Art 9��97, 298

xxviii Table of Legislation and Related Documents Art 9(1) and (2)�� 98 Art 9(2)�� 298 Art 9(5)�� 298 ICC Incoterms�� 72 ICC Rules�� 79, 87–88, 92, 94, 100, 102 Art 2(4)�� 40 Art 15(2)�� 40 Art 22�� 31 Art 33�� 267 ICMA Repo Master Agreement��73, 138, 141 International Currency Options Market Terms�� 130 International Foreign Exchange Master Agreement�� 130 ISDA Swap Master Agreements, 1987/1992/2002��73, 118, 120–21, 127, 130–32, 141, 157, 171, 182–85, 191 LCIA Arbitration Rules��13, 15, 17, 29, 45, 77, 79, 81, 83, 86, 88, 94–95, 101, 309 Art 9�� 12 Art 14�� 31 Art 16(4)��26, 30, 34, 55 Art 20(6)�� 98 Art 22(1)(viii)�� 79 Art 25�� 92 Art 26(2)�� 101 Art 26(8)�� 101 Art 32(2) (old)�� 101 MERCOSUR Treaty�� 204 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958��8, 11–12, 16, 18–20, 24, 26–27, 29–30, 32, 34, 37–38, 44–45, 54, 56, 60, 64, 75–77, 79, 81–83, 90, 93–94, 97, 101, 105–7, 109–10, 121, 164, 166–68, 172–74, 178, 182, 193, 203, 262, 272, 299, 301, 303–5, 309 Art I�� 110 Art I(1)��21, 30, 45 Art I(3)��21, 30, 108 Art II�� 28, 30, 76–77, 81–82, 89–90, 108–11, 165, 174 Arts II–V�� 107 Art II(1)�� 89 Art II(2)�� 89 Art III�� 109 Art IV�� 109 Art V��89–90, 108–13 Art V(1)�� 108 Art V(1)(a)�� 30, 81–82, 89, 110–11 Art V(1)(b)��108, 111 Art V(1)(c)��89, 111 Art V(1)(d)�� 30, 89, 100, 108, 111 Art V(1)(e)�� 25, 30, 106, 108, 111 Art V(2)��109–11

Table of Legislation and Related Documents xxix Art V(2)(a)�� 90 Art V(2)(b)�� 54 Art XVII(I)�� 92 North American Free Trade Agreement (NAFTA)��42, 202, 204, 206, 220–21, 226, 228, 230–32, 241–42, 251, 256 Art 30��220–21 Art 1105��241–42 Art 1110��241–42 Art 1130�� 220 Art 1134(1)�� 245 OECD Convention on Combating Bribery of Foreign Public Officials 1999�� 50 Overseas Securities Lenders Agreement�� 130 PRIME Rules��187–88 Statute of the International Court of Justice Art 16(1)�� 39 Art 36�� 197 Art 38(1)�� 177, 197, 202, 221–22, 278, 285, 290, 303 Art 59��36, 177, 287 Art 3891)�� 32 TBMA/ISMA Global Master Repurchase Agreement��73, 130 UN Convention against Corruption 2003�� 50 Art 3�� 50 Arts 15-27�� 50 UNCITRAL Convention on Assignments of Receivables in International Trade 2001�� 126 UNCITRAL Convention on the Assignment of Receivables in International Trade, 2001�� 141 UNCITRAL Hamburg Rules, 1974�� 23 UNCITRAL Model Law on International Commercial Arbitration, 1985�� 12, 17, 21, 26–27, 29–30, 32, 40, 44, 57, 76, 92–93, 101, 104, 106, 108–9, 120, 166, 168, 182, 192 Art 1(3)�� 21 Art 8(1)�� 28 Art 8(2)�� 28 Art 9�� 93 Art 16(3)�� 28 Art 17��12, 92, 189 Art 17(2)�� 101 Art 17C�� 92 Art 17C(5)�� 93 Art 17F(4)(c)�� 92 Art 17H�� 105 Art 17I��93, 105 Art 17J�� 93 Art 19�� 56 Art 19(2)�� 98 Art 28�� 58 Art 28(1) and (2)�� 227 Art 28(4)�� 59

xxx Table of Legislation and Related Documents Art 31(2)�� 267 Art 34(2)(b)(i)�� 90 Art 35�� 6 Art 36(1)(b)(i)�� 90 UNCITRAL Rotterdam Rules��23–24 UNCITRAL Rules��17, 86, 88, 95, 199, 203, 217, 243, 249, 309 Art 17(1)�� 31 Art 27(4)�� 298 Art 30(1)�� 262 Art 30(5)�� 262 Art 30(6)�� 262 Art 32(2)�� 101 Art 32(3)�� 38 Art 32(5)�� 267 Art 39�� 101 UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration�� 309 Art 6�� 41 UNIDROIT Convention on International Financial Leasing�� 137 UNIDROIT Convention on Substantive Rules for Intermediated Securities 2009�� 145 Art 11�� 145 Art 31(3)(c)�� 145 UNIDROIT Factoring Convention�� 126 UNIDROIT Leasing Convention�� 137 Uniform Customs and Practice for Documentary Credits (UCP)�� 72 US/Mexico/Canada Agreement (USMCA)��204, 206, 213, 255, 263, 265 ch 14�� 214 Vienna Convention on the International Sale of Goods (ICSG/CISG), 1980��60, 72 Art 4�� 291 Art 7�� 108, 285, 291 Art 9�� 291 Vienna Convention on the Law of Treaties 1969 Art 27�� 199 Art 31�� 108, 274, 285 Art 53�� 32, 278, 290, 303 Washington (ICSID) Convention of 1965 in respect of foreign investments disputes and awards�� 20, 65, 69, 88, 91, 95, 176, 181, 195, 201–2, 206, 212, 215, 220, 227, 248, 251, 262, 305–6, 309 Art 14��16, 212 Art 14(1)�� 41 Art 25��206, 256 Art 25(1)�� 202 Art 25(2)(b)�� 207 Art 27�� 197 Art 40(2)��41, 212 Art 42�� 56, 69, 205, 219–21, 227, 251 Art 48(3)�� 267, 272, 305

Table of Legislation and Related Documents xxxi Art 49(2)�� 305 Art 52�� 203, 213, 221, 272 Art 52(1)(e)�� 99, 304–5 Art 54��197, 245 Art 57�� 212 Art 64�� 197 Luxembourg Grand Ducal Decree of 19 July 1983 on fiduciary agreements entered into by credit institutions�� 143 Netherlands Arbitration Act 2015, Art 1020(4)�� 57 Civil Code, Art 6.258�� 57 Romania Romania-Sri Lanka BIT�� 254 Sweden Arbitration Act 2019, s 1(2)�� 57 Switzerland Arbitration Act 1987 Art 4(2)�� 78 Art 181�� 81 Private International Law Statute, 1987, Art 148(2)�� 129 Swiss-Philippines BIT�� 225 United Kingdom Arbitration Act 1950��8, 17, 22, 30 Arbitration Act 1996�� 8, 17, 22, 55, 58, 105 s 14�� 81 s 34��57, 299 s 44��92–93 s 44(4)�� 93

xxxii Table of Legislation and Related Documents s 44(5)�� 93 s 46��59, 227 s 69(2)�� 286 s 74�� 34 s 107�� 167 Banking Act 1987, s 3�� 118 Bankruptcy or (now) Insolvency Acts 1824, 1849, 1861, 1869, 1883, 1914, 1985 and 1986,1994, and 2000��169, 184 s 15(2), (3) and (9)�� 147 s 349A�� 167 Judicature Acts,1871, 1873 and 1875�� 3 Sale of Goods Act 1893�� 279 United States Bankruptcy Code�� 156 ch 15�� 166 s 362�� 147 s 363(b), (c) and (f)�� 147 s 510�� 149 s 547�� 156 s 555�� 160 s 559�� 160 Commodity Futures Modernization Act 2000�� 158 Employee Abuse Prevention Act 2002�� 156 Federal Rules of Civil Procedure�� 35 Model BIT�� 227, 233–34 Art 5�� 241 Art 6�� 241 Art 30�� 221 Art 30(2)�� 227 Art 30(2)(b)��221, 230 Art 34�� 245 Ann B�� 234, 236, 240 Nebraska Bankruptcy Code�� 135 Restatement (Third) of the Foreign Relations Law of the United States, 1987�� 237 s 401�� 229 s 402�� 63, 163, 229, 290 s 403��63, 163, 290 Restatement of Law (Third) of the Law of International Commercial Arbitration 2012, s 4-11��64 Sarbanes-Oxley Act 2002�� 159 s 401(c)�� 158 s 705�� 158 Uniform Commercial Code (UCC)�� 21, 135, 137, 151, 182, 283, 289, 292 Art 2A�� 135 Art 8�� 135

Table of Legislation and Related Documents xxxiii Art 9�� 124, 134–35, 138, 157, 159 s 1-103�� 59, 75, 279, 292 s 2-210�� 132 s 8-502�� 151 s 8-503(e)�� 151 s 8-510�� 151 s 9-315�� 148

xxxiv

Part I International Commercial Arbitration 1.1. Introduction 1.1.1. The Problems and Challenges of Dispute Resolution. Finality, Speed, Cost, Efficiency and Confidentiality. Structural Issues A credible dispute resolution facility is an important aspect of business operations. Although dispute avoidance is in the greatest interest of all parties, disputes do arise and it is then of prime importance that they can be handled efficiently and promptly in order to limit the damage. The existence of such a dispute resolution facility will at the same time serve as a deterrent for a recalcitrant party and thereby promote compliance and support for the rule of law. Domestically, state courts were created to provide the necessary facility. They do so in a formalised manner embedded in strict procedures where professional judges may determine very different disputes from family matters to business problems, from private disputes to disputes with governments and their agencies, from contract and property matters to negligent, fraudulent and criminal cases. They attend also to regulatory, tax and insolvency issues. Sometimes they operate even as judges in constitutional courts. They are not necessarily experts in any of these fields. The law of procedure is meant to keep them on track, provide objective standards to regularise the adjudication process and to avoid undue criticism. Appeal courts operating in similar ways are there as further safeguard and protection. The consequence is often a great deal of attention to procedural detail meant to lead to proper results but also to a propensity for lengthy proceedings in which the substance of the dispute may even be forgotten. In such a system, decision taking itself may become a problem in terms of energy, expertise and courage. Operating in this manner is supposed to support the credibility of the legal system but who is to say whether this proceduralised and formal approach leads to better results—at least there is some order—or whether the opinion of the courts of first instance is always less accurate than the one of the appellate courts? The higher judges have more power and probably more experience but not necessarily the better insights and are farther removed from the facts. The undesirable side-effects are not only that obtaining a type of ultimate justice in this manner may take considerably longer, but also that lower judges tend to live in fear of being corrected on appeal, which further increases formalism and procedural rigidity, thus the length and cost or even the credibility of the proceedings. Probably more importantly, on appeal the true concern may not be better justice at the level of the litigating parties. There may be other considerations: superior judges being asked not primarily to administer the law better in the particular instance, but to clarify it for the future or to resolve contradictions in the lower courts. Appellate judges do not then merely decide the case at bar but rather are meant to contribute to the resolution of others from the past, in the present, or in the future, thus serving some higher notion of truth and ulterior justice or indeed promote

2 Volume 2: International Commercial Arbitration and further develop the legal system as such. Whilst the lower courts may be forced into a liberal interpretation of the rules to decide a case, the higher courts soon become here lawmakers and system suppliers or re-establishers of order, even though it may remain contested to what extent they should be; it is an issue of legal activism and may also raise further cognitive issues in terms of the reliability of decision taking of this sort. Especially in countries that prize systematic unity as civil law codification countries commonly do in private law, they may thus start concentrating on the perfection of the system in this manner rather than on a more satisfactory solution and individual justice. In appeals, judges then work mainly on the norm or rule side: see Volume 1, section 1.2.11. It may be useful as a public service but has a high cost for the actual litigants, not only in terms of efficiency and expense, but also in terms of time lost and therefore finality and emotional energy, all in the name of greater truth or higher justice, now at some abstract level for all, but it must remain a matter of opinion whether this is helpful. At the individual level, it should be realised that justice that cannot be done within a reasonable time frame—say a few years at the most—is no justice at all and to keep the conflict alive has considerable social, economic and emotional costs. This is no less so amongst professionals in the corporate sphere even if they may divert the expense to shareholders—the typical agency problem. Litis finiri oportet is the old saying and it is fundamental: litigation must come to an end but it is often forgotten in appeal facilities and poses in many countries a severe challenge to the rule of law and the credibility of this type of dispute resolution. It could also be argued that this process is over-lawyered, the court system made subject to the financial interest of the legal community, hence laborious, full of complications, and costly. We shall see that one of the prime aims of arbitration is to do away (a) with procedural formalism and (b) the facility of appeal. Speed and cost or efficiency are here prime concerns although, as we shall see also, international arbitration also meets conflicting interests of the legal profession which is a business and can hardly be understood without this acknowledgement. In order to keep a grip, it tends to reemphasise judicialisation and formalism, which—it will be argued in section 1.1.14 below—may become a serious impediment in terms of arbitration’s credibility and effectiveness. There is always a reason for inefficiency and it continues because some benefit or have a vested interest in it. Professional parties, who are usually the litigants in arbitration, do not need or want these complications and in particular do not see in procedural formalism and appeals a guarantee for better dispute resolution, greater truth, or better justice. For them, efficiency and cost are a more urgent consideration, reason also why they are increasingly unhappy with international arbitration’s progressive judicialisation by the legal profession. It is at the same time an important pointer that the whole traditional process of litigation and appeal in the ordinary state courts and the philosophy behind it are defective, at least in modern commerce and finance, perhaps even in foreign investment. In many countries, there is a serious credibility gap. To this may be added the fact that the domestic legal systems these courts primarily serve are often seriously out of date, do not easily accommodate in business newer commercial and financial structures, have problems with internationalisation, tend to be consumer law infested in civil law, and favour domestic public policies even in international cases. To this may be added that local insiders do not like to be held accountable, especially not in their business dealings which are often closely connected with the political establishment and that lawyers benefit from the confusion. In a better world, in civil litigation, professional parties if in agreement should at least be able to control court proceedings to a much larger extent and exclude appeals but that is often considered against public policy—indeed supported by ideas of greater truth and better justice as higher objective goals for all in the higher courts—so that attempts at greater party control of the process

Volume 2: International Commercial Arbitration 3 are not effective or are unsupported. One of the side-effects is that even bad judges continue their profession and the interests of the parties they serve become irrelevant in this regard. In this view, courts do not merely provide a service but stand for the state and the enforcement of its order within a limited set of formal safeguards and without true accountability. As for the narrower issue of appeals, some countries like England are traditionally more circumspect and commonly require in the ordinary court system for at least some leave (and largely exclude appeal on points of fact). When the whole system was reviewed at the time of the Judicature Act in 1871, the (second) appeal to the House of Lords was abandoned and was only retained after a change in government. It is a pointer in the same direction: unlimited appeal is destructive of the proper functioning of the law. In fact, in a good system, all smaller (consumer) claims should go to an ombudsman-type facility for these issues to be decided finally, essentially on the basis of what is reasonable and makes sense. Collection should go to special enforcement agencies.1 In cases where there is a more fundamental argument and difference in the lower courts, appeals on points of law should only be allowed in the public interest to be started and paid for by public authorities, probably without any effect on the outcome of the particular dispute except in prima facie cases involving obvious deficiencies, which amongst professional judges should be rare. Beyond that, all mistakes are in the eye of the beholder: law is not a natural science where mathematical efficiency can do much. Even the reach of logic and rationality may be limited and language may present further confines. There is no mechanical approach to law application and it is not mere syllogistic technique whatever lawyers (and some academics especially in civil law countries) try to pretend. It was much the subject of Volume 1. We correctly talk about legal opinions all the time and they are no more than that. Speed, cost and efficiency may be much more important to make people get on with their lives or business. Litis finiri! It may also be remembered that at least international courts usually sit only in one instance; see the International Court of Justice (ICJ), the Court of Justice (ECJ) in principle also; so appeals were never indispensable. In family and criminal matters, the situation may still require a different approach, although especially in the former a case can equally be made for the earliest possible termination of disputes—it is better as litigation often makes things worse and more intractable at the personal level. In these emotional cases, the loser will never be convinced, rather will consider him- or herself ever more the victim of systematic injustice. At least in the major business cases, ordinary courts should sit in one instance with three judges, substantially in charge of all procedural issues subject to direction by the parties if they are professionals and in agreement, who could still consent to an appeal facility but it would not be implied. Solving the dispute between the parties should be the objective rather than developing the law, which in its progression can hardly be clarified and rarely fits new situations; arguably it was never the true task of judges. Only thus, it would appear, have ordinary courts a chance to continue to operate usefully in dispute resolution, at least domestically in ordinary contractual and property or negligence issues between professional parties. If that cannot be achieved in ordinary litigation, in arbitrations it will be. That is its principal aim. Again, professionals are sceptical of the quality of greater truth and higher justice through the ordinary courts and do not believe the search for it to be efficient or effective. They do not want to bear the cost either and that 1 Consumer arbitration will not be further discussed but it is an important other aspect of dispute resolution. It tends to be either statutory or part of standard conditions imposed by a dominant organiser as an organisation tool. As such it has become contentious although it may still make more sense than ordinary courts. Yet there is legitimate concern about the measure of consent and about bias in arbitrators who are hired and paid by the companies. The EU and UNCITRAL have started to deal with these issues; in the US Congress remains divided. It may be asked whether it would be better if companies joined and contributed to a public service.

4 Volume 2: International Commercial Arbitration should be an important pointer. If it is not good for them, why should it be for others? It takes too much time which makes it even more costly especially if there are going to be appeals. These appeals themselves show that predictability remains elusive and that there is a substantial speculative element, which they were precisely meant to minimise but cannot avoid. It is a considerable gamble. There are no pre-set answers in more unusual cases which are the ones most likely to lead to litigation. In this connection, it may be further considered that adjudication should be distinguished from problem solving, the first one being strictly based on law or legal principle, the latter one being more pragmatic although still based on law but only as pleaded by the parties without any law formation aspiration. That would then be the more proper role of arbitration, at least until such time that a greater settlement ethos may take over altogether and arbitration and conciliation/mediation become more integrated as a third way, see Section 1.1.14 below. On the other hand, in the more traditional view, resort to arbitration may be considered undesirable altogether because it deprives the ordinary courts of an important impetus to develop the law for all, which law then risks to become ever more consumer law (assuming that in that area it is not overtaken by ombudsman schemes or arbitration also)—this may be more real than often realised.2 Judges, it is argued, would not then speak any longer for the legal system and society as a whole, which in this view might undermine even further the credibility of the law they administer. Their precedents would become suspect and increasingly irrelevant for professional dealings especially burdensome in countries where they are considered binding. So much may be admitted, but it should be considered a problem that runs deeper and concerns the very nature of the ordinary courts itself, which may indeed be in need of serious reform. The greater danger is that in professional dealings that still reach the ordinary courts, increasingly consumer standards are applied, eroding all the more the credibility of this law in commerce and finance, and making these courts ever more suspect. It was always a danger inherent in the civil law which is nineteenth-century anthropomorphic and basically consumer law, see the discussion in Volume 1, section 1.4.2. Proper distinctions are not then made. Procedural informality and the absence of appeal means in practice that the parties define their dispute, that all is pleaded as fact even the applicable law, that arbitrators are not judges upholding any legal system of their own and weighing the arguments autonomously against it in search of that deeper truth and greater justice. To repeat, they are there principally to resolve a dispute and not to set the system right. Arbitrators operate, as we shall see, then more like juries deciding the case on the basis of the plausibility of the arguments and evidence presented by the parties, also in matters of the applicable law, no more, no less, and cannot follow an own course. It is as such a true alternative to dispute resolution in the ordinary courts which, as noted, has objectives which may go well beyond the resolution of the case at hand whilst rightly or wrongly (appeal) judges are there then mainly to clarify their own laws (foreign law being pleaded as fact also in ordinary courts). Judicialisation of arbitration, making it ever more like ordinary court proceedings, is often promoted as some answer but again is not a proper response, much promoted by a self-serving 2 The idea is here that more court cases bring greater certainty across the board, and that arbitrators should help, hence the desire especially amongst academics to look for precedents in awards, see eg A Maurer, ‘Transnational Shipping Law’, in M Goldby and L Mistelis, The Role of Arbitration in Shipping Law 247 (Oxford, 2016); O Cachard, ‘The Role of Arbitrators and the Possibility of a Genuine Arbitral Case’, in M Goldby and L Mistelis, The Role of Arbitration in Shipping Law 259 (Oxford, 2016); S Pislevik, ‘Precedent and Development of Law: Is it Time for Greater Transparency in International Commercial Arbitration?’ (2018) 34 Arb. Int’l 241. But even as persuasive law, it makes hardly any sense as in arbitration all depends on what parties put on the table and there is no independent law finding function or authority for arbitrators.

Volume 2: International Commercial Arbitration 5 legal profession, often supported by unperceptive academia; rather it is a serious threat to arbitration’s authority and credibility;3 indeed one could argue instead that ordinary court proceedings should become more like arbitration in professional disputes, appeals to be abolished unless wanted by the parties. Perhaps just as important is to understand that publication of arbitral awards would not help. It is part of this judicialisation process but as these awards only reflect the submissions of the parties who in their analysis, especially of the applicable law, may both be wrong or at least self-serving, the findings in these awards cannot have any precedent value, nor can consistency be an aim in the reasoning. It cannot possibly contribute to a system of law even if one still believes that such system formation and clarification is important and possible, but it cannot truly be privatised. It follows that a finding about English law in the French court or indeed in an arbitration could never be precedent in England. Arbitrators are not there to clarify anything beyond what parties have submitted to them in the presentation of their dispute. That is the essence, it is submitted, of the limited dispute resolution facility arbitration offers, which distinguishes it in this way fundamentally from the ordinary courts, who are guided by other ideals and perspectives.4 As will be repeated throughout, arbitrators are not judges or law makers of any sort and do not have the institutional status and power to act as such and where they may be pushed in such directions it becomes seriously problematic. There may still be serious pressures when it comes to public policy, as we shall see—it is a major challenge—which might require arbitrators to invoke mandatory laws autonomously, it is an important issue, not in the least in terms of credibility and legitimacy,5 but it is exceptional and even then, it will be argued, they are still not like judges, they are not proper spokespersons for the public interest or any other, and must ask for further submissions on which they remain wholly dependent. It is an issue that poses, it will be argued, another serious threat (besides judicialisation) to international arbitration, see again the discussion in section 1.1.14 below and has come to the fore especially in foreign investment arbitration, as we shall also see. To sum up, in all dispute resolution, speed and cost are key issues and should be recognised for what they are. It is part of the proper administration of the rule of law and concerns efficiency and finality. It was already noted that they count also in an emotional sense even if the need for efficiency may be clearer in business disputes. In this connection, it is not that arbitration is necessarily quicker and cheaper per se but since there should not be procedural excess nor appeals, it becomes so, even if judicialisation is working against it. Whatever the attitude may be in the ordinary courts, it is correctly held that early finality is the aim of all arbitration, and appeals 3 See s 1.1.14 below and R Gerbay, ‘Is the End Nigh Again? An Empirical Assessment of the “Judicialization” of International Arbitration’ (2014) 25 Am Rev Int’l Arb 223; cf also A Baykitch and E Bao, ‘A Return to Innate Arbitration Culture: Implications from a Cost and Efficiency Perspective’ (2019) 35 Arb. Int’l 57. 4 See for the reasoning of international arbitrators Part IV below and for precedent and consistency in particular s 1.4.11 below, cf for investment disputes also IM Ten Cate, ‘The Cost of Consistency: Precedent in Investment Treaty Arbitration’ (2013) 51 Columb J of Transn’l Law 421, and more generally G Guillaume, ‘The Use of Precedent by International Judges and Arbitrators’ (2011) 2 J of Intern’l Dispute Setllement 6, noting that precedents are often merely constructs that judges hold on to in order to create the impression of legal certainty. In the worst cases they demonstrate laziness, in others inability to reflect newer needs or proper demands of society. 5 See ss 1.1.10, 1.1.14 and 1.2.5 below. Another area of concern must be where arbitrators decide issues that may affect classes of outsiders who are not party to the arbitration eg, when allocating property rights and security interests, or deciding ranking and set-off issues, see again s 1.1.14 below. It sits equally uneasily with the traditional role of arbitrators which was to resolve disputes regarding only the litigating parties, normally purely contract matters. As the applicable law chosen by the parties is not here dispositive, it is rather the lex situs (assuming it can be determined) as may still be corrected by relevant bankruptcy statutes as a matter of their bankruptcy order. It may force arbitrators into a position of finding the applicable law themselves to protect others or the public at large, which, it will be submitted, is alien to the proper role of arbitrators and undermines it. It may also raise arbitrability and public policy issues in recognition proceedings under the New York Convention.

6 Volume 2: International Commercial Arbitration or similar reviews, even when introduced by the parties in the arbitration clause, are increasingly considered counter to it and against the arbitral order.6 There may still be some flexibility if parties insist, but to maintain a possibility of appeal on all points of fact, law, and procedure would now appear to be unenforceable, at least in international arbitrations. More minor forms of supervision and review may still be acceptable but the limitation of this review facility confirms a different direction and at the same time militates against judicialisation. Another issue is the one of confidentiality.7 Most people do not wish to wash their linen in public. More to the point, there may in business also be issues of protection of sensitive business information or intellectual property rights, again issues harder to deal with in the ordinary courts where transparency and publicity are rightly important issues although judges might have some room to help. In particular, it could be asked, and again it is not clear, why parties in agreement should not be free to exclude publicity in the ordinary courts in commercial matters. Not all needs to filter into the public and much is of no public interest at all, but it remains an important handicap in ordinary litigation. Again, arbitration is able to deal with this issue even if confidentiality may be more difficult to retain where public interests become involved and this has led—correctly—to more publicity particularly in foreign investment arbitrations,8 but also

6 Thus, the US Supreme Court in Hall Street v Matell, 552 US 576 (2008) held that such clauses were an inadmissible extension of court review on arbitral awards, so also the New Zealand Court of Appeal in Gallway Cook Allen v Carr [2013] NZCA 11. Art 35 of the UNCITRAL Model Law is sometimes invoked in support as being mandatory by imposing the binding force of an award supported by Art 34, which also limits recourse to a setting-aside application, although it may not be absolute and there may still be some room for the parties to require a review. The German Supreme Court at least held so on 1 March 2007, III ZB 7/06, 25 ASA Bulletin 2007, 810, although this may be indicative of a more domestic attitude towards international arbitration, appeals being more common in domestic arbitrations. Reviews may still be built into the arbitration clause, at least if it does not involve the ordinary court system. The US case law has not prevented the American Arbitration Association (AAA) to consider errors of law that are ‘material and prejudicial’ and determination of facts that are ‘clearly erroneous’ and to introduce in 2013 Optional Appellate Arbitration Rules allowing parties to include in the arbitration clause an appeal to a newly established AAA Appeal Tribunal to consider errors of law that are ‘material and prejudicial’ and determination of facts that are ‘clearly erroneous’. Especially in foreign investment arbitrations, where the public interest is engaged, there may be a trend back to greater supervision, perhaps even an appeal facility: see s 3.1.5 below. 7 See also G Born, International Commercial Arbitration (Kluwer Law International, 2009) 2251; T Foden and O Repousis, ‘Giving Away Home Field Advantage: The Misguided Attack on Confidentiality in International Commercial Arbitration’ (2019) 35 Arb. Int’l 401; S Pislevik, ‘Precedent and Development of Law: Is it Time for Greater Transparency in International Commercial Arbitration?’ (2018) 34 Arb. Int’l 241; cf further also G Weixia, ‘Confidentiality revisited: Blessing or curse in international commercial arbitration’ 24 September 2015), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2641317; M Samuel, Confidentiality in International Commercial Arbitration: Bedrock or Window Dressing? (21 February 2017), http://arbitrationblog.kluwerarbitration. com/2017/02/21/confidentiality. Confidentiality is sometimes considered distinct from privacy which is then narrower and limits participation in arbitration to the parties whilst confidentiality prevents in that view the disclosure to others of information obtained in private proceedings. 8 At the practical level, the question of confidentiality of arbitrations has arisen foremost in the context of the joining of different but connected arbitrations when one of the parties may object because it may violate the privacy of the proceedings, see Oxford Shipping Co v Nippon Yusen Kaisha [1984] 3 All ER 835, in which the confidentiality argument was upheld. It also arises where orders are issued to reveal particulars of other arbitrations, see Dolling-Baker v Merret [1990] 1 WLR 1205, in which such orders were set aside, or where particulars are disclosed to reinsurance companies likely to be sued for recovery of the amount lost in the arbitration, see Hassneh Insurance v Mew [1993] 2 Lloyds Rep 243, in which such disclosure was limited to the mere finding whilst the reasoning had to remain confidential. English law remains respectful, Dolling-Baker v Merrett [1990] 1 WLR 1205 and Ali Shipping Corporation v Shipyard Trogir [1998] 1 WLR 314.

Volume 2: International Commercial Arbitration 7 to greater concern for due process whilst transparency may be desirable also to underpin and demonstrate arbitrators’ impartiality in the deliberations, especially when it comes to dissenting opinions.9 Publicity is also unavoidable in challenges or recognition proceedings in the ordinary courts, where much is likely to come into the open.

1.1.2. Arbitration and its Nature. Difference with Ordinary Court Proceedings Arbitration is a dispute resolution facility that is based on an adversarial type of procedure in which the dispute is decided upon the submission of the parties (and in principle on no other argument of fact or law) after a full hearing by arbitrators normally appointed by the parties themselves. Their arbitral award is agreed to be final as between them. Mainly for the worse, it However, it is increasingly questioned whether there is such an implied right and it may be doubted whether confidentiality is a fundamental principle of international arbitration, it may rather derive from the private nature of all contracts. The UNCITRAL Model Law has no provision on it, neither have the UNCITRAL Arbitration Rules. It was probably always clear that where a public interest was involved, as in disputes concerning the use of public property or possibly in consumer arbitrations, awards could be disclosed. That also applies in foreign investment and ICSID awards are commonly published. However, it appears that the disclosure possibility now goes further and may also affect ordinary commercial arbitrations. In the 1995 Australian case of Esso/BHP v Plowman, 183 CLR 10 (1995), (1995) 11 International Arbitration 235, the State of Victoria wanted to find out certain information concerning cost, price, volume and revenue given to a gas utility by Esso in one arbitration, in order for the State to use it in another. The High Court of Australia found no confidentiality rule (or custom) or even an implied term requiring the protection of confidentiality. It only accepted the privacy of the hearings, while documents compulsorily produced could not be used for any other purpose than the arbitration. Short of a specific confidentiality undertaking in the arbitration clause itself (an opt-in), it found no obligation of confidentiality, and noted in this regard that the results of arbitrations are commonly divulged while witnesses could in any event not be held to secrecy. See for this issue of confidentiality in international arbitration also the discussion in Vol 1, s 3.2.6. Unless courts ordered disclosure, this case law was reversed in 2010 in an amendment of the 1974 International Arbitration (Secs 23C, D and E) trying to promote international arbitration in Australia, adjusted in a further amendment of 2015 which continued to protect confidentiality but introduced an opt out possibility. Also in the US, confidentiality is not or no longer considered an inherent right and must be provided for in the arbitration clause, see US v Panhandle E. Corp., 118 FRD 346, 349–51 (D. Del. 1988) and A Raymond, ‘Confidentiality in a Forum of Last Resort: Is the Use of Confidential Arbitration a Good Idea for Business and Society’ (2005) The American Review of International Arbitration 490. Thus, apart from exceptional cases, confidentiality no longer seems guaranteed even in commercial arbitration. Of the original three main justifications for arbitration (viz speed, confidentiality and lower cost) at least confidentiality appears to have lapsed for all but the privacy of the hearing itself and the protection of confidential information presented therein unless there is an explicit confidentiality clause. One may see here a demonstration of arbitrations increasingly becoming pseudojudicial losing much of their informal character. Even commercial awards are now also often published, at least by the ICC or in the Yearbook of Commercial Arbitration, although in a sanitized form to render them more anonymous. In such an approach, confidentiality has clearly taken a back seat. Alternative dispute resolution (ADR) may, on the other hand, have retained more informality and may as a consequence also enjoy greater confidentiality protection. Other arguments have been used to promote transparency and became stronger over the past several decades as publicity has also become more closely associated with an ethical obligation to the public, see Sherlyn Hsien-lien Tung and Brian Lin, ‘More Transparency in International Commercial Arbitration: To Have or Not to Have’ (2018) 11 Contemp. Asia Arb. J. 21, 23. It is also noted that the lack of transparency allows for decisions with great magnitude to be made behind closed doors without oversight, see Avinashi Poorhouse and Ronan Feehily, ‘Confidentiality and Transparency in International Commercial Arbitration: Finding the Right Balance’ (2017) 22 Harv. Negoc. L. Rev. 275, all perhaps less relevant in purely commercial arbitrations. 9 MJ Goldstein, ‘Living (or not) with the Partisan Arbitrator: Are There Limits to Deliberations Secrecy?’ (2016) 32 Arb. Int’l 589.

8 Volume 2: International Commercial Arbitration was already submitted, see further section 1.1.14 below, that modern arbitration practices have adopted many features of ordinary court proceedings substantially under pressure of the legal profession which has increasingly monopolised the arbitration practice potentially to the latter’s detriment in terms of credibility. Judicialisation has been the means, promoted by loose and often self-serving talk about complexity and better results, which may have left users perplexed. It may also be noted that in countries like Germany10 and perhaps also Italy, it is joined by academia obsessed with due process protection which is then seen as absolutely mandatory and not to be distracted by party autonomy, not even in the professional sphere. It leaves the question, however, how in such an approach and with such an attitude, private dispute resolution has at all a place; it seems to have remained a problem at least in the modern German mind, hence also more court review and unease more in particular with international arbitration in Germany.11 Even so, there always remained strong contractual aspects especially in the appointment of the arbitrators and the manner in which they decide, which remains in principle based on the parties’ representations and on how they define their dispute. The parties, if in agreement, remain in principle also in control of the adjudicatory process, confirming procedural flexibility and the facility implies avoidance of all appeals as we have seen. It means that arbitration puts the dispute resolution function firmly in the hands of the parties; other (competing) forms of dispute resolution are eliminated while law formation is commonly avoided. Again, professionals are sceptical of any expectation of deeper truth and greater justice in a more judicialised approach and are not willing to pay for it. They specifically agree to be bound by the result, although the contractual nature of enforcement has been progressively abandoned also (except in binding expert advice, see section 1.1.4 in fine) which may be seen as another manifestation of judicialisation.12 Yet, the basic aim remains to decide the dispute, including any points of law, as presented by the parties, and no other dispute in the present or the future, either directly or indirectly. It was already said that there is no desire in the parties to hold their dispute independently against the

10 For Germany, it is clear that Germans (and German courts) define themselves and their sense of justice/ fairness much more than other countries and this may be cultural, see especially Juergen Habermas describing what political sentiment Germans allow themselves to feel after 1945: Verfassungspatriotismus. 11 Cf J Risse, ‘An Inconvenient Truth: The Complexity Problem and Limits to Justice’ (2019) 35 Arb. Int’l 291 (2019) noting that German courts in their supervisory function require even international arbitrators to have read all submissions rather than those to which they are guided by parties during the hearing, but cf also K-P Berger, ‘Due Process Paranoia and the Procedural Judgment Rule’ (2016) 32 Arb. Int’l 415. It raises the old problem of jealousy of the ordinary courts, much reduced in the twentieth century, although perhaps less so in Germany, which is traditionally believed to have been a problem even in countries like England, where the common law would not enforce arbitration agreements (at best it allowed submission agreements which could still be disowned until a final decision was reached), although perhaps exaggerated for the past in modern writings, see for a critique, S Brekoulakis, ‘The Historical Treatment of Arbitration under English Law and the Development of the Policy Favouring Arbitration’ (2019) 39 Oxford J Leg. Studies 124, although the facility of ‘stating the case’ under the 1950 English Arbitration Act, allowing appeal to the ordinary courts of law at the seat on all legal points, had pushed arbitration away from England until amended in 1979 and largely repealed in the English Arbitration Act of 1996. Even so, it will be argued later that in England there remains perhaps more judicial control over international arbitration than eg in France, and it may be less than helpful. As to this jealousy, it may be argued that it is now less likely to come from the courts than from the legal profession that does not want its role in dispute resolution diminished; hence the judicialisation. 12 An early expression was the Dutch-Belgian Mutual Enforcement Treaty of 1925 that started to put arbitral awards at the same level as ordinary judgments, even if not commonly repeated in later bilateral enforcement treaties nor in the EU Regulation (Brussels I), but it has remained the tenor ever since in recognition and enforcement and was adopted as model in the Geneva Convention of 1927, subsequently followed in the New York Convention of 1958. It is probably also the reason why in many countries, arbitration figures in the code of civil procedure. The alternative would have been to enforce arbitral awards as a matter of contract as ordinary foreign judgments were in common law countries and remains the approach in binding opinions of peer group members.

Volume 2: International Commercial Arbitration 9 whole framework of what may objectively be the applicable law to search for some deeper truth or greater justice and they do not feel a need to clarify that law or anything else in respect of other cases between other parties in the future. They do not mean to wait and bear the cost. Arbitrators are not called upon to do so and are not given that authority. Parties do not want legal sophistry and formalism of that sort. Hence no appeals either. It was already said also that arbitrators, if understanding their role properly, are more like juries. In fact, arbitration may best be seen as a continuation of the discussion between the parties and one may see a progression. Parties in dispute will try to find a solution or settlement themselves. If they cannot, they may appoint mediators but they have no power to decide. If this is also not successful, the appointment of arbitrators by the parties may be next. Again, the essence is that they are only given deciding powers in the disputes as presented by the parties on the evidence they offer, no other. If the parties have so agreed, they may even operate in this connection as amiable compositeurs or ex aequo et bono, see further section 1.1.4 below, which means outside any legal framework (except for mandatory laws and public policy issues which cannot be ignored). It is true that arbitrators decide in principle on the basis of the applicable law, but again only as presented by the parties. This never went without saying, and suffers in judicialisation, pushing out mediation and conciliation at the same time and any useful combination (see section 1.1.14 below), but parties must still plead law here as fact like a foreign law must be pleaded as fact in the ordinary courts; in that sense all law is foreign to arbitrators, again they do not represent a legal system of their own and do not have the institutional power to speak for any. Can arbitrators raise legal issues independently? They should not, they may create a dispute not existing between the parties and start stating extra petitum, it was also already mentioned as a key issue, although, as will be seen, it may depend on whether they have acquired autonomous powers in this regard especially in international arbitration under international practices to be discussed later in sections 1.1.9/10, notably in procedural, jurisdiction and arbitrability matters or in their reasoning and probably increasingly also in public policy such as competition issues, fraud, corruption and similar instances of market abuse, and perhaps more so in foreign investment disputes, but it is still the exception and in fact alien to the nature of arbitration and, as was already submitted, a great threat to its legitimacy and credibility as demonstrated in the increasing scepticism towards it in foreign investment dispute resolution, see again section 1.1.14 below. Even so, it must be accepted that the behaviour of the parties may have been subject to regulatory constraints (see sections 1.1.10 and 1.2.5 below) and the impact on the parties and their contract may then have to be determined independently from their submissions, but it is not the true role of arbitrators if properly understood and especially an inquisitorial attitude in this respect may create many problems as we shall see. More fundamentally, resolving public policy issues in private dispute resolution, run as a business, was always counter-intuitive and may undermine the credibility of this dispute resolution, just as judicialisation has done. To repeat, in order to understand arbitration properly, it should be appreciated that arbitrators are not judges,13 and any other attitude undermines the confidence in this facility and may be fatal to its survival. Again, arbitrators are not law makers however much they might like to see themselves in that role. This goes far beyond their jurisdiction or power. Law making in the public sphere is not privatised in this manner.

13 A Nelson, ‘A Judge by Any Other Name? Arbitrator Challenges in State-to-State Disputes’ Kluwer Arbitration (Wolter Kluwer, Jan 23 2012), see further s 1.2.5 below. Especially retired judges starting to act as arbitrators have often considerable difficulty to understand this at first, see also H Zelling, ‘Judges as Arbitrators’ (1993) 15 Adelaide LR 28.

10 Volume 2: International Commercial Arbitration As was mentioned in Volume 1, section 1.4.18, in truth, it is in the daily practice that much of the law in international cases is made and applied even if rarely analysed as such by academia, which can have little knowledge of it. At least in professional dealings, much strife is dealt with and settled in that environment, therefore in commerce and finance often between in-house law departments. Outside law firms may help but it is mostly not their speciality or even interest. In-house we may find increasingly the main legal actors in the business and financial flows and the true legal movers and shakers in the area of legal renewal, especially in international commerce and finance and dispute resolution. Public policy and public order requirements or social values will here also be considered in their progression, first by these departments. Nothing is static, little of it can be foreseen or the risks be allocated in advance. Unlike outside law firms, they are there to keep the peace (also with the public) and make the law work. Blissfully, most problems never come to litigation, either in the ordinary courts or in arbitration, but arbitration fits better in that environment and should thus be considered more part of the law in action than the law in litigation. Again, it is best seen as part of the discussion between the parties. Judicialisation cuts this close relationship and distances arbitration from the parties which has rightly led to increasing unease with it in the professional sphere. Notably professionals do not want to see long tracts on legal issues in the award which may take months if not years to produce and are entirely irrelevant where law and its application is merely a matter of the evaluation of the available evidence. It will be argued in section 1.1.14 that mediation and settlement may have to become integrated to provide for a more credible alternative altogether. It is not then merely based on law, however pleaded. It is only one of the frameworks to be considered. It was already said that in all dispute resolution the prime objective must be speed, limitation of cost, and at least in private dispute resolution also a degree of confidentiality. For professionals, there may also be an element of simplification and in all events an avoidance of legal sophistry, not least in generally more complex international cases, and of the elimination of procedural argument in which the substance of the case may never be reached. There is also a desire to avoid atavism and parochialism, which raises the issue of legal transnationalisation itself, but also a need for greater neutrality especially in regulatory law application, thus taking into account and balancing governmental interests other than those of the country of the seat or of the otherwise competent domestic court. Generally, greater business knowledge and expertise may also be assumed in the adjudication process before arbitrators in what may be a more focussed litigation environment even though arbitrators should never put their own knowledge ahead of the expert opinions submitted by the parties, whose authors may be greater experts and are also subject to cross-examination as arbitrators are not. In section 1.1.7 below, the distinction between domestic and international arbitrations will be explored more in particular from this perspective and may present another special feature in this regard. International arbitration, it will be submitted, operates in a distinct legal environment or order under a transnationalised arbitration legal framework with a momentum of its own that answers more particularly to the needs and aims of the international business community which wants and cherished this alternative although not its judicialisation. Complexity is often used as justification, but good advocacy should be able to deal with it rather than benefit from it. Again, the objective is not necessarily deeper truth or greater justice (except to the extent greater speed and cost limitation promote it); professional parties are well aware of the risks in this respect and if things get out of hand they will settle, which is in any event normally the better action and should be promoted. It avoids more acrimony and cost and may safeguard a constructive future cooperation: business partners know that they are likely to meet again. That not all business disputes settle promptly has often to do with pride, unwillingness to admit mistakes at the personal level, or simply a fear of signalling weakness. It may also be tactical as (sufficient)

Volume 2: International Commercial Arbitration 11 settlement money might not be immediately available, but it is a fact that once the persons most directly connected with the issue move on or management is replaced or retired, the successors often think differently and find the money to end the dispute. Indeed, another aspect further to be explored below in section 1.1.14, especially for international arbitrations, is whether its ethos is or should be more generally towards settlement in which connection a combination with mediation may well be what parties truly have in mind for the future.14 It is the reaction against what they may consider the over-judicialisation of arbitration proceedings ending in renewed legal formalism and its attendant inefficiencies especially in cross-examination and discovery, and this regardless of procedural flexibility and the absence of appeals. Newer thinking does not mean finding here some middle ground per se, which is often the idea of arbitration amongst the uninitiated, especially when it comes to the determination of damages.15 Arbitrators never had the authority to do so, rather, the better idea may now be that arbitrators take a step-by-step approach, decide issue per issue after attempting to find some agreement in respect of each of them on the basis of the submissions of the parties and see how they react in each instance after issues are progressively decided and eliminated in this manner. It would acknowledge that international arbitration, properly understood, is in truth the continuation of the discussion between the parties. So far, the answer has rather been emergency or expedited arbitration, the former often being provisional, subject to a full arbitration later. In several instances parties have been willing to accept any such provisional outcomes as final.16 They may then not be awards proper, unenforceable as such in terms of the New York Convention, which creates problems if not voluntarily implemented, see further section 1.1.4 below. 14 At the moment, the possibilities appear limited, see also K-P Berger, ‘The Direct Involvement of the Arbitrator in the Amicable Settlement of the Dispute: Offering Preliminary Views, Discussing Settlement Options, Suggesting Solutions, Caucusing’ (2018) Journal of International Arbitration 501. Again, this limitation is a function of the twentieth-century judicialisation attitude. Earlier, in Aroa Mines (Ltd) case on merits, 9 RIAA, 402 (1903), it was stated that arbitrators even in cases between states do not systematically apply the rule of law and it was also observed in this connection in the comments that arbitrators commonly do not act as judges deciding questions of fact and law but sometimes rather as negotiators effecting settlement of issues brought before them, these two approaches being considered radically different, see Root’s Instructions to the American Delegation to the Hague Conference of 1907 in G Hackworth, ‘Foreign Relations of the United States’ (1984) 61 Digest of International Law 1128, 1135, see further also the discussion in s 1.2.5 below in respect of international commercial and financial arbitration, where arbitrators are considered to be more like juries rather than judges. Note that the Permanent Court of Arbitration (PCA) may not in this sense be considered an arbitration tribunal. Art 37(1) of the Hague Convention of 1907 makes it clear that this international arbitration ‘has for its object the settlement of differences between States by judges of their own choice, and on the basis of respect for law’. As for the ICJ and its predecessor, the Permanent Court of International Justice (PCIJ), it was understood from the beginning that it was judicial and not in the nature of arbitration, which was distinguished in the sense that in the latter case the parties selected the tribunal, that it was to find on the basis of the principles selected by the parties, and that it was voluntary, see Advisory Committee of Jurists on the Establishment of a Permanent Court of International Justice, 113 (1920). Only this last aspect was retained for the ICJ. 15 See SE Keer and RW Naimark, ‘Arbitrators Do Not “Split the Baby”, Empirical Evidence from International Business Arbitrations’ (2001) 18 J Int’l Arb 573. 16 Rania Alnaber, ‘Emergency Arbitration: Mere Innovation or Vast Improvement?’ (2019) 35 Arb Int’l 441. This facility was first introduced in the US by the AAA in 2006, soon followed by the ICC and LCIA, Stockholm Chamber of Commerce, and the Singapore International Arbitration Center. It can take several forms and depends on the relief sought. Irreparable harm and urgency are commonly confining elements, even a need to show a prima facie case on the merits (which may, it is argued, be conducive to an early settlement). The relief need not be limited to the traditional interim preservation measures in respect of assets and evidence and can go to the merits of the case even if only on a provisional basis. In that respect it may remind more of the French referee procedure and in particular of the Dutch kort geding but their provisional nature is likely to impede recognition and enforcement under the New York Convention; they rely on the support of national laws and courts which is considered their

12 Volume 2: International Commercial Arbitration

1.1.3. The Importance of Defining the Dispute in Arbitrations and the Special Role of the Pleadings of the Parties and their Presentation of the Evidence. Law as Fact The conclusion so far is that in international arbitrations, the emphasis is on the submissions of the parties with respect to points of both fact and law. It demonstrates that arbitration is best seen as a continuation of the discussion between the parties: arbitrators are not judges and are there to solve a dispute as defined by the parties; they do not have a similar status and law formation and clarification function, even if this may be increasingly different in matters of public policy and there are now also other areas where international arbitrators may have acquired autonomous powers: see the discussion in sections 1.1.10 and 1.2.5 below—it was already marked as a serious issue in matters of public policy which sits uneasily with private dispute resolution, see section 1.1.14 below. It still means, however, that normally arbitrators only evaluate the relative strength of the arguments of the parties and bring no other considerations to bear. It follows that in arbitration all is fact, fact and fact. That notably also applies to points of law, that must be raised and pleaded as fact as indeed all foreign law must also be in domestic courts, it was already noted and said that in that sense all law is foreign to arbitrators. They do not represent any legal system as judges do. This is at the same time the reason why their decisions in this regard can hardly have the force of precedent and consistency is irrelevant—dissertations about the law in awards are usually entirely beside the point and show that arbitrators have no proper understanding of their role and what they are doing. Thus, everything depends in principle on what parties bring to the table; it may be very little, their legal analyses may be wrong, but the task of arbitrators is no more than determining which evidence is the more plausible, if necessary upon proper cross-examination, and never to start a new line of argument of whatever sort themselves—in fact creating a dispute that was never there—as ordinary judges might be able to do if only to clarify their own law further.17 weakness, although in international arbitrations, much is taken from the international practice, especially the UNCITRAL Model Law, see also G Hanessian and A Dosman, ‘Songs of Innocence and Experience: Ten Years of Emergency Arbitration’ (2016) 27 Am Rev Int’l Arb 215. See further also WG Bassler, ‘The Enforceability of Emergency Awards in the United States: Or When Interim Means Are Final’ (2016) 32 Arb. Int’l 559: what may emerge as final in this connection depends on the circumstances and courts in the US appear to have considerable leeway. Expedited proceedings are often distinguished and are separated in the LCIA Rules (Art 9). They more simply shorten the periods of time under the traditional rules and are likely to lead to a final rather than provisional award, enforceable therefore under the New York Convention. Emergency arbitration is then contrasted and limited especially to situations where a tribunal is not yet established. What notably happens in England under emergency arbitrations of this type, is that the ordinary courts can no longer be accessed for similar measures, like freezing orders, on the basis of s 44 of the 1996 Arbitration Act, Gerald Metals SA v Timis [2016] EWHC 2327 (Ch), although they still might become involved in their enforcement. See for provisional measures and for Art 17 Model Law more generally s 1.3.10 below. 17 Thus, the power to supplement the law is controversial in international arbitrations, arbitrators’ task being characterised earlier mainly as procedural, see W Craig, W Park and I Paulsson, International Chamber of Commerce Arbitration 2nd edn (Oceana NY, 1990) 143. Again, international arbitrators should not be perceived as lawmakers like appellate judges may have become. Their principal task may thus well be called ‘procedural’ but in essence it is factual and is notably not to clarify the law or create legal precedent even if their decisions may still be considered in that light in academic analysis when enough awards become known eg in foreign investment. It was admitted that especially in areas where arbitrators have acquired more power, like in the case in investment arbitrations or in commercial arbitrations in procedural and evidential matters and perhaps also to keep markets clean, this view may have become too restrictive, contentious as it may be, and supplementation and adjustment may then be part of international arbitrators’ powers, but it is exceptional and only serves to ask for further submissions of the parties, see on these powers also, ss 1.1.10 and 1.2.5 below.

Volume 2: International Commercial Arbitration 13 Again, they are not law makers and have no law to clarify but are much more like juries, also in the aspect of the applicable law. It was presented as a key insight in understanding what arbitration is. Arbitrators cannot use their own knowledge of the applicable law either, again they do not have a lex fori to defend or explain. A further reason is that they are not subject to cross examination. Thus, except perhaps in the areas where arbitrators have now acquired autonomous powers when they still may have to ask for further submissions of the parties and do not themselves ‘invent’ the applicable law, they have not or are not supposed to have knowledge of the applicable law and are not there to clarify it either or indeed to hold the dispute up against all the rules of the applicable legal system as judges in respect of their own can do to find that deeper truth and greater justice. To repeat, parties do not expect it from them and do not want them to do so and pay for it. That is what arbitrating truly means. Legal analysis enters here through the channel of expert opinion on points of law subject to cross-examination. It is not different from arguments on points of fact, for example, a technical or construction dispute where expert witnesses have been called. Arbitrators will thus have to decide only which legal arguments are the more plausible on the evidence presented. To the extent advocates present their own view, they operate as their own expert witnesses in this connection.18 Arbitrators should not do so, again, if only for lack of a facility to cross-examine them. They should not put their own views in the place of those of the parties and should also be careful in cross-examining advocates and expert witnesses on points of law or any other; it is not truly their task to do so except as mere clarification. It raises an important further point. In international arbitration, if properly understood, arbitrators need not be lawyers, just as in construction or maritime disputes they need not be engineers or shipping experts. Again, legal sophistry should be avoided as much as possible. In international arbitrations there is as a consequence no need for lawyers to monopolise the arbitration function more than necessary, potentially making legal argument a large part of the proceedings, judicialisation being the ultimate consequence. It was already said that this is often self-serving in the legal profession and a misunderstanding of what international arbitration truly is and means to be; it cannot be repeated often enough that arbitrators are not substitute judges. It leads to a false idea of judiciality which undermines the credibility of international arbitration and has rightly raised scepticism in its users as already noted and as we shall also see in sections 1.1.11 and 1.1.14 below. Or to put it another way, if arbitrators really think they are judges they need a form of supervision and there must be much greater accountability if they take the adjudication of the law upon themselves. Indeed, this may prove to be urgent especially in foreign investment disputes where their role may have become much more judicial and where as a consequence arbitration is under serious pressure and its credibility is at stake, see further the discussion in section 3.5 below, but it may also be killing ordinary commercial arbitration. To underline the point that arbitrators are not judges, one may start with the arbitration clause itself. Taking the recommended London Court of International Arbitration (LCIA) text, the clause will refer to any dispute arising out of or in connection with the contract, including any questions regarding its existence, validity or termination. That limits the arbitrators’ jurisdiction to these disputes and no others, and it is for the parties to describe and define their differences 18 They may have to be members of the relevant bars to give such opinions. In some countries or states, notably also in California, this has led to the conclusion that only members of the local bars (at the seat) can be arbitrators and advocates. Whether in California that also applies in international cases—it is only established in Californian consumer arbitration—may be contested but doubt on the subject has driven international arbitration away from California. Similar problems arise elsewhere. It is often a protection measure of local bars and an improper understanding of what arbitration is or means to be.

14 Volume 2: International Commercial Arbitration in this connection in their pleadings. To repeat, when the disputes concern points of law, it is for arbitrators to decide only who has in their view the better argument, if necessary, after hearing expert witnesses rather than start an own investigation. This notion of what is in dispute is therefore of the greatest importance and is central in the resolution process and arbitrators’ jurisdiction.19 It follows that when a legal rule is pleaded under a particular legal system, and the other party pleads another, it is not for arbitrators to decide that the real rule is yet another. They do not have that power. In other words, if one party says things are black under the applicable law as pleaded and the other that it is white, it is never for arbitrators to say that on a proper interpretation of the applicable law, it was green after all. Judges might do so under and in respect of their own law and legal system, they may thus consider that they are called to clarify it and apply it as a whole and may institutionally have been given that power, but that is notably not the status and role of arbitrators. As to facts, it is commonly accepted that arbitrators cannot initiate their own factfinding mission either. In general, that also concerns the applicable law. Again, it is fact so far as arbitrators are concerned. This may be extra clear in international cases, although it may again be asked whether that is always fully observed by international arbitrators. Even among judges in recognition proceedings concerning arbitral awards, there may still be confusion. Mustill J in The Chrysalis20 thought the distinction between fact and law still relevant in arbitration and asked first for the facts, then for the law, and thereafter for them being related to each other (which, in this approach, is the moment when a mistake may occur), but recognised also that there may be problems, in which case the ordinary courts will be hesitant to substitute their own view for that of arbitrators in recognition and enforcement proceedings. There are other cases in England which also seem to give arbitrators the benefit of the doubt in such situations,21 emphasising the reading of arbitration awards (by recognition judges) in a reasonable and commercial way and suggesting also sensitivity to the different handling of legal issues in international arbitrations. Simply finding another way to put forward new legal arguments at the recognition stage is then not supported and even less rearranging the facts accordingly.22 It is submitted that it might be better to note the different nature of dispute resolution in arbitrations altogether, the lack of a distinction between law and fact, and the limited powers of arbitrators in this regard, especially to raise legal (or other) issues independently and to engage in legal argument. Again, it is not their task.

1.1.4. Other Forms of Dispute Resolution: Expert Decisions, Amiable Compositeurs, Shortened Proceedings, Mediation and ADR There are other types of alternative dispute resolution than arbitration such as the use of amiable compositeurs, already mentioned (also called arbitration ex aequo et bono) and they should be distinguished. Here there will still be (adversarial) proceedings and hearings, but the decision will not be based on law, rather on what adjudicators consider reasonable and fair (except for mandatory rules of law that these adjudicators cannot waive either like public policy considerations in 19 Cf also Giuditta Cordero Moss, ‘Is the Arbitral Tribunal bound by the Parties’ Factual and Legal Pleadings?’ (2006) 3 Stockholm International Arbitration Review. 20 The Chrysalis [1983] 2 All ER 658. 21 See eg, Lord Bingham in Zermatt Holdings SA v Nu-Life Upholstery [1985] 2 EGLR 14, cf also Sir Michael Kerr, Keating Lecture, ‘Concord and Conflict in International Arbitration’ (1997) 13 Arb Int’ll 121. 22 See Steyn LJ in The Balearis [1993] 1 Lloyd’s Rep 215.

Volume 2: International Commercial Arbitration 15 competition aspects for example). Even then, what is reasonable and fair still has to be pleaded by the parties so that also this type of arbitrator remains constrained in the evidence considered and in the reasoning. In this connection another observation might be usefully made: it has already been said that arbitrators must decide points of law as fact on the basis of the pleadings of the parties except where they have autonomous powers, most clearly in international cases in areas of procedure and evidence, but perhaps now also in other areas especially where public order or public policy becomes engaged, see section 1.1.10 below. As will be discussed later, they might then even apply the modern lex mercatoria (and in public policy matters probably international minimum standards). The point to make here is that that does not make them amiable compositeurs as is sometimes suggested.23 The power to apply transnational law (at least if properly pleaded) is thus not dependent on the introduction of a particular facility in the arbitration agreement, such as amiable composition. Other distinctive proceedings, already mentioned in section 1.1.2 above, may be shortened arbitrations, also called fast track arbitrations in response to the exasperation of parties with the length even of arbitration proceedings and the fact that they are becoming too judicial. Under the LCIA and International Chamber of Commerce (ICC) rules, there are the Pre-trial Referee or emergency and the expedited versions of normal (international) arbitration. As we have seen, in the former it may concern extra relief but usually only on a provisional basis, creating problems under the New York Convention.24 In the latter, only the appointment procedure and the time limits are shortened, which invariably also affects the time for preparation that each party will be given, but the decisions are here still ordinary arbitral awards. The emergency facility was first introduced by the ICC in 1990 and is normally limited to special areas like preservation or restoration measures, including the retention of evidence, collection measures and orders to implement existing contracts, including the signing or delivery of the necessary documents. Mediation is different altogether in that the mediators have no decision-making power; they only mean to engineer and facilitate a settlement. It also resulted from dissatisfaction with arbitration as it has developed and it wants also to avoid its contentious nature, hence the alternative reference to conciliation. This facility is often advertised as being highly successful but there are few statistics and it does not appear to reach the bigger cases. Reference is sometimes also made in this connection to Alternative Dispute Resolution (ADR). Technically that may be considered to include all that is alternative to ordinary court proceedings and then also covers arbitration, but ADR is now usually used in the narrower sense of mediation. The problem with mediation is that if no solution can be found, parties are back to square one, having lost time and incurred extra cost. The facility may be more appropriate and successful in consumer cases and ordinary courts in England commonly recommend (smaller) cases to this type of dispute resolution mechanism. They now have the power to suggest so and it is then often more successful.25 In commerce and finance, it was already mentioned and will be submitted that a combination with (international) arbitration may become more appropriate or even desirable especially to escape over-judicialisation, to be considered further in section 1.1.14 below in connection with the discussion of international arbitration’s future. 23 See for a discussion, AFM Maniruzzaman, ‘The Arbitrator’s Prudence in Lex Mercatoria: Amiable Composition and Ex Aequo et Bono in Decision Making’ (2003) 18 (December) Mealey’s International Arbitration Report 1. 24 See also n 16 above and s 1.6.2 for the contractual rather than judgment approach to enforcement, cf also n 12 above. 25 It has been noted that the success rate is lower when lawyers become involved, see H Genn, Court Based ADR Initiatives for Non-Family Civil Disputes: The Commercial, Court and Court of Appeal (Lord Chancellor’s Department Research Program 2002).

16 Volume 2: International Commercial Arbitration Arbitration in its various forms must further be distinguished from expert decisions accepted as binding between the parties. This distinction is important but not always obvious. Expert decisions are matters of pure contract although often confused with arbitration and sometimes erroneously thought to be its predecessor. An example may illustrate the difference: the freshness of tuna is an essential element in the international tuna trade and may easily give rise to disputes followed by a special form of dispute resolution. They are often called the ‘see and sniff ’ type of arbitrations, which are particularly efficient in situations where differences of opinion cannot wait to be settled in an adversarial manner and parties may then ask an expert in the peer group instantaneously to decide the issue for them. There will commonly be no submissions of the parties or even a hearing. It is not truly a question of law but rather pure fact: is the tuna fresh or not? A binding expert decision will follow: yes or no. There may be no reasoned award either. It all makes a great deal of sense but it is not truly arbitration. There is no award proper and enforcement will be in the nature of the enforcement of an ordinary contract unlikely under the New York Convention even if the dispute is international (between actors from different countries or the fish being somewhere else). Quality disputes in commodity trading lend themselves in particular to this type of dispute resolution. Commodity arbitration facilities may present some hybrids but the basic distinction should be kept firmly in mind especially in matters of enforcement.

1.1.5. Institutional and Ad Hoc Arbitrations Arbitration depends on and is initiated under a contractual arbitration clause, another indication that it is not purely judicial, see also the discussion in section 1.1.2 above and further also section 1.1.11 below (although under BITs it is different and the arbitration facility is treaty-based as we shall see; domestically there may also be statutory schemes especially for consumers). A particular facility may be that an arbitration is considered institutional and it is the arbitration clause that makes it so. It means that the arbitration is to be conducted under the rules of an existing arbitration body, chosen by the parties, usually in the arbitration clause itself. These institutions may also give administrative support to the arbitration (for a fee). Their rules become an extension of the arbitration agreement and subject to the law that applies to it. That is to say that these institutional rules do not present a legal regime of their own or even an area of soft law. They are purely contractual, subject to the law governing the arbitration clause, although under the lex mercatoria concerning international arbitration, their essentials could conceivably acquire the status of customary law or general principle, cf also the discussion in section in 1.2.1 below. Domestically there may be special bodies of this nature, as in the Netherlands, famously, the Netherlands Arbitration Institute. There may be others for commodities and shipping elsewhere. In international commercial and financial arbitrations, it usually means that the arbitration clause will put the arbitration under the rules of the International Chamber of Commerce (ICC) in Paris, the London Court of International Arbitration (LCIA) in London, the Stockholm Chamber of Commerce (SCC), or the American Arbitration Association (AAA) through its International Centre for Dispute Resolution (ICDR) in New York. Choosing their rules implies administration of the arbitration by these organisations at the same time. For foreign investments disputes, there is the International Centre for Settlement of Investment Disputes (ICSID) in Washington as we shall see more extensively in section 3 below. It is different in that it operates under the Washington Convention so that the rules are not merely an extension to the arbitration clause, which itself (as well as the arbitral process) is transnationalised under the Convention. For international commercial and financial arbitrations, on the other hand, this transnationalisation at least of the applicable

Volume 2: International Commercial Arbitration 17 arbitration law may remain questioned, but it is the normal consequence of delocalisation and of these arbitrations being truly international as we shall see in section 1.1.8 below. The consequence is that it brings the arbitration clause and the institutional rules chosen by the parties under transnational law. As will be submitted, the law of the seat plays then only a residual role. The arbitration may also be ad hoc, which means that it does not benefit from institutionalised rules and administrative back-up. The arbitration clause will then commonly be longer and will set out especially how the arbitration tribunal is formed and probably also some procedural rules. In this connection a reference may also be made to the UNCITRAL Arbitration Rules issued by the United Nations Commission on International Trade Law, in the most recent version dating from 2010. It is a halfway house: there are rules but they notably lack an administrative back-up. Nevertheless, they have been successful. They are to be distinguished clearly from the UNCITRAL Model Law, which will be mentioned throughout in many other contexts.26 As there is thus no administration by UNCITRAL under their Rules, this means that the Chair arbitrator will have to set up an infrastructure for the arbitration and has to make the necessary arrangements for deposits, the distribution of submissions, and the hearing. This is a great burden and once a dispute arises and the Tribunal is appointed, it is not uncommon for the Chair to ask approval from the parties (who must pay) for established institutions, notably the Permanent Court of Arbitration in the Hague (PCA), to take over the administration for a fee. Even the LCIA and ICC might do so; in such cases their rules would not be applicable to the arbitration. One danger of institutional arbitrations is that these institutions might no longer exist when the dispute arises. This danger is not imaginary in respect of institutions set up in great enthusiasm in newer international business centres that may have to wait for many years for an arbitration to arise (they require first to be selected in an arbitration clause and subsequently need a dispute to arise under such a clause). Like any other arbitration institution, it requires a considerable case load to become financially self-supporting. In the meantime, such a new institution must find its financial support elsewhere which may prove to be unreliable. There is therefore a considerable risk for parties in terms of such institution’s continued existence. Usually for a new arbitration institution or centre to get off the ground, there must be a special reason. For instance, the Stockholm Chamber was favoured by the former Soviet Union for international disputes in which its agencies became involved. Because of the pull of London, the LCIA was able to re-establish itself quickly in England after the changes in the English Arbitration Act in 1979. It de-domesticated international arbitration under the Act of 1950, which made all arbitrations in England domestic and subject to appeal on points of law in the English courts, substantially eliminating London as an international arbitration centre and leaving the LCIA behind (which had existed since 1892). Its revival thus became possible but even that was not easy. This is only to say that the burden for arbitration centres to establish themselves may be great and time consuming. Again, their continued existence may not be assured and that works 26 The UNCITRAL Model Law is not a treaty, only a model for local arbitration acts, therefore for the lex arbitri of the seat of international arbitrations, but as a template of how international arbitration law should look like it is significant as an expression of where the international arbitration community thinks it is in these matters. This being said, it was always subject to compromise between many schools of thought and is unlikely to embody more advanced thinking (see also the discussion at n 41 below) and notably avoids the issues of delocalisation and transnationalisation of international arbitration. In these aspects it is behind and may not even reflect the international arbitration practice, but it is important in that it has been substantially adopted in many countries. It is, in this respect, a successful tool of harmonisation although not followed by but has functioned as important guidance in England and Germany in the adoption of their present arbitration Acts although it may also be the reason that these Acts do not show more advanced thinking; in particular international arbitration is not set sufficiently apart and is here still considered a (specialised) local facility.

18 Volume 2: International Commercial Arbitration against their credibility and reliability and therefore also against the likelihood of their being chosen for future dispute resolution. Even P.R.I.M.E., much hyped as an arbitration centre in the financial industry, may suffer a similar fate, see for this facility section 2.5 below.

1.1.6. The International Dimension International arbitration has already been mentioned and a special status was suggested. There may be all the more reason to submit to arbitration in international cases for the resolution of which domestic laws are seldom written and in which domestic courts may not be experienced. Moreover, there may be an innate bias against applying foreign laws, especially in regulatory matters, in particular when there may be special domestic public policy imperatives weighing on these courts. This may also affect local arbitrations which commonly remain under closer supervision by them. There may arise other complications locally when disputes arise internationally. In respect of the ordinary courts, there is first the question of jurisdiction. Which local court in what country is competent to deal with an international case? It may be settled by the parties in an exclusive forum selection clause, which is now accepted in most jurisdictions, assuming the issues are at the free disposition of the parties to settle in this way. Short of such a clause, there could be several competent courts in different countries, which raises important issues of lis pendens in the event that parties become engaged in similar litigation in different venues at the same time. Even sorting this out under rules where existing (as in the EU under the 2002/2012 Regulation or Brussels I) may take time, effort and cost. There may also be serious problems with language: all documents may have to be translated into the language of the court and witnesses may have to be heard in translation. The cases may be very big and as a consequence there may be greater anxiety in local judges dealing with them. Arguments may become longer, speed may suffer as a consequence and the cost of advocacy may spiral out of all proportion, further complicated by appeals. But there is also the important question of enforcement. Can a judgment when finally obtained be enforced in the country of the defendant (or of his assets) if that was not the country of the court? As we shall see, for the international enforcement of ordinary judgments, there is nothing like the New York Convention of 1958 on the Recognition and Enforcement of Foreign Awards which provides for an international recognition and enforcement regime for arbitral awards. In international commercial and financial dispute resolution, consideration of the nature and size of the international business flows and their dynamics is likely increasingly to put this type of dispute and its resolution in a special context and gives it a different perspective, which even domestic arbitrators might not have. International arbitrators may understand these dynamics better than local judges or other domestic dispute resolution facilities, who may still be inclined or forced to cut international transactions up into domestic pieces in the hope that the sum total of these laws adds up to something workable and efficient in the international flows. International arbitration may also better reflect the operation of a more dynamic concept of contract and movable property law as already discussed in Volume 1, section 1.1.6, followed in Volumes 3 and 4, both as risk management tools in these flows. On the public policy and regulatory side, it may concern the formulation of international minimum standards of behaviour balancing the international marketplace rather than any preference for a national law unless demonstrably prevailing when in conduct and effect international transactions come onshore. It will be argued that upon proper pleading, international arbitrators are likely to be more perceptive or freer in these matters and that this is expected from them, therefore inherent in their appointment. It may also suggest greater neutrality and is then the natural point of departure for

Volume 2: International Commercial Arbitration 19 substantial transnationalisation of the dispute resolution process and of the applicable arbitration law in this area as well as in the substance of the case, even though arbitrators remain first and foremost dependent on the submissions of the parties and international arbitrators would find it difficult to go beyond them unless perhaps public policy were engaged or the argument entered areas where they have acquired autonomous powers as they may have in procedure and evidence matters in the absence of agreement between the parties (see again sections 1.1.10 and 1.2.5 below), but even then, it is submitted, they would have to ask for further submissions and would hardly be in a position to formulate the law themselves, again they do not speak for any law. But it does mean that if only one party invokes these more modern attitudes in its pleadings, they may find greater understanding and receptiveness in international arbitrators than in local judges. So in international business disputes, largely arising when parties come from different countries; or concerning assets or activities that move from one country to another; or when the transaction involves classes of assets situated in different countries; or when it concerns claims, services or information and technology in the international flows, which can hardly be properly located (see section 1.1.7 below), we may have problems of international jurisdiction in the ordinary courts, while issues of procedural flexibility, issues of speed and cost especially connected with procedural complications, appeals, as well as issues of confidentiality may also acquire greater relevance and urgency. Again, there is also the issue of neutrality or objectivity when major policy interests from different countries are at stake. In respect of ordinary judgments, it was already noted that there are further issues of international enforcement in the absence of any worldwide convention enforcing foreign judicial decisions. It was already mentioned also that the enforcement of international arbitral awards is facilitated under the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. No such facility exists for ordinary judgments and it is an enormous advantage which has favoured international arbitration ever since. It may be illustrative in this connection that among the States of the US under the Full Faith and Credit Clause of the Constitution, recognition in other States’ judgments is no longer a major issue, including enforcement. It is also no longer considered a major problem in the EU where, as already mentioned, we now have a way to provide for recognition and enforcement of domestic civil and commercial judgments in other Member States under the Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, dating from 2002, followed by an amended text in 2012, effective 2014, and replacing the earlier Brussels Convention (the reason why we still refer to this Regulation as Brussels I. Brussels II covers other types of decisions). The essence is that in the EU (as within the US) there is a lot of trust in the operations and decisions of courts in Member States, but not necessarily in those of others. With an ever-larger number of Member States, this may or may not be justified. After Brexit, the UK has lost this recognition and enforcement facility for its judgments in the EU and vice versa.27 In the British Commonwealth among its Members, there is older UK legislation that provided some relief also; in Europe earlier there were some bilateral treaties but such treaty law was on the whole rare. These mutual recognition and enforcement facilities of ordinary judgments are therefore still limited and remain regional at best. The Hague Conference has tried for many years to get them going worldwide without much success: there is an early Convention of 1971 on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters with few ratifications; a bigger project has stalled for years. Notably the US has never entered into a treaty

27 JH Dalhuisen, ‘Recognition and Enforcement of Civil and Commercial Judgments in Europe after Brexit’, SSRN Working paper series.

20 Volume 2: International Commercial Arbitration of this nature, even with Canada. There is, however, the 2005 Hague Convention on Choice of Court Agreements. It allows for a simplified enforcement process when parties have chosen a (domestic) forum, but it does not sanction the exclusion of appeals nor facilitate procedural input by the parties, reasons probably why interest in the Convention is not great so far. These aspects of international cases leading to jurisdiction issues, lis pendens problems, procedural complications, length of the proceedings, appeals and cost, confidentiality and neutrality problems, and enforcement problems, all favour international arbitration. The fact that for recognition of the arbitration clause (which eliminates local jurisdiction and lis pendens issues) and for the recognition and enforcement of awards in other Member States, there is the New York Convention of 1958—now ratified by virtually all countries—provides extra and crucial support. It notably favours neutrality, again relevant especially when other public policies or the public interest or the interest of other countries also become engaged and can be more easily obtained by organising the arbitration well away from the places of the business of the parties and from the direct control by their courts (except ultimately in recognition proceedings under the New York Convention, which limits, however, the grounds for refusal very considerably as we shall see in section 1.6 below). Although the implementation and interpretation of the New York Convention is not without its problems as it is left to each recognition court in enforcement countries to interpret the Convention in its own way and apply its own public policy bar, the aim is nevertheless a more efficient and less destructive form of dispute resolution in international business over which the parties have much greater control, and which promotes speed, efficiency, confidentiality, and even neutrality. Even though the Convention has no clear concept of international arbitration and its different status either, it has nevertheless been highly successful and potentially also contributes to the transnationalisation of the law in this area better to guide the international commercial and financial flows and reduce legal risk. The discussion in this Volume will concentrate mainly on international arbitration and assume its truly international status. How it operates and achieves its aims in this legal environment will be the subject of the discussion in the remainder of Part I. Special features of international financial arbitration will be discussed in Part II, and the type of international arbitration now prevailing in foreign investment disputes with host governments in Part III. The latter presents the most complete expression of transnationalisation when conducted under the Washington (ICSID) Convention. The reasoning of international arbitrators will be the subject of Part IV.

1.1.7. When is a Dispute an International Commercial Dispute? The Operation of the International Commercial and Financial Legal Order. International Commercial Arbitrations and the Difference from Domestic Commercial Arbitration Since international commercial (and financial) arbitration is now commonly distinguished as a different facility, demonstrated, it will be argued, especially in terms of the status and powers of arbitrators and the recognition and enforcement of their awards, see section 1.1.10 below, it must be determined which disputes qualify, or perhaps rather in and for what type of business this type of arbitration operates. ‘Internationality’ and ‘commerciality’ then become important issues, which together potentially lift the dispute and its resolution into a different dispute resolution environment that is particular to international arbitration. These concepts have already been explored in Volume 1, section 1.1.10.

Volume 2: International Commercial Arbitration 21 The UNCITRAL Model Law elaborates in this connection in its Article 1(3) on internationality. Although this Model Law is not binding—it has already been said that it is not in the nature of a treaty but is merely an example of what an international arbitration act may look like in each country that adopts it—the text is authoritative and in its 2006 version denotes what the international arbitration community believes the common standards to be for the time being. As such it is often quoted and even if not adopted, it has served as a major example in many countries, no matter, it has already been said, that it has no clear concept of delocalisation and transnationalisation, not even in its 2006 amendments, which shortcoming then reaches into all domestic arbitration laws based on it. Its concern with internationality (and commerciality) is therefore hardly central and secondary to its main message. Taking a step back, on the contractual side, internationality of the arbitration usually results from the parties living (or having their place of business) in different countries. That is indeed the more traditional attitude as expressed also in the Model Law. On the property or asset side, on the other hand, internationality arises if in the relevant transaction assets have to be moved from one country to another. The same may happen for services, although this aspect (of movement) is found more in the French approach. France in its latest Arbitration Act of 2011, which distinguishes clearly between domestic and international arbitrations, and now simply declares, in Article 1504 CCP, an arbitration international when international trade interests are at stake. It is then for arbitrators to decide whether that will be the case in the particular instance although their views in this respect may be pre-empted by agreement of the parties, who may simply declare international all disputes and arbitrations concerning their transaction. Opting for LCIA, ICC or UNCITRAL Rules may imply it. The UNCITRAL Model Law added a number of other considerations and also considers the arbitration international when the place of arbitration is outside the states in which the parties have their places of business, or when their main business (in respect of which the dispute arises) is outside the states from which they hail. But the Model Law ultimately also leaves the determination to the parties and to their express agreement that the subject matter of the arbitration (agreement) relates to more than one country. Thus, even if it does not clearly relate to different countries, agreement may still render the arbitration international, although this is not then necessarily so for the purposes of the New York Convention, which has its own approach that is in fact simpler and more pragmatic. It refers in its title to ‘Foreign Arbitral Awards’ but does not define them. From Article I (1) it transpires, however, that the Convention applies simply if an arbitral award is sought to be enforced outside the country where it was made. There is here no definition of what a domestic arbitration is either. It appears that the country of recognition has the last word in these matters and there are no other objective criteria. As to commerciality, the Model Law contains a list approach in footnote 1 and there is no definition either. The attitude is that one recognises it when one sees it. The New York Convention does not clarify that point either. In Article I (3) it maintains the commerciality exception, meaning that Contracting States can limit the application of the Convention to commercial disputes and awards only, but does not define what is commercial and leaves it to the law of the state making the declaration. This may not be without problems. The US for example has made the exception, but there is no clear concept of commerciality (not even in the Uniform Commercial Code) and it remains a matter of State law. It was earlier said that when we place ourselves in the international flows of goods, services, money and information as the new paradigm also in law formation and application in international business, any transactions in them and disputes concerning them are international and that that may be the more proper perspective from which these matters should now be considered.

22 Volume 2: International Commercial Arbitration In Volume 1, section 1.1.11, a more radical approach was suggested in this connection by distinguishing simply between professional (business) and other dealings, the first ones now operating primarily in the transnational commercial and financial legal order, which is determined by the size and powers of these flows,28 the latter ones still in domestic (or statist) legal orders. It may not be much different from what is now said in Article 1504 CCP in France. It was further added that even if these professional business dealings may still be purely domestic on occasion, meaning the subject matter of the dispute not having connections with different countries, in their structure they are increasingly likely to conform to the practices of the international marketplace and should then be covered by its laws and dispute resolution facilities as well and the transactions in it are legally one unit, no longer territorially split up on the basis of closest connections with different legal systems. In this approach, all professional business activities are presumed to be universal in principle under transnational law. They are those that are between entities that (a) make it their business to engage in them, (b) regularly do so, (c) are sufficiently expert in them, meaning that they know or may be supposed to know what they are doing, and (d) commonly seek a profit in their dealings (very different notably from consumers). Thus, the notion of professional dealings becomes a key issue and assumes this operation to be in the international marketplace or legally in the transnational commercial and financial legal order as one operation. The habitual dispute resolution facility in that order is now undoubtedly international arbitration, at least for the bigger cases beyond mere collection and it operates in and is covered by the legal framework of that order. It has already been said that it sets international arbitration increasingly apart from litigation in the national courts but also from domestic arbitrations. It was noted before that the latter often served, and probably in nature still serve, as a replacement for the court of first instance. As a consequence, there may still result a greater concern with formal procedural issues, but it is also likely to mean that there could still be forms of appeal, at least on points of law in the domestic system. As a minimum there would be some greater supervision of the higher courts. As we have seen, this was very much the attitude of the English Arbitration Act of 1950 amended in this respect only in 1979. The new English Act of 1996 still allows points of (English) law to be referred to the courts in England as a preliminary matter, if not excluded by the parties (an agreement dispensing with reasons for the award being deemed an exclusion). This is now a curiosity when it comes to international arbitrations (which the English Act still does not fundamentally distinguish and there appears to continue a more activist approach to supervision in the ordinary courts in England and Wales although it is hardly desirable). It is submitted that parties insisting on their arbitration clause still being subject to a national law (rather than transnational law) thereby risk re-domesticating their arbitration. Emphasising the applicability of the lex arbitri of the formal seat, especially also to the arbitration clause and the arbitration itself, may lead to a similar increasingly undesirable result. This is a choice that can still be made but it may be asked whether, while so doing, parties fully understand the consequences and the very nature of international arbitration, which itself must be seen as transnationalised to reap the true benefit, even if one admits that supervision remains an issue but it needs to be resolved differently and be organised at the transnational level also, see further the discussion in section 1.1.9 below.

28 See Vol 1, s 1.5 above and JH Dalhuisen, ‘Legal Orders and their Manifestation: The Operation of the International Commercial and Financial Legal Order and its Lex Mercatoria’ (2006) 24 Berkeley Journal of International Law 129, and JH Dalhuisen, ‘The Operation of the International Commercial and Financial Legal Order: The Lex Mercatoria and Its Application’ (2008) 19 EBLR 985.

Volume 2: International Commercial Arbitration 23

1.1.8. The Notion of the Seat in International Arbitrations and the Delocalisation Issue. Self-Styled Autonomy of International Arbitrators? This brings us more properly to the concept of the seat of an international arbitration, its significance and the continuing tendency towards strict localisation of and local formalism at the seat in international dispute resolution with a strong judicialisation undercurrent, nevertheless claiming extraterritorial effect and coverage of the entire arbitration worldwide. Thus arbitration, even when international, is then still considered a form of local dispute resolution in the judicial manner in which only slight deviations are allowed, supervised and ultimately assessed by the local courts of the seat. In this way, it is still common to talk about the seat of an international arbitration as the lynch pin of international arbitration, which means an anchor in domestic law. Where this idea originates from is obscure but it is reminiscent of Savigny’s proposition that all legal relationships have a seat in a national law (see Volume 1, section 2.1.1). The issue is here the applicable arbitration law: is it the one of the seat, the one of the place where the dispute arose, or is it rather the transnational practice or the modern lex mercatoria itself? The question is simply whether international arbitration operates under transnational law supported to the extent necessary by local arbitration acts in all countries where the international arbitration comes onshore and needs support. More to the point may be the question whether international arbitration properly understood remains a variation of domestic arbitrations or whether it is truly international,29 which means originating and operating independently in its own legal order under transnational law. Is there autonomy here and is it self-styled in international arbitrators operating under transnational law or the modern lex mercatoria as will be the approach in this book?30 For international arbitration, the notion of seat is usually considered to be formal: where parties say it is or, in the absence of such a choice, where arbitrators determine it to be or where they effectively sit. It is therefore not necessarily connected with the place where the arbitration is mainly conducted or plays out, even less where the business is in which the dispute arises, or with which the subject matter of the dispute is most closely connected. It was always artificial and does not have a substantive rationale; it is not public policy either but considered merely a matter of party autonomy. Indeed, the seat in this formal sense is mostly chosen. The best explanation may be better to guarantee neutrality in the dispute resolution,31 the seat being chosen well away 29 The notion of the seat is also known in (international) company law, in the nature of domesticating that law. There are here two different approaches: is internationally the company law derived from its formal seat or from the place of its major activities? France and Germany traditionally take the latter view, England and the Netherlands the former. Either choice is believed to lead to extraterritoriality of the relevant domestic company regime, but especially in the formal approach there is less justification and there may be further conditions in third countries. 30 Cf also GA Bermann, ‘The Self-Styled “Autonomy” of International Arbitration’ (2020) 36 Arb. Int’l 221. 31 The lack of any real contact with the dispute is in fact the weak point and then becomes primarily an issue of neutrality but at least in shipping, it is as such still an issue in the view of the drafters of the Hamburg Rules (and to some lesser extent of the Rotterdam Rules) which demand a real contact, potentially at the expense of neutrality. The true concern behind the Hague Rules and its successors (The Hague Visby, Hamburg and Rotterdam Rules) has always been the dominant position of the carrier which led to these Rules embodying mandatory minimum standards on them at least in non-liner trades governed by charter parties and bills of lading. The concern in the Hamburg Rules is that these minimum standards may be avoided by choosing a jurisdiction (or seat) where the Rules do not obtain or to a similar effect choosing an international arbitration in respect of shippers who have usually little choice when subsequently these dispute resolution venues are invoked by the carriers against them. It may also become a question of convenience and cost for the shipper, especially when there are small claims.

24 Volume 2: International Commercial Arbitration from the country of the dispute, although technically the seat could still be in the country of one of the parties or in the place of their business if so selected by them. In international arbitration, this is now on the whole avoided; it would risk making the arbitration even more local and the award might then not qualify for enforcement under the New York Convention either, the seat potentially being at the same time the country of the business, the arbitration, the award, and the enforcement. In any event, it should be realised that even the neutral or formal concept of the seat risks domesticating the arbitration and may notably render it subject to the control of the courts of the seat, at least so it is often still assumed and is normally also still provided for in the arbitration laws of the seat (lex arbitri) even when distinguishing between domestic and international arbitrations.32 This may not or may no longer be useful; the issue of supervision of an international arbitration will be discussed later. More to the point may be support (not supervision) at the formal seat, for example, when parties do not manage by themselves to constitute the Tribunal, but support may be needed in many other countries and may then be given under their own arbitration or procedural laws, for example, to force witnesses to cooperate and to appear or to safeguard assets. As already mentioned, implicit in the idea of the seat was the paradigm that the whole arbitration was covered by its arbitration law, also for its extra-territorial effect. Thus, the arbitration law of the seat was often thought to have full control over the international arbitration wherever it surfaced, at least in principle. It was then also thought that the rules of procedure and evidence derived from it, even the applicable rules of private international law (to determine the applicable legal regime in the substance of the case). Any presumed dominance of the law of the seat thus suggested that there was no transnationalisation of the applicable legal regime covering international arbitrations and that notably international arbitration practices were irrelevant except if the law of the seat so provided. At least for procedure and evidence, this view is now abandoned in favour of transnationalised concepts, meaning the principles and practices of the international arbitration community itself. It is one of the few but important areas where international arbitrators under transnational law even have obtained substantial autonomy short of any agreement of the parties, as will be discussed further in section 1.2.5 below, and where they commonly apply their own transnationalised standards, although still subject to the instructions of the parties (if in agreement) and further submissions. In fact, the notion of full extraterritoriality of the domestic lex arbitri of the seat is increasingly challenged and replaced by the modern lex mercatoria and its various sources Hence the concern with better contacts when such dispute resolution clauses are imposed by carriers in their standard bills of lading. For arbitration, the result is a limitation of party autonomy in the sense that under the Hamburg Rules only certain seats may result from which the shipper may choose regardless of the choice of seat in the arbitration clause. It was already said that this poses the question of sophistication but also of neutrality. The Rotterdam Rules left the issue to Contracting States, and was in any event somewhat more relaxed as these Rules concern mostly liner trades where parties may be more equal and arbitration is traditionally less common. The importance from an academic point of view is the fundamental challenge to the concept of neutrality of the seat as commonly perceived in the regular international arbitration practice and then used as justification for its dominance. It shows that a more critical academic review of the entire concept of the seat in international arbitrations is long overdue. 32 Belgium at one stage did do away with the supervision of international arbitration by domestic Belgian courts but it was reinstated unless the parties expressly agreed otherwise. This reinstatement is often considered a successful rearguard action in favour of the notion of the seat but would appear rather pointless and has not increased the international arbitration activity in Belgium. In any event, it confirms that it is no longer a matter of public policy but a question of party autonomy. Note that Art 1522 of the French CCP (the most recent French arbitration Act of 2011) equally allows parties to do away with the challenge or setting aside in French courts of awards rendered in France.

Volume 2: International Commercial Arbitration 25 of law being here controlling, especially international practices or general principles (as may be embodied to some extent in the Model Law), besides fundamental principle (as may be particularly relevant in the area of due process). The modern lex mercatoria shows here its relevance also in dispute resolution and potentially not only in the substance of the case. In it, as we have seen in Volume 1, section 1.4.14 dealing with the hierarchy of the different sources of law, see further the next section, the local law—in this case the lex arbitri of the seat—only plays a residual role as may do the local laws of any other country where support is needed. Even more burdensome in this connection used to be the view that for an arbitration to obtain international currency, the award first had to be stamped into law by the courts of the seat (subject to its conditions for doing so—this was the exequatur) so that it acquired the form of a local judgment at the seat first, which only thereafter could be recognised and enforced (or not) elsewhere subject to a further review in the place of recognition. This was the theory and practice of the ‘double exequatur’, which made international arbitration a more hazardous undertaking. It was the main purpose of the Geneva Convention of 1927 to create some order in this process and to facilitate international recognition but it was based on the double review and the full domestication of the award first at the seat of whose laws it became the product. It meant that an award that was not first accepted by the courts of the formal seat had no international enforceability. Crucially, the New York Convention of 1958 broke with this idea and recognises arbitral awards regardless of their fate in the courts of the seat. The Convention was as such an important signpost on the road to the delocalisation of international arbitrations. Under Article V(1)(e), a foreign award may still be denied recognition and enforcement if set aside or suspended by the courts of the seat, but it is not automatic and especially in France but also in the US, there are important cases where a foreign award had been recognised after being annulled at the seat.33 In fact the French Cour de Cassation has referred here to a distinct ‘international arbitral order’, in which the arbitral awards are founded. It is not connected with the seat, the validity of the awards does not derive from its laws, and the courts of the seat have no ultimate control over it (except in their own territory).34 It follows that there is no longer any extraterritoriality per se of any annulment at the seat; in fact, there is no extraterritoriality of its rules either. This leads into the delocalisation theory and its meaning. The main feature is that it makes international arbitration truly international and places it (and the arbitration clause upon separation from the rest of the agreement) under transnational law, therefore under the modern lex mercatoria and its different sources of law and their hierarchy. Again, the lex mercatoria is not then only the putative substantive law of the dispute in the case but it also covers the international arbitration itself and may even extend to international enforcement as we shall see. This evolution has been spotted at least since the 1980s35 and may now present the clearer model, meaning 33 See s 1.5.2 below. 34 See Cour de Cass Civ 1, 29 June 2007 in Ste PT Putrabali Adyamulia v Société Rena Holding et Société Mnugotia Est Epices, Arrêt n 1021, 207 Revue de l’Arbitrage 507. The new French Arbitration Act of 2011 does not clearly reflect this, nor is it clear how far it goes. It may not go beyond the French idea of the international arbitral order, which therefore remains a French concept and is not truly transnational; see also the comment in Vol 1, s 1.1.11. One may therefore still ask how far the French legislator has drawn the consequence. Under the new law, international arbitration may still be a French concept rather than a question of the recognition of an international facility subject merely to French public policy and public order concerns for the effects in France. Indicative is that the severability of the arbitration clause is fully accepted but it is not put under transnational law, while domestic arbitration concepts are still extended to international arbitration. The latter’s special status may therefore still be in doubt. New French statutory law did not therefore contribute much at the conceptual level in terms of clarification. 35 See J Lew, ‘Achieving the Dream: Autonomous Arbitration’ (Freshfield Lecture 2005) (2006) 22 Arbitration International 179 and earlier J Paulsson, ‘Delocalisation of International Arbitration: When and Why it Matters’ (1981) 22 ICLQ 53, and more recently J Paulsson, ‘Arbitration in Three Dimensions’ (2011) 60 ICLQ 291.

26 Volume 2: International Commercial Arbitration the model that at this moment is more responsive to what is happening, propelled as it is by the globalisation of the commercial and financial flows, and explains this type of dispute resolution better and simplifies more. Thus, the lex arbitri of the seat is there only as the residual rule if the other sources of the modern lex mercatoria, discussed in the next section, leave gaps. Even then, it becomes part of the transnational law and will be adjusted accordingly, thus shedding its domestic features. For the rest it principally supports the international arbitration as do the leges arbitri of all other countries where support may be needed, for example in preliminary preservation measures (where the courts of the place of the business of the parties is likely to be most relevant) or in the country or countries of enforcement (again probably the country of the business of the parties), here with reference to the New York Convention in countries that have ratified it, which are virtually all countries of the world. The courts in these latter countries then more properly exercise the supervision in either giving or withholding their support, therefore in the places of enforcement where it matters most. In this view, the involvement of the courts of the seat supervising international arbitrations only complicates the issues and is dilatory, benefitting at best the local legal profession. Of course, the country of the seat may not want to have certain arbitrations conducted on its territory at all, for example, to prevent a cowboy culture in arbitration from developing in order best to preserve its own reputation as arbitration centre in this connection. That would be a perfectly legitimate public policy issue and choice, but all the same only a purely domestic concern that does not affect the international arbitration, which could continue elsewhere. In that view, a challenge (of jurisdiction) at the seat, if successful, has no extraterritorial effect either and the status of the award is not affected by it although it is unlikely subsequently to be enforced in the country of the seat where there are unlikely to be any assets. Thus, the international effectiveness of the award would solely depend on courts in enforcement countries, and it would not or no longer be for the courts of the seat to pre-empt, see further the discussion in section 1.5 below.

1.1.9. The Major Consequences of Delocalisation. Attitude of the New York Convention and the Model Law. The View of Article 16(4) of the LCIA Rules (2014 and 2020) It follows from the foregoing discussion, that delocalisation means detaching the international arbitration from local laws but it does not mean putting them in a legal void or vacuum. To the contrary, it activates the operation of transnational law and its sources, in particular transnational fundamental principle and customary (arbitration) law or practice within the context of the modern lex mercatoria36 and its hierarchy of these legal sources as discussed in Volume 1, sections 1.4.13 and 3.1.2, here applied to international dispute resolution, in particular arbitration, See for the leading defence of legal nationalism in international arbitration, the denial of the latter’s existence, and the belief in the continuing dominance of the seat and its lex arbitri, FA Mann, ‘Lex Facit Arbitrum’ (1986) 2 Arbitration International 245. It reduces all international arbitrations to local ones with some extra features at best. 36 See further the important contribution of Judge James Allsop, ‘The Authority of the Arbitrator’ (2015) 30 Arbitration International 639, 643 also noting the autonomy of the international arbitral order and of its laws, especially with reference to Justice Robert Jackson from the US Supreme Court in Lauritzen v Larson 345 US 571 (1953) identifying a ‘non-national and international maritime law of impressive maturity and universality’ having the force of law not derived from the extra-territorial reach of national laws, but from acceptance by common consent of civilised communities to foster amicable and workable commercial relations. One may see this

Volume 2: International Commercial Arbitration 27 as its transnationalised lex arbitri. Thus there figure in it fundamental principle (notably due process and other fundamental values and policies, such as the separation of the arbitration clause, the Kompetenz/Kompetenz principle and others as we shall see); customary law (custom and practices), not least in procedural and evidence matters; treaty law (New York Convention) in matters of recognition and enforcement of the arbitration clause and the awards; general principles, such as those of the UNCITRAL Model Law; and the arbitration clause as an expression of party autonomy, the latter itself detached from the rest of the contract and placed under transnational law (unless parties specifically agree otherwise when they risk to domesticate the process). To the extent they are mandatory, these principles and rules prevail over the other sources. Local laws, especially the lex arbitri of the seat, will support and the latter may then acquire a residual function in the modern lex mercatoria concerning the operation of international arbitrations. This was already mentioned in the previous section, and the lex arbitri of the seat then becomes part of the transnational law itself, must find its place therein, is subject to the higher transnational sources, and is modified accordingly to make sense and function in the transnational commercial and financial legal order and its dispute resolution facilities, respecting therefore the internationality of the arbitration. Public policy and order requirements in that order may correct and further shape the arbitral process. The essence is that the arbitration is thus placed in the transnational commercial and financial legal order, is activated by but not founded in the arbitration clause (which itself derives its authority from that order upon separation), and is fully transnationalised. One often talks of the arbitration clause as being central to the international arbitration, but it is truly the question of the powers of international arbitrators under the modern lex mercatoria, which also governs the arbitration clause, gives it its force and effect, and defines its place in the hierarchy of norms. In Volume 1, section 1.1.11, the major consequences of delocalisation and placing international arbitrations under international law were already identified and are fundamental to the transnationalised framework and its understanding. They may be restated as follows: (a) Institutionally, the international arbitration facility and the dispute resolution authority it represents find their legal basis and legitimacy in the transnational commercial and financial legal order itself, activated by the arbitration clause, not therefore based on it but triggered and supported by it and the institutional rules it might incorporate. (b) It activates at the same time the modern lex mercatoria and its sources as the law applicable to the arbitration, the arbitration clause itself, and the arbitration process. Transnational law then also determines the extent of party autonomy, the powers and jurisdiction of arbitrators, the arbitrability and admissibility of the dispute, their way of reasoning (see further the discussion in Part IV below), and the status of the award. (c) Under it, the arbitration clause is separated from the rest of the agreement.37 Thus the law declared applicable to the rest of the contract does not control the arbitration clause and the arbitration (nor does the lex arbitri of the seat), which cannot therefore be disturbed by the fate or law of the main agreement.

especially in the traditional mercantile parts of commercial law, but transnational legal principle and custom may now be seen universally in all of commercial and financial law and in its dispute resolution facilities. 37 The notion was recognised by the French Cour de Cassation on May 7 1963, Dalloz 1963, 545. See for the US Supreme Court, Prima Paint Co v Flood Conklin Manufacturing Corp 388 US 395 (1967). In the Lena Goldfields v USSR arbitration, arbitrators had already held so in 1930. This case has never been fully reported, but see VV Veeder, ‘The Lena Goldfields Arbitration: The Historical Roots of Three Ideas’ (1998) 47 Int’l and Comp. Law Quarterly 747. The earliest English case appears to be Heyman and Another v Darwins Ltd [1942] AC.

28 Volume 2: International Commercial Arbitration (d) International arbitrators determine in principle the validity and meaning of the arbitration clause,38 also have the power to determine their own jurisdiction (Kompetenz/Kompetenz) as well as arbitrability and admissibility issues which may now also cover competition and securities regulatory matters. (e) International arbitrators may also exercise original powers in procedural and evidence matters subject to any agreement of the parties in these matters, notably the arbitration clause and rules incorporated therein, meaning that they may autonomously assess the burden of proof, the weight of evidence, assess issues of due process and propel the arbitration in terms of efficiency and speed.39 It does not rule out that they consult the parties in these matters, but must do so openly, whilst their findings are normally not subject to a challenge in the court of the seat or to a review under the NY Convention. (f) Legal transnationalisation may even give international arbitrators the power to deal with transactional and payment finality, with the third-party impact of set-off and netting, and with priorities or preferences in asset-backed funding when their role would then arguably become comparable to that of equity judges in common law jurisdictions. It is another controversial issue concerning the powers of arbitrators and how they are to be exercised.40 38 Unless the plea for invalidity was directed especially at the arbitration clause, when local courts asked to take jurisdiction may also decide the issue, see House of Lords in Fiona Trust & Holding Corp v Yuri Privalov [2007] UKHL 40. This is often referred to as the issue of the negative effect of Kompetenz/Kompetenz which goes into the question how much power local courts still have and could exercise over the arbitration and may also arise in subsequent challenges or enforcement proceedings. If the issue is raised before arbitrators, the positive effect is usually highlighted, meaning that in such cases efficiency may indeed require the matter to be dealt with by the arbitrators, which is now the position in international arbitration. See for this efficiency element and the balance with legitimacy, also GA Bermann, ‘The “Gateway” Problem in International Commercial Arbitration’ (2012) 37(1) Yale Journal of International Law 1–48. Where the issue is first raised in the otherwise competent courts asked to desist, it (negative effect) is more problematic in the sense that one party may be denied its day in court. The question is then more in particular whether the courts will only conduct a prima facie investigation and leave the matter subsequently for the parties to argue in the arbitration or whether they undertake a full review, see also E Onyema, ‘The Jurisdictional Tensions in Domestic Courts and Arbitral Tribunals’, in A Menaker (ed), International Arbitration and the Rule of Law: Contribution and Conformity (Alphen aan den Rijn: Kluwer Law International. ICCA Congress Series 19, 2017) 481–500. Art II of the NY Convention does not cover the issue and is therefore neutral. So is the Model Law (Art 8(1), which copies the NY Convention language and requires the court to desist ‘unless it finds that the agreement is null or void, inoperative or incapable of being performed’, without clearly saying who determines this but there is a bias in favour of the local courts even though Art. 16(3) and 8(2) of the Model Law contain important statements regarding the autonomy of international arbitration in relation to the ordinary courts under the law of the seat. French law since 1949 gives here the power to the arbitrators and there will be only a prima facie judicial review in the courts. German law leaves it to the courts, and English law and courts consider the circumstances and American case law the intent of the parties, which increasingly seems to imply that these matters are truly decided by arbitrators, First Options of Chicago, Inc v Kaplan 514 US 938 (1995). The danger is long and costly judicial proceedings at the beginning of the case. See for France E Gaillard and J Savage, Fouchard Gaillard Goldman on International Commercial Arbitration (Kluwer, 1999), 395; see further JJ Barcello, ‘Who Decides the Arbitrators’ Jurisdiction? Separability and Competence-Competence in Transnational Perspective’ (2003) 36 Vanderbilt J Transn’l L 1116; S Brekoulakis, ‘The Negative Effect of Competence-Competence: The Verdict Has to Be Negative’ (2009) Austrian Arbitration Yearbook, Queen Mary School of Law Legal Studies Research paper No 22/2009 238; A Ahrendt, Der Zustaendigkeitsstreit im Schiedsverfahren (Mohr Siebeck, 1996); GB Born, International Commercial Arbitration 2nd edn (Kluwer, 2009) 911. 39 See also s 1.1.10 below. 40 See JH Dalhuisen, ‘International Arbitrators as Equity Judges’ in PH Becker, R Dolzer and M Waibel (eds), Making Transnational Law Work in the Global Economy. Essays in Honour of Detlev Vagts (Cambridge, 2010) 510. In n 5 above, it was already noted that this power which concerns semi-public policy (as property law is) and affects classes of outsiders especially creditors, who were not party to the arbitration, may be as contentious as the powers in the area of public policy proper and may as such be detrimental to the legitimacy and credibility of private dispute resolution of this nature, see further the discussion in s 1.1.14 below.

Volume 2: International Commercial Arbitration 29 (g) In appropriate cases, international arbitrators may also be able to deal with matters affecting the public at large. That may include public policy issues such as competition and securities regulatory issues, but also other measures, notably those necessary to keep the international marketplace clean, therefore issues of market abuse, bribery, money laundering, and the like. (h) It might even cover the identification and formulation of international minimum standards, like in matters affecting the environment and financial stability, or in the area of taxation. As we shall see in section 1.2.5 below, this poses the important question whether international arbitrators may raise these issues themselves, therefore independent from the pleadings of the parties, in which case they become more like judges when issues of accountability and supervision may readily arise. (i) All the same, it remains a fundamental principle that arbitrators depend on the pleadings of the parties and resolve only the differences as parties have submitted them on the basis of which argument is the more plausible or preponderant; that in this connection all law must be pleaded as fact; and that arbitrators act more like juries and normally have no autonomous authority to clarify the law in any other manner except in those areas where they have acquired original powers to raise and decide legal issues themselves, which must be considered to remain exceptional, even if increasingly it may concern public policy issues. (j) Under the modern lex mercatoria, its sources and their hierarchy as discussed in Volume 1, section 1.4, fundamental principle will be leading, especially relevant in issues of due process such as a proper hearing and equality of parties, but it also establishes the legal framework and legitimacy of arbitrators, sometimes even in being able to raise public policy issues themselves when their independence and impartiality and the transparency of their activity and accountability for their actions may become other fundamental issues. (k) The separability of the arbitration clause, the notion of Kompetenz/Kompetenz, the authority to deal with arbitrability, the limitation of revision, procedural flexibility, and the determination of their own reasoning, are all expressions of and confirm these fundamental principles of international arbitration. Custom and practices will likely deal with the details, also in procedural and evidential matters. So may treaty law (such as the New York Convention in the international recognition of the arbitration clause and the ensuing awards), and general principle found in local leges arbitri, and more especially in the Model Law. (l) The arbitration clause itself, properly separated and transnationalised, and the institutional rules it may make applicable, such as those of the LCIA and ICC, will further clarify and implement the applicable arbitration law as a matter of party autonomy, but always subject to (i) any higher mandatory rules in the hierarchy of the modern lex mercatoria concerning international arbitration and (ii) international minimum standards of public policy or public order that may develop in this connection. (m) Transnational law will also confirm that in this approach or model, the lex arbitri of the seat potentially still provides the residual rule but will to that effect become part of the transnational arbitration law itself and be adjusted accordingly to play its role therein subject therefore to any higher transnational rule or principle as already mentioned. (n) Transnational principle and arbitration custom also give international arbitrators the power to determine the applicable substantive law, which, depending upon the pleadings of the parties, may still result in the application of a domestic law under the rules of private international law or, alternatively, in the application of the modern lex mercatoria and its hierarchy of legal sources to the substance of the case. (o) Where parties still rely on private international law concepts, if only to supplement and complete the modern lex mercatoria, international arbitrators may determine in that connection which rules of private international law (if in dispute) apply and may, if so, pleaded by

30 Volume 2: International Commercial Arbitration any of the parties, refer to non-national or general principles of private international law rather than to those of the country of the seat. (p) Transnationalisation of the arbitration and the founding of the arbitral jurisdiction, powers, and award in the transnational legal order also lead to a limitation of the review by the domestic courts, either when the awards are challenged in the country where they are rendered (of their seat or any other) or in the context of their recognition and enforcement in other countries, the latter being implemented by the New York Convention, which in the view here presented itself remains subject in its interpretation to higher transnational principle and custom under the modern lex mercatoria. (q) Notably the sanction of the courts of the seat is no longer required for the international standing of the resulting awards and is no precondition for their enforcement elsewhere. It also follows that their annulment at the seat is no longer dispositive in recognition and enforcement elsewhere either and has no extra-territorial effect. As already mentioned, the New York Convention did do away with the double exequatur and no longer requires an arbitral award to be stamped into its law by the court of the seat before enforcement elsewhere can be obtained. That is delocalisation, but in many other respects the New York Convention still adheres to the notion of the seat and offers fundamental support for it and the applicability of its law, see its Articles I (1), I (3), V (1)(a), V (1)(d), and V (1)(e). So does the UNCITRAL Model Law. But the Convention is more than 60 years old, dates from a time when the international flows of goods, services, information and money were modest and it can hardly be representative of more current thinking. This may be different for the UNCITRAL Model Law41 but it may be considered that the practitioners who were behind it and its 2006 update were largely educated in the past and still captured by conventional nationalistic thinking in this area.42 It may be noted that Article II of the New York Convention in matters of the status of the arbitration clause stays well away from taking here a position. Article 16(4) of the LCIA Rules 2014 reconfirmed in 2020 is here also regressive and surprising. It is unique among modern arbitration rules in bringing the arbitration clause upon its separation from the rest of the agreement, specifically under the lex arbitri of the formal seat as the default rule. Certainty is here invoked, but it is misplaced and is reminiscent of the attitude in the English Arbitration Act of 1950 that made all arbitrations in England local. The result was that international arbitration avoided England for more than a generation. The LCIA risks a similar fate. It is yet another example where invoking certainty may mean low-quality law and is inimical to new perceptions and very necessary innovation and renewal. In any event, it has already been said that in an international arbitration, the lex arbitri of the seat, if still having a (residual) function, should be placed among all other sources of the modern lex mercatoria and their hierarchy, notably the fundamental and general principles and arbitration practices that have developed transnationally in international arbitrations, and it is subservient to it. Again, within the modern lex mercatoria concerning transnational dispute resolution, the law of the seat is itself transnationalised and adjusted to make sense in the transnational legal order which it must respect and

41 See for the Model Law n 26 above. 42 It is of interest that an important practitioners’ treatise such as that of Redfern and Hunter on International Arbitration 5th edn (Oxford, 2009) 191–92 cannot make up its mind. In their view, delocalisation goes too far, just as if there were a half-way house, and has run into ‘the ground’. Arbitration is still a matter of local laws, see further s 1.1.13 below. The more academic work of JDM Lew, LA Mistelis and S Kröll, Comparative Commercial Arbitration (The Hague, 2003) is different, but does not draw the consequences in terms of the powers of arbitrators and the applicable substantive law either.

Volume 2: International Commercial Arbitration 31 support to still have a meaning and be relevant; see further the discussion of the modern lex mercatoria in this respect in the next section and in section 1.2.1 below.

1.1.10. Powers, Status and Activity of International Commercial Arbitrators. Areas of Arbitral Autonomy. The Applicable Arbitral Law. Problems with Quantum It was submitted in the previous section that properly understood the powers and status of international arbitrators derive from transnational law, activated by the arbitration clause, which itself is covered by that law also, as is the award unless parties specifically state otherwise, in which case they risk that the arbitration and the award will be domesticated. In sections 1.1.2/3 above, the role of arbitrators and the character of arbitral dispute resolution were already discussed. It was found that the jurisdiction of arbitrators is in essence a limited one: solving disputes between the parties on the basis of the facts as presented by them, in which connection law must be pleaded as fact also. Arbitrators have no natural lex fori to apply and are not judges representing or clarifying any legal system or it would have to be the transnational law. They are notably not lawmakers and have no such institutional power. It was already noted that there are, however, areas where arbitrators have acquired original power but in such cases, it is still important to determine the extent of these powers and how these powers should be exercised. Procedure and evidence were mentioned when parties are not in agreement or even choosing the default rule if parties have not pleaded the applicable law. Notably in procedure their original power is relevant, although parties remain in control of their case but there may be no agreement between them, especially once the arbitration has started, and such control is in any event not unlimited. The issue may arise in particular whether arbitrators may speed up the proceedings or close a discussion when they feel they know enough even if parties (or their advocates) want to go on.43 At least in international arbitrations, the practices suggest that arbitrators now have these powers and can exercise them in appropriate cases and they may be significant to achieve arbitration’s main aims: speed and efficiency. One could even see them as other fundamental principles of international arbitration. Then there is the question of determining their own jurisdiction, arbitrability, and way of reasoning. To repeat, there may also be powers of international arbitrators as equity judges, especially in proprietary matters. It may now even be asked whether international arbitrators may have autonomous powers to raise public policy issues, as we shall see. Even if one in principle accepts the notion of the passivity of arbitrators and that they are dependent on the submissions of the parties, see section 1.1.3 above and further also the next

43 See also DW Rifkin and SJ Rowe, ‘The Role of the Tribunal in Controlling Arbitral Costs’ The International Journal of Arbitration, Mediation and Dispute Management 116 (2015). Whether this power to control costs and promote efficiency is autonomous as a fundamental principle of international arbitration or must derive from the arbitration clause and the institutional rules backing it up (see Art 17(1) UNCITRAL Rules, Art 22 ICC Rules, and Art 14 LCIA Rules) may remain a point of debate in this discussion, the former approach relying on transnational law being advocated in this book. See for conflicting considerations of efficiency and due process, S Saha and S Shukla, ‘Resurrecting the Debate on “Due Process Paranoia” in Centrotrade: Paranoia or Judiciousness?’ (2020) 36 Arb Int’L 521, with emphasis on the former to avoid unscrupulous delays, and R Metsch and R Gerrbay, ‘Prospect Theory and Due Process Paranoia: What Behavioural Models Say About Arbitrators’ Assessment of Risk and Uncertainty’ (2020) 36 Arb Int’l 233. It suggests that arbitrators often lack courage and are risk averse.

32 Volume 2: International Commercial Arbitration section, special problems may still arise in the determination of the quantum when arbitrators are not convinced by the submission of either party and there is no majority for either claim or counter claim. Here one sees that in practice arbitrators may start deviating from the submissions of the parties and their expert witnesses, not necessarily to find middle ground, although there may be such a temptation which may, however, be wholly inappropriate.44 Nonetheless, they still have to find upon the submissions of the parties or stay as closely as possible to them and to the applicable law the parties plead but must also reach a (majority) decision. Implicitly, this might leave more room and power to arbitrators and may make their reasoning especially in this aspect of considerable interest. But they should not exceed their jurisdiction, prudently consider their powers in this connection or the lack thereof, and be extremely careful not to decide on grounds which were never at issue and properly argued by the parties. The result would be an award extra petitum. Of course, in the arbitration clause itself arbitrators could be given greater powers in this regard but they are not implicit and suggest a different kind of arbitration which would be more like that of amiable compositeurs, see section 1.1.4 above. Even then, arbitrators remain dependent on the pleadings of the parties and must ask for further submissions if they raise further points independently. It has already been said that leaving the lex arbitri of the seat to one side in these matters does not create a legal vacuum but makes international arbitrations truly international, therefore functioning under the sources of transnational law as these legal sources then also operate in international dispute resolution. They are in the methodology used in this book the same as those for public international law identified in Article 38(1) of the Statute of the International Court of Justice together with Article 53 of the Vienna Convention of the Law of Treaties, and operate in the order or hierarchy further explained in section 1.4.14 of Volume 1: fundamental principle (notably due process, impartiality and independence of arbitrators, efficiency of the proceedings45 but also the separation of the arbitration clause and arbitrators deciding about their jurisdiction, arbitrability, admissibility and their reasoning); the customs of international arbitration (especially in procedural and evidence questions but also in the implementation of the more fundamental principles); treaty law (such as the New York Convention for recognition of arbitration clauses and recognition and enforcement of awards), general principle (such as the UNCITRAL Model Law); and the arbitration clause, including any institutional rules (operating under transnational law also). To repeat, local laws in countries where support is needed, especially those of the seat, present the residual rules but then become part of transnational law also, in the process shedding any typical domestic features. Corrections may still follow from public policy and public

44 See

the reference in n 15 above. A distinction that may be relevant in this respect is the one between reasoning and granting relief. It is on the whole considered inappropriate for arbitrators to give more or different relief from that which is demanded (ultra petita) although if eg, specific performance is asked, it might not exclude damages even if not specifically requested. It may be considered the normal alternative under the law. Similarly, where damages are asked commensurate with a breach, the details need not be pleaded and recognition courts leave here broad powers to arbitrators, see in the US Daniewicz v Thermo Instrument Systems, 992 SW 2d 713 (Texas 1999). In other words, there is not an excess of authority or jurisdiction as long as the remedy is rationally derived from the contract and the breach, Advanced Micro Devices (AMD) v Intel Corp, (1994) 9 Cal.4th 362, but the reasoning must be connected with the pleadings and what is asked, it is not a question of finding some middle ground, and there is no freedom for arbitrators. 45 The distinguished international arbitrator and litigator Lucy Reid has become particularly vociferous on this issue of arbitrators having a prime duty to advance the arbitration, see ‘More on Corporate Criticism on International Arbitration’, Kluwer Arbitration Blog, 16 July 2010. The problem is not confined to the US, see further the discussion in s 1.1.14 below.

Volume 2: International Commercial Arbitration 33 order requirements in each country where the arbitration comes on shore in terms of conduct and effect, conceivably increasingly superseded by transnational minimum standards, in which connection it may in any event still be asked whether and when the arbitration comes truly onshore at the seat or in recognition countries and to what extent. Even considerations of justice, social peace and efficiency, again in transnationalised form, might supplement and in proper cases correct if not already part of fundamental principle. But again, they must be pleaded, at least by one of the parties. If invoked by arbitrators autonomously in pressing cases, they must as a minimum be made subject to further pleadings. Again, arbitrators have no discretion and never become judges in that sense. Thus, the domestic arbitration laws of the seat and of any other country where support is needed operate as the residual rules in the process becoming part of this transnational arbitration law and being adjusted accordingly to make sense in the transnational legal order and always subject to the higher sources of the transnational law just mentioned. Again, this may still be different for the applicable mandatory provisions of the lex arbitri of the relevant country to the extent an arbitration comes onshore in that country in conduct and effect, no more, and there is no extra-territorial effect of such provisions per se and therefore no power per se either over the rest of the international arbitration process.46 Mere artificial contact is not enough, and that is what the seat now mostly constitutes in international arbitration. Notably, it does not exclude that the transnational legal order may itself develop public policy notions in this respect or transnational minimum standards which supersede any local ones. It means that even the modern lex mercatoria and its sources may be corrected by public policy that is not part of it. This conforms to the approach to the lex mercatoria taken in this book in respect of substantive issues, which was the subject of the previous Volume, here extended to the law applicable to the international arbitration process. In this connection it may be useful to make some distinctions to clarify the issues further. As to the applicable law, we first have (a) the arbitration clause to consider, then (b) the activation of the dispute resolution process and the determination of the powers of arbitrators, then (c) the arbitral process, then (d) the substance of the case, and finally (e) the supervision, support, and enforcement functions in local courts. It was already submitted that delocalisation of international arbitration is a key feature in respect of all of them and transnationalisation affects the applicable law in all these instances or aspects. For the arbitration clause, as was mentioned before, it supports the separability, meaning its transnationalisation, and it then also applies to the power and jurisdiction of arbitrators and the issue of arbitrability. Hence the application of the different sources of law as we know them from the lex mercatoria and its hierarchy and will be further discussed in section 1.2 below. Again, it means that even an explicit choice by the parties of the law of the seat applying to the arbitration 46 A sovereign and its laws must be respected in its own territory but in others it requires proper recognition, which may be conditional; it goes to the possible extraterritorial effects of the lex arbitri of the seat, which, as already said, no longer automatically follows. Upon a proper analysis it probably never did; the awards were in any event always subject to recognition elsewhere. But local arbitration laws can forbid these arbitrations from being effectively conducted at the seat, eg, because the law of the seat is concerned about the culture developing in arbitrations. It can even set aside awards, but it is clear that there is no extraterritorial effect and the arbitration can continue and awards can be upheld elsewhere, see section 1.5.2 below. Thus, the law of the seat does not have or no longer has authority over an international arbitration as a whole.

34 Volume 2: International Commercial Arbitration clause must be put in the context of this hierarchy, so must be the default rule of Article 16(4) LCIA Rules (2014). It means that such a choice is subject to any mandatory higher or public order principle in the international commercial and financial legal order concerning international arbitration and any practices developed therein, unless parties indeed wish to localise their arbitration, which is not then any longer international but this can no longer be the presumption. Another important consequence is that the New York Convention must be put in this transnational context also, operates therefore no less among the other sources of law, and is then also subject to higher transnational principle and evolving practice. It thus evolves further and develops while finding its place among the other sources of transnational law (of which the Convention is only one) and their hierarchy within the modern lex mercatoria, although local enforcement courts may have greater difficulty than international arbitrators in support of this approach, whilst the enforcement act itself, as an expression of sovereignty under which such power is (rightly) territorially monopolised by states, remains local. In this connection, in many countries under the New York Convention, at least a notion of transnational public order is developing and replacing local public order bars to recognition, although, as we shall see in section 1.6 below, it remains often a domestic concept of the international public order, therefore not a truly transnationalised concept and may then differ from country to country. In this aspect, therefore, there is still no uniformity until it results from firmly placing the New York Convention in its transnational context and making local courts understand this.

1.1.11. Is International Arbitration Judicial or Contractual? Is it Adversarial or Inquisitive? Jurisprudence Constante, Consistency and Precedent? As to its status, the question arises how judicial the arbitral dispute resolution, especially international arbitration still is, or whether it is merely contractual, a mixture, or something else altogether. This issue was already raised several times above in connection with the role and powers of international arbitrators and the enquiry into any judicial function. It is often cast as a narrower one and tended to arise especially in connection with arbitrators’ liability for their behaviour. May they claim immunity as judges mostly can or are they liable at least for gross misconduct? That would then be a matter of breach of contract or negligence, more in the nature of service providers. Indeed, once an arbitrator accepts an appointment, it may be considered a contract for the supply of services and implies good faith performance, at least in civil law perceptions. In common law countries, in respect of the immunity issue, arbitration is considered more of the judicial type.47 This same attitude may then be extended to arbitral institutions,48

47 Leges arbitri are often specific, see s 74 English Arbitration Act 1996. See for case law in the US Austern v Chicago Board Option Exchange 716 F Supp 121 (SDNY 1989) extending the immunity also to arbitral institutions. 48 See in the US, Boraks v American Arbitration Association, 517 NW 2d 771, 773 (1994). Cf for their role, Sundaresh Menon, ‘The Special Role and Responsibility of Arbitral Institutions in Charting the future of International Arbitration’ Keynote Address at the SIAC Congress 2018 and Ph Habegger, D Hochstrasser, G Ntaer-Bass, U Weber-Stecher, ‘Arbitral Institutions under Scrutiny’, ASA Special Series, N.40, 163 (2013); see for their liability, B Warwas, The Liability of Arbitral Institutions: Legitimacy Challenges and Functional Responses (Springer, Asser Press, 2017); M Rasmussen, ‘Overextending Immunity: Arbitral Institutional Liability in the United States, England and France’ (2002) 26 Fordham Int’l Ll. 1863. In the US the selection of arbitrators has been considered by courts as one of arbitral institution’s judicial functions and therefore justifying immunity,

Volume 2: International Commercial Arbitration 35 but judicial and administrative functions might have to be clearly distinguished and institutional interference with the arbitral process and intrusions in due process will not be protected. In modern times there is another more fundamental and urgent aspect to this discussion. As asked, all along, are arbitrators judges? That affects their powers, perhaps especially in international arbitrations. It may confirm that these powers are not essentially contractual and founded in the arbitration clause but rather in the transnational legal order itself, only activated by parties through their arbitration clause. This was discussed in section 1.1.9 above in connection with delocalisation and is an important issue but it should be well understood that this does not make them any more judges, even if it extends their powers and may also affect their reasoning, perhaps also their attitude to precedent and particularly their potential involvement in law application beyond the submissions of the parties in areas where they are obtaining special powers, potentially even to raise public policy issues autonomously (see section 1.2.5 below). Practically speaking, it is undeniable that even international commercial arbitrators have become more judicial in their approach, perhaps unavoidably in the areas of autonomy although still limited, even when this is rightly considered an improper perception of their task and a bad development.49 It may also be identified as the adversarial against the inquisitive approach, the first more passive one being traditionally associated more in particular with the common law judiciary, the latter more active one being traditionally more connected with the civil law judiciary, even if in the US a more activist approach in the ordinary courts has become obvious in the last two generations and is supported by the Federal Rules of Civil Procedure since the 1930s to make the proceedings more efficient whilst in England there is more recently also concern with case management in the ordinary courts. It was already noted that arbitrators who like to be seen as judges and aspire to this status are increasingly tempted into writing ever longer awards in support, not only in areas where they have special powers which might indeed require extra explanation. It takes ever more time to write, seldom enhancing quality, and may testify to serious misconceptions in this regard even if supported by the legal practitioners. Especially professorial arbitrators but often also former judges seem to think that they must contribute to precedent or a jurisprudence constante across the board in this manner and to that end may particularly indulge in points of procedure and law as if arbitration concerned an appellate jurisdiction—it was already mentioned several times. But the rule of precedent was never accepted in civil law nor in international courts, and this is so for very good reasons: it assumes some system or systematic coherence, which in that view dispute resolution of all sort needs to enhance, but such a system may not be there in international and transnational law at all,50 and it is in any event not the task of international arbitrators to seek out and to clarify it for the future. Even where there is some autonomy for international arbitrators,

see E Wilhelmi, ‘How Far Is Too Far: Reexamining the Continuing Extension of Arbitral Immunity to Arbitral Organizations’ (2006) 1 Journal of Dispute Resolution 319, 320. The situation is less clear in the UK and excludes bad faith of the institution, the relationship is considered contractual, Arenson v Arenson AC 405 (1977), see also VV Veeder, ‘Arbitrators and Arbitral Institutions: Legal Risk for Product Liability?’ (2016) 5.3 Am. Un. Buss LR 335. The liability of arbitral institutions has been repeatedly discussed in French courts. The conclusion is that arbitral institutions do not act as arbitrators and are not afforded the same protection and that arbitral institutions are civilly liable for failing to meet contractual obligations, see Fouchard and Gaillard (n 38) 594, 602–04. 49 RB Lillich and CN Brower (eds), International Arbitration in the Twenty First Century, Towards Judicialization and Uniformity (New York, 1993), see further also the reference in n 3 above. 50 See also WM Reismann, ‘“Case Specific Mandates” versus Systemic Implications. How Should Investment Tribunals Decide?’ (2013) 29 Arbitration International 131. See further also s 4.1.11 below and S Mandelbaum, ‘The Legitimacy of Arbitral Reasoning: On Authority and Authorisation in International Investment Dispute Settlement’, Anglia Ruskin Research Online (2020).

36 Volume 2: International Commercial Arbitration that does not make them law makers. They do not have such an institutional status and authority. Formal law making is not yet privatised. It was already argued that this type of legal activism must be deemed to be wholly inappropriate in international arbitration and, as will be suggested in section 1.1.14 below, presents a time bomb under this facility in terms of efficiency and credibility. It is true that it was promoted from the beginning by the ICC wanting independence and impartiality of arbitrators, treating the award as a judgment and following largely the common law approach to pleadings, discovery and testimony/cross examination and the legal practice built on this to recover its territory. To repeat, international arbitrators are limited to the submission of the parties, at least in principle, in the context of which law must be pleaded as fact, and it is not for them to test any other legal argument even if it could be more appropriate. Hence the concepts of consistency and precedent becoming moot except potentially in those limited areas where international arbitrators may indeed have obtained autonomous powers (see the discussion in sections 1.1.10 above and 1.2.5 below), which now may also increasingly include public policy and public order considerations, but even then, it was suggested, they depend on further submissions of the parties or other expert advice. It is not for them to invent the law. Arbitrators are not the representatives or spokesperson for any legal order or public policy, cannot go by their own wisdom in these matters, an issue becoming especially relevant in foreign investment arbitration, see section 4.2.2 below. Turning to consistency, it is traditionally another issue for ordinary judges, especially in any law-making powers they may assume. In doing so they work in domestic systems and may have a clear lex fori to apply, to defend and clarify, especially on appeal. It may even apply to the ICJ in so far as public international law is concerned. Even though its decisions still have no precedent value (see in this connection also Article 59 of the Statute of the ICJ), they may provide important guidance. Following this lead in arbitration could, however, undermine the entire concept of international arbitration, which, as we have seen, is in essence fact finding and solution oriented, and does not (in principle) go beyond the dispute as presented by the parties. As law must be pleaded as fact, the relevant findings as to the applicable law might not therefore be based on a full evaluation of the legal issues. Even if upon proper academic analysis of the awards, there may still be some line in them, it is not for arbitrators to find or sustain whilst academics in their analyses may be handicapped if they do not know the full submissions. To repeat, arbitrators are not meant to build or enforce any legal system, are not judges in that sense or it would be under transnational law in the limited areas where they may indeed gained original authority. The basic attitude should be that international arbitrators are not to take upon themselves more than they can and should handle or parties wish them to do and pay for. Again, arbitrators are not (appellate) judges and do not have a law-making function. Where arbitrators may seek to enhance their credibility by emulating judges, this seems to be quite counter-productive. Arbitrators state which arguments they prefer on the basis of the evidence provided but do not ask for or impose others. It was already said that for them deciding on a point of law after having heard expert opinion is not different from deciding on construction issues. Even where international arbitrators have obtained original power, they must still ask for further submissions of the parties if they raise new points. Thus, there is a fundamental difference and disconnect between the ordinary courts and international arbitration. There is a true alternative. This not only affects procedure and appeal, but more importantly also the applicable substantive law, and indeed the role of precedent, consistency and certainty. Not having a lex fori to defend may in particular enable international arbitrators to consider other approaches to the law, at least when pleaded, such as, notably, the modern lex mercatoria and its various sources, therefore not only as to procedure but also as

Volume 2: International Commercial Arbitration 37 to substance.51 Whether it is desirable or not, one must accept that courts remain largely local institutions, also in international cases when assuming (international) jurisdiction. That is their perspective and they look then for local substantive laws, primarily their own (not limited by the pleadings of the parties) or, through their (own) rules of private international law, sometimes for foreign law, but again primarily of a domestic nature, never mind whether the international flows and the transactions therein can still be properly cut up along such national lines.52 As was also noted, especially in regulation, they are likely normally to apply their own laws and public policy perceptions and will not lightly balance foreign governmental interests or give them precedence except perhaps in very obvious cases. International arbitrators do not have these confines and local judges should not have them either but in the EU, at least the Rome I Regulation of 2008 still embodies this attitude: see its Article 9 (while it only gives an opening to application of the modern lex mercatoria as nonstatist private law in the Preamble). That remains mostly the accepted wisdom and attitude of local courts in Europe. It reduces their role in international dispute resolution further, hence the relative popularity of international arbitration but arbitrators subsequently adopting a judicial attitude at the transnational level undermine their position and are then prone to get lost in renewed legal formalism and often provincialism. As the EU Regulation does not apply to arbitrations, it does not bind arbitrators, not when the seat is in an EU country either even if this has more recently created problems, see section 1.2.4 below. This may seem a simple policy choice but it is more fundamental: it re-emphasises that international arbitrators under transnational law go their own way and are allowed, perhaps also expected, to do so, even if, as we have seen in section 1.1.2 above, the judgment analogy was increasingly followed in the international recognition of arbitral awards and national laws at the seat of the arbitration (in the EU) may also go against this. It should not make a difference: the courts of recognition and execution provide the ultimate test and are not allowed to go into these matters under the New York Convention except where they give rise to issues of arbitrability or public policy. Again, issues of precedent, consistency or even legal certainty, although much talked about even in international arbitration, are irrelevant and must be considered here in a different light.53 It was already submitted that these are overrated concepts in international 51 In Deutsche Schachtbau- und Tiefbohrgesellschaft [1987] 3 WLR 1023, the English Court of Appeal under Sir John Donaldson held unanimously that at least international arbitrators could rely for the applicable law on internationally accepted principles, thus accepting not only general principle as a source of law but allowing international principles and customs to operate in that connection also. This was not considered to be against English public order and a bar to recognition of the ensuing award in England. This is now widely accepted also elsewhere, but creates an unfortunate dichotomy between arbitrations and the operations of the ordinary commercial courts which are left behind, stuck in a more parochial environment, even in England, but it may be the unavoidable consequence of the institutional back up of either facility, which is very different for international arbitration when seen as founded in the transnational legal order. It may mean, amongst others, that the precedents in local commercial courts loose much of their force transnationally, further handicapped by the fact that most business disputes are determined in international arbitrations. Local law shrivels up, becomes consumer law, and is no longer representative for all society’s activity. 52 In this approach it is indeed also mostly assumed that foreign law must be proven as fact (see s 1.2.6 below) which may make it subject to the pleadings of the parties even in the ordinary courts. 53 It should thus be acknowledged that what we see as precedents in ordinary courts, reached on the basis of what they consider their task, might not be proper precedents in the international flows at all and international arbitrators may see this better. Nor can consistency be a decisive factor; Lord Bingham thought it even a ‘vice’ in [ordinary] judges, let alone in international arbitrators (see also the discussion in s 4.1.11 below), and it cannot be more strongly put. Certainty is also often mentioned in this connection, but as all depends (in principle) on how parties have presented their case, there is no independent role to play for the law. In any event, legal certainty in a

38 Volume 2: International Commercial Arbitration arbitration and the discussion on these issues often signify that its true nature and limitations are still not properly understood. In any event, disputes that come to an international arbitration may be very different, the fact situations being new, international, or otherwise a-typical. Why litigate otherwise? If one nevertheless still emulates ordinary judges, a more useful pointer might be the role of the judges in commercial courts in countries such as France that still have them and where the idea is that the peer group sits in judgment. Often proceedings in these courts are more direct and pragmatic, indeed geared towards quicker results,54 although it does not go as far as dispensing with appeals (to the ordinary appeal courts). They may have lay judges who might have some greater understanding of business while rougher justice is often better for commercial partners than the length of time it would take for greater legal refinement to prevail. Commercial parties are used to risk and must move on. Again, speed is of the essence: long drawn-out battles are debilitating, destructive of relationships, expensive, and take too much management time. Specialised commercial courts are likely to be aware of this and so should international commercial arbitration. To remain helpful, it needs to be even more to the point and capable of cutting knots whilst avoiding legal sophistry. This is not to deny that international arbitration may remain at least to some extent judicial but such a judicial character acquires a distinct meaning which needs further exploration. It has a bearing on the hearing, which is adversarial, not inquisitive. Enforcement is not by way of contract action but is also more in the nature of ordinary judgments—it was already mentioned and is borne out by the New York Convention with its (implicit) views of what an (international) arbitration is in this regard. It may also go to the need for a reasoned opinion, only sometimes capable of being waived (see Article 32(3) UNCITRAL Rules) although lack of it is no ground for refusing enforcement under the New York Convention either, as will be more extensively discussed in section 1.6 below. It was already said that in all of this, it may be different where arbitrators acquire the power to raise public policy issues autonomously: see section 1.2.5 below, when due process will also acquire a more important function, but it sits uneasily with the more traditional concept of international arbitration as dispute resolution facility, increasingly in foreign investment as we shall see in section 1.1.14 below. At the more practical level, what arbitrators typically lack, and judges have at least in their own territory, is the power to order coercive action and also the power to represent the public and to bind third parties, for example when it comes to the proprietary consequences of their decisions (who owns what?), the ranking of security interests, and the consequences of a set-off, which may have an immediate effect on the creditors of either party although not involved in the arbitration. These are important issues, especially in financial litigation, as we shall see in Part II below, again closely connected with the issue of arbitral power and even arbitrability, where the interaction between arbitration and bankruptcy courts is likely to create further challenges, see again the discussion in section 1.1.14 below. As was already mentioned, in private law, international arbitrators might acquire here under transnational law some features of equity judges in common law countries,55 while in regulatory law, they may start to formulate transnational minimum public policy standards,56 even if both remain contentious and may imply a serious threat to fast-moving world is a fraught concept, rather law must be responsive; at most we can hope for some predictability. On the other hand, we must insist on transactional and payment finality, but it is quite different and a proprietary issue, see further the discussion in Vol 1, s 1.1.7. 54 See Vol 1, s 1.1.9 above for the development and operation of these courts in France. 55 It again suggests an approximation to the judicial function but it remains area specific, see Dalhuisen (n 40). 56 J Paulsson, ‘International Arbitration is not Arbitration’ (2008) 2 Stockholm International Arbitration Review 1, in which international arbitrations are thought not to be arbitrations at all, but it depends on what they are

Volume 2: International Commercial Arbitration 39 the legitimacy of international arbitration as we shall also see, and in any event depend on further submissions by the parties when newer standards are suggested by arbitrators autonomously.

1.1.12. Legitimacy, Transparency and Accountability. Independence and Impartiality. Supervision of International Commercial Arbitration, and the Operation of an International Commercial Court In the previous sections, it was posited that in international commercial arbitration fundamental principle and the public order requirements and values, the custom and arbitral practices, or general principles and notion of party autonomy in the transnational commercial and financial legal order or international marketplace ultimately determine the nature and conditions of the arbitration, the validity of the arbitration clause, the powers of international arbitrators, and the status of the award. National leges arbitri of the seat or of any other place where support is needed complement this framework and they present the residual rules but these are not then national any longer either but play their role as part of the transnational law or modern lex mercatoria concerning this type of dispute resolution and they will be shorn of typical national elements. The legitimacy of arbitrators, their powers as well as their status notably also their impartiality and independence, are then determined by transnational fundamental principle as well as the need to preserve the appearance of impartiality and independence at all times. There may also be issues of compatibility57 and ‘double hatting’.58 The same goes for the transparency of their actions and their accountability, which are other major issues in preserving the credibility of this type of compared with. They are not domestic arbitrations or a variety of this type of arbitration as they often still are considered to be among those who see them as covered by the lex arbitri of the seat and therefore in principle still as some form of a domestic arbitration, see for the delocalisation issue s 1.1.8 above. 57 In this connection, the issue of compatibility of functions may also be considered. This has arisen especially in connection with judges of the International Court of Justice acting at the same time as arbitrators. Is it proper or even desirable that they should also act in commercial or other arbitration cases? Does this concern extend to all judges? Are there other incompatibilities? In 1995, the United Nations Advisory Committee on Administrative and Budgetary Questions (ACABQ) asked the United Nations (UN) Secretary-General, see UN Doc A/49/7/Add.11 (8 March 1995), to include in his next Report to the General Assembly an analysis of the ICJ practice with respect to Art 16(1) of the Statute of the ICJ, stating that no Member of the Court may exercise any political or administrative function, or engage in any other occupation of a professional nature. The ICJ replied to the General Assembly and interpreted the Article as allowing ICJ judges occasionally to engage in other judicial or quasi-judicial activities, provided only that ICJ judges gave absolute priority to their obligations as Members of the Court and denied appointments in an arbitration case which in another phase could be subject to being submitted to the Court, UN Doc A/C.5/50/18 (2 November 1995). The ACABQ considered this analysis unsatisfactory and asked for further comment UN Doc A/50/7/Add.11 (12 December 1995). In its follow-up report, the ICJ reiterated its view that it is compatible with the Statute for Judges to act as arbitrators, UN GAOR, 51st Sess, Suppl 4 (1996). This time, the Court noted that ICJ Members occasional engage as arbitrators, for instance, in inter-State arbitrations which the Court saw as evidence of the ‘awareness of the contribution that the Members of the Court may, by their function, make to the development of international law, and of the benefits deriving therefrom for all institutions concerned’. Some might find this an arrogant and self-serving statement, which in any event would not apply to commercial arbitrations. It is also wrong in that the emphasis is here on the law-making function of international arbitrators, which is not their task. 58 Under it, lawyers may notably represent a claimant in one (government investment) dispute while concurrently serving as an arbitrator in another, in which connection it is also noted that arbitrators may use their own past legal opinions to further their arguments, http://ccsi.columbia.edu/2019/06/03/primer-international-investmenttreaties-and-investor-state-dispute-settlement/. See also Samantha Besson et al, ‘Reflection on the Ethics and Empirics of Double Hatting’ (2017) European Society International Law, https://esil-sedi.eu/post_name-118/

40 Volume 2: International Commercial Arbitration dispute resolution, ever more when they get closer to deciding public policy issues. Procedural protection for the parties or due process derive here from fundamental principle also: equality of the parties and their entitlement to a hearing (unless waived, which facility may be limited as a consequence). They are essential, especially in a judicialiced approach and are reflected in the UNCITRAL Model Law and in most modern legibus arbitri, but they would still apply under transnational law, even if they were not so reflected. Although it might cogently be argued that arbitrators in so far as appointed by the parties still continue the latter’s discussion (see section 1.1.2 above), so that at least party-appointed arbitrators need not be strictly independent and could remain advocates at the level of the deliberations of the tribunal, it was already noted that it would put the Chair in the central position as the ultimate decision maker. This is not now the common approach in international arbitrations and the call for independence and impartiality that follows is another indication of their judicialisation, that seems connected.59 To allow a greater degree of involvement of arbitrators may still remain more the attitude in domestic arbitrations, notably in the US (unless the arbitration clause specifically determines otherwise) and may by agreement also remain so in international arbitrations although it is now uncommon.60 In this connection, some distinction is often still made between the notion of impartiality and independence. In this approach independence goes to the relationship with others and impartiality refers then rather to the inner disposition of arbitrators but the terms are now mostly used together and if the emphasis turns on appearance, the distinction is less relevant and probably difficult to maintain as differing standards. The principle of independence and impartiality in all international party appointed arbitrators remains, however, to some extent artificial and has created many problems while favouring challenges which can be very destructive. It also limits the pool of eligible candidates for an arbitrator’s position. Any contact with third parties involved with the parties in dispute, notoriously even with any other partner in a law firm, who may have or may have had such an involvement in the past, may then disqualify an arbitrator. It imposes heavy investigation, disclosure and information duties on arbitrators, justified it would appear only where arbitrators indeed behave more like judges as they might in investment arbitrations based on treaty law. This has compelled some to argue for the abolition of party-appointed arbitrators altogether.61 But parties would feel describing the extent of double hatting in international investment arbitration, finding that 509 cases (47 per cent) had one form of double-hatting present and only 450 cases (42 per cent) had no double-hatting. In Vito G Gallo v Government of Canada, a NAFTA Chapter 11 case, UNCITRAL, PCA Case No 55798 (2009), the claimant challenged the arbitrator appointed by the respondent Canadian government because the arbitrator was simultaneously advising another state party to NAFTA that was not involved with the dispute. The challenge resulted in a decision forcing the arbitrator to elect between advising the other state party or to continue as an arbitrator in the current case. He resigned. 59 As a rule, it appeared only in the 1975 ICC Rules (Art 2(4)). The duty to act ‘fairly and impartially’ dates from 1998 (Art 15(2)). It was already pointed out that it sits uneasily with party appointments, probably with international arbitration altogether where everything depends in principle on the representations of the parties, and it would appear that if the dispute is purely private there is no public benefit, cf also A Stone Sweet and F Grisel, The Evolution of International Arbitration: Judicialisation, Governance, Legitimacy 225 (Oxford, 2017), nor therefore any particular need to go beyond party autonomy unless judicialisation is considered a public good in itself, which is hardly sustainable in purely private dispute resolution. 60 In the US, the Supreme Court case of Commonwealth Coating Corp v Continental Casualty Co 393 US 145 (1968) is often cited, in which a divided court held that at least the chairman must be objectively impartial and any connection with one of the parties is an impediment, even if no obvious partiality results. The judicial analogy was strongly emphasised in the majority opinion. In the concurring opinion it was believed that prior disclosure may fully excuse the relevant arbitrator. But the argument seems to have been predicated on arbitration where only the independence of the chair counted, leaving (in principle) more room for the party appointed arbitrators. 61 See J Paulsson, ‘Moral Hazard in International Dispute Resolution’ (2010) 25 ICSID Review 339, and AJ van den Berg, ‘Dissenting Opinions by Party-Appointed Arbitrators in Investment Arbitration’ in M Arsanjani,

Volume 2: International Commercial Arbitration 41 less involved with the case and the argument could also be seen as self-serving for the insiders. Ever fewer new faces might appear. It also denies the continuing discussion element between the parties in this type of dispute resolution and would further accentuate the judicial element in these proceedings (see section 1.1.11 above and section 1.1.14 below). The answer may be rather in the relaxation of the impartiality and independence rule for party-appointed arbitrators, a rule which may well be overdone in commercial cases, unless major public policy issues arise, when indeed the arbitration may become more judicial certainly, as we have seen, when arbitrators feel free under transnational law to raise these issues themselves. Indeed, it was already said that this judicial characterisation may be more appropriate in foreign investment disputes where the public interest is heavily engaged,62 and may then more properly suggest an emphasis on independence and impartiality as also applies to ordinary judges, although again it does not discharge them from seeking further submissions of the parties on which they must rely—they are not even then law makers, hence also no appeals. Any relaxation of the impartiality rule or a more realistic approach to it, especially in the purely commercial aspects of the dispute, may also open the way to and favour a combination of mediation and arbitration as a way forward, see section 1.1.14 below.63 As things now stand, this raises questions of impartiality when the arbitration must proceed regardless of such efforts; arbitrators may have shown their hand and will therefore often be reluctant to get involved in settlement discussions and use their power to get there. It is an important issue now that unhappiness with international arbitration and its formalism has become more apparent amongst clients, coupled with a distrust of lawyers which are increasingly seen to be self-serving. The question of impartiality and independence is further complicated by the fact that there is in practice often little distance between the arbitrators and law firms effectively choosing and appointing them for their clients and the desire of partners in the same firms to sit as arbitrators also. Arbitrators may also have important connections to related companies where they act as board members and especially to banks that may have any of the parties as clients or who may have a participation in them through custodial accounts or otherwise. Obvious problems arise where the same arbitrators have multiple appointments through the same law firm or even from J Cogan, R Sloane and S Wiessner (eds), Looking to the Future: Essays on International Law in Honour of W Michael Reisman (Brill Leyden 2011), noting that in ICSID arbitrations dissenting opinions mostly come from arbitrators appointed by the losing side, but see also CN Brower and CB Rosenberg, ‘The Death of the Two-Headed Nightingale: Presumption that Party Appointed Arbitrators are Untrustworthy is Wrongheaded’ (2013) 29 Arbitration International 7. 62 The Washington (ICSID) Convention in Arts 14(1) and 40(2) sets further great store by the high moral character of the arbitrators and their recognised competence in the fields of law, commerce, industry, or finance, and then also by their independent judgement in these matters, hence a declaration disclosing any relationship past or present with any of the parties, followed by the possibility of disqualification. It was already said that especially in foreign investment arbitrations where the public interest is much engaged, this is more understandable. Whatever the lofty notions about international arbitrators may be and whether that is at all borne out in investment arbitration—hence also the criticisms—the independence issue and disclosure requirements are taken seriously and are enforced even if often with difficulty especially where in first instance the other two arbitrators need to decide these challenges, see notably Compania de Aguas Aconquiija SA & Vivendi Universal v Argentina (Decision on the Challenge to the President of the Committee), 3 Oct 2001, requesting ‘all circumstances … to be considered in order to determine where the relationship is significant enough to justify entertaining reasonable doubts as to the capacity of the arbitrator or member to render a decision freely and independently’ and Compania de Aguas Aconquiija SA & Vivendi Universal v Argentina, Second Annulment Proceedings 10 Aug 2010 concerning especially the disclosure issue. In terms of transparency of the arbitral process, UNCITRAL published Rules on Transparency in Treaty-based Investor-State Arbitration in 2014. It aims in particular at greater publicity of the hearings (Art 6). They are meant to apply only to arbitrations under new BITs (as from 1 April 2014) unless otherwise agreed therein. 63 See also the discussion in s 1.1.2 above.

42 Volume 2: International Commercial Arbitration the same party. But there may also be problems when arbitrators have sat in similar cases or have published their opinions in similar legal areas of contention. Investigation, disclosure and information duties often remain poorly established or even controversial and they may not always be taken sufficiently seriously by international arbitrators. However, innocence as a result of not investigating properly is notably no longer an excuse. An important compilation of principles and rules was formulated in this connection by the International Bar Association (IBA) in its Guidelines on Conflicts of Interest in International Arbitration also called the ‘IBA guidelines on Conflict of Interest of 2004’ amended in 2014. In the same year (2004) the American Bar Association issued its Code of Ethics for Arbitrators in Commercial Disputes or the ‘ABA Code of Ethics 2004’. These rules are no more than guidance and in individual situations much will depend on the circumstances unless they become reflective of the practices and general principles of international arbitration. As such the IBA and ABA guidelines are acquiring considerable authority. Yet, over and again there are problems in this area, one of the reasons being that international arbitration is a business for arbitrators and potentially an important source of income. There result conflicts of interests and, as in so many businesses, an undercurrent of monopolisation is apparent in a small group of insiders who remain largely unsupervised and are often close to the law firms and arbitration institutions that give them their cases. It is common ground in this connection that arbitrators must properly investigate and use their own conscience first to decide whether to take a case, and may in the case of doubt disclose possible conflicts while accepting the appointment, leaving it to the parties subsequently to object; if the latter do not do so promptly the matter is settled. However, the problems have not gone away and have undermined the reputation of the arbitrating profession, which is often believed to be covetous. As we shall see, this has become an issue especially in foreign investment arbitration where private dispute resolution in public policy matters is more especially under pressure, especially surfacing in the discussions concerning the Transatlantic Trade and Investment Partnership (TTIP), the Canada-EU Agreement (CETA), and the revision of the NAFTA Treaty, see further section 3.5 below. The obligation to remain independent and impartial is a continuing obligation, as is the duty to maintain the appearance thereof at all times. Especially when arbitrators accept other appointments as arbitrators, company directors or advisers, they must review the situation. As in all cases where monopolisation results or is threatened and transparency is a problem, independent supervision is the ultimate answer whilst peer pressure through LCIA or ICC courts may not be enough if only because they are habitually manned by the same persons. In this connection, the creation and operation of an international commercial court or similar institution, not to substitute for international arbitration nor to operate as an appeal body but to protect it, may be called for and has already been mentioned in Volume 1, section 1.1.12.64 It would supervise the process and deal with challenges of arbitrators, could facilitate and centralise the support function of domestic courts, see section 1.5.1 below, and also take over the function of annulment or setting aside of awards and even operate the process of recognition and enforcement of awards in individual countries. It might also order and enforce preliminary measures. Most importantly, it may redress the move towards ever greater judicialisation in the attitudes and behaviour of international arbitrators and the resulting inclination to prolong the agony for the parties. On issues of transnationalisation as well as the application of the relevant domestic regulatory and 64 JH Dalhuisen, ‘The Case for an International Commercial Court’ in KP Berger et al (eds), Private Law and Commercial Law in a European and Global Context. Festschrift für Norbert Horn zum 70. Geburtstag (Berlin, 2006) 893.

Volume 2: International Commercial Arbitration 43 competition laws or other public policy matters, this court could issue preliminary opinions if asked by arbitrators or by parties in agreement on such a request. That could lead in particular to a better representation of the public interest in the formulation of international minimum standards and may have special importance in foreign investment arbitrations as we shall see in section 3.3.5 below. Such a court would require treaty status to operate properly which could be an extension of the New York Convention. It is submitted that there is an increasing need to think in this direction since international arbitration as a self-regulating world of dispute resolution has come under increasing pressure, see again the discussion in section 1.1.14 below. In view of its size and importance, and the intrinsic contradictions resulting from its being a business service that may also deal with the public interest, stronger independent support appears necessary to support its legitimacy, credibility and feasibility and also to make up for unavoidable shortages in terms of transparency and accountability. Again, this is becoming more particularly an issue in foreign investment dispute resolution and became a particular concern in the negotiations concerning the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU: see further sections 3.1.5 and 3.5.4 below, resolved in favour of an appeal court, as we shall see, in the treaty between the EU and Canada (CETA), but the problems arise in all cases where the public interest becomes engaged or conflicts of interest become apparent at the transnational level.

1.1.13. International Moot Competitions, Some Modern Literature on the Concept and Meaning of International Arbitration Moot court competitions have become popular for international arbitration and one must admire the size and jamboree atmosphere they manage to create. It may surprise arbitration practitioners, however, that these competitions are conducted in the style of ordinary court proceedings, usually concentrating on points of law, as if it were the appellate level. The approach is thus judicial, extremely so, and it could be argued that this sets students up entirely in the wrong direction with a flawed perception of what international arbitration truly is. It may inadvertently contribute to an ever more deeply engrained misunderstanding, which threatens arbitration’s ongoing search for credibility. It was already said that arbitration is foremost about facts and concentrates on crossexamination (in which art most advocates are poor). Fact finding in terms of discovery, depositions, witness-of-fact statements and cross-examination is a long and often tedious process which for practical reasons can hardly be approximated in moot competitions. So much may be obvious. But if it is understood that in international arbitrations law must be pleaded as fact, there is an important alternative to the appellate court approximation in moot court competitions. Rather, in these moots, students should concentrate on expert witness statements concerning points of law for either party and on the subsequent cross-examination of these expert witnesses by the advocates and on closing statements. That would present a better and also steeper learning curve into international arbitration and what it truly is or means to be. It was submitted in the above that the key to a proper understanding of international arbitration must further be found in (a) the attitude towards its delocalisation, therefore in the issue of whether international arbitration is truly international, and in (b) the answer to the question whether it is judicial or not. This concerns the powers of international arbitrators under transnational (or any other) law. The modern literature on international arbitration seems unable to handle these matters clearly and it must thus be assumed that it has no clear idea of international arbitration and its nature either. As a consequence, it does not give students and scholars a

44 Volume 2: International Commercial Arbitration proper perspective and may seriously threaten international arbitration’s credibility; we seem not to know what we are doing. The important book Redfern and Hunter on International Arbitration, which this author uses as class material and which is rightly liked by uninitiated students for its practical approach, in its fifth edition (2009), may serve as a ready example. It may even have been regressive in its successive editions and is seriously contradictory in these two key aspects. This continues in the sixth edition of 2015. On the question of delocalisation, it rightly suggests on pages 82–83, repeated on page 63 of the sixth edition, that business people, lawyers, and arbitrators who are involved in international arbitration need to be capable of abandoning a parochial view of the law, as constituted by the particular national system with which they happen to be familiar in favour of a wider and more international outlook. In particular, they must be prepared to accept that there are other systems of law which may, in some respects, be better than their own and which must in any event be taken into account.

It continues on page 188–89, repeated on pages 179–80 of the sixth edition: In this connection, two separate developments are seen. The first is for the State to relax the control which it seeks to exercise over international commercial arbitration conducted on its territory. This is the route taken by modern laws of arbitration. These laws take careful note of the theme of the Model Law, which is that their courts should not intervene in arbitrations, unless authorised to do so. The role of the courts should be supportive, not interventionist. The second development is to detach an international arbitration from control by the law of the place in which it is held. This is so-called ‘delocalisation’. In this way the whole world (or most of it) would be available for international commercial arbitration and international arbitration itself would be ‘supra-national’. ‘a-national’, ‘transnational’, ‘delocalised’, or even ‘expatriate’.

It then cites the French Cour de Cassation in Putrabali. It also noted earlier (page 77, repeated on page 64 of the sixth edition): There are no fixed, detailed rules of procedure governing international arbitration. Each tribunal is different; each case is different; and each case deserves to be treated differently. But there is a basic underlying structure, which is built on three essential elements: first the international conventions (and the Model Law) which have helped to bring about modern national laws of arbitration, secondly, established rules of international arbitration, and thirdly the practice of experienced arbitrators and counsel.

This suggests that these three transnational sources of law provide a more stable legal framework for international arbitration than the mere lex arbitri of the seat, which does not figure here (even as the residual rule). So far so good. But on page 8 (affirmed on page 7 of the sixth edition), the authors say that ‘every arbitration is a “national” arbitration, in that it must be held at a given place and is accordingly subject to the national law of that place’. They continue (page 180): [P]rocedural law is that of the place of arbitration and, to the extent it contains mandatory provisions, is binding on the parties whether they like it or not. It may well be that the lex arbitri will not govern with a free reign, but it will govern nonetheless.

Interestingly this language is deleted in the sixth edition. The authors proceed to cite the support (rather than supervision) function of the local courts in aid of localisation at the formal seat (page 190 repeated on page 181 of the sixth edition), although in practice these courts could be many, in very different countries and often likely to be far from the seat, not only in recognition and enforcement where in any event we have the New York Convention. Nothing in this support function of local courts localises the international arbitration itself; one could argue quite the contrary.

Volume 2: International Commercial Arbitration 45 More extreme is the conclusion on page 190 (repeated in the sixth edition on page 181): More crucially, this law [of the seat] will confer nationality on the award of the arbitral tribunal, so that it is recognised for example, as a Swiss award or a Dutch award and may benefit from any international treaties to which its country of origin is a party.

However, notably the New York Convention does not depend on it; it applies to all awards needing enforcement elsewhere (Article 1(1)), the double exequatur of the Geneva Convention having specifically been abandoned. It follows that the international character of international arbitration is here denied altogether. Implicitly the full extraterritorial effect of this national law is uncritically accepted. Against the position of the French Cour de Cassation, the authors only cite the Belgian change back to control of the court of the seat (unless parties want otherwise) as support for its localisation stand (page 192, or page 184 in the sixth edition). On page 188 of the fifth edition, it is said that the idea of delocalisation is ‘as illusory as that of universal peace’. That would then appear to apply to all of international arbitration, the result being its domestication (see also the repeat on page 179 of the sixth edition). This is a return to the parochial view: there is no international arbitration. Notwithstanding decisions such as Hilmarton, Chromalloy and Putrabali, enforcing awards that have been set aside by the courts of the place of the arbitration remains controversial. With some notable exceptions, courts around the world are still more likely to decline than to enforce annulled awards.

But the point is that they do not need to with reference to the Cour de Cassation in France and the American Federal Courts or indeed the New York Convention itself. It is suggested that ‘to proceed in this manner reduces the seat of the arbitration to a legal fiction: a place of arbitration where nothing takes place’ (page 183 and page 175 of the sixth edition), and it is still posited that ‘the place or seat of the arbitration is … the territorial link between the arbitration itself and the law of the place in which the arbitration is legally situated’ (page 181 and page 173 of the sixth edition), but the true question is how and why this should be so. Indeed, the idea of the seat in this formalised manner may itself be a fiction, precisely because of its lack of substantial contact with the case, see the discussion in section 1.1.8 above. Could it be that all there is to it is that this kind of seat determines the applicable arbitration law, but that the applicable arbitration law determines in turn the dominance of the seat? That makes the argument perfectly circular. In section 1.1.9 above, it was mentioned that the 2014 LCIA Rules also insist on the dominance of the lex arbitri of the seat at least as the default rule; it is the same parochial attitude which denies international arbitration its international character. But it was also said that it cannot determine its own place in the modern lex mercatoria concerning international arbitration and must accept that there may be other rules, or fundamental or general principle and arbitral custom and practices that may prevail over it, as may treaty law. It remains surprising how little practitioners and even the drafters of the latest set of LCIA Rules seem to be aware of the fundamentals and the legal structure of the international law concerning international arbitrations. The question of the judicial nature (or not) of international arbitration was identified above as another vital issue in understanding international arbitration properly. Here again the book cannot give guidance and becomes contradictory. The essence is whether the applicable law is law or fact. Can it be found independently from the pleadings and applied and explained by international arbitrators autonomously? And if so which law? The key statement is on page 410 of the fifth edition: It takes only a brief moment of reflection to appreciate that the convenient fiction that ‘foreign law is fact’ does not work in the context of an international arbitration. Imagine three French lawyer arbitrators, sitting in England, with French avocats presenting arguments on the applicable French substantive law.

46 Volume 2: International Commercial Arbitration Any suggestion that English procedural law would require the relevant French substantive law to be proved as ‘fact’ would surely be greeted with some hilarity. Equally, if a hybrid tribunal composed of one French lawyer, one Egyptian lawyer, and one Canadian lawyer were sitting in London applying the substantive law of Kuwait, how would the Kuwaiti law issues be handled? Would experts on Kuwaiti law give oral evidence to the tribunal, and solemnly change places to cross-examine each other? That would be absurd.

This is strong language but it is completely misguided and was rightly deleted in the sixth edition. First it puts into doubt even the common practice and need in ordinary courts to plead foreign law as fact. The suggestion is that international arbitrators have here greater power and better insights than ordinary judges. But it was already said several times that to international arbitrators all law is ‘foreign’, they do not have a natural lex fori to hold on to and apply or it would be the transnational law itself. The own laws of the place from where the arbitrators hail have no special status. It is a terrible thought that it might be otherwise. International arbitrators are not deemed to have the status of experts in anything and have no institutional standing as representatives of any legal system that they would be called upon to apply and clarify. True, if all advocates and arbitrators came from the legal system that is applicable in the case, they might take it upon themselves to operate as their own expert witnesses. For the advocates that would not be problematic as de facto they are subject to each other’s cross-examination, but it would be very different for the tribunal to go its own way and interpret the law as it deems fit. In particular, they are not subject to cross-examination and may come to conclusions that were never an issue between the parties, potentially stating outside their authority and solving issues and disputes which do not exist and are not raised by the parties thus undermining the entire arbitral process. International arbitrators do not have that authority. There are also important due process implications where international arbitrators may have more institutional power in certain areas such as in procedural matters, as we have seen, barring agreement of the parties. This can indeed be considered an instance of original judicial power, where international arbitrators can also formulate their own due process views, confirmed by the authors on page 335 (page 328 in the sixth edition), but it remains exceptional. In any event, they are not free and must respect (transnational) due process and, it was submitted, ask for further submissions. No less important is that in the view of the authors the rule ius curia novit is deemed implied in the activities of international arbitrators as it is considered to be for ordinary judges but for them only so in respect of their own law, and this is rightly a huge issue in international arbitration (see the discussion below in section 1.2.5). Again, it would suggest that arbitrators are always expert in the applicable law but they might not even be lawyers and it is untenable. The authors do not elaborate, but there is here nothing ‘hilarious’ and ‘absurd’ other than perhaps their own proposition. It is seriously irresponsible and directly undermines the status and credibility of international arbitration. Moreover, it tends to lead to extensive debates on legal detail that parties meant to avoid. The real problem in this connection is that the authors never seriously discuss the source and scope of the powers of international arbitrators and their true role, potentially also as law makers. They reduce them to those resulting from the arbitration clause, which they again locate for its legality and effect in the law of the seat rather than in transnational law upon its proper separation from the rest of the agreement between the parties (under that law), without exploring the other legal sources, short of which the powers of international arbitrators might be very limited indeed, although hardly so portrayed by these authors. If in matters of public policy and the proprietary effect of the transactions between the parties, these powers may have become a great deal broader under transnational law, it still leaves the question whether international arbitrators can raise issues of this nature themselves, which would indeed make them more like judges or at least

Volume 2: International Commercial Arbitration 47 spokespersons for the applicable law. Whatever these powers—and they remain exceptional—it can only be repeated that arbitration is about fact, fact and fact. That is the key distinction from ordinary court proceedings and it is crucial to a proper understanding of international arbitration. It is also to be reflected in the decision-taking and reasoning activity of international arbitrators: they do not impose their own views but choose between the views of the parties on the basis of the preponderance of the evidence presented by them, no other, again unless they have autonomous powers under transnational law, of which again the international arbitration practices present important but limited manifestations, especially in procedure and evidence (if parties have not otherwise agreed), although they are not the only ones, as we have already seen. The key is that ordinarily, international arbitrators are not judges and even where they believe they have original power they are not free, except perhaps in procedural matters, but must even then ask for further submissions or expert advice. In conclusion, the book (despite its many virtues) does not know how to set out a coherent view in these matters and does not give the student proper guidance into what international arbitration is, what it means to do, and how it goes about dispute resolution. Quite apart from the difficulty in locating international arbitration and understanding the meaning of its international character, it is the idea of international arbitration as an increasingly judicial dispute resolution facility in a fictitious seat, ultimately at the pleasure of its courts, that eats at international arbitration’s credibility, and is ‘running [it] into the ground’, not the delocalisation issue as the authors have it on page 192 of the fifth edition, rightly deleted in the sixth. In this void, international arbitration risks becoming a lawyers’ paradise, much promoted by law firms as part of the monopolisation tendencies in all businesses, but to the detriment of non-lawyer arbitrators, mediation efforts, and ultimately the parties. It is submitted that it is not the jealousy of the ordinary courts but that of the legal profession on the whole that is the issue and hampers the credibility of international arbitration. This attitude needs to be seriously questioned and has an effect on the future of this dispute resolution facility as will be discussed more extensively in the next section. Where, as in foreign investment disputes, there may be more autonomous power for international arbitrators under treaty law (BITs), albeit increasingly mistrusted for similar reasons, these powers still need to be carefully explored. They may increasingly extend to public policy and perhaps even property issues arising in international commercial arbitrations. Although these autonomous powers are important in procedural matters as we have seen and are there the most obvious and common, it was argued that even in these instances international arbitrators need to show considerable restraint in going beyond the representations of the parties. To repeat, where they are autonomously exercised, they always remain subject to further submissions of the parties. Not understanding this is not understanding international arbitration.

1.1.14. Three Time Bombs under International Arbitration. Where is it Going? As already indicated in the previous section, international arbitration, notwithstanding its apparent popularity and success, especially within the legal profession and, in its trail, with law students, has not remained without criticism and doubts notably in the business community and latterly more in particular in foreign investment. The discussion was already started in section 1.1.1 above. In the business community, it has to do foremost with three of the traditional benefits attributed to arbitration being efficiency, speed, and limited cost (besides its confidentiality). Serious inroads have been made in the former areas. It was already submitted that this has much

48 Volume 2: International Commercial Arbitration to do with formal attitudes in the legal profession which have led to arbitration’s judicialisation.65 A subparagraph is the localisation of this dispute resolution facility at an artificial seat and the consequent denial of the transnational status of international arbitration, which makes it subject to local particularities.66 It cannot be repeated often enough that the judicialisation that commonly follows is a self-serving attitude in the legal profession, which has tended towards a severe monopolisation of the arbitration practice even within that profession itself, aided by the few law firms that have been specialising in this field and are successful in this area. Virtue is even mentioned, rule of law aspirations quoted,67 human rights considered better protected, but some greater modesty may be more appropriate and greater self-reflection necessary.68 Indeed, it has been said by substantial authority that ‘clients are more likely to see the enterprise as simply unwieldy, exhausting and specifically designed to benefit the balance sheets of lawyers.’69 Others from the older generation of arbitrators have warned about international arbitration’s credibility arguing that present day arbitrators may be suffering from an excess of ego, are losing sight of arbitration’s original function, and are killing the goose that lays the golden eggs.70 So much is clear: there is a lack of understanding of (international) arbitration in the legal community or even an unwillingness to contemplate the issue, which so far has served its interests well. Whether arbitration is judicial at all and arbitrators pseudo-judges were already presented as key issues, another one being whether this type of dispute resolution is international or merely some segment of the intricacies of a local lex arbitri of an entirely artificial seat. That would confirm an entrenched parochial legalistic and formalistic attitude that is inimical to a 65 See ss 1.1.2 and 1.1.10 above and further L Trakman and H Montgomery, ‘The “Judicialization” on International Commercial Arbitration: Pitfall or Virtue’ (2017) Leiden Journal of International Law 7. Cf also A Stone Sweet and F Grisel, The Evolution of International Arbitration: Judicialisation, Governance, Legitimacy (Oxford, 2017). Much is made here of the earlier work of Y Dezalay and BG Garth, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order (Chicago, 1996), see also D Caron et al (eds), Essays Dedicated to Charleas Brower, Practising Virtue (Oxford, 2015), and J Paulsson, The Ideas of Arbitration (Oxford, 2013). Although Dezalay and Garth present an interesting view of how the transnational commercial and financial legal order might be formed, the role of international arbitration in it may be overstated. The destructive force of judicialisation in terms of a viable dispute resolution alternative in that order and the increasingly (self) promoting role of legal practitioners in it, like it is in ordinary court proceedings, using judicialisation or indeed alternatively the promotion of virtue and the rule of law or even human rights as a means to strengthen this role (the latter usually by non-establishment newcomers to the field), may still not be properly understood, cf also F Grisel, ‘Competition and Cooperation in International Commercial Arbitration: The Birth of a Transnational Legal Profession’ (2017) 51 Law and Society Review 790. See for the history of the ICC arbitration model, F Grisel, ‘Aux Origines de l’Arbitrage Commercial Contemporain. L’Emergence de l’Arbitrage CCI (1920–1958)’ (2006) No 2 Revue de l’Arbitrage 1, which shows the absence of a clear philosophy and full understanding of the issue in the early and later work of the ICC. 66 Indian law eg still states that the principles of Indian Code of Civil Procedure and Evidence Act shall be applicable to Arbitrations, Section 19 (1), Arbitration and Conciliation Act, 1996. Subsequent judgments clarify that although the Code of Civil Procedure and Evidence Act shall not bind the arbitrations, their principles shall still be applicable. Fiza Developers & Inter-Trade (P) Ltd v Amci (I) (P) Ltd., (2009) 17 SCC 796. 67 Arbitrators also like this, see eg Lemire v Ukraine, ICSID Case No ARB/06/18, Jan 14 2010 no 263; earlier ICSID Case No ARB/01/3, May 22 2007, nos 154, 279, and several others, cf also D Amariles and A Waeyenberge, ‘Fair and Equitable Treatment in Investor-State Dispute Settlement: A New Interpretive Framework’ (2017) 8 J Buss L 6323. 68 D Kalderimis, ‘International Arbitration in a Brave New World’ (2018) 34 Arb Int’l 533, 542. 69 See VK Rajah, SC (Attorney-General Singapore), ‘W(h)ither Adversarial Commercial Dispute Resolution’ (2017) 33 Arb Int’l 17. Note that the term ‘adversarial’ is used here not as the opposite of ‘inquisitorial’ but is contrasted with ‘mediation’ or similar non-judicial consensual dispute resolution or conciliation techniques. 70 See K-H Bockstiegel, ‘Experiences and Suggestions Regarding the Functioning of International Arbitration Institutions’ in JC Betancourt, Defining Issues in International Arbitration 25 (Oxford, 2016) and BM Cremades, ‘The Expert Witness in International Arbitration’ in JC Betancourt, Defining Issues in International Arbitration (Oxford, 2016) 196.

Volume 2: International Commercial Arbitration 49 more business friendly approach and to all transnationalisation because it is not in the interest of entrenched local legal elites. International arbitration then becomes a pastiche of domestic ordinary court proceedings minus the supervision (appeals) except for a more limited review in annulment proceedings at the seat and local recognition and enforcement of awards in other countries, all further legal processes, tentatively of considerable complication and subject to more appeals. Another aspect is that this kind of arbitration must be strictly based on law, whatever law that may be and it is usually still perceived as a purely local phenomenon. Transnationalisation is then likely to be considered or felt as a dilution of local interests. Merely doing away with procedural rigidity and appeals may then not be enough for international arbitration’s credibility as an alternative dispute resolution facility to survive. Legal formalism soon returns and may well prove to be ultimately debilitating. That is indeed borne out by judicialization and is the first-time bomb under international arbitration. It is joined by the increasing weight of public policy issues. They have become arbitrable in commercial and financial arbitrations and are the essence of foreign investment arbitration. In fact, making public policy arbitrable in Mitsubishi in the US and in Eco Suisse in the ECJ changed the nature of international arbitration fundamentally and presents the second time bomb under its credibility.71 Although undoubtedly efficient—the older practice was to interrupt the arbitration and litigate public policy issues in the ordinary courts possibly through many appeals—the result is deeply threatening to the concept of arbitration which was truly made only for typical private contractual issues that did not go beyond the two parties in the dispute. Public policy is a complication not easy to dispense with, even if another alternative were found beyond the ordinary courts and arbitration.72 One sees it in amiable compositor proceedings which are not based on law but cannot dispense with public policy issues either if impacting on the case. The same goes for binding expert advice, see for these options section 1.1.4 above but it remains a truism that private dispute resolution sits uneasily with the resolution of public policy or public order issues when arising in (an international) dispute and it is counterintuitive. Again, it does not help that it is conducted as a business. In all of this, again, it bears remembering that international arbitrators are not judges. They do not speak for any law or public interest and are not there to invoke it autonomously and clarify it. If properly understood, it was submitted that arbitrators are traditionally more like juries depending on the representations of the parties and how they define their dispute and present their evidence. All must be presented as fact, also the applicable law. The issue is therefore principally one of the presentability and credibility of evidence, no more, hence also the focus on crossexamination. In particular it is not for arbitrators to raise issues or start another line of thinking; it is not for them to create another dispute or clarify any law. It was submitted that this may even be so in the limited areas where international arbitrators have obtained original powers, like in procedure and evidence if parties have not agreed otherwise, but no less where potentially (since Mitsubishi) they may now have power in public policy and public order issues, possibly even raise autonomously issues of competition law, market abuse, money laundering, tax evasion, and corruption, although it was already said several times that this may still require special handling. Notably it does not do away with the need for further submissions by the parties as the basis for the award if only as a matter of utter due process. 71 Although extending arbitrability at least in the US and EU, it is still not clear how far this goes and what the limits are, also in other countries, see P Kumar, ‘Is Fraud Arbitrable? Examining the Problematic Indian Discourse’ (2017) 33 Arb. Int’l 249. 72 DR Hensler and D Khatam, ‘Reinventing Arbitration: How Expanding the Scope of Arbitration is reshaping its Form and Blurring the Line between Private and Public Adjudication’ (2018) 18 Nev LJ 381.

50 Volume 2: International Commercial Arbitration Again, it should be realised that international arbitrators institutionally do not speak for any legal order or public policy nor are they called upon to clarify the issues. They are only there to solve a dispute as presented by the parties, no more. Notably, they are not there to make new law and do not have the institutional standing to do so or it would have to be implicit in the arbitration clause which is unlikely—law making power affects the public at large and does not come from or can be conferred by private parties.73 Even if they wanted it, it is not for them either to

73 It must remain doubtful whether it is true that ‘there is no question today that arbitrators are empowered, and indeed have the duty, to investigate and adjudicate corruption issues and thereby contribute to the global fight against corruption’, see E Gaillard, ‘The Emergence of Transnational Responses to Corruption in International Arbitration’ (2019) 35 Arb. Int’l 1, 3. Although it may be utterly desirable, it remains an issue where this empowerment could come from. International arbitration cannot carry all the burdens of this world and could collapse under their weight. One may also wonder whether, when it comes to the definition of corruption, the lex contractus is applicable as sometimes proposed and it may be doubted whether the private law and choice of law facilities and party autonomy could here possibly obtain. There is no universal definition or international minimum standard and whatever there is, it is not stable. No less important is the criminal nature of this activity which is hardly compatible with the competences of international arbitrators. Can it be dealt with as a purely private matter or do arbitrators have a duty to further investigate and order discovery or even report suspicions to the relevant authorities and handover the case? Again, where would those powers come from? Hardly from the arbitration clause, and who is to pay? Can confidentiality remain preserved? It is also not clear what the remedy should be, although like in the case of anticompetitive contracts, nullity or unenforceability might often be considered the direct consequence. There are two international treaties in this area: the 2003 UN Convention against Corruption with 187 Member States and the 1999 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (followed by Commentaries and Recommendations) ratified by 44 countries. Both Conventions aim at Member States criminalising this activity, in the UN Convention to ‘consider adoption’ of such measures in respect of trading in influence and private sector bribery and embezzlement, in the OECD Convention as a duty to establish bribery of foreign officials as a domestic criminal offence. The OECD Convention in Art 1 is concerned with ‘any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or indirectly or through intermediaries, to a foreign public official, for that official or a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business’. The UN Convention notes the corrosive effect of corruption on society more generally and is concerned (Art 3) with ‘the prevention, investigation and prosecution of corruption and to the freezing, seizure, confiscation and return of the proceeds of offenses …’ but allows the fundamental principles of each Member State to be respected. Subject to this limitation, Arts 15–27 give a more precise description of the activities covered. The issue has sometimes been reported in case law, see World Duty Free Company Ltd v The Republic of Kenya ICSID Case No ARB/00/7, 148–55, Award (4 October 2006), which invoked ‘transnational public policy’. Arbitrators have even allowed negative inferences if parties were not able to disprove corruption, the Tribunal assuming that the payments were ‘nothing more than thinly disguised bribes’ in Metal-Tech Ltd v Republic of Uzbekistan, ICSID Case No ARB/10/3, Award (4 October 2013), see also Michael A Losco, ‘Charting a New Course: Metal-Tech v. Uzbekistan and the Treatment of Corruption in Investment Arbitration’ (2014) 64 Duke LJ Online 37, 38–43. See further also, W Fox, ‘Adjudicating Bribery and Corruption Issues in International Commercial Arbitration’ (2009) 27 J. Energy and Natural Resources L. 487; D Malik and G Kamat, ‘Corruption in International Commercial Arbitration: Arbitrability, Admissibility and Adjudication’ (2018) 5(1) Arb Brief 1, 22. Arbitrability is often assumed if there is an anti-corruption clause in the contract, but that does not resolve the question whether it is treated as a private or public issue and how far the powers of international arbitrators reach especially in the latter case and can be exercised. In a transnational context, general principles deduced from treaty law may help to identify the problems, the rest would indeed be transnational public policy, which again raises the question whether international arbitrators are spokes persons for the public interest and how they would exercise that authority, see also the discussion in s 1.2.5 below. It is reported that over 12,000 companies have voluntarily pledged to meet minimum standards for anticorruption in the UN Global Compact Guide to Corporate Sustainability (2015), but no company has so far ever been removed for breaching its voluntary obligations and the scheme has been criticized for upgrading companies to UN partners ‘without paying the price’, cf K Weilert, ‘Taming the Untamable? Transnational Corporations in United Nations Law and Practice’ (2010) 14 Max Planck YB United Nations L 445, 478.

Volume 2: International Commercial Arbitration 51 assume power over public policy and its application; such power would have to derive from the international legal order itself as discussed in section 1.1.10 above, or in the case of Bilateral Investment Treaties or BITs implicitly from treaty law and is not then any longer a question of party autonomy. No less important: how would these arbitrators come by their wisdom and under what law? It could hardly be the lex contractus or any other local law except public policy in the countries of conduct or effect of international transactions or under a transnational normativity in terms of transnational minimum standards of conduct. Whatever that law is, the assumption would then have to be that international arbitrators are the proper persons and have the power and knowledge to handle these issues as if they were international judges. This might be arguable but the essence remains first the proper role of international arbitrators and their limited status and power and to appreciate the nature of these proceedings as true alternatives to those in the domestic courts, in which connection it would then also be necessary to consider the special place and difficulties of public policy issues arising in that context and their potentially destructive effect on the nature of the arbitration process. In foreign investment arbitrations this has led to a crisis74 which has lost international arbitrators the plot, although the full consequences will take some time to transpire and come to the fore when BITs will be adjusted in line with the Canada/EU approach in CETA, which has adopted a different attitude and has substantially done away with these arbitrations as we know it in favour of a special court, see section 3.5.8 below. The new USMCA treaty favours the ordinary courts (except for certain businesses in Mexico). There is a connected third time bomb that has become clear especially in financial disputes although hardly ever so identified, notably not in P.R.I.M.E. either.75 This concerns the effect of an award on classes of third parties which were never party to the arbitration, especially common and other creditors under awards that deal with property allocation issues, issues of ranking of security interests, and preferences resulting from set-of or netting facilities. Earlier it was mentioned that international arbitrators may operate here in the nature of equity judges.76 Yet is would be a big step to take whilst the end result can be greatly detrimental to outsiders especially in asset backed funding disputes. It has a bearing especially on the effect of the arbitral decision in local bankruptcies, where the public policy bar to recognition and enforcement under the New York Convention may then become a key issue to protect or amend the domestic bankruptcy order and its treatment and ranking of claims.77 What to do? To advance the concept of international arbitration in these newer circumstances, a better modus vivendi may have to be found both to deal more adequately with both business and public concerns. As far as the first are concerned, formality in the proceedings and especially its set form must be challenged. Whilst cross examination may remain important, the formal form of hearings often for many days hardly ever adds much except cost. The discovery process is not as important as it is often made out to be either. It can be very expensive and going through the productions very time consuming.78 A legalistic approach to the substance of the 74 Notwithstanding considerable effort to praise its virtues, see C Brower and S Blanchard, ‘What is in a Meme? The Truth about Investor-State Arbitration. Why it Need Not, and Must Not, Be Repossessed by States’ (2014) 52 Columb J Transnat’l Law 689; S Swebel, ‘The Outlook for the Continued Vitality, or Lack Thereof, of Investor-State Arbitration’ (2016) 32 Arb Int’l 1. 75 See for the P.R.I.M.E financial arbitration facility s 2.5 below. 76 JH Dalhuisen, ‘International Arbitrators as Equity Judges’ in PH Becker, R Dolzer and M Waibel (eds), Making Transnational Law Work in the Global Economy. Essays in Honour of Detlev Vagts (Cambridge, 2010) 510. 77 See further the discussion in s 2.3.3 below. 78 See NM Pace and L Zakaras, ‘Where the money goes. Understanding litigant expenditures for producing electronic discovery’, RAND Institute for Civil Justice (2012). ‘Predictive coding’ may be as reliable as cross examination

52 Volume 2: International Commercial Arbitration case may be equally undesirable and seldom adds to credibility. The length, intensity and cost of the proceedings may be very destructive of relationships. Notably Asian and Islam cultures were always uncomfortable with it. Instead, the international and more informal nature of the facility should be used precisely to make it more responsive to real needs rather than legal sophistry and intractable legal argument under some local laws which were never written for the type of international dispute in question. It was said before, in section 1.1.2, that international (commercial and financial) arbitration is best seen as a continuation of the discussion between the parties. It always suggested a more consensual rather than litigation approach even if in the judicialization and localisation of international arbitration this was soon forgotten by the legal profession. Rather, it further qualifies the role and status of international arbitrators. They are normally party appointed and, although independence, impartiality and other due process requirements now figure large in international arbitrations, the context is nevertheless different and it is not illogical to expect some intervention by the parties in the case. In fact, impartiality and independence always sat uneasily in party arbitration, see also the discussion in section 1.1.12 above. Again, international arbitrators are not judges and are there in principle only to solve a dispute between the parties. In particular they are not there to clarify any law but rather to bring the case expeditiously to an end. As a minimum, in international arbitration, this may mean a distinctly more modern bias in favour of a settlement and both advocates and arbitrators should be well aware of it and increasingly consider it a fundamental rule of international arbitrations and they should work towards it. It is also the more intuitive difference with court proceedings and all forms of judicialization. Rather than see faces drop full of disappointment in the legal profession when a case settles, it should be seen as a triumph for common sense never mind the financial interests of advocates or arbitrators who may be heavily conflicted in these matters. It is well known that the legal profession does not promote conciliation79 but we may need a more activist approach towards settlement.80 This may impinge on the independence of the party appointed arbitrators more in particular when they subsequently still must decide the issues, a matter already raised in section 1.1.12 where a relaxation of the impartiality requirement for party appointed arbitrators was also proposed. Strict due process requirements may also be relaxed. In particular, it may mean a combination of mediation and arbitration, in which much will come down to the ability and skills of the chair, whose independence and impartiality should be treasured and who should use its decision-making powers to bring parties to the table and negotiate in earnest, in which context the chair may also listen carefully to the party appointed arbitrators and might issue a number of awards to eliminate successive barriers to a settlement. Assume there are five issues. The chair may thus try to reach agreement on the first and if that is not possible decide this issue and then review with the parties how much there is still left of the others and deal with them similarly in succession. This is likely to create a very different world of international arbitration and it may be time to consider it in earnest as another alternative.81

to figure out whether documents are relevant or privileged. Cf for a plea in favour of more traditional discovery in international arbitration, PB Klaas, ‘Depositions: an Apologia’ (2009) 25 Arb Int`l 553. 79 See Hazel Glenn, Central London County Court Pilot Mediation Scheme, Evaluation Report (1998). 80 Note also Aroa Mines (Ltd) case on merits, 9 RIAA, 402 (1903) for the nature of arbitration and the comment in n 14 above. 81 See Rajah, n 69 above.

Volume 2: International Commercial Arbitration 53 It leaves us with the public order question where, in the view of this author,82 an international court should start to operate, not as a bilateral appeal court on points of fact, law, or procedure as is now the approach in CETA, see section 3.5.8 below, but rather as a facility from which international arbitrators may ask preliminary opinions on points of public policy or issues that affect third parties especially in financial arbitrations when ranking may be decided. These might be published and may eventually provide greater clarity in the applicable law even though unlikely to function as binding precedent, which is unusual in international tribunals and system thinking or system creation would not be the objective.83 Notably an activist attitude should be avoided, it is for treaty-making powers or customary law, not for arbitrators or even judges to fill the large gaps in foreign investment and other regulatory and public laws or even private laws affecting third parties in international transactions. Such a court could also supervise the behaviour and remuneration of arbitrators and become involved in the enforcement of the awards.84 The overall conclusion is that arbitrators should give up all pretence at law formation and set their sights much lower, concentrating indeed on the resolution of disputes as parties define them, in which context in purely commercial and financial disputes a mediation role would automatically follow accepting that this dispute resolution facility is in the nature of a continuation of the discussion between the parties. Only in that manner, it would appear, does international arbitration have a major role to play, even in investment arbitration, in that case with the help of an international court from which preliminary opinions may be asked to back up legitimacy, accountability and transparency; the same facility would be at hand for public policy and thirdparty issues arising in private cases. To put it differently, if arbitrators think they can and should make law, ordinary courts are better placed and may have to take over with all legal formalism and judicial activism that undoubtedly will follow. A lawyers’ paradise, no doubt. That would be the parties’ choice. It means that international arbitration, regardless of the time bombs under it, is not broken. It is fact or situation sensitive, is solution oriented, and promotes legal diversity, meaning acceptance of the fact that each case is different. There is no search for or creation of a single all-embracing system of rules meaning to set the law in concrete. If there has to be such a system it would not be the task for arbitrators to create it nor probably even for judges internationally. If now in CETA we have some such court of appeal, it could hardly be the role of such a court either. At least in foreign investment, any law-making function belongs to sovereigns; in judges, even international ones, such power would be extreme, again the issue of legitimacy and accountability, in arbitrators it is inappropriate. It will be noted in section 3.5.8 below that such a judicial law formation function (if that is the idea) could be a much greater threat to host countries than to investors and will not necessarily lead to greater respect for sovereign rights and their public policy imperatives. Any system, if it is the aim to create or complete it in this manner, might well be set against them and would then likely operate in all cases in a uniform, ‘consistent’, and more mechanical manner. It must be doubted whether that is what most commentators so obsessed by public policy overrides of foreign investors’ protections seem to want or had in mind. Again, law creation in this area must be left to sovereigns or customary law; private arbitrators who do not have that power over public law.

82 See

s 1.1.12 and n 64 above. also text at n 50 above. 84 See further the discussion in s 1.1.11 above. 83 See

54 Volume 2: International Commercial Arbitration

1.2. The Process of Legal Transnationalisation. The Operation of the Modern Lex Mercatoria as Lex Arbitri. Transnational and Domestic Public Policy Considerations in the International Arbitral Process 1.2.1. The Transnationalities of International Arbitration. The Separation of the Arbitration Clause, its Meaning, and Subsequent Application of the Modern Lex Mercatoria as the Law Applicable to the Arbitral Process. The Residual Role of the Arbitration Law of the Seat The discussion so far has centred on the idea that the whole infrastructure of international arbitration, once properly understood, is truly international and delocalised. The arbitration clause is segregated from the rest of the agreement and the applicable arbitration law is transnationalised. Parties may of course vary this by common agreement and make other arbitration laws applicable although, technically, only in areas at their free disposition, meaning that in international arbitration it is not within their power to avoid transnational fundamental principle or mandatory arbitration practices prevailing, notably when it comes to due process in matters of procedure and evidence. They also have to worry about the public interest and public policies and the effect on third parties in proprietary matters, and in the areas of set-off and transactional and payment finality. Not accepting their transnational character risks altogether domesticating the proceedings, inviting in particular local review, foremost at the seat, and might even deprive the award of the full benefits of international recognition; the arbitration is not then truly international, which would (in this view) assume at the same time its (and the arbitration clause and the award’s) operation under transnational law. If still sufficiently international to fall under the recognition facilities of the New York Convention, which under its terms means simply a need for enforcement in another country than where the award is made, it must be recognised and accepted that even in the framework of that Convention there could still be a review of the award on the basis of domestic public order requirements of the country of recognition rather than under a trans nationalised concept of public order, although even this localisation must in the transnational view be seen in the context of the operation of transnational law, meaning that the New York Convention must also be put in the transactional context and in the hierarchy of the applicable norms whilst transnational minimum standards may take over. Indeed, it has increasingly led to a more transnationalised concept of public order being read into Article V(2)(b) of the Convention in Contracting State as we shall see in section 1.6.2 below. Thus, when its operation is properly understood, the New York Convention itself is be placed amongst the different sources of transnational law of which treaty law is only one and it is then subject to higher fundamental principle and customary transnational law (or the mandatory practices of international arbitration). Significantly, it allows at the same time for its further evolution short of official amendment, which itself may be hard to achieve. In this book, the transnational delocalised approach is not presented as some absolute truth but only as the better model and guidance. It explains and simplifies now more than the older theory of the seat, with its traditional domestic concept of dispute resolution and its approach to the applicable arbitration law and the powers of arbitrators, relying on the lex arbitri of that seat as the law applicable to all of the international arbitration process, alternatively as a matter of extraterritorial application. It is a paradigm and was shown to sit uneasily with the effects of

Volume 2: International Commercial Arbitration 55 globalisation on international business and the force, nature and operation of the international commercial and financial flows. Rather, when one puts oneself firmly in these flows, that is to say legally in the transnational commercial and financial legal order, one sees a different need and perspective. To repeat, transnationalisation and delocalisation of international arbitration follow from the sheer size of globalisation and the transformation of the nature of these flows, which is in any event for a great part virtual or concerns assets in constant movement and transformation in production chains which can hardly be properly located any longer in a specific country. It makes it incomprehensible why arbitrations concerning disputes in these flows must be localised. In fact, only in a delocalised approach may international commercial arbitration become truly operative and it is for us to determine exactly what that means from a legal point of view. It was already said that the model of the ‘seat’ then increasingly deserts us and this is now more generally understood, to start with the French Cour de Cassation. It has already been noted in section 1.1.9 above that that does not mean that local courts and local leges arbitri are no longer relevant. They continue to have a support function and might even correct to the extent an international arbitration comes demonstrably onshore at the seat, but it would not appear that this is different from it coming onshore and needing support in any other country, although there may still be more support needed at the seat, for example in the appointment of arbitrators if the arbitration clause is deficient and parties cannot agree. However, it was submitted that courts in other countries might also appoint, notably if they would otherwise become the competent court. The support function is most acute in recognition and enforcement, especially in countries of assets, most likely to be different from that of the neutral seat. For preliminary protection measures and the compelling of evidence, support in countries other than those of the seat is also more likely and it has already been mentioned several times that there is nothing per se extraterritorial in the application of the law of the seat in this connection; it has no validity elsewhere without proper recognition; only transnational law (and public international law in investment disputes) may claim it. Local laws cannot assume international standing and to the extent many believe the law of the seat still can in international arbitrations, that must be a misunderstanding. If especially the Supreme Court in the UK and the English Bar are behind here (see also section 1.1.9 above for Article 16(4) LCIA Rules 2014 retained in the 2020 revision, reflecting this older attitude), it means that the international arbitration scene in London is still handicapped; there is indeed still a danger of over-interference by the courts in England, further demonstrated by the possibility of a review on points of English law unless excluded. It remains a facility under the English Arbitration Act of 1996, which does still not fundamentally distinguish between domestic and international arbitrations and considers itself dominant in all matters regarding arbitrations conducted in England or where England is declared the seat whilst claiming extraterritorial effect for itself. This attitude might even be more destructive in Germany. Transnational arbitration practices as they develop are then largely ignored and only accepted to the extent they fit in the laws of the seat. A different way of thinking or paradigm may now be needed and follows, it was submitted, from delocalisation. Again, it assumes a different perspective, that of the pull of the international flows which are now far larger than the domestic ones and can hardly be broken up any longer along domestic lines as the contacts are increasingly unclear in a virtual world of rights and obligations which are often no longer localised. Transnational sources of law operate here as part of the modern lex mercatoria, which, it is submitted, also affects arbitration in its institutional and procedural aspects. It means that, although arbitrators may still rely on a domestic law of the seat, even sometimes its rules of private international law as to the law applicable to the substance of the case when so pleaded, this law must then still find its place among all the sources of transnational law and yield when the latter are higher. This is the issue of hierarchy,

56 Volume 2: International Commercial Arbitration also relevant in international arbitration and the law applicable to it.85 It is the argument in this book that such a domestic law, to the extent still applying, is then itself transnationalised and part of the transnational order. Thus, even if in institutional and procedural matters we were still to adhere to this law of the seat, it must be ranked among the other sources of law and yield if they are higher. It means that if transnationalisation of international arbitration were properly understood, local leges arbitri no longer operate independently in international arbitrations, not even in their support functions. To summarise, these other sources are: (a) transnational fundamental principle, for arbitrations especially important in terms of due process even to protect speed and efficiency in the proceedings,86 but they also speak to the separation of the arbitration clause from the rest of the contract, to the Kompetenz/Kompetenz issue, the other powers of international arbitrators such as determining arbitrability and admissibility issues, procedural and evidence matters if not resolved by the parties, their own way of reasoning, and perhaps to their power to raise issues of public interest such as in competition and market abuse cases, corruption, etc and possibly of property law (see sections 1.1.10 above and 1.2.5 below); (b) transnational arbitration custom and practices, especially important in procedural and evidential matters, but also in other areas where international arbitrators have acquired autonomous powers as an expansion of fundamental principle in this area; (c) treaty law, especially the New York Convention in the area of recognition and enforcements of the arbitration clause and awards; (d) general arbitration principles, especially the Model Law and arbitration laws of advanced countries; and (e) party autonomy in particular expressed in the arbitration clause including the institutional rules it may incorporate, which clause itself is separated from the rest of the contract under transnational customary law (following fundamental principle) and founded in and derives its force from the transnational legal order when the internationality of the arbitration is at stake (unless parties have expressly agreed otherwise). As far as the law applicable to the international arbitration process is concerned, we may therefore have (a) both, in procedure and substance, transnational law with the different sources indicated and their hierarchy; (b) for the procedural aspects and support functions the addition of the lex arbitri of the seat or of any other country that is asked to support or intervene, being to this effect part also of that transnational law after shedding their purely domestic peculiarities and subject to the hierarchy of legal sources and potentially transformed thereby; (c) domestic public policy wherever an international arbitration still comes demonstrably onshore (in conduct and effect) unless superseded by transnational minimum standards; and (d) for the international recognition and enforcement of the arbitration clause and of the award the New York Convention subject again to any higher transnational sources of law and transnational minimum standards especially relevant in respect of the public policy bar.87 In the meantime, it may be of interest to compare what the UNCITRAL Model Law and important domestic leges arbitri still make of the applicable arbitration law concerning the arbitral process, at least in terms of procedure and evidence where they now tend to be specific. The Model Law in its Article 19 states that parties are free to agree on the procedure to be followed by the arbitral tribunal, failing which agreement, the tribunal may conduct the arbitration in 85 See for international commerce and finance, Vol 1, ss 1.4.14 and 3.1.2. See for international arbitration, M Renner, ‘Towards a Hierarchy of Norms in Transnational Law’ (2009) 26 J Int’l Arb 533, and World Duty Free v Kenya, ICSID Cao ARB/00/7, 4 October 2006, nos 139 and 157. 86 See text at n 43 above. 87 For the present discussion we shall leave foreign investment arbitration to one side where the respondent is invariably a state and the public interest is engaged more directly. The applicable law in those disputes will be dealt with in s 3.3 below in connection with Art 42 of the Washington (ICSID) Convention.

Volume 2: International Commercial Arbitration 57 such manner as it considers appropriate subject to the mandatory provisions of the Model Law itself. That is also the essence of the French Arbitration Act of 2011 (Art 1509 CCP). The English Arbitration Act of 1996 in section 34 also leaves the procedural and evidential matters to the tribunal subject to the parties’ agreement and that is now often considered the consensus view. In this book this freedom is not perceived as discretion however. It only confirms that international arbitrators are not obliged to apply the lex arbitri of the seat but rather transnational law, including the established transnational arbitration practices. International arbitration does not float in a legal vacuum, rather it floats under transnational law. It was already said that upon a proper analysis, even a choice of law agreement by the parties opting for some domestic law as part of their international arbitration clause is transnationalised if one wants to maintain the international nature of the arbitration. To demonstrate the point: in respect of procedure, it has already been noted that arbitrators may now have the right and perhaps even the duty to hurry things along as a higher international arbitration principle. In the same vein, appeal and review provisions in the arbitration clause might increasingly be ignored, again as a matter of higher international arbitration principle and practice as we have seen.88 In terms of competency of arbitrators, the issue is foremost one of their autonomous powers over the arbitration process and then also concerns their jurisdiction and issues of arbitrability and admissibility. It must always be asked what powers they have and on what ground, for example, may they intervene in the contractual risk distribution like for example in the case of force majeure and especially change of circumstances, and how.89 A hardship clause in the contract would obviously assist but it is still for the aggrieved party to claim and raise and prove the hardship.90 Without such a clause and express authorisation by both parties to the dispute,91 it may not confer sufficient authority on arbitrators and they may have insufficient power even if asked to recast the contract, hardly a legal activity, and this power may not be implicit. Here again arises the credibility issue which may also impact on legitimacy under transnational arbitration law. The true issue may be a practical one: how are arbitrators to relaunch the contract in international professional dealings and ensure faithful implementation? There are no objective criteria even if this part of the proceedings were to be considered in the nature of those of amiable compositeurs. The only issue for them is then to decide upon proper pleading if, when and how the contract comes to an end. ‘No award in the world can serve as the starting point for a fruitful future cooperation’.92 88 See n 6 above. 89 See KP Berger, ‘Adaptation of Long-Term Contracts by International Arbitrators in the Face of Severe Economic Disruptions: Three Salient Problems’ (2020) Journal of International Arbitration 589, 591, and P Accaoui Lorfing, ‘Adaptation of Contracts by Arbitrators, in Hardship and Force Majeure in International Contracts, Dealing with Unforeseen Events in a Changing World’, in F Bortolotti and D Ufot (eds), International Chamber of Commerce (2018) 41. 90 Where existing in codification countries, like in France now in Art 1195(2) Ccm, in Germany in s 313(1 BGB and in The Netherlands Art 6.258 CC, they are often an expression of a consumer law bias lacking distinction with professional dealings where, however, in The Netherlands Art 6.258 CC does not commonly find application. This is also the normal common law attitude except in extreme cases, see Vol 5, ss 1.4.7 ff and to be also the direction in transnational law, which, it was submitted, is substantially the l law of professional dealings. Here local leges arbitri may also help in the context of conferring a broader gap filling power, see eg, Swedish Arbitration Act 2019, s 1(2); Dutch Arbitration Act 2015, Art 1020(4)©, in the approach here taken always subject, however, to sufficient transnational law support and always after hearing the parties’ submissions. 91 The revised International Chamber of Commerce (ICC) Hardship Clause of March 2020 allows the parties to opt for contract adaptation by a neutral third party. It is an alternative to contract termination and the suggested clause is that ‘either party is entitled to request the judge or arbitrator to adapt the contract with a view to restoring its equilibrium, or to terminate the contract, as appropriate’. 92 Nobert Horn, Procedures of Contract Adaptation and Renegotiation in International Commerce, in Adaptation and Renegotiation of Contracts in International Trade and Finance, 28 1986).

58 Volume 2: International Commercial Arbitration Again, areas where arbitrators might also have autonomous powers of intervention may derive from public policy, however dangerous it may be for their credibility, see sections 1.1.14 above and 1.2.5 below, but even then, it must be asked how they can be exercised.

1.2.2. The Transnationalisation of the Applicable Substantive Law. The Modern Lex Mercatoria as the Proper Substantive Law. Differences between International Arbitrations and Proceedings in the Ordinary Courts? Also, in the area of the substantive law applicable to the dispute, the basic paradigm remains since the nineteenth century that, even in international transactions, some national law must prevail. It is therefore still normal always to think in terms of national laws and the modern state (and its courts) have come to be seen as the natural stabilisers and promoters of all law (including private law in this manner) while moving it forward, even in international transactions. Thus, all law became national and then also territorial as a matter of political philosophy, a residue of romanticism—only 50 years earlier people had held exactly the opposite view and saw law as basically universal—although there was also a practical aspect, a cleaning-up operation and the need to move ahead more effectively, for which the modern state proved to be the better motor. This was very much the subject of the previous Volume, which can only be briefly summarised. For the following discussion, it should first be realised that present statutory or Model Law texts rightly make a distinction between the procedural and substantive law applied in international arbitrations, followed also in this book. The rules made applicable in the Model Act and the English Arbitration Act to the arbitration process have been discussed in the previous section. As to the substantive law applicable to the dispute, the Model Law in its Article 28 states as follows: (1) The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substance of the law of that State and not to its conflict of laws rules. (2) Failing any designation by the parties, the tribunal shall apply the law determined by the conflict of laws rules which it considered applicable.

It suggests first (and wrongly) that arbitrators have autonomous powers of administering the law, even if subject to directions. Rather, the article should be explained as dependent on the submissions of the parties, also in this aspect of the applicable law which must be pleaded as fact. Moreover, even though technically a choice of non-state law is here made possible for the parties, at least for the Tribunal, it still confirms the old-fashioned approach: all law is national in principle. Whichever national law that is, it is still considered at the free disposition of the parties and can then be freely chosen or corrected by them. This cannot be true either, for example, in proprietary and regulatory matters and all other matters affecting mandatory law or public policy. Also, local values or fundamental principles cannot be ignored, even in international transactions to the extent they come demonstrably onshore in conduct and effect in a particular country or otherwise potentially transnationally as minimum standards. Once more, we have to ask ourselves whether this statist approach even if supported by an expansive view of party autonomy in the choice of the applicable laws can still be the natural reflex where the international flows of goods, services, money, technology and information have become far larger than any domestic GDP. Here also, the better view is that in these flows, there is substantive law beyond states, even beyond the parties, and that the modern lex mercatoria in

Volume 2: International Commercial Arbitration 59 its various sources and their hierarchy is the better expression of the law in this legal order. At least in Article 28(4) of the Model Law it is made clear that the Tribunal shall take account of the usages of the trade which supposedly may be transnational, although still unlikely to be applied upon the Tribunal’s own motion. Thus, even when a domestic substantive law is chosen, in international professional dealings, it is still subject, it was submitted, to higher mandatory sources of law of the modern lex mercatoria and adjusted to respect its rules; again, this national law if so selected is only a residual transnational source of law operating in areas where parties have power. It must thus give precedence to all mandatory or peremptory law, becomes transnational itself, and is adapted accordingly. Again, this new and transnationalised commercial law is applied by international arbitrators only if it is pleaded, is a matter of evidence, and is then becoming part of their reasoning,93 now commonly upheld by state courts recognising such awards.94 This means that, except in the limited areas where arbitrators have original power, it is up to (one of) the parties to raise these issues and any one of them is authorised to invoke this law. It is the natural trend in the international flows and can no longer be ignored. Nevertheless, also the English Arbitration Act of 1996 in its section 46 remains traditional: The arbitral tribunal shall decide the dispute (a) in accordance with the law chosen by the parties as applicable to the substance of the case, or (b) if the parties so agree, in accordance with such other considerations as are agreed by them or as determined by the tribunal.

At least under (b) parties may here also opt for the application of the lex mercatoria and one might even assume that the tribunal can apply it if the parties have said nothing about the applicable law but one party asks them to do so during the proceedings.95 Again, the text does not make clear

93 See also M Heidemann, Transnational Commercial Law 242 (MacMillan, 2019). ICC Case No 3131, 26 October 1979 (Bernardo Cremades, President) (1984) IX Yearbook Commercial Arbitration 109 was probably the first major international arbitration in which the modern lex mercatoria was upheld. 94 The French Arbitration Act of 2011 Art 1511 CCP accepts that arbitrators may apply the law they consider appropriate and must take trade usages into account, again presumably upon proper pleading by the parties in areas at their free disposition. The Cour de Cassation accepts the application of the modern lex mercatoria, see Compania Valenciana de Cementos Portland SA v Primary Coal Inc Cass Civ (1) 22 October 1991, 1991 Bull Civil I, no 275 and earlier Pabalk Ticaret Ltd Sirketi (Turkey) v Norsolor SA (France), (1984) IX Yearbook Commercial Arbitration 109. So did the Austrian Supreme Court after much soul searching on 18 November 1982 in the ICC Case No 3131 (1984) IX Yearbook Commercial Arbitration 159; see also AJ van den Berg, The New York Arbitration Convention of 1958 (Deventer, 1981) 29, who accepts the enforceability of a-national awards under the Convention provided the awards are themselves not detached from a national arbitration law. As these cases show, this is in itself increasingly contentious. The English courts, after having consistently rejected awards based on equity until 1978, see Maritime Insurance Co Ltd v Assecuranz-Union Von 1865 [1935] 52 L1LR 16 and Orion v Belfort [1962] 2 Lloyd’s Rep 251 (QB Com Ct), changed their attitude thereafter: Eagle Star v Yuval [1978] 1 Lloyd’s Rep 357. Application of general principles in awards may now be acceptable in England: see Deutsche Schachtbau- und Tiefbohrgesellschaft [1987] 3 WLR 1023, see also n 51 above, in which the Court of Appeal under Sir John Donaldson held unanimously that at least international arbitrators could rely for the applicable law on internationally accepted principles, thus accepting not only general principle as a source of law, but allowing international principles and customs to operate in that connection also. One may regret the divergence here between arbitration and ordinary courts, which is, however, becoming increasingly accepted, see again n 51 above. In the US, arbitrators have less trouble in applying the modern lex mercatoria in international commercial disputes and this is not normally challenged, see DW Rivkin, ‘Enforceability of Arbitral Awards Based on Lex Mercatoria’ (1993) 9 Arbitration International 67. It is also reflected in the UCC explicitly recognising the force of custom, see s 1-103 UCC. 95 Even sharia law may thus be accepted in commercial and financial matters or Jewish law in appropriate cases, see, however, also Halpern v Halpern [2007] EWCA Civ 291.

60 Volume 2: International Commercial Arbitration that the applicable law must be pleaded. The meaning of any (local) law still chosen by the parties remains also problematic. It has already been said that it is a problem in public policy, regulatory or proprietary matters and all others not at the free disposition of the parties. For the rest, again, any contractual choice of a local law or any pleading thereof should still be considered in the light of the application of the other sources of applicable commercial law and their hierarchy in international cases. Not accepting this challenge is increasingly creating major legal and practical problems, not only in public policy, regulatory, and proprietary matters or other mandatory law.96 The true problem is that the international flows and their dynamics in the minds of many still have no legal status at all. Rather, how legally to perceive and structure international transactions, especially when backed by these flows as ‘flows’, therefore in their movement and transformation, and the measure of party autonomy in this area under transnational law become the real issues.97 Again, it is the flows that count, now in their globalisation. Not realising this gives rise to serious legal issues, not in the least in respect of transactional and payment finality in the international marketplace, which in respect of these flows can hardly be satisfactorily resolved any longer with reference to the law of a particular place, even if it could easily be determined—see further the discussion in section 2.2.6 below. Indeed, in the Eurobond market and international swap markets these problems are now largely overcome through reliance on transnational practice, see Volume 1, sections 3.2.3 and 3.2.5; they constitute the largest markets in the world (see also section 2.2.2 below).98 Of course, one could ask for treaty law instead and it can be helpful—of which the New York Convention is the major example in this area but it deals only with the recognition of arbitration clauses and the awards, and there is much beyond it in the transnational commercial and financial legal order that cannot wait or be easily captured by treaty law alone. The European Convention on International Commercial Arbitration of 1961 covers some more ground, especially a uniform challenge regime. Yet developing custom will always be ahead and is indeed considered higher in the operation of the modern lex mercatoria: see Volume 1, sections 1.4.8 and 1.4.9. In any event, the quality of treaty law is often modest and coverage only partial, its nature being mostly compromise that does not allow for much deeper thought nor easy amendment. In private law, the international sales law of the CISG of 1980 is a vivid example of the limits; it is the reason that it is avoided on the whole and excluded by the transnational professional practice. But even the New York Convention, which is largely procedural, has difficulty to evolve unless placed in its proper context in the modern lex mercatoria as we have seen.

96 See further JH Dalhuisen, ‘Globalisation and the Transnationalisation of Commercial and Financial Law’ (2015) 67 Rutgers University Law Review 19. 97 It is often thought that the facility for parties to opt for a local law may solve all problems. This is naïve and still assumes first that local law can properly deal with international transactions for which it is seldom written. It has already been said in the text that even domestically, modern financial products hardly fit. The second assumption is that this power to select the law is unlimited, which it is not, particularly in proprietary and regulatory or other mandatory matters where it does not go very far. Even in contract, parties cannot determine their own capacity nor the validity of their agreement, including the defence; see further JH Dalhuisen, ‘What Could the Selection by the Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law (Oxford, 2009) 619. 98 The Eurobond has long been considered an international (negotiable) instrument, see for English case law n 179 below, see further Vol 1, s 3.2.3. It also affected the structures possible in them such as securities lending and repos as well as the services connected with them such as underwriting, brokerage and market making. Transnational minimum standards against market abuse may then not be far behind, although there may be doubt again in respect of security entitlements in custodial holdings of these bonds and their trading, the use of which may, in the more traditional mindset, have ‘re-nationalised’ at least to some extent this business; it will be discussed later in s 2.2.4 below and more extensively in Vol 4, s 3.1ff.

Volume 2: International Commercial Arbitration 61 In any event, treaty law needs interpretation too, in which the other sources of law cannot be ignored and come back into their own, among which the treaty text must then also find its place in the hierarchy of norms, which it cannot itself determine—it was already demonstrated for the New York Convention, see further the discussion in Volume 1, sections 1.4.11 and 1.4.14. Again, transnational fundamental principle and practice prevail over it. The EU, which has an infrastructure in this regard, may do better but has other problems and only limited authority in private law formation, see Volume 1, section 1.4.21, while its 2011 sales law initiative (CESL) was not promising and unaware of most of these problems. It did not consider methodology, lacked sufficient quality,99 and was quietly withdrawn in 2014. But at least it is fully acknowledged in its case law that the EU constitutes a legal order of its own, which, in appropriate cases, will even allow fundamental principle to prevail over the texts of its founding treaties, a recognition therefore of the operation of different sources of law, even at that level, and of their hierarchy.100 That would apply all the more to any of its private law enactments, even if nothing of this transpired in the Draft Common Frame of Reference (DCFR) and its CESL offshoot. It is one of the reasons why these projects did not get traction. The ultimate question is whether there is a transnational commercial and financial legal order operating, as is maintained in this book, therefore whether in the international marketplace we may or must now think in terms of a transnationalisation of the applicable (substantive and arbitral) law in that order. That would indeed be the modern lex mercatoria, its sources and their hierarchy in the international markets. It has already been noted several times that the expression of the public interest and the corrections that it may entail are truly the challenge when we start thinking transnationally in a legal sense. A further key question is then whether these public interest issues, whatever they are, can be raised autonomously by arbitrators in appropriate cases. In civil law terms, we refer here often to the court knowing the law, ius curia novit (see section 1.2.5 below) but there is strictly speaking no lex fori in international arbitrations for the arbitrators to know and apply or it must be the transnational lex mercatoria and the international fundamental public policy principles or minimum standards themselves. The key question is then whether arbitrators are proper spokespersons for public policy in that order. It was already noted also that international arbitrators in their interpretation activities might then also have to consider and deal with (in their view) overriding notions of justice, social peace, and efficiency or utility, now also at the transnational level, at least when properly pleaded, and determine the reasoning they will use in this connection; see further the discussion in section 4.1.4 below. It would go far beyond their traditional role. It may well be that as a consequence, the very opting for international arbitration changes the applicable law or at least how it is perceived and must be presented and applied, not merely as a matter of party autonomy but rather as activation of different powers of dispute resolution altogether, which then acquire institutionally their own autonomous dynamic and meaning in the transnational commercial and financial legal order and may also affect the applicable substantive law and public policy issues. Although both courts and arbitrators will have to think about 99 JH Dalhuisen, ‘Some Realism about a Common European Sales Law’ (2013) 24 European Business Law Review 299; see further also H Eidenmueller, ‘What Can Be Wrong with an Option? An Optional Common European Sales Law as a Regulatory Tool’, SSRN.com (2012). See further Vol 3, s 1.6.13. 100 Case C-144/04 Werner Mangold v Rüdiger Helm [2005] ECR I-19981, upholding as fundamental principle the concept of non-discrimination on the basis of age. This has become a check on private law legislation, although it may not (yet) be invoked directly between private parties. Non-discrimination according to nationality is no less fundamental, see Case 115/08 Land Oberoestereich v Cez [2009] ECR I-10265 and also applies in private dealings under EU laws, in this case directly. See further also Case C-101/08 Audiolux a.o v Groupe Bruxelles Lambert SA a.o [2009] ECR I-9823 and in particular para 40 of the Opinion of AG Tristenjak, see further Vol 1, s 1.4.5.

62 Volume 2: International Commercial Arbitration this transnationalisation of private law and even transnationalisation of regulation in terms of international minimum standards along the above lines upon proper pleading by the parties, it has already been said that even now it is often assumed that international arbitrators have greater freedom and thus more power.101 In proprietary matters, they might then even start matching the powers of ordinary courts when stating in matters of priority and ranking, also in respect of parties not directly involved in the arbitration—it may also be clear in arbitrations concerning intellectual property rights and patents.102 But again, this goes directly into the question of their authority and the foundation of these powers as an institutional issue at the transnational level, as these powers, which affect third parties or the public at large, cannot merely derive from the arbitration clause or be deemed implied. They are not at the free disposition of the parties to a contract, who can at most determine the consequences between themselves.103 It remains a contentious area and goes to the heart of what international arbitration is and implies a serious threat to its credibility, see also section 1.1.4 above.

1.2.3. The Operation of the Public Interest at the Transnational Level. International Minimum Standards and the Relationship to Local Policies and Values If we assume that law in its choices is the result of the constant debate in the society it concerns, here the international business community, we see on the one hand a new legal order emerging to facilitate commerce and finance internationally—its law is the modern lex mercatoria, its different sources and hierarchy—but on the other, new policies and values to balance the international marketplace and keep it credible and clean. These policies and values are not at the free disposition of the parties; indeed, they are mandatory in their legal order, which means that they cannot be changed by contract (although the financial consequences may still be reallocated by the parties among themselves, for example, of taxation or environmental policies). Parties while drafting the applicable law clause often forget that they have no power over public policy, regulation or property law and other mandatory laws, although they might more effectively attempt to redistribute the burdens among themselves. To be more precise, in the new (immanent) law formation in the transnational commercial and financial legal order, therefore in the modern lex mercatoria and the public policies in that market, we have fundamental principles through which new values or policies may infuse private law. There may also be the horizontal effect of human rights in terms of private protection, sometimes even of regulation like the licensing or similar requirements of financial intermediaries (to supplement conduct of business rules),104 although public policy105 may more likely come in more directly from the outside as correction to the operation of the lex mercatoria, for example, competition law declaring anti-competitive contracts illegal. 101 In Deutsche Schachtbau- und Tiefbohrgesellschaft see (nn 51 and 94 above) it was held in England that at least international arbitrators could rely for the applicable law on internationally accepted principles. 102 See W Grantham, ‘The Arbitrability of Intellectual Property Disputes’ (1996) 14 Berkeley Journal of International Law 173 and SH Blackman and RM McNeill, ‘Alternative Dispute Resolution in Commercial Intellectual Property Disputes’ (1998) 47 American University Law Review 1709. 103 Cf also Dalhuisen (n 40) and accompanying text. 104 See also the discussion in Vol 1, s 1.4.6. 105 The concept is notoriously difficult to define as it moves all the time, see also GA Bermann, ‘Introduction: The Origin and Operation of Mandatory Rules’, in George A Bermann and Loukas A Mistelis, Mandatory Rules in International Arbitration (Juris, 2011) 4.

Volume 2: International Commercial Arbitration 63 Domestically, specific regulation may also facilitate the market functions more directly, for example, by preventing forms of market abuse such as insider dealing, price manipulation, forms of corruption and the like, and punish perpetrators. Transnationally, combining public policy or minimum standards of behaviour with a search for fundamental principle may be especially important in the international marketplace where there is no natural regulator except potentially through treaty law, the EU being a special legal order in this regard. It was already said that it presents in its internal market a form of mini-globalisation with an institutional infrastructure. Short of such an infrastructure, it raises indeed the question who the true spokespersons are or can be for the public interests and values in the transnational commercial and financial legal order and who can enunciate them or elaborate on them. In dispute resolution between participants, that could indeed be international arbitrators and formulating such interventions then concerns their powers. Even if one takes the perspective of the international flows and places oneself squarely in the transnational commercial and financial legal order, therefore the international marketplace itself, as this book does, one has to accept that these policy objectives and values are often still expressed most clearly in domestic legal orders and that they remain very relevant to the extent international transactions demonstrably come onshore in such countries, although in such situations there may still result a competition between national and international public order requirements and values, see further also Volume 1, sections 2.2.6–8. Domestically in the local courts, the latter are likely still being considered the higher; international arbitrators may take a different view, which may itself be a reason for parties to prefer this type of dispute resolution. It was already noted that in one international transaction there may be several national policies or governmental interests that compete, a problem well known from US case law, there often expressed in terms of the proper ‘jurisdiction to prescribe’.106 Which government can claim the higher interest, or must governmental interests be balanced, for example, when different competition laws impinge on one transaction? In the US, this is the area of sections 402 and 403 of the Third Restatement of Foreign Relations, see again Volume 1, section 2.2.6 above and international arbitrators may be susceptible to such balancing and may be more neutral than national courts. Again, the issue is whether they can take it upon themselves or must wait for the pleadings of the parties. Quite apart from the operation of the lex mercatoria in the private law aspects of an international transaction, doing away with the tenets of private international law and its search for closest connections in respect of each aspect of an international transaction, in matters of policy, an important issue remains in this connection to determine when the international flows and any transaction therein still come demonstrably onshore, and where. The policies of such a place would then have to be extra considered for that part of the activity. Again, much of these flows can hardly be situated anywhere any longer and if bits and pieces of it still can, their situs is often temporary or fortuitous. The example that maty be used is the production flow from raw materials to semi-finished products to finished products transferred upon a sale into receivables and upon payment into a bank account balance, all in different countries, while there is a need to give this whole process as security for working capital and keep the unity of the production, sale and collection process legally intact (see further section 2.2.7 below). Purely domestic public policies interfering with parts of it may then be seriously troublesome and transnational minimum standards may increasingly be needed to take over and maintain a minimum of order, for example, in environment protections. It was already identified as truly the greater challenge in the whole legal transnationalisation process. Will local courts accept 106 The Bremen et al v Zapata Off-shore Co 407 US 1 (1972), Scherk v Alberto-Culver Co 417 US 506(1974).

64 Volume 2: International Commercial Arbitration this? This is relevant under the recognition facility of the New York Convention and its public policy bar, for example, when international arbitral awards concerning these flows, therefore in commerce and finance, are tested in domestic bankruptcy courts (see section 2.3.3 below). Will the local bankruptcy order yield to the requirements of the transnational legal order in this regard if expressed in arbitral awards in respect of the operation of modern financial products? The view expressed in this book is that if countries want the benefits of globalisation for their businesses, local courts will have to yield, in insolvency particularly important for newer financial products and facilities developed in the international marketplace unless there is indeed a superior public policy issue, which for its credibility would then likely be transnationalised at the same time in the form of a demonstrable transnational minimum standard.107 The alternative is for businesses to stay at home, indulge in local politics, and close the borders, no longer a real alternative for most.

1.2.4. Public Order and Parallel Legal Orders. The Situation in the EU In the previous section it was suggested that public order requirements can operate at different levels. We have domestic and transnational legal orders each with their own public policy requirements, although they may operate side by side in any particular territory. In the transnational legal order, we may refer in this connection to transnational minimum standards. Neither domestically nor transnationally are these policies fixed; they develop all the time around our value systems or political power centres. Domestic public policy requirements invariably impinge on international transactions when they come demonstrably onshore in conduct or effect, although it was noted that in respect of the international flows, they may be ever more difficult to detect or become more fluid domestically, hence the increased emphasis on transnational minimum standards. It was further mentioned that in international transactions, even purely domestic policies may still conflict and it then becomes a matter of the most appropriate jurisdiction to prescribe or of balancing the relevant governmental interests or resorting to transnational minimum standards. In international arbitrations these matters may come up for decision if they affect the private relationship between the arbitrating parties and arbitrators may have to make choices upon proper pleadings. The ultimate authority then vests in the recognition courts and their public policy bar to recognition under the New York Convention. Of course, there could also be an attempt at setting aside under the lex arbitri of the seat or of any other country, if this is still considered useful and proper. This book is sceptical of the benefits. It may be added that the policies of and assessment in the neutral seat, may be hardly relevant in this connection. In the case of recognition and setting aside, public policy is defensive, and normally interpreted narrowly.108 Under the New York Convention, judges can raise their own public policy sua sponte, therefore autonomously in this regard. In the substance of the case, public policy may, on the other hand, be proactive—for example, to promote competition or defend consumers—and may be more expansive assuming they have the authority to decide these issues. Again, this raises in particular the question whether they can raise these issues themselves or whether they must be pleaded; see further the discussion in the next section.

107 Cf the Australian Ansett case, n 211 below. 108 Specifically acknowledged in the US in Restatement of Law (Third) of the Law of International Commercial Arbitration (Draft April 2012), s 4–11.

Volume 2: International Commercial Arbitration 65 This can be taken one step further into the operation of parallel legal orders. When we accept transnationalisation, parallel legal orders may operate in the same territory like the modern lex mercatoria or the international flows besides domestic laws for local business, see Volume 1, section 1.5.7. The connection was also mentioned above in section 1.2.1/2 in terms of local laws being the residual rule of private law in the modern lex mercatoria assuming the relevant local laws can still be identified. It was submitted in that connection that even if chosen by the parties in international transactions, local laws must still find their place in the hierarchy of legal sources and norms of the modern lex mercatoria. Again, such a choice cannot then supersede public policy or other regulatory and mandatory law that would be higher in the international flows. Similarly, public policy can operate at various levels: domestically, when international transactions come demonstrably onshore, or transnationally as minimum standard although it may be less clear how they connect if the latter also exist and are operative. The normal attitude is one of accommodation, which has been demonstrated by recognising courts in the EU. Thus, in France in Cytec,109 the French Cour de Cassation decided that enforcement of an arbitral award may be denied on the basis of EU public policy but did not find a reason to do so in that case, the violation not having been flagrant, effective and concrete. Again, such a finding is helped by the narrow interpretation of bars to recognition. In the EU, parallel legal ordering in the area of public policy may particularly be demonstrated when public policy becomes substantive as is for example the case in the EU with regard to foreign investment treaties entered into by Member States.110 The situation has become acute where concessions under a bilateral investment treaty (BIT) run counter to the prohibitions on government aid enforced under EU law.111 In such situations, there may be a real conflict, difficult to resolve at the level of recognition as the Washington Convention (assuming an ICSID arbitration) has a direct enforcement regime and only limited annulment grounds that do not cover public policy. Under this Convention, the issue is left exclusively to arbitrators as a matter of substantive law; in the EU there is no recourse to the ECJ either in terms of preliminary opinions.112 109 Ste SNF SAS c/ Ste Cytec Industries BV, Cas Civ, 4 June 2008, Bull Civ I no 162, Gaz Pal No 52. There are cases of the ECJ showing similar restraint, see Case C-38/98 Regie nationale des usines Renault SA v Maxicar SpA and Orazio Formento [2000] ECR I-2973. In the setting-aside cases of Case C-126/97 Eco Swiss v Benetton [1998] ECR I-3055, Case C-168/05, Elisa Maria Mostaza Clarov Centro Movil Milenium SL [2006] ECR I-10421, and Case C-40/08 Asturcom Telecommunicationes SL v Cristina Rodriguez Nogeira [2009] ECR I-9579, the ECJ summarised through preliminary opinions that national courts in their recognition of arbitral awards must consider EU public policy. So must arbitrators, although the question whether they can and should do so autonomously was not clearly answered, and they may not if the defendant does not make the case. The US Supreme Court in Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc 473 US 614 (1985) also conceded considerable power to international arbitrators to decide these issues. It is the issue of arbitrability, see further also D Dragiev, ‘Arbitrability of Competition Issues Reinforced’, Kluwer Arbitration Blog (10 Jan 2014); PM Baron and S Liniger, ‘A Second Look at Arbitrability: Approaches to Arbitration in the US, Switzerland and Germany’ (2003) 19 Arb Int’l 27. 110 See GA Bermann, ‘Navigating EU Law and the Law of International Arbitration’ (2012) 28 Arbitration International 397 and MT Parish and CB Rosenberg, ‘Investment Treaty Law and International Law’ (2012) 23 American Review of International Arbitration 138. 111 Even so, accommodation or rejection is not impossible, at least not according to arbitrators, see Eastern Sugar BV v Czech Republic, Stockholm Chamber of Commerce no 088/2004 (2007) in which the Czech Republic unsuccessfully claimed that the EU non-discrimination provision (Art 18 TFEU) excused its price decrees from the fair and equitable provision in the relevant BIT; their enactment was not considered obligatory. The question whether EU law could supersede the obligations under BITs was sidestepped. But the European Commission was not impressed and in Ioan Micula, Viorel Micula, Sc European Food SA, Sc Starmill SRL and SC Multipack SRL v Romania (I), it issued a Decision prohibiting the implementation of the Arbitral Award of Dec. 11 2013, ICSID Case No ARB/05/20, 141-151 considering to have illegally restored state aid to foreign investors. 112 Arbitral tribunals are not courts or tribunals of the Member States, see Case C-196/09 Miles and Others v Ecoles Européennes (2011) and first in Case 102/81 Nordsee Deutsche Hochseefisherei GmbH v Reederei Mond

66 Volume 2: International Commercial Arbitration Problems of this nature may disappear now that the EU under the Lisbon founding treaties has acquired the jurisdiction in this area, but the older BITs remain in place. To get out of their obligations and avoid claims for damages from investors, EU Members as host states have (unsuccessfully)113 argued in this connection that the BITs terminated upon both Contracting States joining the EU. Member States have also argued that under Article 344 TFEU the interpretation and application of the Lisbon treaties is being left to other methods of dispute settlement, but this Article only refers to Member States and not to the rights of private parties.114 Again note that the decisions in this regard have been arbitral. The question whether the EU in its area of jurisdiction is higher than treaty law engaged in by its Member States when no accommodation can be made115 may be transposed to the

Hochseefischerei Nordstern AG [1982] ECR 1095. It follows that arbitral tribunals, even with a seat in an EU country, cannot ask for preliminary opinions but also their findings are not then authoritative under EU law and are not considered to ensure the full effectiveness of EU law. The ECJ bluntly holds that an arbitration clause in BITs between Member States can have adverse effect on the autonomy of EU law and may therefore be incompatible with it, see Slowakische Republik v Achmea BV, Judgment in Case C-284/16 (2018), unusually ignoring the Opinion of the Advocate General Wathelet. This attitude is likely to be reflected in the EU’s reform process of treaty-based investor state dispute resolution mechanisms (ISDS), now an EU competency, which may include an EU multilateral investment court (MIC), studied in a special working group in UNCITRAL. Ultimately this raises the issue of the autonomy of international arbitration as against the operation of the EU public policy in its internal market. In this approach from an EU perspective, international arbitration may become subservient to the inherent systemic organisation of the EU and the expression of its policies and values in all cases. It would appear that the status of intra-EU (investment) treaties under international law is then considered lower than that of EU law, at least in the view of the ECJ, and a pluralistic international legal order is denied, see also E Sipiorski, ‘Conflicting Conceptions of Constitutionalism: Investment Protection from the EU and International Perspective’ (2019) 66 Neth Int’l LR 219 see also J Scheu and P Nikolov, ‘The Setting Aside and Enforcement of Intra-EU Investment Arbitration Awards After Achmea’ (2020) 36 Arb Int’l 253. It may have an effect also in terms of dialogue and accommodation in commercial and financial arbitrations which may thus be forced to move away from the EU but recognition of awards within it under the New York Convention would still run up against EU public policy as viewed by the ECJ. 113 Eastern Sugar BV v Czech Republic, see n 111 above. 114 Eureko BV v Slovak Republic, PCA Case no 2008–13. 115 See AES Summit Generation Ltd & AES-Tisza Eromii Kft v Republic of Hungary, ICSID Case No ARB/07/22 (23 September 2010), in which Hungary among other arguments had claimed that EU law was higher than the Energy Charter Treaty, but the Tribunal upheld the priority of international law and did not accept that EU law could be used to break an international obligation. Again, this is an award, not a judgment of the ECJ. A similar conclusion in Eastern Sugar BV v Czech Republic, see n 111 above, was used for a setting-aside action in Germany but refused in the appellate courts, Decision Appellate Court Frankfurt am Main, 10 May 2012, case 26 SchH 11/10. The ECJ itself is known for critisising the US for not enforcing international law but upholds its own superior status tenaciously, see Joined Cases C-402/05P & C-415/05P Kadi and Al Barakaat International Foundation v Council and Commission [2008] ECR I-6315 often on the basis of the argument that community law has a specific framework of implementation whilst international law has not and depends on local laws for its effect. But it can be argued with equal force that the international principle of pacta sunt servanda is overriding in both situations and puts international treaty law at the same level and then in a prevailing position. The EU being a product of international law itself, based on its founding treaties, cannot ignore the other sources of international law either, notably fundamental principle and customary law which may prevail over treaty when peremptory. Member State constitutional courts have largely gone along with the ECJ even in respect of fundamental rights as long as the ECJ polices itself properly in this regard and the Human Rights Court in Strasbourg also assumes that the ECJ does, Bosphorus Hava Yollari Turism ve Ticaret Anonim Sirketi v Ireland, 45036/98 (2005) Series A, no 440 para 304. Nevertheless, the ECJ by increasingly assuming the position of the Strasbourg court has moved into a different gear when it comes to involving and applying fundamental principle and assumes a degree of superiority which has played an important role first in the ECJ frustrating the EU’s attempt to join the European Economic Area (EEA) and more in particular in 2014 in the EU’s attempt to join the European Human Rights Convention (even though mandated by the Lisbon Treaties), nominally out of concern for the autonomy of the Community legal order but more in particular of its own jurisdiction. In the view of the ECJ, there are no higher

Volume 2: International Commercial Arbitration 67 transnational level.116 Are there international law principles that may supervene? The arbitral tribunal in Eureko BV v Slovak Republic117 suggested as much and it would then also be higher than EU law.118 In foreign investments, this also concerns the discussion about super public purpose under international law, which may indeed excuse host countries in appropriate circumstances from their treaty obligations and protections, although there may still be some form of taking requiring some compensation but it need not then be full compensation, see the discussion in section 3.4.3 below.

1.2.5. Ius Curia Novit? Do International Arbitrators Know the Law and Can they Apply it Autonomously? It was mentioned before that international arbitrators state on the basis of the law, which they must foremost find in the pleadings and presentations of the parties when they might listen to international principles, custom and practices or the modern lex mercatoria, both in procedural and substantive matters. Indeed, it was submitted that, in international arbitrations, the law must be pleaded as fact (see section 1.1.3 above), arbitrators have no law of their own which they can apply or must uphold, they are not judges and are not there to clarify anything beyond what parties have brought to the table and asked them to do, except perhaps in those areas where they have acquired some autonomy (see section 1.1.10 above) when the applicable law is for them essentially transnationalised (although still subject to further submissions of the parties). It was shown that this may be so especially in procedure and evidence, perhaps increasingly also in matters of determining their own jurisdiction, in the issues of arbitrability and admissibility, and in their reasoning. In proprietary matters they might even operate as equity judges with an effect on third parties; this is another important issue especially in arbitrations concerning intellectual property rights and patents, but also in asset-backed financing and set-off in international finance as we shall see in Part II below. The issue of public policy has been discussed already several times. Are the spokes persons for the public interest and can international arbitrators then also raise these issues autonomously? Here also they still depend on further pleadings of the parties and they cannot follow an own course. They might then also listen to considerations of justice, social peace and efficiency in the transnational legal order and perhaps raise them themselves but only in sufficiently pressing cases as corrections, again subject to further submissions of the parties. Efficiency considerations are unlikely to remain here purely national in international transactions, but it may not be different for considerations of justice and social peace, even if in international business efficiency considerations may come sooner to the fore. Yet arbitrators must understand their limitations and, to remain credible, all must be the expression of the consensus in the transnational commercial and financial legal order itself. Indeed, if globalisation holds, international arbitrators may become principles than the Lisbon Founding Treaties uniquely for it to defend and to apply although in other contexts, there may be greater flexibility and even higher fundamental principle, see Vol 1, s 1.4.6. 116 See also International Law Commission, Fragmentation and International Law: Differences Arising from the Diversification and Expansion of International Law, Report of the Study Group of the International Law Commission, UN Doc A/CN.4/L.682 (2006). 117 See n 114 above. 118 See also AES Summit Generation Ltd & AES-Tisza Eromii Kft v Republic of Hungary n 115 above. The EU keeps resisting, see the aftermath of Micula vs Romania, ICSID Case No ARB/05/20, Award of 11 Dec 2013 and for the enforcement action in the US regardless, Micula et al v The Government of Romania, No 15 MISC 107, 2015 WL 4643 180 (SDNY 5 August 2015) dismissing Romania’s sovereign compulsion argument.

68 Volume 2: International Commercial Arbitration ever more sensitive to the promotion of these flows, their liquidity, and the requirements of risk management at that level and the behaviour of participants in the international marketplace, that means under their own lex mercatoria and dispute resolution facilities. It is sometimes said in this connection that international arbitrators must make sure that their award is enforceable meaning foremost that it can survive the enforcement requirements of the New York Convention in countries it may concern. That also concerns their public policy bar, but which one? It does not create arbitral jurisdiction per se in public policy matters, for example in matters of corruption and market abuse. It could also hinder settlement, see section 1.4.4 below. It is therefore unlikely that arbitrators can take this requirement seriously, it is not their task to start an investigation into where enforcement may be asked and decide public policy issues in that context but it may be different when parties raise the issue themselves. Another question in this connection may be whether arbitration can substitute for administrative court proceedings and when they do - meaning that a public authority has submitted to an arbitration, for example in a public-private infrastructure project - whether arbitrators need to adopt a different attitude also as to the amenability of such authorities to such proceedings.119 Are there differences not only in the application of the law, which cannot be merely contractual in a private law sense, but also in the possibilities of appeals, challenges and enforcement of awards? More generally, in the previous sections it was shown that international arbitrators may not be able to avoid the impact of domestic regulatory law and other public policy or public order considerations. They must respect overriding domestic values and policies if pleaded or perhaps autonomously when international transactions demonstrably come onshore in a particular country in terms of conduct and effect: for example, a government might not want certain financial products being sold in its country and may deprive the relevant contracts from all effect at least in respect of its own residents or resident companies. Competition policy is perhaps the more obvious example. It was also mentioned that this leaves the question when such transactions may be deemed to come onshore in an ever more virtual world of intangible rights and obligations. In any event, there may still be conflicts if they do so in several countries at the same time. It raises the issue of the jurisdiction to prescribe discussed in section 1.2.3 above. Transnational minimum standards may also be developing, which may then compete with local ones and increasingly supersede them. But again, also in these aspects, international arbitrators remain foremost dependent on the arguments and pleadings of the parties. They are there to resolve the problems as the parties see and define them, no others. Even these laws, values or policies must be pleaded as fact and proven. However, it can only be repeated that it remains an important question how far international arbitrators themselves may also raise issues of public order and public policy, upon what authority and under what conditions and safeguards. Are they even under an obligation pursuant to transnational law? Competition issues in particular may now have to be raised by international arbitrators autonomously and there is important case law that appears to supports their authority to do so in the EU.120 Other situations where the public interest is engaged or needs consideration 119 See S Brekoulakis and M Devaney, ‘Public-Private Arbitration and the Public Interest under English Law’ (2017) 80 The Modern Law Review 22. Here it was felt that the private law paradigm not only still prevails in the concept of arbitration and does not distinguish, but also that these arbitrations are in this regard supported by the fact that in English law the concept of the administrative contract is not fully developed and remains a concept of private law party autonomy, but cf also the observation made in Vol 3, n 1. See further A Maniruzzaman, ‘International Arbitrator and Mandatory Public Law Rules in the Context of State Contracts: An Overview’ (1990) 7 J Int’l Arb 53. 120 See Eco Swiss v Benetton, n 109 above, in which it was held that the antitrust provisions of the EC Treaty (Art 81) were matters of public order that still could be raised as late as setting-aside proceedings (the original

Volume 2: International Commercial Arbitration 69 also spring to mind: corruption, market abuse, money laundering, tax evasion, etc, as already mentioned also. It must then be considered how far international arbitrators may independently represent the public interest and can formulate it.121 This has become a recent trend at least in foreign investment arbitration, where the arbitration is based on treaty law.122 It may be argued that Article 42 of the ICSID Convention even supports it123 but it may raise all the more the issue whether private dispute resolution of this nature is truly appropriate in foreign investment disputes where the public interest is particularly engaged.124 The trend is recent but may require more restraint in any law formation and formulation function, agreement had not been properly notified to the EU antitrust authorities and was thus void). The ECJ did not strictly speaking decide whether arbitrators may or must apply antitrust rules ex officio but it seems implied and it would appear that they may at least raise the matter in oral argument (so as to prevent a later setting-aside procedure) and are not then exceeding their mandate. 121 In a well-known precedent Judge Lagergren took it upon himself not to enforce a contract whose object he considered to be the trafficking of influence, an issue not raised by the parties, see ICC Case 1110 dating from 1963 but only published in (1994) 10 Arbitration International 286. The contract was considered not arbitrable because not capable of being supported by ‘the machinery of justice’, see also Himpura California Energy Ltd v PT (Perrsero) Perrusahaan Listruik Negara, Arbt’l Award 1999 (2000) XXV Yearbook of Commercial Arbitration, expressing similar sentiments. Other cases show, however, international arbitrators’ reluctance to get involved, see World Duty Free Co Ltd v Kenya, ICSID Case No ARB/00/7, 4 October 2006 and Wena Hotels Limited v Egypt, ICSID Case No ARB/98/4, 8 December 2000. Parties tend to be particularly wary of pleading corruption in which they may have been tainted and arbitrators dislike acting sua sponte, see also M Hwang and K Lim, ‘Corruption in Arbitration—Law and Reality (2011) 8(1) Asian International Arbitration Journal 1, but see for an important more recent case where there was a fuller investigation on the authority of arbitrators Metal-Tech Ltd v Uzbekistan, ICSID Case No ARB/10/3, 4 October 2013 in which a finding of corruption proved determinative. Clearly arbitrators decided here issues which were not in dispute between the parties and the question then is whether they had this authority under the relevant BIT or under the Washington Convention so that they did not exceed their powers altogether, potentially rendering the award subject to annulment. E Gaillard, ‘The Emergence of Transnational Responses to Corruption in International Arbitration’ (2019) 35 Arb Int’l 1 assumes here that ‘there is no question today that arbitrators are empowered, and indeed have the duty, to investigate and adjudicate corruption issues and thereby contribute to the global fight against corruption’ but on the basis of what rules and legal definition? He refers principally to the lex contractus but could that be so in public policy issues? See further s 1.1.14 above. He also notes that ‘In this context, there is little doubt that a transnational rule has been established according to which a contract or an investment that has been reached by means of corruption should not be given effect’. It could be an important example of the formulation of an international minimum standard, see also n 56 above. 122 In Quiborax SA and Non Metalic Minerals SA v Plurinational State of Bolivia ICSID Case No ARB/06/2 of Sept 16 2015 (no 92), the Tribunal explicitly stated that it was not bound by the arguments and sources invoked by the parties, relying on Daimler Financial Services AG v Argentine Republic, ICSID Case No ARB/05/1 of 7 January 2015 (no 295). Wrongly, the Fisheries Jurisdiction Case, Federal Republic v Iceland of 25 July 1974, was also cited as authority which involved a court applying international law and considering itself autonomous in that function. Albert Jan Ooostergetel and Theodora Laurentius v the Slovak Republic, UNCITRAL Case of 23 April 2012 and Metal Tech Ltd, see n 88 above, also suggest a similar trend in respect of investment arbitrations. It may be noted in this connection that especially Swiss arbitrators are less inhibited probably due to the position of the Swiss Supreme Court in the matter, but cf also the case cited in n 126 below. This position is in its generality extreme and should be well understood when appointing Swiss arbitrators. 123 Thus, in Burlington Resources Inc v Republic of Ecuador, ICSID Case No ARB708/5 of Dec. 2012 (no 179), the Tribunal determined autonomously whether an issue was subject to national or international law, followed in Quiborax, see n 122 above. 124 See further the discussion in s 3.5.2 below. See also T Giovannini, ‘Ex Officio Powers to Investigate: When Do Arbitrators Cross the Line?’ in D Baizeau and B Ehle (eds), Stories from the Hearing Room: Experience from Arbitral Practice 59 (Kluwer Law International, 2015); D Geradin, ‘The Power of Arbitral Tribunals to Raise Public Policy Rules Ex Officio: The Case of EU Competition Law’ TILEC Discussion Paper (Oct 2016); D Geradin and E Villano, ‘Ius Curia Novit Stealing the Limelight (Again)”, Kluwer Arb Blog (22 April 2016); CP Albertini, ‘Iura Novit Curia in International Commercial Arbitration’ in S Kröll and L Mistelis et al (eds), International Arbitration and International Commercial Law: Synergy, Convergence and Evolution (Kluwer 2011) Chapter 1.

70 Volume 2: International Commercial Arbitration which then may become incumbent on international arbitrators, more than they now may accept. It is a question of legitimacy and accountability and ultimately also supervision. Legal activism is not expected from arbitrators and it was already said in section 1.1.14 above that moving into the area of the public interest may be a time bomb under international arbitration and its legitimacy. Indeed, the policy reaction is now to steer away from arbitration in foreign investment, see further section 3.5 below. But besides issues of authority and legitimacy, there is also the question how arbitrators would come by their wisdom in these matters. It was submitted before, that if they take it upon them to raise public policy issues, they must at least ask for further submissions from the parties and are limited by them. One issue in this connection is thus whether international arbitrators know the relevant law in such instances, represent it as an independent force, may develop it further and find and apply it independently of the arguments of the parties as ordinary courts are able to do in respect of their own law (not foreign law): ius curia novit.125 This issue arises then foremost in all areas where international arbitrators now assume autonomous powers beyond deciding the issues as presented by the parties. Case law considers it a matter of whether arbitrators have remained within their authority under the arbitration clause or have stated beyond it, and if so, when they can do so.126 It is increasingly accepted that international arbitrators can go beyond this party authorisation (or lack of it) and raise public interest issues on their own motion.127 It would follow that they can formulate the law at least in all the areas where they have acquired such autonomy or authority. The real question may then become the state of dialogue on the relevant law in society or the pertinent legal order and arbitrators hearing evidence in this regard, even at their own initiative. Again, international arbitrators can hardly rely on their own knowledge; institutionally they do not represent or stand for any legal system and are hardly spokespersons for the public interest as such. As a minimum, they would have to ask for further submissions by the parties. It was already suggested that the facility to ask a preliminary opinion from an international court created to the effect may be another answer. Or may international arbitrators independently also seek advice or ask for expert opinions, for example, from NGOs or from the informed press as to what constitutes the public interest in the particular case and how any competition with domestic policies and values should be resolved? Yet it may still be different from the function and powers of ordinary courts as the parties must be allowed due process and especially a hearing on all issues 125 See Giuditta Cordero-Moss, ‘The Arbitral Tribunal’s Power in respect of the Parties’ Pleadings as a Limit to Party Autonomy On Jura Novit Curia and Related Issues’, in Franco Ferrari (ed), Limits to Party Autonomy in International Commercial Arbitration (Juris, 2016) ch 8, 289, 299; T Giovannini, ‘International Arbitration and Jura Novit Curia-Towards Harmonization’ (2012) TDM 3; Phillip Landolt, ‘Arbitrators’ Initiatives to Obtain Factual and Legal Evidence’ (2012) 28 The Journal of the London Court of International Arbitration; Doug Jones, ‘The Remedial Armoury of an Arbitral Tribunal: The Extent to which Tribunals Can Look Beyond the Parties’ Submissions’ (2012) 78(2) Arbitration 102, 122; Anna P Mantakou, ‘The Misadventures of the Principle Jura Novit Curia in International Arbitration – A Practitioner’s Approach’, in Essays in Honour of Spyridon Vrellis (Legal Library 2014) 557; Theresa Isele, ‘The Principle Jura Novit Curia in International Commercial Arbitration’ (2010) 13(1) International Arbitration Law Review; Julian DM Lew, Loukas Mistelis and Stefan Kröll, Comparative International Commercial Arbitration (Kluwer Law International 2003) 73, 78; Gary B Born, International Commercial Arbitration (Kluwer Law International 2008) 185, 188. 126 See Case 4A-400/2008 of the Swiss Federal Supreme Court setting aside the award in question. So did the Quebec Superior court in a similar situation, Case 2008 5903; also the Supreme Court of Finland in Werfen Austria v Polar Electro, KKO 2008:77; and the Court of Appeal Paris in Engel Austria GmbH v Don Trade, 3 December 2009, RG 08/13618. 127 So does the ICJ, see Nicaragua v US (Merits) para. 29 [1986] ICJ Rep. 24, but that is a court. More to the point, in Case 4A-254/2010, the Swiss Supreme court allowed an award to stand where the sole arbitrator on its own motion found a sham invoking Swiss law. This could be seen as raising a public policy issue.

Volume 2: International Commercial Arbitration 71 independently raised by arbitrators and also be given the ability to cross-examine any experts in these areas. Arbitrators cannot spring surprises in their awards as judges probably can (but usually subject to appeal). It prolongs the arbitration and there is then also the important issue of costs to consider, which could easily spiral out of control. It was already said that the fact that arbitrators might become law makers or judges in these instances raises important questions of legitimacy, accountability, transparency, and of their public standing more generally. Other issues are those of consistency and the precedential value of their decisions in these matters.

1.2.6. Autonomous Private Law Formation Trends in Transnational Law Returning to matters of purely private law, it is still likely that at least one of the parties will argue on the basis of a national law system found through the habitual conflicts rules of private international law and this may then often be the starting point for international arbitrators also. Certainty may be invoked128 in order to apply more traditional nationalist thinking, but one obvious problem is that national (private) laws were seldom written for international transactions and may be wholly inadequate to support them. This may be clear especially in international finance. Indeed, it was already repeatedly said that in a faster-moving world that depends on the international flows, the application of national laws may become contrived or artificial and of such a low quality that it destabilises everything, quite apart from legally fractioning the transactions in these flows. As may be seen from Volume 1, section 1.1.7, the issue of transactional and payment finality is here to be clearly distinguished from the notion of certainty and benefits itself from transnationalisation; the international marketplace may be wholly dependent on it in its operations. It may be more important than the concept of legal certainty, is more capable of being achieved, and is basically a proprietary matter. Predictability may be another issue, to be clearly distinguished also, but since disputes, nor how they may arise, can hardly be predicted, the applicable law, even if it could be clear and applied mechanically, cannot be predicted either. In any event, it would appear to be a misconception that the law is there mainly in order to solve disputes, an issue already raised in Volume 1, section 1.4.18. Rather it is there to make daily life easier for all; it was already said repeatedly also that the law is probably the most unpredictable and therefore also the most unsatisfactory in litigation. Dispute resolution cannot be its main purpose: rather it should be dispute avoidance and it was submitted before that the law cannot be properly understood in terms of strife. International arbitrators are likely to understand this better and to be sensitive to what made more sense all along—also in terms of justice, social peace and efficiency—and may then also exercise the equitable remedial functions (as was already mentioned in section 1.1.10 above) but perhaps seldom do so explicitly. At least, they are increasingly likely to consider the more traditional (parochial) rules in this sceptical light and it is unlikely that they will resort to a purely mechanical approach to this law and its application still cutting up international transactions into domestic parts in the hope that it all adds up, unless parties insist on this exercise. Why should they want to do so, unless it is convenient for one of them on the particular occasion? Mostly coming from different legal backgrounds and (again) not having a lex fori of any sort as a base (or it must be the lex mercatoria itself and international minimum standards in policy issues), international arbitrators exercise here considerable freedom even if they are not free. Indeed, they are bound by transnational law, its perceptions and

128 One may also recall in this connection the reference of Jerome Frank to the childish dread of uncertainty and unwillingness to face legal realities, Law and the Modern Mind (Stevens and Sons London, 1930) 41 and 159.

72 Volume 2: International Commercial Arbitration sources and their hierarchy and then in particular by the submission of the parties and how they define their dispute. Again, much therefore still depends on the submissions and advocacy of the parties, who plead the applicable law as fact, but even then, it is increasingly unlikely that a purely nationalist approach will continue to prevail in the international marketplace,129 even with respect to regulation. That must be understood when we still say that international arbitration is based on law and must be very much kept in mind by all parties and those who advise them in international deal making and guide them in the implementation and in dispute resolution through international arbitration. The international flows, their liquidity requirements, finality and risk management mechanisms may increasingly force acceptance and it will be recognised that there is absolutely no point in continuing to chop them up into domestic parts, even if that were technically still possible, in any event never much of an option with respect to locating intangible assets such as monetary claims or the flow of information and technology. This will be demonstrated more in particular in Volume 4, sections 1.1.8 and 1.1.9. In fact, it has already been noted that the problems now go deeper. In a virtual world, where as far as the law is concerned, we talk in any event only about rights and obligations, all becomes intangible and the proper location (or situs) becomes a chimera. It has already been said that where we enter the world of fundamental principle, custom and practices, general principles, and party autonomy at the transnational level in the modern lex mercatoria, states may still step in through treaties to stabilise the new law merchant, clarify and in appropriate cases regulate and impose public order requirements. This is not to be rejected out of hand and the New York Convention stand out although only in the area of arbitration clause and award recognition, but their success in doing so is often limited, especially in private law, viz the modest acceptance of the 1980 Vienna Convention on the International Sales of Goods in the business community and the lack of success of both UNCITRAL and UNIDROIT in their many other unification projects. Similar observations have already been made in respect of the now abandoned EU proposal for a Common European Sales Law (CESL)130 and more generally in respect of the Draft Common Frame of Reference (DCFR), which figured in the EU as an academic model for a full EU codification of private law in the traditional civil law codifications mode ruling out all other sources of law, see Volume 3, section 1.6. It has been submitted all along that such localised approaches to transnational law formation are often the wrong way for professional dealings. Such efforts at EU level (assuming sufficient competency, which is itself a major issue) take all such dealings within the EU at the same time out of the emerging transnational lex mercatoria. They then risk to become local and parochial, now at that EU level, under a traditional (codified) intellectualised statist and territorial legal approach that may hardly be responsive to or aware, first, of professional needs and international flows, and, second, of the values and standards developing in the transnational order in this connection.131 129 In truth, in the international marketplace, the pull of transnational rules was never entirely obliterated, notwithstanding the nineteenth-century nationalisation of all law, including the commercial law in international transactions, and they continued to contribute to the infrastructure for the international marketplace. One may think here of the law concerning bills of lading, negotiable instruments, especially Eurobonds and euro market practices including clearing and settlement, the law of international assignment, of set-off and netting, and of letters of credit (UCP) and trade terms (Incoterms). It may also concern the important and connected issue of finality of title transfers and payments, see for more detail, Vol 1, s 1.4.4. 130 See Dalhuisen (n 96). 131 For those who continue to insist on the application of domestic laws, in theory it may still be possible for international arbitrators, when it is properly pleaded by any of the parties, to interpret these laws in the light of the internationality of the case and this has sometimes been supported in conflicts law theory, in the US amounting for the ordinary courts to an embellished lex fori approach in international or interstate cases, see Vol 1, s 2.2.2.

Volume 2: International Commercial Arbitration 73 The DCFR was identified earlier as the epitome of this approach and it was a mistake for professional dealings, the approach and methodology never having been properly considered: see Volume 1, section 1.4.21.

1.2.7. Principles of Transnational Contract and Movable Property Law Again, and probably more importantly, in private law between professionals, newer forces are at work, both in contract and movable property law, more so at the transnational level as a consequence of the international flows operating as flows and requiring different risk management techniques and facilities, also affecting the relevant law and its application. It may well mean a different model of contract and movable property altogether. This cannot be ignored and the parties are not in full control through a choice of law clause or even by writing down a specialised regime in their contract. International practices or custom on which other participants rely in this connection cannot simply be set aside: the routines of the trade must be respected by all who participate and a choice of law that may counter them needs as a minimum the consent of both parties and further interpretation as to its effect, especially on others, if that was the intention, relevant more in particular in proprietary matters. Again, one may think of ranking and priorities through set-off and netting. Some of these rules may be mandatory in the environment or order in which they operate as property rules usually are. It has already been said that even in international professional dealings the choice of a local law where possible, still puts this local law in an international context where it must make sense and this choice is in any event preceded by fundamental principle, mandatory custom and general principle operating in the transnational commercial and financial legal order itself. Thus, it follows that the application and reach of English law in an English case might well be quite different from its application in an international case upon a choice of this law by the parties. This should very much be kept in mind particularly in relation to the ISDA Swap Master Agreements and the TBMA/ISMA (now ICMA) Global Master Repurchase Agreement, and their choices of a domestic law (commonly New York or English law) both in particular in respect of the netting clauses and set-off principle where mandatory transnational custom may prevail over any choice of domestic law, which could in any event hardly carry much weight in matters affecting other parties. It was already noted that especially ranking and priority are not issues at the free disposition of the parties and can therefore not be determined by their choice of law. While at the same time raising important issues of risk management and financial stability, they engage the public interest: again, one may think in particular of the promotion of set-off and netting as transnationalised risk management tools, as such actively supported by regulators worldwide.132 International arbitrators could then do so in respect of any law that became applicable under prevailing conflicts rules although for them even these conflict rules are not a given; they have none of their own and are now generally thought to be able to choose them probably on the basis of general principles derived from some important domestic models (or in the EU from the EU Rome Regulations). The same interpretational freedom could be adopted in respect of a choice of a domestic law by the parties even if such a choice of law may not go as far in its effect as most seem to think: it has already been noted that it is limited to areas of the law over which parties have power and there is much in property law and regulatory law over which they have none so that other concepts would have to be invoked to find the relevant domestic law. Even in contract law, matters of contractual validity and capacity are not at the free disposition of the parties and much of it is intermingled with public policy, which the parties cannot avoid through a choice of law clause either. Again, these uncertainties and confusions may confer powers of international arbitrators who are called upon to decide the dispute and must find a way, but the question is always: where do these powers come from? 132 There is much confusion about ISDA being a sort of regulator, see further also the discussion in s 2.2.2 below and in Vol 5, ss 2.6.7 and 3.2.5.

74 Volume 2: International Commercial Arbitration Even domestic bankruptcy courts may yield in the application of their own bankruptcy laws but it still cannot be taken for granted. Arbitrators in international commercial and financial disputes will be aware or will be made aware of the newer international trends by the parties or at least by the ones in whose interest it is to plead them in any particular case and it might find increasing favour, more readily in international arbitration than in local courts. Indeed, for both contract and movable property, this may lead to a more dynamic concept of the applicable law from which arbitrators in appropriate cases may choose newer concepts geared primarily to promoting the international flows, their liquidity, and risk management, see further Volume 1, section 1.1.6 and Volume 4. This may be closer to the traditional common law, which in contract and movable property was always more geared to commercial realities and derived from commercial law. To repeat, the essence is that in professional dealings, the contract is likely to be considered a road map and risk management tool in which the literal meaning will prevail over intent and even good faith requires a strict interpretation of the text in duration contract. These contracts are not truly intent based, which also shows in the defences and excuses. Lack of intent is not then a defence unless there was misrepresentation, blame or the absence thereof as excuse is irrelevant unless the contract so allows (for example, in force majeure and hardship clauses). In this connection, in common law, the notion of consideration introduced early on also the idea that parties must invest in their contract before they can have a claim thereunder and that consensus or mere promises are not enough (although their exchange may lead to a valid and enforceable executory contract) for any claim or cause of action based on it. In the meantime, conduct and detrimental reliance have now more properly moved at the heart of contract formation in international business transactions rather than formal notions of offer and acceptance and suggest that new rights and obligations may emerge during the entire contract period and sometimes even before or after. They may be also objective and supplement in terms of pre-contractual disclosure, contractual co-operation, and post-contractual re-negotiation duties, see more in particular the discussion in Volume 3, section 1.1 and their breach may bear a close relationship to actions in tort. As for moveable property, proper risk management may now require a measure of party autonomy in the creation of proprietary rights in the international flows, which are not then cut off at the point of creation but rather at the point of their operation. The idea of a numerus clausus of proprietary rights is here abandoned in respect of certain informed classes of third parties, usually professionals. The class of assets that may be the object of proprietary rights of this nature is likely to be much enhanced and extended through description in the contract, encompassing also classes in transformation and their transfer in bulk, as may be the rights granted in them, but they will not be relevant for buyers in the ordinary course of business of commoditised products. The essence is that the normal commercial flows are protected against these interests and are free from them. That may even concern monetary claims or receivables and their use in asset-backed funding. Thus bona fide assignees/payees who collect in good faith may keep the collections unless they are insiders such as banks and suppliers. There is no search duty even if there are registers, only professional insiders are exposed and must investigate. This confirms the approach in equity in common law countries. In this way, floating charges, finance sales, and similar trustlike structures became major instruments in asset-backed financing structured by the parties in the way they want, but they were always limited in their (proprietary) reach and only work against the insiders. The flows are free. Notions of segregation and constructive trust supplement this dynamic approach to property law and its basic function as a risk management tool.133 133 The dynamic concept of movable property law is discussed at length in Vol 1, s. 1.1.6 a and Vol 4, s 1.10. The basic features are here summarised.

Volume 2: International Commercial Arbitration 75 Although civil law in particular has had difficulties in developing these notions and facilities, modern commercial and financial law are likely to reflect these trends in contract and movable property law at the transnational level in the international flows and again arbitrators are or will be made aware of them and may positively react upon properl pleading. The movement of the international flows of goods, services, payments and money, technology and information (if not also of people) and their scale require it and it is the world in which these disputes arise. Again, resort to fundamental and general principle, custom and practices, and party autonomy at the transnational level is the legal answer. Whereas codification civil-law style eliminated all other sources of law beyond legislation (except if specially authorised by it, which even relegated custom to statutory authorisation),134 and in its territorial approach proved inimical to the international marketplace, it was the subject of Volume 1 that these sources and their autonomy fundamentally revive in the transnational commercial and financial legal order. It may be added that even the common law in England may remain here ambiguous and this may well be the reason for the general reserve in England in respect of legal transnationalisation, which would otherwise be of great benefit to London as an international legal centre. In the Benthamite and Austinian view (see Volume 1, section 1.3.1) all law issues from the sovereign, but at least in commerce the English courts remained pragmatic in respect of customary law, although there could be greater problems with international custom. In the US, on the other hand, it was already noted that the UCC still favours the other sources of law, unless expressly displaced, and it expresses this well in section 1-103 and may be considered to represent the more traditional common law attitude. It is not without consequence and may mean that the New York courts have the advantage and remain better placed as alternatives for international arbitration assuming that their jurisdiction can be established, which may be promoted by a forum choice in favour of these courts. It is an important point; the ordinary courts are not down and out but not all are suitable. Courts in different countries are likely to have a different approach to the applicable law, some are more sophisticated and responsive than others. There remains also the problem of international recognition of the ensuing ordinary court judgment, treaty law being absent, see also section 1.1.6 above. As we have seen, the New York Convention here gives the advantage to international arbitration, although its enforcement mechanism remains fraught and especially in regulatory and bankruptcy issues it remains affected by local public policy considerations and bars to the recognition and enforcement of foreign awards.

1.3. International Arbitration: Initial Steps and Complications 1.3.1. Introduction. Submission and Arbitration Agreements. The Requirement of a Writing. What Does the Arbitration Agreement Cover? Indirect Parties, Consolidation and Joinder The arbitration clause binds the parties to arbitrate their disputes and abide by the award which must be based on their representations and their definition of the dispute; no more is to be resolved unless potentially issues of public policy arise when the public at large becomes involved. 134 It will not here be discussed any further how in civil law these various sources of law revived in the liberal interpretation that was necessary to keep the statutory texts living and relevant, see Vol 1 s 1.2.13 above.

76 Volume 2: International Commercial Arbitration The same may happen to third parties, not bound by the arbitration clause, in the resolution and outcome of proprietary issues potentially affecting them. In such cases, it was posited that the arbitration clause may not be the true source, or at least not the only source, of the powers of international arbitrators and their jurisdiction. Rather these powers are activated thereby but must then be found in the transnational commercial and financial legal order itself, further defined and implemented by the arbitration clause, upon segregation itself also founded in that order, and potentially modulated by the public order requirements therein. That goes in particular to jurisdiction and arbitrability issues and notably also covers the separability and Kompetenz/ Kompetenz notions (see sections 1.1.9 and 1.1.10 above) and indeed the issue of public policy and its determination, including the powers of international arbitrators to deal with and settle these issues and in appropriate cases autonomously raise them. It is the consequence of delocalisation when properly understood. It follows that in international disputes the law (lex arbitri) applicable to the arbitration itself and to the arbitration clause is also the transnational lex mercatoria with its different sources of law of which local laws (at the seat or elsewhere) and treaty laws would be part but subject to the hierarchy between all sources of the applicable transnational arbitral law, see for this hierarchy more in particular Volume 1, section 1.4.14. It would determine the extent of these powers, which remain to be investigated and would need the backup of the international marketplace and business community in the transnational commercial and financial legal order. It was already said that higher norms from these other sources may notably be transnational fundamental principle in matters of due process. Then there are the practices established in international arbitrations (of which the Model Law may be a reflection) or general principles that might derive from modern arbitration laws. Thus, even established practices in the international arbitral order could prevail over domestic and treaty laws concerning international arbitrations and the relevant arbitration clause especially when expression of the fundamental principles of international arbitration, and may even affect the latter and any institutional rules (of, for example, ICC and LCIA) incorporated in it. Public order requirements in that transnational order itself could confer further powers to keep it clean but they have to be demonstrated and may not be assumed. This was the subject of the discussion in section 1.2 and needs no repeating. Limiting ourselves for the moment to the arbitration clause, it must be in writing, at least that is the present requirement under the New York Convention for its international recognition and that may now well have become a fundamental transnational principle also and is at least customary in international arbitration. That means that local leges arbitri to the extent still relevant must also conform. Although a writing is required, it is of interest that under the New York Convention it needs not be signed by the parties. That is reflected in Article II and an exchange of letters or telegrams may be sufficient in the antiquated wording of its text. The requirement is in a modern world not without complications and the Model Law has in its 2006 amendment dealt with this issue in a more modern context in which all paper-based requirements become burdensome and the entire concept of a writing contentious. Indeed, newer transnational customary law may even overtake the New York Convention in this aspect and provide an example of its postponement and evolution under the impact of other sources of law, here transnational customary law or general principles as articulated in the Model Law, although ultimately it remains an issue to be decided in recognition proceedings in the domestic courts in Member States, which, under the New York Convention, have the last word in these matters and does not require a uniform interpretation. Historically there are two types of arbitration agreements. The one would be drawn up once a dispute had arisen, this is commonly referred to as a submission agreement and the other would be pre-existing as part of a fuller sales or other type of agreement. That is the arbitration clause proper. Traditionally the submission agreement was better protected and respected in common

Volume 2: International Commercial Arbitration 77 law and the distinction is often maintained. The submission agreement is likely to be more detailed as it is geared to a situation in which parties know what type of dispute has arisen and what the particular needs are in that connection. Of course, a pre-existing arbitration agreement may also be amended to reflect the actuality of a dispute once it is clear what the problems are. Both are covered and considered the same for the purposes of the New York Convention, which in Article II gives them international recognition meaning that these clauses will be enforced and local courts ousted in all Member States of the Convention. It is a key achievement of the New York Convention (besides the recognition and enforcement of the ensuing awards), and was foreshadowed by the 1923 Geneva Protocol, which first established this international recognition, followed by the 1927 Geneva Convention, which also included the recognition and enforcement of the awards, and of which the 1958 New York Convention was the successor. As a practical matter, it is important that the arbitration clause is kept simple, more particularly because it cannot be known at that stage what conflict may arise. Any complication may endanger the arbitration and create doubts as to the duty to arbitrate and the powers and jurisdiction of the arbitrators. Defective clauses, not uncommon, often drafted by lawyers who have no idea of what an international arbitration truly is, can cause havoc—for example, a clause simply referring to disputes to be resolved by international arbitration, but saying nothing on how to get there—and the ordinarily competent domestic courts may then have to take over. The LCIA suggests a simple formula as follows: Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The number of arbitrators shall be [one/three]. The language to be used in the arbitral proceedings shall be …

One may quibble more with the rest of the text: ‘The seat, or legal place, of arbitration shall be [City and/or Country]. The governing law of the contract shall be the substantive law of …’. Here we still see strong localisation tendencies but may also note that the law applicable to the arbitration clause itself (upon separation) is not settled. As mentioned in section 1.1.9 above, the default rule is under the 2014 LCIA Rules specifically the law of the seat, a new departure which may be much criticised. Note in particular the reference to disputes ‘arising out of or in connection with this contract’. This language tries to be a catch-all but there is unavoidably doubt as to its coverage. Purely contractual issues are clearly covered, but there may be an issue with competition or regulatory matters raising the question of arbitrability as we shall see below. Also, proprietary issues may be more doubtful as are issues of set-off, which invariably affect parties not involved in the arbitration. Company law issues may also arise in a contractual framework, although many may not. The same goes for tort or negligence claims. The issue is always how one gets to such noncontractual issues and how far the clause reaches and there may still be justified doubt about all that is not purely contractual, but one of the important developments of the last generation in international arbitration has undoubtedly been the increase in its expanse and movement into these non-contractual areas as long as some relationship can still be established with the underlying contract (in its formation and implementation) that is being litigated. That is what the language ‘arising out of or in connection with this contract’ now signifies.135 Pure tax and environmental issues, for example, cannot be arbitrated, principally because the relevant authority or regulator might not have subjected itself to arbitration, although the (financial) 135 So, the House of Lords in Fiona Trust & Holding Corp v Yuri Privalov [2007] UKHL 40. The German Arbitration Act (s 1030(1) and (2) CCP) allows any claim that involves an economic interest, at least, it would appear, if at the free disposition of the parties, meaning that the outcome does not affect others.

78 Volume 2: International Commercial Arbitration consequences may still be redistributed among the parties under their contract and any dispute in relation to this redistribution may then be decided under the arbitration clause. The emphasis is thus on (commercial) relationships, but even so there remains the important issue of the true powers of international arbitrators. It has already been said that especially in proprietary and regulatory matters institutionally these powers may well need a deeper foundation in the transnational legal order itself to be truly effective and legitimate. That is the approach of this book (see more particularly the discussion in sections 1.1.9 and 1.1.10 and 1.2.5 above) and also goes to the issue of arbitrability and admissibility, see sections 1.3.8/9 below. It also goes into the question who may truly be considered amenable to being a party and can therefore be forced into an international arbitration as well as claim the benefit of this type of dispute resolution when disputes arise. To repeat, it is not or no longer right to claim that the arbitration clause is the only source of the power of the arbitral tribunal over the parties in international cases. There may also be powers implied. Others, it was submitted, may derive more directly from the arbitration being founded in the transnational commercial and financial legal order itself, therefore notably from international practice and custom or modern lex mercatoria.136 That would be the case when the public or third-party rights become an issue, should their potential coverage be the direction of international arbitration law. It may more immediately bear on who is directly subject to the arbitration and has standing which may go beyond the parties who signed the agreement. Thus, upon an assignment, a new party (assignee) may surface under the old contract to the extent claims under it were assigned. Others claiming a benefit under the contract, like third party beneficiaries, may also be included. There may be undisclosed agency situations. Companies may also merge and there may be forms of succession. Not unusual is also that parent companies which exercise substantial control over subsidiaries might be sued together with them in an arbitration to which they have not signed up. Good faith could then demand their participation, it depends much on the facts, or it may be the consequence of lifting the corporate veil more generally. The French have here also a concept of groupings of companies under which companies may be so closely connected in each other’s management and business or serve the same purpose, for example, in supply and distribution chains so that they become substantially involved in each other’s activities. Involvement in the formation of the contract or its implementation or in its benefits may thus lead to a form of deemed or assumed consent and may then force an unwilling party to participate.137 A related issue is consolidation of cases between different parties but bearing on the same dispute, see further section 1.4.3 below. Again, this may be relevant in groupings of companies and follow from the law, in international arbitrations foremost the international practice. It means that those who may be parties to the arbitration may be or become the subject of some expansionary interpretation under transnational law. There may also be the possibility of joinder in one arbitration when, for example, providers of goods and services are sued not only by their direct counterparties, but by all in the chain who may subsequently have suffered from bad design or workmanship. The applicable rules may themselves shed some light. Thus Article 4(2) of the Swiss Rules allow the arbitral tribunal to 136 This was highlighted in the Swiss Federal Court case of 16 October 2003, swissarbirtationdecisions.com, under 5.1.1, also noting the segregation of the arbitration clause and its independence from the law applicable to the rest of the contract in this respect and potentially prevailing over the law of the seat. Under it, participation in the conclusion or performance of the contract were deemed decisive following the French approach in international arbitrations. 137 Tribunals are reluctant, but see DOW Chemical France v ISOVER Saint Gobain, ICC 4131/1982, (1983) 110 Journal du Droit International 899. The interim award to the effect was endorsed by the Paris Court of Appeal, 22 October 1983 [1984] Revue de l’Arbitrage 98.l.

Volume 2: International Commercial Arbitration 79 decide whether a person can (be asked to) join after consulting all the parties and taking into account all relevant circumstances. Article 22(1)(viii) of the 2014 LCIA Rules covers a request for joinder made by one of the parties and requires consent in writing from the applicant party and the third party joining. It may be seen also as an issue of confidentiality. One important consequence and complicating factor in a joinder or other forms of participation by non-signatories is what rights they have in such cases in the appointment of arbitrators. There may be issues of public policy or fundamental principle (due process).138 Under newer ICC Rules, it is the ICC Court that may decide these issues. Under the LCIA Rules, it is the LCIA Court that must do so (see further section 1.4.3 below). It may be repeated that indirectly, for example, upon a set-off non-parties to the arbitration may be substantially affected by the outcome. The difference is that they have no standing at all. In section 1.1.14 above, it was already noted that this may seriously affect the legitimacy of the award which can hardly bind them. Other proprietary issues may equally impact and affect the status of an award on third parties.

1.3.2. When is there a Dispute? Statute of Limitations It would seem obvious that there must be a dispute before an arbitration can be started. The central role of what a dispute is has already been explained in section 1.1.3 above and is directly connected with the issue of arbitral jurisdiction, which cannot in principle go beyond how parties have defined it and presented their case. Arbitrators behaving otherwise (or knowing better) will only complicate matters and make the arbitration longer and more costly. It is not for them to raise issues. It has been noted in that connection that all becomes fact—normally even the applicable law must be pleaded as fact by the parties who must show how they differ, and arbitrators have to limit themselves to what the parties argue in this connection and not start a new line of argument not adopted by any of them. Again, arbitrators are ordinarily not judges representing a legal system that they must clarify as such in the particular case. It was already said also that arbitrators’ behaviour may be different when the public interest becomes engaged, or in other instances where international arbitrators have acquired original power like in procedural issues and matters of evidence (see the discussion in section 1.2.5 above) and they may then become more like judges in those areas. But they cannot invent the applicable law and must ask for further submissions. Similar issues arise in foreign investment arbitration but it is not in the nature of arbitration proper and behaving otherwise means not understanding it. The dangers this extended authority represents for the legitimacy of the international arbitration process were discussed in section 1.1.14 above. There are other issues in this connection: especially in collection cases there may not be a real issue of fact or law at all. Summary judgment would be normal in ordinary courts or perhaps a special collection facility, but that is not the way in international arbitrations. Ordinary courts might here be the better venue and they may in fact already have disposed of the matter upon the request of one of the parties before the arbitration can be activated. Nevertheless, this is not the approach of the New York Convention which gives international recognition to arbitration clauses in all issues that may arise between the parties, present or future. It has already been said before that under some arbitration rules shortened proceedings may now be used in such cases.139 138 See French Cour de Cass in BKMI and Siemens v Dutco, 7 January 1992 Bull Civ 1 (1992), but regardless of this public policy element, parties may apparently agree otherwise through adopting ICC or LCIA Rules. 139 See n 16 above.

80 Volume 2: International Commercial Arbitration American lawyers will be used to the concept of summary dismissal at the beginning of a case in the ordinary courts when there is found not to be sufficient fact to support the cause of action, which may then be disposed of in this manner. Here again international arbitration does not cover this eventuality or facility, helpful as it might be; in section 1.1.4 above it was noted that the emphasis is rather on fast track with the possibility of special pre-trial referees for preservation and collection measures or orders to implement existing contracts, all on a provisional basis. Time limits are other matters to be aware of at the outset and there may be statutes of limitation to consider. Particularly in international cases, this poses the question under which law and whether such law may also be transnationalised. In all cases it needs to be determined a) from when any time bar started running. In the ordinary courts, this is normally connected with the cause of action first arising. There is the further issue of b) the length of the prescription periods and c) when (as of which moment) the statute of limitation is properly interrupted. In the more traditional conflict of laws approaches in the ordinary courts, there is a debate in this connection whether statutes of limitation issues are substantial or procedural. In the latter case, often followed in common law countries, the issue is one of the lex fori, among localists in arbitration likely to be considered the lex arbitri of the seat. In civil law countries the issue is rather considered substantive, activating other (domestic) rules or the (domestic) law made applicable by the parties, now also increasingly followed in common law countries. It may then allow for a form of party autonomy, parties choosing a particular law in this connection, always assuming that prescription of this nature may be considered a matter at their free disposition and not a public order issue in the relevant court. On the other hand, when choosing a domestic law of whatever country for whatever other reason, parties might have to understand that that may then also determine the statute of limitations regime in an international arbitration.140 Again, transnationalisation may cut through this and relies on the hierarchy among its different sources of law. Even treaty law, which exists in this area under the UNCITRAL text of 1974, would then have to find its place among these sources as would any domestic law chosen by the parties or resulting from other private international (conflicts) rules or even the lex arbitri of the seat as the residual rule. If these issues are considered purely procedural, international arbitrators might even take it upon themselves to raise and decide them accordingly assuming here some autonomy as they may have in procedural matters when parties do not agree—it was already discussed in section 1.1.10 above. But they cannot make up the rules or assume discretion and will have to hear the parties even if they would not then be limited to their submissions. They may invoke arbitral customary law, and general principle, or may ultimately rely on what they believe is proper in the situation as a matter of justice or public policy or order. Generally, they will do so as a preliminary issue, increasingly and properly, it is submitted, on the basis of the law as they find it and their sources and hierarchy under the modern lex mercatoria but only upon a proper hearing of the parties and pursuant to their further submissions. Ultimately it may not make much difference for them whether the issue is considered procedural or substantial, as in both instances similar sources of law will have to be considered under transnational law, although in the first characterisation they may have more power of decision and may not be limited to the submissions of the parties on the applicable law. It is generally accepted in this connection that the start of an arbitration interrupts the time limits—it could be considered a fundamental transnational principle—but in the details that still raises the issue of the start proper. Here again there may be doubt in international arbitrations and arbitrators will decide: the notification of the claim to the other party or, in the case of an 140 See for the continuing nationalistic perspective, SA Pauker, ‘Substance and Procedure in International Arbitrations’ (2020) 36 Arb Int’l 3, 31.

Volume 2: International Commercial Arbitration 81 institutional arbitration to the ICC or LCIA, as the case may be, to their secretariats, is likely to be sufficient, but sometimes a request for designation of the tribunal is necessary under local laws or rules. Thus, the Swiss 1987 Arbitration Act (Article 181) states that: The arbitral proceedings shall be pending from the time when one of the parties submits its request to the arbitrators designated in the arbitration agreement or, in the absence of such designation, from the time when one of the parties initiates the procedure for the constitution of the arbitral tribunal.

This may seem quite severe; and notice to the other party would normally appear to be adequate, at least if sufficiently formalised and that may now well be the better transnational practice. It is also the approach of the 1996 English Arbitration Act (Article 14). Institutionalised rules also tend to follow this approach, but it shows that even in these details, arbitrators may have to lead the way under the modern lex mercatoria concerning them following the submissions of the parties in either a localised or transationalised manner and that there is no great pre-existing certainty in international cases.

1.3.3. Ousting of the Ordinary Courts. Article II New York Convention A key issue in all arbitration is the ousting of the jurisdiction of the ordinary courts. The courts of each country are likely in this regard to respond to different national procedural rules, which may impose conditions or limit the possibility of ouster in other ways. Importantly, in international arbitration, the New York Convention in its Article II here provides a uniform rule for courts in all Contracting States. The basic text is as follows: Each Contracting Party shall recognise an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

This is a broad statement addressed to all courts in Contracting States, even specialised ones or courts of limited jurisdiction such as bankruptcy courts, which may create special issues that will be discussed later in section 2.3.3 below, especially in respect of financial arbitrations. It covers present and future disputes, of a contractual nature or not. Only if the arbitration agreement is ‘null and void, inoperative or incapable of being performed’ may it be ignored by these local courts. In Article II, the Convention does not say what law applies to the validity of the agreement and capacity to conclude it or other formalities, or to what arises from the legal relationship in question or is contractual or not, especially whether proprietary issues and public policy matters may also arise; the Convention is more specific in Article V (1)(a), where, in the context of the recognition of awards, the law of the seat is the default rule. The same lack of clarity may be found with respect to the notion of arbitrability in Article II. In Article V(2)(a), the Convention refers to the law of the recognising country which in terms of Article II would translate in the law of the country in whose courts proceedings have been initiated. Most importantly, Article II does not spell out who has the decisive voice in these matters either: the court first seised or the international arbitration tribunal. Again, one may ask about the force of transnationalisation and whether the New York Convention must now be put in the context of the modern lex mercatoria and its different sources of law, some of which may be higher. The Convention famously lacks an interpretation clause and uniformity in its application is not a stated objective. Its requirement of a writing has already been discussed and is now set in a broader modern context: see section 1.3.1 above. As to the

82 Volume 2: International Commercial Arbitration arbitration agreement being ‘null and void, inoperative or incapable of being performed’, again some systemic guidance may result from Article V(1)(a) of the Convention where reference is made to issues of incapacity, the law applicable thereto and to the relevant contract, all issues, it is submitted, better placed in the context of the modern lex mercatoria and its different sources and their hierarchy. In Article II, there may be more room for such transnationalisation since there is no express reference to any national law. One may then also conclude that the arbitration agreement upon proper separation from the rest of the agreement is itself covered by transnational law (unless parties expressly state otherwise, running the risk of domesticating the arbitration in the process), see the discussion in section 1.1.9 above. In that sense, one could even argue that Article II suggests this transnationalisation. Note, however, that under Article II (and Article V), it is the national courts that in first instance decide on jurisdiction and arbitrability, not international arbitrators, even if they now do so if the issue is raised within the arbitration itself whilst they may ultimately be the more proper forum in international arbitration, although the final test is still in recognition proceedings under the New York Convention. Who decides is a fundamental issue which Article II does not clarify. In section 1.1.9, it was already noted that in many countries (but notably not in Germany), the courts first seized will take here only a prima facie investigation approach and leave a full determination of the jurisdiction issue to argument in the arbitration, therefore to arbitrators, where the issue might then be reconsidered as a preliminary issue once the arbitration tribunal is in place. It is the issue of the negative Kompetenz-Kompetenz. While international arbitrators may be all the more likely to depend on transnationalised concepts here, it should also be relevant for national courts in a more up-to-date interpretation of the New York Convention. This will be discussed for Article V in section 1.6.1 below. It should be realised that if ordinary domestic courts assume jurisdiction regardless of the arbitration clause, an international arbitration tribunal may still be set up at the request of one of the parties, and there would be competing jurisdictions. Any award is then likely to come from a truncated tribunal as the other party may object and not cooperate or appoint an arbitrator. Again, it would be for courts in the relevant enforcement countries ultimately to decide on the international status of any ensuing award and its recognition and enforcement. These could be the same courts that assumed jurisdiction in the first place if indeed closest to the business of the party against whom the award is pursued, which could impede the recognition process if the relevant court has found differently or if the matter is still under appeal. It could, however, not avoid the limited grounds on which recognition and enforcement may be refused and the award may then have to prevail over any domestic judgment in the same case. Of course, in other countries recognition and enforcement will not be similarly impeded.

1.3.4. Interface of International Arbitration and the Ordinary Courts in the EU under Regulation 44/2001 (Brussels I) and its 2012 Amendments The ECJ has in three cases tried to distinguish the regime concerning international arbitration from that of the Regulation, which does not cover arbitration (Article 1(2)), but there may still be overlap or it may be unclear whether the issue is arbitral. The problem arose in particular under anti-suit injunctions issued in the UK meaning to pre-empt the jurisdiction of other courts in the EU. In West Tankers,141 the ECJ held (unlike the House of Lords in the UK) that such an 141 Case C-185/07 Allianz SpA and Another v West Tankers Inc (2009).

Volume 2: International Commercial Arbitration 83 injunction, although concerning an arbitration, could not pre-empt the jurisdiction of the Italian courts first seised in the matter (by insurers upon subrogation). It was for them to decide the issue. Criticism may centre on the presumed prevalence of the court of the seat in these matters, allegedly to promote efficiency (through injunctions), probably still based on an excessive regard for the seat and its powers to validate or invalidate, as the case may be, arbitration agreements and supervise the arbitration. This decision of the ECJ followed the earlier case of Marc Rich,142 in which the question was whether the validity of the arbitration clause itself was excluded from the Regulation. This was found to be the case so that this issue could still be handled by the ordinary courts outside the jurisdiction rules of the Regulation. Note that this does not need to be the court of the seat. In the Van Uden case,143 the issue was rather whether provisional support remedies could issue from the ordinary courts in support of the arbitration. These measures were deemed to come under the Regulation as not being ancillary to the arbitration itself and benefit then also from the recognition of these orders in other EU countries. Subsequent attempts to delete the arbitration exemption from the Regulation failed and the 2012 recast of the Regulation retained it. Regulation 1215/2012 in Preamble 12 confirms that court orders of this nature, including arbitral appointments, annulments or recognition of awards, do not have an effect in other Member States (and overturned in this regard West Tankers but not when it comes to invalidating anti-suit injunctions). Enforcement of awards is governed by the New York Convention only, which therefore takes precedence over the Regulation. Another issue is whether the EU has jurisdiction to intervene in arbitrations at all, either through the Regulation or otherwise, and concerns its power of intervention in private issues including private dispute resolution. It may be on firmer ground when it comes to arbitrability of competition and regulatory issues to the extent these are within the EU competency. In fact, in Eco Suisse,144 the ECJ supported the arbitrability of competition issues although it would be conceivable for the EU at the legislative level to make other provisions or exclusions. It has not so far done so, but whenever its public policy becomes engaged, there may be an effect: see the discussion in section 1.2.4 above.

1.3.5. Establishment of the Arbitral Tribunal. Selecting Arbitrators, Qualities, the Issue of Diversity. Compatibility, Arbitrator Fees, and Truncated Tribunals The basic idea is that international arbitration is a party arbitration, that is to say that each party appoints one arbitrator and that they together choose the Chair. This is reflected in all better-known arbitration rules, with the LCIA, however, maintaining a system by which all three arbitrators are appointed by it unless parties in their arbitration clause have agreed otherwise, which they normally do. In recent times, an argument has been made that all arbitrators should commonly be appointed by such an arbitration body.145 Here the idea is that independence and impartiality would be enhanced. There may also be issues of compatibility and ‘double hatting’,146 but it would give these bodies and the people who control them even more power so that the

142 Case C-190/89 Marc Rich Co AG v Societa Italiana Impianti PA (1992). 143 Case C-391/95 Van Uden Maritime v Deco-Line (1998). 144 See n 109 above. 145 See n 61 above. 146 See nn 58 and 59 above.

84 Volume 2: International Commercial Arbitration effect may be quite the opposite and the argument becomes self-serving. Also, many parties would feel less involved with the case while the tendency of international arbitration to become more judicial would be even more entrenched. As for the Chair, it is possible that he or she is in fact a kind of umpire between the two partyappointed arbitrators (in certain trades it is still common only to have two arbitrators but it does not fit international arbitration) and is in that sense more passive and waits for the moment they cannot agree. In section 1.1.14 above, it was already suggested that it may present a better model part of which would be the integration of mediation in the proceedings. However, more common is now that the Chair is a full member of the team with one vote. The Chair’s vote is legally not preponderant but in practice the Chair’s view often is, the Chair usually also taking it upon itself to draft the award. In order to do so effectively, the Chair will test the ground during the proceedings and see where there is consensus in the tribunal and he or she will effectively promote this. This being said, if there is no agreement, the Chair may be outvoted. In such cases, the Chair may continue the drafting or turn it over to the other arbitrators. Even in a consensus situation, some of the other (wing) arbitrators may draft part or all of the award—it is for the tribunal to agree. If there are dissenting or concurring opinions, the arbitrator concerned is likely to draft his or her own text, which could be part of earlier (discarded) draft awards. Instead of the more normal three arbitrators, it is also possible that parties instead agree on a sole arbitrator once a dispute presents itself, whose appointment then depends on a further agreement between the parties. It is by no means uncommon in smaller international arbitrations and may save costs and usually also time. What qualities should be looked for in arbitrators? There is no single or even obvious standard. The Chair may be particularly important, so what makes a good Chair?147 Another important issue is: how can people get the necessary experience and what experience is needed as a minimum? This touches on the issue how much of a closed shop international arbitration has become, with insiders claiming or suggesting that the lack of experience of the others disqualifies them. Expertise in arbitrators may be an obvious expectation and it helps of course if arbitrators have sat before. That is the procedural side, but as to the merits, expertise is in fact not without problems. Arbitrators cannot put their own insights in the place of the representations of parties and their witnesses. That is notably not their task; they must choose between the arguments of the parties, no more. It should especially be considered in this connection that such knowledge is not subject to cross examination and cannot therefore count for this reason either. Expertise of this nature would also give the more knowledgeable arbitrators a dominant position in the tribunal, which is equally to be avoided. Experience is only useful in order to facilitate the comprehension of the tribunal and thus shorten the proceedings. Diversity, race and gender is an issue in appointments and the closed shop mentality may be supported and reinforced by bias, although the instinct in the existing elite may be simply more to hang on to a monopoly and its business as in any other. It may be more of a justified issue and concern in public policy matters, especially therefore in foreign investment arbitration, but there are other situations where it may also matter.148 Research increasingly focuses on the

147 See H Heilbron, ‘Dynamics, Discretion, and Diversity: A Recipe for Unpredictability in International Arbitrations’ (2016) 32 Arb Int’l, 261, 267, with proposals to come to a better appointment process in this crucial function. 148 Rebecca Rosenberg and Julia Marsh, ‘Jay-Z Says Panel is “Too White” to be Fair in Trademark Case’, Page Six (28 November 2018), https://pagesix.com/2018/11/28/jay-z-says-panel-is-too-white-to-be-fair-in-trademark-case/.

Volume 2: International Commercial Arbitration 85 predominance of male, white arbitrators or those from Western nations.149 It may also be a reflection of biases still prevailing in this connection in law firms.150 Returning to the issue of qualities, the minimum is that potential arbitrators can independently handle complex issues of fact and when necessary, of law (still pleaded as fact, see section 1.1.3 above) and are capable of deciding the disputes that have arisen in these connections and of writing a comprehensive and coherent account. Especially for the Chair, there must also be the ability to hold the proceedings together and move the arbitration forward promptly, not being distracted by unnecessary complications raised by the parties (or other arbitrators). Organisational talent and efficiency are then key issues. Sufficient language capability is obviously also important for all. If the argument is not substantially legal, it is not necessary for international arbitrators to be lawyers and it may be very helpful to have an accountant, engineer, or intellectual property rights person on the tribunal. But even if the argument is about the law, it need not truly be an issue if we accept and understand that all law must be pleaded as fact and any decisions limited to legal disputes that have arisen between the parties. It was already said that it is not that different from deciding between construction expert witnesses. It was already noted that arbitrators are more like juries evaluating facts. They have no law-making function. Nevertheless, the development has been in the direction of ever more lawyers with the undoubted consequence that the proceedings have become ever more judicial at the same time, arbitrators increasingly behaving as if they were appeal judges on points of law, see again the discussion in section 1.1.14 above. It has already been mentioned several times also that this may be more appropriate where arbitrators acquire autonomous powers and they behave more like judges (see sections 1.1.10 and 1.2.5 above) and it may be partly unavoidable also because arbitrations are now largely conducted in the nature of formal proceedings although again arbitrators find primarily on the basis of the representation of the parties and not on their own expertise. They should not promote legal sophistry either, serving only to promote more lawyers to arbitral positions. If they become inquisitive it should only be where they have autonomous powers. Although the civil law tradition may be conducive to more aggressive investigation to fill out some missing facts in a given legal picture, there should be considerable restraint as in international arbitrations this legal picture is itself 149 In 2017, the International Chamber of Commerce released its International Court of Arbitration and Secretariat Report revealing that 73 per cent of its arbitrators were either from North America or Europe. Only four and nine percent were from Africa and Asia respectively. The American Arbitration Association only had one Asian American, South Asian, and Latino arbitrator each. The International Institute for Conflict Prevention and Resolution only reported 13 per cent of arbitrators who identified as ethnically or racially diverse. See Caley E Turner, ‘“Old, White, and Male”: Increasing Gender Diversity in Arbitration Panels’ (3 March 2015), www.cpradr.org/news-publications/articles/2015-03-03--old-white-and-male-increasing-genderdiversity-in-arbitration-panels. See also P Smith, ‘Lack of Arbitrator Diversity Is an Issue of Supply and Demand’, Bloomberg Law (15 May 2019), https://news.bloomberglaw.com/daily-labor-report/lack-of-arbitratordiversity-is-an-issue-of-supply-and-demand, Hannah Hayes, ‘Where Are the Women Arbitrators? The Battle to Diversify ADR’ (1 March 2018), available at www.americanbar.org/groups/diversity/women/publications/perspectives/2018/winter/where-are-women-arbitrators-battle-diversify-adr/, Sarah Vasani, ‘Inspired Arbitrator Choices Addressing International Arbitration’s Diversity Deficit’ (October 2016), available at https://a. storyblok.com/f/46533/x/3bd901f277/inspired-arbitrator-choices-addressing-international-arbitrationdiversity-deficit-sarah-vasani-2016.pdf, and Lucy Greenwood, ‘Unblocking the Pipeline: Achieving Greater Gender Diversity on International Arbitration Tribunals’ (8 November 2018), available at www.american bar.org/groups/international_law/publications/international_law_news/2013/spring/unblocking_pipeline_ achieving_greater_gender_diversity_international_arbitration_tribunals/. 150 Karen Donovan, ‘Pushed by Clients, Law Firms Step Up Diversity Efforts’ The New York Times (21 July 2006) available at www.nytimes.com/2006/07/21/business/21legal.html, Stephanie Russel-Kraft, ‘Law Firms Pledge $5M to Fix Legal Industry’s Diversity Problem’ Bloomberg Law (18 September 2019) available at https://news.bloomberglaw.com/us-law-week/law-firms-pledge-5m-to-fix-legal-industrys-diversity-problem.

86 Volume 2: International Commercial Arbitration fact that must be proven by the parties. Sometimes civil law arbitrators come to the hearing with a draft award already in their pocket in which they seek only the (in their view) missing parts of the puzzle, which subsequently becomes the focus of their investigation. To the extent they mean to complete the legal picture in this manner, this may horrify especially the more common laworiented arbitrators who depend on fact and cross examination. It has already been said many times and cannot be repeated often enough that in most international arbitration cases arbitrators do not have a lex fori or system to worry about or can apply. They may not have any specific knowledge at all except that they are likely to be better versed in business disputes and are comfortable with them and their resolution. Especially when disputed complex issues of law arise (or are promoted by one of the parties), lawyers may more naturally be favoured as arbitrators. It suggests that the Chair should normally be a lawyer as indeed they normally are in commercial courts where still operating independently from the ordinary court system, for the rest often with lay judges, but again arbitrations are not judicial and it is not a precondition or a given. Special complications arise in the appointment process where one party fails to appoint an arbitrator or fails to cooperate in the appointment of a single arbitrator, or where both party arbitrators cannot agree on the Chair. So, alternatives must be provided and they usually result in an appointing authority, either already foreseen in the arbitration clause or otherwise part of the applicable rules, either institutional or not. As has been said before, ICC and LCIA rules are important examples for institutional arbitrations and the UNCITRAL Rules for ad hoc arbitrations. The former have their own courts dealing with these matters, the latter, in particular, relying on the Permanent Court of Arbitration (PCA) in The Hague. Failing such an alternative, it is also possible that the court of the seat fulfils this role in its support function, an instance therefore where the chosen seat may still be of special importance even in a delocalised transnationalised arbitration. But importantly, it might also be the court in another country that would otherwise become competent to hear the case. Another issue is in this regard, the possibility of truncated arbitrations, for example, where an arbitrator resigns or does not show up. Depending on the progress, the remaining arbitrators may take it upon them to decide the case and issue an award regardless, assuming of course they can agree. Again, the ultimate test of the tribunal remaining properly constituted is in enforcement courts. Finally, there is the matter of fees and rewards: it should never be forgotten that international arbitration is a business, which, like all other businesses, is subject to the danger of monopolisation in a small group. This is further encouraged by the substantial amounts that arbitrators might be able to charge, the confidentiality of which in most cases may be another issue. From cases such as Merrill & Ring Forestry LP v Government of Canada151 and other ad hoc cases mostly under the UNCITRAL Rules, where arbitrators must state on their own fees, one gets some idea of the level of fees in foreign investment arbitrations. In the case of the ICC and the LCIA, fees are fixed in principle by these institutions, not by arbitrators in their award and then shown as such, in the first case based on the value of the claims, in the latter case on an hourly rate set by arbitrators within certain ranges. That is also the policy at ICSID. Each arbitrator need not charge the same, even on an hourly basis, and also in ICSID it is quite normal that they do not. The amounts are not published. It would probably be better if they were. Arbitrators often negotiate cancellation fees meaning that the closer they get to the agreed dates of the arbitration hearing, the more they will charge of the agreed fee even if the arbitration never takes place. In ad hoc cases, they will ask for a deposit and may even have negotiated to retain it if 151 ICSID Administered Case, 31 March 2010.

Volume 2: International Commercial Arbitration 87 the arbitration does not proceed. Fees or cancellation fees are not implied, however, and must be specifically agreed,152 although the applicable Rules may be more specific. Reasonable expenses are reimbursable also, mostly within certain limits if the arbitration is institutional. In institutional arbitrations like those under LCIA and ICC rules, these organisations will deal with the deposits.

1.3.6. Challenges of Arbitrators It is necessary to repeat that international arbitrators, even though party appointed, are and must remain independent from the parties appointing them and their lawyers and remain impartial (this issue was discussed in section 1.1.12 above). International arbitrators must not seek or canvass for these appointments either. That is the modern rule in international arbitrations and it is now often considered fundamental principle, although domestically, especially in the US, the situation may still be different and this book takes a less judicial view, see section 1.1.14 above. It is not uncommon for parties (and their lawyers) to interview possible candidates but these interviews have to be handled with considerable care by the latter, who are wise to keep the discussion brief and business-like, and retain a record that can be shown to the other party if necessary. In view of the requirements of impartiality and independence, the merits of the case hardly call for a discussion. After an appointment, there should not be contact, except perhaps if the chosen arbitrators cannot agree on a Chair and there is an impasse when the appointed arbitrators may confer with the party that appointed them as to what to do next.153 Under the arbitration agreement or the applicable Rules, it may then be for the parties to take the necessary steps and they must be alerted accordingly. Again, caution is required in order not to undermine the impartiality and independence of the arbitrators. They must be seen to have maintained it at all times. That goes to challenges, which are tied in particular to impartiality and independence and the requirement to maintain them and their appearance, an issue first raised in section 1.1.12 above where the International Bar Association’s Guidelines were also mentioned. Clear is or should be that if a prospective arbitrator has too close a connection with one of the parties or its supporting entities, its legal representatives or even another arbitrator, an appointment should be refused. A common alternative is that all relationships are disclosed so that the other party can review them, which would avoid the drama and cost of later challenges which, if successful, are much more destructive as a new arbitrator needs to be appointed and the earlier appointment of the Chair may then also be undermined. The possibility of a challenge is a continuous hazard in this regard as it can come up at any time when new facts become known and may also motivate a challenge to the award or its recognition and enforcement later. Invariably these preventive actions on behalf of potential arbitrators require a high degree of judgment in the candidates whose integrity can be judged by the investigations they have conducted and the quality of the disclosure of the results. In this connection there may exist an information duty, particularly important if a sitting arbitrator takes on other functions as legal counsel, director or arbitrator. He or she may not be able to gauge how this may impact, reason why the parties to the arbitrations in which this arbitrator is involved should be advised to be able to form their own opinion. The 2004 IBA Guidelines on Conflicts of Interest amended in 2014 proved helpful but did not manage to reduce the problems. The issue is always interconnectedness and the appearance of

152 K/S Norjarl A/S v Hyundai Heavy Industries Co Ltd [1991] 1 Lloyd’s Rep 260. 153 E Onyema, Selection of Arbitrators in International Commercial Arbitration (Routledge Research in International Commercial Law 2010), notes that this is common.

88 Volume 2: International Commercial Arbitration impartiality and independence at all times; it is not per se a question of the factual independence or impartiality which may not be endangered but it can no longer be assumed and appearances have become as important to retain the credibility of the whole process; in a better world, international arbitrators should not accumulate functions. When they do, a lack of investigation cannot support a lack of knowledge and therefore a claim to independence; it is self-induced and undermines its appearance. The alternative is independent supervision of international arbitrators (of behaviour not appeal) by an independent board, court or similar facility, advocated earlier in this book (see Volume 1, section 1.1.12, and further in section 1.1.12 above). Perhaps the international arbitrating community should have long ago asked for it in order to strengthen its legitimacy, more in particular when it takes on public policy issues; not having done so has undermined its stature and has made it subject to abundant criticism, which may be largely uninformed but has nevertheless weakened its stature. In public interest issues, it has raised the more fundamental question whether private dispute resolution is at all appropriate and it may no longer appear to be so to many exactly because of the lack of supervision.154 As we shall see, this is or has become a major issue in foreign investment arbitrations where the public interest is more directly engaged and might in appropriate cases still discharge host governments from their protection duty under BITs or at least mitigate the compensation payable for intrusions on the basis of the public interest. This is the key issue of super-public purpose and indirect regulatory takings; see section 3.5.5 below for a discussion of the type of dispute resolution in the context of the Transatlantic Trade and Investment Partnership (TTIP), now pre-empted by the new rules between Canada and the EU in CETA, see section 3.5.8 below. There are also important practicalities. Who decides these challenges? If there is a court, as in the case of the ICC or LCIA, it is that facility. If there is none, as under the UNCITRAL Rules and under the Washington (ICSID) Convention in the case of foreign investment arbitrations, it is the other two arbitrators. This may in itself be less than desirable and it has been argued that the embarrassment this may cause the other arbitrators has raised the bar for the challenge to succeed. The lex arbitri of the seat may provide another alternative when the rules say nothing, the arbitration is fully ad hoc, or if the award has already been rendered before the relevant facts become known. Of course, the issue may also come up in challenges of the award, or annulment and enforcement proceedings. The issue of and proper grounds for challenges of arbitrators remain an Achilles heel of international arbitration, its credibility, and ultimately its legitimacy. Challenges are often abused.155 It was suggested in section 1.1.14 above that a better approach may be an integration between arbitration and mediation geared to settlement in which party appointed arbitrators would indeed be allowed to play a more active role in the resolution of the dispute and the impartiality and independence requirement would mainly be applied to the Chair.

1.3.7. The Jurisdiction of International Arbitrators and Challenges to Jurisdiction Arbitrators may decide the jurisdictional issues as preliminary matters to avoid a full discussion of the case and its cost, should there prove to be no sufficient jurisdiction. It has already been

154 See JH Dalhuisen, Letter to the Editor of the Financial Times, 7 May 2015. 155 B King, ‘Party Autonomy, the “Right” To Appoint, and the Rise of Strategic Challenges’ (2016) European International Arbitration Review Chapter 2.

Volume 2: International Commercial Arbitration 89 noted in section 1.1.9 above that in a proper delocalisation analysis, these powers of international arbitrators derive institutionally from the transnational commercial and financial legal order itself. The arbitration clause, which upon proper segregation, may be considered to be founded in that same order and its laws, only activates these powers, although it may also modify and expands them albeit no further than the public order in the transnational legal order allows and requires. It has already been said repeatedly that parties can make a domestic law applicable to the arbitration clause and also opt for a domestic lex arbitri to cover the proceedings, but in doing so they risk making the arbitration domestic. It was further noted that a distinction between the professional and consumer situation, especially in proprietary matters, may well be considered equitable in the more traditional common law sense and that this may give international arbitrators even power over third parties when it comes to ranking and the determination of preferences, for example, in set-off and netting, which may affect third parties not party to the arbitration, here notably common creditors. Again, such power over third parties would not appear to result from the arbitration clause; it concerns key issues which require ample consideration in international financial arbitrations when the effects on local insolvency laws may also have to be considered especially in the context of recognition (see sections 1.1.14 above and 2.3.3 below). It may be noted once more in this connection that the applicable law clauses in the Model Law and domestic legibus arbitri appear hardly aware of these issues, are caught in cliché, and often provide little guidance. The question of jurisdiction may come up in different contexts and may be raised at different moments. First it may arise under Article II of the New York Convention when an arbitration clause is argued to oust the jurisdiction of the normally competent court in a Member State of the Convention. This was already discussed in section 1.1.9 and 1.3.3. It may also arise under Article V of the Convention as we have seen in the context of the recognition and enforcement of the award and will be discussed further below in section 1.6. In principle, local courts decide the issue, but under Article II now in most countries only upon a prima facie investigation as already noted.156 Beyond these two situations, arbitrators decide in first instance on their own jurisdiction.157 That is the transnational principle of Kompetenz/Kompetenz and its negative effect when courts become involved in jurisdiction questions and is besides the transnational separation principle, which severs the arbitration clause from the rest of the agreement, a cornerstone of international arbitration and fundamental principle (see section 1.1.9 above). However, the issue may also still come back in challenges or annulment proceedings in the courts at the seat. Properly considered, the New York Convention in its Article V restricts the jurisdiction issue to a review by recognising domestic courts of the arbitrators’ decisions in these matters, which review goes, however, beyond the formal review of the existence of an arbitration agreement (Article V(1)(a)) and that it is in writing (the requirement under Article II (1) and (2)). Under Article V(1)(c), the relevant language refers to awards dealing ‘with a difference not contemplated by or not falling within the terms’ of the arbitration agreement. Article V(1)(d) deals with the proper composition of the tribunal and therefore indirectly probably also with the issue of impartiality and independence as a matter for consideration in the context of recognition and enforcement of the award domestically. 156 See n 29 above and E Onyema, ‘The Jurisdictional Tensions Between Domestic Courts and Arbitral Tribunals’ in A Menaker (ed), International Arbitration and the Rule of Law: Contribution and Conformity, 90 (Alphen aan den Rijn: Kluwer Law International. ICCA Congress Series, 19, 2017) 481–500. 157 Normally that should be at the beginning of the proceedings on penalty of acquiescence or implicit acceptance or submission, see L Mistelis and JD Lew, ‘Section C: Jurisdictional Issues in Arbitration’ in Applicable Laws and Procedures in International Commercial Arbitration, prepared for the University of London, University of London Press, Sec. 3.1 (2005) 1–47.

90 Volume 2: International Commercial Arbitration It was already mentioned also that in Article V, the residual or default rule in matters of arbitral jurisdiction remains for recognising courts the law of the seat, not therefore transnationalisation. It was noted also that Article II is unspecific on the issue of the applicable law and it has been submitted all along that international arbitrators, deciding on their jurisdiction in the course of an arbitration, are increasingly likely to refer to transnationalised concepts, and upon a proper interpretation of the New York Convention domestic courts may also increasingly do so. Again, it requires the New York Convention to be put properly in the context of the different sources of law under the modern lex mercatoria, in this book considered necessary for it properly to evolve.

1.3.8. The Issue of Arbitrability in International Arbitrations The issue of arbitrability concerns the question of what is ‘capable to be settled by arbitration’ in the language of the New York Convention (Articles II (1) and V (2)(a)) and the Model Law (Articles 34(2)(b)(i) and 36(1)(b)(i)). It needs as such to be distinguished from the issue of jurisdiction, which may now in principle cover all contractual, proprietary, regulatory, tort and all other matters that may arise from or in connection with the contract, its formation, and performance, see section 1.3.1 above. It was submitted before that in international cases, the issue of arbitrability is best considered in a delocalised context where it is covered by transnational law: see section 1.1.10 above. Rightly or wrongly, this has allowed a broad expansion of the concept, notably for it to include competition, regulatory and proprietary issues, the latter, it was also submitted, then being connected with equitable powers in international arbitrators. Altogether one may see here a substantial increase in the tasks of modern international arbitrators and in their powers of determination. National courts, especially the US Supreme Court,158 promoted it in the interest of furthering international trade and comity, although the final check is still in the recognising courts and the use by them of their public policy bar, even if transnationalisation of the concept may well be taking over, also in the interpretation of the New York Convention (Articles II and V), which in matters of recognition of the award still distinguishes between arbitrability and public policy as discussed in section 1.3.3 above. Beyond the Convention, arbitrators will decide the arbitrability issue (like the jurisdiction issue) themselves and may do so in preliminary awards, again to avoid a full discussion of the case and its cost, should there be no arbitrability. As public policy is often the key issue in terms of arbitrability, it is argued throughout that in view of these greatly expanding powers, the proper supervision of international arbitrators is becoming a major issue, even more so in foreign investment arbitrations where the public interest is directly engaged, which is a true challenge, see section 1.1.14 above. It is a seriously distorting feature in the more traditional view of arbitration and suggests further judicialisation if not also a law-making function for arbitrators at the same time. The alternative should also be considered, however. One important motivation in the extension of arbitrability is that otherwise incidents in the proceedings must return to the ordinarily competent state courts with their procedural and appeal complications. This presents the worst of all worlds: the arbitration may be suspended for years, with arbitrators retiring etc. From this point of view, the expansion of the arbitrability is foremost an efficiency issue.

158 See cases cited in n 109 above.

Volume 2: International Commercial Arbitration 91 It was submitted that the better approach is the creation (by treaty) of an international court from which arbitrators can ask preliminary opinions in these matters to protect themselves and enhance their credibility. It would not be an appeal court with all the extra costs and delays and any putative desire to create in this way some international legal system even if preliminary opinions may produce substantial pointers in that direction.

1.3.9. The Issue of Admissibility in International Arbitrations Besides the issues of jurisdiction and arbitrability proper, there is the related issue of admissibility or appropriateness of the jurisdiction or even the suitability of the claim or its eligibility for arbitration. It suggests legal or procedural impediments but could also concern inherent defects in the claim that prevent its adjudication.159 Competition issues may present an example. As we know, they are now considered arbitrable by the US Supreme Court and the ECJ in the EU, but a proper investigation could be of such magnitude and complexity that it cannot be properly conducted in an arbitration. The concept of admissibility is largely an academic invention and is a more subjective matter that needs to be handled with substantial care in view of arbitrators’ contractual duty to deal with all issues unless indeed they have no jurisdiction or the issue is not arbitrable and there is hardly any guidance from cases. Unlike jurisdiction and arbitrability, it is notably not a concern under the New York Convention or Model Law nor found and covered in arbitration rules. This is also true for the ICSID Convention and its Rules. Once the concept is accepted, however, the issues may be wide ranging but are likely to have a connection more in particular with forum non conveniens, lis pendens and res judicata (or finality) notions,160 and might also arise because of the operation of statutes of limitations,161 all uncertain concepts in international arbitration, the first one notably not even adhered to in civil law, but are known in international law.162 Like jurisdiction and arbitrability, the admissibility issue may arise in preliminary fashion, as such to be dealt with by the Tribunal at the outset, although conceivably the issue could arise later.

1.3.10. Other Early Incidents: Preliminary Issues and Protections One problem in the early stages of an arbitration is that there is not yet an arbitration tribunal in operation that may provide the necessary steering or guidance and where necessary can decide about statute of limitations, jurisdiction, arbitrability, admissibility or the preservation and other protection measures that may need to be attended to and can, upon its constitution, be taken either by the arbitration tribunal alone (upon the request of one or both parties) or after activating the relevant courts in states where action is required. In this case, the lex arbitri (or other procedural laws) of that country (and not of the seat, unless there is activity in that country also)

159 See W Park, Arbitrage of International Business Disputes 2nd edn (Oxford, 2012) 231; F Santacroce, ‘Navigating the Troubled Waters between Jurisdiction and Admissibility. An Analysis of Which Law should govern Characterisation of Preliminary Issues in International Arbitration’ (2017) 33 Arb Int’l 539; Z Douglas, The International Law of Investment Claims (Cambridge, 2009) 148. 160 See s 1.4.5 below. 161 See s 1.3.2 above. 162 J Crawford, Brownlie’s Principles of Public International Law 9th edn (Oxford, 2019) 667, cf also SA Pauker, ‘Admissibility of Claims in Investment Treaty Arbitration’ (2018) 34 Arb Int’l 1 suggesting considerable caution.

92 Volume 2: International Commercial Arbitration will in the first instance decide whether requests from relevant parties or ultimately from the tribunal and its orders may be honoured. One important question is then indeed who takes the initiative and who can order what? Emergency procedures have more recently been put in place.163 They may cover more ground, but their recognition elsewhere remains no less problematic, whether orders by the Tribunal or local courts. The Model Law deals with preliminary matters more especially in terms of preserving assets and evidence or ordering the continuation of vital activity pending the resolution of the dispute. It is of interest to compare also Article 25 LCIA Rules, section 44 of the English Arbitration Act, and section 21 of the AAA Rules. The Model Law still seems to arrogate to the lex arbitri of the seat the major role (although not necessarily to its courts), never mind where the action is to have its effect or the assets involved are located. Chapter IVA, according to its title, distinguishes here between interim measures and preliminary orders. Technically this is of importance under ICC rules where these measures if issued as awards issue from its Court creating further delays, orders do not. Article 17 states that in principle the arbitral tribunal may at the request of a party grant interim measures. They are defined as any temporary measure, whether in the form of an award or otherwise, by which before a final award the tribunal orders a party to (a) maintain or restore the status quo, (b) prevent current or imminent harm or prejudice to the arbitral process, (c) preserve assets out of which a subsequent award may be satisfied, or (d) preserve evidence. One sees that the action is here centred in the Tribunal even though, in this perception, still under the lex arbitri of the seat. Article 17A mentions the conditions and requires for the first three types of measures that irreparable harm would result without them, while there must be a reasonable possibility that the requesting party will succeed on the merits. This last requirement, although not unusual in respect of ordinary courts under national laws, may be greatly bothersome. What proof is to be established? Although it is said that granting the interim measures does not affect the tribunal’s powers in determining the main dispute, it may show bias; the requirement should have been stated negatively, if at all, in the sense that the requesting party could not be given the benefit of an interim measure if it was unlikely to succeed in the main suit, although it then still sounds like summary dismissal. Frivolous or unrealistic requests should obviously be avoided, whilst the requirement could even induce settlement thereafter, but it was already noted that in respect of the main issues there is no such thing as summary dismissal, so this precondition hardly fits the model. It is obvious that in view of the importance of these measures, they should never be ordered lightly and restraint is necessary in the arbitral tribunal, especially if supplies are to be redirected and bank accounts or other assets are to be blocked. As for preliminary orders, under the Model Law, a party may request them from the tribunal together with a request for an interim measure directing the other party not to frustrate the purpose of the order requested. They are valid for 20 days and are renewable. In order not to frustrate the surprise element on which these orders will often depend, the request for the order may be ex parte, that is to say without prior notice to the other party, but notice must be given immediately thereafter as a matter of due process (Article 17C). It was already said that these interim measures may be issued as an award and may as such technically be recognised and enforced more easily elsewhere (Article 17F(4)(c)) although the problem at the ICC was already mentioned). This is so irrespective of the country where they were issued, under the Model Law subject to similar constraints as existing under the New York 163 See n 16 above.

Volume 2: International Commercial Arbitration 93 Convention (Article 17I), the New York Convention itself does not cover them. A preliminary order on the other hand lacks enforcement potential (Article 17C(5)) and depends for its effectiveness more directly on the cooperation of the court system in the relevant country. It means that any surprise effect will be lost when enforcement is asked and the ex parte nature of the order will not help. Article 17J confirms that appropriate national courts may also order the interim measures directly irrespective of where they are located, based on their own procedures in this regard. It stands to reasons but shows that even the Model Law accepts that it is not necessary for the parties to go through the arbitral tribunal, they may go directly to the ordinary courts for protection if that suits them better. It may be more efficient, a great deal cheaper and quicker and also maintain the surprise effect better. Note again the diminished role of the court of the seat here. It is not given a special role under the Model Law, even when the tribunal is not yet constituted, the reason probably being that most of the action will not be at the seat, which is neutral and normally far away from the businesses and assets of the parties. Although the English Arbitration Act in section 44 still concentrates the support powers in the court (of the seat), it does so only to the extent the arbitration tribunal lacks adequate powers or has not yet been constituted (section 44(5)). Otherwise, permission of the arbitral tribunal is still required for parties to access ordinary courts directly unless there is urgency or all other parties agree to the measures (section 44(4)). Again, the true issue is the effectiveness of these measures in the places where it matters most, notably where the assets or evidence are, and it may be best to address the relevant courts in those countries directly rather than go through the tribunal or courts at the seat first. The party most concerned may have to make an early decision here but it may still require the consent or some form thereof from the tribunal, which it may do best at least to notify, assuming it is constituted. Requesting interim measures from local courts (including the parties’ own courts) is not considered a breach of the arbitration agreement (Article 9 Model Law). Locally, these measures could even be broader than those considered under the Model Law and might be the same as these courts may order in support of the proceedings in their own countries. It depends on the relevant local laws.

1.3.11. Procedural Order No 1 Given these early incidents and possible complications, the Chair after the appointment of the tribunal is likely to call a business meeting as soon as possible to establish proper order in the proceedings but also for the main actors to get to know each other: especially arbitrators and the main advocates, preferably including also an authorised person for each party. The time frame is of special importance here: pleadings, discovery, number of witnesses, witness statements, and especially the start and duration of the hearing and how it is going to be conducted may be agreed. The Chair may normally ask the parties to make a first draft of what is to become Procedural Order No 1 so that the business meeting will be limited to the points on which there is as yet no agreement. It is not likely to last long, one day at the most. The Chair will strive to keep the temperature as low as possible and at least on procedural points will look for consensus; the merits are unlikely to be discussed. The Order is usually signed by the Chair only. This confirms the practice that in procedural matters the Chair normally acts alone while keeping the other arbitrators informed unless more major complications arise. The Chair may thus vary the Order as needed, especially when reasonable requests for extensions of time arise. This flexibility is the reason that parties will not sign the Order even if they

94 Volume 2: International Commercial Arbitration have prepared its text as it could then be explained as an amendment to the arbitration agreement, not to be subsequently varied except with the consent of both of them. Rather, the Procedural Order is likely to demonstrate a shift that is occurring at the same time in the relative position of the actors: the arbitrators and particularly the Chair are taking over in procedural matters (unless parties still specifically agree otherwise, which is ever less likely when the dispute warms up). In any event, it is now mostly assumed that arbitrators have original power to move the proceedings along, see section 1.1.10 above. It is particularly important that the Order establishes the dates and length of the hearing as it is difficult to get all the actors together and change their schedules at short notice. Some safeguard will be built in order not to call the hearing too early so that postponement may become unavoidable. Altogether it may mean about two years into the arbitration before everything is ready for the hearing: appointment of the tribunal, challenges, preliminary issues of jurisdiction and arbitrability, and organising pleadings, witnesses and discovery. With the time necessary to agree and write the award, much of the third year may be gone also. In large cases, this is indeed the minimum framework and may be just acceptable in terms of speed, although there is much pressure for shorter or even shortened proceedings, see sections 1.1.2 and 1.1.4 above. One key remains for there to be an activist Chair who does not entertain complications lightly, avoid legal sophistry, concentrates on what needs to be decided, move things along as speedily as possible, and also seeks to write a prompt and focused award.

1.3.12. Terms of Reference? The ICC Rules still require terms of reference to be formulated by the arbitrators before the arbitration proper starts. It was a typical civil law concept, abolished now in most countries, recently also in Portugal, which requires judges to summarise the case after the pleadings and parties in an arbitration will sign the document. It is supposed to make clear what is required to be shown in both fact and in law but usually results in simply reciting the pleadings rather than condensing the issues. It fits especially in civil law thinking that is legal system oriented and seeks to concentrate on the relevant facts that must be proven in that context after the legal framework has been defined which would suggest that it can be done before the hearing, the reason why is has always been mistrusted by common law lawyers. It shows: the civil law-oriented ICC still has the facility, the LCIA does not. In particular, it sits uneasily with the idea that law must be pleaded as fact. The requirement is on the whole no longer believed to be greatly helpful in international arbitrations. It became formalised and tends to cause delay of the proceedings.

1.3.13. The Status of Early Decisions A number of early decisions were mentioned: Procedural Order No 1, provisional measures, and possibly early decisions on statute of limitations, jurisdiction, arbitrability and admissibility. It has already been noted that the Procedural Orders may be changed by arbitrators and are not intended to make any final determinations. They are not awards proper. The same may go for interim measures and orders, but it is different for decisions in respect of jurisdiction, arbitrability, admissibility and statutes of limitation. Although they are sometimes also called interim or even provisional, this is misleading as these are awards that are final as to the issues settled therein and cannot be changed by arbitrators thereafter. They are covered by the New York Convention, not the others. These issues may be decided up front only for efficiency reasons to avoid further

Volume 2: International Commercial Arbitration 95 cost and this can be done if no factual inquiry is needed. The fact they may come first does not make them less final. Challenges of arbitrators are usually decided by the Courts of institutional arbitration facilities such as the courts of the ICC or LCIA and are then also final although not strictly speaking awards. If arbitrators decided these issues themselves as in the case of an ad hoc arbitration under the UNCITRAL Rules and under the Washington Convention, one must assume that such decisions are then also awards and final.

1.4. The Conduct of the Proceedings and the Award 1.4.1. Pleadings and Discovery Assuming that the tribunal is properly constituted, whilst there is a valid claim, proper jurisdiction and arbitrability and otherwise competent courts have been ousted, and the appropriate preliminary issues have been taken care of, the arbitration can proceed although these issues may still be raised and figure later in the arbitration, like in the case of challenges of arbitrators if new facts about their connections with the case become known or when further preservation measures may be needed. The exchange of pleadings is the essential action at the beginning of an international arbitration; they define the dispute and the claims as the parties see them. In the common law tradition there are only three, the claimant being considered to have the last word. So, there is the claim, the answer to the claim, and the reply to the answer. Different sets of rules use different terms here but this is the idea in general. Parties may agree otherwise: in many civil law countries the last word is given to respondents. There is in any event a fourth document if there is a counterclaim, but it is only the reply to the answer to the counterclaim. The Procedural Order No 1 may have set the time frame which the Chair may amend if such becomes reasonable under the circumstances. Otherwise, the institutional rules where applicable will do so. The pleadings are accompanied by all documents on which they rely, normally all contemporaneous documentation on which the parties can lay their hands such as the contracts that were signed, perhaps the exchanges of messages preceding them or concerning the way the conflict arose and all statements made at the time in connection therewith.164 164 Some practical advice may be in order: (a) The pleadings are addressed to the tribunal, not to the other party or anybody else (the purpose is to define the dispute for arbitrators, get their attention, and incur their favour as early as possible). (b) The pleadings must be concise and show what is in dispute, no more; they should avoid as far as possible presenting the case for the other party, which only confuses. (c) Law must be pleaded as fact, just like all else and must be proven; it must be shown, not narrated; the same applies to public policy considerations, which exceptionally might also be raised by the arbitrators themselves (see s 1.2.5 above). (d) Never assume that arbitrators know anything in the case; they are the last to come to it, the opposite of the advocates; it does not mean that international arbitrators are stupid and the tone in the pleadings should never be condescending and should not throw in anything merely to impress. (e) Be very aware of the different cultural and linguistic backgrounds of the arbitrators; use short sentences, avoid acronyms, do not use superlatives, set out clearly and simply who the relevant actors are, find and do not hesitate to use common language, omit especially technical procedural legal terms (litigation lawyers are often poor performers in international arbitrations for that reason), avoid all sport analogies and almost any other, never try to be funny or insert jokes—they may not be understood and may give an impression of clumsiness. (f) Do not demean the other party more than necessary, especially early in the proceedings unless there is clear evidence which should then be presented immediately. Ordinarily, arbitrators must keep a balance between the parties and do not want to be pushed. It is prudent to present upfront all points in dispute, especially in the claim, with supporting evidence in a summary manner but no more. Again, it is necessary to be precise and to the point to get the attention needed.

96 Volume 2: International Commercial Arbitration Requests for documents not so far disclosed but allegedly in the possession of the other party or that party having access to are commonly made. This is the issue of discovery, which may be requested immediately in the claim or in the answer to the initial claim. There are differences here between civil and common law. In the first, we may see a close connection with the burden of proof, often less so in the latter. This suggests substantive rules in the former, procedural rules in the latter. It is relevant as in international arbitrations, as we have seen, arbitrators have autonomy in procedural matters unless parties agree otherwise, not in substantive rule application, although the procedural flexibility common in international arbitrations may solve tensions between substance and procedure and the uncertain extent of both. What connects the civil and common law traditions is concern for equality and a level playing field but it is achieved in different ways, civil law inclining towards reversing the burden of proof and towards inferences, whilst resorting to document discovery mainly if the burden of proof and production is on that party. It also has to do with a more inquisitive or adversarial approach, see section 1.1.11 above. It was submitted that the civil law lawyer tends to have a legal framework in mind and seeks the missing pieces of evidence through enquiry by the tribunal. That is being inquisitive. The common law is adversarial and the tribunal is more passive. The international arbitration practice inclines to this more procedural common law approach. It raises the issue of discovery more in particular and it is widely admitted but in international arbitration under its practices, it may not amount to a fishing expedition or wild goose chase, as it may sometimes become in common law countries. The requesting party must show cause, therefore must make clear that the document requested would be relevant and material. The search must primarily be for contemporaneous documents or a specific class thereof (for example, all connected with the formation of the contract). They must not be otherwise available and must reasonably be suspected to exist and be accessible by the other party. This is expressed in Article 3 of the International Bar Association’s Rules on Taking Evidence in International Commercial Arbitrations of 1999. Although this is not a binding document (albeit parties can make it so by contract, notably by referring to them in the arbitration clause), it is an important expression of the practices in international arbitration. It may increasingly be considered part of the lex mercatoria concerning the proceedings and as such find a place therein either as custom or more likely general principle. Discovery is a sensitive issue in international arbitration not in the least because civil law lawyers are not used to it, as they are not much used to cross examination of evidence either. It is a different model that comes to light wherever arbitration follows the more judicial pattern. Whilst the common law litigation tradition is widely followed with its accent on fact finding, the civil law scepsis has at least contributed to avoiding excess. But the more fundamental issue also bears on speed and cost. Must indeed all facts first come on the table or is it possible to select on the basis of an earlier legal characterisation of the dispute as civil law is used to, allowing for a search for relevant facts mainly by the tribunal? There is also the issue whether we have here dispute resolution Lack of discipline in this aspect may give arbitrators too much room to play around and this could become costly. It should further be realised that English arbitrators will seldom read anything before the hearing, at least not large bundles. Others may not spend more than a day and nothing should be made more complicated than necessary at this stage. There will mostly be a second chance during the hearings, the closing arguments, and in the post-hearing memorials. New arguments may be brought on those occasions but not new issues in dispute except with leave of the other party or possibly the tribunal. There are obvious complications when there is a challenge of arbitrators, a jurisdiction problem, an arbitrability or admissibility issue, a need for preservation measures, a counterclaim, or requests for disclosure. Again, they must also be dealt with concisely, one by one, in proper order; it is necessary to make a tidy impression at all times. That creates confidence in arbitrators, reduces their workload, and is efficient.

Volume 2: International Commercial Arbitration 97 as the parties define the dispute, or is there a search for better law and its application, in this book not directly associated with the arbitration function. Is it practical or does it seek a deeper truth as courts may believe it their task to do, certainly in the appellate function? In that case, the ultimate decision might have to be weighed after considering all facts that may become known against all legal solutions. It was already submitted repeatedly that the task of international arbitrators is not in that nature. Parties want a resolution of their problems as they see and define them, no others. In the conduct of the proceedings, there will be room for a further answer or reply upon any documents or other evidence presented and more may be asked or given on whatever theory or order. Again, orders in this connection are not awards enforceable under the New York Convention and it would be up to the law of each relevant country that has jurisdiction over the other party to enforce these requests under its own rules concerning the support for foreign arbitrations. If there is no co-operation, more likely is that international arbitrators will use the technique of negative inferences as specifically admitted in Article 9 of the IBA Rules. Here it follows the civil law tradition, the common law being directed more towards injunctions, not directly available to international arbitrators. As we shall see, the standard of proof is always the balance of probability, this being civil litigation where there is no need to reach the standard of proof beyond all reasonable doubt. This being said, the weight of contemporary evidence will normally be the greatest, higher especially than uncorroborated witness testimony.

1.4.2. Witnesses and Hearing. Burden of Proof and Decision-Taking It was already said repeatedly that international arbitration if properly understood is about facts, facts and facts. Even law must be pleaded as fact. Witnesses are here the next concern to confirm or establish these facts further. Only in Moot competitions is arbitration transferred to an activity of appellate courts on points of law and it gives students entirely the wrong idea, see section 1.1.13 above. In real life, there may be witnesses of fact and expert witnesses including those on points of law. They normally produce statements in advance of the hearing and the Procedural Order No 1 will confirm this. In international arbitrations, these witnesses may be coached by the lawyers unless this becomes clearly inappropriate, notably mendacity cannot be encouraged, promoted or rewarded. Too slick a presentation will soon arouse suspicion in experienced arbitrators and may be counterproductive. They may then also ask more pointed questions.165 A further business meeting may be called before the hearing to iron out any remaining questions or problems and will usually be conducted by telephone. The hearing itself normally starts with opening statements by either party and there is usually an agreement how long they may take, otherwise the Chair will determine it, normally not more than one and a half hour each. It will be followed by examination and cross-examination of the witnesses of fact, first the ones for claimant than the ones for respondent. Then follow the expert witnesses. Examination by the party presenting the witnesses and cross-examination by the opposing parties is different in that the examining lawyer may not ask leading questions, while the cross-examining lawyer can and usually will, but arbitrators tend to be informal also in this aspect and basically will allow anything that serves their better understanding of the case unless the evidence is clearly privileged. Cross-examination of witness of fact and expert witnesses is at the heart of the hearing. To be most effective, it should concentrate on a small number of precise points, indeed probably limited 165 See also R Harbst, A Counsel’s Guide to Examining and Preparing Witnesses in International Arbitration (Kluwer, 2015).

98 Volume 2: International Commercial Arbitration to leading questions. Who and what among witness testimony should be believed and accepted? This is a particularly difficult area for arbitrators. Assuming that nobody is clearly lying, what is to be preferred and how should the preferences be reasoned out? It is a cognitive process that is not purely rational and logical and cannot be free from discretion and cultural bias,166 see also section 4.1.2 below on legal reasoning. As to the burden of proof, Article 20(6) LCIA Rules empowers the tribunal to decide whether or not to apply any strict rules of evidence as to admissibility, relevance or weight of any material tendered on any matter of fact or expert opinion. The International Arbitration Rules of the AAA (Article 20(6)) have a similar rule (Article 22(1)). It leaves little room for a challenge at the seat and none for a review by recognising courts under the NY Convention. All evidence deemed relevant and material by arbitrators will be accepted unless privileged, see also Article 9(1) and (2) of the 1999 IBA Rules on the Taking of Evidence in International Commercial Arbitration. Common sense is here a major guide followed by arbitral reasoning practices. It is submitted throughout that this is now a question of transnational law in which the international arbitral practice will figure large,167 see further also section 4.1.12 below for the reasoning of arbitrators in this regard. It is an issue of preponderance and plausibility. For expert testimony there is the further question of expertise in the tribunal, how they can judge. They can appoint their own expert but that may make things worse: yet another opinion while arbitrators cannot leave the decision to this third party who is not cross-examined. It has already been mentioned that there is a problem with expertise in the tribunal itself; it 166 See Heilbron (n 147). Consistency, predictability and guidance are admitted to remain unavoidably difficult issues. Especially in the assessment of probability and the calculation of damages there is often unidentified reliance on hindsight. Cf further also L Reed, ‘The 2013 Hong Kong International Arbitration Centre Kaplan Lecture – Arbitral Decision-making; Art, Science or Sport?’ (2013) 30 J Int’l Arb 85. 167 Earlier there had been much discussion on whether the rules of evidence were procedural or substantive, the former in the common law, the latter more in the civil law tradition, cf F Schwarz, ‘Systematic Case Management and the Burden of Proof ’, 4th Bergsten Lecture (Vienna, 2016). The upshot was that amongst the traditionalists, the laws of the seat applied in the first characterisation, the law of the contract in the latter one (both subject to other dispositions in the arbitration clause). In a transnationalised scenario of which arbitral custom is the best expression, the issue does not similarly arise as, in either qualification, transnational law and its different sources of law and their hierarchy apply. Substantially, it means a combination of the allocation of the burden of proof and the use of inferences on which the civil law tradition traditionally much relies, see also s 1.4.1 above, and the common law emphasis on document disclosure. It was submitted that it may have much to do with a different approach to the role and importance of facts in the common law system, which international arbitration has largely inherited. The focus of the attention is, however, pragmatic: what serves arbitrators best to be able to determine which party is more plausible in its allegations? No more. One helpline is the balance of probabilities, meaning that some allegations are commonly considered more true or sound than others: fraud is less likely than negligence, deliberate injury less likely than carelessness, what is more serious is less likely than what is serious. It follows that the more improbable, the stronger the evidence must be. International arbitrators have a measure of autonomy in these matters, well established in the Model Law (Art 19(2)), but in the approach of this book subject to transnational law, and further to the other dispositions in the arbitration clause and the submissions of the parties which law, also the applicable transnational law in this regard, is again pleaded as fact. As we have seen, for document disclosure there must be reasonable cause for requests of this nature. Shifting of the burden of proof and inferences are then interconnected facilities. These issues are often confounded in the discussions and in the traditionalist view it may become unclear what law applies. They may start to rely on the international arbitral practice and signal an approximation between common and civil law traditions. In truth, it is then a question of the transnational arbitral customary law subject to any higher due process principles, especially the principle of equality and it has no longer much to do with the lex arbitri of the seat or with the (domestic) laws applicable to the substance of the case. To repeat, characterisations are hardly relevant in this connection. Pragmatism, party autonomy, and due process are the key and are reflected in the transnational customs and practices that have developed in international arbitrations in this regard.

Volume 2: International Commercial Arbitration 99 may lead to de facto sole arbitration and may disturb the balance in the tribunal. There are then also issues with cross-examination or the lack of it. One way to facilitate the decision is to ask the experts presented by the parties to jointly present a report on where they differ and why. Often the best explanation is the simplest, one that arbitrators can understand, but it is clear that in these matters there is an end to rationality and room for subjectivity, countered when there are three arbitrators; there is some protection in numbers and a three-member tribunal may be particularly important in such situations.168 At the end of the cross-examination, the Chair will normally ask the other arbitrators whether they have further questions and may ask some him- or herself. All arbitrators may intervene with questions all the time but it was already repeatedly said that they should not raise new issues or start a new line of thought or argument unless they feel called upon to do so in areas where they have autonomous powers (see section 1.2.5 above), notably and contentiously in issues of public policy or public order, competition issues being the most important example so far. There could also be issues of money laundering, corruption or market abuse, as we have seen, but it has already been said repeatedly that arbitrators must be careful not to complicate things, prolong the proceedings and increase the costs, for example, forcing parties to come up with new expert witnesses unless there are very good reasons to do so. Even then, one must assume that the parties can still dismiss the arbitrators if they do not like it or more likely settle the case. Subsequently, it will be time for the closing statements and also here there will normally be an agreement as to how long they may take. All will be recorded verbatim, and the text will be circulated daily. Often there will also be a possibility for parties to present post-hearing memorials. Arbitrators will set a time frame and they will be delivered simultaneously and there will be no further replies. These texts are likely to be of great help to arbitrators when drafting their award. In the post-hearing memorials, parties sometimes even present a text for a final award as they would like to see it.

1.4.3. The Conduct of Multi-party Arbitrations. Consolidation and Class Arbitrations? The question of joinder was broached in section 1.3.1 above when discussing the parties to an arbitration, but there may also be more than two parties from the beginning, notably when there are more parties to the same contract, all situations therefore of a multi-party arbitration, which 168 In the assessment of damages, the quantum, there may be further confusion between the art of accountants and economists. Their roles are quite different but often poorly understood by arbitrators. Accountancy is technical, concerned with profits and losses in an accounting sense, the difference between revenue and operating expenses. Economists also looks at the opportunity costs. One could also say that accounting is looking backwards to historical figures and their change over time, while economic analysis also discounts the future. It is more concerned with correlations and causality and changes in preferences and a business’s response. To show the difference: if an asset is lost, accountants will assess the loss foremost according to the values shown in the balance sheet. Economist will look at the effect of the loss on the business and its further conduct. Similarly, accountants look primarily at the flows of assets and liabilities compared to last year’s or the last quarter’s record, whatever the veracity of that record. Economic analysis will go behind that record, see what has still meaning in a business context, re-evaluate the figures accordingly, and discount or enhance their importance for the future of the business in the light of its challenges and opportunities. The issue of quantum remains fraught also for other reasons and especially in foreign investment disputes is a matter of reasoning and its adequacy under Article 52(1)(e) of the ICSID Convention, annulment under it being seldom granted, however, on quantum grounds, see also S Mullen and E Whitsitt, ‘Quantum, Annulment and the Requirement to Give Reasons: Analysis and Reform’ (2016) 32 Arb Int’l 59.

100 Volume 2: International Commercial Arbitration raises the issue of what complications may be expected and how these might be handled. In such cases under ICC Rules the Court of the ICC may deal with the matter of appointment of arbitrators and how many there should be. The LCIA Court under its Rules must now do so. Guidance will be that if there is a party arbitration, each party should be able to appoint an arbitrator provided presumably that it does not weigh the total number of arbitrators in favour of one set of parties. The New York Convention is mainly concerned that the composition of the tribunal is in accordance with the agreement of the parties (Article V(1)(d)) and does not elaborate. The French Cour de Cassation in Dutco expressed some public policy concern here as we have seen.169 When there are several contracts with different parties litigating the same issue, it may be convenient and efficient to consolidate. May one interested party freely join or may parties even demand consolidation, for example, involving subcontractors who may otherwise be sued by the contractor in different proceedings but on the same ground, namely faulty materials? The general rule is that consent is required from all in order for anyone to join or to consolidate.170 If there is sufficiently broad appointing power in an appointing authority, at least the same arbitrators could be appointed in each case so as to avoid opposite decisions, but different laws could still apply as to the substance and the applicable arbitrations rules could also be different. International recognition may be further complicated, especially if there was no agreement of the parties to the composition of the tribunal. Class arbitrations should be distinguished. It would seem curious that they could happen but the US Supreme Court proved amenable in the case of a standard form contract under a sole arbitrator and left it to the latter to decide whether there was a class.171 The fact that not each interested party appointed an arbitrator was not considered decisive. It is now not uncommon in standard contracts to see an express exclusion of this form of dispute resolution in the US. The facility is so far limited to domestic arbitrations. It may be of interest in this connection that the transnational arbitration practice in some commodity markets in so-called string arbitrations has allowed the award between the seller and the last buyer to be binding on all intermediaries as to the quality of the product passing through a chain. This may also obtain in maritime arbitrations in the case of sub-charters.

1.4.4. The Award All decisions that are final, meaning dispositive of any disputes between the parties, either of fact or law, procedure or any other made by arbitrators in the course of the arbitration are awards in a technical sense, no matter what they may be called. They may be labelled preliminary, interim or partial, it does not matter, and it cannot characterise them. Thus, decisions on jurisdiction, arbitrability, or admissibility as preliminary issues raised in an arbitration, which is common, may well lead to ‘preliminary’ awards in that sense, but they are all the same dispositive and final and cannot be varied by later decisions, see also the discussion in section 1.3.7 above. There may still be possibilities for review, even sometimes for appeal, although it has already been noted172

169 See also text at n 138 above, and further B Hanotiau, Complex Arbitrations: Multi-contract, Multi-issue and Class Actions (Kluwer Law International, 2005) and ‘Consent to Arbitration: Do we Share a Common Vision’ (2011) 27 Arb Int’l 539. 170 Abu Dabi Gas Liquefication Co Ltd v Eastern Bechtel Co [1982] 2 Lloyd’s Rep 425, cf also s 35 English Arbitration Act 1996. It may also be considered an issue of confidentiality. 171 Green Tree Financial Corp v Bazzle 539 US 444 (2003). 172 See n 6 above and accompanying text.

Volume 2: International Commercial Arbitration 101 that in international arbitrations it may increasingly offend the notion of finality. The essence is that the award itself cannot be reviewed by arbitrators and that the arbitration itself is at an end in respect of the issues covered, except that the applicable rules may still allow for minor corrections of obvious mistakes, notably in calculations. On the other hand, all decisions that are not final, even if called awards, are not such in a legal sense: so the Procedural Order No 1 and its successors and preservation measures do not settle any matters conclusively and are not then awards in the true sense, therefore normally preliminary or interim measures are not so either, even if Article 17(2) Model Law allows the form of an award but it should not confuse and is technical: it was already noted that ICC awards issue from its court, other measures do not and may issue from the tribunal directly. It was already said also that neither the New York Convention nor the Model Law have a definition of awards but it is commonly assumed that finality is the key. The UNCITRAL Rules in Article 32(2) only require the award to be in writing and declare them to be final and binding on the parties (see also Article 26(2) and (8) LCIA Rules (2020)). In terms of formality, the seat must often be mentioned also. The 1998 LCIA in Article 32(2) required (and other Rules may still do so) that the tribunal make every effort to ensure that the award is enforceable but it need not investigate the local laws of countries where enforcement takes place. It was limited to enforceability at the seat in the 2014 LCIA Rules, where it is seldom relevant and asked. If parties are concerned about these issues, they should make it part of their pleadings. Default awards may present special problems. They are not in the nature of default judgments in the ordinary court and, even if a party does not defend, they are normal awards. The problem is due process and proper representation of the interest of the absent party. If there are (some) pleadings this may help. Arbitrators must be satisfied, on the one hand, that they make the proper decision but on the other must not become the advocates of the absent party in the examination of witnesses, although they may well have to become more inquisitive. They may have to be particularly concerned about their own jurisdiction and the arbitrability of the contentious issues. Again, in areas where they have acquired autonomous powers and do not therefore depend solely on the representations of the parties, they may be able to do more.173 There may be consent awards and they are important as parties may reach a settlement but may want it to be issued in the form of an award so as to ensure enforceability under the New York Convention. International arbitrators will normally be co-operative as long as there are no overriding public policy or public order considerations, which parties in this way may seek to circumvent. Article 39 of the UNCITRAL Rules makes clear that arbitrators cannot be forced. The relief that may be asked for and can be given in awards varies widely and may be anything that the parties legally may request, including damages, specific performance, injunctions, (compounded) interest, and costs. In appropriate cases, it may even mean adaptation of contracts in the light of new circumstances if supported by the applicable law, see also the discussion in section 1.2.1 above. There may be a problem with punitive or exemplary damages, which may approximate criminal sanctions. There is likely to be considerable hesitation on this point.174 Specific performance is also unusual because it is messy and hard to enforce, but it is not out of order. Restitutio in integrum is a special form of it and is not uncommon. In respect of costs, the principle in international arbitration is that loser pays all, but that may not cover the management cost and arbitrators are likely to look further at what is reasonable. If the winner brought an

173 The issue of default is probably best discussed in MJ Mustill and SC Boyd, Commercial Arbitration 2nd edn (LexisNexis 1989) 535 ff for domestic arbitrations. The essence is that the claimant must prove his case. 174 It was refused by the House of Lords in British Airways Board v Laker Airways Ltd [1988 AC 58 (HL).

102 Volume 2: International Commercial Arbitration excess of witnesses or unnecessarily prolonged the argument, this will be taken into account. At least in ICSID awards, full costs are seldom allowed; reasons are seldom given.175 Tribunals decide by majority or, if so agreed, the voice of the Chair may be preponderant, still a possibility in older commodity arbitrations as already mentioned. If the majority prevails, it may still happen that there is no majority at all, especially when determining damages. The ICC Rules allow the Chair to decide the issues in that case. That is more generally the practical approach in all matters of procedure. As to quantum, what may happen alternatively is that the arbitrator allowing the higher amount will also be counted for the next lower amount until a majority is reached, see also section 1.1.10 above. Other issues are those of separate, concurrent or dissenting opinions. They are on the whole not encouraged in international arbitration as they may undermine the credibility of the award and may give individual arbitrators an undesirable opportunity to show off or, in the worst case, to show that they are defending the interests of the party having appointed them. Since arbitrators are not there to clarify the law either but only to solve a problem, these opinions cannot serve a purpose in that context either and only unusual circumstances should motivate them. Rather, it is submitted that arbitrators have a duty to strive for unanimity and that a minority should defer to the majority as two, after all, normally know better than one. It is an important rule that the deliberations are secret and cannot be disclosed. There is danger where secretariats of arbitration institutions become involved and arbitrators should keep a proper distance, bureaucracies and similar agents being notorious for leaking like sieves. The issue of reasoning will be dealt with below in section 4.

1.4.5. Effect of the Award, the Notion of Res Judiciata, and the Potential Impact on Third Parties and the Public For this discussion, the res judicata effect of awards and its meaning especially in recognition proceedings, are important issues. It should not be compared and automatically equated with the effect of ordinary judgments,176 where even in respect of recognition and enforcement elsewhere there may be considerable complications.177 Before the ordinary courts, it is clear that res judicata effect follows formally when the appeal period is ended. Substantially the same cause of action cannot then be restarted between the same parties, but the collateral effect may be less clear, even in respect of ordinary judgments. It is possible to distinguish in this connection between the effect on the same parties in another cause

175 K Bondar, ‘Allocation of Costs in Investor-State and Commercial Arbitration: Towards a Harmonised Approach’ (2016) 32 Arb Int’l 45. 176 The problems connected with the international recognition of res judicata have been noted especially in the United States, see AT Von Mehren and DT Trautman, ‘Recognition of Foreign Adjudications’ (1968) 81 Harv L Rev 1601, 1671. One problem is that the res judicata effect in common law countries relates primarily to the factual situation of the case and in civil law countries to the legal issues involved, for which in common law countries the concept of collateral estoppel was developed. 177 Although in the context of foreign recognition of ordinary judgments, the notion of res judicata is often considered a key concept, it cannot be taken entirely in the traditional sense either and is more likely to be referred to by way of a legal presumption. The discretion of the recognising court, the possibility of introducing what could be an incongruous result, and the acceptance of what would be, in effect, the product of two succeeding procedures (the one of the rendering court and the one of the recognising court) militate against the notions of litis finiri oportet and nemo debet bis vexari, res judicata pro veritate habetur, and the equality and integrity of judicial proceedings respectively, all constituting key elements of the traditional doctrine of res judicata.

Volume 2: International Commercial Arbitration 103 of action and on third parties. As to the former, findings of fact in one case may be relevant in another if finally determined in the first, although it would still be necessary to determine when that is so. It could cover also points of law when pleaded as fact. In common law this is often considered an issue of estoppel. Especially in arbitrations, the position of third parties may be more troublesome, notably in proprietary matters and issues of set-off, perhaps more in particular relevant in subsequent bankruptcy of one of the parties. These issues will be discussed more extensively in the context of financial arbitrations in section 2.3.3 below. But the problem might also arise purely contractually, especially in related contracts when it is an issue of privity (see more particularly Volume 3, section 1.5), relevant also with respect to arbitral awards which could themselves be seen as matters of contract law in this aspect. An example may suffice: the price under a supply agreement may be made dependent on that of another concerning semi-finished products. Under such contract, arbitrators have allowed an increase following a dispute. Need the purchaser of the final products accept this finding or can the matter still be re-argued in a second arbitration? Here again, arbitrators may not have the same powers as judges at least when speaking for their own legal regime. Awards are matters of privity between arbitrating parties and effect on others may not be assumed. These are matters with which the ILA’s International Commercial Arbitration Committee has concerned itself since 2004 in its Report and Recommendations on Lis Pendens and Res Judicata and Arbitration, in which connection it indeed notes that the situation should not necessarily be equated with ordinary judgments. It is submitted that it has to do with the powers of arbitrators. If, as must be increasingly assumed, they do not merely derive from the arbitration clause but institutionally rather from the transnational legal order itself, which the arbitration clause only activates, it is easier to see that international arbitrators may acquire powers also in public policy and proprietary matters. This was discussed above in section 1.1.9, where it was further noted that in property matters, they might then operate more and more like equity judges, potentially relevant especially in financial arbitrations as we shall see. It is another matter whether this may also apply to connected agreements—see the supply contract example above.

1.5. The Role of National Courts 1.5.1. Support It was already suggested several times that an international arbitration does not operate in a legal vacuum. Traditionally it was believed that its legal place was the seat and that the latter’s laws encapsulated the arbitration and was the source of the effectiveness of the award even if it was international, therefore also in its extraterritorial effects which was assumed. As a general proposition it was argued above that this is no longer tenable and the delocalisation model was found to be better because at this juncture it simplifies and explains more: see section 1.1.8. In fact, it was noted that it has long been held that at least in matters of procedure, evidence and private international law, including the facility to apply the modern lex mercatoria, the tribunal is free, although in this book this freedom is not unfettered either but subject to the submissions of the parties and always embedded in law, now at the transnational level, subject therefore to the hierarchy of the various autonomous sources of the transnational lex mercatoria that then operates both in procedure and substance, see also section 1.2.1 above. In this view, transnationalisation of the law applies all the more to all areas where international arbitrators have acquired autonomy (under transnational law) and then very much concerns the

104 Volume 2: International Commercial Arbitration legal infrastructure of the entire international arbitration. It was argued that it then also covers the notion of segregation of the arbitration clause and the law applicable to it, including jurisdiction, arbitrability, admissibility and the reasoning of international arbitrators. At least in matters affecting the public interest, international arbitrators might then even be able to raise such issues autonomously and look for transnational minimum standards, ordering further submissions of the parties or appointing their own experts (see sections 1.1.10 and 1.2.5 above), a much more unsettling proposition, it was submitted. International arbitration may, however, still need involvement from local authorities. As we have seen, there are basically three areas where this may be needed and they can be summarised as follows. First there may be a need for support. Preliminary preservation measures are one such situation, see also section 1.3.9 above. Supervision of arbitrators and the award may be another. That is the area of challenges to the award and its annulment, dealt with in the next section. Finally, there is the issue of recognition and enforcement, especially against local assets of a respondent, dealt with in section 1.6 below. To this could be added the support for the arbitration clause in local courts implying their ousting. In the first case, it concerns especially the preservation of assets or evidence, the continuation of supplies, and the compelling of witnesses. It is therefore not limited to support at the seat where parties likely have little activity, having chosen it exactly because of its neutrality. The main issue in terms of support is thus where it is needed and whether the laws of that country will induce its courts or other relevant instances upon request to give it under its own laws and support the arbitration. That has then nothing to do with the laws of the seat unless it is still given a special extraterritorial role here or the relevant national law refers back to that law in matters of support, but it is unusual. In section 1.3.9, it was noted that as far as support is concerned, except in matters of appointment of arbitrators, the seat has little to contribute. Students should not be deceived by the Model Law. Although it refers to the seat directly or indirectly many times and was probably written with that central theme still in mind, it is no more than a model for national arbitration laws. As such it serves (or not) international arbitration in whatever form it may be required but the transnational law in these matters should no longer be considered in a seat-centred way, putting emphasis on the courts of the seat or at least its laws retaining the initiative also in terms of authorisation for whatever support may be required elsewhere. The Model Law is here hardly general principle and representative It is an antiquated notion and if there is a need for centralisation, that function is now more commonly left to the arbitral tribunal under transnational law. It follows that although parties requesting such measures might be out of order under applicable arbitration rules of this nature, in cases of urgency they might have to go directly to the relevant courts or authorities that need to be activated. In fact, it may be preferred, see again the discussion in section 1.3.9 above. The law and courts of the seat are only truly relevant to the extent there is conduct and effect of an international arbitration in the country of the seat or a need for support there, but the same goes for the law of any other country where there may also be such conduct and effect, for support especially relevant in places where assets must be preserved, evidence safeguarded, witnesses called, and activity sustained pending the arbitration. An interesting issue in this connection is the compelling of witnesses. Again, it depends on local support in the residence of these witnesses and its laws as to whether their courts will act and upon whose request. In the US, the issue arose under the Federal Rules of Procedure, which allowed support of this nature for foreign ordinary court proceedings but strictly speaking no others. The US Supreme Court started to make an exception, however, for foreign competition authorities, now commonly extended to international arbitration, where there is this

Volume 2: International Commercial Arbitration 105 public element.178 In the US, a particular feature has more recently arisen. Can discovery in foreign arbitrations also be compelled in this way and would that discovery be US-style or the more limited style in international arbitrations?179 Big winners would be law firms in the case of the first solution, but the efficiency and cost effectiveness of international arbitrations would suffer. To support the latter, a case can be made that a prior order of the arbitral tribunal may then be helpful and significant.180 In Intel,181 the US Supreme Court allowed a degree of flexibility and stated that a District Court is not required to grant a § 1782(a) discovery application simply because it has the authority to do so. Especially where there is a need for a surprise element, see again the discussion in section 1.3.9 above, therefore a need for ex parte facilities, which activating the arbitral tribunal or even more so the court at the seat with its publicity may disturb, direct access to the courts in the relevant countries may be essential and a prior order from the arbitral tribunal could be destructive. Ultimately, it would appear that the accent in terms of support is always on local authorities in countries where it is needed. Direct access may be key but it is not unnatural and even sensible to keep some control and centralise these measures at least so that the arbitral tribunal knows what is going on and what is being asked for in support and where. Again, this centralisation if needed is now more likely to be at in the arbitral tribunal itself, not in the courts of the seat, which proved inefficient and simply introduced yet another complication. The key is to keep the arbitral tribunal at least informed after measures have been requested and taken in the most relevant jurisdictions. The English Arbitration Act of 1996 is of interest in this connection and has already been cited before. It puts the arbitral tribunal at the centre except in cases of emergency or urgency or if the tribunal is not yet constituted, when courts in the relevant countries may be directly accessed by the parties for necessary measures. It should be understood but is not apparent from the text, that the English Act has no automatic control over all of an international arbitration and its incidents wherever but only over conduct and effect of the arbitration in England, no more. As there is no international recognition for support measures issued by the Tribunal under the New York Convention, again, it will ultimately depend on national laws in the place where action is needed whether the tribunal’s instructions or orders will have the required effect or a party may go directly. The Model Law proposes here a special recognition regime in Article 17H and I, which basically copies the conditions of the New York Convention. Significantly, there are no recognition rules under the Model Law for orders of the courts of the seat in this connection demonstrating a lack of relevance. The metaphor of the relay between the Tribunal and the court of the seat in these matters is often still used but it must be asked whether it is still apt in this connection. Even a relay between the Tribunal and the ordinary support courts may not here be to the point.

178 US Supreme Court in Intel Corp v Advanced Micro Devices, Inc, 542 US 214 (2004). 179 US Supreme Court in Servotronics Inc v Rolls-Royce, cert. granted March 22 2021, Supreme Court Dkt. No. 20-794. The relevant reference is 28 US Code § 1782 under which federal district courts may order those who reside in the district to give testimony or produce documents for use in a ‘foreign or international tribunal’. 180 Cf also Claudia T Salomon and Sandra Friedrich, ‘Obtaining and Submitting Evidence In International Arbitration in the United States’ (2013) 24 Am Rev Int’l Arb 549, 586; Neil AF Popović, Jacqueline M Simonovich and Shin Y Hahn, ‘Rolls-Royce Seeks to Resolve Circuit Split on Whether District Courts Can Order Discovery For Use in Private Arbitration’ Nat’l L Rev (23 May 2020), www.natlawreview.com/article/ rolls-royce-seeks-to-resolve-circuit-split-whether-district-courts-can-order. 181 See n 178 above.

106 Volume 2: International Commercial Arbitration Anti-arbitration orders or injunctions in local courts may be seen as the opposite of support and they are not uncommon.182 Must international arbitrators follow suit when their arbitration is forbidden by a local court? It often still concerns the court of the seat. Again, it can only have an effect in the relevant country but not impede the arbitration elsewhere, even if the order came from the courts of the seat. If one of the parties is within that jurisdiction, the arbitration may become truncated but it will not end.183

1.5.2. Supervision and Challenges The essential question in matters of supervision of arbitrators and their award is whether any review is centralised at the seat or whether it is left to the recognition courts. In the first case, we speak of challenges or annulment of the award. Here it is of interest that the New York Convention suggests that such challenges may not be limited to the courts of the seat but that there may be multiple countries where challenges can be mounted, notably also in the courts in the country of the law under which the award was rendered (Section V (1)(e)), which also suggests that parties could appoint another court by choosing another arbitration law. The New York Convention may not be dispositive in this regard as it depends on the laws of each country where challenges may be brought. More importantly, however, even locally annulled awards may still be recognised elsewhere under the Convention, which is a recognition of their international character and the limited extraterritorial reach of the law of the seat and its effects under the Convention. Still annulment may happen and could be in several countries. This being said, under the Convention the final word is now definitely with recognition courts; we should not have two ways of supervision and a potential doubling up. It offends the principles of finality, cost limitation, and speed, and contributes to the undesirable judicialisation of the arbitral process, much criticised in section 1.1.14 above. All the same, there may also be multiple recognition courts but that simply and unavoidably depends on wherever assets can be found. As challenges of the award in local courts remain possible—Belgium at one stage abolished them but later on reintroduced them subject to their possible elimination in the arbitration agreement, which is now also the situation in France and countries like Portugal, see the discussion in section 1.1.8 above, showing it is no longer a public policy issue—it is important to determine what the grounds are; the Model Law uses the same as those in the New York Convention for the refusal of recognition and enforcement. We must then also ask whether such an annulment concerns the validity of the entire award or only its effect in the relevant country, normally the one of the seat. It may be best again to approach this from the point of view of different legal orders operating in parallel. Courts of the seat or any other have no power over the international commercial and financial legal order and its dispute resolution facility or what the French now

182 See also R Garnett, ‘Anti-Arbitration Injunctions: Walking the Tightrope’ (2020) 36 Arb Int’l 347. For the EU, anti-suit injunctions were already mentioned in s 1.3.4 and should be clearly distinguished as they order parties rather to continue the arbitration and avoid local courts, in that sense pushing the opposite ethos favouring the arbitration. 183 The situation may become very complicated and embarrassing. In the saga of Himpurna v Indonesia, TDM 2 (2004), a US Corporation, in a second arbitration against Indonesia in connection with an earlier award the payment under which was guaranteed by the State, was faced with an injunction from the Indonesian courts against continuation. The tribunal ignored the injunction and moved the hearing to The Hague. The Dutch courts did not sustain the injunction and an award was issued. The problem is that arbitrators when they continue may themselves be at risk in the manner of a contempt of court or similar recourse in the country of the injunction.

Volume 2: International Commercial Arbitration 107 call the ‘international arbitral order’, unless it comes onshore. It follows that the effect of annulments of this nature are limited to the international arbitration coming demonstrably onshore in the country of the annulment. That means that an annulment has no (extraterritorial) effect per se in other countries. It was different under the Geneva Convention in respect of an annulment at the seat and it is the legacy of the change in this regard under the New York Convention. Again, annulment wherever does not prevent recognition and enforcement of such an award elsewhere under the New York Convention, although it is usually respected, but especially the use of public policy at the seat which may prove wholly irrelevant to the arbitration and its outcome may suggest otherwise.184 It demonstrates the international character of the awards and their foundation in the transnational legal order rather than in the law of the seat. That was the achievement of the New York Convention when it did do away with the double exequatur of the earlier Geneva Convention which required the award to be given judgment status in the court of the seat first, before it could be recognised elsewhere, emphasising the local character of all awards and arbitrations whilst inviting a double review in which that of the seat was often considered preponderant and extraterritorial. That can no longer be maintained. Some special concerns and issues may be of particular interest. First ordinary courts should not meddle. Such a disposition, especially in the courts of the seat, only gives losers more ideas and sustains a litigation mentality. It takes far too long, often creates extra language problems, and is likely to be followed by appeals; in any event early recognition elsewhere will pre-empt it and requests for annulment do not suspend such recognition requests. Another issue to consider in this connection is that, unless everything goes obviously of the rails, complaints about conduct of arbitrators during the proceedings are better reserved until after the final award is rendered. After all, the nervous or aggrieved party may well win the case and there is nothing served by a stop-go attitude in the arbitration if that was the idea, although it is unlikely that the arbitration will be suspended and injunctions to the effect effective; the arbitration might simply continue elsewhere.

1.6. The New York Convention. International Recognition and Enforcement of the Awards 1.6.1. The Coverage of the New York Convention The New York Convention is usually associated with the international recognition and enforcement of arbitral awards as is also suggested by its title. It is the subject of Articles III–V, but in section 1.3.3 it was already mentioned that in Article II it covers other aspects as well, especially the recognition and international currency of arbitration agreements, which is another key feature.

184 It has been firmly established in case law that a successful challenge at the seat does not pre-empt recognition under the New York Convention, see in France Ste PT Putrabali cited in n 34 above, summarising earlier French case law including Hilmarton Ltd v Omnium de Traitement et de Valorisation (1997) XXII Yearbook of Commercial Arbitration 696, and in the US Chromalloy Aeroservices Ltd v Arab Republic of Egypt 939 F Supp 907 (DDC 1996), repeated in TermoRio SA ESP et al v Electranta SP, et al, 487 F3d 928, 939 (DC Cir 2007) and most recently in Corporación Mexicana de Mantenimiento Integral, S de RL de CV v Pemex-Exploración y Producción, No 10 Civ 206 (AKH), 2013 US Dist LEXIS 121951 (SDNY 27 August 2013).

108 Volume 2: International Commercial Arbitration Article I further defines its scope and possible limitations. In principle, any award that needs recognition or enforcement in other countries than were it is rendered is covered. The issue of what is international and commercial is broached here although in a simple manner (see the discussion in section 1.1.7 above) and there are no substantive criteria. It would appear that the drafters did not want to get involved in whether awards are domestic or international. On the basis of reciprocity, Member States may reserve the facility to awards rendered in Member States and may also limit it to awards arising out of legal relationships that are considered commercial under the law of the Member State making the declaration (Article I.3). Especially in common law countries that might not be so easy to determine. Nevertheless, the US made the declaration. What is notable from the text is also the absence of an interpretation clause. As for all treaties, the Vienna Convention on the Law of Treaties of 1961 applies, notably its Article 31, but it does not mean a great deal and what is in particular absent is a need for uniform interpretation, compare Article 7 of the other (1980) Vienna Convention on the International Sale of Goods (CISG). It means that each Member of the New York Convention and its courts can still go their own way and there is no uniform approach so that different solutions may still be found in domestic courts recognising an arbitration agreement (for example, in the law applicable in that connection to jurisdiction and arbitrability under Article II)) and more particularly in those that recognise and enforce awards. In any event, much remains unsettled and the incorporation statutes in each Member State may shed more light per country. The ratifying state may indicate which local courts are competent, how much of an appeal in these courts is still possible (increasingly limited to only one), and the time frame mostly between one and three years, with the question whether this runs from each (interim and other) award or only from the final award in the arbitration. The Convention remains old-fashioned in so far that all international awards still appear to remain some species of domestic awards in the country of the seat, although Article V (1)(e) does not longer dispositively suggest its foundation in and supervision by the law of the seat, already noted as an important departure from the earlier Geneva Convention, but where the applicable law is invoked, that still appears to be local law, notably that of the seat (Article V (1)(b) and (d)). It reflects the situation in 1958 from when the Convention dates. References to the place and law of the seat remain explicit or may be implied throughout unless reference to another (national) law is made or rules of private international law may be deemed implied, although in respect of Article II in particular where no law is indicated, a transnational approach is conceivable and would depend on the pleadings of the parties, it was already noted also. The delocalisation model dates from later, although, again, under the Convention awards may be recognised and enforced even if successfully challenged at the seat (or in the country under the law of which the award was rendered), see also section 1.5.2 above. This being said, it was shown that localisation at the seat remains also the approach of the Model Law, last amended in 2006 and in the extreme in the LCIA Rules since 2014, see section 1.1.9 above. Indeed, the Convention is old and would appear in need of updating, but, with so many Member States, consensus is difficult to achieve and it has not been attempted.185 It was submitted 185 That is not to say that proposals have not been made, probably the most important ones by AJ van den Berg in his Miami Draft following his 2008 ICCA presentation. He noted that the rate of successful enforcement proceedings was in decline, that Member States courts take an ever more liberal approach to the text and that greater scepsis appear to have set in in recognising courts in respect of the work of international arbitrators. The Draft concentrated more in particular on uniform interpretation, a better definition of international arbitration allowing recognition and enforcement also in the country where an award is rendered, the public policy exception, and the permissive nature of the recognition conditions demonstrated by the word ‘may’ in Art V (1), the latter two potentially leading to very different interpretations. Another issue identified was that under Art V (1)(e), it is

Volume 2: International Commercial Arbitration 109 that the New York Convention, in order to evolve, is best seen as being placed in the context of the transnational lex mercatoria with its different autonomous sources of law, of which treaty law is only one, and it must compete with them, notably fundamental and general principle, the practices developing in international arbitration, and party autonomy (in the arbitration clause, transnationalised, it was submitted, upon separation from the rest of the agreement). This applies also to the evolution of the concept of arbitrability in Articles II and V (2) of the Convention, in the latter Article the notion still being connected to the law of the country recognising or enforcing the award. The notion of public order and its bar to recognition and enforcement of the award should then similarly be considered evolutionary and that has happened in many Member States as further discussed below.

1.6.2. Recognition and Enforcement. Article V of the New York Convention The law depends in its dispute resolution on voluntary compliance with judgments or arbitral awards. Social and economic considerations or fears of adverse publicity or economic retaliation may reinforce this. Unwillingness to comply is often merely tactical in order to get a more favourable settlement. However, this may be, it will be necessary to have a stick somewhere. Police power is the ultimate remedy and must be activated, which can only be done through local courts in the place where assets can be found or other action must be taken, for example when it comes to specific performance. There may result multiple enforcement possibilities in different countries. Article IV of the Convention specifies a simple procedure: an authenticated arbitration clause and award, duly translated, must be presented to the proper court. It is of interest that in respect of international arbitral awards and their recognition and enforcement, the model of ordinary judgment recognition is chosen ever since the Geneva Convention of 1927. There would have been other possibilities, notably simply suing for contract performance on the basis of the award. It was already said in sections 1.1.2 and 1.1.11 above that the judgment analogy derives from older bilateral recognition treaties, notably the Dutch–Belgian one of 1925, which covered both ordinary judgments and arbitral awards and used the same conditions for recognition and enforcement. In this approach, commonly a distinction is now made in treaties between recognition and enforcement of foreign judgments. That is maintained also for arbitral awards and reflected in Article III of the New York Convention even if under it the conditions for either are the same. It remains also the system of the Model Law, but it is very different, for example, in the EU Regulation (Brussels I) on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters, last amended in 2012, under which recognition of judgments is now virtually automatic but not enforcement. It should be realised in this connection that many judgments never need enforcement, such as the ones for defendant, or declaratory or constitutive judgments. Yet they might still require recognition to prevent further action. The distinction between recognition and enforcement here enters the realm of understanding of what is going on. Recognition operates like a defence or shield. It prevents further litigation, especially important if there was an award in favour of respondent, including those concerning a

increasingly considered that a setting aside judgment in the court of the seat must be capable of recognition in the country of the recognising court under the ordinary rules of recognition of foreign judgments before it can at all be considered. Whatever the merits of this approach, it at least cuts down further the force and relevance of such annulments in many countries.

110 Volume 2: International Commercial Arbitration lack of jurisdiction and arbitrability. Enforcement proper is not then the issue. But when enforcement is needed, the award rather acts as a sword and activates police force, especially important, therefore, for a claimant who successfully claimed damages or specific performance. Here prior court involvement and authorisation in the place where action is needed is essential. Again, it should be realised that other decisions, even if in favour of claimant, may not need enforcement for example, decisions that quiet title and other declaratory decisions or those concerning status and capacity. Especially the latter could still affect the validity of the arbitration clause and may require recognition in subsequent proceedings, see Article V(1)(a). Article V defines the impediments to recognition and enforcement of awards in Member States of the Convention. There are some more under the Convention, such as those resulting from the meaning of internationality and those affected by the commerciality reservation and any reciprocity requirement in Article I, already mentioned. Another issue may be that the arbitration clause must have been in writing under Article II (even if the requirement of a writing is not repeated in Article V, and does not apply to the award either). A further, extra-convention, impediment may derive from sovereign immunity claims in respect of foreign states. The essence of the New York Convention is that recognition and enforcement is in principle assumed unless resisted on narrow grounds which never entail an appeal on points of fact or law, procedure or the assessment of evidence, unless they rise to the level of the specific conditions laid down in Article V, which only concentrate on proper composition and jurisdiction of the tribunal, due process, arbitrability, and public order. Moreover, when specific issues like the one concerning jurisdiction or challenges to arbitrators have been dealt with by arbitrators or courts of the ICC or LCIA, there would as a consequence appear even less space left for refusal of recognition or enforcement as it would suggest a form of appeal. Furthermore, the impediments under Article V are never dispositive and allow the recognising and enforcing domestic courts some leeway; they may be, but are not necessarily, a ground for refusal of recognition or enforcement when asked confirming that recognition or enforcement are in essence presumed to be granted. In other words, the language is permissive, not mandatory. In fact, the recognition and enforcement facility is implied and the ground for refusal must be established by the party objecting to it except in matters of arbitrability and in the public policy where recognising courts have autonomy (Article V (2)). They are now commonly narrowly interpreted although not necessarily the same everywhere.186 It has already been said that there is notably no requirement of uniformity in the interpretation. More specifically Article V(1)(a) requires proper capacity of the parties to the arbitration agreement under the laws applicable to them and that the arbitration clause is valid under the law the parties have chosen or otherwise under the law of the seat. For companies it raises the question of ultra vires authority and under which law: that of the formal seat or of their main activity? The issue of capacity proves more particularly relevant in respect of state agencies. Note again the absence of transnationalisation of these concepts (especially important if state entities operate internationally), which would depend on further evolution of the Convention’s interpretation. Invalidity of the arbitration clause may result from lack of intent under applicable law but also because of illegality (like competition issues). Here again transnational minimum standards could become relevant.

186 See AJ van den Berg, The New York Convention of 1958 (The Hague, 1981) 267ff. See more recently especially the International Law Association, Final Report on Public Policy as a Bar to Enforcement of International Arbitral Awards (2002), referred to in n 193 below.

Volume 2: International Commercial Arbitration 111 Article V(1)(b) deals with due process, but only in the form of proper notice of the appointment of arbitrators or of the proceedings and the ability to present the case. More modern law concentrates on equal treatment and a proper hearing.187 They are also the focus of the Model Law. Again, in the context of the lex mercatoria, there may here be further clarification. Article V(1)(c) deals with jurisdiction in terms of the dispute being contemplated or falling within the scope of the arbitration agreement (an issue which might often also be brought under Article V(1)(a) in the sense that there is no valid arbitration agreement covering the dispute). It was already said that it is important especially where arbitrators are tempted to start a new line of reasoning that was never in dispute between the parties. It was also already noted that if arbitrators have disposed of the issue of jurisdiction, there is less room for review in the recognition court. Article V (1)(c) is not an appeal facility. Article V(1)(d) deals with the proper composition of the tribunal pursuant to the arbitration agreement and institutional rules incorporated therein or otherwise still the lex arbitri of the seat. One may assume that issues of independence and impartiality and other matters of conduct of arbitrators may also be covered under this section. In all of these issues, there is a question as to what extent they should have been raised during the proceedings before the arbitrators when the impediments became known and the issue of acceptance, directly or indirectly, may enter into the discretion of the recognising or enforcing domestic courts.188 If the court of the ICC or LCIA or under the UNCITRAL Rules the other arbitrators have duly dealt with the issues, there is less room for review, again there is no appeal function under the Convention. Article V(1)(e) finally allows domestic courts to refuse recognition or enforcement on the basis that the award was successfully challenged at the seat or in the country under the law of which the award was made. Although the latter part may be unclear, the importance of this language is that there might be multiple places for challenges under the Convention and that they are not limited to the courts of the formal seat of the arbitration and its central position is denied, see also the discussion in section 1.5.2 above. Again, refusal of recognition and recognition is not automatic as it was under the Geneva Convention and annulment even at the seat has no extraterritorial effect per se. The conditions outlined under Article V (1) are presented by the party against whom the award is invoked wishing to contest its recognition or enforcement. In Article V (2), there are two more conditions which may also be invoked by the recognising or enforcing domestic courts at their own initiative. They concern the questions of arbitrability and public order, both to be determined according to the law of the country where the recognition or enforcement are being sought. Note here again the absence of a more transnational approach, hardly surprising in a Convention dating from 1958. Again, it will have to come from the evolution of its interpretation within the modern lex mercatoria and its other competing sources of law. Indeed, the concept of arbitrability has been substantially broadened in the international arbitration practice following Mitsubishi in the US and Eco Suisse in the ECJ,189 accepted in many member States and many of them now also operate a kind of international public policy concept that is a lesser bar to

187 The term ‘hearing’ is not used. It may be relevant as in Germany in particular there is an attitude that a proper hearing means that arbitrators review all documents presented in the case rather than those to which they are guided by the parties during the hearing, see also n 11 above. 188 This issue may also arise when a losing party starts ordinary court proceedings arguing that the arbitration agreement on which this party relied in the arbitration was always invalid. This could become an issue under Art II. 189 See for these cases n 106 above. See further the comment at n 186 above. See also B Orawiec, ‘The Public Policy Exception under the New York Convention on the Recognition and Enforcement of Arbitral Awards (The UK Perspective)’ (2016) 21 Comparative Law Rev 54.

112 Volume 2: International Commercial Arbitration recognition and enforcement. Especially the courts in the US eschew parochial tendencies and have a strong pro-enforcement bias.190 Yet public policy is by no means a uniform (transnational) standard) even if recognising courts in Member States increasingly refer to ‘international’ public order; as we have seen, every country still practices its own notion of arbitrability also (not all follow the American and European example). The French Supreme Court in Dutco overruled the decision of the Court of Appeal denying recognition of an award on the ground that the principle of equality was violated. French courts in more recent cases hold that the awards may be refused recognition and enforcement only if the breach of public policy is ‘flagrant, effective and concrete’.191 The Highest Arbitration Court of the Russian Federation has often referred to public policy as constituting ‘universally recognized moral and ethical rules’.192 It would appear that the breach of public policy must increasingly be manifest, also now the criterion in the EU Regulation in respect of the recognition and enforcement of civil and commercial judgments in the EU. To repeat, uniform interpretation is not an aim of the Convention and there may remain substantial differences. This being said, countries that are part of globalisation and want its benefits will be harder pushed to deny international arbitral awards recognition and enforcement on purely domestic grounds. The International Law Association (ILA) has tried to help with more uniform definitions of public policy and emphasises exceptional considerations for refusal under this heading,193 see further also the discussion on public policy in sections 1.2.3–1.2.5 above. A special issue may be recognition in bankruptcy situations of international arbitral awards, for example in their approach to set-off and other preferences, if they offend the domestic bankruptcy order in recognising countries. This will be discussed more extensively in section 2.3.3 below. Here again one may see that countries seeking to benefit from international finance may increasingly have to accept the impact and operation of products common in that world, therefore also in local bankruptcies, and may then recognise relevant arbitral awards accordingly.

190 Sonatrach (Algeria) v Distrigas Corp 1995 (US District Court Mass), XX Yearbook of Commercial Arbitration 1995, 795. See for Switzerland KS AG v CC SA, XX Yearbook of Commercial Arbitration 1995, 762 and for case law in Germany XII Yearbook of Commercial Arbitration 1987, 489. In Koehler v Bank of Bermuda Ltd 12 NY 3d 533 (2009), this pro-arbitration bias went as far as to motivate the New York Court of Appeals to extend recovery from the losing party (a foreign bank) to its assets abroad (outside the US) as a consequence of personal jurisdiction over the defendant in New York, now limited, however by the US Supreme Court in Daimler AG v Bauman 134 S Ct 746 (2014), which found a minimal direct presence in the US insufficient. Being at home in New York or conducting a substantial proportion of business there would now appear to be the minimum threshold to reach foreign assets through recognition of an award in the US. 191 Paris Court of Appeal, SA Thales Air Defense v GIE Euromissile, 18 November 2004. 192 Ansell S.A. v OOO MedBusinessService-2000, Highest Arbitration Court, Russian Federation, Ruling No. VAS8786/10, 3 August 2010. 193 ILA Committee on International Commercial Arbitration, Final Report on Public Policy, Transnational Dispute Management, vol 1, issue 1 (2002). In its Recommendation 2(b) it is stated: ‘In order to determine whether a principle forming part of its legal system must be considered sufficiently fundamental to justify a refusal to recognise or enforce an award, a court should take into account, on the one hand, the international nature of the case and its connection with the legal system of the forum, and, on the other hand, the existence or otherwise of a consensus within the international community as regards the principle under consideration (international conventions may evidence the existence of such consensus). When said consensus exists, the term ‘transnational public policy’ may be used to describe such norm’. Note that this may go further than domestic notions of ‘international public order’ increasing the bar to international recognition and enforcement of awards. Justice Stephen Breyer, The Court and the World 195 (Clearing House 2015), suggests that courts may thus look beyond their borders, even though confirmation by the US Supreme Court is still awaited. It is the vexed area of international minimum standards. Cf also Sneha Mohanty, ‘International Commercial Arbitration in the Light of Public Policy: One Step Forward Two Steps Back?’ (2020) II Corpus Iuris LJ 182, 190.

Volume 2: International Commercial Arbitration 113 At the local level, depending on the incorporation statute into local law, it may still be problematic whether bankruptcy judges can directly deal with these issues or whether a specially appointed court must be activated for recognition and enforcement, which may imply some double or competitive review when it comes to fitting in the award into the local bankruptcy order. Another issue already mentioned also may arise locally when under the incorporation statute a time limit is set for recognition and enforcement, often three years. Does it start from the time of each type of award or from the final (last) award? It may create problems when, for example, the arbitration jurisdiction issue is early settled in favour of arbitration. The other party cannot object to recognition as it is unlikely to be requested by the successful party at that time and when recognition of the final award is sought it might be too late to object to the earlier award on jurisdiction, whose recognition is then assumed. It was suggested that the emergence of an international court may be useful also to give here judicial guidance and create uniformity in the application of the Convention, see for such a court also sections 1.1.12 and 1.5.2 above and 2.4.2 below.

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Part II International Financial Arbitration 2.1. Introduction194 2.1.1. Special Problems in International Financial Arbitrations One of the first things to remember when discussing international financial disputes and arbitration is that modern financial products such as loans secured by commercial and related cash flows, particularly in floating charges, or supported by other forms of asset backing as in finance sales (like finance leases and receivable financing) have encountered problems integrating into the law wherever, including therefore domestically, both in the contractual and proprietary aspects. So have many hedging instruments such as futures, options and swaps and others to manage risk, like securitisations and credit default swaps, and the way these products are traded or unwound. This unavoidably complicates the application of any domestic laws under traditional conflicts of laws rules and theories for those who still believe that in international finance the application of national laws rather than transnational principle and practice is still the answer to the applicable law in complex international situations. Commonly, problems arise here in the obligatory and more especially in the proprietary aspects of financial products operating transnationally when it affects their transfer, payment finality, and liquidity. Options, futures and swaps are contractual and it may be even more difficult to transfer or unwind them without consent of the counterparty. Other problems may arise in the primary and secondary activities in the capital markets, the Euromarkets and their operations transnationally now being the more important concern. In investment security entitlements, we must then also decide whether the claims against one’s custodian are contractual or proprietary or something in between or beyond? The legal status of stock lending, and even of repos, may also remain troubled,195 and similarly the status of client accounts. Do clients own them or do they have only a contractual claim? That reduces them to the lowest rank in a distribution upon bankruptcy of the formal account holder. More generally there may be problems with constructive or resulting trusts, especially with the notion, manner and effectiveness of segregation of client assets. One may further ask whether credit default swaps are credit risk management instruments, under which risk is commoditised and seemingly transferable or tradable, or are they legally merely contractual guarantees?

194 See for a shortened version of the following text, Jan H Dalhuisen, ‘The Applicable Law in International Financial Disputes’ in J Golden and Carolyn Lamm (eds), International Financial Disputes, Arbitration and Mediations (Oxford, 2015) 169. 195 See for a discussion of these financial products and risk management tools, Vol 5.

116 Volume 2: International Financial Arbitration The extent of the set-off and contractual netting facilities are also often less than clear. They have become other major risk management tools and result in strong preferences in a bankruptcy liquidation. In many jurisdictions, there are also problems with the law of assignment, including the easy separation of monetary claims from the contract or other relationship out of which they arise. Their transfer in bulk is another key issue. Transnationally it will be argued, they are increasingly operating as if they were like promissory notes. But that may be hard to place under domestic laws and they still depend for their effectiveness on acceptance by the competent bankruptcy courts which like all enforcement agencies remain in essence domestic. Conditional or finance sales as alternatives to secured transactions are also often poorly understood, which affects notably finance leasing and repo financing activity. Again, local bankruptcy courts may not be accommodating, although when an arbitral award to the effect is protected by and needs recognition under the New York Convention, they may have to rethink in terms of its public policy bar and its application, a facility which judgments of ordinary courts normally miss in international enforcement in the absence of treaty law. The result is that modern finance is legally often poorly embedded and the (domestic) laws deemed applicable, whichever they may be, might hardly give an answer or may in any event leave considerable doubt and may be parochial or atavistic. That may even go for the most sophisticated domestic jurisdictions such as those of England and New York. Although these are issues of substantive law, often difficult therefore to deal with even locally, they may cast international financial arbitration in a special light as potentially it may deal differently with them when properly so pleaded by one of the parties. Whatever the powers of international arbitrators may be, what are they whilst dealing with these unsettled issues? Are they a kind of equity judges196 and can they rule in a manner that may affect outsiders, being all those not party to the arbitration, notably common or other creditors, when arbitrators decide who owns a property, what the security interests in it are, their rank, or whether there is a(n extended) preference through the application of set-off and netting arrangements agreed between the parties? The stress this unavoidably creates in international arbitrations and the effect on its credibility and legitimacy was already highlighted in section 1.1.14 above. Is arbitration here still a proper forum? Traditionally banks eschew arbitration for this reason. There may also added problems with awards in bankruptcy when the public policy bar may acquire special and added importance, it was already mentioned in the previous section. The second thing to remember is that finance is heavily regulated.197 This means that financial service providers, especially banks,198 beyond concern about their role in the payment system, will need a licence for much of their money recycling activity, notably in terms of their deposittaking function when directed towards the general public and their lending activity.199 This is now also true for many activities of the intermediaries in the recycling of money through the capital markets, notably investment banks or similar institutions in their different functions such

196 See n 76 above. 197 Vol 5 is devoted to this subject. 198 The operation of non-banks or of the shadow banking system remains largely outside the present discussion. They are hard to define and it remains unclear how far they will or can be incorporated in the financial regulatory system. 199 Issues of financial regulation and the public interest are here clearly distinguished from issues of liquidity and monetary policy, although obviously accommodating monetary policy may have an effect upon the stability of the banking system, as may liquidity policy. This is problematic where central banks are in charge of both banking and monetary policies and also exercise a major role in effectuating financial stability. These overlapping powers and the way this may impact on the financial system are not further discussed here either, but see Vol 6, s 1.1.6.

Volume 2: International Financial Arbitration 117 as their underwriting, market making, brokerage or investment management activities.200 Even issuers are now commonly subject to a form of authorisation when accessing the capital market and will have to produce a prospectus. There is also the role of official markets or over the counter markets (OTCs), Multilateral Trading Facilities (MTFs), other Alternative Trading Systems (ATSs), or Central Counterparties (CCPs) to consider, which may require some licensing as well and their activities and forms of trading may be subject to at least some supervision, common in the pre- and post-trade price reporting functions as we shall see. This is foremost the area of administrative law but the public concern is also likely to extend to conduct of business and product supervision where there may be direct public intervention in private law formation and its remedies, thus reinforcing private law protection between participants such as brokers and their clients, which may then become another issue in international arbitrations, but probably easier to handle. This may happen especially where weaker parties become involved, notably as investors needing (private law) protection against these intermediaries, in particular in terms of damages for losses or the annulment of inadvertent investments, in common law countries often under reinforced fiduciary duties.201 Here again domestic courts may take a different position as courts and arbitrations may face different challenges, although the administrative law aspects of regulation are less likely to rise to the level of arbitration, if only because regulators may not want to submit to it in the case of disputes. However, it should also be appreciated that, laterally (and more contentiously), the authorisation conditions and limitation concerning intermediaries may sometimes still have an (horizontal) effect in private law202 and hence in appropriate cases on the intermediaries’ liability 200 There are for these activities or functions commonly (a) a licence or authorisation requirement with conditions in terms of (i) ‘fit and proper’ tests of management, (ii) minimum capital standards of the institution, (iii) adequate systems, and (iv) a clear business plan (which serves as basis for the other conditions), (b) prudential supervision making sure that these conditions remain complied with, (c) conduct of business rules, and (d) supervision of the products (that these work), the latter two especially (but not only) important in respect of retail customers or investors. In authorisation and prudential supervision, we are foremost in the area of administrative law. In commercial banking, this remains the main focus of regulation. In the capital markets, the emphasis was traditionally more on conduct of business and product supervision than on licensing and prudential supervision, particularly in brokerage services, therefore more on private law than administrative law remedies even if this may be changing—before 2008 investment banking was mostly considered less risky and less of a threat to financial stability; at least there were no depositors to protect and investment banks were supposed to segregate client assets and could not take their moneys as deposits. On the other hand, conduct of business is now becoming more important for commercial banks; how mortgages were sold in periods of euphoria has thus become a major issue. See further the discussion in Vol 6, s 1.1. 201 In terms of conduct of business, reinforcement of fiduciary duties springs to mind first and foremost and commonly supplements the law of brokerage and investment advice or management, especially for retail investors in common law countries, supplemented by contract or negligence remedies. For brokerage activity, concepts such as ‘best execution’, ‘know your customer’ and ‘suitability of the investment’ may be mentioned. One may still call this reinforcement or private recourse against intermediaries a form of regulation, although regulation is more commonly associated with direct instructions to intermediaries, therefore with the licensing requirement and prudential supervision but the public interest also speaks through the reinforcement of private law remedies. Conduct of business concerns now increasingly also arise in commercial banking. Here it is not so much the protection of the depositors, who may benefit from deposit guarantee schemes, but rather those who take out loans. Again, the (mis)selling of mortgages to them has given rise to major claims. As far as the soundness of the products offered is concerned, one may think of concern about (electronic) payments in banks and the creation and transfer of investment securities entitlements by securities brokers. 202 It is generally understood that the licence requirements for these activities or functions and the prudential supervision that follows are not geared to the protection of depositors and investors directly, who are primarily protected through deposit guarantee and investor protection schemes. Rather they concern the stability of the system or systemic risk. Increasingly macro-prudential supervision is here superimposed over the more traditional micro-prudential supervisions; this is pure policy for which legal recourse is often missing, see Vol 6, s 1.1, but cf for the horizontal or indirect effect, also Vol 6, s 3.7.19.

118 Volume 2: International Financial Arbitration towards their clients, thus potentially resulting in extra-contractual civil liability against perpetrators of the licence conditions. So might deficient regulators themselves. Prospectus liability may be seen as an important example of the horizontal (private law) effect of administrative conditions and licences: there are other examples, but they are relatively rare.203 There could even be the question of civil liability of regulators,204 although there is so far less support and regulators generally continue to benefit from a form of immunity. Again, regulators are less likely to submit to arbitration in this aspect also. More important may be the civil effects of any intervening bankruptcy of an intermediary, which in truth may be seen as a special form of regulation in situations of (approaching) insolvency, as will be discussed later (in section 2.3.3).

2.1.2. Special Arbitration Needs in International Finance. The Powers of Arbitrators and the Status of Contractual Choice of Law Clauses It is probably true that in international financial disputes there is an increasing need for arbitration as there earlier was in purely commercial disputes; efficiency, sensibility and rationality may sustain it and the conscience and knowledge of international arbitrators may also contribute. This is borne out by recent changes in the ISDA Master Agreements (see for these Agreements section 2.2.2 below and Volume 3, section 3.2.5) allowing for arbitration. The applicable law issue may itself demand a different approach in terms of greater flexibility and sensitivity to transnational trends; it has already been noted in this connection that international arbitrators may have more room for manoeuvre in this regard than ordinary courts upon proper pleading by at least one party to the dispute.205 It may be that in a globalised environment, rationality and efficiency may acquire a special meaning in finance as they imply responsiveness to newer needs on a different and more specialised scale. Informed international arbitrators may also be more concerned than local courts with the promotion of the commercial flows, liquidity and better risk management at that level, but finance is policy heavy, the reason why an expansive view of arbitrators’ powers and their role generally may remain here more controversial and the call for greater supervision of them (not appeal) more urgent; this was already mentioned in section 1.1.10 above, amplified in sections 1.1.14 and 1.2.5 above and will be discussed in greater detail later. These then are in a nutshell the challenges in terms of the applicable law in international financial transactions and of the role of international arbitrators in this area. The issues are thus

203 See under recent EU Directives, the liability of rating agencies for their ratings, Vol 6, s 3.7.13. 204 The House of Lords in Three Rivers District Council and Others v Governor and Company of the Bank of England [2000] 2 WLR 1220 seemed less concerned with depositors but accepted—absent bad faith—the prevailing statutory restrictions on liability for banking supervisors as an adequate defence, in the UK more extensively interpreted than elsewhere, eg in France, where administrative courts now accept in this connection faute simple as sufficient ground for civil liability, therefore leaving more room for depositors’ protection; see also Cour Administrative d’Appel de Paris, 30 March 1999. In Three Rivers, even reasonable policy objectives and considerations connected with systemic risk or the smooth operation of the financial system did not seem to figure large. They were in any event not weighed against the statutory requirements of depositors’ protection as laid down in s 3 of the UK Banking Act 1987. It was assumed that the EU First Banking Directive of 1977 (77/780/EEC), now largely superseded by the Credit Institution Directives of 2000, 2006 and 2014 (CRD4), even though clearly concerned with depositors, did not give depositors extra rights in this connection. No guidance from the European Court of Justice was sought; see further M Andenas, ‘Liability for Supervision’ [2000] Euredia 379. Protection of regulators appeared here an objective in itself, although not everywhere as broadly interpreted as in the UK. 205 See Deutsche Schachtbau- und Tiefbohrgesellschaft cited in nn 51 and 94 above.

Volume 2: International Financial Arbitration 119 less procedural but more substantive, the way the arbitration is conducted is not essentially different from ordinary commercial arbitrations. Rather, we are concerned primarily with the private law recourse against counterparties, for professionals and consumers alike (although likely to be different) and therefore their protection in a private law sense. This private law recourse therefore, and how it may be handled in international arbitrations, will be the main subject of this part of the discussion, especially in the area of conduct of business, rather than from the point of view of financial stability raising more in particular administrative law issues in terms of licensing requirements and prudential supervision, except for any horizontal (or private law) effect.206 But issues of market integrity, conduct and abuse, insider dealing, and money laundering or other forms of corruption may also need consideration. They commonly form the third prong of financial regulation after issues of financial stability and conduct of business. When it comes to international financial arbitration, we must then especially consider how far issues when touching on the public interest or rights of third parties are still arbitrable and may even be raised by arbitrators themselves. Again, these issues are closely connected with the question of the powers of international financial arbitrators and the foundation of these powers in a globalised legal order and it raises important issues concerning the operation of the arbitration itself (see sections 1.1.10 and 1.1.14 above). This then also concerns the determination of proprietary issues affecting third parries’ not signatories to the arbitration agreement. The basis remains that arbitrators are only there to resolve disputes as defined by the parties in which connection both facts and the, in their view, applicable laws must be pleaded: see section 1.1.3 above. It was already said that only in limited areas have international arbitrators obtained original power notably in procedure and evidence matters (assuming the parties are not in agreement as to how to proceed), the determination of their jurisdiction, arbitrability of the issues, admissibility, and their way of reasoning. In public policy and order matters they may also be acquiring an own function, for example in competition issues and market abuse, as was the main subject of discussion above in section 1.2.5. Yet, it remains controversial although increasingly supported, but it has turned in a credibility issue, especially in foreign investment arbitration, see further the discussion in section 1.1.14 above. It also poses the question whether international arbitrators in pressing cases are empowered to consider or even raise issues of justice, social peace and efficiency as overriding considerations. As we have seen, perhaps they now also have equitable power in proprietary matters and issues of set-off, and may have other equitable powers of relief, which may even suggest a more activist role in the proceedings, although these powers also remain exceptional and controversial as they affect third parties, not party to the arbitration. It thus needs to be considered whether—if we may indeed assume that finance is now largely an international activity and at least in structure, services and products on offer gravitates towards a universal model—this makes international finance all the more conducive to strong forms of (spontaneous) legal transnationalisation, especially in the applicable private law between professional participants. That poses the issue of the development and application of the substantive modern lex mercatoria in this area and the issue of delocalisation, the operation of the transnational commercial and financial legal order, the representation of the public interest in this order, and the powers of arbitrators to raise legal issues independently notably when the public interest becomes engaged in the international marketplace, especially in situations of market abuse, money laundering and corruption. Are they spokespersons for the public interest in such situations? See sections 1.1.10 and 1.2.5 above. Do they have power to determine proprietary issues and matters of ranking or priority amongst creditors not party to the arbitration? It was noted 206 See the discussion at n 202 above.

120 Volume 2: International Financial Arbitration that the development of the Eurobond and the financial practices in that market were an early demonstration of legal transnationalisation. The international swap market followed under the ISDA Master Agreements. It should be realised in this connection that the Eurobond market is the largest capital market in the world and the swap market the largest market of all,207 see further also Volume 1, sections 3.2.3 and 3.2.5 above. Yet especially the issue of the public interest and that of all interventions affecting the public and third parties remains an important and contested issue in terms of arbitral power and authority. Delocalisation of international financial arbitration and legal transnationalisation then become major connected issues already discussed more generally in sections 1.1.8ff above but may find in principle an easier acceptance in international arbitrations. Again, these are important trends, especially in countries that will accept further globalisation as a means for renewed energy and growth, and they are the real trade-off, even in the formulation of international minimum standards, potentially also as public order correction of the modern lex mercatoria. It was already said repeatedly that the international marketplace needs balancing if only to preserve its integrity and credibility and that that is the major challenge in legal transnationalisation. Importantly for our subject, this might also affect the nature of international dispute resolution, especially at the level of international arbitration, perhaps even more so in finance, which is the reason why it may increasingly have to be considered separately from other commercial arbitrations, an idea probably also behind the creation of P.R.I.M.E. (Panel of Recognised International Market Experts in Finance) in The Hague (see section 2.5 below). This may be reinforced by the wholly different spectre of an insolvency of a financial counterparty, which, besides liquidity, counterparty and market risk, directs much of the thinking of financiers and may then also be more specifically relevant in financial dispute resolution. When an insolvency intervenes, it may be assumed that this creates a potentially different environment, which may have a considerable effect on the applicable law and remedies. One may think of the attachment of assets, the ranking of security interests, and the extent of set-off and impact of netting clauses in swaps and repo transactions. This may also affect international arbitration, although the question remains how and that needs to be considered further and is the particular challenge of this part of the discussion., see further section 2.3.3 below. At this stage it may be observed that like regulatory law, insolvency including liquidation or reorganisation proceedings remains as a starting point typically domestic, although their international reach has been extended in the EU through a procedure of mutual recognition under the Insolvency Regulation and unilaterally elsewhere under variations of the UNCITRAL Model Law, adopted notably in the US and the UK. So far there is no such thing as an international bankruptcy regime and bankruptcy remains as such in principle territorial, effective especially in respect of any conduct and effect of an international transaction in the territory of the bankruptcy (but not necessarily in others unless there is international recognition under the instruments just mentioned or under local case law), therefore that of the bankruptcy court.208 Other courts in the country of the bankruptcy will commonly submit and defer to their bankruptcy courts, but courts elsewhere and especially international arbitrators may not, although they can often not ignore the existence of such a bankruptcy either and they might have to consider or even define 207 See for the size of these markets Vol 1, nn 1 and 26. 208 An excursion into the nature of bankruptcy is avoided here. It is still often seen as a matter of private law because that was where it was traditionally embedded (in commercial law) when regulation did not have its modern status and effect. Even though it may still admit of much party autonomy, there can hardly be any doubt that bankruptcy is basically a regulatory matter, even clearer in modern reorganisation proceedings when also cutting down the rights of secured creditors.

Volume 2: International Financial Arbitration 121 their (anticipated) impact when this becomes an issue between the parties in dispute resolution. This may affect first and foremost any proof of claims for which there is usually a summary procedure in the bankruptcy court even in respect of foreign claims against the bankrupt whether or not in litigation. It may also impact on the powers of international arbitrators with regard to any set-off of claims—see more particularly section 2.3.3 below. It may be repeated in this connection that arbitral awards cannot in the traditional approach affect parties who are not party to the arbitration,209 which may especially concern matters of ranking of security interests and issues of set-off. It is of particular interest and more obvious when a bankruptcy is pending. Such an arbitration would not appear to be able to upset the bankruptcy order in the country of the bankrupt, and may then even raise issues of recognition under the New York Convention in that country, bankruptcy courts being courts of special jurisdiction which may have their own public policy reasons to ignore foreign arbitral awards—it is another problematic issue. It may then concern all proprietary issues involving assets, especially relevant in asset-backed funding including finance sales and related trust or other structures when becoming embroiled in a domestic insolvency, unless again we assume that international financial arbitrators have institutional power to decide these issues, which invariably affect third parties not party to the arbitration and in that sense potentially the whole bankruptcy. This becomes another key issue,210 likely, it is submitted, increasingly to redefine the consequences of (domestic) insolvency through international financial arbitrations.211 Local insolvency regimes

209 See again for the danger to the credibility of international arbitration in this area, s 1.1.4 above. The US Supreme Court in allowing arbitrators to decide class actions, Green Tree Financial Corp v Bazzle 539 US 444 (2003), made an important exception, which shows that this rule may no longer be considered absolute; see also s 1.4.3 above. It may also be noted that where arbitrators interpret standard terms, such as the ISDA Master Agreement, it may also affect others. 210 It was earlier identified and discussed in terms of the equitable powers of international arbitrators, see Dalhuisen (n 27) and accompanying text. It was posited in this connection that ever since Roman law—the praetorian law or ius honorarium—this extra facility has proved to be a necessary institutional prerequisite for the adequate operation of private law, especially in order to prevent it from stultifying and to underpin private law’s dynamic character. Ordinary courts may not be able to take this on, never mind how liberal they may be in their interpretation technique, and legislators cannot adequately handle it—it would require a continuous process of updating, which is beyond their purview. Civil law has always been handicapped by the absence of this facility and it may explain why the greatest differences with common law are exactly in equity and its products and facilities (floating charges, finance sales, trusts, assignment and set-off, agency, fiduciary duties, and the like). At the level of transnationalisation, there is in any event no formal legislator and international arbitrators must take over. They become like equity judges. Again, this is an institutional issue in the transnational commercial and financial legal order itself and is accepted only because the public at large is protected. These specialised interests and facilities only operate between professional insiders who are aware of them and have an investigation duty. Again, international arbitrators may be better able to deal with them given these limitations. 211 Note in this connection the Australian (Victoria) cases in IATA v Ansett [2005] VSC 113, [2006] VSCA 242, and [2008] HCA38, in which the Australian High Court ultimately accepted that, at least in a non-financial CCP (central counterparty) in respect of mutual airline claims resulting from passenger cancellations and ticket changes, the transnational form of clearing and settlement and set-off trumped the Australian bankruptcy laws. This was an important precedent, see further C Chamorro-Courtland, ‘The Legal Aspects of Non-Financial Market Central Counter Parties’ (2012) 27(4) Banking and Finance Law Review, and an advance notably on British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390 in England. In the meantime, international bankruptcy principles are developing and are being written down. See IMF, Orderly & Effective Insolvency Procedures (1999) and World Bank, Principles and Guidelines for Effective Insolvency and Creditors Rights Systems, May 2001, available at www.worldbank.org/ifa/ipg_eng.pdf. For another compilation, see also WW McBryde, Axel Flessner and SCJ Kortmann (eds), Principles of European Insolvency Law (Deventer, 2003). Their usefulness is limited if they do not manage to deal with the very concepts of proprietary or priority/separation or segregation rights, and their operation and acceptance in the international sphere. The same applies to the modern set-off and netting facilities.

122 Volume 2: International Financial Arbitration would thus appear to be increasingly under pressure as a consequence on the internationalisation of the commercial and financial flows. A choice of (a domestic) law by the parties may not have much effect or meaning in these circumstances as these issues are not at their free disposition. On the other hand, in a delocalised environment, it may no longer be impossible for international arbitrators to assume greater powers regardless, although it is a big step. Again, it could give international arbitrators in international finance (some) power over domestic bankruptcy courts while relying on transnational market practices or customs among all market participants as part of the modern lex mercatoria, which could then even be mandatory as property law normally is given its effect on third parties. That could also affect issues of segregation and set-off or netting. Local bankruptcy courts would thus increasingly have to accept that if such structures operate in the transnational legal order and are accepted in awards, they can no longer be ignored unless there are still strong overriding public policy or order issues against it in the transnational legal order itself or domestic values are still so overriding that they must continue to be respected. It is a matter of application of the New York Convention but these considerations may be dwindling at least if in other respects the country of the bankruptcy wanted the benefits of globalisation for its citizens and companies. It was said before that this is not a one- way street. It follows that when we talk of the applicable law in international financial arbitrations, the scene is varied, product wise, regulatory wise, bankruptcy wise, and national/transnational wise, different probably for international arbitrators and more so in finance. For the purposes of this discussion, we shall have to introduce some framework to make it manageable and informative. To this end it may be best to choose six building blocks of private law in international finance (in no particular order), showing both the private international law and transnational approaches, and, where useful, the Draft Common Frame of Reference (DCFR) approach, which at one time sought unification through codification at EU level, supplanting at the same time the modern lex mercatoria approach for that area, whether that makes sense or not, see further Volume 1, section 1.4.21 above. These building blocks are more extensively discussed in Volume 5 and are summarised here to the extent necessary. The chosen building blocks are (i) assignments, (ii) set-off/netting, (iii) secured transactions/ finance sales and related trust structures, (iv) the use of book entry systems for investment securities, (v) segregation, and (vi) the issue of transactional and payment finality.212 The transnational approach will in each instance be compared with the traditional private international law approach, which still insists on the application of domestic laws. The discussion of these various topics subsequently will come together in the question of how we might transfer an international commercial and related cash-flow and rank proprietary interest holders transnationally for asset-backed financing. It is a key question in this connection whether the international flows themselves can now be given legal status, which was the thesis in this book all along. Thereafter it will be the turn of regulation/competition/bankruptcy issues, the jurisdiction to prescribe to the extent regulatory issues can arise in international arbitrations, and then also international minimum standards. This discussion will end with a few remarks on the selection and abilities of international financial arbitrators to take on these various tasks, on the issue of the appearance of their independence and impartiality, and the need for accountability and transparency. This again raises the important issue of their powers and supervision (not appeal),213 probably of greater importance for financial arbitrators as indeed it may be even more so for foreign

212 Much of the research may be found in Vol 5. 213 Dalhuisen (n 64).

Volume 2: International Financial Arbitration 123 investment arbitrators as we shall see, affecting third parties or the public at large. In international finance, many of the issues are proprietary and affect third parties not involved in the arbitration. Comparisons will be made with ordinary judges. Finally, the potential need for supporting treaty law will be considered to stabilise international financial arbitrations and make them more effective, especially in areas touching on property rights and public order. As far as the applicable law is concerned, this will hopefully lead to a more comprehensive scenario facing the international adjudicators, especially international financial arbitrators. This Part will conclude with a discussion of P.R.I.M.E., particularly of the applicable law clause in the P.R.I.M.E. Finance Rules and provide a catalogue of the issues that may be faced in such a P.R.I.M.E. arbitration.

2.2. Building Blocks of Private Law in International Finance. The Applicable Law and its Transnationalisation 2.2.1. Assignments and Securitisations The law of assignment used to get little attention as claims were not considered an important asset class until receivables and other financial claims became important. Indeed, the assignment is now a most important building block in finance: floating charges and receivable financing all embed assignments and they spring particularly to mind. In securitisations, large parts of loan books in banks or large portfolios of car loans in car financing companies may be transferred through assignment, see for a fuller discussion Volume 4, section 1.5. There are many problems even domestically.214 They concern mainly the assert status of claims and the possibility of the transfer in bulk and the inclusion of future claims, more particularly in floating charges when inventory under the charge may subsequently be converted into receivables (and thereafter into cash payments or bank balances): are they all included in the assignment and, more particularly, when transferred as security, do they all retain their original rank upon conversion? These issues are closely related to the discussion on whether claims are assets at all and capable of being the object of proprietary rights. Of course, internally they are a product of the law of obligations, but the better view is that externally they are just like any other assets: they can be transferred and pledged. Yet especially in Germany, now followed in the Netherlands, claims are or are no longer considered ordinary assets nor treated as such; again, see further the extensive discussion on these issues in Volume 4, section 1.5.1. The common law in England was similarly inhibited but not equity which had to come to the rescue. The characterisation as obligatory rather than proprietary may on the one hand facilitate their transfer and make it subject to a more flexible transfer possibility largely dominated by party autonomy, therefore by what parties want, leading in Germany, for example, to the possibility of including claims in charges if they arise in the future as a consequence of the sale of inventory

214 In the case of credit derivatives, only risk is removed and this is in principle a purely contractual transaction under which a protection seller assumes the risk. Also, in the case of risk layering, there may not be a transfer of underlying assets, at most of future cash flows. Still their transfer will have proprietary effects, as does the trading of credit default swaps (CDS), which must be assumed to be through assignment. In international transactions, the law applicable to the proprietary aspects of assignments will need to be considered and in the more traditional nationalistic view the place of the location of these intangible assets or underlying contracts. In risk-layering schemes, short of transnationalisation, the applicable (domestic) law is likely to be the law of the place of the party receiving the cash flow and assuming the risks connected with it.

124 Volume 2: International Financial Arbitration under the charge. In the Netherlands, this is hardly possible and each receivable needs to be separately transferred when it emerges, usually done on a daily basis, lowering the ranking and priority which dates as from such time. The DCFR follows the German approach in principle but applies in essence the same regime to assignment as it does to movable assets, reinforcing in this connection the requirement for identification and existence of the claim before it can be transferred or assigned (Article III-5:104). This undermines the operation of floating charges and impacts also on any party autonomy in this area while at the same time limiting the scope for receivable financing and factoring. In securitisations, see Volume 5, section 2.5, which deal mostly with existing claims and their transfer, there may still be questions in respect of future interest income being included. More importantly, there remain also serious problems with bulk assignments concerning whole portfolios if the accent remains on individualisation and identification of assets, and documentation in respect of each individual transfer, rather than on reasonable description of a class in the context of a proprietary transfer. The UCC in Article 9 has an altogether favourable regime for all assignments including those in bulk, and assumes them to be, but equates them with the creation of security interests unless a transfer for mere collection was the intent. The difference is, nevertheless, that the assignee, although ordinarily no more than a security interest holder, may collect and does not need to dispose of the claims upon a default by way of a sale and also may retain overvalue unless especially agreed otherwise. That is reminiscent of finance sales, discussed in the next section. These problems acquire special significance and create further complications in an international context. How is a portfolio of claims with debtors in different countries to be transferred, either in full or as security or by way of a conditional (or finance) sale as in some forms of recourse financing? What would be the applicable law? This presents a major conundrum that hardly allows for a satisfactory conclusion under the canons of private international or traditional conflicts of law doctrine pointing always to a domestic regime, see further Volume 4, section 1.9. Here, in order to be effective, transnationalisation or the operation of the custom of the international marketplace must take over, relying at the same time on a much-enhanced notion of party autonomy in proprietary matters, but subject to the protection of the bona fide collecting assignee or the assignee collecting in the ordinary course of business. Again, that is the solution domestically in common law countries (in equity), which then also allows for bulk assignments and the assignment of future claims upon a proper description in the documentation, but these concepts need to be lifted to the transnational level, therefore to transnational law, to make the transfer of an international portfolio of claims (with debtors in different countries) a real possibility. That may also safeguard these assignments (better) in domestic bankruptcies. On the other hand, in the more traditional approach, which always looks for the application of a domestic law, the first question is where these claims are located with the idea that they are transferred according to the law of the situs, like the rules for physical assets as we shall see. The true problem is here that a claim does not have a natural situs: in commerce the place of a claim is mostly considered the place of the debtor where it must also be enforced although that rules out an international bulk assignment under one domestic law. Here the (domestic) law of the creditor or owner of the claims may be more convenient and would create unity at least in the transfer of claims (and therefore in the documentation and especially registration or other formalities) albeit by no means in the enforcement by the assignee against the debtors. Some argument can be and has been made that assets are habitually situated at the place of the owner, although it does not solve the problems with the assignment of future claims. Another way is to assume party autonomy here and allow the assignor and assignee to determine the applicable law, which might be the modern lex mercatoria with its reliance on evolving custom and general principle. That may more

Volume 2: International Financial Arbitration 125 effectively save bulk assignments and assignments of future claims in the international flows and is the beginning of transnationalisation but still requires a parties’ choice, always assuming that they can now choose a non-statist law. At least such a choice may be upheld in an international arbitration as we have seen. It would become truly significant if non-statist law could also be applied if pleaded when parties have made no such choice at all. As a consequence of these problems, the law concerning an international assignment (which may become transnational not only because debtors are in different countries, but also because assignor and assignee are) has remained unsettled, important as it has become, and is underdeveloped.215 Because of the difficulty with the situs, one important result is that the private international law concerning chattels is not normally followed, so that there is even less guidance. In finding applicable domestic laws in the various aspects of the transfer of chattels, private international law concentrated mainly on power, intent and formalities, and may in this connection make a distinction between the contractual, proprietary and enforcement part of the transfer, either in full, as security interest, or conditional (finance) sale. In the applicable law to assignments, however, private international law seems to make fewer distinctions in this regard, probably because it does not sharply distinguish between the contractual and proprietary aspects of claims. On the other hand, although in practice the notion of bulk appears to be more directly important for claims and their transfer than for chattels, this is hardly acknowledged either. An important issue is here also to what extent under the applicable law a claim can be separated from the contract out of which it arises. In Volume 4, section 1.5 it will be argued that monetary claims transnationally are increasingly treated as promissory notes. It also affects the defences of debtors against these assignments, even if payment as a result becomes more burdensome or rights of set-off are endangered. Again, local laws are here behind. but under the traditional private international law approach, all remains their preserve. There appears, however, less emphasis on the disposition right, the contractual requirements for the transfer, the type of proprietary rights created, and any documentation, notification or registration needs in this connection. Rather private international law, at least in Europe, appears to concentrate on different aspects: validity of the assignment, raising more particularly the need (or not) for notification of the debtor, and assignability of the relevant claim, raising more particularly the third-party effect of assignment restrictions in the underlying agreements out of which the claims arise and the possibility of an assignment of future claims and their transfer in bulk (in turn connected with identification and specificity requirements). This different private international law approach as compared to chattels is acknowledged and also is promoted by Article 14 of the EU Regulation of the Law Applicable to Contractual Obligations (Rome I, earlier the Rome Convention of 1980) without much further discussion and without special attention to bulk assignments (including those of future claims) or to the consequences for international financings where they are especially relevant, but it has created considerable confusion in case law because these various concepts (validity, assignability and the reference to the defences of the debtors) are poly-interpretable and are by no means stable and sometimes overlapping.216 The EU Regulation is here at its weakest and it was always difficult to understand what this text meant to achieve. The origin of the text is obscure. Earlier, the private 215 In fact, even if no assignment takes place, one could still ask what the status of a claim and the proprietary rights created therein is in other countries (or in a bankruptcy operating there). 216 See Vol 4, s 1.9.5, but it may be acknowledged that the terms ‘proprietary’ and ‘enforceability’ equally still lack precision in respect of claims, see further JH Dalhuisen, ‘Business Law in Europe after Brexit. The Need for Legal Transnatioinalisation in the International Market Place and the Example of International Assignments’, SSRN Working Paper Series.

126 Volume 2: International Financial Arbitration international law of the different countries applied many different rules: sometimes the law of the assignor, sometimes of the debtor, sometimes of the assignment agreement, sometimes of the underlying contract out of which the claim arises. Note that in the EU Regulation, the assignment is dealt with in the context of contract law, and the proprietary aspects seem to have no standing of their own, which is now also accepted by the ECJ.217 This is also the English attitude, which then allows a more extended notion of party autonomy in equity to operate. It means that an assignment (in bulk or otherwise) of claims under a foreign law, will be accepted in England and be recognised there domestically, but only as an equitable interest, subject therefore to the better rights of unsuspecting other assignees in England who manage to collect in good faith or in the ordinary course of business. It must be noted in this connection that the private international law of England in this area changed as a consequence of the EU Regulation although it could still be applied in international arbitrations, which the EU Regulation does not cover. One has to see how this will be dealt with after Brexit. Because of all these problems and doubts, in international finance it is possible and it may become necessary for international financial arbitrators indeed to accept, when properly pleaded, a much more radical stand and allow transnational concepts to intrude especially into the non-contractual aspects of assignments, therefore into the aspects of debtor protection, into the proprietary and enforcement aspects, into questions of what types of assignment (including bulk assignments for whatever purpose) are possible, what the formalities are especially in terms of notification to the debtors, and what their effect is on the collection right of various assignees against the debtor. They could be derived from international Conventions such as the UNIDROIT Factoring Convention and the 2001 UNCITRAL Convention on Assignments of Receivables in International Trade, even in Non-contracting States.218 They could, however, also derive from fundamental legal principle, international custom, and general principles or party autonomy (subject to the protection of bona fide purchasers/assignees/collectors against adverse interests so created), therefore more directly from the modern lex mercatoria. It would allow other than purely domestic proprietary rights to be created pursuant to whatever assignment agreement, international or not, and regardless of the otherwise applicable domestic law. This is the true challenge and may be increasingly reflected, it is submitted, in international financial arbitrations when arbitrators are forced to move to these issues and that would be a very positive development. This is likely to result in another, more informal but also more responsive type of (transnational) law and facilitate international bulk assignments and even the recognition of rights in the receivables when the debtor moves to another country or when the type of collection right so created needs enforcement against assets of the debtor elsewhere (if there is no voluntary

217 The ECJ in its decision of 9 October 2019, BGLBNP Parisbas SA v Teambank AG, Case C-548/18, ECLI:EU:C:2019:848 decided the issue and considered the 2008 Regulation not applicable to proprietary issues, and it may be assumed not to enforcement issues either. It follows that Member State laws continue to prevail in these aspects. The reasons given were that a choice of law was scrapped in the text of Art. 14(3) and further the clarification in the draft 2018 Regulation on the Law Applicable to Third Party Effects of Assignment of Claims even though not law and since then as project suspended. The Commission rightly felt that there was no sufficient clarity and academic support was insufficient. 218 This important initiative was not a success because it could not take the key step, being the equation of the modern receivable with the promissory note. It also floundered because of its ultimate surrender to private international law (and its great vagaries) in all aspects where the Convention could be interpreted as not having covered the subject, which were most unclear; see for comment further Vol 5, s 2.3.8. It was an important but missed opportunity in an area of the law where enlightened academic thinking could have helped a great deal, but it must be said that also at the practical level support for this initiative was minimal and often unsophisticated.

Volume 2: International Financial Arbitration 127 payment), even in bankruptcies. In such cases, the key question is always who has the collection right and whether the debtor was right not to pay the assignee in view of his own defences or of the better rights of other assignees. Transnational law may set uniform standards also to be recognised in local insolvencies when it is likely to matter most.219 The traditional example derives from negotiable instruments and in more modern times their Eurobond variety. That means that the applicable law becomes susceptible to transnational ownership and assignment facilities regardless of more traditional numerus clausus restrictions, also allowing newer security and conditional or temporary transfers subject to their own transnational regime of bona fide assignee/collector protection, all as may be required for a better functioning of the international marketplace in these assets unless the public interest forbids it, although there would seem little reason for it to do so. It is suggested that this is the true way forward. Private international law depending entirely on some domestic legal regime even in major international financial transactions is, quite apart from the considerable confusion that reigns under it in the subject of assignments, no longer likely to provide sensible answers. It cannot cope and has come to its natural end in this area. International arbitrators may have here more freedom assuming the issues are properly pleaded and national bankruptcy laws will accommodate. For purposes of this discussion, the question is how arbitrators should react upon proper pleading by the parties. It is clear that they may have greater flexibility than ordinary courts but their outcome in order to be sustained must find recognition in the applicable property law which would depend for its true effectiveness on its transnationalisation and the acceptance thereof in local bankruptcy courts.

2.2.2. Set-off and Netting Another key area in which we must ask where in the international flows private international law and its predilection for the application of domestic laws have left us is the law of set-off and netting, see for a fuller discussion Volume 5, section 3.2. Here again, we may have to consider a need for transnational thinking in terms of risk management in an international setting of mutual claims where international arbitrators may equally be forced to take a lead and protect the international flows, their liquidity and the risk management facilities needed in them, at least to the extent properly pleaded by one of the parties and there may then be all to play for in international arbitrations in the hope that the result will be recognised in local bankruptcies in countries member of the New York Convention. This issue is of special importance in international finance and acquires particular relevance through the ISDA Swap Master and the TBMA/ ISMA Repo Master Agreements. Their status in the international marketplace, their interpretation, the residual effect of the parties’ choice of law in favour of a domestic regime and its meaning must then be further considered, which issues have already been raised in section 1.2.2 above concerning choice of a domestic law in areas of the law not at the free disposition of the parties. Indeed, parties to the transactions cannot determine their own ranking or preferences in defiance of other parties’ rights in the same assets or asset classes, although there may be room for structuring. Notably for swaps and repos, the master agreements and the netting out

219 See for transnational customary law operating and being recognised as such in local bankruptcies, nn 210 and 211 above.

128 Volume 2: International Financial Arbitration thereunder, trans-border and in different currencies and maturities, are then important issues. These netting agreements present important examples of financial structuring intended to curtail risk, conforming here to international standards. Again, transnationalisation on the basis of international practice or custom (within the modern lex mercatoria) may then help out in order to make risk management through these facilities safe at the international level where international arbitration may be first in line to provide the necessary clarity. This may even become an issue of financial stability and also of efficiency as public order requirements in the transnational commercial and financial legal order itself. Indeed, international regulators favour netting and actively promote it. Originally, in the 1988 Basel (I) Accord, they accepted novation netting only in respect of a single swap but gradually allowed bilateral close-out netting even of the novation type provided there resulted a single obligation between the parties (see Volume 5, section 2.5.5). However, here also, we still see the destructive force of the application of national laws: the financial institution concerned have to obtain legal opinions confirming that the netting agreement is enforceable under the law (a) of the jurisdiction of the counterparty, (b) of its acting branch if situated elsewhere, and (c) of the relevant netting agreement. This could mean three legal opinions at some considerable cost. In April 1996 the BIS allowed reinterpretation of the Basel Accord also to facilitate multilateral netting but only for foreign exchange contracts, as is now operated interbank in London for members of Exchange Clearing House (ECHO). As for the law applicable to set-off if operating internationally (thus when a claim in one country, or arising under the law of such a country, is to be set off against a claim arising in another or under the law of another), conventional private international law or conflicts rules are often still invoked, although it will become apparent below that it is by no means always clear which local rules should then prevail. It remained a very grey area; conflicts rules in matters of set-off have not been the subject of much study. At the substantive level, differences in the approaches to setoff, especially in respect of its limitations, may be found in its nature. They may arise and differ in (a) the eligibility of the payment obligations that may be reduced by set-off; (b) the questions of the maturity of both claims; (c) their being liquidated to money; (d) their being in the same currency; and (e) the question of the retroactivity in legal systems that require notification by the party invoking the set-off. Another difference may arise (f) in the set-off possibility of timebarred counterclaims. Most importantly, (g) the applicable bankruptcy or other laws may not be receptive to any expansion of the set-off concept by contractual netting arrangements, dealing with or structuring around these limitations, when it may matter most. It is important in this connection to make some further distinctions, see further Volume 5, section 3.2.3. The set-off may be (a) a remedy to be invoked by the parties outside bankruptcy when they may be able to invoke it either generally upon giving notice (as in Germany and the Netherlands) or only as a defence in litigation (as in England, unless there is connexity or an agreement to that effect). In these countries, the set-off is in essence subject to party autonomy, including the right of the parties to expand the notion in the context of bilateral or even multilateral netting agreements. In England, it was the equitable set-off that allowed for these contractual adjustments also, again an important instance of adaptability through forms of party autonomy, which civil law generally missed and only more recently introduced but by no means everywhere. The alternative is to view the set-off (b) as an ipso facto or automatic facility as in France generally and elsewhere in bankruptcy only. This approach is indeed imperative in bankruptcy as the set-off might otherwise not be effective because the bankrupt party is no longer in a position to dispose of its assets so that the set-off would be at the mercy of the bankruptcy trustee and would then, as a minimum, risk losing its preferential character. A related key issue here is then whether by agreement the ipso facto set-off can be expanded (or outside bankruptcy) avoided

Volume 2: International Financial Arbitration 129 by alternative netting agreements. Are these contractual expansions sustained in bankruptcy? Again, civil law has greater difficulty here than common law (in equity). It is a matter of its public (or bankruptcy) order. Altogether, these differences raise important issues concerning the applicable law. A uniform regime would obviously help a great deal, especially since in the conflict of laws approach there is no consensus and different suggestions have been made (see further Volume 5, section 3.2.6). The lex fori approach is a common one and leaves the decision to the law of the country in which the adjudicating court sits. That would be somewhat logical at least where the set-off is (largely) considered procedural, as in England, or arises in bankruptcy even if the debtor and the claimants are outside the bankruptcy jurisdiction. It clearly introduces an objective element and the set-off may not then appear to be capable of being governed by a contractual choice of law. Outside bankruptcy, this approach is also understandable in countries where the set-off remained ipso facto as in France. It may also be justified by the preferential effect of the set-off. But it should be clear immediately that this approach does not provide a solution in international arbitrations where there is no natural lex fori (or it would have to be the old notion of the seat, but at least in procedural matters the compulsory application of the law of the seat has commonly been abandoned). In general, the lex fori approach has found support in England220 and is (more surprisingly) sometimes also advocated in the Netherlands even outside bankruptcy. Some cumulative application of the set-off requirements under the laws of both claims to be set off is another option if they are covered by different laws. As we have seen, at least outside bankruptcy or any other ipso facto application, these laws may conceivably be chosen by the parties, which introduces a subjective element, however, and makes the applicable law a lex contractus issue regardless of the preferences that result and may affect others creditors adversely. Again, this raises an important public policy issue but nevertheless appears to be the French approach regardless of its ipso facto attitude;221 it is sometimes also favoured by the ordinary courts in the Netherlands, and would more particularly recommend itself for netting agreements. But the result would still be the application of some domestic law in (conceivably) totally unrelated situations with adverse effects on outsiders. Indeed, here again, it must be asked whether the ranking and preferences that result are at the free disposition of the parties to a netting agreement. Finally, it is not uncommon to see an approach under which a debtor invoking a set-off (therefore a counterclaim) in his defence can only do so under the law of the first claim, therefore the claim against which the set-off is made. This is the German222 and Swiss223 approach in which the applicable law depends on the party first invoking the set-off (as it is always the law of the other party’s claim). Since the law (of the first claim) so applicable may be a law chosen by the parties to

220 It is to be noted that English law is undecided, interesting in such a major issue where many assume legal certainty: see Dicey and Morris on The Conflict of Laws, 15th edn (London, 2012) r 19, 7-039. 221 See for the French cumulative approach, H Batiffol and P Lagarde, Droit international privé 7th edn (Paris, 1983) ii, no 614. There are several variations on this theme in France and it is sometimes believed that the details of the set-off in terms of calculation and the effects depend on the law applicable to each claim: see P Mayer, Droit international privé (Paris, 1983) no 732. 222 See BGH, 11 July 1985 [1985] NJW 2897, and earlier 38 BGHZ 254 (1962); see further D Martiny, Münchener Kommentar zum Bürgerlichen Gesetzbuch (Munich, 1990) EGBGB, s 32, Rn 37. In a bankruptcy, however, the lex fori concursus is preferred: see BGH, 11 July 1985, cited above; see also H Hanish, ‘Report for Germany’ in I Fletcher (ed), Cross-Border Insolvency: National and Comparative Studies (Hamburg, 1992) 111. 223 See Art 148(2) of its Private International Law Act 1987 referring to the law applicable to the claim against which the set-off is invoked as a defence. See also L Pittet, La competence du juge et de l’arbitre en matière de compensation: étude de droit interne et international (Lausanne, 2001).

130 Volume 2: International Financial Arbitration their contract, there is also a subjective element here. In this approach, an exception is commonly made for the case of bankruptcy when the applicable bankruptcy law is thought to determine the set-off right. This is then a reversion to the lex fori approach but only in insolvency situations. Applicability of the law chosen by the parties in their underlying contracts, out of which their claims emerge, was an approach sometimes believed to be supported by Article 10(1)(d) of the 1980 EU Rome Convention on the Law Applicable to Contractual Obligations, now replaced by Article 12(1)(d) of the EU Regulation of 2008 (Rome I), which provides that the law applicable to a contract also applies to the various ways of extinguishing obligations. Yet, even though the set-off is in origin a means of payment, therefore a particular means of extinguishing a monetary obligation, it need not necessarily be characterised as a way of extinguishing obligations and could equally be viewed as a surrender of claims or sometimes even as a mere accounting device.224 In a contract for differences depending on novation-netting like the modern swap, it is even questionable whether the set-off is a method of payment of underlying claims at all. Rather, there is a new financial instrument. In any event, the special feature of the set-off in terms of the creation of a preference may need to be considered separately. Altogether it may also be possible or even necessary now to see set-off and netting mainly as a risk management tool rather than a form of payment. To ease the problems with (close-out) netting, particularly in bankruptcy, the aggregation principle has been vigorously pursued in master agreements under which, particularly in swaps, all swap dealings between the same parties, present and future, are deemed integrated into one contract. This is bilateral netting, which indeed has become a major risk management tool. Once signed between two parties, all their swap dealings are thus meant to be covered by it and any new swaps are integrated into this system and its netting facilities through standard telex confirmations.225 This integration is certainly the prime objective of the International Swap Dealers Association, which produced in this connection in 1987 an industry standard agreement, the ISDA Swap Master Agreement, in the later 1992 version extended to all derivatives, notably commodity and equity swaps.226 But again it must be asked whether the aggregation principle can

224 As regards the applicability of Art 10(1)(d) of the Rome Convention, opinion is divided. In Germany, it is applied only if both claims are governed by the same law: see J Kropholler, Internationales Privatrecht (Tübingen, 1994) 426. In the Netherlands, its general applicability to set-off outside bankruptcy has been advocated by RIVF Bertrams, ‘Set-off in Private International Law’ in K Boele-Woelki (ed), Comparability and Evaluation, Essays in Honour of Dimitra Kokkini-Iatridou (Dordrecht, 1994) 153. 225 There are other important industry standard master agreements such as the 2000 TBMA/ISMA Global Master Repurchase Agreement, already mentioned, the Overseas Securities Lenders Agreement, the International Currency Options Market Terms (ICOM) and the International Foreign Exchange Master Agreement (IEFMA). 226 There were always two such masters, the Rate Swap Master for interest rate swaps and the Rate and Currency Swap Master for both interest rate and currency swaps. The latter is the more common outside the US and usually the one referred to. It was amended in 1989 and 1992 to also cover other derivative products and became a multiproduct master agreement, recast as the Swaps and Derivatives Master Agreement in 2002 to better deal with distressed counterparties and markets following the problems in the Asian markets in the late 1990s. In particular the close-out provisions were reconsidered. Force majeure and acts of state affecting payment or compliance with other material provisions are notably not to upset the close-out and its effectiveness and present a new termination event or event of default. In 2009 ISDA developed a new Master Confirmation Agreement, also called the Big Bang Protocol, which introduced two changes. First, it established so-called Determination Committees taking binding decisions on whether a credit event occurred, replacing the prior need for bilateral negotiation. Second it made auction the default option for the price determination of distressed bonds necessary to liquidate CDS contracts. The ISDA further arranged greater standardisation for CDS in terms of expiry dates and premiums, the latter being able to force protection sellers or buyers to make upfront payments to compensate for the difference between these premiums and the market price.

Volume 2: International Financial Arbitration 131 stand up especially in a bankruptcy, which remains a local facility closely connected to enforcement which is the main attribute of all sovereignty and concerns public policy.227 The Swaps and Derivatives Master is in its Local Currency and Single Jurisdiction version subject to New York law in particular in the US; English law is usually made applicable to the Multicurrency-Cross Border version. This does not seem to prevent parties from choosing any other law, but it is not common, although some countries like France and Germany also have own master agreements. Again, it must be questioned what a choice of a domestic (or any other) law here means. Are these matters at the free disposition of the parties or may or must we rely instead on international practice to create a better and more objective regime? That is transnationalisation for professional participants in the international financial markets. Short of it, the impact in bankruptcy remains unavoidably subject to the applicable (domestic) bankruptcy laws. Indeed, established market practices based on a universal acceptance of the principle of set-off may increasingly underpin the contractual netting concept internationally, also in its enhancement of the set-off principle, at least outside bankruptcy. It would appear to be a practical necessity. At least in the UK, in the Lehman cases, the courts proved accommodative for the law to remain responsive and relevant.228 The tool was ‘purposive interpretation’. Again, whether acknowledged or not, this leads into transnationalisation and the modern lex mercatoria to which a choice of a domestic law by the parties would become subservient in the context of the hierarchy of norms within the modern lex mercatoria as explained above. It may prove to be a crucial issue in the international marketplace. It should be noted that in this respect the ISDA Swap Master Agreements may well have acquired their own transnational status, superseding in reality the domestic law declared applicable by the parties (usually English or New York law) or any domestic mandatory law resulting under conflict of laws rules.229 It suggests a mandatory or peremptory element and a transnational minimum standard accepted and indeed necessary as risk management instrument in the international marketplace. Again, the true issue is how far that also obtains in bankruptcy situations where the (domestic) lex fori concursus may still be considered ultimately to control the effect of the netting agreement. It is a matter of recognition, still subject however to domestic public policy or its bankruptcy order considerations. Another limit would be the public order requirements in the transnational legal order itself. Can it live with this extended preference, which especially the netting agreements create at the expense of other creditors, although even domestically it is now often less of an issue as many bankruptcy acts have been amended to allow for it? One may see then here a general transnational principle emerging. It was suggested before that even the applicable domestic bankruptcy laws may increasingly have to accept the ISDA netting arrangements as an expression of the international market

227 See British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390, in connection with novation netting and its limitations in bankruptcy in England; also the Australian case law cited in n 152 above for a different view as to CCP netting. While it is not possible to change the ranking in respect of third parties by agreement, as was the dictum in British Eagle, it may still be by custom, which, by its very nature, concerns all participants. 228 The fact that the implementation of MiFID I, now Art 16(9) MiFID II, required segregation of client funds but allowed this in the UK under the Client Assets Sourcebook Ch 7 (CASS7) to be done on a provisional (and incomplete) basis during the day, did not make a difference, Re Lehman Brothers International (Europe) [2012] UKSC 6 (also called ‘CASS7 Supreme Court’). In the event, it caused considerable delays to determine what the pool now was and who was entitled to it. This had an undesirable risk management effect as moneys were effectively frozen. See for the Lehman cases also s 2.4.3 below and L van Setten, The Law of Financial Advice, Investment Management, and Trading (Oxford, 2019) 96. 229 There has been some confusion on whether the ISDA is a pseudo-regulator, see n 132 above.

132 Volume 2: International Financial Arbitration practice or custom in the context of the hierarchy of norms of the modern lex mercatoria backed by public policy in the international marketplace. Segregation of client funds and securities is requested in Articles 16 (9) and 16(10) MiFID II in the EU and such principle could then amount to mandatory practice or customary law binding even on (local) bankruptcy courts. It may be an important indicator. The transfer of swaps as contracts for differences may then also follow its own distinct pattern, if not facilitated by CCPs in regular exchanges with their own clearing process and safeguards.230 So far, in over the counter (OTC) markets, it requires the consent of the other party to the swap and could well result in a novation under transnational law. These complications are the reason why such swaps are usually not transferred but rather hedged or unwound. If there is nevertheless a transfer, so far, the law selected by the original swap parties231 is often believed to cover the novation in all its aspects if it is not assumed that distinct international practices prevail here also. Transnational law may take a more facilitating view, allowing the transfer of the contract more in the way section 2-210 UCC does for sales contracts in the US. In the meantime, the EU Collateral Directive envisages a special close-out netting facility that must be considered bankruptcy resistant in bankruptcies pronounced in EU countries.232 The idea is that financial transactions that are conditional or temporary, such as repos and securities lending, or that move in and out of the money like swaps, futures and options, and maintain collateral requirements to back up the resulting retransfer or payment obligations, are subject to a (statutory) bilateral close-out and netting of all payment and delivery rights and duties in each EU country.233 Strictly speaking, national laws are here still prevailing but at least they have been harmonised under the Directive and are also enforceable in bankruptcy. Again, we might discern here a general principle operating at the transnational level. In the UK ‘purposive interpretation’, in this case of the Directive, is confirmed and used to reach this result, sustained even in local bankruptcy, although the notion of a floating charge was rejected for lack of control, which the Directive requires without defining it, whilst it is the essence of any floating charge that there is no control over the assets.234 The issue is truly tracing. However that may be, an internationalised approach is here also increasingly apparent and we must see whether this holds true after Brexit, likely when the true reference is to transnational practice filtering through into a local bankruptcy.

230 The EU now covers under EMIR especially record keeping, transfer of positions of defaulting clearing members, orderly liquidation, and return of excess assets as collateral or margin (Recital 64), see for EMIR further Vol 5, s 3.7.6 and van Setten (n 228) 129 for the safeguarding of cleared contracts and collateral. Again, it is a (regional) harmonisation of standards that conforms to international practices and needs. 231 See in the Netherlands, HR 19 May 1989 [1990] NJ 745. 232 See Vol 5, ss 1.1.8, 3.2.5 and 4.1.5. The Directive was issued pursuant to an ISDA report of March 2000 on Collateral Arrangements in the European Financial Markets, the Need for Law Reform. Harmonisation of the law in this area at EU level was believed important to facilitate the possibility of funding participants to use the collateral which they received to secure this funding for their own financing needs. This meant the facility to on-sell, lend or repo investment securities received as collateral subject to an obligation to return similar securities. It is often perceived as a novel departure but in fact a similar system had always existed in respect of fungible securities that had not been set aside for specific clients. 233 Collateral is itself a broad and undefined concept that may entail security, title transfers or margin accounts. For the Directive, the key is the untrammelled facility to realise any security interest in or to appropriate the relevant assets (in the case of a title transfer) or margin, all to the extent these assets are in the possession of the non-defaulting party, and it nets out all delivery and payment obligations in a final close-out upon an event of default. Notably, local bankruptcy laws that impede these facilities or require statutory delays are made ineffective for these types of financial transactions. 234 Re Lehman Brothers International (Europe) [2012] EWHC 2997 (Ch) (also called ‘Extended Liens’ case). See also s 2.4.3 below for other Lehman cases that seemed more expansive, see further van Setten (n 228) 142.

Volume 2: International Financial Arbitration 133 Again, for purposes of this discussion, the question is how arbitrators should react upon proper pleading by the parties. Also here, it is clear that they may have greater flexibility than ordinary courts but the outcome in order to be sustained must find recognition in the applicable law which would depend for its true effectiveness on its transnationalisation and acceptance of the resulting preferences by local bankruptcy courts in particular.

2.2.3. Secured Transactions, Finance Sales (Repos) and Related Structures When in an international transaction, chattels must move from one country to another, it is mostly still assumed in the traditional private international law manner that as to the applicable (domestic) law, the lex situs applies in all proprietary aspects of the transaction,235 but it does not provide clarity when assets move and a choice needs then still to be made between the laws of

235 In private international law, the lex situs notion finds general acceptance in proprietary matters, if only because they are often closely related to enforcement which, in terms of repossession, is more naturally a question of the law of the country of location of the asset (although particularly in bankruptcy the proceedings may be opened elsewhere). Indeed Art 22(5) of the EU Regulation on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters of 2002 (superseding Art 16(5) of the earlier Brussels Convention of 1968) accepts for enforcement the exclusive jurisdiction of the courts of the situs which apply their own laws. In proprietary matters, it has already been mentioned that the lex situs notion is particularly strained when the assets are intangible, see Vol 3, s 1.9, or move frequently, as in the case of aircraft and ships, so that the situs becomes virtually fortuitous. For ships and aircraft that move internationally, the fortuitous nature of their situs often does not change the situation dramatically in so far as the creation and recognition of proprietary rights and charges in them are concerned, when for the creation and perfection the proper situs may still be considered the place of their original registration, although it does not avoid the recognition problems in the case of enforcement if ships or aircraft are arrested elsewhere and subjected to a foreign execution. There is also a classic situs problem when charges shift into manufactured goods or proceeds. In the first case, the situs of their manufacture could be considered the place of the conversion: see the Scottish case of Zahnrad Fabrik Passau GmbH v Terex Ltd 1986 SLT 84. For shifting into the proceeds or receivables, an argument can be made that the situs is the place of the delivery of the asset or of the payment, the law of which would therefore determine any additional formalities of the continuing charge (which could even be seen as an automatic assignment) or indeed the possibility of such a shift giving the original seller collection rights. Any continuation of the original charge in the asset backing up any receivable as an ancillary right would then also be covered by this lex situs, as would indeed be any rights of bona fide successors in the converted property or even of the receivable. In this connection, reference should also be made to repos in fungible assets when only assets of the same sort need to be returned. As the assets to be used will only be known at the time of (re-)delivery, an argument may be made here in favour of the application of the law of the place of delivery as the true situs for this purpose. The place of delivery is then the actual place of delivery and not the agreed one. In the case of the use of a book-entry system it would be the place of the intermediary used for this purpose (PRIMA) and the (limited) facility under the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary for parties to choose the applicable law in respect of book-entry transfers as we shall see below in text preceding n 279. Another situs problem arises in respect of registered shares, which are often deemed located at the place of the register. The law of this place then determines the manner of transfer and the way charges may be created in the shares. It does not seem necessary that the law of the place of the register is also the lex societatis as companies may choose to maintain registers outside their country of incorporation. A similar approach may obtain for registered bonds, for depositary receipts and indeed also for shares and bonds subject to book-entry systems. More importantly, it may allow transnationalisation of these systems under their own transnationalised rules. As will be argued, in all these situations transnationalisation of the legal regime would appear to be increasingly called for to achieve a greater deal of stability (and sense) in the applicable proprietary law through custom and market practices in the context of the operation of the modern lex mercatoria. It may be argued that in particular the notion of the lex situs has become unmanageable in respect of the international flows of movable assets. Much of this is now also virtual.

134 Volume 2: International Financial Arbitration the country of origin and destination. These issues are dealt with more extensively in Volume 4, section 1.8. In this approach, it is now often accepted that the domestic law of the country of origin will apply to the creation and perfection of the original proprietary right, even if created under the contract law of yet another country, but that the domestic law of the country of destination will impose a recognition regime under which only foreign proprietary rights properly established at the original situs and sufficiently equivalent to those in the country of recognition will be accepted. The others might be rejected or—always provided that they were properly created—converted into nearest equivalents. There is an element of judiciary discretion here and the result is by no means always predictable. Further problems may arise from disparity in registration and other formation and perfection requirements between the country of origin and destination, even if there is equivalence when the foreign interests are not registered in the recognising country while similar local interests in the destination country would be invalid without it, particularly relevant for secured interests and their ranking. The fact that the original requirements in this respect are or cannot be sufficiently advertised in the country of destination (in its filing system if any), may be considered an extra impediment for their recognition in that country. Thus, a foreign reservation of title in assets such as professional equipment that was moved in the meantime to the US may have no effect there as perfected security and retains therefore at best the status of an attached but unperfected security interest for lack of filing, with the low rank (just above unsecured creditors) that follows, while in a bankruptcy the general lien of the trustee will put it in the rank of ordinary creditors. In any event, if converted into a security interest in the US there would be a loss of the appropriation facility upon default that is likely to exist in the country of origin. For more limited proprietary rights such as specialised secured interests and floating charges, see Volume 5, section 2.2.5, where equivalents might be especially difficult to find, this is more particularly relevant in enforcement in the new country. The English introduce here a further element already noted above for assignments: all foreign interests so recognised are equitable, which means that they are defeated in respect of all who acquire the underlying assets in the ordinary course of business. It means that the ordinary commercial flows in England are protected against those foreign interests of which the acquirer did not know when acquiring the property although it is still conceivable that professional insiders have some kind of extra search duty in their due diligence activity. In bankruptcy when not opened at the original situs, there may be other aspects. In that case, the lex concursus may still prevail over the new lex situs, at least for the limited (but important) purposes of the bankruptcy itself, certainly if the bankruptcy is in a third country. This may create problems if the bankruptcy trustee subsequently seeks to collect the asset from its (new) situs, where neither the original nor the lex concursus attitude to the particular proprietary interest may find favour. For conditional or finance sales and conditional title, there may also be public policy considerations and impediments to recognition elsewhere when the asset moves, or in foreign bankruptcies, in which connection the reservation of title may again provide an illustration, but what interests us here is primarily finance sales such as the finance lease, repurchase agreement (repos) and factoring of receivables. Finance sales present different forms of asset-backed funding with a different risk and reward structure (see Volume 5, section 2.1), manifested in particular by the fact that, as in reservations of title as sales price protection, the asset is appropriated by the non-defaulting party rather than made subject to an execution sale with the return of overvalue to the defaulter, although in several countries there is a possibility of re-characterisation of these structures into secured transactions. That is on the whole undesirable except in cases of a pure sham, but is certainly also the approach of the UCC Article 9 in the US. It left repo financing particularly in the lurch, only to some extent repaired in the federal Bankruptcy Code for

Volume 2: International Financial Arbitration 135 the event of an insolvency,236 while at least some finance leasing was subsequently moved to a new Article 2A. Quite apart from these complications, again the desirability of introducing these domestic complications into international transactions through the application of domestic laws that were never written for them may itself be seriously doubted and may in any event be the subject of legitimate questioning in international financial arbitrations. In all international transactions raising these issues, to obtain greater clarity, it may be essential first to distinguish between the (a) contractual, (b) proprietary and (c) enforcement or (d) bankruptcy aspects and, in the case of modern finance leasing, also between (e) the derivative or collateral rights of the lessee against the supplier, which are in fact rights exerted against a third party as far as the lessee is concerned. Further distinctions may have to be made between (f) the types of proceedings in which these issues may arise. Indeed, besides in enforcement or bankruptcy, the nature of the legal structures concerned may also be tested in preliminary, provisional or summary proceedings, or in ordinary proceedings on the merits. Parties should be aware that the recognition of foreign proprietary interests may result differently in each of these proceedings, even in the country of the new situs, in view of their different objectives or the different manner in which the recognition of the interest is invoked, for example as a defence, a collateral issue, or the main issue. Again, international arbitrators might take a different view here as compared to dispute resolution in national courts and in particular may be more inclined, when properly pleaded, to a transnationalised approach in international transactions in order to escape all the vagaries and uncertainties of finding some national law which is very unlikely to have considered the international complications. Whatever the proceedings in which foreign proprietary interests arise, are invoked or are made the subject of litigation, whether at the (original) situs or elsewhere, it remains basic in all of them that international contractual issues regarding them arise when the parties to the arrangement are in different countries. Under established private international law or conflict

236 It is generally agreed in the US that the recharacterisation of repos as a secured transaction is disastrous and leads to dispositions upon default and perhaps even to filing needs at the time of creation in view of the fungible nature of investment securities and therefore the tenuous nature of the possession by the financier. There would also be the danger of a stay and adjustment of the security in an insolvency: see MA Spielman, ‘Whole Loan Repurchase Agreement’ (1994) 4 Commercial Law Journal 476 and JL Schroeder, ‘Repo Madness: The Characterisation of Repurchase Agreements under the Bankruptcy Code and the UCC’ (1996) 46 Syracuse Law Review 999. However, where the repo price is clearly expressed in terms of the original purchase price plus an agreed interest rate, the repurchase seems to be re-characterised as a secured loan, also in the US. It is submitted that that is the better view. Case law is divided, see Cohen v Army Moral Support Fund (In re Bevill, Breslett and Schulman Asset Management Corp) 67 BR 557 (1986) and In the matter of Bevill, Breslett and Schulman Asset Management Corporation and SS Cohen v The Savings Building and Loan Co, USCA 3rd Cir, 896 Fed Rep 2d, 54 (1990). In these cases intention was considered decisive as to whether there was a security agreement or a sale and repurchase: see also Jonas v Farmers Bros Co (In re Comark) 145 BR 47, 53 (9th Cir, 1992), but the fungibility of the underlying assets was believed to have an undermining effect on proprietary claims, although it seems that if the assets are with a depository who will provide replacement goods, the fungibility issue may be less urgent. All now translates into entitlements, which could be shared or conditional. See for the new model for transfer and pledging of such securities and the priorities of owners and pledgees in them, Art 8 UCC 1994 Revision. However, case law may sometimes still be construed to be more generally averse to true repurchase agreements: see Lombard Wall Inc v Columbus Bank & Trust Co, No 82-B-11556 Bankr. SDNY 16 Sept 1982; cf also In re Lombard-Wall 23 BR 165 (1982), which characterised repos as secured loans and led to the 1984 Bankruptcy Code amendments. See more recently still the US Supreme Court in Nebraska Dept of Revenue v Loewenstein 115 SCt 557 (1994), holding the same, but expressly limiting this finding to taxation matters. It did not mean to interpret ‘the Securities Exchange Act of 1934, the Bankruptcy Code or any other body of law’. It is often thought that the 1982, 1984, 1990 and 2005 amendments to the Bankruptcy Code especially dealing with repos in government and other securities (ss 101(47), 741(7), 101(49), 555 and 559–62) and exempting the netting of these transactions from the stay provisions, now indicate a different approach to repos while taking them outside Art 9 UCC.

136 Volume 2: International Financial Arbitration rules, the domestic law of the closest connection, often presumed to be the law of the party that must perform the more characteristic obligation, will normally apply in these contractual aspects unless parties have chosen another law in areas of contract where they can do so. That is at least the position under the 2008 EU Regulation (Rome I) already mentioned before, unless again we are here more comfortable with the modern lex mercatoria, which may increasingly satisfy international arbitrators (who are not bound by this Regulation). Whatever it is, it does not prevent the contract from validly creating charges or other types of proprietary interests not accepted or recognised by the proper law of the contract as long as the asset is in a country or will move to a country where they are accepted. A contract regarding chattels is thus international when the parties are in different countries regardless of whether the chattel being sold or made the object of a charge moves or is intended to move to another country. In fact, it will often remain where it is. It does not distract from the internationality of the sales agreement, but it does mean that in a proprietary sense the transaction is also international. Indeed, international proprietary issues proper arise largely when the asset moves between countries, which may or may not be the consequence of a sale. Only in such cases is there in the traditional private international law approach the need to determine the relative impact between the law of the place of origin and destination on the status of the proprietary right. As mentioned above, if the principle of the lex situs is still deemed to apply, it means here applicability of the law of the country of origin in matters of creation and of the law of the country of destination in matters of recognition of the foreign interest so created, with or without adjustment of the relevant interest to the nearest equivalent in the destination country. Under the prevailing private international law view, there is therefore a two-step approach. International enforcement or bankruptcy issues on the other hand arise in recognition terms principally when a physical asset subject to a charge has moved to the country of the enforcement or bankruptcy. In enforcement, which is normally considered an exclusive prerogative of the courts of the situs, international issues will thus arise first and foremost when such an asset moves (or may be moved notably by the bankruptcy trustee) with foreign charges attached to it. It is not therefore sales connected. These charges are then subject to the recognition and fitting-in process of the lex executionis or lex concursus in terms of ranking. But enforcement issues may also present themselves in an international context in the case of a bankruptcy opened at the centre of affairs of a bankrupt with assets in other countries (that have not moved) to the extent the extraterritorial effect of such a bankruptcy is accepted in the country of the asset. As enforcement proceedings thus take place in a country different from the situs, it may then still be asked what kind of precise effect they may have at the situs. Ultimately this may be a matter (of recognition) by the law of the situs itself in the foreign bankruptcy. In other words, the enforcement is not international, only the claims to enforcement are. There are here questions of jurisdiction and of recognition of bankruptcy proceedings if conducted outside the country of the situs and under the EU Bankruptcy Regulation may give rise to the creation of sub pools. This recognition should be clearly distinguished from the recognition of a foreign proprietary right when the asset has moved to the country where any of these procedures is initiated. In bankruptcy, there arises in either case the question how foreign charges in those assets are treated, but the answer may not be the same. The conclusion must be that under present private international or conflict of laws approaches, the validity, status and rank of, or powers under, security interests or conditional sales may be differently decided in the various types of proceedings and may be different again for a foreign asset that has in the meantime moved to the country of these proceedings and for an asset that remains elsewhere upon recognition and enforcement at its situs. In the ordinary courts, the international status of the ensuing judicial decisions is likely to be different and subject to different

Volume 2: International Financial Arbitration 137 recognition possibilities. In fact, it could even happen that a decision reached on the status of foreign proprietary interests in provisional proceedings, or even in proceedings on the merits, is not fully accepted in bankruptcy proceedings even in the same country as the ranking, and the fitting-in process may then require special handling. On the other hand, the bankruptcy findings concerning the foreign proprietary interests may not have any further status or impact outside these bankruptcy proceedings, even in the country of the bankruptcy. In the meantime, for finance leasing and factoring, some international action has been taken through uniform treaty law in the UNIDROIT Leasing Convention of 1988. It has only received a small number of ratifications and may not receive many more. The international aspects of assignments and the factoring technique have already been discussed more fully in the context of the international assignments of claims above. All still rely on traditional private international law for aspects outside the scope of the relevant Conventions. They commonly do so even for those aspects within their scope if not specifically dealt with. In that case, the general principles on which these Conventions are based first prevail, but it is mostly unclear what these principles are, especially in the proprietary and enforcement aspects. Also, the scope and coverage of these Conventions are often not sharply defined so that one cannot be sure when such general principles may be invoked and relied upon.237 In 2002, UNIDROIT also produced a Convention (with an aircraft facility or protocol) aiming at the creation of an international interest in Mobile Equipment.238 The background was that the need for internationally supported security has greatly increased through the privatisation of airlines and railways, with the attendant need to raise international financing, which can no longer depend on state guarantees, while the major assets of these companies (which are at the same time their major capital goods) often have no fixed lex situs so that domestic security interests in them are constantly endangered. The idea is that a distinct type of international interest is created under the Convention resulting from a security agreement, a reservation of title, or a finance lease (Article 2) in mobile equipment as defined in Article 2(3). Realistically, the American functional approach is abandoned here, and re-characterisation of conditional sales and leases is thus avoided. For purposes of the Convention, mobile equipment concerns categories of equipment that habitually move between states and are identifiable (and not future), such as aircraft, aircraft engines, helicopters, ships, oil rigs, containers, railway rolling stock, satellites or other space property and other categories of uniquely identifiable objects. Parties may derogate from the provisions of the Convention only in a number of default remedies: Article 15. This reflects the mandatory nature of proprietary law in which connection a new uniform international regime is created under the Convention. What does all this add up to in international finance and in arbitrations concerning it? At the very least, it must be understood that there is a large area outside the traditional secured

237 The uniform laws, common in the US among the various States, are not Conventions in the above sense. Although unification is clearly the objective and models are as such presented (by the American Law Institute and the Commissioners on Uniform State Laws), they remain State law and there may and do exist minor differences between States, even in the UCC. Where interstate (or international) conflicts arise, there is, therefore, still a need for a conflicts rule (see eg s 1-301 UCC), which allows the uniform law of the particular State to be applied if the transaction bears an appropriate relation to the state concerned. If there is uniformity between the laws that may so be deemed applicable, the importance of these conflict rules is only to determine that no other law applies. 238 See Vol 5, s 2.1.10 and for a comment, MJ Stanford, ‘UNIDROIT Convention on International Financial Leasing and the Preliminary Draft UNIDROIT Convention on International Interests in Mobile Equipment’ (1999) 27 International Journal of Legal Information 188; see also P Winship, ‘International Commercial Transactions’ (1999) The Business Journal 2001 (ABA).

138 Volume 2: International Financial Arbitration transactions where major funding operations with some other forms of proprietary protection are increasingly situated. By talking about secured transactions, and more so by forcing new, asset-protected funding structures into a unitary system of secured interests under domestic laws (the re-characterisation issue), we may be making a significant mistake (absent public order constraints) and entering a world of unreality. That is a first issue for international arbitrators to appreciate. In this connection, the ownership- and security-based systems of funding and protection need to be clearly distinguished. The former normally conform to the pattern of conditional sales of assets, the latter to the traditional secured loan, while sale credit protection is likely to assume the form of the former. In essence, conditional or finance sales present funding through the sale of assets, there is no loan; repos are the main examples. If the repurchase price is not tendered in a timely fashion, the buyer becomes the unconditional owner of the assets he or she bought, and there is no execution sale and return of any overvalue (even if the situation is there for fungible investment security repos, which commonly also include a right of use for the repo buyer, now usually handled through netting and set-off under the ICMA Repo Master Agreement, ignoring therefore the proprietary character of this facility in favour of the netting preferences).239 Finance leases are others. Only if there is a clear loan, identified by an agreed interest rate structure, is the situation different, and any proprietary support will then function as a secured transaction and be converted into it; re-characterisation would be proper. If not, the different risk and reward structures of these funding alternatives should be clearly recognised and accepted. In most domestic legal systems, these insights are often still embryonic, although moving in the direction of greater clarity, with English law probably the most sophisticated and, surprisingly US statutory law (Article 9 UCC) in its unitary approach on this point perhaps the least, although US case law is not insensitive to the (characterisation) problem. This conclusion is somewhat unexpected as it concerns here two common law countries, while academic opinion, shared by many in England,240 often stresses the intellectual and practical superiority of Article 9 UCC. This is undoubtedly correct in many aspects, especially in the treatment of the floating charge, but not in the unitary functional approach to finance sales and their re-characterisation into secured transactions—even the reservation of title. In the meantime, civil law has had little to contribute here in the realm of ideas. In one of the latest efforts at re-codification, the modern Dutch law approach, security substitutes are simply refused any proprietary effect, even though it is not made clear what they are or when they arise. The result is that the modern finance sales are also threatened. Unlike American law, Dutch law does not even convert conditional sales into secured transactions. In the EU the 2008–09 DCFR does not consider the concept of finance sales either and confines conditional ownership rights to reservation of title, now a special proprietary right as are finance leases; repos are secured transactions (!) all in the German legal tradition, which is on the whole unaware of, or unreceptive to, financial dealings and their needs, whether at the national or transnational level.

239 In Re Lehman Brothers International (Europe) In Administration) aka Pierson v Lehman Brothers Finance SA, EWHC 2914 (Ch), 232 (2010), it concerned the nature of the interest of entitlement holders, see also van Setten (n 228) 111, segregated in a form of trust but not passing through to the back up in insolvency situations, which back up is nevertheless segregated, again conforming to transnational market practice, also in the matter of a shortfall in backup and equal treatment of all entitlement holders in the same class of assets assuming that they acquired the interest as bona fide purchasers. See for other Lehman cases s 2.4.3 below. 240 For England see the Crowther Report (1970) and Diamond Report (1989) and further MG Bridge, ‘Form, Substance and Innovation in Personal Property Security Law’ [1994] Journal of Business Law 1.

Volume 2: International Financial Arbitration 139 The importance and danger are that in several countries there remains a substantial re-characterisation risk, which spreads to international finance under the old private international law approach. International arbitrators should be aware of this when asked to deal with these issues in respect of the international flows of assets and related services, assuming always that they have power and authority to bind and affect third parties. In the meantime, one may ask why ownership-based funding has become so much more popular in the last 20 years, as shown in repos, finance leases, and (some forms of) factoring or receivable financing. It is in the possibility of lower cost for the party requiring financing and, particularly, the greater variety of financial products it supports, which are motivated by the need for different risk and reward structures and choice internationally. Certainly, the conditional sale and ownership transfer, leading to split- ownership rights, seems more in tune with the unbundling of risk increasingly practised in international finance. Importantly, opening up the proprietary systems by using the concept of conditional ownership in financing even locally may lead to harmonisation internationally on the basis of an extended notion of party autonomy in this area (always subject to the protection of the commercial flows against these charges, as we have seen), and then provides a bridge between common and civil law, albeit at a conceptual cost to civil law lawyers. It may show that the split ownership in conditional sales and title transfers allows for structures in civil law very similar to those of the common law trust.241 It must be supplemented by a better bona fide purchaser and assignee protection, or protection of purchasers and assignees operating anywhere in the normal course of business in commoditised products of this nature. The result would be a more dynamic but also better harmonised law concerning collateral operating internationally—this must be considered the trend and the pull will derive from international finance itself, but as earlier in the case of assignments and set-off, we see here also the key influence of equity thinking, now in international financial transactions. When properly pleaded, it must be anticipated that this will find support in international financial arbitrations as this is reality in international finance under the modern lex mercatoria. It follows that development of a more transnationalised concept of ownership, still existing in the area of commercial paper and documents of title which are historically the product of the older international law merchant, may further facilitate the operation of proprietary interests as risk management tools in international finance when the assets surface or play a role in other countries. This has already been found to be very relevant for intangible assets such as receivables. Transnationally, the Eurobond remains the most important modern example but it should be so more generally now for all types of personal property that are part of or used in the international flow of assets and funding. This then also affects the security and particularly conditional ownership interests created in these assets, confirming a modern dynamic concept and use of modern movable property law. It was already said repeatedly that the resulting transnational interests would still need recognition in local bankruptcies, especially in enforcement. It has already been said also that this is likely to be increasingly supported by transnational custom or practice or party autonomy, as autonomous sources of transnational law. In the UK, the Lehman cases in the ordinary courts (of chancery) may be seen as starting to reflect this also, see section 2.4.3 below, still subject, however, to a fitting-in process under local bankruptcy or other applicable enforcement laws in terms of an expanded notion of nearest equivalent. International public order requirements may further facilitate and refine this process. 241 It is likely that further ratification of the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1985 (since 1992 effective between the UK, Canada, Australia and Italy), to which the Netherlands has now also acceded, and ratification of which is also being considered in France (see Vol 4, s 1.6.7), will provide its own stimulus in this approximation process.

140 Volume 2: International Financial Arbitration International arbitrators in coming to their awards if touching on these areas of the law between professionals should be aware and are likely increasingly to support structures that support these flows and their needs and move then away from more parochial and fragmented reasoning, subject nevertheless to proper pleading and public order requirements foremost derived from the international marketplace itself, especially to keep it clean and competitive. Again, international arbitrators may arrogate here to themselves also equitable powers that extend to third parties not party to the arbitration but these powers would need support in transnational customary law, that is of the commercial community it concerns. Liquidity and proper risk management in these flows may then also become further considerations. In terms of recognition, it will ultimately be a matter of interpretation and application of the public policy bar under the New York Convention to determine the effect of the relevant awards in local insolvency proceedings which may become increasingly accommodating, it was submitted, in countries that want to participate in globalisation of their business connections and interests. It again demonstrates the advantages of international arbitral awards as against judgments in the ordinary domestic courts which miss this international recognition facility under treaty law. The EU Collateral Directive, already mentioned, even though limited in scope, is a significant indicator of modern trends in the professional sphere and an important pointer to the development of the lex mercatoria in this area, particularly in its clear distinction between secured transactions and finance sales, its inclusion of future assets including receivables and cash, and its lack of formalities. The 2001 Mobile Equipment Convention, although also limited in scope, was found to be significant in better catching modern trends as well. These developments invite discussion on all types of conditional ownership and their operation even in national laws. This may have a similar opening-up effect in the civil law of property as the concept of good faith, fairness or reasonableness had in the civil law of contract. Debate in this area is necessary, urgent and greatly to be encouraged. Unfortunately, it must be noted that the DCFR has not been able to make any innovative contribution and the transnational financial practice itself will have to speak louder, for which international financial arbitration may prove to be an appropriate forum. It should always be realised that we are speaking here of the world of professionals in their wholesale dealings in the international flows. When (consumer) assets come to rest in the hand of end users domestically, there may be another world in terms of proprietary rights. Bona fide purchasers are likely to be protected domestically. It has already been said also that these assets are likely to be immediately consumed and, in any event, largely lose their value once unpacked and they are likely to have only a limited period of use. There may be a secondary e-bay market in them, but it is a low-price and low-quality environment, largely a rotation issue, or merely a question of cleaning out the house. Very few will still feel strong attachments here or a sense of property in the more traditional manner. It has become a lifestyle issue in the consumer world or a form of ‘light weight’ living. These changing perceptions of property in that world are unlikely to surface in international arbitrations and are not therefore the subject of this book, but one of the reasons why projects like the DCFR cannot contribute to the discussion is perhaps that they do not know how to distinguish between these different worlds and are unaware of the different trends in them while still looking for a unitary system. It is submitted that greater imagination and courage will lead to an approximation of the different proprietary approaches in international professional dealings or perhaps to a transformation at that level entirely. It may well be a necessary prelude to understanding and accepting transnationalisation better. In fact, in international commerce and financing, there is no real reason or intellectual justification for the fragmentation of the ownership concept along purely domestic

Volume 2: International Financial Arbitration 141 lines even if the transnational flows could still be cut up accordingly; it is also illogical. Once this is understood, it will also be seen that there is no reason or justification for the differences to remain operative in purely domestic financial transactions either unless there are overriding public policy or public order requirements still in operation at national levels. It is clear that in terms of legal support for newer financial structures, conceptually, civil law has further to go than common law, but in the end, regardless of the disappointment of the DCFR and earlier the 2001 UNCITRAL Convention on the Assignment of Receivables in International Trade, it is unlikely ultimately to hinder the need and tendency to protect modern funding techniques and achieve the necessary cross-border standardisation. Again, international financial arbitration may help and be willing to clarify the picture and support much greater room for the creative force of party autonomy in this area subject to the protection of the ordinary flows and may use the opportunity in particular to broaden the facility of transfers in bulk upon a mere description of the asset class including the use to which the ensuing property right is put and support the connected reclaiming, shifting and netting concepts in the process, providing at the same time a better structure for floating charges and tracing facilities at the transnational level. Thus, the ultimate aspiration, being the transfer as security of an international cash flow, will be attained, effective against all insiders in the nature of all equitable interests but leaving the international flows or outsiders including the general public otherwise unaffected and its liquidity untrammelled, earlier identified as a key issue (see further the discussion in section 2.7 below).242 Yet it was also mentioned that the extension of arbitral powers in this manner may remain controversial and a danger to its credibility, see section 1.1.14 above. Enabling international arbitrators to seek preliminary opinions in these matters from an international court was suggested as an answer. In practice, besides Eurobonds and their proprietary status, the rights in oil rigs placed in the high seas may also support newer concepts of property rights and secured transactions. The practices in swaps under the ISDA Master were also mentioned as well as those under the ICMA Repo Master. It may highlight the importance of physical control at first, but then also of entirely new structures that are not at all physical but may support modern financing of these facilities in terms of conditional ownership and other legal rights that operate transnationally and can no longer be reduced to domestic law concepts and their confines.

242 Domestically, these facilities have commonly depended on statutory law that even now may become increasingly product specific: see eg recent French law in respect of floating charges, repos, securitisations and other newer financial products. Even domestically this is destructive of the existing property concepts of civil law in the countries concerned. Implementation of the EU Collateral Directive in EU Member States had a similar effect at that level; practically, it was a significant move in the right direction although in a limited area. A last observation may be in order. The equality of creditors is often presented as a justified concern and as an argument against the proprietary effects of all kinds of financial schemes likely to protect the financier, as finance sales also do. This equality or the so-called par conditio creditorum is not truly the basis of the system of creditors’ protection or a fundamental legal principle, although in civil law endlessly paraded as such. It is the ranking (and the separation or segregation of assets including reclaiming facilities), and not the equality, that is the essence of modern bankruptcy and of creditors’ relationships more generally. What is equitable, not what is equal is the issue and now usually expressed in (bankruptcy) legislation to which the equality principle is not overriding. What happens in finance sales is a reshuffling of proprietary interests between financiers in more modern ways, who thus re-allocate the risk of default of the counterparty substantially amongst themselves as professional operators. Any detriment is hardly likely to affect the common unsecured creditors, who in bankruptcies are unlikely to get much anyway. Protecting them better—if that became a policy preference—can only be done effectively by giving them a flat percentage of all the assets of the bankrupt estate and can in any event hardly come through dispute resolution.

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2.2.4. Investment Securities and their Modern Holding in Electronic Entitlement Systems In connection with the transfer of investment securities, in either physical or entitlement form, there also arise important proprietary issues, see for a more extensive discussion Volume 4, Part III. They have to do especially with the nature of the trading and holding of the investments in terms of proprietary, co-ownership or beneficial (or similar) rights against intermediaries. The question arises how these issues must be handled in international transactions. Here again, international financial arbitrators may be called upon to clarify and show better ways, which are likely to point to transnationalisation of the applicable legal regime simply because domestic laws can no longer satisfactorily handle these issues in an international market context either when the transfer of these assets is likely to go through several countries. Powers are important and the reach thereof in matters which are indeed largely proprietary and then reach third parties if not also the public interest. This is not the place for a discourse on the differences between bearer and registered investment securities or investment securities of the more modern security entitlement kind in book-entry systems maintained by brokers, but there are some essentials. The latter immobilise the underlying securities at the level of a depository or custodian, who issues entitlements to investors (or their brokers as sub-custodians) in a dematerialised manner allowing for security accounts to be created by brokers for their clients backed up by their own entitlements against the depositories. These entitlements are then transferred in much the same manner that payments are made in modern electronic payment systems. The result is a securities account with the broker, which will at the same time also hold a cash account for its client. There emerges here a sui generis system of transfer that notably does away with traditional delivery notions and requirements in terms of cause and disposition rights. This facility is commonly subject to strict compartmentalisation in the sense that end-investors will not have pass-through rights (amended to some extent only in the case of an insolvency of the immediate intermediary) to the depository and to a strict asset maintenance obligation of the sub-custodians meaning that they must amend their back-up to align it with sales and purchases by their clients/end-investors. This has become the normal way of securities holding and affects trading in the sense that brokers will credit or debit their clients’ securities accounts immediately upon purchase or sales instructions and adjust the back-up promptly by themselves going into the markets or using a set-off against opposite requirements of other clients. Book-entry systems of this nature are an ingenious step forward in the matter of the holding and transfer of investment securities. They underline the importance of dematerialisation of assets more generally and the ever-greater impossibility to handle them physically (unless they must physically be used). They increasingly become mere claims although still of a proprietary nature, even if the meaning thereof may need further elucidation. In truth they are derivative instruments. Short of the creation of securities entitlements, it is clear that the financial instruments issued in the international markets, in particular the Eurobond as a bearer negotiable instrument, always had a transnational property status and derived it from the international law merchant from which originally all negotiable instruments originated. This has already been noted several times and it is so regardless of the contractual choice of law clause as in proprietary matters the applicable law acquires an autonomous function and is not at the free disposition of parties, meaning that a contractual choice of law, usually in favour of English law or the law of New York, is not decisive here whilst transnational customary law is. Indeed, English law has continued to accept that in connection with the negotiability of bearer bonds: ‘the existence of usage

Volume 2: International Financial Arbitration 143 has so often been proved and its convenience is so obvious that it might be taken to be part of the law’.243 The transfer and protection of bona fide purchasers or holders of these bonds (in due course) is then also likely to follow internationally established practices, which may well extend to the types of conditional or temporary ownership rights and security interests that may be created in them, notably the repo, and it then also extends to securities lending and rehypothecation. This is an important theme. Prevailing book-entry systems of transfer, based on underlying immobilised portfolios of Eurobonds, may then also be subject to similar transnationalisation of the applicable legal regime, including the status of these entitlements, the interests created in them and the protection of third parties, although there is here an important (regressive) tendency to see any entitlement register as being located at the place of the intermediary, which has reintroduced domestic notions of the holding of these securities, un-usefully it is submitted. Because book-entry systems are then often still perceived as purely domestic facilities, on the face of it there is thus still a possibility of a strong regression into domestic concepts even in respect of underlying securities that are internationalised such as Eurobonds. Transnationalisation remains important nonetheless, and necessary in the proprietary aspects, especially in the assetmaintenance obligation affecting tiers in other countries, the protection against insolvent brokers who have back-up entitlements elsewhere, any remaining pass-through rights through tiers in other countries (relevant particularly in a bankruptcy of the broker who issued the entitlement), the prohibition on the pledging by intermediaries of back-up entitlements, the way end-investors may themselves encumber their entitlements or transfer them conditionally, the finality of the transactions, the protection of bona fide buyers of these securities entitlements, the danger of a shortfall in entitlements if there is insufficient back-up, and the effect of intervening bankruptcies on clearing and settlement. The lack of interest in the 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary is an indication that, after an initial flurry of interest, this private international law treaty, which seeks to perpetuate the prevalence of local laws in the international holding and trading of securities of this nature, did not show the right way and it has not found many ratifications. Rather, the market sustains the continuing operation of the transnational lex mercatoria in this area and it is submitted that in practice that has been the case for a long time, no different now for securities entitlements in these markets.244 It means that domestic laws are irrelevant and 243 Bechuanaland Exploration Co v London Trading Bank [1898] 2 QBD 658. 244 A shock resulted in this connection from the decision of the Belgian Supreme Court of 17 October 1996 (SartTilman) [1995–96] RW 1395, note Storme, ruling out the fiduciary or conditional transfer of assets in Belgium. It greatly increased the re-characterisation risk in respect of ownership-based funding through Euroclear and raised the spectre of the need for the execution of a pledge agreement in all cases and the crediting of the investment securities to the special Pledge Account in Euroclear under Art 5 of the Royal Decree of 1967 pertaining to Euroclear, assuming Belgian law was applicable. The situation was remedied through new legislation of 15 July 1998 concerning ‘amendments to certain legal provisions regarding financial instruments and securities clearing systems’ (Art 30) [1998] Moniteur Belge 28.934. The better view is that the 1996 case was not relevant in the first place as transnational market practice applies to euro securities and the way they are held and transferred through Euroclear. Belgium law at most applies residually. That appears also and correctly to have been the view in the market before the Belgian remedial legislation became effective. This Belgian legislation of 1998 covered more than the operations in Euroclear but is limited to situations where the transferor is a bank or other financial institution or performs investment activities for its own account or for the account of third parties (or is a foreign company or institution with a similar status). In other words, it only applies to fundraising in the professional sphere (but can be done on behalf of customers). The re-characterisation risk was eliminated in Luxembourg much earlier through the Grand Ducal Decree of 19 July 1983 on fiduciary agreements entered into by credit institutions, but the protection was limited to securities located in the Grand Duchy, which raises the issue of the location of securities entered in a book-entry system: see for the more modern solutions (also in Euroclear and Clearstream), Vol 4, s 3.2.2.

144 Volume 2: International Financial Arbitration conflict of laws rules redundant except in a supplementary fashion. In respect of international registers or book-entry systems, domestic laws are in any event fortuitous for lack of sufficient contact. Market practices and general principle then take over. Importantly, this also allows for transnationalised notions of security interests or repos and conditional or other finance sales to attach to or operate in them.245 It may be noted, however, that in the EU, the EU Settlement Finality Directive of 1999 is still couched in terms of domestic law (and its harmonisation);246 it seeks to deal especially with bankruptcy problems and provides primarily for a harmonised regime meant to protect the position of the European Central Bank (ECB) in its liquidity-providing function to the banking system, which is based on repo financing, although many EU countries have implemented the measure to apply more generally. The Directive intentionally side-stepped proprietary issues, which therefore remain unharmonised in the EU. However, in 2004 a limited effort was made in the already mentioned EU Collateral Directive to deal with (some) rights (in terms of securities or repos) that can be established over securities entitlements, without, however, defining these entitlements and their nature either. In the Settlement Finality Directive, the type of collateral is also not defined and could be a security interest of conditional or temporary ownership as we have seen. Floating charges are also possible that cover future assets and transfer them in bulk subject to an adequate description. Control must be surrendered but that is possible in many ways, which also remained largely undefined, yet it has remained an issue under the Collateral Directive as we have also seen. As already mentioned, the Settlement Finality Directive is mainly concerned with the narrower issues of collateral and introduces here a harmonised regime within the EU, but the legal status of the underlying investment securities and especially of securities entitlements or the bank balances was not considered and as a consequence neither were the important segregation and pooling issues. Nor is the question of the residual proprietary rights of the original owner in the assets offered as collateral. Conflict of laws notions may thus remain important, also in the question of the protection of bona fide security investors and in the issue of finality to the extent not covered. The Settlement Finality Directive, like the Collateral Directive, still opts here for the so-called PRIMA (Place of Relevant Intermediary Approach) rule, therefore for the domestic law of the most immediately concerned intermediary with whom the account is held. There are some clarifications, however, and in Article 9 a number of issues are clearly identified as being covered by the law of the book-entry register, notably whether the entitlement holder’s right is overridden or subordinated to security interests or conditional sales, the legal nature of any such rights, their creation and effect, the position of bona fide purchasers in this connection, and the execution of such interests. Should the already mentioned 2002 Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary, which introduces the PRIMA notion internationally, be adopted by EU countries, it would prevail over 245 There are substantial problems with the pledging of investment securities, repos, stock-lending, short selling, margin buying, and rehypothecation, which cannot be discussed here at length, but see Vol 5, s 4.1.3. They are by no means eliminated in book-entry systems; they may even have become more intractable in international dealings but cannot be resolved by a private international law approach to these problems either without breaking up the markets into domestic parts, which only leads to further complications and confusion for no obvious reasons. 246 The Settlement Finality Directive of 1998 (Art 3(1) and (2)) was meant to reduce the liquidity risk, particularly in transactions with the European Central Bank (but was given a wider scope in most EU countries in the implementing legislation). Ultimately the concern is to reduce systemic risk linked to payment and securities settlement systems and is therefore not only (or even primarily) concerned with payment systems, but at least as much with security entitlement systems and any transfers in those systems (although added only in the later drafts). It only affects certain payment and securities settlement systems governed by the law of a Member State and notified to the Commission by the States whose laws apply to them. Participants are also a defined class and only include supervised financial institutions, public entities, central counterparties, clearing houses and settlement agents.

Volume 2: International Financial Arbitration 145 the provisions of the Collateral Directive in this regard and notably introduce a degree of party autonomy allowing for a contractual choice of law (presumably always of a national nature). The problems with the PRIMA approach are discussed elsewhere.247 The absence of any sensitivity to market practices and international custom in respect of the operation of modern book-entry systems remains its greatest oversight, but that is also true for the EU Directives. It ignores the connection with the modern lex mercatoria. Even for the uniform perfection regime, reference is still made to conflict rules while local registration requirements also remain applicable as long as they do not undermine the validity of the relevant security interests or title transfers. Ranking is also specifically left to the law so found to be applicable. It would of course still be subject to the normally applicable execution or bankruptcy rules. In 2009, UNIDROIT produced a Geneva Convention on Substantive Rules for Intermediated Securities (‘the Geneva Securities Convention’, not yet entered into force for lack of sufficient ratifications),248 aiming at a uniform substantive regime. In the methodology of this book, it would still have to find its place in the modern lex mercatoria amongst its other sources of law and their hierarchy, and is therefore subject to higher fundamental principle and custom. In terms of the applicable law, attention must also be given to modern clearing and settlement systems. Technically, clearing and settlement organisations operate on a membership or participants’ basis subject to a membership agreement or general conditions.249 In the case of a transfer, the modern clearing systems 247 See Vol 4, s 3.2.2. 248 The Convention devotes no special attention to repos but appears to treat them in the same way as security interests (Art 11). This must be a mistake: see also the text at n 236 above. There is an optional Chapter V that deals more extensively with collateral transactions. It also covers title transfer collateral agreements, which here include repos (Art 31(3)(c)) but does not go into the distinctions and re-characterisation issues. The Convention has not attracted practitioners’ attention and seems too contrived to work properly. 249 The following techniques are commonly used in this connection: (a) A settlement agent or central depository system requires the participants to enter into bilateral relationships with the settlement agent under which that agent holds cash and securities accounts in which intraday debits and credits are netted out on a bilateral basis between the settlement agent and the participant. The modern book-entry systems on which security entitlements are based are an important example of this system and function also between a broker and his clients (assuming that the broker operates a book-entry system). (b) A clearing house system which has two phases in the settlement process and which in principle involves all participants. In the first one, the payment and/or delivery instructions are calculated and netted out between the participants for a period (say one day). Subsequently (either the same trading day or within an agreed period thereafter, say T+1 or T+2) any resulting balances are settled by payment or delivery to each participant. That is the system of settlement through Euroclear and Clearstream and most modern payment systems. (c) A central counterparty (CCP) system allows all transactions to be conducted with the same counterparty through back-to-back transactions, while this counterparty nets and closes out (either the same day or within an agreed period thereafter) all deals outstanding between it and any participant in its system. It is often exchange connected (especially in derivative exchanges) and in the case of a transfer between two end-users who have matching trades, the exchange becomes technically the buyer to any potential seller and the seller to any potential buyer. From early on, the DVP or ‘delivery versus payment’ was the standard settlement method, at least in the Eurobond market, based on a shortened settlement cycle. Within it, there were several more specific techniques practiced, see also the ‘Delivery versus Payment in Securities Settlement Systems (1992)’ Report of the Committee on Payment and Settlement Systems (CPSS) of the BIS or Central Banks of the Group of Ten Countries, which distinguished between: (a) real-time gross settlement, which meant simultaneous trade-by-trade execution of the securities and of the payment transfers; (b) gross settlement over a time period, in which the trade-by-trade approach is maintained but the securities and the payment streams (often guaranteed by banks) are netted out at the very end of the cycle; and (c) net settlement, in which all is simply netted out between participants at the end of the settlement period (but still on the basis of simultaneity).

146 Volume 2: International Financial Arbitration themselves may guard against default by the broker, of which the central counterparty (CCP) technique is the more advanced.250 It implies a guarantee of the operation of the system by one counterparty, who takes over all rights and obligations from the participants through a kind of novation and nets-out on a continuing basis all mature obligations in terms of security transfers and payments provided there is sufficient standardisation in the underlying instruments to make this feasible.251 It has already been said that although technically often still considered subject to a domestic legal regime, the manner of operation in the international markets, the way of clearing, settlement and netting, the repo business and the pledging of the assets, all became substantially subject to the practices of the Eurobond market and should as such be considered transnationalised, even Euroclear and Clearstream, which were both originally still perceived as domestic (Belgian and Luxemburg) institutions in support of the Eurobond market. A similar attitude may then be taken in respect of the connected derivative markets, their products and operation. This should neutralise not only the legal problems derived from any lex situs as applicable law in respect of the underlying bonds or other investment securities, but also the problems connected with the location and operations of these additional facilities. The result is less legal risk and also a more predictable and cost-effective regime. Again, international arbitrators might have here more flexibility and be less attached to local laws upon proper pleadings of the parties, but their powers extended to property issues and public policy must remain controversial.

2.2.5. Segregation, Ranking and Constructive Trusts If, as is submitted, transnationalisation of the applicable private law is a necessity for operations in the international marketplace in order for the applicable law to remain relevant and responsive in the international flows (unless public policy forbids it), it must be admitted that, especially for financiers, key issues at that level are separation and priority, again largely proprietary issues. This challenge is more extensively discussed in Volume 5, section 1.1.9. In other words, when in a bankruptcy (wherever) may some party, in this case the financier of the bankrupt debtor, lay claim to assets of the latter’s estate and segregate them, that is, take possession from the bankruptcy trustee or retain the assets if already in possession, and claim them as his own (potentially leading to appropriation in conditional or temporary sales for financing purposes) or when may a priority right be asserted in any sales proceeds in an execution sale of these assets and who may initiate and conduct the execution sale in such cases? Or when may there be a set-off of mutual claims (either by statute or under netting clauses), which also leads to a form of priority/preference? This facility has already been discussed in greater detail above. Issues of separation of assets and differences in ranking as part of execution sales in or outside bankruptcy emerge all the time in both civil and common law countries. For bankruptcy, it is often said that equal distribution is the essence of all modern bankruptcy law, but in truth it is

The practical difference is in the liquidity requirements of the participants. Regardless of DVP, bankruptcy laws may still undermine the system in the case of an intervening insolvency of one of the participants. This is the concern of legislation, see in the EU the Settlement Finality Directive of 1998, n 211 above. 250 See for this clearing HF Minnerop, ‘Clearing Arrangement’ (2003) 58 The Business Lawyer 197. 251 Note in this connection the Australian (Victoria) cases in IATA v Ansett [2005] VSC 113, [2006] VSCA 242, and [2008] HCA38, see n 211 above.

Volume 2: International Financial Arbitration 147 equitable (not equal) distribution,252 which in modern times is a matter of statutory definition in terms of ranking and set-off or netting facilities. Indeed, it is this separation and particularly the ranking or priority that is the essence of modern bankruptcy. Equality only exists within the same rank. As each secured creditor is likely to constitute a rank of its own (except perhaps for unperfected or uncrystallised security holders in floating charges especially in the US and in England who may figure together as the lowest class of secured creditors just above the unsecured ones), in practice there is likely only to be equality in the lowest ranks. A technical reason is further that unsecured creditors are likely to have only obligatory claims, which rank pari passu per se. Only in modern reorganisation proceedings may the needs and details of the survival plan suspend the separation or priority and demand concessions even in respect of secured claims and segregated assets, especially in terms of stays and cram down. It could even interrupt a set-off or at least the operation of contractual netting clauses.253 Subject to these limitations and amendments, protection against bankruptcy or bankruptcy resistance is created for financiers basically by granting them full or more limited proprietary

252 See the comment in n 242 above, see also Vol 3, s 1.1.9. 253 The basic principles of ranking which will assert themselves also in transnational law may be summarised as follows: the older right prevails over the younger (prior tempore, potior iure: first in time, first in right), except that the grantor of the right is always postponed although likely to be fully reinstated at the end of the term of the security right (if not executed). This priority among the grantees is the normal consequence of proprietary rights having an effect against all the world. The older interest holder may therefore ignore the younger. Any secured creditor may (in principle) execute subject to the other liens or similar interests, although subject to the rights of bona fide purchasers (not so likely in a forced sale). Bankruptcy laws may sometimes provide for a sale free and clear by the trustee (to realise overvalue) subject to the secured creditors being paid off according to their rank out of the proceeds (or being given alternative security): see s 363(b), (c) and (f) of the US Bankruptcy Code and s 15(2), (3) and (9) of the UK Insolvency Act (for administrations under the Act). Sometimes there may also be an implied right for the debtor to sell free and clear in the ordinary course of business as under a reservation of title or floating charge to protect the ordinary flow of his business. Although ‘first in time, first in right’ is the basic rule, there are exceptions: purchase money may have the highest priority in order to safeguard the ordinary flow of goods. More specific charges are also likely to prevail over more general ones: therefore, the later reservation of title is likely to prevail over an earlier charge over all the buyer’s present and future assets. In England this follows from the crystallisation requirement in respect of floating charges. Possessory liens may be advantaged over non-possessory liens, so that they may more readily entail their own execution right even in bankruptcy of the debtor, and may therefore avoid the trustee’s costs, and will not be dependent on his action and timing. This is not so in Germany, where there is for the non-possessory charge (Sicherungsübereignung) in a bankruptcy of the counterparty only a right to a priority in the proceeds (Absonderung rather than Aussonderung). Other countries such as the US accept rights to repossession and separate recovery but make them subject to a short and temporary stay under s 362 of the Bankruptcy Code. It may also be different for statutory liens or (in France) privilèges, which are usually non-possessory and lead only to a preference in the bankruptcy liquidation proceeds. Contractual liens normally prevail over such statutory ones even if older, although some statutory liens, like tax liens, may sometimes also be given the status of a contractual security interest, especially in the US, as a consequence of which the older ones prevail over younger contractual liens. Statutory liens, especially general tax liens, may by statute also be given super priority status and then take priority also over all contractual liens and more specific statutory liens, which normally would have precedence. It may be added that in this area of status and ranking and the rights derived therefrom, the various legal systems are by no means always clear, even in respect of purely domestic proprietary and similar rights. Especially the conflicts between the reservation of title, particularly when allowed to shift to replacement goods and proceeds and floating charges or earlier security interests also comprising future assets of the debtor, may be substantial and have given rise to much litigation. It should also be considered that the set-off gives perforce the highest priority, while retention rights in practice may force the other creditors, even if secured, to pay off the retentor in order to be able to recover any excess value in the retained assets. The status of contractual enhancements of the set-off and retention right may again be much less certain and give rise to many questions.

148 Volume 2: International Financial Arbitration rights in the debtor’s assets or through set-off facilities. Separation or segregation facilities or priorities are not, however, only derived from proprietary and set-off rights. In the realm of separation outside the area of proprietary rights and set-off proper, in common law countries (in equity) we have constructive trust facilities and the possibility of equitable liens or retention rights, see Volume 4, section 1.4.10. They are often a sequel to unjust enrichment or restitution claims and not typical bankruptcy or default remedies but are also effective in insolvency and are then especially important and relevant in bankruptcy situations, but when precisely they arise and how far they go (as into commingled or replacement goods) is often less clear. In common law, the notion of tracing is closely related to this concept of constructive trusts, and means exactly to reach replacement assets, of special importance in floating charges. Common law jurisdictions are basically pragmatic here, again especially in equity, although neither necessarily generous nor even fully clear outside the areas of trusts, conditional and temporary ownership rights, and floating charges. Civil law is more restrained. A key point is that common law jurisdictions allow proprietary relief, thus returning assets in appropriate cases, even in a bankruptcy of the counterparty, while civil law in such matters may at best give a claim for damages, which will be merely a competing claim in a bankruptcy of the debtor. Yet even in civil law, a retrieval facility increasingly surfaces where moneys have been improperly handled or misappropriated by asset managers and broking agents or are threatened by their bankruptcy. It shows a true need for separation, also accepted where proprietary rights are increasingly allowed to shift into replacement assets and proceeds and a beginning of tracing may become possible. In the law of obligations this type of relief earlier led everywhere (but particularly in civil law) to increased possibilities of specific performance. The notion of separation beyond the realm of proprietary rights, set-off, or unjust enrichment is mostly connected with pooling, joint or common ownership, and legal personality notions, as may also apply to bankrupt estate itself. In agency and guardian relationships, the management and treatment of client assets and moneys, as well as the handling of assets of minors or incapacitated persons, create a need for ever stronger protections of the principals or beneficiaries, also through separation notions, especially important if the assets are officially in the name of the agent or guardian, which is normally the case. Again, this is a problem habitually resolved in common law through constructive trusts, which is much more difficult to achieve in civil law. But even if there is separation in principle in such cases, there may still be practical problems when the assets remain or become irreversibly commingled with the assets of the holders, managers or trustees, or creators of these separated properties and can no longer be clearly identified. It is a question of fungibility and is then also a problem in common law (cf in the case of proceeds especially section 9-315 UCC in the US). Note further that sufficiently separated client assets and accounts will give rise to pooling if there are various beneficiaries, but also note that in such cases, this pooling is not itself the cause of separation but rather the result of it. Similar problems arise when assets are used in the manufacturing of replacement goods when separation in principle may be joined by interests of others in the products if their assets were also used in the manufacturing process. Yet it follows from the foregoing that the extent to which separation/segregation or priority rights can be privately arranged beyond full ownership structures and secured transactions is not always clear. Finally, it should also be considered that creditors may voluntarily postpone themselves, as, for example, in the case of lenders conceding subordinated loans. This is truly a question of party autonomy and third-party benefit, not therefore limited, as it benefits and does not seek to prejudice other creditors. It is very common and is normally not contentious, although the ranking of these postponed creditors among themselves may still be an issue and the legal nature

Volume 2: International Financial Arbitration 149 of subordination may still present problems.254 Subordination may be complete or springing (or inchoate), which means that junior creditors will still receive payments as long as certain events do not happen. In the practical operation there may also be some differences: it is normal in a contractual subordination that the junior does not receive anything as long as the senior creditors are not satisfied, but it is also possible that the junior creditor receives his payments normally but sets them aside for another class of (senior) creditors. In this connection, there may even be a trust structure or subordination trust, which confers on the senior creditors a beneficial ownership right in the sums of money so set aside. More importantly, postponement may also result from the operation of the applicable law. This is again particularly relevant in bankruptcy, and may arise in respect of creditors who have taken an active part in the management of a bankrupt company, such as directors/sole shareholders, and provided loans. It is an instance of lifting the corporate veil or of equitable subordination,255 also relevant for loans of unlimited partners. All these issues are likely to arise in financial dealings conducted in the international marketplace and they may then also be raised in international arbitrations concerning them. Again, it may no longer be useful or even possible in the international flows to rely here merely on domestic concepts, mainly because of the location issue and the weak connection with any country and its laws. Here also, the dynamics of international finance and the way it is protected and risk is divided are likely to take over and cannot then escape international arbitrators, although again the powers of international arbitrators to deal with proprietary issues and related public interests may remain in doubt.

2.2.6. Transactional and Payment Finality Other overriding concepts may also increasingly have to be considered from an international market perspective, especially the concept of transactional and payment finality and its theoretical legal underpinnings in that market, again in essence proprietary issues. This is also reminiscent of the older lex mercatoria: internationally there were early concerns in this connection in respect of negotiable instruments and letters of credit where the protection of the bona fide holder was joined by the notion of abstraction or independence meaning that these facilities were separated from the relationships out of which they arose so that a defect in these relationships could not undermine effectiveness. These crucial concerns and remedies continue unabated for more modern forms of bank payment, in fact they arise for all traded commodities and, it is submitted, acquire then also a special significance in the modern lex mercatoria. In international

254 It is probably best construed as a third-party benefit agreed with the debtor, the third parties being here the creditors that stand to benefit except in situations where there is an agreement to the effect between all existing creditors of a debtor. Notably in bond issues that is not normally the situation. It cannot be so in respect of unknown future (senior) creditors either. In the case of a bond issue, the undertaking between the debtor and junior (subordinated) creditors arises from the participation in the issue or the acquisition of subordinated bonds in the secondary market. The subordination must probably be seen as irrevocable by the debtor, even before the senior creditors have accepted the benefit. They may in fact never explicitly accept before a bankruptcy of the debtor, but their acceptance may be implied from the moment the benefit is given. It is commonly assumed that this acceptance does not lapse through a default under the original loan agreement, or in the case of its invalidity or rescission after the funds have been supplied. It would amount to a lifting of the subordination when the funds become so returnable. 255 cf s 510 US Bankruptcy Code.

150 Volume 2: International Financial Arbitration transactions, finality is a major issue; it should not be confused with legal certainty. It is a proprietary matter256 (see also the discussion in Volume 1, section 1.1.7). Although these issues are often still perceived as questions of national laws, again they may be better clarified in a transnational context and given their proper weight in international transactions and payments made in that context. The lex situs would otherwise be the first call but again in international business the point is that assets are likely to move in trading or moneys in payment, so that their situs becomes uncertain and the location is in any event unclear when electronic payments are made out of bank balances that could be anywhere while several intermediaries in different places form the (virtual) pipeline through which the payment reaches the payee. For investment securities of the entitlement variety, the situs could also be anywhere, as we have seen, and thus also gives little guidance in terms of determining the finality of the transfer. Yet transactional and payment finality is a key issue in all markets and central to their operation and it acquires in the international marketplace an international flavour. As already mentioned, it is proprietary: who in the end has what? Ultimately it may be for international arbitrators to clarify what the relevant rules in this respect are in the transnational commercial and financial legal order as it concerns here legally a key part of its infrastructure. The bottom line is that in the professional sphere, no amount of legal sophistry (whether under a domestic or transnationalised law) should unsettle done transactions except if there is fraud. The notion of finality is in modern times particularly underpinned by the protection of: (a) bona fide purchasers or rather all purchasers in the ordinary course of business concerning commoditised assets to protect the commercial and financial flows; (b) the abstract system of title transfer, which separates the transfer and validity of proprietary rights from the underlying contract out of which they arise and its validity; and (c) the notion of reliance. It is further reinforced by (d) de-emphasising the psychological nature of the will, notably in matters of mistake that could otherwise easily undermine any transaction, even the delivery itself as a legal act where still required. The concept of independence, well known from negotiable instruments and letters of credit as just mentioned, is an important support here and the abstract system of title transfer is another particular example of it, but there are more instances such as the independence of the receivable vis-à-vis the contract out of which it arises (and once assigned cannot easily be invalidated under it either) further underpinned in assignments by the abstract nature of the rights of the assignee. But the essence is that in the international marketplace, in order to quiet title, we must look increasingly for transnational concepts of finality operating in that market and this may then also surface in international arbitrations. Again, finality should not be confused with legal certainty. The latter is an objective of the DCFR (see Article I-1:102(3)(c)), there only relevant in interpretation and, even then, irrationally so it is argued, as it condemns participants to antiquated notions that could be so out of date that certainty of this nature means low-quality law. One may here recall what has already been said

256 Certainty in this narrower sense of finality has traditionally been stressed in English case law (without, however, distinguishing itself sufficiently from the more abstract notion of certainty) ever since Lord Mansfield, especially in mercantile transactions, see Vallejo v Wheeler [1774] 1 Cowp 143, 153 (KB); see more recently also Homburg Houtimport BV v Agrosin Private Ltd, The Starsin [2003] 1 Lloyd’s Rep 571, 577 (Lord Bingham of Cornhill) and Compania de Neviera Nedelka SA v Tradex Internacional SA, The Tres Flores [1974] QB 264, 278 (Roskill LJ). For the US, see Mc Carthy, Kenney & Reidy, PC v First National Bank of Boston 524 NE 2d 390 (Mass 1988). Again, it is to be noted we are concerned here basically with negotiable instruments and letters of credit, all related to payments, or bills of lading, therefore a narrower strand of commercial law where finality is indeed of special importance and the key issue (not certainty, even when the term is used), see also Pero’s Steak and Spaghetti House v Lee 90 SW 3d (Tenn 2002).

Volume 2: International Financial Arbitration 151 about an irrational search for stability and the earlier remarks to the effect that future needs can often not be adequately covered by extrapolation of past experiences. Finality in title transfers and payments is a narrower but also more forceful concept than ‘certainty’. Certainty should then also be distinguished from predictability, which is a dynamic concept.257 In securities trading special finality issues may arise in a bankruptcy context. They do not then concern the finality of any transfer proper but rather the power of an insolvent intermediary still to give transfer and settlement instructions, its (continued) functioning in the relevant clearing and settlement facilities, the effect on its participation in the netting, and any retroactivity of the bankruptcy in this regard until the beginning of the day of the bankruptcy (which is a common bankruptcy rule and undermines all transactions in which the bankrupt was involved on the day of his bankruptcy). These finality issues arise typically in the context of the settlement of agreed transactions and have in Europe been the subject of the EU Settlement Finality Directive already mentioned above.258

257 The DCFR showed little appreciation for this key concept of finality. It is not central to it and it even seems to prevaricate, especially in rejecting the abstract nature of the transfer, ultimately to embrace the causal system at least in the transfer of chattels, Art VIII-2:202 and probably now also in the assignment of claims, Art III-5:118(2) meaning that it allows a completed title transfer to be undermined by the status of the underlying agreement of transfer. It has already been said that this makes little sense in a modern commodity-driven environment. By moving away from the German system, which showed here the better insight—and which it otherwise slavishly followed—the drafters of the DCFR confirm that they had little idea of real needs and it is regressive. Even so, the DCFR adopts the principle of separation between contract and transfer, see Art IVA-2:101, the latter requiring a separate act of transfer to effectuate a change of ownership in the sale of goods. From Arts II-7:212 and II-7:303, it would appear that the effects of nullity or avoidance of the underlying contract are determined by the rules on unjust enrichment. In this connection, Art VII-2:101(2) states that if the contract or other juridical act is void or avoided retrospectively, the enriched person is not entitled to the enrichment on that basis. This would still seem to suggest a need for a retransfer, therefore an abstract system as also borne out by Art VII-5:101, which specifies that where the enrichment consists of a transferable asset, the enriched person reverses the enrichment by transferring the asset to the disadvantaged person. Whatever the right interpretation of these sections, as far as finality goes, the DCFR’s various facilities add up to a concept of finality that seems confused and is too weak for the commercial and financial practice, especially in the adoption of the causal system of title transfer as the general rule. 258 In terms of the legal characterisation of the transfer and its finality, similar issues arise in the case of (electronic) payments through the banking system. These issues also centre around (a) the question of capacity and intent and the effect of fraudulent or defective instructions, (b) the meaning of acceptance, and (c) in the transfer, its formal requirements (eg in terms of existence, identification and delivery) and its acceptance. Finality is here underpinned by (i) de-emphasising the role of capacity and intent; (ii) the abstract nature of the crediting or debiting; (iii) notions of independence of the instructions; (iv) the bona fides of payees once they have been credited, so that they need not be concerned about the origin of the money or it being tainted unless they were in the plot—it is truly a question of title and disposition rights which may be assumed; or (v) as a question of reliance. It is, however, possible that the issue of finality is handled somewhat differently for securities entitlement transfers than in payments. For payments, the emphasis in the reasoning may be on (i), (iv) and (v), for investment securities it may be more on (ii), (iii) and (iv), in line therefore with the notion of abstractions of the transfer and independence of the instructions derived from the practice of the old negotiable instruments, which investment securities traditionally were. In the US, in payments through the banking system (as against cash payments), the matter is the subject of statutory law in Art 4A UCC. It appears to rely on a combination see also Comment s 4A-303. The Germans may rely more on the notion of abstraction or independence. For investment securities trading, Art 8 UCC appears to favour option (iv)— finality is enforced and adverse claims cannot be made against bona fide transferees for value: see ss 8-502, 8-503(e) and 8-510 UCC. Similar needs arise also in respect of the irreversibility of instructions once the process of transfer is set in motion although, if the transaction is not chained, there is less danger of legal disruption. However, especially in the case of fraud, it may still (exceptionally) be possible to prevent or reverse any credit to an investor. Also, if the debit or credit is due to an error at the level of the immediate intermediary, the latter may still be able to correct its mistake by amending the booking, but not for other reasons. In other words, the intermediary must also respect the finality of the booking. It is not certain whether in the daily practice that is sufficient.

152 Volume 2: International Financial Arbitration This does not mean that a defective payment or a defective security transfer cannot be remedied later by the payor or in the case of investment securities by the broker. Naturally, an erroneous or defective payment can be reclaimed by the payor. But that would be a separate issue and a different legal act or cause of action, for example on the basis of mistake or unjust enrichment when too much was paid or credited in terms of a commercial transaction, although even then, as we shall see, the transferee may still be protected and keep the money or securities, regardless of what went wrong to the extent he/she was somehow owed them, assuming the receiver was in good faith and did not contribute to the mistake. Again, the key is that a transaction once completed should not itself become invalid and reversible merely because of some legal sophistry in terms of capacity, intent, disposition right or delivery (assuming always that the money was owed and indeed received). That is finality. Different legal systems may take different approaches (or even a combination) or put the emphasis differently as we have seen, but the objective is always finality. In many countries statutory law may still be patchy or non-existent and the matter is left to case law. It is obvious that a more subjective or objective view of finality is possible here, and although there may be legitimate controversy in this area, there is growing unanimity that the effectiveness of transactions and payments should not be undermined by subtle legal reasoning, either at the level of the payment method and intermediaries or systems used or at the level of the liberating effect. So, the objective approach is the preferred one. It is not a matter of principle but one of necessity and transnational law would reflect it. In terms of finality, there are also important practical issues for example, as to whether and how payments in the pipeline, that is for bank transfers the banking system, may still be stopped or automatically reversed, especially in the case of human or system error (or fraud). Whatever the legal arguments, the modern approach is that that should not happen lightly (and only under special rules). It bears out that these payments, once set in motion, should be seen as independent from their environment or history and from the defects that may attach to the original instructions and intent. Again, this is an economic necessity backed up by public policy choice to which the applicable law must conform. In other words, once payment is set in motion and is, so to speak, in the pipeline, it must be unhindered as it is in no one’s interest to throw sand in that machine. This policy choice in the operation of payment systems should also come out at the transnational level and if necessary be reinforced there.259 Again, in matters of the applicable law, international financial arbitrators when confronted with these issues will likely be increasingly sensitive to the practices developing in this regard in the international marketplace itself, supplemented if necessary by the general principles they find in domestic laws, rather than breaking up tiered transactions according to the law of the place of the relevant securities intermediary or chained transaction per country of the relevant intermediary bank. It is harmful to international trade and payments and undermines the very finality it seeks. Transnationalisation of the concepts works here in favour of greater market stability and is likely therefore to be favoured by international arbitrators, barring any public policy or public order impediments, which themselves may be increasingly transnationalised.

259 Another one is that money is presumed to be untainted. So, the ultimate receiver might consider it clean, again, unless he was in the plot itself. That goes for cash but also for credits in banks. To repeat, it is the issue of finality of the transfer or payment. A similar approach may be anticipated in the transfer of investment securities.

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2.2.7. How Do We Transfer an International Commercial and Related Cash-Flow and How do We Rank Proprietary Interest Holders Transnationally? Ultimately, the transfer of an international commercial and related cash flow is probably a key issue in all of the foregoing, where the applicability of domestic law and its monopolisation of the legal sphere may become insufficient, irrational, ineffective and wholly out of date. In fact, this concerns the legal position of all globalising commercial and financial flows and affects their liquidity, risk management, and transaction and payment finality facilities and aspects. What is more normal than that a manufacturing plant, which produces cars it wants to sell in different countries, offers its entire stream of products and resulting receivables and payments to a bank for financing of its working capital? Yet we have already seen that even domestically this may create great problems, especially in civil law countries when future assets cannot be transferred and any transfer in bulk is in any event legally hampered, as (in that approach) all items to be transferred proprietarily must be individualised and identified as existing assets. It is the notion of physicality in respect of all assets, particularly strong in civil countries but in common law countries also at law, although not in equity. It may well be the fundamental flaw in all thinking on the subject. Proprietary rights are not physical, as no right is, and should not be characterised by the nature of the underlying assets. Legally, it is substantially irrelevant what these assets are. In any event, in a modern environment they have to be captured in their flow rather than as individualised, identifiable, immobilised items. If that much is accepted, it follows that all thinking in terms of lex situs also becomes essentially flawed and redundant in respect of all that moves. That also suggests that there is no natural preserve for any domestic proprietary regime left in respect of the international flows, be they of goods, services, money, information, or technology. All must be captured in their movement and liquidity whilst they constantly change in their substance. Reasonable description then takes the place of identification, individualisation and physical setting aside, and will capture these assets in their flows and transformation without affecting the title and its transfer. The description will extend to the type of user, income and enjoyment right that is created or transferred, some of which are or may become proprietary. Party autonomy takes over but to do this safely and efficiently, it was already noted many times, the proprietary aspects only operate against the insiders, that is those who themselves commonly participate in the creation of these rights. All flows are otherwise free of these charges as has already been said several times, and it is the essence of equity in common law countries, which notions are here transferred to the international marketplace. Floating charges in (common law) countries that recognise them are even now locally a prime example of this but they are often still considered exceptional elsewhere. The concept is due to move to the centre and should, it is submitted, become the key to our thinking concerning all property law in movable assets that are part of the international flows, whether tangible or intangible. This thinking supplements the larger space for party autonomy in this area that is likely to be accepted in the international marketplace in shaping these proprietary rights while rightly curtailing their effect on these flows in respect of all purchasers in the ordinary course of business of these products. This was explained before and again reminds strongly of the approach in equity in common law countries. It may be recalled that in the traditionalist conflict of laws approach, the inventory and related cash-flows would have to be transferred individually per item or claim per country of their situs, whichever it may have been, even though in respect of physical assets that habitually move

154 Volume 2: International Financial Arbitration between countries and for receivables, there was never a natural situs as there is not for claims either. Moreover, whenever the asset transforms into its next phase of production, all may be lost and needs to be re-established with potential loss of rank. In fact, from this notion of situs and its narrowing concepts in many countries, it commonly followed that under the old private international law approach to the applicable (domestic) laws, it was not possible to transfer an international commercial and related cash-flow at all. It would have to be identified and chopped up per country and separated accordingly (always assuming that the separation was possible— that is the situs determinable—and that even domestically the transfer of the parts was possible). This was so for no other than systematic and parochial reasons: law being always national in this perception and in property law physical. Again, even the DCFR could not contemplate a better system, now for the entire EU area, and its approach to floating charges remained confining as we have seen. The modern lex mercatoria would be able and probably keen to take the necessary steps, indeed means to acknowledge the unity of commercial and related cash-flows and arrange and protect their transferability under transnational law in the international marketplace. It is a practical necessity in a globalised environment, unless public policy and public order (then also of a transnational nature) dictate otherwise, although again it would be hard to see why. It presents the ultimate challenge to international financial arbitration, although here again, these newer proprietary structures may for their ultimate effect still depend on recognition in local bankruptcies primarily as transnational customary law being part of the modern lex mercatoria. There can be little doubt that transnationalisation of this nature puts local bankruptcy laws under pressure260 and it may not be surprising therefore to learn that in the US, as in Germany upon unification, the bankruptcy laws were the first ones to be federalised. More simply, we may well ask ourselves why it is or should be that when we bicycle from Basle to Strasbourg the legal status of the bike changes twice as we go along and may in respect of the same asset be very different in the three countries concerned. It particularly affects the manner and formalities of a transfer including security transfers. There is no logical reason why this should be so and it was not so before the nineteenth century. It is a defect in our thinking not supported by rationality. Now that we are talking not about one bike but about the international flows, it makes even less sense and the law must respond to this anomaly. The international practice must structure itself around it and international financial arbitrators may be the first in line to face newer realities and deal with them when properly pleaded by one of the parties.261

2.3. Financial Arbitration, Public Policy Concerning Financial Instruments, Regulation, and Remedies 2.3.1. Public Interest in Financial Products and Services In international financial arbitrations, there first arise the complications of the modern financial products—by way of examples they were the subject of the previous sections—but also the capabilities of international arbitrators to understand and deal with them, and their powers to do so. To understand them may be a question of experience but it will depend foremost on advocacy

260 See for this development in connection with the operations of transnational CCPs, nn 107, 211 and 251 above. 261 See for the transnationalised principles of ranking n 253 above.

Volume 2: International Financial Arbitration 155 and on the submissions of the parties in which connection all must be pleaded as fact, including the applicable law; arbitrators are not supposed to depend on their own knowledge or expertise except in order better to evaluate the evidence brought by the parties. It was submitted all along that they are not otherwise to bring their own insights or start a new argument or dispute between the parties. They are not there to explain any law either beyond what the parties have asked them to do and are not spokespersons for any law and not for the public interest either, strictly speaking not even in market abuse (including anti-competitive behaviour), money laundering, and suspected fraud or corruption situations. They cannot as such raise issues autonomously, do not represent the public or affect and bind third parties in principle in any proprietary aspects either, which may be an important issue in many financial products as we have seen, unless it can be demonstrated that they have acquired these powers and authority. In international arbitration, autonomous powers of arbitrators developed, it was shown, first in matters of procedure and evidence, also in the reasoning of international arbitrators, who acquired also important powers to determine their own jurisdiction and the arbitrability of the dispute. These powers, especially when affecting the public interests or the rights of third parties, can then hardly derive from the arbitration clause as a private arrangement between consenting signatories but must derive, it was submitted, from the operation of the transnational commercial and financial legal order itself, in which the arbitration clause itself, upon proper separation from the rest of the agreement, is also founded. Even then it requires international arbitrators to ask for further submissions of the parties or from other authorities (including an international court where starting to operate in these matters assuming they can be asked preliminary opinions) and they are bound thereby; they are not to invent the applicable law, whilst the ultimate authority in this regard continues to reside in the courts of recognising countries, in finance in particular, it was further submitted, in their bankruptcy courts as a matter of arbitrability and public order. It follows that the issues of consistency and precedent can hardly arise in these circumstances and they were considered alien to international arbitration if properly understood. Whilst thinking about the public interest in particular (of which proprietary issues may be a subsection), to start with, it may be instructive to revisit what legislators, top down, or more likely transnational law, bottom up, are doing with some of the products and facilities mentioned so far also in terms of property law support without any attempt at trying to be complete in terms of the effects on the applicable private law. Unlike in licensing matters and prudential supervision (that are substantially geared to financial stability issues pursuant to administrative law) or in matters of market integrity (where there may be criminal issues), in international finance, private law is likely to be dominant particularly in the conduct of business aspects of financial operations, which are the more probable to arise in an international arbitration (as regulators are hardly likely to submit to arbitration in matters of prudential supervision), and this law is not then strictly regulatory in an administrative or licensing law manner, although regulation may reinforce the private conduct of business protection and supplement the liability of intermediaries in contract, negligence or fiduciary duties. It may then lead to rules of mandatory law that could also more indirectly derive from fundamental principle, like the protection of weaker parties. For smaller borrowers and investors there are and may need to be more special protection of this nature, like in the sale or mis-selling of banking and investment products but they are unlikely to be more directly involved in the newer financial products listed in the previous sections except for their purchases of and payments for consumer goods and investment securities. Ultimately, there may then also be the question whether the licence requirements, more commonly identified as regulation proper, if not directly so providing, may still strengthen civil liability because of horizontal effect (and when) as a matter of non-contractual liability of intermediaries vis-à-vis

156 Volume 2: International Financial Arbitration their clients or perhaps even of regulators in respect of damaged parties.262 The question for purposes of this discussion is then how these issues are to be dealt with in an international arbitration. What is therefore the public interest and how does it impact, either through regulation or fundamental principle/international minimum standards of protection? We have seen above that one of the major building blocks in international finance is the assignment. It plays a role in particular in floating charges, receivable financing, and securitisations, and it was noted that there are special problems with then separation of these claims from the contracts out of which they arise, bulk assignments and assignments of future claims; others arise internationally when claims outside the jurisdiction are meant to be included. Again, under traditional private international law, it is likely to raise issues of the location or situs of claims under the applicable domestic laws if a bank seeks to remove loans from its balance sheet in securitisations or if it wants to be protected by a charge over receivables with debtors in different countries. Beyond the bankruptcy ramifications, no public policy and regulatory concerns have surfaced so far in this area, but it is still possible to identify some more special concerns. Especially the use of Special Purpose Vehicles (SPVs) or similar entities to move assets off balance sheet have been considered to contain a funding element, for example when, in a securitisation, bonds are issued by the SVP to pay the originator for the assets, but re-characterisation should not be an issue if the transfer of loan assets was outright and paid for. There is no funding of the originator and the transfer does not take the form of a conditional or temporary transfer either. There is an outright sale, no less, no more.263 This has not remained uncontested, however, and re-characterisation is then often considered some kind of objective or public policy requirement or protection of the general public, or at least of common creditors at large, which could mean that in the event of a default of an originator, a disposition of the transferred assets would be required, the asset still being part of its bankrupt estate and deemed to have remained with the originator subject to a security interest of the SPV. This would be an extraordinary result, fatally undermining all asset securitisation. The re-characterisation debate is then highly damaging and misdirected, but not, unfortunately, unusual. Especially post-Enron, in which, apart from all wrong doing, there was in fact no funding proper, the issue was revisited in the US (the Durbin-Delahunt Bill to amend the Bankruptcy Code).264 Following what has already been said, the issue should simply be solved by asking if there is an interest rate (structure) agreed between the originator and SPV. If not (and it would be highly unusual), there is no loan and there cannot be security supporting it. Again, in an asset securitisation, the objective is not funding at all but payment for assets irrevocably transferred. It 262 See the text at 202 above. 263 The mere transfer of a class of assets to an SPV, which acquires them outright and pays for them, should therefore never be re-characterised as a secured transaction in which the purchase price could be recast as a loan secured on the assets transferred to the SPV. Doubts remained, however in the US in view of LTV Steel Co, Inc v US 215 F3d 1275 (2000), a bankruptcy case in which it was argued that the transfer of assets to an SPV was not a true sale and that the collections by the (now bankrupt) originator were its cash collateral which, pending a resolution of the sales issue, could be used during the bankruptcy if adequate protection was given. A settlement followed so that the basic issue was not determined. 264 The Durbin-Delahunt proposal (the Employee Abuse Prevention Act) of 2002, intended as an amendment to the federal Bankruptcy Code, was introduced in Congress to undermine securitisations, ostensibly to protect retirees and employees while seeking in s 102 to re-characterise as a secured loan any sale (with or without securitisation) of assets, including those to SPVs, if its material characteristics were substantially similar to that of a secured loan. No criteria were given. It was eventually withdrawn. The fear seems to have been that through securitisation, valuable assets could be improperly taken from weak companies, thus contributing to their insolvency. But as long as the sale price paid by the SPV was normal or within a usual range and not a preferred transaction or fraudulent transfer (against which there is in any event ample protection in the US Bankruptcy Code, s 547), it is unclear what the true concern could have been.

Volume 2: International Financial Arbitration 157 is likely to reduce funding. There is therefore not even a finance sale or any repurchase implied. The last thing the originator/assignor wants back are the assets moved from its balance sheet.265 On the other hand, it may well be that, in risk layering, intentionally substantial risks remain with the originator, which ultimately may affect the off-balance-sheet nature of the scheme. The transfer of risk in whatever form may not then be complete and this could leave some room for re-characterisation. There may not even be a transfer proper of loan assets, only the risk in respect of them. This could conceivably create re-characterisation risk also, but if the re-characterisation concerns the transformation of a sale into a secured transaction, there should at least be a formal interest rate structure agreed. This is what international arbitrators should also keep in mind when these re-characterisation issues arise in an international arbitration and that there may be a public policy aspect. Another indirect attack on financial engineering, also potentially arising and potentially relevant in international arbitrations, concerns the credit default swap (CDS), see further Volume 5, sections 2.5.2 and 2.5.8. It came from those who see it as an insurance product and argue that, in the case of a naked CDS—that is CDS protection bought without exposure to the underlying risk it insures—there is no insurable interest so that these products must fail. It was thought by 2010 that 80 per cent of the activity in CDSs was naked. It is an important information supplier to markets in the manner of short selling, which as such may also have the benefit of increasing market liquidity. Similar effects can be created through options, swaps and futures. The argument then goes to the practice of shorting itself as a normal market function. It is one thing to condemn CDSs outright and forbid, for example, naked CDSs. This could be a regulatory stand, unwise in the view of this author as it would amount to a form of regulatory market manipulation, but it is at least direct. To use what must be viewed as a piece of legal sophistry leading to a contrived re-characterisation to undermine this product is less opportune, especially the insurance analogy. The basic point to make and for arbitrators to understand is that insurance assumes a pooling of resources by several interested parties to meet a particular loss in one of them. There is no such pooling in CDSs. This is reflected in the pricing, which, in the case of an insurance, is based on actuarial research but in the case of CDSs on market forces. Another conceptual difference is that an insurance contract covers losses actually suffered while CDSs provide for an agreed pay-out to all holders upon a credit event. Furthermore, insurance coverage is cancelled simply when premiums are not paid; cancellation of CDSs does not automatically follow the non-payment of the protection fee. The better analogy is the guarantee. It is not normally opposed on the basis of similar arguments. In these debates, economic rather than legal arguments are often introduced but it risks confusing everything. There is no doubt that international practice accepts the status and legal effectiveness of the CDS, even if naked.266 265 See SL Harris and CW Mooney, ‘The Unfortunate Life and Merciful Death of the Avoidance Powers under Section 103 of the Durbin-Delahunt Bill: What Were They Thinking?’ (2005) 25 Cardozo Law Review 1829; see also SL Schwarcz, ‘Securitisation Post-Enron’ (2005) 25 Cardozo Law Review 1539. In fact, some States of the US, such as Delaware, had earlier introduced some special asset-backed securities facilitation statutes exactly in order to promote securitisations. These State laws make sure that asset sales in securitisations are true and final sales and they may as such serve as clarification in the light of the functional approach of Art 9 UCC and, especially in the case of receivables, that all such assignments are final. These State laws would, however, have been superseded by any federal (bankruptcy) legislation of the type just mentioned. 266 It was in England, in particular, supported by the so-called Potts opinion, an opinion of a QC, which in England is generally considered to have the status of an opinion of the court of first instance and stands as such until overturned by another opinion of at least similar rank. It was sponsored by ISDA. The argument here is that the payment obligation is not conditional on the payee sustaining a loss or carrying the risk thereof. It does not seek to protect what could be called an insurable interest on the part of the payee and its right is not dependent on it. The Law Commissions of England and Scotland in a 2008 paper on Insurable Interests supported these views.

158 Volume 2: International Financial Arbitration It may be of interest that in the US, the Sarbanes-Oxley Act of 2002 already concerned itself (in section 401(c)) with financial engineering. It feared excesses and asked for a Securities and Exchange Commission (SEC) report on the extent of the use of off-balance-sheet (derivative) transactions using SPVs. A report was published in 2005. It emphasised that the use of financial structuring merely for accounting and reporting purposes should be discouraged.267 In respect of CDSs, earlier the federal Commodity Futures Modernization Act (CMFA) of 2000 aimed at creating greater certainty for CDSs. In that context it clarified first that they are not regulated by the Commodity Futures Trading Commission (CFTC) and the normal banking regulators remain competent, but because these contracts are between professionals, the regulators generally accepted a hands-off approach. It meant that particularly the potential systemic risk implications were ignored. This came in for much criticism during the 2008–09 financial crisis but the International Monetary Fund (IMF) intervened in 2009 to explain the need for this type of risk-management tool and the diversification of risk it achieves. Yet it is clear that especially in the credit derivative market, there is a problem with the popularity of these newer products, their proper documentation, and proper assessment of risk.268 Greater transparency may be needed as it would show when and how banks protect themselves, thus raising the temptation of neglecting (costly) oversight of their borrowers. This is an instance of moral hazard. Other problems are over-protection, which may allow protection buyers to benefit more from a decline in values than from an increase. Capital adequacy concessions based on CDSs may also have to be reviewed on the basis of a better assessment of the credit of protection givers. However, although excess and abuse is much to be avoided, the concept of risk protection in this manner is sound.269 267 In s 705 of the Sarbanes-Oxley Act of 2002, the Comptroller General of the US was asked to report on the role of investment banks in schemes of this nature. These issues were thus raised well before the 2007–09 financial crisis. On 7 January 2005 the SEC adopted new rules to address the registration, disclosure and reporting requirements for publicly offered asset-backed securities. They applied only to public offerings in the US and not to CDSs. The difference between asset-backed securities and corporate securities was recognised. The accent was on transaction structure, disclosure of credit enhancements, quality of the asset pools, servicing and cash flow distribution. These new rules in essence summarised and streamlined the existing regulatory practices in this area. The use of SPVs and more generally the role and techniques of financial engineering did not come under similar scrutiny in Europe. The role of credit agencies in this connection was also considered in the US: see D Coskun, ‘Credit Agencies in a Post-Enron World: Congress Revisits the NRSRO Concept’ (2008) 9(4) Journal of Banking Regulation 264. Their role in the events leading up the 2007–09 crisis, in which they were much criticised, was therefore not a new issue and had been considered earlier. 268 See D McIlroy, ‘The Regulatory Issues raised by Credit Default Swaps’ (2010) 11 Journal of Banking Regulation 303 and SK Henderson, ‘Regulation of Credit Derivatives: To What Effect and For Whose Benefit?’ Part 1–7, Butterworths Journal of International Banking and Financial Law (London, 2009) and SK Henderson, ‘The New Regime for OTC Derivatives: Central Counterparties’, Part 1–3, Butterworths Journal of International Banking and Financial Law (London, 2011). See further also European Central Bank, Credit Default Swaps and Counterparty Risk (August 2009) and J Kiff et al, ‘Credit Derivative Systemic Risks and Policy Options’, IMF Working Paper WP/09/254 (2009). The ECB Report also went into the area of netting of opposite off-setting CDS trades (p 44) or ‘compression’/‘termination’/’tear-up’; see further also the important IOSCO Report, The Credit Default Swap Market (June 2012). Their removal does not change the risk profile but reduces the notional value of a bank’s derivatives and hence the exposure to operational risk. TriOptima provides this service and runs quarterly termination cycles for single-name CDSs and monthly cycles for CDS indices. Perhaps the most important conclusion of these reports is that securitisation is legitimate but that the practice can be improved. 269 The creation of a Central Counter Party (CCP) in this market, especially for CDSs, is often believed to be useful and could at the same time allow for better margin enforcement and also stronger forms of settlement netting, especially important between big-bank dealers amongst themselves, see further JP Braithwaite, ‘The Inherent Limits of “Legal Devices”, Lessons for the Public Sector’s Central Counterparty Prescription for the OTC Derivative Market’ (2011) 12 European Business Organization Law Review 87; SG Cecchetti, J Gyntelberg and M Hollanders, ‘Central Counterparties for OTC Derivatives’ [2009] BIS Quarterly Review 45.

Volume 2: International Financial Arbitration 159 The above is only to give examples of the public interest in financial products and their operation, which again raises the issue how these concerns, often of a domestic nature, play at the transnational level. In other areas, public concern with financial products may be less of an issue although not unknown either. Thus, finance leasing has not so far attracted much public concern or regulatory interest and has remained largely scandal free. Even so in private law legislation, the characterisation and operation of the modern finance lease is handled in very different ways as already discussed above. Floating charges, where legally operative, are an important facility, in that case protecting lending activity, especially in respect of working capital, but create considerable (often systemic) private law problems, especially in civil law countries as we have seen. This may be remedied through legislation as in Article 9 UCC in the US but in many other countries they remain legally problematic. This has not solicited much public interest, although, for example in France, this has been changing and legislators have started to take an interest mainly to protect Paris as a viable financial centre, see Volume 5, section 1.4. Elsewhere it is sometimes said that the limitations which, especially in civil law countries, derive from their intellectual system and basic notions of identification, specificity, disposition rights concerning the relevant assets, and other transfer requirements, are meant to protect common creditors as a matter of public policy. It has already been shown that that is unlikely; the result is rather a reshuffling of interests between various classes of preferred and secured creditors. Again, the question is how these concerns must be handled in the international flows and are to be considered in an international arbitration. The proper functioning of the payment system, on the other hand, is a major policy issue in each country and usually an immediate concern for central banks. Hence their involvement in payment systems and in their proper functioning and their role as organisers of the on-line and off-line clearing systems, although usually still in a private law manner in terms of instructions, finality and clearing (including the responsibilities of clearing members, see the discussion in section 2.2.6 above). The safety of the payment system was indeed a major concern in the financial crisis in 2008. This concern also rises to the level of international payments and the stability of the international financial system. Here again, the traditional approach requires these payment flows to be divided per country or situs, which may create great uncertainty as we have seen. Errors in instructions and execution and how they are legally dealt with may create further worries, but again so far this aspect does not appear to have risen to the level of the public interest. Within the EU there is, however, concern about the details of the free movement of money and payments cross-border and the cost as a policy issue. Indeed, practical problems arose with payments in other Member States and with the delays this often caused. There is also the issue of proper exchange rates to be applied in what are often small transactions in or from Member States that are not yet members of the euro and in respect of payments among such countries themselves. In 2007, the EU started issuing

Under Dodd-Frank in the US and the European Market Infrastructure Regulation (EMIR), the CCP clearing in particular of CDSs is encouraged and given capital adequacy relief as a major incentive for clearing. They present a framework and assume that CCPs as private institutions would be keen to engage in this activity and that their members would be willing to absorb any resulting losses from the default of other participants. This framework appears to be content with the substantial further concentration of risk in these institutions. For the parties, the additional collateral requirements may be quite severe, however, and netting out the requirements or indeed the positions may not be a sufficient counterweight. It will probably take quite some time before we can see how these measures work out and what kind of effect they are going to have. The law of unintended consequences may be in full operation. Ill-targeted regulation or over-regulation as in Sarbanes-Oxley, may easily result. Risk management may be curtailed in its progression or banking may shrink in unacceptable ways.

160 Volume 2: International Financial Arbitration Directives in this area (SEPA, see Volume 6, section 3.6.12), which may also affect the modes of payment. Naturally, there will also be money laundering concerns and the use of the banking system and bank transfers to that end, as other major public concerns. There are also a number of obvious public concerns in the operation of book-entry systems for investment securities. They may relate to self-dealing and other forms of internalisation and the best price protections that are afforded. Margin trading and the maintenance of open positions through short selling may be others. Error trades may present further worries, also for regulators. More particular regulatory issues of concern may be short selling more generally, the stresses it imposes on securities entitlement systems in particular, and the risks especially for smaller investors. Naked short selling emerged as a particular concern in Germany in 2010 following the Greek crisis, although not immediately related to book-entry systems. In principle, any impossibility to deliver the securities would limit the activity, if not making it illegal at the same time. Intra-day trading or trading occurring within the particular settlement period may, however, not require any delivery at all as the position will be closed out before. Short selling (unless clear market abuse) is usually the messenger of bad tidings. There is an inclination to shoot this messenger but the result may be a false market. The repo market (like the swap market) is a vivid and other important example of an industrydriven and market-supported form of risk management, aided by a risk-reduction facility centred on the netting principle and the master agreement, see further Volume 5, section 4.2. While for repos legal risk may on the one hand be increased because of an inadequate proprietary legal framework under traditional laws, with the attendant characterisation problems and resulting uncertainties and lack of protection as explained above, the situation is substantially retrieved through the use of the set-off principle in netting agreements, assuming that facility is sufficiently supported in law, although it may still remain unclear which law that is. Netting may be at the expense of unsecured creditors but it reduces counterparty risk, liquidity risk and most importantly systemic risk. It is no wonder therefore that it is popular with regulators and that, where necessary, extended set-off rights of this nature have been supported by statutory amendment, as in sections 555 and 559 of the US Bankruptcy Code, and are also fundamentally favoured and protected in the EU Settlement Finality and Collateral Directives as we have seen.270 Since an early stage, netting gave rise to particular regulatory interests in connection with the 1996 amendments of the Basel I Accord concerning capital adequacy requirements. As mentioned earlier, netting in clearing and settlement systems is fully recognised in both the EU Collateral and Settlement Finality Directives, the latter also guarding against undesirable interruptions because of an intervening bankruptcy of any of the participants in the clearing and settlement process. Perhaps the most important area of public concern is how financial products are offered to investors, especially the smaller ones, hence the raft of special protections against brokers and investment advisors. It was already mentioned that this concerns conduct of business and amounts to a reinforcement of contractual and fiduciary duties of these intermediaries acting

270 There may also be a problem connected with the price at which assets are temporarily removed from balance sheets through repos and they may be used to hide losses during vital reporting dates, usually at the end of each trimester. A case of regulatory arbitrage was reported in 2010 in connection with the earlier bankruptcy of Lehman’s (the Repo 105 issue). By conducting the deals in London, where under prevailing legal standards they were considered to be true sales (which would not have been the case in the US), they were then so considered in the US upon consolidation of the US and UK accounts. In the US this removed the assets from the balance sheet, even though under prevailing accounting rules in London the characterisation of a ‘sale’ would not have made a difference. Rather than being a traditional regulatory issue, this would appear to be a question of harmonisation of accounting standards worldwide.

Volume 2: International Financial Arbitration 161 as agents and advisors supplemented, if necessary, by negligence actions. Here we see special concepts such as ‘know your customer’, ‘suitability of the investment’ and ‘best price’ emerging among many others. Mandatory private law may thus increase as governments use it to achieve policy objectives, for example a better protection of consumers and smaller investors, the first often through good-faith notions, the latter through the extension or amplification of agency and fiduciary duty or negligence notions as already mentioned. In the EU they now form the substance of MiFID I and II. In fund management, similar concerns may arise, in the EU now partly taken care of in the UCITS Directives and the Alternative Investment Fund Management Directive (AIFMD). The above examples give some idea of newer financial products and facilities and policy concerns in respect of them. They are discussed here only by way of illustration and may be raised in international arbitrations when arbitrators have to deal with them largely in a private law context in disputes between brokers and investors or banks and their clients as matters of mandatory private law. Other public policy concerns may exist or emerge, competition law is a most obvious case in point. In international arbitrations it may be for arbitrators to decide what is or is becoming relevant in terms of public interest or mandatory law. As argued before, this may be a matter of them applying transnational (corrective) standards even in private law, localised especially if international transactions come onshore in conduct or effect, otherwise international minimum standards might have to be considered. If it is accepted that arbitrators may represent the public interest, it may well be that they could also autonomously raise such issues, see section 1.2.5 above. It remains a major issue discussed all through. In this connection, it should not be forgotten that even domestically newer social values or methods are not only imposed by governments but may enter private law in other ways, notably through the court system invoking (shifts in) fundamental values and the choices to be made in that regard. There is not necessarily a government monopoly here; in civil society it would be a sad day indeed if citizens had to wait solely for government to take action in matters of adequate protection. In various ways, new policies enter the law all the time, including private law, conceivably even in a mandatory fashion, either directly or more indirectly in dispute resolution. That is not different at the transnational level, but then increasingly in a transnationalised way, potentially finding expression in the form of arbitral awards. This is also likely to further the demands for justice, social peace and perhaps also utilitarian and efficiency considerations or commonsense notions to which international arbitrators may be more sensitive, in this way updating and pushing forward the living law in the international marketplace but only, it was submitted, upon proper pleading by the parties. International arbitrators rate not there to impose a new legal, economic, or social order and miss the institutional power and legitimacy to do so unless they can make it credible that they have acquired here autonomous powers in the transnational commercial and financial legal order.

2.3.2. Conflicts of Public Policy. The Jurisdiction to Prescribe, International Minimum Standards and the Spokesperson’s Function in Respect of the Public Interest. A Role for Arbitrators? What are their Powers? In the previous section, it was shown that public policy can take the form of mandatory private law intervention in finance and then affects the operation of financial products, not only in their proprietary aspects in the ways in which they are handled or asset-backed funding is arranged,

162 Volume 2: International Financial Arbitration but also, in the way they may be sold by intermediaries when there may be issues of mis-selling and problems with ‘know your customer’, ‘suitability’ or ‘best-price’. That is conduct of business. Government may, on the other hand, also intervene by directly licensing and supervising financial intermediaries such as banks and investment brokers and advisers. That concerns more in particular financial stability. Governments may withdraw these licences or impose further conditions in case of bad behaviour. This was identified in section 2.1.1 as a matter of administrative law, which does not normally give individuals a private action, although conceivably there could still be horizontal effect and a spill over into conduct of business protections, an issue dealt with in Volume 6, section 3.7.19, but this law does not otherwise rise to the level of arbitration unless a regulator is respondent, which is less likely. Mostly aggrieved individual investors cannot force governments to act or derive rights against licensed intermediaries who breach the licensing requirements; we accept that governments may have their own reasons (within the law) to deal with delinquent licensees in their own ways. Their civil liability (or that of their regulators) may be limited at the same time. As already noted, in international cases, domestic governmental interests or policies, or domestic public order requirements or values affecting participants as expressed in local laws, may present special problems in the operation of other legal orders in international transactions, in particular the transnational commercial and financial legal order (see also the discussion in Volume 1, sections 2.2.6ff). To the extent an international transaction has an effect on the territories of states that are or may be affected or if there is conduct in such territories, local policies (and values), notably those concerning the protection of (smaller local) investors cannot be ignored in international transactions. It has already been said that in an ever more virtual environment, the international flows might be much more difficult to spot but it remains true that even a lex mercatoria approach cannot ignore these local concerns or interests, is in fact deferential to them, and must take them into account to the extent relevant and justified, the determination of which then becomes a key issue.271 The impact of governmental interests on the lex mercatoria can thus be considered a competition between different legal orders on the same territory, meaning competition between the transnational commercial and financial legal order and its operations and domestic legal orders, which remain territorial. The key is that governments are sovereign on their own territory and can go about protection in their own ways (unless restricted by international law). A complication is here the possibility that different conflicting governmental interests impinge on the same transaction so that a choice may have to be made by adjudicators even if, like local courts, in principle they cannot normally reach beyond their own legal order. Nor, it is submitted, can they interfere under proper notions of the rule of law in other legal orders operating in their territory without showing proper respect and in a globalising world willingness to co-operate and accommodate at least in principle. The other side of this coin confirms, however, that their own public policy or order rules cannot be ignored in other legal orders either, especially in international operations taking place on their territory (in terms of conduct and effect) and they must in principle prevail unless there are good reasons that it should be otherwise. That is what deference means. Competition policy has been extensively tested in this context and early shed a particular light. It is also relevant in international finance. Can security laws and their protections be effective and 271 It is clear that domestic laws of this nature do not become part of the hierarchy of the lex mercatoria, as other domestic rules of private law may still do residually, as we have seen, but these rules compete with the lex mercatoria and should in principle be distinguished from fundamental legal principle as ius cogens or human rights or similar public order considerations which operate in the lex mercatoria itself, and therefore in private law, and are for international transactions, it was submitted, of a transnational nature.

Volume 2: International Financial Arbitration 163 applied extraterritorially (therefore in other legal orders), notably when non-residents organise a (financial) cartel, which affects prices in the forum state such as in the US or in the EU? In practice, this raises a number of important sub-questions, first whether under the applicable domestic laws, these laws extend under their own terms to activities abroad. At least in the US, there is a presumption against extraterritoriality of national laws, but it depends, first, on the intent of the legislator, and subsequently on the application to foreign situations, also on interpretation. American and EU competition laws are now considered to have extraterritorial effect. A measure of discretion in balancing the interests if there are other competing (competition) laws is assumed by the (American) courts and this is accepted to be quite separate from the legislator’s (presumed) intent and is based on comity, which has fairness at its core, but is in such cases mostly still seen as a national rather than an international concept, although reference is now often made to moderation.272 Awareness of the interests of other states is assumed.273 In this regard, sections 402 and 403 of the Restatement (Third) of Foreign Relations Law of the US (1987) refer to reasonableness and set guidelines. They are of great interest, need to be carefully considered, and may also be indicative of a more international trend. In Europe, reference in this connection is often made to règles d’application immédiate: see Article 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I). Here the formulation of a conflicts or private international law rule is still preferred, even though it does not concern private law issues. Reference is sometimes also made to so-called unilateral conflicts rules giving effect to public policy of forum states in appropriate circumstances as a matter of non-choice.274 Under it, precedence is indeed given to governmental policies when they are more obviously relevant, notably therefore when there is (significant) conduct or effect on the territory of the state concerned (although courts may always apply the policies and public order requirements of their own forum state). As already noted, since international arbitrators do not have an own forum state and are in any event not covered by the EU Regulation, it is likely that in international arbitrations these various domestic laws or claims to jurisdiction to prescribe will be more objectively weighed and considered. That was always one of the advantages of international arbitration when the public interest becomes engaged in private disputes. It was submitted that a key issue is whether ultimately the application of domestic policy rules in international cases may be tested and balanced under international minimum standards, that is to say in international arbitrations under notions of the international public order. That could mean that transnational public order requirements take over. Fundamental values in the transnational order may then also prevail. Outside the area of international finance and the protection of notably smaller investors, this is also quite conceivable in workers’ protection issues or in

272 See for this international law principle the Barcelona Traction, Light and Water Company, Ltd (Belgium v Spain) (1970) ICJ Rep 3. 273 See for the extraterritorial application of competition laws in the US the well-known line of cases starting with United States v Aluminium Company of America (Alcoa) 148 Fed 2d 416 (1945) and United States v Imperial Chemical Industries (ICI) 105 F Supp 215 (1952). The creation of a (potentially fraudulent) worldwide patent network and its effect on the US may in this connection also be considered under American tort and competition rules if restricting American plaintiffs’ activities, see Mannington Mills Inc v Congoleum Corp 595 F2d 1287 (1979). What will be considered in this connection is whether the ties with the foreign country are strong enough while ultimately the reasonableness may also be tested, see Timberlane Lumber Co v Bank of America 549 F 2d 597 (1976), in which the relative effect on the US as compared to the effect on others was thought to be an issue and also whether there is another court readily available; see for a fuller discussion, and for the move from comity to legal guidelines or principles, Hartford Fire Insurance Co v California 509 US 764 (1993). 274 See for an early comparative study, still relevant, GA Bermann, ‘Public Law in the Conflict of Laws’ (1986) 34 (Supplement) American Journal of Comparative Law 157.

164 Volume 2: International Financial Arbitration determining environmental standards for international operations. International arbitrators may then even become the spokespersons for these standards and therefore of the public interest in those markets, much as, domestically, new social values are often first articulated by courts. Thus, even issues of financial stability, market discipline (or abuse), money laundering and bribery might arise autonomously as transnational law issues to be determined by international financial arbitrators without reference to national laws or value systems (although they may still figure as examples or enter as general principle), although in Section 1.1.14 above the dangers to the legitimacy and credibility of international arbitration were already signalled. One important question is whether resulting awards, if affecting the application of domestic regulation, will be enforced (under the New York Convention) in countries most directly concerned, if the regulatory regime that is considered applicable by arbitrators is not the regulation of the relevant (recognising) jurisdiction itself. Their courts may still see this as an issue of their own public order although it is possible and not now uncommon that they accept here a more international interpretation of it as well, practising a kind of domestic international public order concept, although this will depend to a great extent on the sophistication of the relevant domestic court, see the discussion in section 1.6 above. In financial regulation proper, therefore largely in matters of licensing, authorisations, and prudential supervision, there may arise other, more special issues in international financial operations as there are likely to be home and host regulators each imposing and enforcing special rules in respect of financial activities on their territories, which may raise the question where the more characteristic obligation is to be performed to determine which regulator might be more competent to determine the rules, also those concerning conduct of business. Which rules of protection of market participants apply here? First, upon proper consideration, it may be that the transaction is not cross-border or international at all, for example where a foreigner unsolicited opens a bank or securities account in another country. That is relevant especially within the EU, since its harmonising Directives, including MiFID I and II, only apply to cross-border dealings. That may then also affect the investors’ protection regime and investors’ recourse, which could still be different in respect of purely local financial dealings. Again, much financial regulation is of a different nature and bears on licensing and direct regulatory supervision of certain participants. Thus, deposit taking, underwriting, market making in securities, brokerage and investment management now commonly require licences to which conditions will be attached. This was earlier identified as a matter of administrative law and does not give private parties direct recourse against perpetrating licensees, but civil liability is not per se excluded. It is a matter of interpretation what the intention of the legislator was275 and there are explicit exceptions, for example prospectus liability following authorisation to issue securities in the public markets. The 2009 Rating Agency Regulation of the EU as amended in 2013 may serve as a further example.276 Investors may now directly claim for damages from Rating Agencies in the case of wilful misconduct or gross negligence. Non-contractual civil liability is then an important issue, which may also surface in international

275 Even for MiFID, the ECJ refers to national law to define the civil consequences of the investors’ protection it offers, see Case C-604/11 Genil 48 SL and Comercial Hostelera de Grandes Vinos SL v Bankinter SA and Banco Bilbao Vizcaya Argentaria SA, 30 May 2013. 276 Regulation 2009/1060/EC amended by Regulation 2013/462/EU. For the implementation of the liability, Art 35bis s 4 of the 2013 Regulation explicitly refers to domestic law in terms of the notion of damage, willful misconduct and gross negligence, causality etc. In trans-border transactions, under EU Regulation (Art 4(1) Rome II) the applicable domestic law is the law of the place of the damage. No special EU concepts were developed here.

Volume 2: International Financial Arbitration 165 arbitrations when again the issue arises where the licensed activity may be situated or leads to conduct and effect.277 The question of arbitrability of regulatory issues is closely connected with the effect arbitrators (may) give to regulation and how they handle conflicting domestic governmental interests in this respect or arrive at international minimum standards in appropriate cases. This may also concern their powers to accept non-contractual civil liability of perpetrators. The substantial expansion of the notion over the last 30 years is well known and international arbitrators, who determine the issue of arbitrability themselves, may take an expansive view here but may arguably still adopt a forum non conveniens mode if they cannot handle the issue, especially if evidence of third parties over whom arbitrators may have no power needs to be solicited to determine the effect of anticompetitive behaviour for example, or if substantive regulatory issues are at stake, which cannot be decided without hearing regulators and others not party to the arbitration. It is often considered a matter of admissibility.278

2.3.3. The Impact of Insolvency Laws At this juncture it may also be necessary to say more about a bankruptcy intervention in an international financial arbitration, an issue already broached more incidentally above several times. Insolvency is best seen as another regulatory issue even if for historical reasons it is often still cast as an area of private (commercial) law. In the case of a bankruptcy, in purely contractual matters, for example, in disputes concerning a monetary claim, relevant bankruptcy courts may take the position that they are more competent in the matter than arbitrators and that such claims need to be established in (summary) proceedings in bankruptcy once the latter intervenes. The same may go for any contested proprietary claims, which if admitted are likely to give a right to immediate repossession of the relevant asset regardless of the bankruptcy or there may be questions of ranking of security interests. The existence of an arbitration clause may not then be considered a bar to such bankruptcy proceedings under the New York Convention (Article II). That may from their perspective also be more efficient. The further claim may be that arbitrators cannot affect third parties in their award and therefore especially not the bankruptcy and its order, the involvement of the whole estate and all stakeholders being its essence. However, to what extent (pre-existing) international arbitral awards impact on other interested or affected parties, particularly relevant in allotting a property to the one party or the other, in matters of ranking in asset-backed financing, and in questions of set-off and netting, as we have already seen, remains to be determined as a matter of powers of arbitrators and of the status of their award in the international commercial and financial legal order. In how far can these decisions be given effect in a (later) local bankruptcy. These powers then become a preliminary issue of the objective law at the transnational level in which, it is submitted, international practice and custom as part of the modern lex mercatoria and its dispute resolution facility may now play an important role.279 But it was also said before, in section 1.1.14 above, that these powers which

277 The horizontal effect of the licensing standards will not here be further discussed but see Vol 6, s 3.7.19 and see for civil liability of regulators n 204 above. 278 Note the well-known cases in the US in which arbitrators were allowed to proceed in regulatory matters: The Bremen and Scherk v Alberto-Culver Co (n 106); and Mitsubishi Motors Corp v Soler Chrysler-Plymouth, Inc (n 109). See for the admissibility issue, s 1.3.9 above. 279 See JH Dalhuisen, ‘International Arbitrators as Equity Judges’ in PH Becker, R Dolzer and M Waibel (eds), Making Transnational Law Work in the Global Economy. Essays in Honour of Detlev Vagts (Cambridge, 2010) 510.

166 Volume 2: International Financial Arbitration may adversely affect classes of third parties (especially creditors) not party to the arbitrators, may present an important time bomb under the credibility of international arbitrations. It should be appreciated that bankruptcies, which always remain local, cannot automatically claim extraterritorial effect, not therefore full power over foreign creditors, debtors and assets or foreign activities of the bankrupt either, and then effectively also not over an international arbitration in respect of any of these or them. Of course, in the EU we now have the 2002 Bankruptcy Regulation (although limited in the EU to bankruptcies pronounced in other EU countries) and in several countries the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, notably in chapter 15 of the US Bankruptcy Code, which allows for greater extraterritoriality of foreign bankruptcies. All the same, it remains unlikely that a bankruptcy court will suspend its own (summary) jurisdiction to await the outcome of an international arbitration while likely invoking jurisdiction and arbitrability issues in respect of an arbitration in these circumstances or otherwise public policy. It may even seek to terminate the arbitration or at least disallow the bankrupt or its trustee from continuing to participate. Recognition of any subsequent or even earlier award under the New York Convention may then also fail in the country of the bankruptcy,280 but it should be understood that a bankruptcy court is not a court of general jurisdiction and, depending on the local incorporation statute of the New York Convention, it might not be a proper recognition court. In the literature, sometimes a distinction is made here between core or pure bankruptcy issues and others,281 the idea being that the latter remain arbitrable also in bankruptcy, but the distinction is not clear especially in the important issue of the determination of the claim and rights to the estate.282 At the practical level, it should be noted that many structural bankruptcy issues are unlikely ever to be the subject of an arbitration such as the appointment of trustees, powers of the court, stay of proceedings, inventorisation of assets and claims, determination of the distribution list or presentation of a reorganisation plan and the voting on it. This is simply a question of bankruptcy jurisdiction, it being hardly imaginable that a contractual arbitration clause would (mean to) cover or anticipate these bankruptcy facilities or aspects, except perhaps for the inventorisation of assets and claims. It would likely require some submission agreement including the consent of the bankruptcy trustee to farm out specific issues of this nature to an arbitration once the bankruptcy has intervened, which consent is very unlikely to be given; the bankruptcy trustee might have no power. The bankruptcy issues that arise in international arbitrations are therefore likely to be lateral or coincidental although not necessarily minor: the effect of a stay, the modality of the proof of claim, its inclusion in the estate as well as property rights, the ranking, the extent of a set-off, the effect of the distribution list or an approved reorganisation plan on the enforcement of claims and property, etc. In dispute resolution, they pose more immediately the question of the power of the bankruptcy over an international arbitration and the effects of its laws which—as already said—may be a matter of extraterritoriality, which cannot be automatically assumed, although the bankruptcy court will have the last word in matters of distribution and reorganisation to the extent that it has managed to gain control over the estate.

280 There is precious little case law, but see Audiencia Provincial de Barcelona, Seccion 15a, Auto de 29 Abr 2009, Rec. 708/2008, in La Ley, 213720/2009 in a case where international arbitration was allowed to proceed with reference to international treaties. That did not necessarily mean the acceptance of any resulting award. 281 See in the US, Matter of Nat’l Gypsum, 118 F3d, 1070 (1997). 282 See also V Lazic, Insolvency Proceedings and Commercial Arbitration (The Hague, 1998) 154ff, relying on Zimmerman v Continental Airlines, Inc 712 F2d 55 (3d Circuit 1983); see further also D Baizeau, ‘Arbitration and Insolvency: Issues of Applicable Law’ in A Rigozzi (ed), New Developments in International Commercial Arbitration (Zurich, 2009) 100ff.

Volume 2: International Financial Arbitration 167 A special issue is likely to arise when a bankruptcy trustee tries to force a creditor to cooperate especially in the verification of the claim, which creditor invokes the existence of an arbitration agreement as a bar and tries to collect on the basis of a favourable award and may well be successful in a third country. Again, it would be a question of extraterritoriality of the bankruptcy trustee’s powers in this regard, which may not be assumed automatically to affect the operation of the arbitration clause and of the arbitration, at least if conducted outside the country of the bankruptcy. Regardless of what issue is arbitrated, an award may still have meaning outside bankruptcy proceedings, especially clear when they are terminated, but it is also clear in countries where the bankruptcy, under its own rules or under the rules of that country, cannot reach while the arbitration or award can. It is often not sufficiently realised or it is easily overlooked that even a determination of a claim in bankruptcy is not res judicata outside the bankruptcy proceedings, even in its own country. Again, the key to understanding bankruptcy is its limited purpose and nature even if the consequences may be quite severe and far reaching; all the same, the bankruptcy court exercises only a limited jurisdiction. Hence also the summary nature of the proceedings, although it is conceivable that upon a full appeal the initial bankruptcy finding must be considered fully settled. It may therefore well be that exactly in such appeals the arbitration clause will regain its full status as defence or bar. Continuation of the international arbitration would therefore be normal even if the bankruptcy court ignores the results, orders otherwise, or even forbids the bankrupt party to participate.283 Another relevant although related point is that the position when looked at from the arbitration may be quite different from when looked at from the perspective of the bankruptcy. From the international arbitral perspective, tribunals are normally allowed to proceed regardless of domestic bankruptcies. For arbitrators the issue is one of their own jurisdictions and/or arbitrability or arbitral powers and international arbitrators, having the power of determination in these matters, might not look much further and take a formal attitude. Bankruptcy courts, on the other hand, may take a much more restrictive view of the arbitration and are likely to be guided by different policies and may emphasise instead the most effective distribution or reorganisation of the estate or more particularly the need to preserve their bankruptcy order. Clearly, a balance needs to be struck but it may be much influenced by the perspective one takes and the role one plays or duties one has, either as an arbitrator or bankruptcy trustee/judge, in which connection it should be acknowledged that recognition of arbitral awards in bankruptcy proceedings is an established theme—even if there may be substantial doubts as to how recognition may be affected by a bankruptcy under the New York Convention—although the recognition of the effect of an intervening bankruptcy in international arbitrations is not. An important question is then which bankruptcy court/country is ‘relevant’. There is primary and secondary bankruptcy jurisdiction, the first commonly thought to exist in the country of the residence of the debtor, the second in the country where the debtor may have some activity or assets. This raises important issues of definition that will not be further discussed but it follows that there is usually one primary bankruptcy while there may be more secondary ones. Under their own laws, these bankruptcies may have a different international reach and especially

283 This raises other important issues concerning undefended arbitrations and ‘default’ awards, which are not here further discussed, but see s 1.4.4 above and they may easily arise upon an intervening bankruptcy. English law has in this respect a special feature that under the English Arbitration Act 1997, s 107, it allows the bankruptcy trustee to confirm or reject the arbitration agreement like any other executory contract. This is in line with the Insolvency Act 1986, s 349A.

168 Volume 2: International Financial Arbitration secondary bankruptcies might not be considered to have much of an extraterritorial status even if their own law. But if it still assumes it, there may be even less international recognition, although acceptance of the UNCITRAL Model Law on Cross-Border Insolvency or similar local legislation may help. We have already seen that even primary bankruptcies may not have much of it short of treaty law (or, within the EU, the 2002 Regulation). International recognition and especially enforcement, being already problematic for ordinary judgments, may then be ever more so for bankruptcy, also when based on primary jurisdiction. This will also not be further discussed except to say that while the bankruptcy courts hold sway in their own country, both in primary and secondary bankruptcies, and may well ignore an international arbitration, there may be all to play for in third countries, which may upon recognition of either the bankruptcy or the arbitration or both have to establish a balance between the two and the perspective may slip here more in favour of the international arbitration. In either situation, the balance is in truth a matter of public policy or order, but countries with the original bankruptcy jurisdiction are likely to react here quite differently from bankruptcy recognition countries and this may be an important point to keep in mind. It should be understood in this connection that the recognition regime is also quite different for both, international recognition of arbitral awards being in most countries under the New York Convention very likely still subject to a different interpretation (of the public policy bar to recognition) in the country of the bankruptcy and in bankruptcy recognition countries. There is nothing similar for international bankruptcy recognition, except now within the EU under the 2002 Bankruptcy Regulation, while unilaterally there may be in individual countries under the UNCITRAL Model Law on CrossBorder Insolvency as already mentioned. Even under these texts, the bankruptcy recognition regimes are seldom clear on the matter of pending international arbitrations, although they may be clearer on pending law suits.284 There is another policy issue to consider: courts everywhere may now be more willing to take into account the possibility that relevant assets move around the world only to avoid a bankruptcy; this is very much behind the greater willingness internationally to recognise domestic bankruptcies and give them some extraterritorial effect. Unilateral bankruptcy recognition policy may thus become more liberal. This is very much behind the increasing acceptance of the UNCITRAL Model Law on Cross-Border Insolvency, which, short of treaty law, presents a text for domestic legislation in the area of unilateral recognition of foreign bankruptcies, notably followed in the US and the UK, still distinguishing in this connection between primary and secondary bankruptcies as the EU Regulation also does. This more liberal attitude could even motivate international arbitrators to help when they also become aware and wary of debtors hiding in or moving their property away from the country of the bankruptcy. As a consequence, they might consider with more favour the unity of the bankruptcy proceedings and their extraterritoriality, in such cases to be promoted by the public order in the transnational order itself. 284 Cf, however, also Syska and another v Vivendi and others [2008] All ER (d) 34, following for international arbitrations the regime for pending law suits under the EU Regulation, considering therefore the lex concursus as determining the status of the arbitration with the exception of pending arbitrations, which are considered to operate under the law of the EU country where they are pending (assuming there is one); see also I Fletcher, ‘Joseph Syska, as Administrator of Elektrim SA v Vivendi Universal SA’ (2010) 22(10) Insolvency Intelligence 155–57. One may well wonder whether this analogy is correct, local law suits in the ordinary courts being by definition domestic, international arbitration not being so unless one still believes them to be tied to the seat. Even if in this case the award in an arbitration that was already pending was not set aside as English law was held to apply and the arbitration agreement in favour of an arbitration in England was upheld regardless of Polish bankruptcy law to the contrary, one may question the reasoning. The 2012 amendments to the Brussels I Regulation make clear that pending arbitrations are not similarly treated.

Volume 2: International Financial Arbitration 169 Such an attitude will also depend on the receptiveness of the domestic bankruptcy courts to international developments, including in appropriate cases a search for a better balance with international arbitrations and respect in principle for arbitral awards, in particular when determining the status of assets and the ranking of security interests therein or status of other asset backed financing facilities resulting from their use in international financings. In other words, this more informal modern recognition ethos and need could not be unqualified or merely unilateral. Here again the issue arises that arbitrator finding under their extended powers in international arbitrations on the basis of transnational market practices in matters of ranking and set-off may then expect these powers to also have an effect in local bankruptcies. Again, it cannot be automatically assumed that bankruptcies, which remain all local or domestic in principle, can interfere with (or suspend) an international arbitration. It can only concern the conduct under and effect of the arbitration in the bankruptcy jurisdiction and in other countries that recognise the extraterritoriality of the bankruptcy in question but in these countries always subject to the latter’s own views and conditions for bankruptcy and arbitration recognition, the latter under the New York Convention, and the balance that they strike in this regard, as already mentioned.285 It is a matter of policy which may be shifting. Finally, in the foregoing the important issue of ranking of foreign security or set-off possibilities in international arbitral awards and their recognition in (local) bankruptcies was mentioned several times. The English case of British Eagle International Airlines Ltd v Compagnie Nationale Air France and the Australian case of IATA v Ansett were noted in this connection,286 the former denying effect to professional parties creating their own priorities (through a CCP) and the latter accepting them in a bankruptcy. It was posited before that since equitable proprietary interests only operate between insiders, we need not be concerned here about the flows of goods which remain unencumbered in respect of parties buying in the ordinary course of business. One may see here a transnational principle of party autonomy in property matters to which arbitrators may become more receptive and acquire decision taking powers, but it leaves the position of bona fide common creditors to be considered, which are pushed down. From the transnational perspective we may spot here a domestic public order issue to which British Eagle might have been especially sensitive. It meant that uninformed common creditors could still rely on the appearance of ownership in the debtor in respect of all goods it handles except in respect of a limited number of published security interests and a more limited notion of set-off. The case dates from 1975 when the doctrine of apparent ownership was still alive in England. But it was abandoned by the Bankruptcy Acts of 1985/1986, which also confirmed support for netting clauses. The doctrine never operated in this manner in the US and its impact (solvabilité apparente) was in France much reduced after 1980 when in that country the reservation of title was accepted as effective in bankruptcy. The conclusion is that in terms of fundamental principle, public order or policy, the bona fide purchaser is ever better protected and the bona fide common creditor ever less.287 The justification for the latter is often that regulators are now more interested in risk management in banks than in the position of the common creditors at whose expense the expansion of the asset backed financing facilities and set-off and netting facility operate. Perhaps more convincing is the argument that statistically common creditors in bankruptcy never got

285 Thus, in In re JSC BTA Bank, Debtor in a Foreign Proceedings, 434 BR 334, 337 and 343 (2010), the United States Bankruptcy Court SDNY refused to use the recognition of a Kazakhstan primary bankruptcy within the US to stay the proceedings of a Swiss arbitration that had nothing to do with the US or the debtor’s property within the US. 286 See nn 107, 211 and 251 above. 287 See s 2.3.3 above and Vol 5, s 1.1.10.

170 Volume 2: International Financial Arbitration very much anyway. If it was really a public policy concern, smaller unsecured creditors should be given a fixed slice of the assets, which has found little support, however, so far. So, it would appear that there is hardly a transnational public policy principle at stake that would also have to be discounted in an international arbitration as a transnational minimum standard or operate as a credible public policy bar to the recognition of the ensuing awards in local bankruptcies.

2.3.4. International Financial Arbitrations, Proprietary Matters and Issues of Ranking We must more in particular consider that financial arbitration may face special challenges which go beyond mere contractual disputes even outside bankruptcy. The issue was also already broached in principle several times above. There is foremost the possibility of asset-backed funding which may raise important issues of property law in terms of the nature, structure and operation of security interests, floating charges (in respect of inventory, receivables and collections or proceeds), and finance sales like leases and repo funding operating internationally, therefore cross border. Particularly when these charges concern assets in different countries, assets that are moving from country to country, or when in repos assets must be re-delivered to repo sellers in other countries, there may be complications in terms of the determination of the applicable property laws short of their full transnationalisation in international finance transactions. More problems may arise if there is a bankruptcy and the relevant assets are or may have to be surrendered to or are retained or claimed by a bankruptcy trustee especially if operating in the country of their situs when international recognition of arbitral awards affecting the bankrupt estate may be less probable, even under the New York Convention.288 It was already said that the public policy bar is likely to be raised under the NY Convention, or issues of jurisdiction and arbitrability, even admissibility, probably all the more so in these situations. Practically speaking, this may limit substantially the power of international arbitrators in or over these assets or financial products in the country of the bankruptcy, but the true question is in how far this also affects the legal position of the arbitrators and whether they may or must take the bankruptcy environment into account in their decisions. Must or may they desist in these circumstances? At the practical level, it will certainly also affect their powers of attachment as a preliminary measure. Again, in respect of assets of the bankrupt in third countries, the situation may be quite different. It was already said that it concerns in particular the institutional status and powers of international arbitrators. In property matters outside, but especially within a pending bankruptcy—relevant therefore if the relevant assets are physically in the country of the bankruptcy—there are deeper questions in arbitrations concerning them, notably the effect of any decisions on third parties or the effect erga omnes, it was already mentioned in the previous section. It is in the nature of property rights and proprietary protection that third parties are

288 This being said, in respect of the situs, all kind of issues arise if the assets are intangible claims like receivables or habitually move between countries, like ships and aircrafts (although often deemed located at their register). Again, these issues will not be here further discussed, but they are very real, see the discussion in Vol 4, ss 1.8 and 1.9. The EU Bankruptcy Regulation takes the view that for purposes of the Regulation, claims are located at the place of the debtor, Art 2 (g) which makes a great deal of sense but prevents a unitary regime to operate in respect of a portfolio of claims with debtors in different countries.

Volume 2: International Financial Arbitration 171 affected and/or that their rights may be pre-empted by a decision about title or that they may be pushed down in rank when security interests are reaffirmed. That is also the effect of set-off and netting. Again, the question is then in how far an arbitral award, that in principle can have no third-party effect, may nevertheless have effect on others. That needs further discussion, quite apart therefore from the question of recognition of such awards in the country of the bankruptcy. It raises more urgently the question of the true nature of international arbitration and the powers of the arbitrators. It was also already discussed at large whether international arbitrators still operate under a domestic law (lex arbitri of the seat) and derive their powers and status from it as would, in that approach, the arbitral award. For international arbitrations, the view in this book is one of delocalised arbitration, see section 1.1.9 above. At least it is submitted that that is now the better academic model, because it explains more, simplifies the argument, and reflects the reality of globalisation better. Not wanting to face this may mean not properly understanding what is going on or what international arbitration now truly is or has become.289 In this type of delocalised arbitration, it is further considered that, subject to proper pleadings and a proper hearing, arbitrators might apply the modern lex mercatoria and institutionally might even assume equitable powers,290 in finance notably further to recognise and develop proprietary or set-off and netting structures in the transnational commercial and financial legal order itself.291 This is part of the continuous development of the modern lex mercatoria,292 on the one hand in terms of the evolution of international practices or custom or international general principle within it and even of party autonomy where appropriate293 also in proprietary matters at the transnational level and on the other by allowing arbitrators to deal with these issues, even though it may put considerable stress on the arbitration process, its credibility and legitimacy, see section 1.1.14 above. Again, the ISDA Master Agreements with their netting clauses are here a prime example of what may well have become transnational practice and it allows these matters now to be decided in arbitrations and approach which appears to be accepted in the community concerned. 289 See on this issue further J Paulsson, ‘Arbitration in Three Dimensions’, LSE Law, Society and Economy Working Papers 2/2010, London School of Economics and Political Science, Law Department, published at www.lse.ac.uk/ collections/law/wps/wps.htm, and 60 ICLQ 291 (2011). In fact, it was always irrational somehow to assume automatic extraterritoriality of the lex arbitri of the seat, see s 1.1.8 above. It is now well established that courts in other countries may hold and enforce quite different views. The NY Convention itself whilst abandoning the double exequatur already recognised this development in 1958, see s 1.1.9 above. As is well known, the French Cour de Cassation has underlined the fact that international arbitration is founded in the international arbitral order, see Cour de Cass Civ 1, 29 June 2007 in Ste PT Putrabali Adyamulia, 207 Revue de l’Arbitrage, 507, from which it follows that the arbitration agreement itself (including the arbitration rules made applicable therein), its severability, the notions of jurisdiction, Kompetenz and arbitrability, finding the applicable procedural and substantive laws, the mode of reasoning, and the issues of challenges and recognition also belong to that order, see ss 1.1.9 and 1.2.1 above. As we have seen in n 22 above, the new French Bankruptcy Act of 2011 does not yet draw this conclusion. Although it is the more consequential view, there may remain therefore still some justified doubt what the true legal position in France is after the 2011 statutory amendments. 290 See Dalhuisen (n 279) 510. 291 Below, a whole array of other powers will be discussed that international financial arbitrators may also have. They are mostly related to public order considerations. It would indeed suggest the possibility of (some) powers erga omnes, much as ordinary judges have them under applicable domestic laws. 292 See JH Dalhuisen, ‘Legal Orders and their Manifestation: The Operation of the International Commercial and Financial legal Order and its Lex Mercatoria’ (2006) 24 Berkeley JIL 129. 293 It is often thought that particularly in assignments of receivables, parties have power over the applicable legal regime, see Vol 4, ss 1.9.3/4. See for the issue of equitable powers allowing party autonomy to operate more broadly in proprietary matters subject to the protection of the commercial flows (or bona fide purchasers or purchasers in the ordinary course of business of commoditised products), Vol 4, s 1.3.3 and for a summary Vol 1, s 1.1.6 above.

172 Volume 2: International Financial Arbitration This being said, it was submitted that international arbitrators will remain deferential in particular towards domestic regulatory and public order requirements, although they might be superseded by transnational standards or transnational minimum requirements, another consequence of countries and their citizens and businesses wanting to be part of globalisation and avail themselves of its benefits. This deference may also apply in principle to the domestic proprietary regimes but international arbitrators may develop them further on the basis of market practices at the transnational level if properly pleaded; in view of the internationality of most major financial dealings and their asset backup and the practices developing in the international markets, arbitrators may have little choice but to move forward. Assuming always that there is sufficient relevant contact, this deferential attitude may even extend to applicable bankruptcy laws which, on one theory, may also be seen as regulatory rather than purely private law arrangements. International arbitrators may be further motivated to do so by evidence that debtors are trying to hide their assets in foreign jurisdictions, it was mentioned in the previous section that this may also motivates broader international bankruptcy recognition. Also here, they might increasingly rely on international standards and more fundamental concepts of protection but may then also expect some reciprocity in terms of respect for their awards in bankruptcy courts, at least if relating to the assets concerned, their proprietary status, any claims to the title, and ranking aspects. It may mean a measure of respect for third party effect and erga omnes status of the arbitral awards.294 It does not fully resolve the issue of third party or proprietary effect itself, however. It may be relevant in this connection that affected third parties, although not party to the arbitration, may have figured as amici curiae. Especially their organisations like the International Swap Dealers Association (ISDA) may have done so in the relevant proceedings and they could have pleaded transnational practice. This could be an important reason, if needed, why they or their members may be subject to the ultimate findings of the award, even in a bankruptcy, although ISDA does not act as a trade organisation with power over its membership proper. Yet ranking, for example, if determined in such an award might then conceivably have greater effect even in an otherwise domestic bankruptcy as it concerns a transnational industry standard on which all may rely or have already relied, including other creditors, whose organisations have been heard. If such bankruptcies were asked to be recognised elsewhere, these considerations could be given extra weight in favour of arbitral awards in recognising third countries. In fact, in bankruptcy recognition in third countries, adjustments are commonly made to the bankruptcy measures to make them fit better in local laws and the technique is well known although often ignored by modern commentators.295 Arbitral awards could figure in that adjustment process as well. Yet public policy in any recognising (bankruptcy) jurisdiction may still make here amends, not only in respect of the foreign bankruptcy but also in respect of any arbitral award, even under the NY Convention. Again, it will be hard for arbitrators to truly anticipate these issues even if they could take them into account. At least one cannot be sure how courts in the various countries will react; especially in a pending bankruptcy, the reaction of bankruptcy courts in particular might amount to a review of the merits of the award, not itself condoned under the New York Convention. The result could nevertheless still be that the issues settled in the award are not finally settled in any ensuing or intervening bankruptcy, foremost in the country of the bankruptcy, but also in any country in which it may subsequently be recognised. Public policy or the domestic bankruptcy order may also be invoked. Also set-offs or nettings even if accorded

294 See also the comments in s 2.3.3 above and in n 296 below. 295 See Dalhuisen on International Insolvency and Bankruptcy, Vol 1, 3-417ff (Matthew Bender New York, 1986).

Volume 2: International Financial Arbitration 173 in an arbitral award, could then still be undone in bankruptcy; at least a creditor if wanting to participate could be asked to account for any benefits already so received. To sum up: there are here important issues of arbitral jurisdiction and powers, perhaps also of arbitrability, of effect of the award erga omnes (even in a bankruptcy),296 and of recognition policy, all relevant in terms of the application of the New York Convention, probably more restrictively applied in a bankruptcy environment or in alternative corporate reorganisation proceedings under more modern insolvency laws, potentially with important differences, however, between the country of origin of the bankruptcy or where it is subsequently recognised and may have to compete with arbitration recognition.

2.3.5. International Financial Arbitration and Financial Regulation In the foregoing, it was already said that arbitrators will be deferential to regulation which is mostly still domestic and of public order. That also goes for financial regulation (even if in the EURO zone in Europe as off 2012, there is a search for an EU regime and a single regulator under the ECB). But they cannot avoid being drawn into making choices, if, in an international financial transaction, different regulatory regimes may compete. In the US, this is also referred to as the issue of the jurisdiction to prescribe, that is to say the question which government must be deemed to have the preponderant interest in international cases or cases with foreign elements. Of course, different laws may be applicable here for different parts of the transactions depending largely on where or on whose territory they play out. There are home and host regulators, questions of where the more characteristic obligation is performed, etc, again matters that cannot be here further discussed, but they are real enough: some countries may not want particular financial activities to occur on their territory as a matter of conduct of business and protection against mis-selling in particular. All are concerned with financial stability and require adequate capital to be set aside for each banking operation. Again, subject to the parties’ pleadings and a proper hearing, arbitrators may prefer international minimum standards like in conduct of business and in competition issues or when it comes to abuse or corruption of the international marketplace, including insider dealing and money laundering. EU Directives provide here guidance as may do the Basel Committee and the International Organisation of Securities Commissions (IOSCO) in their work and recommendations. Once more, the key concept of netting springs to mind and the regulatory concerns in this regard, which favour it in terms of a powerful risk management tool, thus crucially supporting the private law transnationalisation of the netting concept under ISDA, including its third-party effect which

296 In public international law before the ICJ, the operation of the law erga omnes has become an important issue, in particular in respect of fundamental principle and human rights or humanitarian protections, see M Andenas, ‘Jurisdiction, Procedure and the Transformation of International Law: from Nottenbohm to Diallo in the ICJ’ (2012) 23 EBLJ 127ff. These issues now also play at the level of the ECJ, see the Mangold and Audiolux cases, ECJ Case no 144/04 22 Nov 2005, ECR I-19981 (2005) and ECJ Case no 101/08 of 15 Oct 2009, ECR I-9823 (2009). International courts like national judges may have here greater institutional powers than international arbitrators, who are mere product of party autonomy, although if their authority and awards are founded in the transnational legal order, its rules and practices may also supplement and in appropriate cases even amend the arbitration clause and expand the status of international arbitrators, which in such cases would be activated but not be totally covered by the arbitration clause alone. Note, however, that the effect erga omnes discussed in this context of fundamental principle is different from the effect erga omnes of proprietary rights, which rather goes to their effect. Nevertheless, in terms of powers of arbitrators, there may be a similar expansion.

174 Volume 2: International Financial Arbitration received substantial regulatory blessing. These are important developments which are still in their infancy but may leave international arbitrators not unmoved upon proper pleading by the parties. Perhaps they may acquire expanded powers in public policy matters, a delicate issue already much discussed before, see Sections 1.1.4 and 1.2.3. Here again, one important question is whether resulting awards if affecting the application of regulation will be enforced in countries most directly concerned, including in their bankruptcies, if the regulation that is considered applicable by arbitrators is not the regulation of the relevant (bankruptcy) jurisdiction itself. Again, these courts will likely see this as an issue of public order although it is possible that they may increasingly accept here a more international interpretation of it, but it will much depend on the sophistication of the relevant (bankruptcy) court, whilst the attitude may again be different in bankruptcy recognition countries.

2.3.6. International Financial Arbitration, Public Order Requirements and Fundamental Principles in International Finance It was noted above that particularly in an international bankruptcy, the balance between the bankruptcy order and international arbitral awards is to be found in each relevant country as a matter of public policy or order in that country, different potentially in the original bankruptcy country and third countries that recognise the original bankruptcy. The latter is a matter of the New York Convention in the many countries that have ratified it, but especially in this area the Convention may allow of very different interpretation. In this connection it was already asked in how far the bankruptcy intervention may affect the powers of international arbitrators in the international commercial and financial legal order and whether they may or must take the new situation into account. Is Article II of the New York Convention here also relevant and how must it be handled? Powers to find erga omnes in proprietary matters regardless of the bankruptcy, if indeed existing and accepted, may be manifestations of original international arbitral power impacting on and in turn potentially limiting the domestic bankruptcy order(s). Powers to define and even transnationalise the applicable proprietary regime on the basis of international practice and custom as part of the modern lex mercatoria may sustain here the international arbitrators’ independent position, more so probably if domestic regulation supports at least the concept of set-off and netting as just mentioned. This is therefore more especially relevant in areas of law not at the free disposition of the parties and therefore not covered by the law they may have chosen which is unlikely to affect the propriety regime particularly in its priority and ranking consequences. International arbitrators might find a more objective international practice (if properly pleaded) instead, again the facility of set-off and netting first spring to mind, but in international finance, the whole proprietary regime in respect of movable assets including receivables may now be in the balance, ending at the same time the dominance of the lex situs in proprietary matters still based on the prevalence of domestic laws.297 It was also already shown that powers to determine the applicable regulatory regime potentially expand the arbitral reach further, even though (like in new property structures) it remains always a balance with domestic public policy considerations in relevant countries which may in any event still affect the recognition possibilities of any award, particularly in bankruptcies, as

297 See also n 288 above and accompanying text.

Volume 2: International Financial Arbitration 175 was already mentioned also. Moving to international minimum standards may strengthen the international arbitration, but it may still hit the rocks in domestic policy considerations in recognising (bankruptcy) courts. Obviously, there are here many pressures and in the mind of local recognition judges there is often little clarity. The benefits of globalisation are universally wanted but there is a price to pay in nationalism, which legally goes foremost to lowering the public policy bar in respect of the operation of foreign legal facilities and transnationalised concepts of law on the own territory. It requires in truth another way of looking at domestic public policy and public order requirements and in bankruptcy also at notions of the own bankruptcy order and its (domestic) notion of efficiency of the proceedings in respect of foreign interests and claims, a need now more obvious in international finance. Thinking along these lines produces an image of modern international financial arbitration which may become quite different from what is normally considered an international arbitration and raises important institutional issues, easier to understand and place if we assume the delocalised model of international arbitration, but there is more. In international finance disputes, may arbitrators also consider fundamental issues as overriding like those that have to do with financial stability and better risk management (which also often, but not only, resolves in issues of set-off and netting), transparency, the promotion of the international commercial flows unencumbered by all kind of security interests and charges, the finality of financial transactions and payments, orderly (often international) markets and avoidance of market abuse, insider dealing, and anti-competitive behaviour in them, and with issues of transparency and corruption, or the movement of assets beyond enforcement or bankruptcy jurisdictions? Are these issues of such a nature that they may even be raised by arbitrators autonomously as overriding issues of the public order in the transnational legal order itself,298 albeit always subject to a proper hearing on these issues as a matter of due process (again under transnationalised procedural rules)? In this connection, may arbitrators also autonomously solicit the help of or invite affected third parties or amici curiae and other groups that profess an interest for comment on the transnational or national status of the relevant financial rules and facilities, including relevant bankruptcy trustees or their representatives? Unavoidably, we see here major public policy or public order issues arising within the international financial arbitration itself. Potentially, there will be many other interests for arbitrators to consider. It must also be asked whether international financial arbitrators acquire here an own role in terms of transparency and accountability of the actors which goes well beyond any concerns they may have been about proprietary structures, regulatory issues and intervening bankruptcies or similar proceedings, although they may then also want better to support these. This may further underline that international financial arbitration is becoming quite distinct from ordinary international arbitrations and may well deserve a different slot altogether like investment arbitrations, although of course in a very different way. For this type of arbitration to become fully operative, it needs support from the transnational legal order for it to fully operate, and the arbitration clause itself could not transfer and sustain these powers alone. It then also raises important issues of supervision and transparency of these arbitrations themselves. It may support the creation and operation of P.R.I.M.E. as a separate arbitration facility for finance as will be discussed later. In section 5.2.4 below, the desirability of an international commercial court as ultimate supervision and guidance facility will be defended and may be all

298 Clearly, many of these issues are not at the free disposition of the parties and their choice of law is here irrelevant. In such cases, parties may not fully remain the master of their arbitration either, see s 2.1.2 above.

176 Volume 2: International Financial Arbitration the more appropriate if in these matters third party interests and public order are increasingly engaged. It may require treaty support without which, it is submitted, this whole world of international financial arbitration, if it is as depicted here, may not be able to operate fully and safely or get sufficiently off the ground on its own. It may be incumbent upon the Netherlands government in its support of P.R.I.M.E. to consider these issues and take the initiative at P.R.I.M.E.’s request. So far it is not clear that P.R.I.M.E. itself fully understands the issues; it seems to be mainly a networking shop but no cases. Credibility but also issues of independence of the arbitrators (from the parties and all others) and their expertise (in transnationalism and its relationship to domestic interests) will become here major issues. Accountability and proper guidance and supervision are others.

2.3.7. The Autonomy of International Financial Arbitrators In the previous section a number of important issues surfaced which have to do with the autonomy and powers of international arbitrators, all the more so potentially in financial disputes. It poses the question amongst others to what extent these arbitrators may raise autonomously public policy issues, therefore also when not raised by the parties in their submissions. Competition issues have served in the EU as an example where it was believed that international arbitrators do not only have a right but may even have a duty to intervene.299 The concept is not therefore as strange as it once may have seemed, but how far does it go? Are all public policy and public order issues in this category or even others, like property issuers? This touches also on whether arbitrators may bring in their own business expertise in finance and how.300 It was already noted that especially in civil law thinking the idea is that the judges know the law (ius curia novit).301 This may be a fair assumption in respect of ordinary judges who work within their own legal system (if foreign law is applicable the situation is quite different and it must be pleaded as fact as we have seen), but international arbitrators are not ordinary judges and have no natural legal system that they represent or it would be the modern lex mercatoria. Rather the idea is that in international arbitrations the parties must both plead all law as fact, arbitrators know nothing.302 This is the more prudent position for the parties and arbitrators to take,

299 See the European Court of Justice in Case C-126/97 Eco Swiss v Benetton [1998] ECR I-3055. 300 A practical problem is that many financial experts never acted as arbitrators and many international arbitrators do not have financial expertise. In a party arbitration where each party appoints an arbitrator it may be difficult to achieve here a balance. 301 See s 1.2.5 above and on this issue also Ph Landolt, ‘Arbitrators’ Initiatives to Obtain Factual and Legal Evidence’ (2012) 28 Arb International 173. There is also an interesting contribution of DM Bigge (from the US State Department) on the subject in the Kluwer Arbitration Blog of 29 Dec 2011, which summarises the issue for investment arbitrations on the basis of available case law without coming to a clear conclusion. Here there would seem to be a bias in favour of the theory of autonomy in ICSID cases, even when it concerns law beyond fundamental public policy issues, although it could conceivably be argued that in ICSID all is public policy, but there is still the question of a proper hearing, the role of the submissions of the parties, and the question in how far international arbitrators can go beyond them as (civil law) judges may be able to do more freely in order to clarify and expand their own legal system as law makers. 302 As we have seen in s 1.1.3 above, in an international arbitration, the normal situation is that both the applicable law and fact must be pleaded—arbitrators may insist on the former, see also German CCP Sec. 293—unless it can be made out that the ICSID Convention or relevant BITs changed this for foreign investment arbitrations and made these arbitrators a type of international judges deemed to be cognisant of the relevant international and other law. This is not obvious and therefore unlikely, but cf also the analysis of ICSID cases by David Bigge referred to in n 301 above.

Volume 2: International Financial Arbitration 177 but may international arbitrators still bring in their own public policy concerns and their own knowledge of the operation of the international financial markets? The bottom line is here always respect for the equality of the parties and the need to give them a proper hearing in all aspects of the arbitration.303 There cannot be new arguments in the award. So much may be clear and this is a matter of due process. As a minimum, arbitrators would have to put their own concerns and views before the parties first and solicit their comment, even if, in matters of erga omnes effect, for example, it may not be clear who the truly relevant parties are. Whether legally appropriate or not, it should also be considered that intervention of this nature is not without considerable danger and risk for the arbitrators and the arbitration, see again the discussion in Section 1.1.14 above. Particular aspects may be rising cost because of arbitrators bringing new points, and the appearance of bias at least seen from the perspective of the party that may be detrimentally affected. The attitude of arbitrators in this respect is then likely also to become an issue in recognition proceedings and may further complicate them. It is always dangerous for an arbitrator to bring own concerns or expertise even on point of laws;304 on points of pure fact it would be wholly inappropriate but fundamental policy issues may be a different matter. This goes also to the issue of an arbitrator’s own business or financial experience which may be considered to concern fact, not tested, however, in cross examination.305 Another issue is that it could side-line the other arbitrators. Even then the need to promote efficiency and the earliest possible conclusion of the case suggest that arbitrators should not fly kites, not in international financial arbitrations either. It may also be of interest in this connection whether arbitral decisions can be pleaded as precedent or as such be invoked by arbitrators sua sponte. This raises many other issues. It was already said several times that the rule of precedent does not prevail in international law306 and

303 In this connection it is notable that the French Cour d’Appel in Paris in Carribbean Niquel v Overseas Mining, 08/23901 (25 March 2010) set an arbitration award aside on the basis of a lack of hearing in respect of a legal theory used by arbitrators but not advanced by the parties (even though closely related to a theory that was proposed and argued), although there is other case law in France, which points to arbitrators in their characterisation of the facts being in principle able to resort to alternative reasoning, Societe VRV v Pharmachim, 1998 Rev Arb, 684ff, even without notice, see further also the Swiss Supreme Court in Dame Y v Z, [2008] ASA Bulletin, 742ff, and the English Court of Appeal in ABB AG v Hochtief Airport GmbH, Athens International Airport SA, [2006] 2 Lloyds Rep. 1, but, at least in the newer case law, it does not dispense with a proper hearing, see earlier already in England, Interbulk Ltd v Aiden Shipping Co Ltd (The Vimeira), [1984] 2 Lloyd’s Rep, 66, but in other countries this may still not be fully clear. 304 Another distinction that may be relevant in this respect is the one between reasoning and granting relief. It is on the whole considered inappropriate for arbitrators to give more or different relief from that which is demanded (ultra petita) although if eg, specific performance is asked, it might not exclude damages even if not specifically requested. It may be considered the normal alternative under the law. Similarly, where damages are asked commensurate with a breach, the details need not be pleaded and recognition courts leave here broad powers to arbitrators, see in the US Daniewicz v Thermo Instrument Systems, 992 SW 2d 713 (Texas 1999). In other words, there is not an excess of authority or jurisdiction as long as the remedy is rationally derived from the contract and the breach, Advanced Micro Devices (AMD) v Intel Corp, (1994) 9 Cal 4th 362. But there is no discretion for arbitrators. They cannot split the difference, see n 15 above and must in their reasoning depend on the submissions of the parties and their claims, see also n 44 above. 305 These financial arbitrators are not to be equated with peer group quality decision takers in the commodity industry, whose decisions are not based on law and mostly not reasoned, see s 1.1.4 above. It is here the practical expertise that counts and that often is solicited for an instantaneous decision. These are not proper arbitral awards in terms of the NY Convention and do not mean to be. They are matters of contract implementation. 306 See also s 1.1.11 above. The rule of precedent is rejected in international law, see Art 59 Statute ICJ in line with the civil law tradition. The only exception is when customary law is being formed through repeated application of the same rule, so already Baldus in the fourteenth century, see Vol 1, n 314. In international law that would mean custom as source of law under Art 38 (1) Statute ICJ.

178 Volume 2: International Financial Arbitration any guidance that may be so obtained must be pleaded or if arbitrators wish to rely on it must be presented to the parties first for their comment. Again, the own expertise and insights of the Tribunal must be tested.

2.4. Complications in International Financial Arbitrations 2.4.1. The Reasoning of International Financial Arbitrators The reasoning of international arbitrators will be the subject of Part IV below and the discussion is here limited to financial arbitrations. A general observation to make is that the reasoning of international arbitrators could hardly be more ‘rationally determinate’ than the reasoning of ordinary judges.307 More particularly, arbitrators were never ‘bouches de la loi’ as judges were once supposed to be on the European Continent; they are not law makers either. Adjudication is not a mathematical exercise; causality and rationality acquire here a distinct legal meaning, more obvious probably in international arbitrations which has difficulty being fully a rule-based system especially in the transnational and public order ramifications. It has already been said that international arbitrators have great powers but they are not free, including their reasoning. Again, their freedom is in particular subject to the rules and practices developing in the transnational commercial and financial legal order and to its public order requirements in which, it was argued, the powers of the international arbitrator are themselves founded, but, crucially, international arbitrators articulate these rules themselves also, much as they also determine their own jurisdiction, arbitrability, and rules of procedure and evidence. The final test of this is in recognition, which, if international arbitration is to survive, will only be denied on the basis of clear excess, and it should never be forgotten that the New York Convention does not allow any appeal on matters of fact or law and does not go into the reasoning at all. The commercial nature of the transaction between professional parties also enters the equation as do concerns for speed and cost, in the best awards demonstrated by conciseness and focus, further supported by the absence of appeals and reviews. These are legitimate, even prime, considerations also in the reasoning. Arbitrators are there to solve a problem between the parties—no more, no less—in the most efficient and expedient manner. In doing do they must base themselves in principle on the representations made by the parties and they cannot start their own line of argument. They may now also increasingly rely on their conscience, knowledge and sensibility as equity judges did and to some extent probably still do in common law countries and acquire powers in property matters and to defend the public interest; it truly depends

In civil law, the term jurisprudence constante is sometimes used in this connection whose status is, however, obscure, see also s 1.1.11 above and the Additional Opinion (Nos 15–16) of JH Dalhuisen in Compañía de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic (ICSID Case, ARB/97/3), Second Annulment Proceedings, August 10 2010. See further Gilbert Guillaume, ‘The Use of Precedent by International Judges and Arbitrators’ (2011) 2 Journal of International Dispute Settlement 5. Precedent suggests the ultimate creation of a coherent system of law and effectuates a kind of third party effect of awards that is alien to arbitrations, which remains principally dependent on the submission of the parties. See for foreign investment also the observations of M Reisman in n 50 above and 529 below. The effect of decisions erga omnes, if any (also in proprietary matters), see n 296 above, throws up similar issues but should be well distinguished, see also the discussion in s 4.1.11 below. 307 See s 4.1 below.

Volume 2: International Financial Arbitration 179 on where the transnational commercial and financial order is and accepts. The fact that banks are now also happier with arbitration may underscore this trend. Thus, international financial arbitrators may become more activists (as foreign investment arbitrators may also be as we shall see) but are not there to create or clarify a legal system. Ordinary judges should not be copied. International arbitrators simply decide which of the parties’ arguments are the more plausible and should be careful and extremely reticent to add their own. It means that international arbitrators must promptly decide the dispute, focus on the essence, not issue general dispositions, and not attempt to create precedents (or contribute to a jurisprudence constante), whose binding force is in international law in any event contested, while a search for consistency is also inappropriate beyond the obvious. Again, they are there to decide the dispute between the parties on the basis of their arguments, not to attempt system building in the civil law manner; it is clear that international arbitrators are less hemmed in than ordinary judges as they need not worry about the impact on the system. They are far from an appellate jurisdiction. Not having a lex fori of their own (or it would be the transnational law itself), it is not their task to promote and explain local laws either or any other law in particular, not truly the lex mercatoria either. As far as the applicable law is concerned, they have the power to apply the modern lex mercatoria (and its hierarchy in which domestic private law may still be the residual rule) but only when properly pleaded and as a matter of evaluating the evidence upon expert testimony, no more, validate the direct or indirect parties’ choice of such law or other laws and assess their meaning, but in international transactions increasingly also determine and recognise the relevant proprietary interests and domestic governmental considerations in terms of regulation and any other overriding domestic value subject to articulating in appropriate cases minimum transnational standards (or policies). Again, it suggests a large measure of discretion (or comity) in international cases, potentially more so in international finance, to be explained in the reasoning but in the manner, arbitrators believe best unless there is patent excess. The rest is left to the checks in recognition courts. In this connection, there remains in particular the important issue of whether international arbitrators may raise issues themselves if they consider them of overriding public policy or order importance. Here again, there may be greater freedom in international arbitrations and perhaps a greater need in international finance, see section 1.2.5 above, but arbitrators are not free in these aspects either and any power in this regard (coming from the transnational commercial and financial legal order itself) must be exercised with the greatest care. In fact, it was already submitted that international arbitrators cannot lightly make themselves the spokespersons for the general interest, but in appropriate cases they may not be able to avoid it. As a minimum, there will have to be a hearing on these new issues and parties must be treated equally as matters of the utmost due process. Further delays and costs must be seriously considered. In civil law, reference is here commonly made to the doctrine of ius curia novit (see section 1.2.5 above): the judges know the law, but it has already been noted that arbitrators are not judges and the question here is ‘which law?’ as in international arbitrations there is no natural lex fori or it must be the transnational law itself. Whatever law is invoked must be pleaded as fact and proven, and it is in principle not different for public policy issues but for any special and autonomous powers of international arbitrators in this regard and there might have to be more in international financial arbitrations to make it work as indeed there are also now more in foreign investment arbitrations but they are seriously questioned and it has affected credibility, see the discussion in section 3.5 below. These are therefore major issues, more difficult than sometimes assumed. It raises at the same time the further issue whether arbitrators might not only have a right but also a duty to raise these

180 Volume 2: International Financial Arbitration matters on which ICSID case law at least remains divided.308 So may be the case law of the ECJ.309 The ICJ has accepted a duty for itself to do so while invoking its status as a court.310 International arbitrators lack that status and might institutionally not therefore have the same powers and may have to be more circumspect. It cannot be denied that in these matters and the way to reason them out, international arbitrators will bring the ‘ballast’ of the legal regimes from which they hail, with potentially important differences between a more structured civil law approach as compared to a more searching and adversarial (therefore more passive) common law approach, a more formal but also inquisitive (therefore more active) European approach as against a more ‘realist’ American approach of (often) judicial activism, and a more commercial than consumer law attitude, or perhaps even a more policy-oriented rather than private law-oriented approach. That is all likely to be discounted in the way they reason, even if they may not themselves be greatly aware of it. Again, the example of ordinary judges in the countries they come from may not be helpful. Under transnational law, they largely determine themselves how to proceed in this regard, again except if showing excess. Asking for a ‘clear explanation’ or a ‘full picture’ or even ‘elementary logic’ suggests an insufficient understanding of the situation and of the possibilities.311 Realistically, arbitrators cannot even vouch for the possibility that their preferences for some arguments in some aspects of the same case may contrast with their preferences for other arguments in others. More neutral may be the requirement that the reasoning on points of fact and points of law can be followed to its conclusion.312 Besides the other elements already mentioned, such as speed, cost, focus and conciseness, that puts the accent on mere plausibility. Again, only the most obvious contradictions can and should be avoided and consistency within the award, let alone with other awards or with the entire law of international business and investments, even if it was clear what the concept of consistency really meant, is no realistic demand either; see again the discussion in Part IV below.

2.4.2. Is There a Need for New Treaty Law and for Supervision of International Financial Arbitrations by an International Commercial Court to Stabilise International Financial Arbitration and Enhance its Credibility? Thinking along the above lines in terms of powers of arbitrators, it was already submitted that the laws they apply and their reasoning produces an image of modern international financial arbitration which may become quite different from what is normally considered an international

308 See eg, H v Boutte and M Brunetti, ‘Investment Arbitration—Ten Areas of Caution for Commercial Arbitrators’ (2013) 29 Arbitration International 570. In this connection the practice at the ICJ is often believed normative also in international arbitration, see Nicaragua v US (Merits) [1986] ICJ Rep 24, para 29, but that does not go without saying. 309 UK v Iceland (Merits) [1974] ICJ Rep 9, para 17. 310 See for ECJ case law, n 109 above. 311 Requiring the award to be convincing, see P Lalive, ‘On the Reasoning of International Arbitral Awards’ (2010) 1 Journal of International Dispute Settlement 1, does not introduce an objective standard either and also presents an unmanageable test, see further s 4.2.1 below. 312 The view in MINE v Guinea, ICSID Case N° ARB/84/4 Decision on Annulment, 22 December 1989 that the minimum requirement is not satisfied when contradictory reasons are given therefore seems untenable. Frivolous reasons, to which this decision also refers, are more to the point, but what are they?

Volume 2: International Financial Arbitration 181 (commercial) arbitration. It has already been said also that it raises important institutional issues and issues of applicable law and policies, easier to understand and to place if we assume the delocalised model of international arbitration. But it was also asked whether international financial arbitration acquires an own distinctive feature in terms of transparency and accountability of participants in international finance, especially because of the concerns there may exist about proprietary structures, regulatory issues and intervening bankruptcies or similar proceedings, although they may also wish to support these better. This may further underline that international financial arbitration is becoming quite distinct from ordinary international arbitrations and may well deserve a different slot altogether like investment arbitrations, although in a different way. It also raises important issues of independence, impartiality, accountability, transparency and supervision of these arbitrations themselves. If properly understood, it may support the creation and operation of P.R.I.M.E. as a separate arbitration facility for them. Earlier the creation of an international commercial court or similar institution was proposed313 first to assume a supervisory role in international arbitration in terms of appointment of arbitrators, their impartiality and independence, and especially the appearance thereof, expertise and conduct, but more importantly also to issue preliminary opinions to international arbitrators if so requested concerning their powers especially when determining public policy issues, the applicable law in this regard, and the measure of its transnationalisation, and conceivably also to intervene in matters of challenges and enforcement of the awards. This supervision may also be necessary as a counterweight to the lack of transparency and accountability because of arbitration’s private nature and could be an important prop to the legitimacy of such proceedings. This may be needed all the more in international finance and could also reinforce the third-party effect of modern financial structures if accepted in arbitral awards, where necessary even in local bankruptcies. Furthermore, this international court could assume an active role in ordering preservation measures pending the constitution of the arbitral tribunal and subsequently order their enforcement through the courts of relevant countries. Ideally, such a court should obtain treaty status to support the authority needed to back up an effective system of international financial arbitration that, in the case of disputes in financial matters, could meet the challenges enumerated above. Such a treaty could also usefully enumerate and reinforce the powers that international financial arbitrators need effectively to solve international financial disputes and which have been described throughout. Indeed, this whole new world of international financial arbitration, if it is as depicted here, may not be able to operate fully and safely or get sufficiently off the ground on its own. In other words, treaty law might stabilise this scene as the Washington Convention did for foreign investment arbitrations.

2.4.3. International Financial Arbitration and the Position of Ordinary Judges Compared. The Lehman Cases Finally, the position and role of ordinary domestic courts in international finance should be further considered, compared and if necessary be re-evaluated. First, as to third-party effect of proprietary structures and set-off rights, it should be considered whether, institutionally, ordinary courts and judges are in principle better placed than international arbitrators, if only in the application of their own laws. The expertise (and power) of ordinary judges should not be

313 See Dalhuisen (n 64) and ss 1.1.12, 1.5.2 and 1.6.2 above and Vol 1, s 3.3.3.

182 Volume 2: International Financial Arbitration underestimated and upon proper advocacy many might find a way to deal with most problems and they may be a great deal more succinct and coherent in their reasoning potentially even in cases with a considerable international flavour.314 However, then have then same problems with the application of foreign laws, whilst their findings, whatever they are, may be less likely to obtain international recognition in the absence of something like the New York Convention, although in the EU we now have the Brussels I Regulation for ordinary civil and commercial judgments, revised in 2012, and also the Bankruptcy Regulation 1346/2000 of 2002. Countries may also follow the UNCITRAL Model Law on Cross-Border Insolvency as notably the US and UK have done, as already mentioned. We also have the Hague Convention of 2005 on Choice of Court Agreements, which envisages a simplified recognition and enforcement regime for ordinary judgments when a court is chosen by the parties, a regime to some extent comparable to that of the New York Convention, although so far it still lacks sufficient ratification to be truly meaningful.315 Yet it must also be accepted that in domestic courts there are likely still to be language and expertise problems in many countries and there will be generally less awareness of or confidence in international practices and the entire concept of transnationalisation with its effect in international finance in particular, also on the applicable regulation and its interpretation. It is probably still an issue for most whether they can apply transnationalised law at all, certainly at their own initiative. Again, in international transactions this is becoming increasingly bothersome. Hence also the potential advance of international arbitration in this area, although the power of arbitrators to invoke any law which is not pleaded including public policy and bankruptcy notions is even more limited as we have seen. It was noted in this connection that especially the courts in the US, in legal realism and with their powers under the UCC to find on the basis of many sources of law, may have an advantage and may still present a greater challenge and alternative to international arbitration. Whatever the status of their judgments, mostly ordinary judges may not feel able to assume a similar freedom and flexibility in international proceedings as international arbitrators may do to achieve more up-to-date, higher-quality, and more responsive decisions. In particular, this may mean less willingness to consider application of transnational custom or principle upon proper pleading as, for example, may derive from the ISDA Master Agreements. There also remains the issue of appeal, which may delay a final decision in local courts for many years (even in bankruptcy proceedings), although it may be conceivable that a choice of court agreement itself enhances the power of judges and eliminates appeals, assuming this does not raise public order issues in the relevant jurisdictions and is also effective in a bankruptcy. Unfortunately, the 2005 Hague Convention on Choice of Court Agreements did not clarify these issues. Finally, especially in appeals, local courts may be hemmed in by a need to clarify their own law at large or even contribute to national system building, which may sit particularly uneasily with the needs of international dispute resolution, although it is said in respect of the Lehman litigation that the decisions were ‘more sensitive to the dynamics of the global financial markets’.316 It is a key issue. In practice as we have already seen in sections 2.2.2, 2.2.3 and 2.2.4, ‘purposive interpretation’ is now commonly used by the courts in England to achieve the necessary adaptation to international practices but it remains a purely national facility.

314 cf eg the important decision of the English Court of Appeal in Lomas & Ors v JFB Firth Rixson Inc & Others [2012] EWCA Civ 419 on the interpretation of the ISDA Master Agreement; see also text at n 317 below. 315 Only Mexico has ratified, the US and EU have so far only signed the Convention. For other judgments there is nothing similar except in some countries on a bilateral (treaty) basis. 316 See J Braithwaite, ‘Law after Lehmans’, LSE Law, Society and Economy Working Paper 11/2014 at p 9.

Volume 2: International Financial Arbitration 183 As we have seen, financial issues are most likely to arise in the ordinary courts in the case of a bankruptcy or similar insolvency proceedings. Indeed, the Lehman situation in England after 2008 may be used as an example. It gave rise to about 30 cases, eight of which were appealed317 and three of which ended in the Supreme Court.318 For the present purposes, the cases dealing with the following issues were of the greatest importance: (a) contractual issues, notably the interpretation of the ISDA Master Agreement where it showed gaps, although any resulting set-off and netting issues are no longer merely contractual, (b) proprietary issues, notably upon the exercise of user rights by the creditor (or repos buyer) in assets given as security and the protection of client moneys and investment securities or entitlement through segregation of the money pools and pools of underlying supporting back up assets of the custodian, and (c) the concept and protection of the pari passu notion in bankruptcy. In contract (under (a) above) supplementation in respect of any close-out amounts, the Court of Appeal found in Lomas319 that the non-bankrupt party out of the money could either rely on termination (and pay up the valuation as established under the agreement) or under the inapt drafting of clause 2(a)(iii) of the Master Agreement suspend payment until the default was lifted. This allowed a delay until the interest rate situation turned. From the point of the bankrupt estate, at least that was better than immediate extinction of the debt altogether. Rather than implying terms in widely used standard contracts, the context and commercial objectives were considered. Potentially this allowed for the consideration of international practices. Perhaps more fundamental were the proprietary and segregation issues (under (b) above). First it was decided that all that was intended as client money was deemed to be under statutory trust even if not yet formally segregated during the day which the implementation rules in the UK had allowed. At least that was the purposive interpretation given to the EU MiFID I implementation in the UK.320 Floating charges of securities and other balances were on the other hand not considered to have sufficiently transferred control as required under the EU Collateral Directive and were therefore not protected under its UK implementation, even if the key of floating charges always was the lack of control over the relevant assets,321 and this was perhaps more contentious. The true issue is tracing. Related problems were the effect of the right of use of the assets by secured creditors or in repos on the proprietary claims of owners or repo sellers to a return of the property. Importantly in this regard, the right of use was not considered an impediment to the return of the assets or duty to replace them, nor commingling per se either. Apparently, a form of tracing and of constructive trust remained implied,322 which made de rejection of floating charges less credible, whilst for repos of fungible securities, the repo buyer appeared to have all the right including the use subject to netting in the case of insolvency.323

317 Re Lehman Brothers International (Europe) [2009] EWCA Civ 1161; Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2009] EWCA Civ 1160; Re Lehman Brothers International (Europe) [2010] EWCA Civ 917; Re Lehman Brothers International (Europe) [2011] EWCA Civ 1544; Bloom v Pensions Regulator [2011] EWCA Civ 1124; Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419; Lehman Brothers International (Europe) v Lehman Brothers Finance SA [2013] EWCA Civ 188; Trustees of Lehman Brothers Pension Scheme v Pensions Regulator [2013] EWCA Civ 751. 318 Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38; Re Lehman Brothers International (Europe) [2012] UKSC 6; Bloom v Pensions Regulator [2013] UKSC 52. 319 See n 314 above. 320 Re Lehman Brothers International (Europe) [2012] UKSC 6 (also called ‘CASS7 Supreme Court’). It caused considerable delays to determine what the pool now was and who was entitled to it. 321 Re Lehman Brothers International (Europe) [2012] EWHC 2997 (Ch) (also called ‘Extended Liens’ case). 322 Re Lehman Brothers International (Europe) [2009] EWHC 2545 (Ch) (also called ‘MCF’ case). 323 Re Lehman Brothers International (Europe) [2011] EWCA Civ 1544 (also called ‘Rascals’ case).

184 Volume 2: International Financial Arbitration Finally for the pari passu argument under (c) above, there was some further judicial clarification, notably of the common law anti-deprivation principle, an uncertain concept meant to protect common creditors against a wild growth of (equitable) security interests, a concern which had emerged earlier also in British Eagle.324 It was indeed interesting to see how equitable proprietary interests affect the common creditors (or not) and how difficult it seems to be for Chancery to create some clarity here outside and especially inside bankruptcy or similar proceedings. In Belmont,325 the view was expressed that it concerns ‘intentional or inevitable evasion of the principle that the debtor’s property is part of the insolvent estate’ but that this principle should be ‘applied in a commercially sensitive manner, taking into account the policy of party autonomy and the upholding of proper commercial bargains’. This obfuscates. Between the insiders, it is of course all about risk management—a dominant regulator concern also—but one may well ask how much concern there should still be about the rest as statistically they never got much in bankruptcy and they know that. It was already noted that the law protects bona fide purchasers against all equitable interests (they ordinarily have no search duties) but not bona fide creditors (who have). That is policy, see also Volume 5, section 1.1.11 and for more case law and the need for transnational clarification Volume 5, section 2.6.11 in fine. It empties substantially the pari passu (anti-deprivation) argument, which was probably never much of a fundamental principle except in the breach. For similar reasons, in 1985 the UK Bankruptcy Act did away with the notion of apparent ownership (or solvabilité apparente). The fact is that the valuation of swaps acquires a particular meaning and urgency in a close out upon an event of default in a swap relationship. This became clear in particular in the interaction between ISDA and the UK courts under the 1992 Master Agreement text as subsequently amended in 2002. In principle there are two methods: either to ask market makers for quotes for replacement swaps, which may vary greatly in times of stress and even outside it for complicated products. The alternative is a loss assessment by the affected party itself on the basis of a fair evaluation by the non-defaulting party, such party acting reasonably and in good faith. This is obviously more subjective but may be more reasonable in abnormal times or for unusual products. These methods are also referred to as the market quotation and loss methods, bankruptcy courts having here the last word regardless of the contractual language in master agreements but international market practice might not be ignored. These courts may be inclined to a more objective approach if feasible, but will also consider whether the cost of the transaction is reasonable when an actual replacement has been made regardless of the precise wording of the master agreement requiring several quotes in respect of a close out calculation. It has already been said that international financial arbitrators may on the one hand have less power in finding erga omnes in proprietary and ranking matters as compared to local judges, particularly relevant in proprietary issues (unless we accord them the status of equity judges under transnational law). In other areas they may have more, especially in all that comes close to party autonomy, but in public policy and regulatory matters again they may have less (see the discussion in section 1.2.2 above).326 How much guidance there is from local courts in 324 See n 216 above and accompanying text. 325 See n 318 above. 326 The valuation of swaps may present a case in point. There are in principle two methods: either to ask market makers for quotes for replacement swaps, which may vary greatly in times of stress and even outside it for complicated products. The alternative is a loss assessment by the affected party itself on the basis of a fair evaluation by the non-defaulting party, such party acting reasonably and in good faith. This is obviously more subjective but may be more reasonable in abnormal times or for unusual products. These methods are also referred to as the market quotation and loss methods, bankruptcy courts having here the last word regardless of the contractual language in master agreements. They may be inclined to a more objective approach if feasible, but will also consider whether

Volume 2: International Financial Arbitration 185 bankruptcy situations, such as from the Lehman’s case law in England, at the transnational level may also be debated, but it may be of some help especially where it demonstrates that local judges are often no less groping in the dark, particularly in proprietary matters where transnationalisation of the interests in the international flows and a greater space for party autonomy may be the answer between insiders competing for recovery rights (see the discussion in section 2.2.3 above). Nevertheless, in all risk-management techniques, there may still be elements of public interest to consider. They remain by their very nature often more domestic, although if they conflict, international financial arbitrators may be able to exercise greater freedom or power than ordinary judges as to which regulation is more properly applicable, although it also complicates their role and raises the issue of their powers as we have seen and potentially recognition issues. They may be forced to make a choice, for example when it comes to prospectus liability in an international offering, when, as mentioned before, they may opt for international minimum standards upon the pleadings of the parties or even autonomously, it remains an important issue. Ordinary judges may simply give preference to their own policies, not least also in bankruptcy. Better balancing may give international arbitral awards a better chance to be recognised elsewhere, although local bankruptcy courts may still test these awards simply on the basis of compatibility with their own (regulatory or other mandatory) laws, including their secured transaction laws, as was noted before. Third countries recognising such bankruptcies may give the same preference to their own regulation or mandatory rules in their own territory in these matters. One sees here potentially a special bar to all recognition of foreign decisions, whether judicial or arbitral, although arbitral awards may still have some edge under the New York Convention. Again, it will depend a great deal on the sophistication of the relevant court, either in the original or in a recognising country. On balance and for the reasons stated, international arbitration may here be in the ascendency notwithstanding all its problems and credibility in these matters, see again section 1.1.14 above.

2.5. The Emergence of P.R.I.M.E. 2.5.1. Special Needs of International Financial Arbitration. The Emergence of P.R.I.M.E. It was argued and is the basic theme of this book that law is the result and outcome of a constant dialogue in (the relevant part of) society about its meaning and extent and it can never be completely known. Even purely domestically, where legislation and judgments try to stabilise the scene, that is clear in interpretation. Law is there to provide a modicum of order in the relevant

the cost of the transaction is reasonable when an actual replacement has been made regardless of the precise wording of the master agreement requiring several quotes in respect of a close out calculation. See for the English Courts, Fondazione Enasarco v Lehman Brothers Finance SA, [2015] EWHC 1307 (Ch). The importance is that party autonomy and the ISDA text (in this case the one of 1992) was not the last word and courts may decide on a different course. Arbitrators may be less sure. The ISDA language was adapted in the 2002 text under which the replacement value of terminated transactions was to be determined in good faith using commercially reasonable procedures in order to produce a better result, but it required ever greater sophistication and leaves a great deal of power with the non-defaulting party and the courts or perhaps arbitrators to determine the correct interpretation and application of the ISDA Master in these matters, see for a critical comment, R Zepeda, ‘The ISDA Master Agreement 2012: a Missed Opportunity?’ (2013) 28 JIBLR 308.

186 Volume 2: International Financial Arbitration legal order, which is better when it is just, promotes social peace, and is efficient. That is the challenge of civil society. Even if in modern times, national legislatures and judiciaries became the most likely spokespersons and clarifiers also in commercial law at the international level, this stabilising role is now to some considerable extent left to others in terms of market practices, custom and principle or party autonomy. When disputes arise, international arbitrators increasingly play a role in this process besides ordinary courts, practitioners and perhaps academics. This concerns especially the operation of the modern lex mercatoria in private law but increasingly also minimum regulatory or public policy standards in public law or the public interest in terms of market balancing values and the articulation of public order constraints on transactions, if only to avoid abuse. Insolvency as a regulatory phenomenon acquires a special place here in finance and, although remaining domestic in principle, its international ramifications acquire a particular significance, the extent of which then needs to be further defined. This was the subject of the previous sections. It was pointed out that the role of international arbitrators is quite different from the ordinary courts, which will not only seek to articulate and clarify, but may also see it as their task to stabilise their legal system further, especially in appeals. That is notably not the task of international arbitrators who have no lex fori to explain or expand or it must be the transnational law itself. This may explain why, when properly pleaded, it is now widely accepted that international arbitrators may apply principles, customs and perhaps also accept a broader concept of party autonomy, therefore the modern lex mercatoria when finding and applying the applicable law. Domestic courts may remain here relegated to the presumed certainties of private international law, leading to the application of some domestic law, preferably their own, that is unlikely to have been written for the international financial flows. In this environment, it may not surprise that international arbitration is increasingly becoming the preferred dispute resolution mode also in international finance. The main purpose was to explain what this means in terms of the applicable law and how this subject should be approached. It was then also pointed out that financial arbitration may be increasingly distinguished because it requires more fundamentally powers in property and public policy issues which derive from the transnational legal order itself; it was submitted that they cannot truly be derived from the arbitration clause and party autonomy. In summary, in international commerce and more so in international finance, the applicable law is not or no longer an automatic and mechanical application of some national law but rather a more direct search for a new normativity that operates in the international marketplace itself in order to make its operations more meaningful and the applicable law more responsive to the concerns of the business community and of the public alike at that level. These are particular challenges facing international arbitrators in the financial area where issues of financial stability, honesty and reliability in markets and in the offering of financial services by businesses or banks that operate internationally are then also important; money laundering and bribery or other forms of corruption being others. International arbitrators cannot shirk their responsibilities and may then well operate in a significantly different environment than has so far been considered. It directly affects their powers and way of reasoning where it should be further considered that on the one hand they are not an appellate jurisdiction—they are called merely to resolve an individual dispute upon the basis of facts as pleaded—but on the other they may be faced with issues that may affect third parties in matters of priority and indeed the public interest more broadly, which also raises the question whether arbitrators may or even must raise public interest issues autonomously. It is submitted that this opens important new vistas in international arbitration but it was already argued in section 1.1.14 above that it may also be its undoing. Again, because of these special features international financial arbitration might increasingly be distinguished from ordinary commercial arbitrations. It concerns here the intricacies, third

Volume 2: International Financial Arbitration 187 party and public policy aspects or regulatory concerns in international finance. Specifically to further international arbitration in the financial area, in 2010 a foundation was set up in The Hague, the Netherlands, called P.R.I.M.E.—Panel of Recognised International Market Experts in Finance—with the aim of upgrading dispute resolution in the global financial markets, making use of the collective experience of experts familiar with the operations, practices and developments in these markets.327 These experts were intended to function as arbitrators, mediators, or litigation experts in international finance and would also assume an educational function. Especially because of the interaction with regulation, bankruptcy and public policy, and the demands of transnationalisation, a facility of this nature in international finance is likely to have to face a number of more specific issues or complications.328 It was argued that the third party and public interest or policy effects are a serious threat to this type of arbitration, its credibility and legitimacy (as it has become also in foreign investment arbitration where the public interest is more directly at stake). First, the third party and public policy effects are more apparent in financial arbitration than it is in ordinary commercial arbitration which is still more contract dispute oriented. In finance, especially in asset back funding and in set-off and netting, proprietary and preference issues are likely to arise concerning rank and priority in assets or asset classes that may deeply affect outsiders, especially common creditors who are not party to the arbitration. In practice, this concerns especially the recognition of any ensuing awards in local bankruptcies and their order or priorities. Judges speak here with greater authority as they are institutionally authorised to deal with legal questions and develop their own laws even if it concerns outsiders. Arbitrators have hardly such authority. Arrogating it was earlier considered a time bomb under the entire concept of arbitration in this area, see again section 1.1.14 above. Other such time bombs were identified as the issue of public policy or financial regulation more generally and the judicialisation of the proceedings. P.R.I.M.E. so far proved unaware of much of this. It was already said that one problem is that its financial experts have little idea of what arbitration is and its arbitration experts of international finance and how it operates. P.R.I.M.E.’s success is therefore not assured. It was an important initiative but it is not receiving cases.

2.5.2. The Applicable Law Clause in the P.R.I.M.E. Rules It was submitted that to achieve effective international arbitration in finance, much will depend on recognition of the institutional power of the arbitrators with respect to proprietary, bankruptcy and regulatory or other public policy issues that may arise more properly in international finance, which may also go to the issue of the applicable procedural and substantive laws and their transnationalisation in the international commercial and financial legal order, including its dispute resolution facilities. A key insight was here considered to be that the powers of international

327 An important point is that it will take a while before financial institutions will adopt the relevant arbitration clause and even longer for a dispute to occur under these clauses. Will P.R.I.M.E. still exist? In other words, will it remain subsidised long enough to maintain itself out of the flow of this business? Submission agreements may bring business sooner, but some considerable flow is required before institutions of this nature become financially self-sustainable. 328 The author made a first attempt discussing P.R.I.M.E. in Jan Dalhuisen, ‘Arbitration in International Finance’ in Jorge Miranda et al (eds), Estudos em Homagem a Miguel Galvao Telles, Vol II (Coimbra, 2012) 99; see further also the contribution of Jonathan Ross, ‘The Case for P.R.I.M.E. Finance: P.R.I.M.E. Finance Cases’ (2012) 7 Capital Markets Law Journal 221.

188 Volume 2: International Financial Arbitration arbitrators to be fully effective must derive from the transnational commercial and financial order itself and are then only activated by the arbitration clause, which upon a proper analysis acquires its own effectiveness also from the transnational commercial and financial order in which it is founded but cannot itself create power over third parties in international arbitrators, nor can it be created by a choice of law clause as these issues are not at the free disposition of the parties. This being said, the UNCITRAL language adopted by P.R.I.M.E. on the applicable law would appear inadequate in this regard and still derives from an environment of contractual (non-financial) disputes only. It reads: Article 35 1. 2. 3.

The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate. The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract, if any, and shall take into account any usage of trade applicable to the transaction.

Given the limited powers of the parties over many of the relevant issues in international finance, in the context of P.R.I.M.E., this language should be amended to: Subject to the pleadings of the parties, the arbitral tribunal shall determine the applicable law, taking into account the international and financial nature of the transaction and/or dispute, the rules designated by the parties in areas of the law at their free disposition, the relevant property, regulatory and bankruptcy laws, as the case may be, as well as the requirements of the international or pertinent national public order especially in terms of, but not limited to, financial stability, risk management, protection of the commercial and financial flows, transactional and payment finality, competition, market abuse, other improper market practices, corruption and money laundering. In doing so, the tribunal shall consider in particular the fundamental principles and public order requirements obtaining in international finance, the customs and practices that have developed in the international market place, relevant treaty law, the general principles of law that may be found in the operation of advanced domestic financial markets, and party autonomy. The tribunal shall be authorised to raise issues of overriding fundamental principle, third party protection, and public order autonomously, subject to the rights of parties to equal treatment and a fair hearing. If the parties have expressly authorised the arbitral tribunal to do so, the arbitral tribunal shall decide as amiable compositeur or ex aequo et bono in all matters at the free disposition of the parties.

2.5.3. P.R.I.M.E. Preliminary Issues (a) Is there a need for a facility to expedite the formation of the Tribunal and for expedited proceedings? (b) What are the typical preliminary preservation and continuation of business needs that may require immediate action even before an Arbitral Tribunal can be formed? (c) Especially if they concern the preservation of assets, what is the role of the ordinary courts at the situs? What is in this regard the situs of receivables or of assets that habitually move between countries for these purposes? (d) Who will order these measures in such cases; may they be ex parte; and what are the procedural safeguards?

Volume 2: International Financial Arbitration 189 (e) Is early relief of this nature to be provisional and tied to some prospect of ultimate success on the merits? (f) How are these orders to be enforced if coming from the arbitral tribunal and what is the support and enforcement function of the ordinary and possibly bankruptcy courts in relevant countries? (g) Is Article 17 of the Model Law adequate in this regard and may it be assumed to represent and have the force of international custom or practice or general principle?

2.5.4. P.R.I.M.E. Status, Powers and Operation of Arbitrators. Arbitrability (a) What is to be required from arbitrators in terms of expertise and independence? There will also be the important issue of the (continued) appearance of independence and impartiality. (b) How far do the arbitrators’ powers reach? In particular, does the arbitration clause cover property issues and the ranking or priority of creditors or issues of set-off and netting, which may affect third parties but also the relevant bankruptcy regime and its order in distribution and reorganisation?329 (c) If that is the case, how best should the arbitration clause be drafted?330 If that is not the case, where do these powers come from? (d) How far are financial disputes arbitrable if public policy becomes engaged or regulation starts to impact?331 (e) May arbitrators anticipate the attitude of relevant bankruptcy courts in determining their own jurisdiction or arbitrability of the issue? (f) Is there to be a rule of precedent, are prior decisions to have persuasive effect; or are arbitrators foremost to solve a dispute between the parties on the basis of the latter’s submissions of law and fact? (g) May arbitrators in this connection also rely on their own expertise in international finance and their own experience of the international practices (the civil law notion of ius curia novit)? How far may they substitute their own knowledge for that of the parties (and their experts) and how does that fit in with the notion of a proper hearing and cross examination? (h) May arbitrators, in respect of the operation in the international market or in international financial transactions if they deem it appropriate upon proper submissions of the parties, assume the objective transnationalisation of the private law and apply the lex mercatoria? (i) Do arbitrators in this connection have powers similar to those of equity judges (in a common law sense), especially in areas not at the free disposition of the parties, for example to develop newer proprietary structures on the basis of evolving practice, for example with regards to

329 See also British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390 and IATA v Ansett [2005] VSC 113, [2006] VSCA 242, and [2008], dealing with the operations of a CCP internationally including its netting-out of claims, which in Ansett was considered to be binding on domestic bankruptcy courts; see also n 152 above. It may be wondered whether an arbitral award recognising and reinforcing the practice would similarly bind domestic bankruptcy courts. Acceptance in local bankruptcies is the ultimate test of the acceptance of transnationalised law. 330 See s 2.5.3 above. 331 See ss 1.2.2ff above.

190 Volume 2: International Financial Arbitration derivatives, securitisations, custodial systems of securities holdings, or borrow them from existing legal systems in terms of general principle and from where derives such power?332 (j) How far may arbitrators consider, apply or give weight to concepts such as financial stability and proper risk management, for example through CCPs, and declare them overriding as a matter of transnational public policy? Is the protection of other outsiders like common creditors of the same order? (k) May this also concern the promotion of the international commercial flows unencumbered by all kinds of (domestic or other) charges and imposts (except among insiders) and the issue of finality of transactions and payment? (l) May arbitrators raise these issues autonomously if they think them overriding and are there others such as prevention of market abuse, anti-competitive behaviour, corruption, ethics and the like? What about a hearing? (m) Do arbitrators have power to find and apply international minimum standards in regulatory matters? Where would that authority come from?

2.5.5. P.R.I.M.E. Procedural Issues (a) What freedom do arbitrators have in determining procedural matters and matters of evidence? May they proceed on the basis of transnational fundamental (due process) principles or general principles or established practices in international arbitrations? (b) May arbitrators independently decide issues of speed and efficiency in the proceedings? (c) Must all issues be pleaded as fact, including the applicable law? (d) What is the standard of proof? (e) Are the proceedings adversarial or inquisitive? (f) How activist may arbitrators be? May they ever go beyond the submissions of the parties, when and how? Do they have an autonomous law-making function and in what areas? (g) Are they bound by precedent? Is there an issue of consistency and how do they reason?

2.5.6. P.R.I.M.E. Contractual Issues (a) Are financial contracts concluded between professionals foremost to be read as a roadmap and risk-allocation tool subject to a high degree of literal interpretation? (b) In international finance what is the room left for defences and excuses such as mistake, force majeure and change of circumstances, assuming the result has not become manifestly unreasonable, taking into account the overall situation of the professional party seeking relief?

332 As already mentioned in the text above, at issue here are more up-to-date forms of set-off and netting, trusts facilities and tracing rights especially under floating charges (which would themselves be transnationalised and cover assets in different countries), or more modern forms of (bulk) transfers or assignments, subject always to the protection of the ordinary commercial flows (or of bona fide purchasers or assignees and purchasers or assignees in the ordinary course of business). This may be relevant, especially when determining priorities on the basis of secured transactions or finance sales, in floating charges, in constructive trusts and tracing situations, in finance sales such as leases and repos, in short selling, security lending, rehypothecation, in matters of finality of security entitlements and electronic payments, in the effect of set-offs and the possibility of netting, in matters of assignment, and in matters of agency concerning the passing of property rights and obligations.

Volume 2: International Financial Arbitration 191 (c) Are there pre-contractual disclosure and negotiation duties to be considered as normative in international financial dealings? (d) How much room does this leave for the notion of good faith? Is it mandatory in international financial transactions, what does it mean, and may parties set standards? May arbitrators define it on the basis of transnational practices? Are there also overriding issues of justice, social peace, and efficiency to be considered in pressing cases?

2.5.7. P.R.I.M.E. Proprietary Issues (a) How far are third parties to be affected by arbitral findings in terms of priority and ranking, set-off and netting? Does it make a difference if they or their organisations (such as ISDA) have been heard as amici curiae? (b) If arbitrators have this power, should some better facility be created for potentially affected third parties to intervene in the proceedings? Should there be a possibility of a challenge or appeal on these issues? (c) How far may arbitrators allow or promote party autonomy in proprietary structures? May they rely on international practices? (d) What about the issues of transactional and payment finality and the status more generally of buyers in the ordinary course of business (freeing of the commercial flows)? Again, may arbitrators apply international standards in these areas where party autonomy and choiceof-law clauses cannot reach (matters not at the free disposition of the parties)?

2.5.8. P.R.I.M.E. Regulatory Issues (a) Are all financial regulatory issues arbitrable? (b) May arbitrators determine the international reach or extraterritoriality of domestic regulation (the jurisdiction to prescribe), balance different conflicting governmental interests or claims to regulatory power in this connection, or formulate minimum transnational standards of regulation and protection for transactions with contacts (conduct or effect) in several countries?

2.5.9. P.R.I.M.E. Taxation Issues (a) It being assumed that international arbitrators may always redistribute the taxation burden between the parties if their contract so provides or custom and practice require it, may they also decide taxation issues, for example the ranking of tax liens if the relative priority in collection proceeds is to be determined between the parties?

2.5.10. P.R.I.M.E. Bankruptcy Issues (a) May arbitrators in their decision taking take the bankruptcy environment into account and also determine the international reach or extraterritoriality of domestic bankruptcy laws to the extent relevant in an arbitration?

192 Volume 2: International Financial Arbitration (b) May they consider the UNCITRAL Model Law on Cross-Border Insolvency the transnational standard in this connection and the EU Bankruptcy Regulation within the EU the standard also in arbitrations? (c) How far must they follow the orders or instructions of bankruptcy courts? Does it make a difference if there is primary or secondary bankruptcy? Does it make a difference if it is the original bankruptcy court or a court in a country that recognised the bankruptcy? (d) Is any intervention of the courts at the seat of the bankruptcy in respect of a foreign bankruptcy relevant to the arbitral tribunal? (e) Assuming, on the other hand, that bankruptcy courts will ignore arbitrations even in the determination of claims, will always prefer their own system of summary proceedings for proof of claim, and will always apply their own priority regime even in international cases, may international arbitrators also anticipate this and take these attitudes into account? (f) May they abandon the arbitration because of the intervention of a bankruptcy and when?

2.5.11. P.R.I.M.E. Applicable Law Issues and Parties’ Choice of Law (a) May or must arbitrators ignore the choice of a law by the parties in areas that are not at their free disposition, especially in property matters and matters of set-off and netting? (b) May parties in this connection still opt out of the lex situs (including in assignments when the issue of the location of receivables arises) and also have freedom to choose the applicable regulatory or bankruptcy laws? (c) May arbitrators apply transnationalised concepts instead, such as international market practices and customs or general principles developed in commercial and financial centres, if necessary, as mandatory private property law under the modern lex mercatoria? (d) May they recognise newer transnationalised proprietary structures and set-off rights and determine the degree of party autonomy in proprietary matters? (e) May arbitrators apply overriding fundamental transnational principles in terms of financial stability and risk management, movement of the international flows, finality of transaction and payments, market abuse and competition? (f) Assuming parties have (sometimes) the possibility effectively to opt into another legal system, what if the law so chosen by the parties proves wholly inadequate to safeguard the international transaction for which that law was never written or makes no proper sense in the circumstances? (g) Would the choice by parties of a non-statist law such as the lex mercatoria (including international custom and practices) or sharia law be effective (again assuming it concerns areas of the law at the free disposition of the parties and there is proper pleading)? (h) Again, to what extent do the arbitrators have original powers here to apply these concepts, subject to the requirements of a proper hearing?

2.5.12. P.R.I.M.E. Legitimacy of the Award. Supervision, Recognition and Enforcement Issues (a) Are the arbitral decisions (and arbitration clauses and procedure) to be rooted in the international legal (or arbitral) order or still in some domestic lex arbitri, mostly considered to be the law of the seat? Should the concept of the seat of the arbitration be usefully maintained in this regard?

Volume 2: International Financial Arbitration 193 (b) Should any court wherever be put in a similar situation of support when action in its country is required and what would the remaining function of the courts at the seat be in such cases in terms of support and supervision of financial arbitrations? (c) If the review is essentially left to the courts in countries where support or enforcement is sought, as for final awards under the New York Convention, how is uniformity to be achieved especially in local (bankruptcy) courts? In particular, how can the notion of public order, jurisdiction and arbitrability be delocalised for these purposes? (d) Do bankruptcy courts have here a special status under the NY Convention, such as to be able to invoke public policy considerations more broadly?

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Part III Foreign Investment Arbitration 3.1. Introduction 3.1.1. Proceedings Against States Foreign investment arbitration presents a prime example of a fully delocalised and transnationalised international arbitration regime, at least if it is conducted under the Washington or ICSID Convention of 1965, but delocalisation may also receive an extra impetus if the foreign investment arbitration is conducted under other rules, especially those of UNICITRAL when any heavy emphasis on the law of the seat would appear misplaced, especially when backed up by or originating in bilateral investment treaties (BITs). Before embarking on the subject of foreign investment and foreign investment protection against host states, being the states that receive the foreign investment, it may be useful to consider first more generally the problems of enforcement against states, because even if there is recourse in principle against host states, for example through arbitration, any award not voluntarily complied with still needs to be enforced, which in the case of states may be particularly problematic. How far does the rule of law go here? If there is a need for enforcement, can host state property be attached by creditors, especially private property in the hands of states, property therefore that has no ostensible public function or only a more remote one? There may be all the more reason for this if the business a state has engaged in has itself no particular public function. It is in this respect now well established that a state may act de iure gestionis, therefore merely as a private party—for example buying chairs for its civil servants or buying up real estate for office buildings and contracting construction engineers. If a state does not pay its commercial debts, presumably these chairs or buildings could be attached, the former conceivably to be reclaimed under a reservation of title, the latter to be offered in an execution sale, but even here it could be considered that they still have some public function lest civil servants have no place to sit and suffer the indignity of having to stand up without a roof over their heads. The line is therefore not clear. Private land might ultimately also be used for some public good, not merely redevelopment, like for office or more pertinent military or security purposes. Yet there are many abandoned air fields or similar facilities that have lost their public purpose and are derelict, but may be very valuable and there may be a lot of it. But even if the contract and its enforcement are purely issues of private law, states may still have special ways out; it depends on local law in terms of contractual excuses and defences and especially in terms of enforcement against publicly owned property. In practice, it is very difficult to shake out a state in its own territory, it may not even be legally possible. This brings to light another issue: local (host state) laws are here normally applicable. It is unlikely that any state will accept a foreign law to determine its relationships or actions, at least in its own territory, and can be forced into payment under someone else’s law, never mind which law is chosen by the parties

196 Volume 2: Foreign Investment Arbitration (even if one of whom will be the state itself). The manner of enforcement against all, and states in particular, is commonly one of the places where they or their assets can be found and this may obviously present problems with an unwilling sovereign in its own territory. The state is likely itself to dictate the rules of enforcement in this regard even in purely private transactions and may always vary the applicable law through its legislature. By treaty states may limit this discretion and their sovereign authority in this respect vis a vis other states but not commonly vis a vis private persons or enterprises. The conclusion must therefore be that payment by states remains largely voluntary, at least in their own country. So much for the rule of law. The only thing left is opprobrium. Can property of a state in foreign countries be attached? That would appear easier if it can be found and many states (or their agencies and central banks) may have large accounts especially with the Fed (for US $) in New York or (earlier) with the Bank of England (for sterling) in London, but enforcement against these accounts might embarrass the US or UK governments even if the claim concerns private business dealings of foreign states. Here the issue of foreign sovereign immunity arises. Local case law traditionally formulates limitations and, in the US, as well as in England there now operate foreign immunity statutes which set out a more limited scenario for enforcement against foreign governments, basically confining it to operations entered into by them (wherever) de iure gestionis, with (often) some more liberal regime for enforcement in respect of foreign state agencies. State Departments and Foreign Offices may still be allowed to render opinions, which often suggest judicial abstention. Even if the courts proceed, assets used for (some potential) public purpose may still not qualify, for example ambassadors’ residences or even their cars. Although there is now a lively case law in the margin of these foreign sovereign immunity concepts or statutes, especially in the US, where in the marketplace there may even be a kind of arbitrage going on especially in respect of foreign government bond issues and their enforcement, it may be considered an undesirable creditors’ driven activity and improper legal paradise. The question often is why a state should enforce on its own territory claims against a foreign sovereign, which it would not allow to succeed if they were directed against itself. It may be better to assume that all payment by government is voluntary, wherever. Can the home state of a creditor help? This comes down to diplomatic protection. Will the home state intervene and raise the issue with the relevant foreign government? Much as in the case of enforcement against foreign governments through its own courts, it might be loath to get involved and may in any event have other priorities and be considered bigoted where it does not allow claims against itself. In any event, it may rate the friendship of the host state higher. If it did not, in the olden days a gunboat might be sent. This was the era of gunboat diplomacy, but already at the Second Hague Peace Conference in 1907, in the Convention on the Peaceful Resolution of International Disputes, this was ruled out and a system of international arbitration between states (which could also cover private claims of its nationals333 who were still not able to bring them themselves) was set up in the Hague through the Permanent Court of Arbitration (PCA).334 Such arbitrations could also result under bilateral treaties of which the treaties of Friendship, Commerce and Navigation (FCNs) became important examples. They did not give individual 333 The key point is that it is normally assumed that nationals do not have a remedy of their own under public international law, which is the law between states. Another point is that states can only protect their own nationals, no others, in this manner in terms of judicial action or diplomatic protection, see Permanent Court of Justice in Panevezys-Saldutiskis Railway (Estonia v Lithuania) (1939) PCIJ Reports Series A/B 76, 16. 334 The PCA is to be distinguished from the International Court of Justice (ICJ) or its predecessor the Permanent Court of International Justice also in The Hague, which both came later. Again, there remained the problem with enforcement of an award. The Hague Conference was not able to put an enforcement regime in place against states nor did it prove possible later for ICJ judgments.

Volume 2: Foreign Investment Arbitration 197 investors direct enforcement rights either; they could give a better framework for protection but investors still depended on their governments (home state) to pursue the matter with the host state, if necessary, through state-to-state arbitration.335 Bilateral Investment Treaties (BITs) were here an important progression as we shall see. They provided a system of stability and protection of investor rights and could not easily be challenged by host states lest a form of expropriation resulted giving rise to compensation under international law. They gave private investors derivate rights against home states in this regard, which were enforceable directly by them in arbitrations, the resulting arbitral awards in an ICSID arbitration being self-executing against the relevant host state. As we shall see, this lifted foreign investment protection to the level of public international law. But although these facilities meant a direct enforcement action for the investor against the host state, again the enforcement itself remained a problem. The fact that the awards became directly effective, did not mean enforcement and payment per se. Moreover, some countries like Argentina often argued (without much ground and success) that the requirement of local registration of the awards still entailed a possibility of local review. Enforcement elsewhere would still be limited because of sovereign immunity issues and constraints (Article 55 ICSID). More precisely, Article 54 ICSID requires in this connection that Contracting States as they sign the Convention recognize future awards. But only monetary obligations are considered as enforceable in this manner; the enforcement of other obligations may be more complicated and they were not covered to avoid conflict in the enforcement process. As far as sovereign immunity is concerned in respect of host or any other states, the Convention did not limit the immunity and left the issue to Contracting States.336 Article 27 limits diplomatic protection unless the Contracting State fails to enforce the award. The International Court of Justice may also be activated in such cases. Under Article 64, Contracting States may submit unsolved disputes to it unless they contracted otherwise which Article is deemed to create jurisdiction under Article 36 of the Statute of the Court.

335 The Permanent Court of Arbitration (PCA) may strictly speaking not be an arbitration tribunal in the sense that it does not in principle depend on the submission of the parties in defining their dispute. Art 37(1) of the Hague Convention of 1907 makes clear as a matter of treaty law that this international arbitration ‘has for its object the settlement of differences between States by judges of their own choice, and on the basis of respect for law’. On the other hand, earlier, in Aroa Mines (Ltd) case on merits, 9 RIAA, 402 (1903), it was stated that arbitrators even in cases between states do not autonomously apply the rule of law and it was observed in this connection in the comments that arbitrators commonly do not act as judges deciding questions of fact and law but sometimes operate as negotiators effecting settlement of issues brought before them, these two approaches being considered radically different, cf Root’s Instructions to the American Delegation to the Hague Conference of 1907 in G Hackworth, ‘Foreign Relations of the United States’ (1984) 61 Digest of International Law 1128, 1135, see further also the discussion in s 1.1.3 and s 1.1.14 above in respect of international commercial and financial arbitration, where the accent is indeed on the limitation of the dispute to submissions of the parties and on the lack of autonomous law finding power in the tribunal and on the need for a more consensual approach to dispute resolution through arbitration. Traditionally, arbitration was distinguished more in particular in the sense that the parties selected the tribunal which was to find on the basis of the principles selected by the parties, and that it was voluntary, a matter of party autonomy, see Advisory Committee of Jurists on the Establishment of a Permanent Court of International Justice, 113 (1920). As for the ICJ and its predecessor, it was understood from the beginning that it was judicial and not strictly speaking in the nature of arbitration although the first sentence of Art 38(1) of the ICJ Statute makes it clear that dispute resolution and not law formation is the task of the Court. Only the voluntary aspect was retained for the ICJ. 336 David R Sedlak, ‘ICSID’s Resurgence in International Arbitration: Can the Momentum Hold?’ (2004) 23 Penn St Int’l L Rev 147.

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3.1.2. Foreign Investments and their Protection. Host Country Investment Statutes and Investment Agreements. The Calvo Doctrine. The Washington Convention (ICSID) and BITs A foreign investment, that is an investment in a country other than the one of the investors, is subject to ordinary commercial risks. This will concern the private set-up: land may be bought, a factory built, and people hired. Production may start and this may or may not prove profitable in the host market or in the export market or in both. But there are extra risks from the perspective of the foreign investor, which have largely to do with the host government. Will it increase taxes, could it change the regulatory regime, may it impose tariffs on exports of products as well as on imports of materials, or make them subject to licence requirements? May foreign exchange be freely brought in and converted into local currency, and may earning in local currency be freely converted back into international currencies either in the open market or via the host country’s central bank and taken out? At what exchange rate in the latter case? May the open or international currency market be accessed if the central bank does not have enough hard currency? More in particular, may foreign earnings in hard currency be retained outside the host country? What about the threat of nationalisation? This can come about in many ways: through an outright taking or, as just mentioned, through increased taxation, which may become confiscatory, or through other regulatory measures with similar effect. Management might be removed or imposed or there may be an imposition of regulatory micro-management rules similarly limiting the commercial freedom of the foreign investor. An example may help: because of apparent public health and safety concerns, a government might decide to nationalise all nuclear power plants outright, including those resulting from foreign investment; alternatively, it may replace the management with local people, or impose a system of micro-management through regulation. In all likelihood there will be a substantial reduction in value for the foreign investor (and probably for any other). Even if these measures might be necessary, the issue of compensation will still arise either in terms of an expropriation or more likely in this case in terms of a nonexpropriatory taking (for ‘super’ public purposes, a reference to police powers is here often still used) as we shall see below in section 3.4, the difference being in the measure of damages, the one requiring in principle full compensation, the other probably leaving more discretion depending on how it is done and the reasons. Host-government investment statutes or codes, meant to attract foreign investors giving them assurances, may clarify the situation for them. They are not unlikely to offer protection against expropriation and similar measures or other imposts, while also clarifying the taxation, tariffs and foreign exchange regimes in what are then often called stabilisation clauses or provisions. In the case of the extraction of minerals from the subsoil, which in most countries the government owns, there may be a further regime concerning royalty payments and government involvement in the exploration and production, all conceivably subject to similar stabilisation promises. But what do or can these promises mean? Can a state bind its sovereignty through such statutes which were unilaterally given and can obviously be changed? Reliance may then become an important issue, more so perhaps if there are also contractual undertakings. How relevant are they vis a vis host states, see further section 3.4.5 below, where it will be argued that a foreign investor simply relying on such promises may be deemed to be naive or the beneficiary of poor legal advice. A sovereign can change all laws and there may be no recourse, at least in its own territory. Even in an international arbitration, it may not be different unless one can point to a higher (transnational, normally treaty or customary) rule binding on such states in favour of

Volume 2: Foreign Investment Arbitration 199 private investors (who do not themselves have direct standing under public international law), and it is at least accepted that states cannot use new domestic legislation as a defence against treaty obligations, see Article 27 of the 1969 Vienna Convention on the Law of Treaties but that is different for local investment laws. Even in the case of treaties, there would still be the problem of actual enforcement against the host government. Again, the only thing left may be opprobrium: henceforth, foreign investors are warned and new foreign investment may suffer but memories may be short and on the basis of new economic conditions, especially increasing market prices, or worse conditions elsewhere, soon new investors may arrive. Only notorious defaulters such as Argentina may suffer longer-term damage. One more immediate adverse result may be that new foreign investors may want their initial money lay-out back sooner and will not easily invest more, decreasing the benefit for the host country, but under competitive pressures foreign investors may still relent. Might investment or concession agreements help and provide a stronger protection base than local investment laws? They usually do four things: (a) they guard against expropriation or require at least full compensation in such cases, (b) they stabilise the tax and foreign exchange regime (while for the extraction industry they may also impose royalties and other imposts), (c) they choose the applicable law (at least in areas where the law can be chosen, see section 3.3.3 below), and (d) they may allow for international arbitration in the case of disputes. However, their status in law is unclear. The key issue is again whether a host government can bind itself and its sovereignty irrevocably, now by private (concession) agreement even if authorised by statute to enter into them. As they are bilateral, concluded between international companies and host governments, can they provide greater protection against breaches of this nature by host governments than their investment legislation and their amendments? Can a government, by contract, bind its sovereignty for the future? The older idea was that investment contract claims against host countries could only be brought before an investment tribunal if a violation of the contract was also a violation of treaty law.337 Is reliance on a contract that the host state signed extra protection? What does reliance here mean, is it stronger because of any contractual underpinning, see again section 3.4.5 below?338 Except for de jure gestionis

337 See Salini Costruttori SpA and Italstade SpA v Kingdom of Morocco, ICSID Case No ARB/00/4, Award July 31 2001. See further also Compania de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/03, Award July 3 2002, which distinguished claims under treaty and investment agreements with reference to the applicable law. Obviously, umbrella clauses may change here the balance, see the discussion in s 3.3.4 below. A special situation may arise where the host country tries to frustrate the operation of the investment agreement and its dispute resolution process, which may itself activate the BIT protection, see Bayindir Insaat Turizm Ticaret Ve Sanayi AS v Islamic Republic of Pakistan, ICSID Case No ARB/03/29, Decision on Jurisdiction 14 Nov 2005. This may also happen when the enforcement of such awards is frustrated by host states. 338 See also nn 481 and 490 below. The notion of reliance is well known in public international law but often connected with treaty obligations of states amongst themselves. Yet, in Czech Republic BV (the Netherlands) v Czech Republic Partial [2001] IIC 61, the ad hoc Tribunal (under the UNCITRAL Rules) found that the government ‘breached its obligation of fair and equitable treatment by evisceration of the arrangements in reliance upon which the foreign investor was induced to invest’. Similarly, in Tecnicas Medioambientales TECMEDS v United Mexican States [2003] Case ARB (AF)/00/2, IIC 247 (ICSID), where the Tribunal considered that the fair and equitable provision of the relevant BIT ‘in the light of the demands of good faith required by international law, requires the Contracting Parties to the Agreement (usually treaty law|) to accord a treatment to foreign investment that does not go against the basic expectations on the basis of which the foreign investor decided to make the investment’. In LG&E v Argentina [2006] Award on Damages Case ARB/02/1 (ICSID), para 130, the Tribunal was more specific and required that the investor’s fair expectations have the following characteristics: ‘they are based on the conditions offered by the host state, … they may not be established unilaterally, they must … be enforceable

200 Volume 2: Foreign Investment Arbitration aspects, this may not be the case. It means that public policy needs may continue to be overriding, although the question of damages may still arise, but how much? In matters concerning the sovereign, doctrines of good faith contract implementation may acquire at least a different connotation and less protection for the private party. An investment agreement or concession is no longer and probably never was a purely private deal in the defences and excuses of the sovereign party and it would be naive to think that it was ever otherwise. Nevertheless, quite strenuous efforts have been made to somehow give these contracts (some or a better) international status339 even though they often still referred to a specific domestic legal regime as a choice of law by the parties in the private law manner. That would not then likely be the law of the host state but something more neutral. More direct protection under international law proper, would require large international corporations to be seen as having (some) legal personality and standing under (public) international law, which may still not convince. Does it help or clarify to characterise the investment agreement contract as an administrative contract?340 This issue has been raised in several cases, and while it has not been rejected out of hand, neither has it been embraced at the international level, although it would appear the more proper analysis. The further question is then whether these administrative contracts are still governed by a national administrative law (usually that of the host government as counterparty), or whether this law may itself be considered transnationalised, thereby becoming part of (public) international law, which might entail international minimum standards of investor protection, see again the discussion in section 3.3 below. What is its relationship to any law still chosen by the parties? Do they have the power to make it stick and be enforced? In the Aminoil case, the tribunal did not pursue the theory of the administrative contract and it is as yet not fully developed in international law (which concerns itself primarily with the law between states).341 In TOPCO, the arbitrator reasoned that administrative contracts are not sufficiently widely and firmly recognised in the leading legal systems to constitute general principles of international law.342 In Aramco, the tribunal concluded that there was no justification for by law, … damages arise except for those caused in the event of state necessity, the fair expectations cannot fail to consider parameters such as business risk or industry’s regular patterns’, and stability does not mean that the legal system remains frozen in time. 339 Especially in France by Prosper Weil, ‘Droit international et contrats d’Etat’ in P Bardonnet (ed), Mélanges offerts à Paul Reuter (Paris, 1981) 549, in which connection it becomes also an issue whether individuals or corporations might be beneficiaries of public international law protection, a situation that obtained more broadly before the nineteenth century when the notion of the modern state had not yet crystallised. See, however, also JG Ku, ‘The Limits of Corporate Rights under International Law’ (2012) 12 Chicago Journal of International Law 729, although the notion that only states can be subjects under public international law is recent, see AL Silva Rocha, Private Actors as Rightsholders under the International Law of the Sea, PhD thesis Un Cat Portuguesa (2018), especially the general part I. 340 In foreign investment, the consequences of the administrative contract characterisation still remained unclear because international law did not traditionally cover these relationships and still has not developed a clear notion of administrative law. Arbitrators struggle with this although the subject is receiving increasing attention, see Hernán Pérez Loose, ‘Administrative Law and International Law’ in P Bekker, R Dolzer and M Waibel (eds), Making Transnational Law Work in a Global Economy, Essays in Honour of Detlev Vagts (Cambridge, 2010) 380. See also Rudolf Dolzer, ‘The Impact of International Investment Treaties on Domestic Administrative Law’ (2005) 37 International Law and Politics 953–72, and B Kingsbury and SW Schill, ‘Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality, and the Emerging Global Administrative Law’, Institute for International Law and Justice, NYU Law School, Working Paper 2009/6 (Global Administrative Law Series). 341 Government of Kuwait v American Independent Oil Company (Aminoil) [1984] Award of 24 March 1982 66 ILR 518 and 21 ILM 976. 342 Texaco Overseas Petroleum Co & Cal Asiatic Oil Co v Gov’t of the Libyan Arab Republic 17 ILM 1, 10–11 (18 January 1977).

Volume 2: Foreign Investment Arbitration 201 applying what was considered a French law notion to a dispute between a US company and Saudi Arabia.343 The administrative law characterisation is becoming more prominent, however, which stands to reason when not only states become involved. But note that if a concession agreement can be so qualified, there is still no full protection for foreign investors and there may still be important rights for governments to change the terms but at least there are conditions normally even under national (administrative) laws. Again, it becomes a matter of compensation, which may be little or lacking altogether at least under local (host country) laws, whilst investors will then depend on local courts to enforce this regime. However, it might still be better than mere private contract principle and these standards could be transnationalised although any higher rules under international law still need to be further developed. There are other consequences. The matter of a contractual choice of law was already raised. First, it may hardly be relevant: an administrative agreement is governed by the law of the sovereign it concerns, unlikely by that of any other, see again the discussion in section 3.3 below unless international minimum standards are developing, important perhaps in respect of countries that barely have any developed administrative law but engage in these investment agreements regularly. Again, even under such international law principle, (host) states might still be able to rebalance these contracts and change them subject to compensation, when there will still be the issue of how much. That was at least the message in Aminoil344 where the principle of compensation was made to work at the international level. In international transactions, it may be conceivable that international law will correct and clarify the standards further: at least the measures should not have been whimsical, vindictive, irrational or disproportionate and discriminatory. There was already language to the effect in the Libyan arbitration cases (which were, however, not defended),345 and it may be incorporated in BITs in the fair and equitable (F&E) clause, discussed later, see more in particular section 3.4.5 below. The sum total of this is that large international companies may now have at least some protection under international administrative law where they are otherwise not considered to be legitimate actors under public international law. In the meantime, and importantly, the Washington Convention lifted the arbitration clauses in these investment agreements to international status if parties chose the ICSID model while BITs may elevate investment agreements to the level of protected investments altogether. That is done under the so-called umbrella clauses, see section 3.2.2 below, the consequence of which is that its protections are elevated to international law and enforceable as such in BIT arbitrations as we shall see, which may then operate in parallel with investment agreement arbitration under ICSID. The so-called Calvo doctrine, first proposed in 1868 in Argentina, struggled with these issues much earlier by requiring foreign investors to submit to the local laws of the host states (rather than depend on the gunboat diplomacy of those days) or deeming them to have done so, just like domestic investors. This approach was supported at the First Hague Peace Conference of 1899. The problem for investors was then with stability and with the conceivably adverse disposition

343 Saudi Arabia v Arabian Am Oil Co (ARAMCO) 27 ILR 117, 164 (Arb Trib 1963). 344 See n 341 above. At least that was thought to be so for oil concessions whose nature was deemed to have been generally transformed since they were first entered. It was not a question of change of circumstances but rather of a change in the nature of the contract itself. This approach was preferred to pursuing the idea of the administrative contract but the result is very similar. 345 Libyan Petroleum cases, BP Exploration Company (Libya) Limited v Government of the Libyan Arab Republic [1973 and 1974] 53 ILR 297; and Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab Republic [1977] 53 ILR 389.

202 Volume 2: Foreign Investment Arbitration of local courts in respect of foreign investors, especially when the local public interest became engaged. This is the issue of neutrality, the problems being compounded by local language, procedural and appeal complications. The foreign investor was thus fully in the hands of local government and its courts. It became an ideological and political issue for the South and Middle American Countries of those days, but there was also an economic issue: by giving the foreign investor extra benefits of this or any other nature, local investors and entrepreneurs could be disadvantaged and soon a country would only have foreign investment. There may nevertheless be good reasons for this in terms of modernisation and acquiring the benefits of foreign technology beyond the cost of importation. The host country may even become a major exporter because it can offer lower salaries by international standards (but higher than local ones), and may also impose fewer regulatory impediments (which on the other hand could mean more pollution). At present, China is a most important example and Mexico may be yet another. In the extraction industry, there may be little alternative: not everybody can explore and safely develop oil and gas reserves, especially offshore, nor may the country have the financial resources to put them into production, but it is a trade-off and policy issue. There are cycles in this: international companies were considered continuations of the colonial regimes in the 1970s and persecuted. They became much sought after by the 1990s, especially after the change of policies in China. Globalisation has further changed the atmosphere in their favour but this is not to say that there may not be reversals and that civil society will always accept the consequences. The increasing resistance against foreign investment protection through multilateral treaty law in the North American Free Trade Agreement or NAFTA between the US, Mexico and Canada, now replaced, and also in the (suspended) Transatlantic Trade and Investment Partnership or TTIP negotiations between the US and EU, not in the least against ever expanding protection and inroads on local sovereignty through the most favoured nation principle and perhaps also the F&E clause, whilst arbitration is increasingly distrusted in these matters, is a potent demonstration, see section 3.5 below. In any event, enforcement against host states always remains a difficult issue, whatever protection is offered. Again, it is often more a matter of opprobrium as long as it lasts (see the discussion in section 3.1.1 above).346 Beyond the problems of enforcement, it was already said and it is commonly assumed that governments can only bind their sovereignty irrevocably vis-à-vis other governments, not private parties under ordinary contract rules, and this is then done through treaties, now notably BITs, although they may also be so bound under customary international law (CIL) and fundamental and general principle, see Article 38(1) of the Statute of the ICJ. It may be recalled that in this area of foreign investment, treaty law came first in through Friendship, Commerce and Navigation (FCN) treaties already mentioned, but in terms of dispute resolution in respect of direct protection of investors, more in particular through the Washington (ICSID) Convention of 1965 and its arbitration regime, although cases brought under it date only from 1990, and BITs went further. Under the Washington Convention, which dealt only with the arbitration facility, not with substantive law protections, Contracting States recognised (vis-à-vis each other) that at least ICSID arbitration clauses in investment agreements opting for this new arbitration facility were

346 With BITs being renewed constantly, the same question of bindingness as in respect of private arbitration agreements could still be asked as even the Washington Conventions and the ICSID arbitration facility may be discarded as in fact has happened in the new USMCA Convention replacing NAFTA. In the words of J Pauwelyn: Why ‘[have] more powerful home states (such as the United States) agree[d] to end unilateral enforcement and tie their hands to rules-based settlement’?, ‘Rational Design or Accidental Evolution? The Emergence of International Investment Law’ in Zachary Douglas, Joost Pauwelyn and Jorge E Viñuales (eds), The Foundations of International Investment Law: Bringing Theory into Practice (Oxford, 2014) 38.

Volume 2: Foreign Investment Arbitration 203 binding and could not be unilaterally withdrawn or modified through statutory law in the host state. Prior consent to arbitrate was still necessary, so there had to be an arbitration clause or submission agreement, but this consent could even result from the provisions of investment laws in host states. Article 25(1) confirms this and sets the jurisdictional framework allowing investors from Contracting States to enforce the arbitration clauses in investment agreements against host governments. The Convention further provides a regime for how these arbitrations are to be conducted and the awards challenged and enforced. To help administer them, an ICSID Secretariat was established in Washington at the World Bank.

3.1.3. Bilateral Investment Treaties (BITs). Extra Protections It is, however, through bilateral investment treaties or BITs that true protection has come to the fore and these treaties have overtaken the scene,347 ICSID arbitration remaining under them the normal venue in the case of disputes, although it is not normally exclusive under these BITs which may offer arbitration under the UNCITRAL Rules as a common alternative. It follows that the major substantive protection for foreign investors now derives directly from treaty law and follows under public international law albeit for investors only in a derivative manner under treaties between host and home governments to which investors as private agents can still not directly be parties but they can be (third party) beneficiaries whose protection may be directly enforced by investors through a treaty arbitration facility against host states, therefore under public international law. In this manner, governments promote investments from the other country under protections specially defined and set out in these treaties, which then commonly also concede to the investors an arbitration facility through which they can enforce these rights against host countries directly, again often by making use of the ICSID facility even though originally perceived as a sequel to investment agreements and still being so structured. As we have seen, the resulting awards are made self-executing against such countries, although here again in enforcement there is still no mechanism against defending host governments in their own countries, while enforcement in other countries remains constrained by the applicable foreign sovereign immunity laws. If ICSID arbitration under the Washington Convention is chosen, awards may be annulled, the revision process is internalised in ICSID and may be obtained on the limited grounds of Article 52. Upon annulment, a new arbitration must be started to obtain relief. If the commonly existing alternative of arbitration under the UNCITRAL Rules is chosen (which has the advantage of covering also indirect investors, meaning those who use intermediary companies in countries benefitting more favourable BITs) by the investor, recognition and enforcement will be under the New York Convention assuming that any payments under the award may be still characterised as ordinary commercial debt, which appears

347 BITs are often considered the successors to the earlier treaties of Friendship, Commerce and Navigation (FCN), which had never, however, given direct rights to investors against host governments as we have seen above. The main importance of these treaties was that under them direct military or similar intervention of home states was barred (even before the Hague Peace Conferences) unless there was denial of justice or extraordinary delays in administering it. BITs are meant to go much further especially in giving foreign investors a (derivative) dispute resolution facility under which they may sue a host state for failure to comply or rather for damages. The origin of the BITs is usually traced to the 1959 Abs-Shawcross Draft Convention on Investments Abroad and the 1967 OECD Draft Convention on the Protection of Foreign Property. The 1959 Germany-Pakistan BIT is commonly considered the first in its field.

204 Volume 2: Foreign Investment Arbitration to be accepted in most countries even though the investment itself and any disputes concerning it under the relevant BIT would probably not be characterised as merely commercial and therefore the arbitration not either. These BITs, which may sometimes be multilateral of which the North American Free Trade Agreement (NAFTA now superseded by the US/Mexico/Canada Agreement or USMCA) in its chapter 11 provided the most important example,348 commonly offer a number of standard protections, notably against expropriation, which as a concept proved difficult to define, however, see section 3.4.2 below, but requires full compensation in order to be legal (although the area of non-proprietary takings mostly remains a muddle as we shall also see in section 3.4 below).349 They normally offer a definition of foreign investment and of foreign investors, see section 3.1.4 below.350 They commonly give national treatment, which means treatment as good as for nationals,351 and most favoured nation (MFN) treatment, which means that benefits given to foreign investors in another BIT (although not necessarily in foreign investment agreements) are automatically extended to all.352 They usually also provide fair and equitable treatment (F&E), including a right to protection against arbitrary or discriminatory treatment. It means that basic standards of rational behaviour must be met by foreign governments (and especially vindictive and repressive behaviour must be avoided, see further section 3.4.5 below).353 Other protections are in a right to full protection and security, usually closely connected with F&E treatment. There is also likely to be a foreign exchange regime. Investment agreements or concessions may still top up these protections under which, in particular, a foreign law may be made applicable. It has already been said that these investment agreements may themselves even enter as protected investments under a BIT and are then lifted

348 There are others as part of the 1987 ASEAN Agreement for the Promotion and Protection of Investments (between Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand), as part of the 1994 Energy Charter Treaty (ECT), and as part of the MERCOSUR Treaty (between Argentina, Brazil, Paraguay and Uruguay) through the 1994 Colonia and Buenos Aires Protocols. Some bilateral free trade agreements have similar chapters, such as the one between the US and Chile of 2003. An attempt by the OECD to come to a global Multilateral Agreement on Investment (MAI) failed spectacularly in May 1995. Hence the present efforts at regionalisation in the Pacific and Transatlantic areas in respect of the Trans-Pacific Partnership or TPP and Transatlantic Trade and Investment Partnership or TTIP, see further the discussion in s 3.5 below. 349 See also A de Nanteuil, ‘Expropriation’ in MM Mbengue and S Schacherer (eds), Foreign Investment under the Comprehensive Economic and Trade Agreement (CETA) (Springer, 2019) 127, see further also the comments in s 3.2.1 below. 350 See further JA Bischoff and M Wuhler, ‘The Notion of Investment’ in MM Mbengue and S Schacherer (eds), Foreign Investment under the Comprehensive Economic and Trade Agreement (CETA) (Springer, 2019) 19. 351 It is commonly believed to mean a three-step analysis: a) inquiry into like circumstances or like situations, b) determination of less favourable or discriminatory treatment, and c) consideration of justifications, see AK Bjorklund and L Vanhonnaeker, ‘National Treatment’ in MM Mbengue and S Schacherer (eds), Foreign Investment under the Comprehensive Economic and Trade Agreement (CETA) (Springer, 2019) 45. 352 In the language of the ICJ, France v USA, (1952) Case Concerning Rights of Nationals of the United States of America in Morocco, ‘the clause serves to maintain at all times fundamental equality without discrimination among all countries concerned’, see further C Crepet Daigremont, ‘Most Favoured Nation Treatment’ in MM Mbengue and S Schacherer (eds), Foreign Investment under the Comprehensive Economic and Trade Agreement (CETA) (Springer, 2019) 71. It has been an extremely effective tool in international trade (GATT), allowing countries to come in at different levels of tariffs in the expectation that they would be lowered and would stabilise in this way at international levels doing away with protections, but for foreign investments it means reinforcement and the spread of protection benefits which may be less opportune. 353 See the discussion in s 3.4.5 below and also P Dumberry, ‘Fair and Equitable Treatment’ in MM Mbengue and S Schacherer (eds), Foreign Investment under the Comprehensive Economic and Trade Agreement (CETA) (Springer, 2019) 95.

Volume 2: Foreign Investment Arbitration 205 to the level of treaty law through so-called umbrella clauses to be discussed later and which may come in many varieties, see further section 3.2.2. Thus, there may be further protection under BITs against a breach of stability undertakings or other commitments on which investors came to rely especially pursuant to investment agreements or concessions. All the same this does not mean that mandatory law or indeed public international law can be replaced in this manner through a party choice of (some national) law in an investment agreement and a party choice of law of this nature can only be effective in areas of law at the free disposition of both parties, therefore mainly in the private law aspects of the investments and that would not appear to be changed through the operation of umbrella clauses. As to the applicable law, Article 42 of the Washington Convention should be interpreted accordingly (see again the discussion on the applicable law in section 3.3 below). The BITs themselves mostly concede that the law of the host state will apply to the investment unless overruled by international law, which means treaty law, CIL or fundamental and general principle of international law. It has already been noted that the administrative nature of these investment agreements (and indeed of all foreign investment protection) is now increasingly understood and recognised and in the process of being transnationalised. It leaves even less room for a choice of law by the parties. The issue of the applicable law will be discussed in section 3.3 below.

3.1.4. The Concept of Foreign Investment and Foreign Investor. Treaty Arbitration and Jurisdiction For foreign investments to gain special treaty protections, investors are primarily considered those who make longer-term commitments in foreign countries and are not mere sellers of goods, traders, or speculators.354 Investments of this nature are usually a package but they could also be a portfolio of bonds or a loan intended to be held to maturity as we shall see. For purposes of investment protection, foreign investments might best be characterised as a type of administrative licence protected as such and that characterisation, it is submitted, may now well present the better insight, probably clearest in the extraction industry. Hence also the old term ‘concession agreement’. It may then receive a measure of protection as such under public international law and connects with the earlier view that investment agreements are administrative contracts.355 354 In Salini Costruttori SpA and Italstade SpA v Kingdom of Morocco, ICSID Case No ARB/00/4, Award 31 July 2001, it was said that there were four requirements: a) contributions, b) a certain duration of performance of the contract, c) participation in the risk of the transaction, and d) a contribution to the economic development of the host state. In Canadian Cattleman for Fair Trade v USA, UNCITRAL Award on Jurisdiction (June 28 2008) No 144 it was stated that: ‘Something more permanent … is necessary for a contractual claim … based on cross border trade to rise to the level of investment such as a commitment of capital or other resources in the territory of a Party to economic activity as such’. The requirement under d) above was dropped in later cases, cf Saba Fakes v Turkey, ICSID Case No ARB/07/20 (2010) and also in CETA, which still required, however, a certain duration and other non-limitative characteristics in 8.1. A form of consolidation of home and host country activity eg, a manufacturing activity in the US and a distribution activity in Mexico may qualify, especially if the distribution in the host country is entirely dependent on the manufacturing in the home country, see Cargill Inc v United States of Mexico, ICSID Case no ARB(AF)/05/02 (18 September 2009). 355 Traditionally (and especially in the US) the concept of investment protection remains much connected with property rights or the concept of assets in a private law and physical sense, meant to protect as such against deprivation or dispossession, and was then more directly connected with the concept of a ‘taking’, equally considered physical, which raised immediately the issue of indirect takings or expropriations, eg through taxation or

206 Volume 2: Foreign Investment Arbitration Of course, there may be private law aspects too: the foreign investor may buy land for manufacturing facilities from the host government at the same time (although it may also buy them from third parties), or occupy its private land for extraction purposes, or may directly receive such land from the host government for the time being, or receive occupation rights, for example, offshore on its Continental Shelf or for agricultural purposes or forestation. It does not change the status or nature of the foreign investment itself and its characterisation as such in terms of its protection and the principles underlying it even though the established definition of the foreign investment in investment agreements or BITs may also incorporate types of private property that are to be protected such as patents, shareholdings and loans. There is often confusion as a consequence, not least in the US, but the public (administrative) and private law aspects of a foreign investment could be usefully distinguished. They are subject to different laws and the latter often involve parties other than host states.356 Article 25 of the Washington Convention does not define foreign investment or the foreign investor. It proved impossible for the drafters to do so but it leaves a problem with the jurisdiction of ICSID arbitrators, which is naturally confined to foreign investment disputes. The language is as follows: ‘The jurisdiction … shall extend to any legal dispute arising directly out of an investment between a Contracting State … and a national of another Contracting State …’ Since BITs came on board their definition of foreign investments is normally used in arbitrations under these treaties, but it leaves the question whether the ICSID Convention uses a broader or narrower concept (in practice usually the former, as the notion was progressively expanded in BITs), the essence being that the requirements of both Conventions need to be fulfilled when it comes to an ICSID arbitration under a BIT and the jurisdiction issue. From the pre-existence of the Washington Convention, it must be assumed that it always implied a concept of foreign investment and case law has further developed it, although, again, especially its legal nature as an administrative licence remains underdeveloped. It is often thought that as another fundamental aspect, the investment in order to qualify must aid the further economic development of the host country.357 replacement of management or regulatory micro management. It is confusing mainly because many economic interests are intangible, eg, intellectual property rights but also monetary and other claims whilst the true issue is the diminishing economic value of the asset and operation, whether or not physical. In respect of them the term ‘tantamount to expropriation’ was then used, even though from early on treaties defined investment property often broader in terms of ‘all property, rights and interests’, see also A Reinisch, ‘Expropriation’ in P Muchlinski et al (eds), The Oxford Handbook on International Investment Law (Oxford, 2008) 410, but many definitions remain asset rather than economic interest or value based, often with a physical bias, the emphasis not being on the package as such nor on its meaning or value. See for the possible distinction between investment agreement claims and treaty claims in this respect also n 337 above. 356 It is thus submitted that the substantive protection under BITs, NAFTA now USMCA (and potentially a TTIP) if it is to follow what has become the model, is in the nature of administrative law protection (therefore as a statutory concession or licence), which through a treaty may gain the status of international law or otherwise it may become part of CIL. It is then notably not expressed in terms of private contract or property rights although often still confused therewith. Beyond the notion of administrative licence, there is hardly a water-tight definition and some description can only lead the way. There may be other confines, but the limitation to ‘investments made in accordance with the applicable law’ (see also the EU Commission’s Questionaire in s 3.5.3) has little clarity as it immediately raises the question: which law? It is likely to be the higher treaty law or CIL and not host country law where conflicting. That goes to the complicated problem of the applicable law, especially when chosen by the parties, see JH Dalhuisen and A Guzman, ‘The Applicable Law in Foreign Investment Disputes’ available at http://papers.ssrn. com/sol3/papers.cfm?abstract_id=2209503; see further s 3.3 below. 357 In respect of the meaning of Art 25 of the Washington Convention, arbitral tribunals are divided. The ad hoc annulment committee in Patrick Mitchell v Democratic Republic of the Congo, ICSID Case No ARB/99/7, IIOC172 (2006) insisted on and assumed an implied concept of it, but not the tribunal in LESI SpA et ASTALDI Spa v People’s Democratic Republic of Algeria, ICSID Case No ARB/05/3, IIC 205 (2001).

Volume 2: Foreign Investment Arbitration 207 It is difficult to judge but at least it helps to explain why loans to host governments or other investment projects might be foreign investments.358 In this connection, a mere commercial sale gone wrong is not enough;359 expenses incurred for bidding for public contracts were not deemed foreign investments either.360 The foreign investor may operate in the host state through a company fully incorporated in that country (it may even be a requirement of the host country) but that does not deprive the investor from its foreign status. The investment may itself be in many forms: hardware, software, patents, bonds or loans (if held until maturity and not for speculative purposes), shares in other companies (not held for speculative purposes either), oil and gas concessions etc. It is now accepted that foreign investors may themselves be controlled by foreigners from countries other than the BIT home state, for example holding companies elsewhere, or perhaps even by investors in the host country as long as the investment is organised from abroad. It is even possible to choose the home state in order to benefit from its treaty network concerning foreign investment and target a specific country for investment from that country. So, there may be shell companies created to this effect in the relevant home country to benefit from the foreign investment protection in the host country. There may thus result treaty arbitrage as there is in the area of taxation361 and a formal approach is usually taken.362 But there is also case law in which arbitrators were looking for the ‘ultimate owner’, which may not then be in the host country.363 This was seen as an issue of foreign control under Article 25(2)(b). It also goes to the use of the term ‘directly’ in Article 25. It has already been mentioned that it may be an issue when opting for an ICSID or UNCITRAL arbitration. Another issue is whether BITs may be retroactive, meaning covering pre-existing foreign investments. New investment was originally the aim, but newer BITs may also cover prior investments although this requires a special provision to the effect and is not deemed implicit in the text. Even then it has been held that prior action of host governments in respect of such earlier investments was still not covered and there was no retroactivity in this aspect.364

3.1.5. The Complications Deriving from the Nature of the International Flows, the Overlap between Trade and Foreign Investments Laws. Different Dispute Resolution Technique There may be a substantial overlap between international trade and investment, which raises the issue in particular of concurrent dispute resolution facilities and how they are to be handled. It is the approach of this book to see the legal world from the perspective of the international flows of goods, services, information, technology, money and related investments and place oneself firmly in that universe. While doing so it may become clearer that the issue may not be the investment itself, which may still be sufficiently located and identified in a particular country, but

358 See Ceskoslovenska Obchodni Banka AS v The Slovak Republic, ICSID Case No ARB/97/4, IIC 49 (1999). 359 ICSID Annual Report, 6 (1985). 360 Mihaly International Corporation v Sri Lanka, ICSID Case No ARB/00/2, IIC 170 (2002). 361 Saluka Investments BV v Czech Republic, UNCITRAL Rules Partial Award, IIC 210 (2006) paras 222–43. 362 In Tokios Tokeless v Ukraine, ICSID Case No ARB/02/18, IIC 258 (2004), the same principle was upheld even though most investors in the shell company were from Ukraine itself. 363 TSA Spectrum de Argentina SA v Argentine Republic, ICSID Case No ARB/05/5, IIC 358 (2008), paras 160–62. 364 Tecnicas Medioambientales Tecmed SA v United Mexican States, ICSID Case No ARB(AF)00/02, 43 ILM 133 (2004).

208 Volume 2: Foreign Investment Arbitration that the real importance and relevance of such an investment is truly as part of the international commercial flows themselves. Foreign investments then serve a broader purpose, have a supporting function and cannot or can no longer be seen in isolation.365 Thus the nature of a claimant’s global business becomes the issue when considering the nature of host state activity which may be limited to mere distribution of products made elsewhere but it may also require local supporting facilities.366 It is the issue of the horizontalisation of production and its connected investment, supply and distribution system. One important consequence may be that the distinction between trade and investments erodes and that the creation and/or maintaining of a distribution system in a host country and its sales into such a system may be considered an investment there and lost sales into the host country even a breach of its investment protection.367 Thus the more interesting question may be that a loss of sale from home into host country, due to host government action, creating technically a loss in the home country may still be attributed to the host country and be considered a breach of investment protection in the host country. In terms of present distinctions and facilities, trade resolution regimes (under WTO) and investment dispute resolutions may at least start to overlap and become alternatives or indeed may both be operative at the same time. It may be recalled in this connection that trade dispute resolution, unlike foreign investment disputes, is still dealt with between states which may be activated by aggrieved private parties although states are in charge and retain discretion. The remedy in such cases is the unilateral withdrawal of trade concessions by the state in question. In investment disputes, on the other hand, aggrieved private parties now commonly have direct recourse against host states through international arbitration as discussed above, at least if there are BITs or similar treaties. These different dispute resolution techniques may thus combine in the context of the international flows and their trade and investment protection.368 There are important examples of this, the most egregious being the case of Philip Morris, whose production of cigarettes in Australia was made subject to extra warning requirements which type of warnings were fought by the company and its subsidiaries in Australia and elsewhere in both ways.369 Cases like these are still relatively few but it can easily be seen that they may increase in the future. The notion of trade and investment in these international flows as flows may thus need re-evaluation and this poses the question whether a choice between the two different resolution techniques must be made or whether they may still operate cumulatively. It may not be objectionable that they continue to do so in principle and there is important support for this position which favours fragmentation.370 Others have pointed out that this may put smaller states with 365 BIT’s themselves often express this in an aspirational sense, see G van Harten, Investment Treaty Arbitration and Public Law (Oxford, 2007) 140. Longer term aims are then expressed as encouraging capital flows, international investments, or similar ideals, cf eg, the Preamble to the German-Pakistan BIT of 1959. 366 See M Feldman, ‘Distinguishing Investors from Exporters under Investment Treaties’ in J Kalicki and A Joubin-Bret (eds), Reshaping the Investor-State Dispute Settlement System (Brill Leyden, 2015) 760. 367 Cargill, Inc v United Mexican States, ICSID Case No ARB/05/02 (18 September 2009). 368 See Y Shany, The Competing Jurisdictions of International Courts and Tribunals (Oxford, 2003); BE Allen and T Soave, ‘Jurisdictional Overlap in WTO Dispute Settlement and Investment Arbitration’ (2014) 30 Arbitration International 1. 369 This case gave rise to much discussion, see S Puig, ‘The Merging of International Trade and Investment Law’ (2015) 33(1) Berkeley Journal of International Law; J Pauwelyn, ‘Dealing with the Increasing Complexity of Investment–related Treaties: A Framework and some Policy Guidelines’, available at http://iisd.org. 370 S Ratner, ‘Regulatory Takings in an Institutional Context: Beyond the Fear of Fragmented International Law’ (2008) 102 American Journal of International Law 475 and PS Berman, ‘Global Legal Pluralism’ (2007) 80 Southern Californian Law Review 1155.

Volume 2: Foreign Investment Arbitration 209 lesser resources in a disadvantageous position.371 This may be so but they face the same problem in many other areas: the basic issue is that they have difficulty in finding the talent to man a modern state and in the face of globalisation may experience greater pressures to conform. It is the same reason why they tend to suffer more from financial crises. They cannot help themselves and may even risk to become dysfunctional. The EU largely taking over solves this problem for its smaller Members. Obviously, these are or should be big issues in the TTIP debate between the US and EU (see section 3.5 below on the dispute resolution regime) assuming it resumes. Suffice it to say for the moment that these problems should not only be considered from the perspective of present protection facilities, but that the nature of the international flows themselves may require their reconsideration. It will be argued in section 3.5.2 below that arbitration may remain the more viable dispute resolution facility in this area but that it needs a form of supervision to remain credible and inspire confidence especially in deciding public policy issues.

3.1.6. Status and Powers of Foreign Investment Arbitrators In sections 1.1.10 and 1.2.5 above, much was said about the (limited) powers of international arbitrators and their role and jurisdiction. The essence was that they are there only to resolve a dispute between the parties as the latter have formulated it upon the evidence they presented. International arbitrators, it was submitted, are limited to the submissions, pleadings and arguments of the parties in commercial and financial disputes in which connection the applicable law must also be pleaded as fact and proven as such. At least international commercial arbitrators have no natural lex fori to uphold or clarify; they are not judges and even less law makers. They only determine which of the arguments are in their view the better and are not meant to bring their own ideas (as they are not in dispute). It is all a matter of the preponderance and plausibility of the evidence presented by the parties, also that concerning the applicable law and how it should be applied. It was submitted all along that as such they are more like juries than judges. Their findings cannot be precedent in a legal sense and there cannot be a search for consistency; all depends on the evidence of the parties. It can be too little or too much, but it is the only thing in dispute that needs to be resolved. That was perceived as the traditional position, but it was also said that there are increasingly areas where international commercial arbitrators exercise own powers, in which areas they may then also be able and be allowed to apply the law autonomously and formulate it. Traditionally, in international arbitrations, that applied to procedure, evidence and its weight, at least if parties did not agree in these matters, or if there were overriding (transnational) principles (often of due process) at stake. In international arbitrations, it now also applies to the determination of their own jurisdiction, arbitrability, admissibility, and ways of reasoning, subject to any review in enforcement proceedings. As we have seen, they might even be exercising equitable powers in proprietary matters and issues of relief, although probably still not autonomously and would in any event still depend on further submissions of the parties. More generally, they might become spokespersons for the public interest in areas such as competition issues, and market abuse, money laundering, or corruption. That is the area of arbitrability. In pressing cases, they might even bring to bear their own ideas of justice, social peace and efficiency, although it was also

371 See Pauwelyn (n 369).

210 Volume 2: Foreign Investment Arbitration pointed out in section 1.1.14 above that these powers present a serious threat to the credibility of international arbitration. They must be supported by the transnational commercial and financial legal order and its laws in which these powers are then founded and it may be considered that to privatise public policy decision taking this manner is counterintuitive and is increasingly being questioned. That became an issue in TTIP, the revision of NAFTA, and in the EU/Canadian Treaty (CETA) as already noted. The recent EU treaties with Mexico, Singapore, and Vietnam use the same model. Indeed, it must now be considered whether and how this is all moving forward in foreign investment arbitration under treaty law (not necessarily under investment agreements) as in these foreign investment cases the public interest is primarily engaged and the facility is likely to be backed up by treaty law.372 That may make these arbitrators much more like judges, but it remains a problem and raises all the more issues of legitimacy, accountability, supervisor, expertise, independence and impartiality, while precedent and its force and considerations of consistency may become other issues. Conceivably such arbitrators may become law makers whilst autonomously determining and clarifying the applicable law. That also enters into the issue of openness of the proceedings and publication of the awards and possibly a review or appeal function. Probably equally important is how these arbitrators come by their wisdom, whether they must still ask for further representations or submissions by the parties and might even seek advice from NGOs373 or from international organisations like the International Labour Organisation or similar bodies. Conceivably, foreign investment arbitrators may fulfil here a different function and play a different role than in commercial arbitration, although to what extent must still be a matter for discussion.374 Are they indeed spokespersons for international law or for the otherwise applicable law? In particular, these arbitrators whilst raising legal issues autonomously would still have to conduct a proper hearing and depend on them in their reasoning and legal clarification. They cannot pull a rabbit out of the hat. The danger to arbitration’s credibility was highlighted in section 1.1.14 above and it has become severely questioned in foreign investment where there is as yet little law and there are many blanks or gaps. To repeat, one may see here a progression: traditional commercial disputes were largely contractual and private, indeed entirely dependent on the representation or submissions of the parties and the way they formulated their dispute even on points of law. Financial arbitration moves out of these shadows because of the stronger proprietary and public policy elements

372 This has also been considered in the context of the search for consistency, see S Kasper, ‘Investor-State Disputes on the Rise: Influencing the Commercial Arbitral World?’ (2016) Arbitration 394, who acknowledges that law is pleaded as fact also in foreign investment arbitrations but also that every investment agreement retains its own history and context in this connection. 373 The issue of amicus curiae may then also arise, see E de Brabandere, ‘NGO’s and the “Public Interests”: The Legality and Rationale of Amicus Curiae Interventions in International Economic and Investment Disputes’ (2011) 12 Chicago Journal of International Law 23, and E Levine, ‘Amicus Curiae in International Investment Arbitration: The Implications of an Increase in Third-Party Participation’ (2011) 29 Berkeley Journal of International Law 217. 374 This is sometimes also cast in terms of promoting the rule of law, which would appear the consequence of full judicialisation, see DW Rivkin, ‘The Impact of International Arbitration on the Rule of Law’ (2013) 29 Arb Int’l 360; B Kingsbury and SW Schill, ‘Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law’, Institute for International Law and Justice, NYU Law School, Working Paper 2009/6 (Global Adminstrative Law Series); P Akhavan, ‘The Contribution of Investment Arbitration to the Rule of Law’, in A Menaker (ed), International Arbitration and the Rule of Law: Contribution and Conformity, 19 ICCA Congress Series, 81 (2017). See also T Schultz and C Dupont, ‘Investment Arbitration: Promoting the Rule of Law or Over-Empowering Investors? A Quantitative Empirical Study’ (2014) 25 EJIL 1147.

Volume 2: Foreign Investment Arbitration 211 affecting third parties and the public at large, while in foreign investment the public interest starts to dominate and there is further detachment from earlier perceptions about the function and scope of international arbitrators and their powers.375 There may then be a progression towards a more judicial role in each instance suggesting at the same time increasing powers of arbitrators to raise and determine legal issues and clarify the applicable legal regime, but this still does not make international arbitrators ordinary judges. If that had been wanted, the relevant treaties could have created a foreign investment court or retained the jurisdiction of the local courts in host countries.376 This has now happened under the EU-Canada Treaty (CETA) and might also happen in the TTIP, if it still has a chance, see section 3.5.6 below, and may signify the dawn of a different era in this type of dispute resolution altogether, which would become further judicialised in which the private dispute resolution facility would be controlled. As will be discussed later, many experienced lawyers may not believe this to be progress per se, but greater supervision of foreign investment arbitration is necessary if it is to continue and, it will be argued, should have been asked for by the arbitration community itself and arbitrators should be enables to ask preliminary opinions from such a court rather than creating appeal functions, which are likely to be costly and long and over judicialised. It would have prevented much criticism and rethinking. A prelude to this supervision is openness and transparency.377

3.1.7. Initial Steps and Conduct of Foreign Investment Arbitrations No less than in financial arbitrations, the basic approach in foreign investment arbitration conforms to what has become international commercial arbitration. That is borne out when the UNCITRAL Rules are chosen by an investor in an arbitration under a BIT that allows this alternative as BITs usually do, but there may be a number of more fundamental and practical differences in ICSID arbitrations relevant when preferred by claimant in a foreign investment dispute. First such arbitrations are under transnational law and it was already observed that ICSID arbitrations are the true example of arbitration’s internationalisation as they are conducted under treaty law, which means that laws of a seat and the supervision of its courts are irrelevant as they remain in principle in arbitrations under the UNCITRAL Rules although even then it may be asked whether the transnationalisation element is stronger and therefore the application of the lex mercatoria and its hierarchy of norms more obvious and robust at least in respect of the applicable arbitration regime, especially of procedure and evidence as explained more generally for international commercial arbitration in section 1.2 above. For ICSID Arbitrations, there is the Washington Convention supplemented by its Rules of Procedure for Arbitration Proceedings (Arbitration Rules). Again, they largely follow the commercial arbitration practice, even though with deviations. At the heart is party arbitration meaning the appointment of an arbitrator by each party, the difference being that they do not

375 See P Bernardini, ‘International Commercial Arbitration and Investment Treaty Arbitration—Analogies and Differences’, in D Caron et al (eds), Practicing Virtue: Inside International Arbitration (Oxford, 2015) 52. 376 See also SW Schill, ‘Crafting the International Economic Order: The Public Function of Investment Treaty Arbitration and its Significance for the Role of the Arbitrators’ (2010) Leiden Journal of International Law 403. 377 W Kenny, ‘Transparency in Investor State Arbitration’ (2016) 33 Journal of International Arbitration 419; CG Buys, ‘The Tension between Confidentiality and Transparency in International Arbitration’ (2003) Am Rev Int’l Arb 123. Cf also the 2014 UNCITRAL Rules on Transparency and the earlier statement by the OECD Investment Committee, Transparency and Third-party Participation in Investor State Dispute Settlement Procedures (Paris, 2005).

212 Volume 2: Foreign Investment Arbitration appoint the Chair but both parties to the arbitration make a proposal at the time they appoint their arbitrator. If they do not appoint and disagree on the Chair, ICSID appoints the relevant arbitrators and Chair from the roster of arbitrators appointed by the Members of the Washington Convention or from the ten persons that the World Bank may additionally appoint. Article 14 of the Convention requires these appointees to be ‘of high moral character and recognised competence in the field of law, commerce, industry or finance who may be relied upon to exercise independent judgment’. In practice, this means that for host states they are always lawyers who are close enough to the appointing national governments although they do not need to be of the same nationality and sometimes are not, especially for countries that do not have this expertise in abundance at home. If parties choose an arbitrator outside the ICSID roster, they must still satisfy the qualifications of Article 14, see also Article 40(2). The other requirement is that for each tribunal there must be a majority of nationals that do not belong to the State party to the dispute. Under Article 57 of the Convention, tribunal members may be challenged and this is not uncommon especially in respect of their independence. It raises the question of investigation, disclosure, and information duties of appointees. In the absence of any ICSID court or similar facility that operates like in the ICC and LCIA, it is up to the other two arbitrators to decide the issue in first instance. In practice this has proved embarrassing and probably has increased the bar for dismissal quite significantly, see further the discussion in section 1.1.12 above. A similar situation arises under the UNCITRAL Rules. The ICSID Convention is in so far unique that it allows dismissal of claims manifestly without merit (Rules 41(5)). It also has a default rule (Rule 42) when additional time may be granted to the absent party. It requires the tribunal to examine in such cases its own competence and to ensure that the submissions made by the party present are well founded in fact and law. It leaves the question how far this goes and it may put a great strain on the notion of impartiality, arbitrators should not become advocates for the absent party, see also the discussion in section 1.4.4 above. Rule 39 deals with provisional measures in a cursory manner focussing on the preservation of rights without a discussion what they may be or what orders can be issued. It should be realised that attaching or impounding government property will always be difficult because of their public purpose and there are no provisions for ex parte action either, but it is made clear that any judicial or other authority may still be activated in this regard. It may be of interest to consider that the Rules may well go here quite beyond the Treaty. In section 3.3.3 below, the issue of statute of limitations will be discussed. The conclusion is that there is no such bar against treaty law claims, not even against investment agreement claims brought in ICSID arbitrations, but there may be for investment agreement disputes if the proceedings are conducted under other institutional or ad hoc rules. Jurisdiction issues are determined by arbitrators, issues of arbitrability would not appear to arise in similar fashion as in commercial arbitration as even an UNCITRAL arbitration is treaty based and the rights arising under it are per definition arbitrable. Whether admissibility is an issue may also be questioned, see Section 1.3.9 above for commercial arbitrations.378 Pleadings are exchanged in the manner common to international arbitration but there will be four documents (Rule 31), the defendant host state having the last word. Another special feature is that in a BIT arbitration there are no counterclaims of host states. Rule 34 makes clear that in matters of evidence the tribunal shall be the judge of the admissibility of any evidence adduced and of its probative value. The tribunal also has the last word in terms of production of documents and discovery. Again, the international commercial practices are likely to be followed. 378 SA Pauker, ‘Admissibility of Claims in Investment Treaty Arbitration’ (2018) 34 Arb Int’l 1 suggesting considerable caution.

Volume 2: Foreign Investment Arbitration 213 Rule 47 under 1(i) restates the requirement of the Convention (Article 48 (3) and 52 (1)(e)) that the award must state on every question submitted to tribunal together with the reasons upon which the decision is based. It will be argued later in section 4.2.2 that this is an inappropriate and unreal demand. It is for arbitrators to decide what the fundamental issues are in each case and they are also in charge of the reasoning. It leaves the question whether BIT arbitrators can raise legal issues themselves and may clarify the applicable law beyond the presentations of the parties. Important ICSID cases seem to suggest so although this remains greatly contested, see the discussion and the cases cited in section 1.2.5 above. It is one thing to assume that they have this power but another question where their wisdom in these matters might come from if they go beyond the submissions of the parties and feel not constrained by them or ask for more. It is a life issue that has contributed to the questioning of this whole dispute resolution process. As we shall see in the next section, some ask now for specialised courts (the EU in CETA); others want to revert to diplomatic solutions between home and host governments, many want ordinary courts where they can be trusted (partly the approach in the NAFTA (USMCA) amendments).

3.1.8. The Supervision of Foreign Investment Arbitration. Annulment Proceedings Compared Whatever the prevailing views on the appropriateness, it is a fact that foreign investment arbitrators in particular usually deal with issues that are closely related to the public interest, however defined or urgent. It may be true that investment agreements and BITs more particularly motivate host states to give many protections and limit policy considerations at the level of the state, but in their interpretation and application considerations of sovereignty revive and, as will be argued later in section 3.3, under international law ‘super’ public purpose may in any event still override the concessions made by the host state even if the question of compensation does not go away in such cases but need not be full compensation. This again raises the issue of the arbitrators’ powers but also of the supervision of their ability to set aside the (full) protection. Is dispute resolution of this private nature here still the proper response? It became much questioned during the TTIP negotiations between the US and EU (see section 3.5 below) and also in the revision of NAFTA (USMCA Treaty). The CETA Treaty between the EU and Canada (section 3.5.8 below) opted for a specialised court system with full appeals, as we shall see. The answer is, it will be submitted in section 3.5.4 below, not appeals, which is only more fodder for lawyers, but better supervision of arbitrators by a specialised international court or similar institution or board from which arbitrators could also ask preliminary opinions and which will supervise them.379 This should also have been the solution under the Washington Convention rather than its procedure of annulment under Article 52, which avoids appeals but seems to aim at some similar result in terms of supervision although in a way that ill expresses the concept and has destabilised the set-up of the Convention. Indeed, the annulment facility and the way it has been used and found expression has become one of its more contentious parts and weakest spots. The grounds are on their face quite different from the recognition conditions of the New York Convention but less so on a deeper analysis. The key remains that they do not amount to an appeal proper and that 379 See Dalhuisen (n 76) and JH Dalhuisen, ‘The Transatlantic Trade and Investment Partnership Response Answer to the EU Questionnaire of March 2014’ see SSRN Working Paper Series and the text at s 3.5 below.

214 Volume 2: Foreign Investment Arbitration none of the grounds for annulment is prescriptive, again the word ‘may’ is used in Article 52. The key is that the Tribunal should have been properly constituted, it should not have manifestly exceeded its powers, there should not have been corruption on the part of a member of the Tribunal, there should not have been a serious departure from a fundamental rule of procedure, and the award should not have failed to state the reasons on which it was based. Only the second and last item are seriously contentious, for see further the discussion in section 4.2.2 below. The last one needs to be considered together with Article 48(3), which requires the award to deal with ‘every question submitted to the Tribunal’. It was already said that this is a wholly unreasonable and unnecessary request. It is for arbitrators to decide what is relevant. It only makes for voluminous awards that may take years to produce and only increase the costs and inefficiencies.380 In this book, it will be further argued in section 3.5, dispute resolution rather than law formation remains the preferred direction also in foreign investment disputes, in which arbitration may still be the better alternative assuming arbitrators are properly supervised and can ask preliminary opinions in matters of their powers and public policy issues from an international court. It may also be settlement oriented. This is not the present direction. International arbitration has become suspect, not in the least because it is a business and is run as such. At the more abstract level, it is also clear that private dispute resolution sits uneasily with the determination of public policy issues which may involve very large claims against host states. Furthermore, there is often still some desire for proactive law making in this area to fill in the very considerable gaps. That may then be believed to be more properly the task of specialised courts, but it was already said that it must be seriously questioned whether they are the proper and better institutions to do so. It is for states to determine policy and there is far too much contention here to leave this even to specially created courts instead and to the rule of precedent to arrive at some a jurisprudence constante and system building in the civil law manner. On this scale, it would not appear legitimate in courts. It may be noted in this regard that even the ICJ has shied away from such a role. Its decisions tend to be narrow and case specific and are not precedent under its own rules (Article 59 of its Statute). Others desire these issues to revert to resolution through the ordinary national court systems (host country) or even diplomatic process. The successor to NAFTA (USMCA Chapter 14) is showing a combination, arbitration being excluded entirely in investors disputes against Canada and the US and in respect of Mexico limited to certain product lines. CETA on the other hand wanted a specialised appeal court to become law maker. That seems to be where the EU is at the moment, but it should be approached with a great deal of scepsis, see further the discussion in sections 3.5.8 below.

3.2. The Basic Foreign Investment Protections. Direct Foreign Investors’ Claims and the Role of Investment Arbitration 3.2.1. Investment Agreements and Treaty Law Protections It has already been said in section 3.1.2 that in foreign investment or concession agreements the objective is normally a) to guard against expropriation, b) to create stability in the fiscal, foreign 380 It is possible to summarise all these grounds in the ‘reason requirement’, see Guillermo Alvarez and WM Reisman (eds), The Reasons Requirement in International Investment Arbitration: Critical Case Studies (Brill Leyden, 2008) 1.

Volume 2: Foreign Investment Arbitration 215 exchange, and regulatory regime, c) to select an applicable law, and d) opt for international arbitration in the case of disputes. The latter facility was strengthened by the Washington Convention for those parties who selected ICSID arbitration in their investment agreement as we have seen. BITs now commonly add to this and, in the absence of an investment agreement or on top of it, provide for a more general regime of protection concerning stability, expropriation and compensation, including e) national treatment and f) the most favoured nation principle, g) fair and equitable treatment, h) security and protection against arbitrary or discriminatory treatment, and (often) i) an umbrella clause which lifts investment agreements to the level of treaty protection and public international law. They j) commonly also create an arbitration facility allowing foreign investors directly to sue host states for the treaty protections; and usually give a choice between ICSID or UNCITRAL arbitration. This facility derives then from treaty law and does no longer depend on the existence of an arbitration clause to claim the extras protections from host states, all operating at the level of public international law. The expropriation protection has given rise to a great deal of argument especially concerning indirect expropriations, see further in particular sections 3.4.1, 3.4.2 (definition) and 3.4.4 below. Value reduction is the essence, less how it came about except through host government action, and it may be indirect. The UNCTAD Guide on Expropriation defines the extension to indirect expropriation with reference to state practice, arbitral awards, and doctrines using the following characteristics: (a) an act attributable to the State; (b) interference with property rights or other protected legal interests; (c) of such a degree that the relevant rights or interests lose all or most of their value or the owner is deprived of control over the investment; (d) even though the owner retains the legal title or remains in physical possession.381 The terminology is not fixed and indirect expropriation has also been referred to as de facto, creeping, disguised, virtual, constructive or regulatory.382 381 United Nations Conference on Trade and Development, ‘Expropriation’, UNCTAD Series on Issues in International Investment Agreements II, 12 (2012), available on: https://unctad.org/en/Docs/unctaddiaeia2011d7_ en.pdf. The tribunal in the case of Telenor Mobile Communications AS v The Republic of Hungary, (2006) Final Award, 13 September 2006, ICSID Case No ARB/04/15 laid down a non-exhaustive list of what state actions can be construed to amount to indirect expropriation: (a) repudiation of the concession agreement. (b) forced amendment of a Memorandum of Association so as to require relinquishment of the exclusive right of use of a licence which had the effect of destroying the commercial value of the investment. (c) displacement of the investor’s management. (d) the imposition of taxes which would substantially erode profits. (e) denial of permits necessary to operate the concession, and associated measures. (f) freezing of the investor’s bank account and harassment of its staff. (g) detention and. deportation of key personnel necessary to nm the business comprising the investment. (h) acquisition of a majority shareholding in the concession company where subsequent measures adopted by the majority which destroy the economic value of the investment go beyond the legitimate exercise of a majority shareholder’s right to manage the company. 382 Creeping expropriation is sometimes thought to be different as having: ‘a distinctive temporal quality in the sense that it encapsulates the situation whereby a series of acts attributable to the State over a period of time culminate in the expropriatory taking of such property’, Generation Ukraine v Ukraine, Award of 16 September 2003, ICSID Case No ARB/00/9 [20]–[22]. In the case of Burlington Resources v Republic of Ecuador the tribunal held that the proper approach to determining whether one action or a series of actions of the host state amounts to expropriation was to address each act individually. Only when no individual action constituted an expropriation was it considered proper to consider whether the combined actions amounted to a creeping expropriation, Decision of Jurisdiction June 2 2010, ICSID Case No ARB/08/5.

216 Volume 2: Foreign Investment Arbitration International tribunals have recognised at least three criteria to assess whether a state action in dispute rises to unlawful indirect expropriation: impact;383 extent of interference;384 and the nature, purpose and character of the measure.385 In section 3.4.4, it will be observed that the 383 In Telenor Mobile Communications AS v The Republic of Hungary, 13 November 2006, ICSID Case No ARB/04/15, the tribunal held that while considering whether a state measure would constitute expropriation the determinative factors were first the intensity and duration of the economic deprivation suffered by the investor as a result. The affected property must be impaired to such an extent that it must be seen as taken, GAMI Investments, Incorporated v Mexico, Final Award, IIC 109 (2004), 15 November 2004, Ad Hoc Tribunal (UNCITRAL) [126]. Thus, the tribunal has to identify if there is a decrease in the economic value of the investment. It should be complete or be close to being so, Suez, Sociedad General de Aguas de Barcelona, SA and Vivendi Universal, SA (formerly Aguas Argentinas, SA, Suez, Sociedad General de Aguas de Barcelona, SA and Vivendi Universal, SA) v The Argentine Republic (II) (2003) ICSID Case No ARB/03/19. If there is still income, it needs to be determined whether there is a decrease in value. This may be difficult. In Pope & Talbot v Canada, Interim award, IIC 192 (2000), 26 June 2000, Ad Hoc Tribunal (UNCITRAL) the tribunal determined that the loss of future business profits did not amount to a substantial deprivation and the measure was not tantamount to expropriation. The requirement for a complete or close to a complete loss of the economic value of the investment is also often difficult to establish especially if the impact only affects future profits. If the investor also losses control over the investment, he may, however, be more likely to succeed, Sempra Energy International v The Argentina Republic, (2007) Award, 28 September 2007, ICSID Case No ARB/02/16 [285], cf also Sedco v National Iranian Oil Co, Sedco, Inc v National Iranian Oil Company, (1985) Interlocutory Award, 28 October 1985, 9 the Iran-United States Claims Tribunal Reports 248, [278], and earlier Antoine Biloune and Marine Drive Complex Ltd v Ghana Investments Centre and the Government of Ghana, [1989] Award on Jurisdiction and Liability of 27 October 1989, cf further also Pope & Talbot v Canada: ‘detention of employees or officers of the investment or supervision of their work, taking of the proceeds of company sales, interference with management or shareholders’ activities, preventing a company from paying dividends to its shareholders and interference with the appointment of directors or management of the company’. The effect must in principle be irreversible, permanent and definitive, Tecnicas Medioambientales Tecmed SA v United Mexican States, Award of 29 May 2003, ICSID Case No ARB(AF)/00/2, [116]. Terminology is irrelevant and the appointment of ‘temporary’ managers by the host state may not give investors a real prospect to resume control and is therefore expropriation. The origin or idea behind the host government’s taking is not relevant. This is also referred to as the ‘sole effects doctrine’, first developed in the US-Iran Tribunal, see Tippetts, Abbett, McCarthy, Stratton v TAMS- AFFA Consulting Engineers of Iran, (1984), 6 Iran-US CTR 219, holding that the intent of the government or purpose is less important than the effects of the measures and the form of the measures is less important than the reality of their impact, later followed more generally in investment disputes, Patrick Mitchell v The Democratic Republic of Congo, Annulment Proceedings of 1 November 2006, ICSID Case No ARB/99/7 [53]. 384 Previous records of the host state and other communications may affect the reasonable expectation of the investor. This issue of reasonable or legitimate reliance will be discussed further in s 3.4.5 and n 338 above, and nn 481 and 490 below. It may be a fair and equitable treatment obligation that may filter through into the question of expropriation. See also M Perkams, ‘The Concept of Indirect Expropriation in Comparative Public Law – Searching for Light in the Dark’ in S Schill (ed), International Investment Law and Comparative Public Law (Oxford, 2010) 149, with research on multiple national and regional jurisdictions like the European Court of Human Rights and the EU. In Azurix Corporation v The Argentine Republic, (2006) Award of 14 July 2006, ICSID Case No ARB/01/12, [318], the tribunal held that legitimate expectations need not be based on specific and explicit undertakings or representations of the host State; implicit assurances, coupled with the investor’s assumptions may be sufficient, but the tribunal in Methanex Corporation v United States, (2005) Final Award on Jurisdiction and Merits of 19 August 2005, 44 ILM 1345, Ad Hoc Tribunal (UNCITRAL),found it important that specific commitments were given to the foreign investor. According to M Krzykowski, M Mariański and J Zięty, ‘Principle of Reasonable and Legitimate Expectations in International Law as a Premise for Investments in the Energy Sector’ [2020] Int Environ Agreements, legitimate expectations cannot be assessed in isolation from the character of the governmental action or its economic impact. 385 The nature, purpose and character of a measure may be considered relevant in considering whether an indirect expropriation has occurred, Ying Zhu, ‘Do Clarified Indirect Expropriation Clauses in International Investment Treaties Preserve Environmental Regulatory Space?’ (2019) 60(2) Harvard International Law Journal and in order to distinguish between an indirect expropriation and a valid regulatory act to discharge the host state from paying compensation. Again, these issues are further discussed in s 3.4 below. Also here the distinction between direct and indirect expropriations would appear irrelevant and is probably confusing.

Volume 2: Foreign Investment Arbitration 217 distinction between direct and indirect expropriation, which is largely based on the physicality of the former and the absence of it in the latter, carries no distinctive value. The gist is that indirect expropriation has an effect similar to direct expropriation, only a physical transfer of property missing, but legally and economically both are treated the same. As will be shown, the question is rather whether these takings are incidental to ordinary non-discriminatory government action or specially targeted public welfare takings, when in either case there is no expropriation proper although there might still be a case for some compensation for non-expropriatory takings under F&E treatment. The fair and equitable (F&E) treatment concept has also given rise to much controversy and remains largely unsettled in its reach and impact386 Unless restricted by treaty law or administrative guidance, it may stand for customary law and fundamental and general principle as the other accepted sources of public international law. To that extent, it reminds of the good faith concept in private contract law even though there need not be an investment agreement proper and the protection derives from treaty law directly. It may then fill up gaps in treaty law, like in the measure of damages for non-expropriatory takings as we shall see in section 3.4.5 below and may also have a meaning in the context of reliance on governmental undertakings, but as behavioural standard, it now is increasingly limited that irrational and vindictive behaviour of host states, see again the discussion in section 3.4.5 below. In respect of the arbitration facility, the most favoured nation (MFN) provision has raised the question whether it also applies to procedural issues, in other words, whether a more favourable provision in other BITs (for example doing away with notions of exhaustion of local remedies or cooling periods) may condition the arbitration facility in the BIT under contention. Famously,387 it was held that the MFN concept applies in such situations, so that a requirement to first consider mediation and a fixed time frame for it may fail if it is not a requirement in other BITs of the same country.388 More generally the MFN notion may have become problematic in foreign investment. It derives from the old GATT and was a powerful mechanism to reduce tariffs. If a Member State reduced them for one country it had to do so in respect of all other Members, see for this mechanism also Volume 5, section 2.2.1. Tariff reductions would in this manner quickly spread. To maintain this mechanism for foreign investment protection means that tax and regulatory stabilisation protections may equally spread and lower general standards. Here it is meant to increase protections rather than reduce them, reason why its use in this manner may be questioned. Within the TTIP negotiations, the EU in particular started to review the whole area of these protections, see section 3.5.7 below, and seemed to want to do away with both the national treatment and MFN protections. The F&E treatment was also in question. This would set an important precedent for a more fundamental review of this entire area of the substantive protections besides the facility of arbitration itself, which, as we shall see, also became contentious.

386 See further the discussion at n 488 below. 387 Emilio Agustin Maffezini v Kingdom of Spain, ICSID Case No ARB/97/7, IIC 85 (2000). 388 It needs to be distinguished from the discussion as to whether this requirement, where existing, is merely procedural or jurisdictional. Case law remains divided on this issue. If the requirement is purely procedural, it may in appropriate cases be ignored by arbitrators, but not if it affects their jurisdiction arising under an arbitration agreement, see Ronald S Lauder v The Czech Republic, UNCITRAL Rules, IIC 205 (2001) in favour of the procedural characterisation as against Enron v Argentina, ICSID Case No ARB/01/3, IIC 92 (2004).

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3.2.2. Concurrent Investment Agreement and BIT Arbitration Jurisdiction. Umbrella Clauses There may be concurrent arbitration facilities under Investment (or Concession) Agreements and BITs in respect of the same investments. The obvious rule is that in such cases each facility is directed towards the cause of action that arises under the investment agreement or the BIT respectively.389 They may fall under both. If there is an umbrella clause, it may further be that all protections in the investment agreement rise to the level of international law, eclipsing local law variations and amendments, potentially making its provisions also enforceable under the BIT arbitration.390 This is commonly not believed to be so for purely private law issues,391 especially contractual claims to be resolved under private law, unless the arbitrators act in a reproachable manner when there may still be room for further protection against such an attitude under the BIT rules.392 It would amount to a kind of review under the relevant BIT. This was the issue in the well-known case of SGS v Philippines,393 but the subject remains controversial and these issues are by no means fully resolved.394 The better view may be that only issues of sovereignty or more in particular issues of investor protection proper are arbitrable in the BIT arbitration even if more directly arising under the investment agreement.

3.2.3. The Issue of Compensation Under BITs, expropriation, although commonly remaining undefined as a concept, is illegal unless there is full compensation of market value assessed immediately prior to the governmental intervention and payable in freely convertible currency. It concerns in essence the price a willing buyer would be willing to pay in an arm’s length deal at that moment. In section 3.4, this issue of legality will be further explored and also the question of indirect expropriations as compared to non-expropriatory takings and the matter of compensation in respect of them, which, it will be submitted, may in such cases be less than full compensation. The question of full compensation is itself not as simple as it may seem either and is capable of many interpretations. It is also case specific.

389 Lanco v Argentina, ICSID Case No ARB/97/6, IIC 148 (1998). This principle has been upheld many times since. 390 The umbrella clause and its meaning are not uncontentious, see for its operation also s 3.2.1 above. The concept is old and already figured in the first BIT, the one between Germany and Pakistan of 1959 (Art 7), see further AC Sinclair, ‘The Origin of the Umbrella Clause in the International Law of Investment Protection’ (2004) 20 Arb Int’l 4. The idea was that the principle of pacta sunt servanda should also bind states in their dealings with private parties, see Notes and Comments to Art 2 1967 OECD Draft Convention on the Protection of Foreign Property. It may be noted that the clause gives special protection against the host state, but not vice versa. The foreign investor is here considered the weaker party, cf also J Antony, ‘Umbrella Clauses since SGS v Pakistan and SGS v Philippines—A Developing Consensus’ (2013) 29 Arb Int’l 4, noting its essentially jurisdictional function. It may also reinforce the notion of reliance, see n 385 above and further s 3.4.5 below, although it may weaken any claim where no specific commitment is made in the investment agreement or otherwise. It also raises the issue whether the undertakings were still valid under the applicable law at the time the claim is brought. 391 Sempra v Argentina, ICSID Case No ARB/02/16, para 310 (2007). 392 See also the discussion at n 354 above. 393 SGS v Philippines, ICSID Case No ARB/02/6, IIC 224 (2004). 394 See also s 3.3.4 below and J Crawford, ‘Treaty and Contract in Investment Arbitration’ (2008) 24 Arbitration International 3 and earlier TW Waelde, ‘The “Umbrella” Clause in Investment Arbitration’ (2005) 6 Journal of World Investment & Trade 183.

Volume 2: Foreign Investment Arbitration 219 It should be repeated that neither the concept of expropriation nor that of full compensation is normally defined in the pertinent texts. There is also the issue of restitution or specific performance. As we shall see below in section 3.4.6, it usually has only a meaning if some cooperation of the host government may be expected, although it may become more common.395 It would appear that even moral damages may now be taken into account in exceptional circumstances, including physical duress of executives or loss of credit and reputation.396

3.3. The Applicable Law in Foreign Investments 3.3.1. Introduction Determining the applicable substantive law in foreign investment disputes raises a number of issues.397 It was said before that ICSID arbitrations are transnationalised but that does not automatically mean that the applicable law is transnationalised at the same time. In fact, the Washington Convention in Article 42 speaks to this issue, and so may BITs. Consulting the usual legal sources of treaty texts, available cases and scholarly literature yields helpful but incomplete guidance and often raises more questions than it answers. Case law also contributes to our understanding, but the number of cases on point is limited.398 The academic literature is relatively scarce.399 The dominant approach to the applicable law question distinguishes between two situations, depending on whether or not there is an investment agreement (traditionally called a concession agreement in the extraction industry and infrastructure projects) or at least an arbitration clause, submission agreement, or some other dispute resolution clause (which is here simply referred to as the investment agreement). For present purposes, situations in which this sort of agreement

395 Mr Franck Charles Arif v Republic of Moldova, ICSID Case No ARB/11/23, IIC 585 (2013). 396 Desert Line Projects LLC v The Republic of Yemen, ICSID Case No ARB705/17, IIC 319 (2008). 397 The following is an updated and edited version of Dalhuisen and Guzman (n 356). 398 Wena Hotels Ltd v Arab Republic of Egypt [2002] Revision Case 98/4 paras 31, 36 (ICSID); LG&E v Argentine Republic [2006] Decision on Liability Case 02/1 (ICSID); Duke Energy Electroquil Partners v Republic of Ecuador [2008] Award Case 04/19 (ICSID); Azurix Corp v Argentina [2006] Case ARB/01/12 67 (ICSID); Vivendi Universal SA v Argentine Republic [2007] Decision on Annulment Case ARB/97/3 paras 95–96, 102 (ICSID); Asian Agricultural Products Ltd v Republic of Sri Lanka [1990] Award Case ARB/87/3 paras 20–21 (ICSID); Autopista Concesionada de Venezuela, CA v Bolivarian Republic of Venez [2003] Award, Case ARB/00/5 paras 92–105 (ICSID); Compañía de Desarrollo Santa Elena SA v Costa Rica [2000] Award 39 ILM 317 para 64 (ICSID); Enron Corp & Ponderosa Assets, LP v Argentina Republic [2007] Award Case ARB/01/3 paras 206–09 (ICSID); LG&E v Argentina [2007] Award on Damages Case ARB/02/1 para 98 (ICSID); CMS v Argentina [2005] Award Case ARB/01/8 115–16 (ICSID); MTD v Chile [2004] Award Case ARB/01/7 72 (ICSID); Sempra Energy International v Argentina [2005] Case ARB/02/16, 235–35 (ICSID); Maritime International Nominees Establishment v Republico of Guinea [1989] Decision on Annulment Case ARB/84/4 paras 5.03–6.43 (ICSID). 399 But see WM Reisman, ‘The Regime for Lacunae in the ICSID Choice of Law Provision and the Question of its Threshold’ (2000) 362 15 ICSID Review: Foreign Investment Law Journal; and earlier Ph Kahn, ‘The Law Applicable to Foreign Investments: The Contribution of the World Bank Convention on the Settlement of Investment Disputes’ (1968) 28 Indian Journal of International Law 44; I Shihata and A Parra, ‘Applicable Substantive Law in Disputes between States and Private Foreign Parties’ (1994) 183 9 ICSID Review: Foreign Investment Law Journal; A Parra, ‘Applicable Substantive Law in ICSID Arbitrations Initiated under Investment Treaties’ (2001) 20 16 ICSID Review: Foreign Investment Law Journal; A Parra, ‘Applicable Law in Investor-State Arbitrations’ in AW Rovine (ed), Contemporary Issues in International Arbitration and Mediation (Fordham Papers, 2007) 7; VC Igbokwe ‘Determination, Interpretation and Application of Substantive Law in Foreign Investment Treaty Arbitration’ (2007) 23(4) Journal of International Arbitration 297.

220 Volume 2: Foreign Investment Arbitration exists will be referred to as the ‘ICSID approach’. When there is no agreement, the ‘NAFTA approach’ will be referred to. The distinction between these two approaches emerges from the relevant treaty texts. Under the ICSID approach, the investment agreement may include a choice of law provision negotiated and agreed upon by the parties. Under the NAFTA approach no such choice can be made by the parties. In one case, then, the parties choose the applicable law and in the other they do not. It is perhaps not surprising that much discussion on the applicable law question focuses on this distinction. Upon careful consideration, however, the practical difference between these two situations is much less than it initially appears. Although it is commonly believed and often stated that the presence of an investment agreement grants the parties considerable authority to choose the applicable law, it is submitted that this party autonomy is, in fact, highly restricted. The true issue is to identify that which is at the free disposition of the parties and that which is, instead, mandatory. When the question is examined carefully the parties have much less choice than is commonly believed and the difference between the two approaches fades away.

3.3.2. The ICSID and NAFTA Approaches Distinguished Under what may be termed the ICSID approach, the treaty text regarding the appropriate applicable law (Article 42) reads as follows: The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such an agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules of the conflict of laws) and such rules of international law as may be applicable.400

As this text suggests, the ICSID approach assumes there is always an investment agreement (or at least arbitration agreement) in place. This was the situation at the time of the conclusion of the Washington Convention in 1965, substantially before the era of BITs. At that time an arbitration agreement was, indeed, the minimum requirement to get to arbitration and the issue of applicable law. Though the investment agreement does not have to include a choice of law provision, the opportunity exists for such a clause, and the treaty text in question states that the parties are free to choose the applicable law. Under what may be termed the NAFTA approach, on the other hand, there is no need for an arbitration clause, either in an investment agreement or a specific arbitration or submission agreement. The treaty itself provides for international arbitration. Article 1130 NAFTA used the following formula (which may also be found in many BITs): A Tribunal established under this Subchapter shall decide the issue in dispute in accordance with this Agreement and the applicable rules of international law.401

In contrast to the ICSID approach, NAFTA does not explicitly provide for party autonomy with respect to the applicable law. Taken at face value, it would seem that the content of the law is prescribed by the treaty. It does not refer to the potential applicability of the laws of the host state either.

400 Art 42 of the Washington Convention. 401 Art 30 NAFTA.

Volume 2: Foreign Investment Arbitration 221 The US Model BIT, including the most recent 2012 version, accommodates both the ICSID and NAFTA approaches. Article 30 of the 2004 text used the ICSID formula when there is an investment agreement and a variation on the NAFTA formula when there is no such agreement or when the investment agreement is not relied on to conduct the arbitration: The tribunal shall apply: (a) the rules specified in the pertinent investment authorization or investment agreement, or as the disputing parties may otherwise agree (b) if the rules of law have not been specified or otherwise agreed: (i) the law of the respondent, including its rules on the conflict of laws; and (ii) such rules of international law as may be applicable.402 Except for the clarification issue in point 3, the 2012 text essentially retained the same approach: 1. 2.

[in respect of issues arising under the Treaty] …. the tribunal shall decide the issues in dispute in accordance with this Treaty and applicable rules of international law, [in respect of issues arising under investment agreements] … the tribunal shall apply: (a) the rules of law specified in the pertinent …. investment agreement, or as the disputing parties may otherwise agree; or (b) if the rules of law have not been specified or otherwise agreed: (i) the law of respondent, including the rules on the conflict of laws; and (ii) such rules of international law as may be applicable.

3.

A joint decision of the Parties, each acting through its representative designated for purposes of this Article, declaring their interpretation of a provision of the Treaty shall be binding on a tribunal, and any decision or award issued by the tribunal must be consistent with that joint decision.

However one considers the applicable law, it is worth noting that three sources of law dominate the applicable law discussion: the law chosen by the parties, the law of the host country (including its conflict of laws rules) and international law (including the rules of relevant investment treaties). Focus on the distinction between the ICSID approach and the NAFTA approach emerges naturally from the different contexts. The language of ICSID Article 42 seems to say that the parties are free to choose the applicable law while NAFTA omitted any mention of party choice. This language certainly suggests that party autonomy is greater under the former than the latter. However, the different texts actually have very similar—indeed, almost identical—legal meanings. The reason is that the ability of the parties to choose the applicable law is much more constrained than is often believed and as it might appear under ICSID, while NAFTA gives the parties some flexibility despite its failure to say so explicitly. Of course, BITs being treaty law, this suggests that international law is the first stage of enquiry, but international law leaves much unsaid in which case domestic laws still acquire validity especially that of the host country as it presents the environment likely to be most directly affected especially in its mandatory provisions unless superseded by treaty law, in this case the relevant BIT and its interpretation as well as by customary international law (CIL) and the other sources of international law mentioned in Article 38(1) of the Statute of the International Court of Justice, notably also in its reference to other treaty law here in particular the Vienna Convention on the Law of Treaties.403 402 Art 30(2)(b), US Model BIT 2012. 403 HE Kjos, Applicable Law in Investor-State Arbitration: The Interplay between National and International Law (Oxford, 2013). More contentious must be the proposition that failing to identify or apply the proper law may give rise to an annulment under Art 52 of the ICSID Convention where applicable. The applied law is never a sufficient

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3.3.3. How Far Does a Choice of Law by the Parties Reach? Statute of Limitations Under the ICSID approach, parties are explicitly given the power to choose the law that applies to the investment. With it they acquire significant flexibility, at least in theory. They can choose the law of the home state, the host state, a third state, or some other set of rules. They can even rely on international law broadly or ‘general principles common to civilized nations’. The choice could, in principle, be virtually anything including a modern lex mercatoria, sharia law, or even a regime drafted by the parties for just this purpose. In practice, the chosen law is, however, often the law of the host state. Sometimes it is instead that of the home state. This latter choice can be found, for example, in international loan documentation but is otherwise quite rare. Still, as noted above, no national law needs to be chosen and there are important examples where general principles are selected by the parties. For example, in the Aminoil Arbitration Agreement,404 the parties chose the principles of law and practices prevailing in the modern world, while the Concession itself referred to the principles common to the laws of Kuwait and the State of New York and, in the absence of such common principles, the law normally recognised by civilised states, including law which has been applied by international tribunals. In at least one instance, similar language derived from Article 38(1) of the Statute of the International Court of Justice, where the sources of international law are defined, was used in case law.405 Noting that the parties are free to choose the applicable law, however, is only the start of the inquiry. To say that the parties may choose the law does not identify the limits of that choice. The parties, after all, are not free to completely remake the applicable legal system. To understand the applicable law issue, then, we must understand the range of legal issues that the parties have at their free disposition. What aspects of law may they choose? What remains beyond their reach? What applicable law is mandatory or peremptory? The same issue comes up in the domestic context. It is routinely said that the parties to a contract can choose the law that will apply to that contract. But here, too, the choice is far from unfettered. We must look to the applicable legal system to see where the parties can or cannot deviate from background rules. Put another way, the domestic legal system establishes many mandatory legal rules that the parties cannot avoid or change. That is so in the basic aspects of capacity and validity ore legality, but it is also so in all that relates to public policy or public order. Many legal systems, for instance, impose mandatory securities laws, competition laws, labour laws, and more. The question is similar, if more complex, when the agreement is made between a foreign investor and the host state. The host can, of course, provide whatever rules it wishes for the investor (limited only if some jus cogens rules apply) but as previously stated the real question is whether the host is able to commit itself in this way not only in the present, but also for the future.

ground for annulment under the Convention, this is not an appeal and to the extent the Ad Hoc Annulment Committees under Enron Creditors Recovery Corp v Argentine Republic, Decision on Application for Annulment, ICSID Case No ARB/01/3, IIC 441 (2010) and Sempra International v Argentine Republic, Decision on Annulment, ICSID Case No ARB/02/16 438 (2010) suggest otherwise, this was clearly a mistake. 404 21 ILM 976 (1982). 405 Lord Asquith in the case Petroleum Development (Trucial Coast) Ltd v the Sheikh of Abu Dhabi [1952] I ICLQ 247, 260 was probably the first to use it in the more limited sense of the law applicable to a concession agreement. It does not necessarily refer to principles of international law.

Volume 2: Foreign Investment Arbitration 223 The same question applies to the choice of applicable law that seeks to set aside the host country regime. Is that choice something to which a sovereign state can bind itself irrevocably through agreement with an investor and what could the choice of a different municipal law, amalgam of laws, or a special contractual regime achieve? What ground could it cover? More generally, what can a contract with a host government arrange or set aside in terms of the otherwise applicable law? Can it set aside prevailing public policy and public order notions of the host state, including environmental, taxation and competition laws? Can this kind of contractual arrangement with a host government imply a kind of alienation or privatisation of sovereignty? Put another way, can such set-asides, once given, be withdrawn by the home state? A practical issue may be the statute of limitations. When is a claim against host governments prescribed? It is generally accepted that there is no statute of limitation rule against treaty claims under international law.406 That applies also to BIT claims and may even be so in respect of claims under investment agreements where the case is brought under ICSID, when the treaty law status may obscure the issue of a statute of limitations and perhaps there is none.407 Application of the law of the host state, even if chosen, is here more generally rejected.408 Treaty law sometimes deals with it but it is exceptional.409 Might there still be a rule of latches as general principle under international law rendering the circumstances important in this, from origin equitable, relief in common law countries?410 Here there might be more room for considering domestic statutes or rules,411 but it could not merely be of the respondent state. It might give relevance to the diligence exerted by the claimant as well as the question whether any delay has adversely affected the respondent in terms of destruction or obscuration of evidence and the loss of other available preliminary or final measures. The ICJ has also noted that delay on the part of claimant may make a claim inadmissible after an excessive period of time but admits that there is no rule and it depends on the circumstances of each case.412 The issue of whether the host state’s public policy can be set aside by a choice of law clause or ignored in an investment agreement is obviously of prime importance in regard to expropriation. For example, when an investment agreement includes protection against expropriation or a stabilisation clause, can it guard against inconsistent existing or future public policy regulations by choosing the law of another country as applicable? The question is thus whether an agreement of this nature is strong enough to trump public order notions. Is reliance of the investor on such a contract and its good faith implementation sufficient protection against sovereign authority?413 We know that governments in the exercise of their public function may change their minds, but then what is the applicable law? Can it be chosen in order to obtain a more favourable regime and bind host governments better? If so, does it stick? 406 Certain Phosphate Lands in Nauru (Nauru v Australia), Preliminary Objections, Judgment ICJ Reports 1992, 253, para 32. 407 Gavazzi v Romania, ICSID Case No ARB/12/25 Decision on Jurisdiction (2015), 52, para 147. 408 AES Corporation and Tau Power v Republic of Kazakhstan, ICSID Case No ARB/10/16 (2013). 409 See Art 13(3) Austrian-Kazakhstan BIT. 410 Cf also Ch Tams, ‘Waiver, Acquiescence, and Extinctive Prescription’, in J Crawford, A Pellet and S Olleson (eds), The Law of International Responsibility (Oxford, 2010), 21. See for the principle, Wena Hotels Ltd v Arab Republic of Egypt, ICSID Case No ARB/98/4 (2000), paras 102 ff. 411 Alan Craig v Ministry of Energy of Iran, Award 71-346-3 (Iran-US CI. Trib) 3 Iran-USCTR 280 (1983) para 6, cf also Caratube International Oil Company v Republic of Kazakhstan, ICSID Case No ARB/13/13 (2017), 114 para 421. 412 Certain Phosphate Lands in Nauru (Nauru v Australia), Preliminary Objections, Judgment ICJ Reports 1992, 253–54, para 32. 413 For a discussion of the impact of reliance on governmental undertakings on expropriation, see Jan H Dalhuisen and Andrew T Guzman, ‘Expropriatory and Non-Expropriatory Takings Under International Law (2012) available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2137107 and s 3.4.5 below.

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3.3.4. The Characterisation Issue: Contract, Administrative Agreements and Treaties. The Umbrella Clause, its Meaning and Effect Some of the uncertainty surrounding the applicable law issue stems from the fact that the investment agreement does not fit neatly into our existing categories of agreements. Because it involves a state and a private party agreeing on terms that are more than merely commercial, there is ambiguity about the status of the investment agreement. These issues were already raised before in section 3.1.2 above. Perhaps the most obvious characterisation of the investment agreement, and any choice of law clause therein, is as a private law contract. As we have seen, an important implication of such a characterisation is that the agreement might not bind public authority. The host state, then, enters into the contract as, in effect, a private party that cannot make binding commitments about its future actions as a sovereign. The investment agreement, then, is not strong enough to guard against policy changes by the host. Moreover, if the investment agreement is characterised as a private law contract, then the parties’ ability to choose the applicable law faces the same limits as every contract between two commercial actors. Put slightly differently, the state can make a binding applicable law commitment with respect to its commercial dealings (although even that is limited as noted before to issues at the free disposition of the parties, excluding notably issues regarding third parties or affecting the public in general, therefore issues of property law and ranking or of regulation), but it can notably not do so with respect to its sovereign conduct. The author has already acknowledged that there may be difficult interpretive questions about whether a particular government action or commitment is in the nature of a commercial action or a sovereign act. These challenges are familiar, however, and need not be discussed in detail here any further. As we have seen, characterisation of the investment agreement as a private law contract is not the only possible option, however. One alternative is to think of the investment agreement as an administrative contract, which would likely allow the state to unilaterally amend or terminate the agreement, most likely under its own laws but within certain limits. This issue has been raised in several cases, and though most tribunals have not embraced the concept, it is fair to say that it has not been entirely rejected either. It was already said that this description fits the Aminoil case, in which the tribunal considered the theory and neither dismissed it nor embraced it.414 Again, reference is made to section 3.1.2 above. In TOPCO the arbitrator reasoned that administrative contracts are not sufficiently widely and firmly recognised in the leading legal systems to constitute general principles of law.415 In Aramco, the tribunal concluded that there was no justification for applying this French law notion to a dispute between a US company and Saudi Arabia.416 In BP v Libya, however, the arbitrator found the concession to be an administrative contract.417 The point here is simply that classifying such agreements as administrative contracts would affect the way in which they may be viewed by a tribunal. It can hardly be denied that contracts with governments in the public sphere form a special category in all legal systems. If this is clearer in systems like the French (where the notion of an administrative contract is familiar), then it is that civil law on the whole concentrates more on

414 Government of Kuwait v American Independent Oil Company [1984] Award of 24 March 1982 66 ILR 518 and 21 ILM 976 (ICSID), paras 90, 92, see also s 3.1.2 above. 415 Texaco Overseas Petroleum Co & Cal Asiatic Oil Co v Gov’t of the Libyan Arab Republic [1977] 17 ILM. 3, 19–21 (Arb Trib). 416 Saudi Arabia v Arabian American Oil Company (ARAMCO) [1963] 27 ILR 11 Report 117–64 (Arb Trib). 417 BP Exploration Company (Libya) Ltd v Government of the Libyan Arab Republic [1979] 53 ILR 297 (Trib Arb).

Volume 2: Foreign Investment Arbitration 225 contract types than the common law, which looks more at types of relationships, although the result may not be truly different. It may still mean that international lawyers with a common law background are less comfortable with the administrative contract as a concept, but much of this is semantics. The more specific question under such an interpretation is whether the applicable administrative law may still be chosen by the parties rather than being always the law of the host country. Could the administrative law of any other country be opted into? It would seem unlikely that a host government would accept it and even then, could be bound under any other than its own administrative law, although again international arbitrators may be prepared to accept international minimum standards under international law if the applicable municipal administrative law is underdeveloped. The characterisation of the investment agreement as an administrative law contract would thus limit the space for a choice of law but could enhance the protection of the investor. The Aminoil case described two special rules that would apply if an administrative contract were found to exist. First, host states may require a variation in the other party’s duties under an administrative contract but they cannot unilaterally modify the financial terms and must also maintain the contractual equilibrium. Second, such a contract may be terminated when essential necessities concerning the functioning of the state are involved, but, in that case, reparations must be made. There is therefore an implied sovereign right to breach these agreements but only in limited circumstances and with appropriate compensation. However, purely commercial clauses are not so affected, although even here governments may still have special opt-outs. It has already been noted that there is, in any event, much middle ground. Another possible characterisation of an investment agreement is as a contract under public international law. Such a contract between states is a treaty. The question is whether some similar form of contract is conceivable under international law between a state and a non-state entity. If so, does an investment agreement fall in that category and what would it mean if it did? This leads to a consideration of the status of private parties under international law.418 Public international law, being traditionally the law between states, is no longer used to dealing with private parties. It would represent a radical departure from established present practice to give an agreement between a state and a private party a standing similar to that of a treaty between states. Views about such things can change over time, and perhaps especially the notion that an agreement between a state and a private party might be binding under international law may emerge.419 For now, however, one is hard pressed to imagine how a tribunal could reach this result. The issue comes up, however, especially if there is an umbrella clause in the relevant investment treaty, see again the earlier discussion in section 3.2.2 above. Here, even if the investment agreement itself does not constitute an enforceable form of commitment, the investment treaty may represent a binding promise by the host state to honour the commitments made in the agreement. Consider notably the language in the Swiss–Philippines BIT at issue in the SGS v Philippines case:420 ‘Each Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party’.421

418 This is not yet a completed evolution but nevertheless increasingly a reality to which BITs also testify. See for this discussion earlier also Richard M Buxbaum, ‘The Role of Public International Law in International Business Transactions’ in JJ Norton (ed), Public International Law And The Future World Order (Littleton, CO, 1987). 419 See n 339 above. 420 SGS Société Générale de Surveillance SA v Republic of the Philippines [2004] Decision on Jurisdiction Case No ARB/02/6 92, 95–97; 113–35 (ICSID). 421 Swiss–Philippines BIT, Art 11.

226 Volume 2: Foreign Investment Arbitration But even without such a clause, there may be (some) protection under BITs in the case of an egregious breach of such an agreement, especially when its dispute resolution clause and the enforcement of the awards thereunder are not respected.422 The idea is here that it simply concerns the protection of the investment. It is sometimes proposed in this connection that a difference is made between the investment agreement, any transaction thereunder,423 any dispute resolution thereunder, and any ensuing award.424 Umbrella clauses may do more. Although the interpretation remains controversial (see again section 3.2.2 above), there appears to be agreement that it is possible to draft a clause that will lift what would otherwise be merely a violation of the investment agreement to a higher level, making it a treaty violation. Even SGS v Pakistan, which is more sceptical of umbrella clauses, conceded as much, stating that ‘Article 11 of the BIT would have to be considerably more specifically worded before it can reasonably be read’ to convert contractual breaches more generally into treaty violations,425 the clear implication being that a sufficiently well-drafted umbrella clause would, indeed, protect an investor against breach of the investment agreement under international law. Any other conclusion would imply that states entering into a treaty are incapable of binding themselves in this way—creating a jus cogens rule prohibiting treaty commitments in which states promise to honour their promises to private parties. But one should not exaggerate the potential of an enforceable umbrella clause. By elevating what would otherwise be a contractual commitment to the level of international law, an umbrella clause prevents the host state from unilaterally changing the terms of that particular commitment. The umbrella clause, in other words, allows the state to make binding commitments that it lacks the legal authority to avoid. Through this mechanism, for example, a state can commit itself to a stabilisation clause. It follows that the parties can exercise a broader choice in the area of protection if an umbrella clause applies. This inevitably brings us back to the question of how to interpret an umbrella clause. Even a clause that satisfies the tribunal in Pakistan might not be interpreted to apply to a choice of law clause that sets aside the host country’s public laws if that was the idea. A tribunal may ultimately return to the question of the clarity of the umbrella clause.

3.3.5. Public Law and Private Law Indeed, we see the most important illustration of the argument—that the ICSID and NAFTA approaches to the applicable law question when properly construed work out essentially the same—in the distinction between public and private law issues. Even under the ICSID approach, the parties are only able to select the private law that applies to them. They cannot bind the state with respect to its public functions. This highly constrained choice, then, provides the parties with a flexibility that is not fundamentally different from what is available under the NAFTA approach.

422 See n 337 above. 423 Desert Line Projects LLC v The Republic of Yemen, ICSID Case No ARB/05/17, Award 6 February 2008. 424 As for the latter two issues, therefore whether the dispute resolution facility and awards are also investments to be protected as such, see respectively Chevron and Texaco Petroleum Company v Republic of Ecuador, UNCITRAL PCA Case No 34877, Interim, Award 1 December 2008, 179–86; Saipem SpA v The People’s Republic of Bangladesh, ICSID Case No ARB/05/07, Decision on Jurisdiction 21 March 2007. 425 SGS Société Générale de Surveillance SA v Islamic Republic of Pakistan [2003] Decision on Jurisdiction Case ARB/01/13 171 (ICSID).

Volume 2: Foreign Investment Arbitration 227 The text of Article 42 of the ICSID Convention provides strong support for the claim that party autonomy is limited to private law matters and that investment agreements, at least in an ICSID context, are best viewed as equivalent to private law contracts. The Article states that if the parties have failed to agree on the applicable law, the tribunal is to apply the law of the host state and ‘such rules of international law as may be applicable’. The English version fails to specify whether the law at issue is all law, including public policy and public international law, or some subset of international law. In the Spanish version, which is equally authoritative, the language is more precise. It states that in addition to local law tribunals should apply ‘derecho international privado’ (private international law). The clear implication is that the parties are granted the authority to choose the applicable private law only. BITs follow suit, as does the US Model Treaty Article 30(2).426 If this is correct, party autonomy is indeed limited to private law and private law issues, always assuming that these are at the free disposition of the parties. Though parties are free to incorporate or exclude the private law at their disposition—meaning laws which are not mandatory—they are not able to choose public law (or even deviate from mandatory private law). To repeat, the category of laws beyond their control, includes regulatory laws such as environmental, taxation and competition laws. Whatever laws are mandatory for private parties negotiating a private contract are beyond the scope of party choice in an investment agreement. Thus, for example, under this approach all administrative and international law would be outside party control and parties, including host states, would lack the power to bind themselves irretrievably with respect to public law issues. Here we see the end of party autonomy and the power to effectively choose the law pertaining to their relationship. As the foregoing indicates, there are significant limits on what a choice of law provision can achieve. This may be affected by treaty, of course, but only if the treaty itself changes the fundamental limits on party choice. It may be possible for a treaty to do so through an umbrella clause, as already discussed, but to succeed it must at a minimum be explicit about its intent. Again, even if parties (including the host state) purport to choose the mandatory environmental laws of another state, that choice is not decisive. Because the investment agreement or choice of law agreement is not itself a treaty, it cannot override existing mandatory law. The only exceptions would be if an investment treaty contained an umbrella clause, as already mentioned, providing that such concessions would be binding as a matter of international law, but even such clauses are subject to interpretation as we have seen in the previous section. Another possibility is that host state law could authorise such concessions through its domestic laws. In that case, however, the concession would be binding only as long as domestic law made it so. There would be nothing to prevent the host state from changing its laws.427 426 The US Treaty provides that if the parties have not specified the applicable law, the tribunal shall apply the law of the respondent and ‘such rules of international law as may be applicable’. US Model Treaty 2012. To the extent relevant, it may be noted that Art 28(1) and (2) of the UNCITRAL Model Law also make a reference to conflicts rules of private law in the context of stating the applicable law. So does the English Arbitration Act of 1996 in its Art 46. Extending the analysis from the ICSID Convention to the US Model BIT is made more difficult by the fact that the US treaty does not have an official Spanish version and so one cannot make quite the same argument as that made for the ICSID Convention. Nevertheless, given the similarity in language and the fact that the ICSID Convention was in place prior to the US Model treaty, it is reasonable to assume that the language in the latter is intended to have the same meaning as that in the former. 427 There might be some issue of good faith here if the host were to behave in a sufficiently duplicitous manner and the investor were to rely on assurances from the state. This is a subtle question because, while the obligation of good faith cannot be waived by the parties, if it is understood that that state is entitled to change its laws one might conclude that the investor cannot reasonably rely on any assurances from the state that it will refrain from doing so. See for this issue of reliance also nn 338 and 481 above, and text at n 490 below.

228 Volume 2: Foreign Investment Arbitration To repeat, if the law of a state other than the host state were chosen by the parties, the only addition to host country law would be that the other state’s private law rules would apply to private law issues. Even in the private law realm, however, the foreign state’s laws would only apply in matters at the free disposition of the parties. To provide a concrete example, if the parties were to include an expropriation or stabilisation clause in the investment agreement, it would not move the applicable law away from that of the host country or international law. In particular, such clauses cannot irrevocably protect against the host state’s sovereign power to change its law. A claim that the host did not honour the stabilisation clause would not be sustainable based on the investment agreement alone, because it was not within the power of the parties to freeze host country law. The host is free to change its laws and so may disregard the stabilisation clause. There will, therefore, be no violation by the host state, and no question of compensation would arise in terms of breach of contract. The only hope for the investor, then, would be international law, including both customary international law and any applicable investment treaty, especially if there is an umbrella clause in the relevant BIT. When party autonomy fails to reach a particular area of law, as is the case for public policy or public order issues as well as private law issues that are not at the free disposition of the parties, the choice of law issue becomes simplified: The relevant law will normally be the law of the host state but it could also be international law. The remaining question is whether the law of the host state prevails over inconsistent international law. Both ICSID and the US Model Treaty specify that the relevant law is the law of the host state and applicable rules of international law, but neither treaty specifies which of those two sources is to take precedence. One’s instinct is to favour international law as it is meant to bind states, and arbitral decisions in Wena and LG&E confirm this view.428 The pre-eminence of international law is even clearer in legal systems that incorporate it into domestic law.429 In that situation there can be no doubt that international law takes precedence over inconsistent domestic law. The best view, then, is that host states normally maintain their own mandatory laws and values and international law only becomes relevant if it conflicts with or supplements these laws. In the first case, it will prevail.

3.3.6. International Law and a Party Choice of Law Let us finally examine the impact of any commitment in an investment agreement that purports to avoid a rule of international law. Does the investment agreement have that power? Consider, by way of illustration, an agreement that, by its terms, allows expropriation without compensation. Under prevailing customary international law states are required to provide compensation when they expropriate investments. The measure of compensation is controversial, but it is broadly accepted that some compensation is required. Alternatively, could the parties also choose to discard existing customary international law protections against discriminatory or vindictive measures, which is a matter of minimum treatment, now often expressed as fair and equitable treatment, as confirmed in Aminoil, Genin, and SD Meyers?430 428 Wena [2002], LG&E [2006] (n 398). 429 BG Group Plc v Republic of Argentina [2007] Final Award paras 89–97 (UNCITRAL); Siemens AG v Argentine Republic [2007] Award Case ARB/02/08 paras 78–79 (ICSID). 430 Aminoil (n 341); Alex Genin, Eastern Credit Ltd, Inc v Republic of Estonia, Award ARB/99/02 para 367 (ICSID); SD Myers v Canada [2000] First Partial Award paras 258–59 (NAFTA), see further the discussion in s 3.4.5 below.

Volume 2: Foreign Investment Arbitration 229 Again, the answer is generally held to be that the parties cannot deviate from otherwise applicable public policy,431 including policy issues settled under international law.432 In the latter case, that would at least apply to customary international law and to applicable treaty provisions, including those under BITs.433 Intuitively, there may be nothing wrong with an investor voluntarily abandoning its protection under international law and of course no one needs to pursue its remedies. Legally, the problem is not so much that such an agreement would represent bad policy as it is that the parties lack the authority to make such a change to the prevailing rules of international law. This is the inevitable result of the doctrinal observation that only states are empowered to create or change international law. Though a normative defence of this outcome is somewhat beside the point, one might be found by analogising the investor to a consumer abandoning its protection under mandatory consumer law. This protection is a form of public right and parties cannot modify it, although the consumer need not pursue the remedy and may also agree to a settlement of a dispute. More formalistically, obligations contained in both customary international law and investment treaties are obligations between states. Strictly speaking, then, an investment agreement allowing expropriation without compensation seeks to overturn an obligation owed to another state, not simply one owed to the investor. The investor obviously has no authority to release the host state from an obligation it owes to the home state, so terms in the investment agreement that purport to do so are not effective. Because the parties to an investment agreement cannot change international law, the ultimate rule is that parties acting under a private agreement (such as an investment agreement) cannot change the rules governing expropriation, protection against whimsical or vindictive government action, procedural (due process) standards, or safety protections under customary international law. In addition, parties may not change the application of treaty law, including an applicable BIT. Consider a contemporary example. Imagine an investor that is owed money by a host government. Suppose further that the investor and host reach an agreement under which the debt is renegotiated and reduced. The investor is, of course, free to make such an agreement, and it is likely to be effective. If there is a BIT in place, however, then the investor lacks the authority to waive the protections offered by the treaty. The public international law rules created by the treaty (or present in customary international law) remain. This is more than a hypothetical example. A BIT exists between Germany and Greece, for example, so any renegotiation of Greek bonds held by German investors may face this issue. There is, to be sure, considerable uncertainty about the content of foreign investment law (whilst the issue of reliance may also arise, see the discussion in sections 3.1.2 above and 3.4.6 below). Even here, however, the parties are not in full control. Consider, for example, the

431 It is true that under rules of comity, domestic courts sometimes yield to the better claims of other countries to the application of their regulatory laws in international cases where more than one regulatory regime may apply. Arbitrators are perhaps more likely to do the same in appropriate cases. Comity of this nature is sometimes also considered international law, but is quite different from (public) international law as normally perceived and in truth no international law at all except where international minimum standards are applied and substitute for domestic notions in such cases, but again always within the discretion of the local courts, cf also s 401/2 Restatement (Third) of Foreign Relations Law in the US and Art 9 EU Regulation on the Law Applicable to Contractual Obligations (2008). These issues are not further pursued here either. 432 See Thomas Wälde, ‘The Umbrella Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases’ (2005) 6 Journal of World Investment and Trade 183, 211 and authorities cited therein. 433 Reisman (n 399) 362.

230 Volume 2: Foreign Investment Arbitration required level of compensation for an indirect expropriation under customary international law. Some take the view that full compensation is required, while others assert that ‘adequate’ compensation is sufficient. One could imagine the parties, in search of certainty, specifying the compensation that would apply in their investment agreement. How should a tribunal treat such a provision, assuming it is clear and on point? This is a difficult question because two competing principles are at play. On one hand, this is a question of international law, suggesting that the parties have no control over it. The parties, as already mentioned, have no power to change international law—it is for the tribunal to deal with uncertainty and vagueness in international law, not the parties. On the other hand, given the uncertainty of international investment law (level of compensation, meaning of fair and equitable, impact of umbrella clauses, etc), it is hardly surprising that the parties may at times prefer to provide clarity at the time of the investment rather than waiting for a future dispute and a tribunal ruling. This perspective suggests a strong policy reason to allow the parties as between them at least to specify the content of international law that would otherwise be uncertain. Investment tribunals are mostly pragmatic institutions, and a firm prediction about how they should or would resolve this question is not ventured. One obvious possibility, though not the only one, would be to accept the parties’ agreement if the parties’ proposed rule falls within the scope of plausible rules. If it does not, the tribunal would determine the rule without regard to what the parties wished, assuming of course that the investor insists on the investment agreement being discarded in this respect. This may not be a fully satisfactory solution. To the extent such a decision influenced future arbitral rulings, there is a risk that the parties to the initial dispute would acquire a disproportionate impact on the law of investment. The absence of stare decisis provides some protection against such an outcome, and may provide the tribunal with just enough flexibility to adopt this approach.

3.3.7. The Applicable Law in the Absence of an Investment or Arbitration Agreement Up to this point the discussion focused on the situation in which an investment or arbitration agreement is in place and it was argued that the impact on choice of law is smaller than is often suggested. The choice of law question when an arbitration is initiated under a BIT or NAFTA in the absence of an investment or arbitration agreement will now be considered. In such a case, no choice of law has been made by the parties. The parties could, of course, enter into a choice of law agreement on the eve of arbitration. This would return us to the already discussed situation in which a choice of law clause exists. If an arbitration is started directly under a BIT, modern treaty texts support the idea that the relevant treaty applies plus international law.434 Although the law of the host state is not mentioned, it cannot be that local law simply is irrelevant. After all, the large majority of law governing the daily operation of an investment is local law. The better reading of the treaty provision is that the law of the host state, including choice of law, public policy and public order considerations continue to apply unless those are overridden by the law of the treaty or by customary or other sources of international law. This conclusion is inevitable because international law is not a comprehensive legal system. It does not cover all matters.

434 2012 US Model BIT, Art 30(2)(b).

Volume 2: Foreign Investment Arbitration 231 Again, the difference between this situation and the situation in which there is an investment agreement with a choice of law provision is smaller than it initially appears. In both cases the parties are able to choose the applicable private law to the extent that local law allows them to do so but not much more.

3.3.8. Conclusion In the end, then, there is virtually no difference between the ability of the parties to choose the applicable law. Whether one considers the ICSID approach or the NAFTA approach, the parties have essentially the same ability to choose the law that will apply to the investment. In both cases, that choice is limited to private commercial law matters and, even within this category, to those rules of law that are not mandatory. The result must be that three sets of law may be applicable depending on the type of issue: (a) Any domestic private law, general principle, or lex mercatoria the parties choose to the extent the private law was at the free disposition of the parties and not mandatory. In the absence of such a choice of law, the applicable private law is the law resulting under the choice of law rules the Tribunal shall apply, or it may be the lex mercatoria as transnational private law if the Tribunal prefers it upon proper pleadings by the parties. (b) The host country’s mandatory laws apply when there is no possibility of a choice of law by the parties affecting these laws with regard to the conduct of the investor or the effect of the investment on the host state. These mandatory laws include regulatory, tax and competition laws, and local administrative law. (c) International law, including the applicable BIT or other treaty law, applies. These laws can be in addition to local law and overrule any conflicting mandatory domestic law and also any conflicting private law (such as private agreements that try to set aside or modify international law). How conclusive are treaty texts with regard to stating the appropriate applicable law? Are they merely declaratory in these aspects and must we accept they are often unfocused and incomplete? When host country law and customary international law are mandatory, they always appear to apply regardless of such texts. The exception is when host country law is clearly overruled by the applicable treaty law. The above demonstrates that the explicit distinction in some treaties between investment and arbitration agreements and the selection of applicable law is not of great consequence when it comes the applicable law. Clearly, in the first case there may be a choice of private law by the parties, but this selection cannot do away with the private domestic mandatory laws such as regulatory, tax, competition and administrative law, even if their government so agrees. In conclusion, even though these treaty texts are seldom well thought out in this area of the applicable law, the greater problem is that there is insufficient clarity in the area of applicable law to foreign investment disputes more generally. In this sense the treaty texts are only a manifestation, not the cause, of ambiguity. For these reasons not much authority can be given to these treaty texts where they exist. A solid argument can be made that these texts are confusing and we are better off without them. BITs that have no applicable law provisions (such as the model UK BIT) may thus be preferable. Since it remains difficult for treaty authorities to answer these issues of applicable law, it may be best to leave them to arbitrators upon proper pleadings by the parties or otherwise to the competent courts.

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3.4. Proprietary and Non-proprietary Takings 3.4.1. Introduction435 As we have seen, international investment law deals more particularly with expropriation, protection against which, in its various forms, is at the core of the topic. In principle, expropriation is a host government’s right, but at least requires compensations to be lawful. Under customary international law, the required level of compensation has been disputed, as has been the question of what other consideration (other than a failure to compensate) would render an expropriation unlawful.436 In particular it is not clear what other recourse, beyond compensation, is available in such cases. Could there be reinstatement? Treaty law, especially BITs and the NAFTA, now elaborates on the issue and tries to create greater clarity but there remain many problems. First, there is the preliminary question of what constitutes an expropriation.437 In considering this question, it is useful to start with the neutral term ‘taking’, which identifies an economic consequence (a reduction in the value of the investment) without directly speaking to the legal status of the government action. We can then ask whether a taking is an expropriation under international law, whether it is lawful or unlawful, what the consequences are and what non-expropriatory takings are and how they should be treated. Note, in particular, that not all takings are expropriations under international law. As discussed below, this set of non-expropriatory takings includes those carried out for what we term a ‘super’ public purpose or public welfare as well as takings incidental to normal government action. That such takings are not expropriatory, however, does not mean that they are necessarily lawful and non-compensatory. We must, therefore, consider questions of both legality and compensation for both expropriatory and non-expropriatory takings. A full inquiry into the rules governing expropriation, thus, must address three questions: Is a taking expropriatory or non-expropriatory? Is it lawful or unlawful? Is it compensable or non-compensable? Though these questions are related, they each involve different legal issues and must each be answered separately. As is often true with international law inquiries, we should begin by considering the background rules provided by CIL. Beyond its rules on expropriation, CIL provides for a minimum standard, sometimes equated to the need for fair and equitable treatment (F&E).

435 The following is an updated and edited version of Dalhuisen and Guzman (n 356). 436 As a starting point, we may still take the Libyan Petroleum cases, BP Exploration Company (Libya) Limited v Government of the Libyan Arab Republic [1973/1974] 53 ILR 297; and Texaco Overseas Petroleum Company and California Asiatic Oil Company v The Government of the Libyan Arab Republic [1977] 53 ILR 389, and (the Aminoil case) Government of Kuwait v American Independent Oil Company [1984] Award of 24 March 1982 66 ILR 518 and 21 ILM 976. They moved the concept of expropriation forward under customary international law. Aminoil stated that expropriation could be legal provided that compensation was paid. Under customary international law, the measure of damages remained unclear. As is well known, the Hull formula requiring full compensation, normally adhered to in modern BITs, has been heavily contested as the absolute standard under customary international law. It has been applied with substantial variations, not least because the concept of full compensation itself is not clear. It raises obvious valuation questions and in particular the question of the inclusion of future profits and their calculation, issues not discussed here. 437 Early on Gordon Christie and later Rosalyn Higgins reflected on this issue without, significantly, arriving at clear answers, see GC Christie, ‘What Constitutes a Taking Under International Law’ (1982) 38 British Year Book of International Law 307; and R Higgins, ‘The Taking of Property by the State: Recent Developments in International Law’ (1982) 176 Recueil des cours—académie de Droit international 259.

Volume 2: Foreign Investment Arbitration 233 The distinction between the minimum standard and F&E under CIL is largely a matter of semantics in the context of international investment law. F&E appears to be the modern expression of the traditional minimum standard developed under CIL.438 In treaty law, as is well known, F&E may go no further, but at times it may be expansive and provide some additional protection, although there is often still a question how much and in what areas. This may be relevant, as we shall see, in the area of non-expropriatory takings, their legality, and the question of compensation in the case of their illegality, but F&E may also define better the protection against expropriation proper. At least with respect to what might be called direct expropriation—meaning expropriation that affects the legal title of an asset or its management—expropriation clauses in investment treaties provide significant guidance with respect to the question of legality. However, the way in which they define and approach the meaning of expropriation and, in particular, their use of the distinction between direct and indirect expropriation, may create more confusion than clarity. A tribunal must obviously accept an investment treaty as written and so must apply the text, and this is what the key cases on the subject try to do. The legal system governing expropriation would be more straightforward, however, if the direct/indirect distinction were discarded. Further clarification is here relevant and may then also affect the interpretation of these texts. Moreover, although investment treaties often distinguish direct and indirect takings (for example the US Model BIT), they normally fail to address the legality of either type of takings with sufficient precision to make clear when they are permitted, when they are unlawful and what the precise recourse is.439 In the following an attempt will made to simplify and clarify a long discussion on these subjects and to provide a framework in which the cases, in so far as we have them, may fit better and the choices may become clearer. Directly relevant cases will be cited, but no claim is made to an exhaustive discussion.440

3.4.2. Takings and Expropriation To make progress in the area of takings in international law requires, foremost, greater clarity with respect to the vocabulary used.441 An attempt is therefore made to clarify the terminology. To begin with the broadest category of governmental acts that concerns us here, they are ‘takings’. A taking in its most general meaning is any host governmental action that negatively

438 See H Haeri, ‘A Tale of Two Standards. “Fair and Equitable Treatment” and the Minimum Standard in International Law’ (2011) 27 Arbitration International 27. The F&E treatment language is not traditional in customary international law, which more commonly continues to use the reference to the ‘international minimum standard of treatment of aliens’, see further the discussion in s 3.1 above. 439 See LY Fortier and SL Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know it When I see it, or Caveat Investor’ (2005) 13 Asia Pacific Law Review 79. See further also the discussion in s 3.2.1 above and s 3.4.4 below. 440 The approaches under these various types of rules may not always be equated and some are more political than others. Where necessary these differences will be highlighted, see for example, n 449 below. 441 See the pioneering article by Thomas Waelde and Abba Kolo, ‘Environmental Regulation, Investment Protection and “Regulatory Taking” in International Law’ (2001) 50 ICLQ 811. Besides the sources mentioned, other key materials have been researched for clues, especially the ILC’s Responsibility of States for Internationally Wrongful Acts and the Energy Charter Treaty.

234 Volume 2: Foreign Investment Arbitration affects the economic value of the foreign investment.442 One way to understand when a taking occurs is to view the foreign investment as a bundle of rights (and obligations). A taking has occurred if a government measure negatively affects one or more of these rights. This definition focuses on value reduction and so encompasses both direct and what is commonly termed creeping or indirect expropriation.443 It is also useful when considering the 2012 US Model BIT which, in Annex B, states that an action cannot constitute an expropriation unless it ‘interferes with a tangible or intangible property right or property interest’. The same Annex states further that ‘an adverse effect on the economic value of an investment’ is not sufficient, by itself, to constitute an indirect expropriation.444 The proposed use of the term taking is thus consistent with what the US BIT describes as ‘interference with property rights or interests’. A taking may be expropriatory or non-expropriatory, lawful or unlawful, compensable or non-compensable.445 Before turning to the question of which takings constitute expropriation, it is helpful to set aside altogether government actions which affect the value of an investment but do so only minimally. At the outset it may be recalled that the term ‘expropriation’ remains commonly undefined in BITs and investment agreements. Case law may come to the rescue. Glamis446 asserts in this connection that for a taking to constitute an expropriation, there must be some minimum economic impact on the investment. If this minimum is not reached, we can still talk of a taking in as much as some value has been lost, but it is not legally cognisable under international law. There may still be some remedy available under local (host state) law, but the investor is otherwise without recourse. It must be correct that some level of takings ought to be considered de minimis.447 If nothing else, this result is a practical necessity. Virtually any government action that affects the economy will have some, however small, impact on foreign investment. To provide one simple example, 442 For the emphasis on a ‘material and functional analysis’ of the effect and on the ‘equivalent economic effect’ see also Waelde and Kolo (n 441) 813. A formal or title-based approach is rejected by them and the economic meaning of a ‘taking’ moved to the centre. It is now commonly considered that the focus of the analysis of an expropriation is the effect of the host state’s measures on the investor’s property, the so-called ‘sole effect doctrine’ confirmed in Tippetts, Abbett, McCarthy, Stratton and TAMS-AFFA Consulting Engineers of Iran v Islamic Republic of Iran [1984] 219–25 (6 Iran-US CTR). It is the ‘reality of their impact’ that is important. See also Compañia de Aguas del Aconquija SA and Vivendi Universal SA v Argentina [2007] Award Case ARB/97/3 para 7.5.20 ICSID. ‘While intent will weigh in favour of showing a measure to be expropriatory, it is not a requirement, because the effect of the measure on the investor, not the state’s intent, is the critical factor.’ 443 See also the references in s 3.2.1 above. 444 US Model BIT (2012), Annex B.4(a)(i). 445 An investment, for our purposes, is any form of property entitled to protection under international law (whether treaty or CIL). This type of property should not be confused with more traditional private law notions. In particular, it need not be operated and transferable in a similar manner and may be subject to different public order or public policy constraints. Rather, this kind of ‘property’ operates more in the way of a licence, see the discussion in s 3.1.2 above, therefore as an implicit administrative law facility created under and covered by public international law. This does not mean, of course, that part of the investment may not take the form of ordinary private law facilities, such as the ownership of land and buildings, equipment, inventory, receivables and cash in the host country. There may also be specific governmental permits in that context. 446 Glamis Gold Ltd v United States of America [2009] NAFTA/UNCITRAL Award, paras 357, 536. See the next note for the issue whether the governmental action needs to be substantial in order to support a claim for expropriation. It may have to be confiscatory at least in the case of a non-expropriatory taking for a damage claim, s 3.4.6 below. 447 The requirement for a substantial deprivation was mentioned in Pope & Talbot Inc v Canada [2000] Interim Award 122 ILR 316 s 102 (UNCITRAL); Sempra Energy International v Argentina, [2005] Case ARB/02/16 s 284; and Tecmed v Mexico [2006] Case ARB (AF)/00/2 10 ICSID Reports 54 para 115. In Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania [2007] 464 Case ARB/05/22 (ICSID), it was confirmed that effects of a certain severity must be shown to qualify an act as expropriatory, there being nothing to require, however, that such effects be

Volume 2: Foreign Investment Arbitration 235 a successful effort to improve social programmes will affect the labour force and may create at least some small upward pressure on wages. It is inconceivable that every foreign investor would be insulated against these sorts of changes to the business environment. These de minimis takings, then, do not, and should not, rise to the level of being legally relevant to an expropriation analysis. The example of a de minimis taking is a helpful starting point for the discussion because it demonstrates that a government taking need not be expropriatory. The key distinction between the terms is that a taking is defined in an economic sense whereas an expropriation is a legal term. A taking is a necessary condition for an expropriation, but it is not sufficient. We are interested, then, in identifying the sufficient conditions for an expropriation. Put another way, beyond the de minimis exception, we would like to know when a taking is non-expropriatory and when it is expropriatory. The most convenient approach, and one we follow below, is to define those takings that are non-expropriatory and identify those that remain as expropriatory. It is submitted that a taking that is more than de minimis is non-expropriatory if it belongs in either of two categories: (i) takings that promote public welfare (also referred to as ‘super’ public purpose), a category that includes health, safety and security;448 and (ii) takings that are incidental to legitimate, ordinary government action.449 These two categories are simple enough to label, but harder to define with precision.450 These two forms of non-expropriatory takings and the strictly economic. In Tippetts, see n 442 above, the Iran-US Claim Tribunal held that it was not even necessary for the host government to acquire anything of value. Legal title to the property need not be affected. The interference may, for example, be the appointment of new management, an issue of particular relevance in many Iran–US cases. It has been observed that there may not be much difference between substantial and total deprivation, as was found to be necessary in Venezuela Holdings et al. v Venezuela, ICSID Case No ARB/07/27 Award 9, 2014, para 286, see further Total SA v Argentina, ICSID Case No ARB/04/01 (2010) para 195. See Chemtura v Canada, UNCITRAL Award August 2 2010, para 249 for a more circumspect approach. Difficulties may arise when there is still some income and future cashflows must be determined to reach a reliable valuation, see also n 442 above. As discussed further below in s 3.4.6, the level of deprivation required for non-expropriatory takings to become compensable may be greater than for expropriatory takings. At this stage of the discussion the key is that for takings to become legally relevant in terms of foreign investment protection, there must be some minimum level of economic damage. 448 See also Christie (n 437) 338: ‘The existence of generally recognized considerations of the public health, safety, morals or welfare will normally lead to a conclusion that there has been no “taking”’. Note here the denial of a taking altogether. What should have been said is that there is no expropriation. 449 Case law under the Iran-US Claims Tribunal referred to the ‘police power of states’, see eg Too v Greater Modesto Insurance Associates [1989] Award 378 (23 Iran-US CTR) where the Tribunal found that ‘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 …’. See also Sedco, Inc v National Iranian Oil Co [1985] 248–75 (9 Iran-US CTR), where the Tribunal recognised the existence of ‘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’. The principle has also been confirmed in more recent investor–state arbitrations, see eg Saluka v Czech Republic [2006] UNCITRAL Partial Award. ‘It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare’. We may see here a distinction between ‘super’ public purpose or welfare and incidental takings and the connection with regulation, but it is not clear what may qualify as such. 450 The Iran-US Claims Tribunal for technical and political reasons tried to distinguish takings that it considered legal but still subject to some interference which then made them compensable, see Amoco International Finance Corp v Government of the Islamic Republic of Iran [1987–1988] Award 310-56-3 and 27 ILM 1314 (Iran-US CTR); and Mobil Oil Iran, Inc v Government of the Islamic Republic of Iran [1987] Award 311-74/76/81/150-3 (Iran-US CTR), but they did not fall under the category of non-expropriatory takings and were in substance considered expropriations. See also GH Aldrich, ‘What Constitutes a Compensable Taking of Property? The Decisions of the Iran-United States Claims Tribunal’ (1994) 88 American Journal of International Law 585. It shows that decisions of this nature may be tailored to a particular framework or institutional regime of dispute resolution and

236 Volume 2: Foreign Investment Arbitration distinction between them are addressed in the next two sections. It follows from this approach that all other takings are in principle expropriatory unless de minimis.

3.4.3. Public Welfare and Non-expropriatory Takings A taking that promotes public welfare is termed a non-expropriatory taking. The 2012 US Model BIT is fairly clear (at least relative to many other treaties) on this question. In section 4(b) of Annex B it states 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.451

This is, of course, just one example from a single model treaty, but it illustrates the existence of this category of takings that are considered non-expropriatory because they are based on public welfare considerations. The next question, of course, is to clarify what counts as ‘public welfare’. The older term ‘police powers’ are still used and there may also be the issue of ‘necessity’. There is no perfect clarity to be found here in what constitutes public welfare in this sense, but in the case of the US BIT at least, health, safety and the environment are included as a non-exhaustive list of policies that may satisfy the public welfare requirement.452 The treaty language, then, is helpful, but falls well short of a complete definition of the term ‘legitimate public welfare’. Beyond the treaty language, one can look to the relevant case law. Though the issue has come up in some cases, tribunals have provided at best only modest guidance on this question. Indeed, there are at least some instances in which different tribunals have reached contradictory conclusions. Consider, for example, the cases of Methanex and Santa Elena.453 Both involved measures aimed at environmental protection and both raised the question of whether takings of this sort constitute a compensable expropriation. The tribunal in Methanex stated that: [A]s a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.454

are therefore not necessarily conclusive or even persuasive in other contexts. There is in any event no rule of binding precedent in international law and, even if there was, arbitral awards might not qualify. See for further comments of this nature, SR Ratner, ‘Regulatory Takings in Institutional Context: Beyond the Fear of Fragmented International Law’ (2008) 102 American Journal of International Law 475. 451 United States Model BIT, Annex B 4(b) (2012). 452 The text can be read to suggest that direct takings (however defined) even for welfare or environmental purposes are still expropriations. This is not the line followed here. It further admits that in ‘rare circumstances’ indirect regulatory takings may still be illegal. Again, it does not say what these circumstances and the consequences are, especially in terms of compensability. 453 For an overview of the interplay between environmental protection and international investment law, see Kyla Tienhaara, The Expropriation of Environmental Governance—Protecting Foreign Investors at the Expense of Public Policy (Cambridge, 2009). 454 Methanex Corp v United States of America [2005] Award 44 ILM 1345. The issue of specific commitments is an important one and we return to it in s 3.4.5 below. The conclusion that these takings are then automatically noncompensable is questioned below and is a key issue.

Volume 2: Foreign Investment Arbitration 237 The Santa Elena tribunal took a different view of environmental measures, stating that: 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.455

In Methanex, then, an environmental measure that is non-discriminatory and for a public purpose was judged not to be an expropriatory taking unless the host state had given some specific commitments to the contrary to the investor.456 Methanex goes farther than this author would in as much as it declares that any non-discriminatory regulation for a public purpose is nonexpropriatory (and also non-compensatory) as long as due process is satisfied and no specific commitments are given. The author does not see here a ‘matter of general international law’ and prefers that only a narrower category of ‘super’ public purpose be considered non-expropriatory. In contrast to Methanex, Santa Elena took the view that the public purpose of the measure was irrelevant. Thus, the fact that the measure in question was an environmental measure was not decisive to the question of whether or not there was an expropriation.457 The lesson here is that not all environmental measures are universally recognised as satisfying the elusive requirements of a ‘super’ public purpose.458 As a minimum, the question depends on the facts and circumstances of the case, the views of the particular tribunal and, of course, any relevant language in the applicable treaty.459 Beyond the available investment cases, one can turn to soft law sources in an attempt to clarify the content of the ‘super’ public purpose category. The so-called Harvard Draft Convention on International Responsibility of States of 1961460 referred to tax, currency, public order, health or morality, exercise of belligerent rights or actions otherwise incidental to normal state action. EU law may instruct us further. Under European law governments may not take action that impedes the free movement of goods, services and money or the freedom of establishment unless the relevant government measure is motivated by reasons of health, safety and security (Articles 36, 52 and 62 TFEU). Though these rules are not primarily about investment, they 455 Compañía de Desarrollo Santa Elena SA v Costa Rica [2000] Award 39 ILM 317 72 (ICSID). 456 The tribunal also required that the commitments be made prior to the investment. 457 One might seek to distinguish Methanex from Santa Elena on the grounds that the former was a ‘regulatory’ taking while the latter was a direct taking. The Santa Elena reasoning, however, was extended to regulatory takings in Tecmed v Mexico [2004] Case ARB (AF)/00/2 43 ILM 133 (ICSID) in which the Tribunal relied on Santa Elena and stated (para 121) that it did not find ‘[any] principle stating that regulatory administrative actions are per se excluded … 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’. 458 Another example is provided in Metalclad Corporation v Mexico [2001] Case ARB(AF)/97/1 40 ILM 36 (ICSID). In that case Mexico issued an ‘Ecological Decree’ to establish a Natural Area for the protection of rare cactus. Metalclad argued that this decree precluded the operation of its landfill facility (p 59). The tribunal concluded that this decree was enough to constitute an expropriation, implying that in the eyes of the tribunal this form of taking is not what has been labelled ‘super’ public purpose here. 459 Note that in Marvin Roy Feldman Karpa (CEMSA) v United Mexican States [2003] Case ARB (AF) 99/1, 42 ILM 625 (ICSID), the NAFTA Tribunal confirmed that ‘governments must be free to act in the broader public interest through protection of the environment, new or modified tax regimes [etc]’. So much is clear but it should be noted that this does not by itself imply that there is no cause for compensation. Indeed, it will be submitted that it is this (widespread) assumption that stands in the way of a more rational analysis. It may be recalled that the US Restatement (Third) of Foreign Relations Law refers here to general regulation ‘commonly accepted as within the police power of States’. This suggests a margin for appreciation but also that any resulting takings are non-compensable. Again, in the thesis here presented, that remains to be seen and must be the subject of further analysis. 460 (1961) 55 American Journal of International Law 554.

238 Volume 2: Foreign Investment Arbitration offer a list of public welfare objectives sufficient to override important policy considerations. Host countries may still impose their own rules in these areas if the issues are sufficiently pressing, always subject to the requirement of proportionality and non-discrimination. But the ECJ has introduced some other categories under the notion of the general good where host country action may also remain appropriate, subject mainly to four conditions: the action must be justified by imperative public purpose requirements, must be non-discriminatory, suitable to achieve that purpose, and proportional.461 This is very much in line with what one has in mind when one speaks of public welfare or ‘super’ public purpose. The EU approach has even developed the same kinds of safeguards as those present in the international law of foreign investments. The ECJ has adopted an expansive notion of the general good, one that goes well beyond simply health, safety and security. The key line of reasoning was first formulated in the EU through case law in 1979,462 and became important in the financial services area pursuant to the German insurance case in 1986 used in the area of consumer protection.463 It has since been expanded to the protection of workers,464 the protection of creditors, and the proper administration of justice.465 It is also used for social protection,466 to retain the cohesion of the local tax regime,467 to preserve the good standing of the local industry,468 to prevent fraud,469 and in certain other special situations.470 Environmental issues are notably absent from this list, though they would perhaps be included if an appropriate case presented itself to the ECJ. EU case law and the Harvard list are not conclusive but, it is submitted, provide useful guidance. In the EU, the general good became in this manner a general and overarching concept, which could also be deemed to include the security, safety and health exceptions to the free movement of goods and the freedom of establishment, which the EU Treaties themselves had introduced. But although an expansive concept, it remains constrained and the EU in its Directives and Regulations tries to define and limit it in its effect on the free flow of goods, services and money, the essence of the internal market.471 This constraint derives from the nature of the relationship between the Member States and the treaty objectives themselves, especially because the resulting curtailment of cross-border movement goes against the basic concept of the Union and the operation of one open internal market. Nevertheless, in appropriate cases there is public policy of a national nature that overrides the internal market policy. International law may intervene here as well. The arbitral tribunal in Eureko BV v Slovak Republic472 suggested as much in a conflict 461 Case C-55/94 Reinhard Gebhard v Consiglio dell’Ordine degli Avvocati e Procuratori di Milano [1995] ECR I-4165. This entire area is of great importance in the EU and the operation of its internal market has given rise to highly important case law, to which Gebhard provides perhaps the best introduction. This case law can only be signalled here and summarised in the briefest of ways. Note that Waelde and Kolo (n 441) also make particular reference to EU case law although being less specific. 462 Joined Cases 110/78 and 111/78 Van Wesemael [1979] ECR 35. 463 See Case 205/84 Commission v Germany [1986] ECR 755. 464 Case 279/80 Re Alfred John Webb [1981] ECR 3305. 465 Case C-3/95 Reisebüro Broede v Gerd Sandker [1996] ECR I-6511. 466 Case C-272/94 Guiot [1996] ECR I-1095. 467 Case C-204/90 Bachman [1992] ECR 249. 468 Case C-384/93 Alpine Investments BV v Minister van Financien [1995] ECR I-1141. 469 Case C-275/92 Schindler [1995] ECR I-1039. 470 See Case 62/70 Coditel v Ciné-Vog Films [1980] ECR 881 in connection with the protection of intellectual property; Case C-180/89 Commission v Italy [1991] ECR 709 in connection with the preservation of the national heritage; Case C-353/89 Mediawet [1991] ECR I-4069 in connection with cultural policy; Case 55/93 Van Schaik [1994] ECR I-4837 in connection with road safety, perhaps extendable to environmental matters more generally. 471 In the financial area more particularly in the Markets in Financial Instruments Directive (MiFID 2004) and its implementation Directive and Regulation, see Vol 5, s 3.5. 472 PCA Case no 2008-13 (2010).

Volume 2: Foreign Investment Arbitration 239 between a BIT and EU public policy and it would then be higher than EU law.473 The conclusion is that treaty provisions do not stand alone or in a vacuum. Not being subject to these constraints, it is likely that the notion of the general good, or ‘super’ public purpose, in this sense has a more liberal and broader application in the international law of foreign investments. If so, the expropriation provisions of investment treaties would leave states with more, rather than less, authority to regulate their economies. On the other side of the balance, however, the F&E obligation might be interpreted strictly on the grounds that doing so promotes cross-border investment and is consistent with the preamble of many BITs. There may, therefore, be some tension between expropriation rules and F&E, and the way a tribunal perceives this relationship may affect its decision. Neither investment treaties nor arbitral decisions provide enough clarity to specify the precise contours of available public policy objectives sufficient to render a taking non-expropriatory. For this reason, it remains necessary to manage the issue on a case-by-case basis, accepting that tribunals may not always agree. What matters most is that the focus of the inquiry should remain on the question of whether or not a particular regulation is a matter of public welfare or ‘super’ public purpose. As the cases mentioned above show, not any public purpose will do. If there is public welfare or ‘super’ public purpose, however, the taking should be considered non-expropriatory. As we shall see, this still leaves the question of when these takings are lawful or unlawful and when they are compensable.

3.4.4. Incidental Government Takings as Non-expropriatory Takings The second category of non-expropriatory takings consists of those that are incidental to ordinary government action. As an initial matter it is worth repeating the point from the prior section— if takings are public welfare takings, they are non-expropriatory. In that case, no inquiry into whether or not they are incidental to normal government activity is required from an expropriation perspective. The objective of this section, then, is to shed light on how and when takings that are not specifically in pursuit of public welfare could still be considered non-expropriatory. As is true throughout the field of expropriation, the boundaries can be difficult to discern, but it is nevertheless true that government actions taken as part of normal public functions and which incidentally lead to a taking are often not considered expropriatory.474 This class of takings is sometimes referred to as ‘regulatory’ or ‘indirect’. It may be better to avoid this terminology because it seems that it obscures more than it clarifies. The term ‘regulatory’ evokes a narrower range of government activities that are often thought of as ‘regulation’. Normal tax policy, for example, is not typically characterised as ‘regulatory’ though it

473 See also AES Summit Generation Ltd & AES-Tisza Eromii Kft v Republic of Hungary [2010] Case Arb/07/22 (ICSID). 474 cf Saluka Investments BV v Czech Republic ICC 210 (2006) para 263, ‘international law has yet to identify in a comprehensive and definitive fashion precisely what regulations are considered “permissible” and “commonly accepted” as falling within the police or regulatory power of States and, thus, non-compensable. In other words, it has yet to draw a bright and easily distinguishable line between non-compensable regulations on the one hand and, on the other, measures that have the effect of depriving foreign investors of their investment and are thus unlawful and compensable in international law’. Note here again the idea that these takings are non-compensable. They are non-expropriatory, but may still be compensable, see s 3.4.6 below. cf also the 2004 OECD Report Indirect Expropriations and the Right to Regulate in International Investment Law, which hardly clarifies these issues.

240 Volume 2: Foreign Investment Arbitration can certainly lead to a taking, which if incidental to normal government activity, would be non-expropriatory but could still be unlawful and compensable.475 The term ‘indirect’ is also problematic because the conventional understanding of the term does not accord well with the legal requirements for an expropriation. Government actions that amount to a taking can be quite direct and yet still be incidental to regular government activity. Taxes once again provide an example. The taxation of an investment is most accurately described as direct. To be sure, a general form of taxation is not targeted, but it is a direct taking nonetheless. Securities laws and other information disclosure requirements offer other examples. These requirements are incidental to government action, but their impact on firms will often be direct rather than indirect. Requiring, for example, the disclosure of information considered sensitive to the firm seems better described as a direct taking rather than an indirect one. The term ‘takings incidental to normal government activity’ fits the needs of the moment considerably better. Such takings are the result of burdens imposed by host governments in the normal exercise of their public functions in a non-discriminatory fashion. The requirement that the activity be in the normal exercise of a government’s public functions excludes essentially commercial activities. Thus, for example, the failure of a government to pay bills owed to a foreign investor would not be a typical public function, and so would not fit under this category. As the above discussion suggests, the class of takings incidental to normal government activity may encompass a great deal. There is little limit on what fits within the category other than the requirements that they be non-discriminatory and carried out in the exercise of a public function. They may even be ‘super’ public purpose, but the essence is that all are nonexpropriatory. This leads to the question of how to handle especially confiscatory takings of this nature. Such takings are sometimes viewed as the paradigmatic example of expropriation and many investment treaties treat such takings as such. The US Model BIT, for example, distinguishes ‘direct expropriation, where an investment is nationalised or otherwise directly expropriated’ from ‘indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without a formal transfer of title or outright seizure’.476 The definitions provided in the US treaty should make it clear why distinguishing between direct and indirect expropriation is problematic. If an indirect expropriation has ‘an effect equivalent to direct expropriation’, why should the law treat the two differently? A further example may clarify. In a crisis situation, a host state may nationalise all nuclear power plants. It might instead change all management or it may try to micro-manage all nuclear power plants in a non-discriminatory manner through regulation. This may even come about ‘indirectly’ by imposing new regulation on all public utilities of whatever nature. All can agree that the measures are for public welfare or otherwise incidental to government action. The result is a non-expropriatory taking. The essence is not how it is done but the question for the investor is the reduction in value of the investment, after having complied with all previous requirements, and what its remedy still is.

In this connection it may also be noted that case law accepts that in the exercise of a state’s regular powers, in extreme cases the imposition of taxes may indeed still be tantamount to expropriation, see Burlington Resources Inc v Republic of Ecuador, Decision on Liability, ICSID Case No ARB/08/5, IIC 568 (2012), but again it would appear better to talk here of an non-expropriatory taking becoming confiscatory, therefore still requiring some compensation but again not necessarily full compensation as the reference to expropriation would otherwise appear to suggest. 475 See for the consequences in terms of protection and compensation, WM Reisman and RD Sloane, ‘Indirect Expropriation and its Valuation in the BIT Generation’ (2004) 75 British Yearbook of International Law 115. 476 2012 US Model BIT, Annex B.3-4 (2012).

Volume 2: Foreign Investment Arbitration 241 Thus, despite the common distinction made in treaties between direct takings, relying on the way in which formal title is handled, and other takings, it is submitted that it makes more sense to group takings as done above—based on whether they are incidental to normal government activity (or specially targeted public welfare takings). As such, there is no need to distinguish between direct and indirect expropriation, see also the discussion and cases in section 3.2.1 above. It is clear that a seizure of property and title could be incidental to normal government activity and would not automatically be considered an expropriation, even if it were confiscatory. The proposed analysis is, of course, normative rather than positive. It assumes that the prevailing treaty law is consistent with the approach outlined. To the extent an applicable treaty provides clear guidance it must be followed. So, for example, if a treaty distinguishes direct from indirect takings, a Tribunal must consider the relevant text. Under the US Model, as mentioned above, an outright seizure of a foreign investment is seen as an expropriation. Under the treaty, then, a taking of title represents an exception to the above comments about takings incidental to normal government activity (and, for that matter, to the comments about public welfare takings). Even here, however, the proposed approach is useful as it provides a more coherent and tractable approach to the question of whether a taking is expropriatory and if this approach may be more widely understood and accepted, it could have an effect on treaty interpretation.

3.4.5. Lawful and Unlawful Expropriations. Non-expropriatory Takings and the Meaning of the F&E Clause Having described expropriatory and non-expropriatory takings, the question of lawfulness, which arises in both categories, is now considered. Only thereafter can the matter of compensation be determined. When a taking is expropriatory, we must then inquire into its lawfulness under international law. The familiar rule is that an expropriation made for a public purpose and in a non-discriminatory manner is lawful if compensation is paid. The precise level of compensation required is more contentious, but there is wide agreement that some compensation is needed. Most investment treaties, of course, require full compensation. In addition to these requirements, one can add that the expropriation must not violate due process or F&E. In other words, there is a connection between the legality of expropriation and the obligation of F&E. This relationship is explicit in many treaties, including the US Model BIT and NAFTA, which provide that an expropriation is lawful only if it complies with international minimum standards (which, in turn, are defined in the BIT as encompassing F&E).477 The F&E obligation, then, has at least two parts to play within the context of most investment treaties (and may also still have a CIL component beyond it). The first, as just mentioned, is as one of the elements, along with non-discrimination, public purpose and compensation, required to make an expropriation lawful.478 F&E here increases the chance that an expropriation is unlawful and connects it with a potentially expansive interpretation of the F&E concept. Its second role is as a stand-alone obligation within the treaty. Indeed, a violation of the F&E provision may constitute an independent violation, even if there is no expropriation. The third role is conceivably filling in the lacunae or gaps in the treaties. 477 US Model BIT, Arts 5, 6; NAFTA Arts 1105, 1110. 478 See also the discussion in s 3.2.1 above.

242 Volume 2: Foreign Investment Arbitration The first two roles for F&E have significant overlap. Where a lawful expropriation requires that F&E be provided, a failure to meet that standard will yield two violations—an expropriation and a violation of the F&E clause itself. In either case, some compensation is required, although compensation does not automatically cure the F&E violation. Including the F&E requirement within the definition of expropriation may make little practical difference since even if it is not included there, it enters as an independent requirement for legality. In either case it seems that full compensation is likely to be ordered by a tribunal. This was the result in Metalclad, where lack of transparency in the regulatory regime was (contentiously) deemed a violation of F&E under Article 1105, which was deemed to require full compensation under Article 1110.479 Next the lawfulness of a non-expropriatory taking needs consideration. A non-expropriatory taking obviously does not violate the prohibition on expropriation, and so we must look elsewhere for a potential violation. One familiar pattern involves special government undertakings. There is some support in case law for the notion that the F&E provision converts a breach of special government undertakings or other assurances provided by the host government into a breach of the treaty resulting, potentially, in an unlawful expropriation.480 This approach, which renames a taking that would otherwise not be an expropriation as expropriatory simply because the government made some assurances to the investor, is resisted. It seems more sensible to acknowledge that a non-expropriatory taking can be a violation, and that this violation operates through the F&E obligation and that this may be so especially when government undertakings are breached. The key implication for present purposes is that takings we describe as non-expropriatory might be deemed unlawful. If the issue of lawfulness comes down to a breach of a government undertaking, the question goes to whether a sovereign can bind itself to commitments made through an investment agreement.481 This was already raised in sections 3.1.2 and 3.2.1 above. What may here be the significance of reliance? If viewed as an inquiry of the content of the F&E obligation, we must ask at what point do government representations become so significant that a failure to honour them amounts to a violation of that obligation? There is no consensus on this point.482 Whatever the answer, it is clear that a more expansive interpretation of the F&E obligation (under the relevant treaty or CIL) would increase the likelihood that a non-expropriatory taking is unlawful.

479 Metalclad Corp v Mexico [2001] Award 5 ICSID Reports 209 (ICSID). Quite apart from the contentious expansion of the concept of fair and equitable treatment in this case, it would appear that the conclusion that a breach of Art 1105 may amount to an expropriation is correct. The reasoning in SD Myers, Inc v Government of Canada [2001] Partial Award 40 ILM 1408, decided at virtually the same time without apparently the benefit of knowledge of the opinion in the other case, may here be contrasted. In SD Myers, the Tribunal decided that there was a breach of fair and equitable treatment under 1105 NAFTA but it saw no expropriation and therefore decided on compensation according to its discretion. In neither case was there a public welfare taking or one incidental to ordinary governmental action, so in the analysis here defended and given the damage to the investment, there would indeed have been an expropriation: Metalclad was right. Full compensation would have been the standard, although in practice that may not have been different from compensation awarded for the ‘material harm inflicted’ in SD Myers. If there had been a non-expropriatory taking, the discretion in the matter of compensation (presumably under the fair and equitable treatment clause) would have been more understandable. 480 See eg Saluka (n 361) para 302; Metalclad (n 479) para 103; Generation Ukraine, Inc v Ukraine [2005] Award Case ARB/00/9 44 ILM 404 (ICSID), para 20.37; Methanex (n 454) IV D para 7. The Methanex Tribunal actually focused on ‘specific commitments’ with regard to public purpose takings, see text accompanying n 454 above. 481 On this matter, see Dalhuisen and Guzman (n 356) and for the issue of reliance nn 338 and 481 above and s 3.4.6 below at n 490. 482 Compare Glamis Gold (n 446) para 616; and Merrill & Ring Forestry LP v Canada [2010] NAFTA/UNCITRAL Award 210.

Volume 2: Foreign Investment Arbitration 243 The most common starting point for analysis of the F&E requirement is still the Neer case,483 which is quite minimalist and protects only against exorbitant treatment.484 It is possible for the Neer standard to reach flagrant breaches of earlier undertakings, but only if they are egregious. Some recent cases have tried to soften the Neer standard. ADF notes that the concept evolves over time so a state’s obligation reflects the requirement ‘as it exists today’.485 In Pope and Talbot486 the Tribunal dispensed with the Neer requirements that the conduct be ‘“egregious,” “outrageous” or “shocking,” or otherwise extraordinary’.487 In the recent Merrill & Ring case,488 business considerations were given greater weight, which served to lower the threshold necessary to find a violation of F&E. On the other hand, Genin489 and Methanex show how hesitant arbitrators were and probably remain to judge the regulatory policies of host states and to consider any resulting takings unlawful in the absence of bad faith. This is hardly an area in which the law is clear, but it can be said with some confidence that the host government intervention must be (objectively) quite bad, perhaps even requiring that it be idiosyncratic or vindictive. That appeared the message in Glamis. A less expansive notion of F&E means that the taking is more likely to be lawful, a more expansive notion increased the likelihood of unlawfulness. Host government undertakings then also raise the matter of investor reliance on such assurances and their legal meaning under international law. With respect to these undertakings, one view is that it may be assumed that investors realise that a government has it within its sovereign powers to change its mind and so reliance on such statements may not be justified, although arbitrators in some cases have been more indulgent.490 It is not the purpose here to expand on

483 LFH Neer and Pauline Neer (USA) v United Mexican States [1926] 4 RIAA 60 21 AJIL (1927) 555 (US–Mexico General Claims Commission). 484 See Glamis Gold (n 446) para 616. But see Merrill & Ring (n 482) para 210 (suggesting a lower standard). 485 ADF Group Inc v USA (2003) 18 ICSID Review: Foreign Investment Law Journal, 6 ICSID Reports 470 (ICSID). 486 Pope and Talbot v Canada [2001] Award on Merits 7 ICSID Reports 102, 122 ILR 352 (ICSID). The intervention of the NAFTA Fair Trade Commission and its restrictive interpretation, the discussion whether this amounted to amendment and on the retroactive effect are not further considered here. By tying the interpretation to the rights of aliens, the standard of protection under the F&E clause became the one accorded to local investors but that is a repeat of the national treatment clause except if the element of ‘effective market access’ were also included, a concept not tested so far in this connection. 487 Pope and Talbot (n 486) para 118. 488 Merrill & Ring (n 482). 489 Genin v Estonia [2001] 6 ICSID Reports 241, 17 ICSID Review: Foreign Investment Law Journal 39 (ICSID). 490 We enter here the world of the rights and obligations as between governments operating in their public capacity and private parties, which is the remit of administrative law. Concessions or similar investment agreements can be conceived of as administrative contracts and have often been so characterised in investment arbitrations, see ss 3.1.2 and 3.3.4 above. The consequences of such a characterisation remain unclear, because international law did not traditionally cover these relationships and has not yet developed a clear notion of administrative law. Arbitrators struggle with this although the subject is receiving increasing attention. See Hernán Pérez Loose, ‘Administrative Law and International Law’ in P Bekker, R Dolzer and M Waibel (eds), Making Transnational Law Work in a Global Economy, Essays in Honour of Detlev Vagts (Cambridge, 2010) 380. See also Rudolf Dolzer, ‘The Impact of International Investment Treaties on Domestic Administrative Law’ (2005) 37 International Law and Politics 953–72. See for reliance also nn 338, 427 and 481 above. In (UNCITRAL Rules) Czech Republic BV the Netherlands) v Czech Republic Partial [2001] IIC 61, the Tribunal found that the government ‘breached its obligation of fair and equitable treatment by evisceration of the arrangements in reliance upon which the foreign investor was induced to invest’. In Tecnicas Medioambientales TECMEDS v United Mexican States [2003] Case ARB (AF)/00/2, IIC 247 (ICSID), the Tribunal considered that the fair and equitable provision of the relevant BIT ‘in the light of the demands of good faith required by international law, requires the Contracting Parties to the Agreement to accord

244 Volume 2: Foreign Investment Arbitration this important discussion except to say that notions of reliance and good faith operate potentially quite differently from the private law of contract and they may play out in other ways, especially when governments give these undertakings in the exercise of their public function (de jure imperii). But even if they act as ordinary commercial partners (de jure gestionis), they may still have special ways out of the contract or similar undertakings if the public interest becomes engaged. For present purposes it is enough to note that to the extent a general legal rule protecting such undertakings exists, it must come from the F&E obligation or customary law and general principle; it was already said in section 3.2.1 above, that the F&E concept may implicitly make reference to them. To complete the picture, non-expropriatory takings may be unlawful also for other reasons: non-discrimination, proportionality and due process spring to mind. Again, they would derive from F&E protection, although there may also be analogy with expropriations.491

3.4.6. Remedies The discussion so far has identified four distinct scenarios to consider: lawful and unlawful expropriations and lawful and unlawful non-expropriatory takings. Each of these four situations presents a different question with respect to compensation. To repeat what has already been said, for expropriations we commonly distinguish between lawful and unlawful expropriations and the key standard is full compensation.492 Indeed, compensation is one of the conditions to make an expropriation lawful, which casts compensation as a requirement for legality rather than a remedy.493 This curious formulation is no doubt explained by the fact that states do not like to be accused of illegality and to be punished. Compensation, however, is only one of the four conditions required for legality. The expropriation must also be non-discriminatory, taken for a public purpose, and done in accordance with due process of law. It follows that even if there has been full compensation, the expropriation may still be unlawful. So, for example, if the measure was discriminatory, if there was no

a treatment to foreign investment that does not go against the basic expectations on the basis of which the foreign investor decided to make the investment’. In LG&E v Argentina [2006] Award on Damages Case ARB/02/1 (ICSID), para 130, the Tribunal was more specific and required that the investor’s fair expectations have the following characteristics: ‘they are based on the conditions offered by the host state, … they may not be established unilaterally, they must … be enforceable by law, … damages arise except for those caused in the event of state necessity, the fair expectations cannot fail to consider parameters such as business risk or industry’s regular patterns’, but stability does not mean that the legal system remains frozen in time. 491 Technically, they might also become unlawful for breach of national treatment, most favoured nation treatment, violations of other treaty provisions, as the case may be, or of CIL beyond F&E treatment although the remedies may be different. 492 See Reisman and Sloane (n 475). For the available remedies in international investment law, in particular, Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (British Institute of International and Comparative Law, 2008). 493 Note that there have been some voices in the literature that argue differently. For Mohebi, ‘the non-payment of compensation does not, as such, make a taking ipso facto wrongful, rather it is a violation by the expropriating state of an independent duty which applies evenly to both unlawful and lawful takings’, M Mohebi, The International Law Character of the Iran-United States Claims Tribunal (Boston, MA, 1999) 289. Importantly in the context of the present discussion, it suggests that even lawful takings may require compensation.

Volume 2: Foreign Investment Arbitration 245 demonstrable public purpose, or if it was carried out without sufficient due process, it remains unlawful, even if compensation is paid.494 This form of unlawfulness—one that is present even when full compensation has been paid—raises the question of a suitable remedy. Perhaps reinstatement (restitutio in integrum) can be ordered by arbitrators. That would appear to be the only sensible remedy left, though it is not explicitly provided for. It is sometimes argued that the difference is in the measure of damages: fair market value in the case of a lawful expropriation as compared to the cost of restoring the prior position, but both are entirely compatible with the notion of full compensation.495 The real difference is therefore in the possibility of physical reinstatement or specific performance. At least in private law, the civil law tradition is specific performance. In the common law, on the other hand, it is exceptional. Treaty law496 does not specifically cover this problem, so the basis on which an arbitrator might choose it is difficult to identify. Furthermore, re-instatement is normally not considered a remedy under international law unless the relevant government co-operates. Without that cooperation it faces severe practical problems.497 Another possibility is that there simply is no remedy beyond full compensation. It is hardly unusual for international law to declare something unlawful without imposing a formal sanction. Perhaps the distinction between a lawful and unlawful expropriation is nothing more than the identification of the latter as impermissible. All of this suggests that the concept of unlawful expropriation may have little meaning beyond full compensation. Indeed, there may in practice be no difference between lawful and unlawful expropriation at all if full compensation as of the day of the taking is being offered. If so, host governments could take for any reason and in any manner if they offer full compensation, though in the case of unlawful expropriations there are perhaps some additional reputational harms as a result of being seen to act outside the law. The reputational consequences would not be limited to the reaction of other states. An investor may prefer to invest in a country where unlawful expropriation is less, rather than more, likely. A country that engages in unlawful expropriation, therefore, may be seen as a less desirable host. 494 Note that some arbitral tribunals have refrained from distinguishing between lawful and unlawful expropriation and applied the compensation provision of the BIT in either case, probably to avoid sensitivities. See Sedelmayer v Russia, Award of 7 July 1998, Chamber of Commerce Stockholm; Wena Hotels v Egypt [2000] Case ARBl98/4 41 ILM 896; Middle East Cement Shipping and Handling Co v Egypt [2002] Case ARB/99/6. 495 We may also think of the cases starting with ADC Affiliate Limited and ADC & ADMC Management Limited v Republic of Hungary (ICSID Case No ARB/03/16), Award of 2 October 2006, which, when assets increased in value, distinguishes for the assessment of fair market value between legal expropriations (date of the taking) and illegal expropriations (date of the award). 496 The issue was extensively discussed for customary international law in BP v Libyan Arab Republic, see n 279 above and the answer was that specific performance was probably not available, although it was even then suggested that special host governmental undertakings could make a difference. This subject of reinstatement does not get much attention in modern discussions but Art 1134(1) NAFTA mentions the possibility of restitution, as does Art 34 of the US Model Treaty but under both the host state may always pay monetary damages and the applicable interest in lieu of restitution. Art 54 ICSID renders only pecuniary obligations directly enforceable in the host state, but non-pecuniary obligations may be enforced elsewhere subject to the pertinent rules of sovereign immunity. 497 In international law, restitution is still considered to be the primary remedy, but in international investment law significant limitations to restitution apply and arbitral tribunals will on the whole refrain from issuing awards of a restitutionary nature, mostly for practical reasons. An example is the case of LG&E v Argentina [2006] Award on Damages Case ARB/02/1 (ICSID), para 84, where the Tribunal rejected the claim to re-establish the pre-breach legislative framework: ‘The judicial restitution required in this case would imply modification of the current legal situation by annulling or enacting legislative and administrative measures that make over the effect of the legislation in breach. The Tribunal cannot compel Argentina to do so without a sentiment of undue interference with its sovereignty’.

246 Volume 2: Foreign Investment Arbitration There remains, however, a sense that the distinction between lawful and unlawful expropriations is minor. The more important distinction is between takings that are expropriatory and those that are not. In the case of non-expropriatory takings, the question of legality does not primarily hinge on the presence or absence of compensation but instead on whether there has been a violation of some other investment treaty provision. As already discussed, this makes the F&E obligation of central importance, and drives the inquiry toward matters of non-discrimination, proportionality and due process and probably also special governmental undertakings. To the extent there is a violation of the F&E obligation (or some other obligation), a strong consensus has emerged from investment tribunals that a non-expropriatory taking still leads to an obligation to provide compensation.498 Even if there is no unlawfulness of this nature, a non-expropriatory taking may still require compensation and would become illegal without it.499 In the above, the example was given of intervention in the nuclear power industry for public welfare reasons or as a result of the exercise of regulatory jurisdiction incidental to normal government action in the area, leading to a substantial diminution in value for the investor. For very good public policy reasons, the investor might be divested of the entire investment but that does not in itself discharge the host state from paying compensation assuming the investor has so far complied with all its obligations. Again, in our view, it is not helpful to move the taking in such cases to the category of expropriations. Rather it is a matter of unjust enrichment and restitution by the host state, but again we do not perceive this in private law terms. It is a question of F&E under international law. The question then becomes: How much value has to be seised for a non-expropriatory taking to be compensable. There are rarely clear answers once one gets into this sort of line-drawing exercise, and none exist here. The best that can be said is to observe that if the burdens imposed on the investment are confiscatory, then the taking is still compensable in respect of a foreign investment.500 This may expand the de minimis rule or concept at least for takings incidental to ordinary government action which are legal. For illegal ones, there will obviously be more room for compensation. This leaves ambiguity and there is no consensus or clarity available on this question, and one should refrain from generating a false or unwarranted sense of certainty. Once again, there will be case-by-case resolution,501 but recognising the ambiguity within the framework proposed may itself clarify the situation. Thus, there is a lack of complete clarity with respect to the measure of damages for non-expropriatory takings, whether lawful or unlawful. Even if an investment treaty applies, the standards of compensation are not necessarily the same as those for legal or illegal expropriation. In respect of these non-expropriatory takings, it need not necessarily even be the same for public welfare takings and takings incidental to normal host governmental action. In the absence

498 See Metalclad (n 479) 113; MTD v Chile [2004] Award Case ARB/01/7 238 (ICSID); CMS v Argentina [2005] Award Case ARB/01/8 409-10 (ICSID); Azurix Corp v Argentina [2006] Case ARB/01/12 420 (ICSID); LG&E v Argentina (n 398) paras 58, 60. In the approach here defended, the author would have preferred an award under which the taking in Azurix was indeed expropriatory requiring full compensation rather than saying that nothing was taken so that relief could only follow under the F&E clause leading to full compensation in that manner. 499 In Vivendi v Argentina I, ICSID Case No ARB 97/3, Award July 3 2002 para 7.5.11 it is suggested that a partial deprivation of value does not lead to expropriation but would be a non-expropriatory taking. Again, this is an approach not preferred in this book. 500 Waelde and Kolo (n 441) 819 require an ‘excessive detrimental impact’. It was already noted in n 360 above, that in this connection the level of deprivation may need to be higher than in expropriatory takings in order to lead to damages. 501 Confirmed in Methanex (n 454) and Ethyl Corporation v Canada [1999] 38 ILM 708.

Volume 2: Foreign Investment Arbitration 247 of clarifying case law so far—SD Myers may give some hints—one must assume here some considerable discretion for arbitrators.502

3.4.7. The Public Interest Discounted in the Quantum of the Damages? It has been argued that the public interest may affect the measure of damages and may be discounted in that manner over the express protection provisions of investment treaties.503 This is a more dubious approach. Either there is ‘super’ public purpose or there is not. If so, the host government may be excused and there will be no expropriation but it may still have to pay damages for a non-expropriatory taking in the manner discussed above. It may not be full compensation. There is greater discretion depending on the circumstances, therefore the facts. To imply such a discretion also in the assessment of full compensation would appear to confuse the issues. Rather than mitigation of full compensation on the basis of overriding public interest considerations, in the present analysis, these should qualify the taking as non-expropriatory and thus lead to the possibility of lower damages or none at all in this more articulate manner. It is not a backdoor ploy.

3.4.8. Conclusion The purpose of this discussion was not to give precise solutions for individual cases, but rather to provide a better framework to explain and understand the issue of host government takings of foreign investments. The approach outlined may allow for a better and more coherent classification of cases and provides a useful roadmap for the resolution of future disputes that raise the critical question of when a taking is expropriatory, when it is lawful, and when it is compensable. Fundamental is to distinguish the questions of expropriation, legality and compensation. The treatment to be afforded any given taking depends on how it connects to these three legal issues. In exploring the importance of each question, we also highlight the importance of the F&E obligation under either CIL or treaty law. With respect to expropriation, for a taking to be an expropriation its impact on the value of the investment must be more than de minimis, and it must not fall into either of the two categories of non-expropriatory taking: those that promote public welfare (‘super’ public purpose takings) and those incidental to legitimate ordinary government activity. Whether expropriatory or not, a taking can be either lawful or unlawful. It is well established that an expropriation is lawful if it is made for a public purpose, in a non-discriminatory manner and the required compensation is paid. It also must not violate the requirements of due process and F&E. If any of these requirements are not satisfied, it is unlawful. A non-expropriatory taking can also be unlawful, most importantly by violating the F&E obligation. Of particular concern here is the importance of government undertakings—at what point does a government’s failure to honour its prior promises violate the investor’s right to F&E? 502 See also n 479 above. In Azurix, see n 498 above, the investor held onto the property but there was a material taking, therefore an expropriation because there was no super public purpose or incidental effect. The case relied on the FET clause and went into the issue of discretion, less appropriate in these circumstances. 503 A Kulick, ‘Sneaking Through the Backdoor—Reflections on the Public Interest in International Investment Arbitrations’ (2013) 29 Arbitration International 435.

248 Volume 2: Foreign Investment Arbitration The remedies appropriate for each situation were also discussed. Expropriations require compensation, and investment treaties almost always require that it be full compensation. Whether some other compensation is required for expropriations that fail the test of legality for other purposes (for example, those done in a discriminatory manner) is not clear. If such additional compensation is necessary, it is hard to know what it would be—perhaps some form of restitution? Or perhaps there is simply no additional compensation in this situation.

3.5. Dispute Resolution and the Transatlantic Trade and Investment Partnership (TTIP). The EU 2014 Questionnaire, Subsequent Action, and the EU/Canada Treaty (CETA) 3.5.1. Introduction The dispute resolution facility through international arbitration has become the model in BITs for foreign investment protection, supported by the ICSID facility under the Washington Convention as we have seen. Resort to and dependence on diplomatic action between governments was eliminated, although it still remained the normal facility in international trade, even if strengthened within the WTO, but for alleged violations of the trade rules, private parties still remain dependent on their government to take action (or even retaliate as has become possible under the WTO). This is now different for foreign investment under modern BITs. The progression to an external form of dispute resolution with respect to foreign investment was an extraordinary development, now supported by the full force of international law. The resort to arbitration was in this connection a further feature504 and meant private recourse in foreign investment under international law rather than the involvement of domestic courts, where there were obvious disadvantages because of procedural and language complications, appeals, and, in many countries, more dubious independence and a parochial attitude. The system under which this arbitration operates is now often referred to as Investor State Dispute Settlement or ISDS. It has not remained unchallenged and gave rise in 2001 to an early discussion in the New York Times in connection with NAFTA. The critique of foreign investment arbitration, which centred on the national courts (in the US) being deprived of jurisdiction in matters of public interest where private dispute resolution could be considered less appropriate as a matter of principle, subsided when the US won all early (and later) NAFTA cases. In the context of the TTIP negotiations, the Guardian newspaper in the UK started to voice similar reservations in November 2014, although it was not immediately clear whether the arbitration facility itself or the special protections were being attacked or whether the EU being in charge was merely seen as depriving UK courts of jurisdiction and infringing on Member States’ sovereignty. This criticism, which found a resonance in the European Parliament and some national parliaments, notably that of the UK, but also in the press in France and Germany, managed to unsettle the European Commission in the discussion of the prospective dispute resolution facility in the TTIP between the US and the EU which was at first following the established arbitration pattern. It soon appeared that the EU had no clear idea itself but sought to accommodate

504 T St John, The Rise of Investor-State Arbitration: Politics, Law, and Unintended Consequences (Oxford, 2018).

Volume 2: Foreign Investment Arbitration 249 very different points of view. It was correctly realised that the issue was not merely arbitration but rather the application of the foreign investment protection rules more generally. Even if arbitrators were on occasion believed liberal, it was in essence within the powers given them by these treaties. Thus, soon the entire treaty structure of foreign investment protections as it had developed under BITs came under scrutiny, including the definition of a foreign investment, the issue of stability, the operation of the most favoured nation notion, and then also the facility of arbitration itself. Resuming the discussion in section 3.4 above, the key issues are always the takings by governments, and therefore value reductions with respect to foreign investments resulting from host government action (provided such reductions were more than de minimis). When do they amount to expropriations and are therefore expropriatory takings, and when are they not? In the case of expropriatory takings, when are they legal or what kind of compensation is required to make them so? But also with respect to non-expropriatory takings, there may still arise serious issues of legality and compensation, as we have seen. It was submitted that these issues may be clarified and the arguments simplified by reducing them to three clusters: (a) when are takings expropriatory and non-expropriatory? (b) when (in either form) are they legal and illegal? and (c) when are they (in either form) compensatory or non-compensatory? It may be noted in this connection that much anxiety derives from the idea that under these investment treaties (and under governmental undertakings in investment agreements whether or not they are supported by umbrella clauses), host states are supposed to have given away too much of their sovereignty having lost too much control over the foreign investors. International arbitrators are then seen as the mouth pieces and defenders of that deficient order. This is of course not really the case and a fair comment. Again, BITs and investment agreements will define the risks of host government action and who bears them, although even then it is well known a) that there are super public policy considerations (or police powers) as peremptory norms that allow governments in appropriate circumstances to ignore their guarantees and assurances given in this regard and b) that under customary international law they may also ignore these commitments when the takings are incidental to their ordinary governmental activity. This was discussed in section 3.4 above. If there is still too much protection given, then that is so by virtue of the BITs and concessions of the relevant host states, and is not directly a matter of dispute resolution. In short, arbitrators apply the relevant treaty protections and hardly create new ones even if they may sometimes be given to a liberal interpretation technique, which is by no means always obvious or evident. For the present purposes we need not go into further detail on investors’ protections and on host country exposure except to note that (a) whether there is i) super-public purpose or ii) activity that is merely incidental to ordinary governmental action, and whether there is still a need for compensation and what that should be, even if there is no illegality but still confiscatory action or considerable host government enrichment, be it under the Fair and Equitable (F&E) clause or results from customary law, all allows for a wide range of opinion as to what the solution in each case is. This is so exactly because it concerns public policy and its impact in often greatly differing fact situations; (b) these issues are the ones likely to be at the heart of all dispute resolution in this area (besides issues of jurisdiction) arising either under investment agreements (whether or not supported by the ICSID mechanism), or under BITs or multilateral investment treaties where the ICSID mechanism may still be chosen instead of other venues like the one under the UNCITRAL Rules; (c) there arises then also the question whether these public policy issues are truly justiciable, meaning that there may be sufficient guidance in the law and texts themselves for arbitrators or courts to decide these issues or whether it forces them into a law-making function that

250 Volume 2: Foreign Investment Arbitration exceeds their normal role in dispute resolution. This would suggest that the ISDS in BITs or even in ICSID may always have been a bridge too far and may need reconsideration. Can arbitral powers be filled in adequately by legal rules and who is to formulate them: arbitrators/judges or treaty law? If none are suitable, we may be back by simple diplomatic action as is still the WTO solution for foreign trade, as we have seen. To summarise: we have three types of dispute resolutions in this wide area of possible argument where there is great case sensitivity, exactly because of the public policy flavour. They are (a) arbitrations, (b) the ordinary courts (either domestic or international), and (c) state to state or diplomatic intervention. All three should be considered in greater detail with regard to their nature, effectiveness and appropriateness. But hovering over it all is the further question whether the protections now commonly given in foreign investment treaties or BITs are proper even if we accept that there are situations where they may not apply (like in principle in the case of super public purpose or incidental host government action).

3.5.2. The Dispute Resolution Options. Investment State Dispute Settlement (ISDS) To start with investment arbitration: arbitration is, as we have seen, commonly defined by three features that distinguish it from court proceedings: (a) There is procedural flexibility and parties are in principle in charge appointing also their own arbitrators; (b) The proceedings are adversarial and are not inquisitive. This means that they depend on the submissions of the parties and even the law, like everything else, is pleaded as fact; (c) Consequently, there is no appeal on points of law (or any other) either, the issue of precedent does not arise, and there is no concern with consistency. It all depends on the facts, meaning what parties bring to the table and this may be very little notably in as far as the applicable law is concerned; again, arbitrators do not have an autonomous law finding, law-making, or law enforcement function—they are not judges and do not institutionally have that status which is commonly not conferred on them by arbitration clauses either (see the discussions in section 1.1 above). Parties simply do not have that power and ordain so by private arrangement. In this approach, arbitrators are there to decide the disputes submitted by the parties as the latter define them, and the powers of arbitrators are limited as we have seen. The only issue before them is then which arguments are the more plausible and one does not need lawyers to decide these issues. Just as lawyers may decide construction disputes on the basis of expert witness testimony, non-lawyers may equally decide legal issues upon such testimony. They are not judges but act more like juries. Thus arbitrators, especially international ones, are not to start any new argument or reasoning of their own, which would go beyond what is in dispute between the parties; they cannot resolve issues that have not arisen between them. To repeat, if one party says it is black, and the other party says that it is white, it will be either black or white and arbitrators cannot find that, on a proper interpretation of the applicable law, it is green. This is one type of dispute resolution and became the preferred one in commercial dispute settlement and increasingly also in financial disputes as we have seen. Again, broad discretion in the formulation and interpretation of the applicable law as related to the facts of the case is not then an issue, the limit is the parties’ submissions and their dispute as they define it. No other. It may be recalled in this connection that common law courts traditionally also behaved much like umpires in an adversarial approach unlike civil law courts which commonly tested the system of their laws more pro-actively in an inquisitorial manner. Even if common law courts especially in the US became more inquisitorial

Volume 2: Foreign Investment Arbitration 251 and also in the UK engage increasingly in case management, the situation did not change in international commercial arbitrations (except as we have seen potentially when the public interest became more involved and a basis for such new powers can be found and demonstrated in the transnational law itself). This model was used also in foreign investment arbitration or at least it was never clearly distinguished, see also section 3.1.6 above, but it may be noted in this connection that arbitration and what it means or entails as a dispute resolution mechanism in foreign investments seems not to have given rise to a great deal of fundamental discussion when originally introduced. One might have thought that it would have been an issue at the time of the drafting of the Washington (ICSID) Convention, but it seems not to have been so. That may appear surprising but is not or less so if one realises that for the drafters of the Convention the arbitration clauses in investment agreements were a given and the issue was how to give them a status under international law. This lack of interest also spilled over into BITs, when they started to become popular, although not all opted for arbitration and in some of the older one’s domestic courts in the host state remained competent and in others there remained the issue of the exhaustion of domestic remedies first. As a practical matter and depending on the circumstances, this could also be beneficial for the investors, who in any event might have wanted to retain that option. Dispute resolution of this arbitral type was simple in principle and could then probably also deal with the broad discretions left under the applicable rules as all depended on how parties presented their case and the meaning of the rules themselves. As we have seen in sections 1.1.10 and 1.2.5 above, the issue became whether this still held even if these rules were public interest oriented and the situation shifted where arbitrators started to assume on occasion an autonomous function in the process even in commercial arbitrations. That began when competition issues became arbitrable under Mitsubishi in the US as we have seen, while the idea that arbitrators might have to raise these issues themselves, or at least could do so, took hold under ECO Suisse in Europe (see sections 1.1.10 and 1.3.8 above). Potentially, arbitrators thus started to speak for the public interests autonomously. That raised important issues as to their powers which could then hardly any longer derive from the arbitration clause itself. In matters of other market abuse, like insider dealing, money laundering, corruption, they might then acquire similar authority (see further the discussion in section 1.2.5 above). It suggested that even in commercial disputes, arbitration could become a hybrid form of dispute resolution, more so, as it was argued, in financial disputes, somewhere therefore between the original adversarial idea and the inquisitive model. For arbitrators it raised serious issues about their status, their legitimacy to deal with these issues, accountability and supervision as already discussed, see Section 1.1.14 above. Questions of consistency and precedential value of the decisions in these areas then also arose, as did the matter of appeal or other forms of supervision, issues already noted several times. Foreign investment arbitration had already drifted into that direction, whether or not it was originally so intended. In fact, Article 42 of the Washington Convention could be interpreted as to suggest at least some autonomous law finding authority in ICSID arbitrators. BITs and NAFTA followed. It was also much favoured by the arbitration community which liked to see itself as pseudo judges and wanted that status, an attitude on the whole much encouraged by advocates but seriously questionable in principle. One support for them was undoubtedly the drift towards legalistic results and legal sophistry that accompanied it which in turn they much supported and confirmed the dominance of lawyers. It allowed the further monopolisation of this type of dispute resolution in the legal profession. It led to another extreme that even lawyers outside an inner group were made suspect having no experience in this art, not being part of its priesthood. Although in commercial arbitration this led to a great deal of unease (cf footnote 61 and also section 1.1.14 above), in foreign investment arbitration, this judicialisation was more

252 Volume 2: Foreign Investment Arbitration welcomed and sustained by the informed press that talked about greater certainty as if the field was sufficiently mapped out or could be, but the danger for the arbitrating profession was always that this mapping out was then better done by courts as potentially it required a great deal of law creation. Even then it could be asked whether such courts were appropriate law creating instances in an area of the law where there were many gaps and as a consequence much discretion. It was by no means clear that an increase in legal sophistry, aided by appeals would create better law. It would not necessarily aid the host states either, if that had been the idea. More fundamentally, it was submitted, that filling out the law to create greater predictability is a political issue that involves many choices and they may not be there for judges to make. It has to be part of treaty law, for sovereigns to decide (barring customary law). Indeed, it is not merely the investor protection itself but also how it is distributed or even superseded under more objective rules that becomes the true issue. Especially the determination of super-public purpose as an excuse under international law against more protection or whether the taking was pursuant and incidental to ordinary government action and even then, whether it was still confiscatory or legal in terms of discrimination, proportionality, and due process become key issues, see the discussion in section 3.4 above. Supposedly they may be determinable in a more objective legal framework that can be invoked, elaborated and perfected in the relevant dispute resolution process by the decision takers themselves. That may move the discussion more into the direction of an international court system of some sort and to question the suitability of arbitration itself and the proper dispute resolution method in such situations. Again, is a court system appropriate to fill in the gaps? It would have to be more activist than many would think desirable. The result could easily be a solid support of investment protection, which was the ethos so far of all BITs, being set in concrete as we shall see later. At least arbitrators should not have that aspiration and limit themselves to resolving a dispute as put before them by the parties even in foreign investments and where they believe they should raise issues of law themselves, again they would still depend on further submissions of the parties and should not arrogate to themselves the role of law creators. From that perspective, arbitration in foreign investment is not broken, diversity in solutions recognising very different fact situations may even be preferable, but it will be submitted that such an ISDS should be much better supervised. There is a closely connected question which is no less fundamental: Is there a system of law to be developed in this area and is dispute resolution subservient to it? This was much the subject of Professor Michael Reisman’s Freshfield lecture in 2012 responding to the Glamis Gold Case, see section 1.1.11 above. Are the issues raised in investment protection disputes so case-specific that no jurisprudence constante can safely or reliably develop, or putting it otherwise, can these public policy considerations ever be mapped out in a rule-based manner? Glamis at least thought that we should learn to think in such a framework. This, again, would favour a court system for its development, although if we accept that the area remains too case specific and therefore too fact based, it may still favour the continuation of an arbitration mode, in which only in the case of clear gaps in the applicable law, arbitrators assume a lawmaking function, and even then, only after asking for further submissions of the parties and depending on these in their decision taking and reasoning and there should be much restraint. However, if it is true that these gaps are still so frequent and large, that role would remain substantial. Nevertheless, case specificity and large gaps might continue to mitigate also against (a) a court-like system seeking to formulate new law more actively, (b) the dictates of consistency, and (c) the rule of precedent. Indeed, even the ICJ recognises and practices restraint in this connection because international law is not considered by it to be sufficiently developed to operate otherwise. For the same reason there is no appeal in these arbitrations, as we have

Volume 2: Foreign Investment Arbitration 253 seen and is also uncommon in international courts (partly because they do not need to resolve differences in lower courts). Another related issue that may be considered in this connection is what greater justice means, and this is not limited to host states being prevented from implementing their policies once they have put BITs in place.505 Special concerns are that foreign investors’ protection may favour the rich elites in host countries but harms the poor through corruption, abuse of cheap labour, environmental degradation and the like. Poor defences against inequality may contribute.506 Lowering standards are obviously another concern. Another problem may be that what little local activity is still there (in less developed countries) or may develop is disadvantaged because foreigners have a better (tax and regulatory) deal. The question thus becomes whether other peremptory notions besides super public purpose exceptions develop to impact on and vary the investor protections and guarantees under treaty law. Notably, are the treaty rules of investment protection also to be considered in the light of their promoting social peace, human rights,507 redistribution and social welfare, or the rule of law in terms of procedural fairness and due process for all? One may then also ask whether perhaps home states have a duty to supervise their investors when they operate in foreign countries. That may also concern the issue whether they pay proper taxes, respect the environment, abuse labour, and observe competition rules of the host country. Do home governments also have supervisory obligations in this respect which are justiciable, if necessary, in their own courts? Again, courts might then be better placed than private dispute resolution through arbitrators to consider these issues and make new law, if that is the idea, although one may still question whether they could be local courts and it would have to be some international court.508 One way is to require the parties to exhaust local remedies first. In Chapter 11 of NAFTA, investors only needed to waive their rights to proceed in any other administrative tribunal or court.509

505 See S Ratner, The Thin Justice of International Law (Oxford, 2015). See also P Mayer, ‘A Good Arbitrator Should Have Justice as his Goal’, Leaders League, 26 April 2016. 506 See Guardian Life: ‘What is TTIP and How Does it Affect Us?’, The Guardian, 18 Feb 2015. 507 See Marc Jacob, ‘International Investment Agreements and Human Rights’, INEF research paper series on human rights, corp resp and sustainable dev, March 2010, at 7; A Claire Cutler, ‘Transformations in Statehood, the Investor-State Regime, and the New Constitutionalism’ (2016) 23 Ind J of Global Legal Stud 95, 100; Bruno Simma, ‘Foreign Investment Arbitration: A Place for Human Rights?’ (2011) 60 Int’l and Comp L Q 573, 575. Critics argue that the delocalised modern legal foreign investment regime may be described as a form of ‘new constitutionalism’ where the expansion of capitalism through legal frameworks that favour privatisation, liberalisation and the deregulation of trade, investment and financial services is favoured, whilst the economic, social and cultural welfare of local communities are degraded. The argument often is that since states have a duty to protect human rights it should excuse them from any opposite obligations under BITs. The question usually is how pressing these rights are in the circumstances – is there super public purpose – or whether there may be other remedies. BITs seldom deal with the issue but the 2020 Draft Italian model is an exception (Art 5(1)): ‘T]he Contracting Parties reaffirm their right to regulate within their territories to achieve legitimate policy objectives, such as the protection of human rights, public health, safety, the environment, public morals, financial stability, social or consumer protection, or the promotion and protection of cultural diversity’. A prominent ICSID case is Suez, Sociedad General de Aguas de Barcelona SA and Vivendi Universal, SA v Argentine Republic, ICSID Case No ARB/03/19 in which Argentine unsuccessfully invoked human rights to protect water and sewage resources to end contracts offered foreign investors, cf also CMS Gas, ICSID Case No ARB/01/08, no 121 (‘[T]he Tribunal does not find any such collision … [T]here is no question of affecting fundamental human rights when considering the issues disputed by the parties’). 508 See also M Bronckers, ‘Is ISDS Superior to Litigation before Domestic Courts?’ (2015) 18 J Int’l Econ Law 655; R Quick, ‘Why TTIP Should Have an Investment Chapter Including ISDS’ (2015) 49 Journal of World Trade 199. 509 See D Garcia-Barragan, A Mitretodis and A Tuck, ‘The New NAFTA: Scaled-Back Arbitration in the USMCA’ (2019) 36 (6) Journal of International Arbitration 739–54.

254 Volume 2: Foreign Investment Arbitration Provisions of similar nature are common in BITs and other investment treaties, only a few treaties require the exhaustion of local remedies before bringing an ISDS claim.510 One must also consider the arbitrators themselves. Who are they, what do they represent? Undoubtedly the standing of international arbitrators has been damaged by an exalted idea of themselves, their covetous attitudes and craving for new cases, and by the bureaucracies that surround them where there may be a symbiotic relationship that threatens them both. It was already said earlier, that arbitration is a business and it is in the nature of all businesses to strive for monopolisation. Amongst an insider crowd of arbitrators and law firms, originally congregated in the International Council for Commercial Arbitration or ICCA (before its opening up which made it a jamboree of arbitrator hopefuls and insignificant at the same time), cross appointments and mutual advancement became common in the various secretariats if not also in the courts of the established arbitral institutions. These secretariats which may exert great power over appointments and the handling of cases (the ICSID Secretariat often being asked to help at the invitation of arbitrators who have too many cases) are like all bureaucracies threatened by four features: (a) they want more power and influence; (b) they do not want accountability; (c) they gravitate towards the lowest common denominator; and (d) they leak like a sieve. It takes a strong leader to avoid these pitfalls and a good (and published) internal rule and procedures hand book to keep order. Some secretariats and courts have been more successful than others. As far as the arbitrator blend itself is concerned, arbitrators were once modest and mostly continue to be so in maritime and construction cases or other specialised areas, but elsewhere have become prone to a narcistic disposition that may make investment bankers blush. It is embarrassing for students to see their inflated fees and the challenges. Even for large rewards, arbitrators may not write their own awards but may hire others to do so, an issue that arose dramatically in Yukos Shareholders v Russia (2014). What are such arbitrators thinking in terms of public respect especially when they mean to deal with key public policy issues and then find that these awards are challenged because of their own behaviour? Their obligation always was to make sure as best as they could to make their awards enforceable. It has created anger (and jealousy). No wonder that the informed press wants an international court for foreign investment disputes. It was already said that this author does not believe that international arbitration in these matters is completely broken, especially when it is understood that it is not strictly judicial, but it needs proper supervision and accountability. There has now arisen an uphill struggle for credibility and legitimacy—indeed not unlike the situation for investment bankers, and a court system may be needed to calm the situation, but it would show that the true issue is rather the nature of the protections themselves through a clearer definition of the rules, which at least the EU is now trying to achieve. That is the issue of calibration which in the EU is also conducted with respect to the general good, especially in financial regulation (MiFID I and II), although the concept may never be exhaustively defined. The idea of supervision of these arbitrations through an international court especially set up for this task, not as an appeal court, but with a possibility for arbitrators also to ask preliminary opinions in matters concerning public policy and order (which may themselves become

510 See Martin Dietrich Brauch, Exhaustion of Local Remedies in International Investment Law 7 (2017), www.iisd. org/sites/default/files/publications/best-practices-exhaustion-local-remedies-law-investment-en.pdf mentioning that some treaties that require the exhaustion of local remedies includes the 1976 Germany-Israel BIT, the 1981 Romania-Sri Lanka BIT and the 2007 Albania-Lithuania BIT. Even then, they are often considered waivable by investors.

Volume 2: Foreign Investment Arbitration 255 coordinated in the supervising specially created international court) is proposed throughout this book (see section 1.1.12 above) and then could also be the way forward for the TTIP. If the alternative is ordinary courts, it was already said that there are two options, the national courts of the host states or an international court. It may not be useful to dwell too long on national courts. Courts in the US, Canada and England may be able to handle these issues. In the case of TTIP, that was also the perspective of Senator Warren and others in the US, although in this connection, they think foremost that domestic public policy is better considered (and favoured) in this manner which is not necessarily the objective one should look for in international dispute resolution. It recalls the discussion in the New York Times referred to in the previous section. National courts might not see themselves as spokespersons for international law, acting as international courts on those occasions but may pursue local policies and domestic legal concepts instead. Especially in Europe, there are many countries where there must be other doubts about the involvement of local courts, not in the least also in their appeal function, the time that would take, procedural niceties, language issues, etc. In the TTIP, the jurisdiction in these matters could, however, be attached to the ECJ operating in such cases as a local (host country) court for all of the EU. It has already been said also that there may be reasons why even the investor might still prefer local courts in particular situations, but the better alternative may then be a specialised international court to be set up by treaty law, in the case of the TTIP by the relevant treaty itself. It could still be offensive to the US as a matter of pride or policy and may look less good politically, but in practice it need not be that different from giving these powers to international arbitrators with enforcement provisions in the treaty and could be a better way to develop the law in this area if that is what is truly wanted and achievable. The EU Commission as we shall see in section 3.5.6 below, following CETA see section 3.5.8 below, proposes here a two-tier system, a lower court which still has some arbitration features and then an instance of appeal on both points of fact and points of law. In the NAFTA successor (USMCA Convention), there is a return to local courts in claims against the US or Canada, whilst in the case of investors’ claims against Mexico, it depends on the type of business if arbitration survives. The question of appeal itself may remain most contentious in such a set-up. An appellate mechanism commonly has three functions: (a) control of the decision makers; (b) correction of errors in law making and law application, potentially even reconsidering the facts; (c) issues of consistency, precedent and potentially system clarification and system building to achieve greater predictability in the future. The latter two functions assume that we can identify errors of law and fact in the broad areas of policy where reasonable people may differ as to the meaning and application of these policies. It assumes that we have a concept of like and like in these matters where, again, fact situations may prove to be and are usually very different and everything seems more case specific. It suggests indeed that there may be a rationality here that is not at all apparent, nor is it clear that it can be developed, see the discussion above. If, to repeat, we must accept that rules in these areas cannot be sufficiently clarified by a judicial system, meaning that even courts may not provide the appropriate dispute resolution facility, we might have to revert to intergovernmental or diplomatic solutions short of more comprehensive treaty law. That remains the system of dispute resolution under the WTO as we have seen and was also recommended by the Economist for foreign investment disputes. A state-to-state diplomatic resolution process is also still active under the older Treaties of Friendship, Commerce and Navigation as we have seen also. A related idea is to have at least interpretation committees of contracting states which can give binding directives to courts, assuming always of course that they would be able to agree on anything. It may suggest an unfortunate blend of judicial and political power in dispute resolution. Whatever it is, this approach would confirm that a more judicial system of dispute resolution as developed under BITs may have been a bridge too far.

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3.5.3. The EU Questionnaire. What are Investments? In its efforts to regain some control over the debate, in March 2014 the EU Commission published a Questionnaire, which expressed newer ideas and sought further guidance. It published a summary of the answers in January 2015 and a Concept Paper for further action in May 2015, invoking especially a new text which it had concluded later, in December 2014, with Canada (CETA), see section 3.5.8 below. It was followed by an EU proposal for investment protection and dispute resolution in November 2015 that substantially deviates from the existing model, see section 3.5.7 below. The first Question of the EU March 2014 Questionnaire concerned the ‘Scope of the Substantive Investment Protection Provisions’ and concentrated on the issue of ‘investment’ (see the discussion in section 3.1.4 above). What is a foreign investment? It is submitted that the substantive protection under BITs, NAFTA and eventually TTIP, if it is to follow what had become the model, is part of administrative law protection, which through a treaty gains the status of international law. It may be recalled that originally this protection was sought by investors through concession or licence agreements, which had difficulty reaching a sufficient level of certainty under customary international law as sovereigns cannot irrevocably bind themselves under domestic laws and private investors did not have sufficient standing under public international law to defend themselves. Whatever modern treaty law texts may now say or provide (which may be confusing while Article 25 of the Washington Convention notoriously left the issue open), it may be clear that a foreign investment for purposes of treaty law cannot be expressed in terms of private contract or property rights. Again, the issue is one of administrative protection only. It was suggested above that investment in this sense properly considered is an administrative licence, although to gain this special (treaty) protection, there are some confines. Foreign investors are only those who make longer-term commitments and are not traders or speculators. Further, investments of this nature are usually a package but they could also be a portfolio of bonds or a loan, all in principle intended to be held to maturity. There is no watertight definition and descriptions only lead the way, but there may be further limitations. ‘Investments made in accordance with the applicable law’, is the definition the Commission appeared to like, but it has no clear meaning. It immediately raises the question: which law? It is likely to be the higher treaty law and not host country law where conflicting. This points to the complicated problem of the applicable law, especially when chosen by the parties (see the discussion in section 3.3 above). It is then likely not to be the law of the host state when it matters most for them, always assuming that parties are indeed free to choose the law which is not the case in matters not at their free disposition. There is also the question of time. Here the Commission seemed to want to move away from the text to which it subscribed itself in the CETA with Canada, referring to the applicable law ‘at the time’ of the conclusion of the Agreement. With respect to host country laws, that is the issue of stabilisation, dealt with in the next section, a concept which the Commission now appears to start to reject, but which was always the essence of investment protection and earlier of concession or investment agreements.

3.5.4. What Protections are Justified and How do they Relate to Evolving Public Interest Concerns of Host Governments? The second Question focused on ‘Non-discriminatory Treatment for Investors’. The expropriation/ compensation clause, the MFN clause, the National Treatment clause, the F&E clause and the

Volume 2: Foreign Investment Arbitration 257 Investor-State Dispute Settlement (ISDS) system have become the heart of treaty law in this area as we have seen. The key is the stabilisation of the legal regime. Host governments can give further undertakings, which are subsequently also enforceable under international law, as concession agreements under umbrella clauses in BITs may also be. If the EU now means to limit not only the MFN clause but also the F&E and ISDS clauses, and rejects the notion of stabilisation they embody, it should be realised that it aims in essence at a different foreign investment protection set-up altogether. That may be justified but may have to be more clearly explained. Quite apart from whether that would be acceptable to the US, the motivation now seems to be politics in Europe and a defensive attitude at the EU level following the press reports already mentioned. Yet it risks lacking sufficient clarity and may be based on a poor understanding by the public especially focussed on what ISDS tries to achieve. The Commission states that only in ‘rare cases’ may there be a need to deviate when even discrimination against foreign investors may be justified but did not elaborate. In this connection, the EU Commission seems to be especially exercised about the MFN clause, which was always at the very heart of international protection of this nature, originally especially in the GATT with respect to the trade of goods, and was as a concept a compelling success in the liberalisation of the international marketplace. If the importation of protection standards offered to others now becomes offensive, the real question is why they were given to others at all. It becomes a discrimination issue. It has already been said that the new approach is progress in so far as it acknowledges that it is not arbitrators but the treaties themselves that give the extra protections, especially against later host government policy measures. To repeat, these protections are only enforced and not created by international arbitrators even if one allows for liberal interpretation on occasion, which may give rise to some criticism but is not the real issue. If the EU now wants to create another balance, it would seem that there comes a moment when one must ask whether there is still much meaning and whether foreign investment could then still be part of the TTIP. What does the EU want, not only therefore in terms of dispute resolution but in all that may lead up to it? Although the main issue for the EU Commission in this Question was the furtherance of domestic public policies rather than ISDS itself, both the conflict with domestic public policy developments and the ISDS issue are at the centre of the discussion and the accompanying sensitivities should be firmly addressed. Yet it is necessary to make proper distinctions. When it comes to the furtherance of domestic public policies, not every host country public interest is sufficiently compelling to override treaty law if it is still to have some meaning. In particular, we must first define what is compelling or ‘super’ public purpose since presumably all government activity has some public purpose.511 Not every consumer, environmental or financial stability measure qualifies to supervene the treaty protections, but some do in certain circumstances. The EU case law on the general good may be of interest with regard to this (see section 3.4.3 above). On the other hand, in the analysis of the book there are also measures incidental to ordinary government action that may also be considered outside the treaty protection and, even if not pursuing a special higher public interest or ‘super’ public purpose, must equally be accepted by foreign investors. That is CIL, which, it was suggested, is often further supported in the F&E clause. These two very different categories of exceptions (which are not new) were discussed in section 3.4 above and also mentioned in section 3.5.1 above and may be identified as resulting in non-expropriator takings, but another key here is that there may still be some form of 511 See again Dalhuisen and Guzman (n 413), and further s 3.4 above.

258 Volume 2: Foreign Investment Arbitration compensation, especially if the measures amount to unjust enrichment of host governments, are (even when incidental) still confiscatory, breach special governmental undertakings, or were discriminatory or disproportionate and therefore still illegal, but they may not require full compensation since there is no expropriation proper. This picture, it was submitted, simplifies and we should concentrate on it while discussing ISDS where it may be tested in the light of the totality of treaty law protections. These may not need to be curtailed per se but the exceptions should be better defined when host government policies may still prevail and under what conditions. It will be argued below that in these matters’ arbitrators (if arbitration is to continue ion these matters) should seek preliminary opinions from a court or similar facility established under the Treaty. The third EU Question was connected and looked into the meaning of ‘Fair and Equitable Treatment’. The EU Commission is seeking to ‘clarify the standard’. In doing so it should be understood that the subject of the F&E clause is not only protection, where CIL may always have put it; the Near case law (see section 3.4.5 above) is still valid but greater restrictions could be introduced in the treaty, indeed F&E itself does not always deal with more rights and may itself be restrictive. Importantly, it also fills gaps in the texts, much as good faith does in private contract law (although good faith and reliance may have a narrower meaning in administrative dealings where governments have more options, especially important also with respect to special governmental undertakings under international law, see section 3.4.5 above). The F&E clause will deal with that, express in that context also CIL and may, it was submitted, then even elaborate on the realm of non-expropriatory takings, their definition, their lawfulness, and the compensation regime. It is this entirely different but essential (supplementation) aspect of the F&E clause that seemed to be largely and wrongly overlooked in the ideas of the Commission. The fourth Question dealt more particularly with ‘Expropriation’. In section 3.4.4 above, the distinction between direct and indirect expropriation was rejected as unclear and confusing, and it is suggested that the Commission should seek similar clarity here rather than perpetuating the present obfuscation. For example, regulatory and tax measures are usually considered indirect, but their effect may still be confiscatory and therefore very direct. To repeat, it does not mean expropriation if these measures are accepted as overruling the treaty protections by being ‘super’ public purpose or by being incidental to ordinary governmental action, but there may still be a taking and therefore a need for some compensation. In respect of the previous questions, it has already been said that there may still be compensation, although more so in the case of illegality, but that does not make for expropriation either, only for a higher measure of compensation under the F&E clause, which may even then not be full compensation. It is for ISDS to decide although, again, it would be helpful if the TTIP Treaty further defined here the categories and options. It could greatly simplify the picture. The fifth Question dealt with ‘Ensuring the Right to Regulate and Investment Protection’. This seems to come to the heart of the problem already foreshadowed in the previous Questions. It would appear particularly unwise to carve out special areas from treaty protection beyond ‘super’ public purpose measures and measures incidental to ordinary government action, both subject to their own rules of compensation as non-expropriatory takings under the F&E clause as already explained. It may create far more problems than it solves. Also, where should disputes concerning them (for example competition issues and impact of subsidies, which can be very destructive of foreign investment) go? Multiple dispute resolution systems would start operating side by side. All would end up in a litigation culture. To repeat, in the model here presented, consumer, environmental, even financial stability and similar issues should be distinguished not on the basis of field or substance but only on whether there is an overriding domestic public policy issue at stake or otherwise whether the measure was incidental to ordinary government action.

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3.5.5. Investment Arbitration and the Suitability of Investor State Dispute Settlement (ISDS) through Arbitration The subsequent questions dealt with ISDS in particular. The essence of all dispute resolution in this field would appear to be a prompt resolution mechanism. National courts are simply not the proper venue because of lack of experience (in most countries), language problems, potential regulatory bias, and endless possibilities for appeals and other procedural complications, which only benefit lawyers and create a litigation culture that should be avoided at all costs. This has long been recognised. It was already acknowledged that arbitration is by no means ideal but it has proved to be the only viable alternative if ISDS is to be maintained. It can be more firmly institutionalised. It was argued that the closer arbitration comes to public policy, the real problem is the lack of supervision of arbitrators and their behaviour, which is a matter of accountability and transparency and also affects credibility and legitimacy. Responsible arbitrators should long ago have asked for such supervision and arguably it should now be imposed. This will be elaborated below. ISDS in the form of arbitration should therefore continue but it must be supervised by a specially appointed supervisory court or similar authority created under the TTIP Treaty or more broadly by an international commercial court. Crucially, rather than an appeal court, arbitrators should be able to ask instead for preliminary opinions from such a body if the defence of ‘super’ public purpose is raised by host states or when the question of whether incidental measures pursuant to ordinary government action are still illegal or clearly confiscatory arises or when they may think there are other overriding issues. The sixth Question dealt more in particular with transparency. The true issue is not publicity proper and the EU Commission might overemphasise it, although it could be improved by, for example, publishing all pleadings (the awards are already published). But one would have to be careful in opening up the arbitration hearing itself to the public as it may become unmanageable and a broad discretion must be left to the Chair in terms of what it can handle. Again, the issue is rather transparency and accountability of arbitrators. As a start, like in the case of ordinary judges, their fees should be published and all connections with the law firms should end. A code of conduct is further considered. There the keys are enforcement, effective supervision on that basis and probably the need for a supervisory court. The seventh Question dealt with ‘Multiple Claims and the Relationship to Domestic Courts’. It may now well be that the EU has to say that it favours domestic courts in principle although it correctly points out why this venue is hardly suitable. That should be accepted and it may be better to make this clear up front. It has already been said that any ambiguous EU approach to the jurisdiction of arbitrators invites parallel proceedings, which are highly undesirable and only promote a litigation culture in which nothing will be promptly settled. Again, in the view here presented, the only true issue is to make ISDS in the form of arbitration more palatable through better supervision and preliminary opinions in distinct areas. No more, no less. The eighth Question dealt with ‘Arbitrators’ Ethics, Conduct and Qualifications’ and closely follows from the sixth Question. Again, the prime issue is one of supervision where a code of conduct as well as roster may indeed be helpful, but one important issue has always been proper access to the arbitration profession. Established arbitrators have constantly sought to limit it. Again, there is much evidence of monopolisation within a small group which also dominates the bodies of the appointment institutions or agencies. This must be broken in investment arbitration and a supervising court or similar authority is very much needed to create and maintain order. Of course, prior experience in arbitrators is important, but how does one get it if one cannot participate? We need a more diverse group and also younger people. Risk can and must be taken here subject to the

260 Volume 2: Foreign Investment Arbitration ultimate supervision of the court, which should maintain the proper discipline. This should not be left up to the arbitrators themselves, whether or not they act together with their law firms. Impartiality and independence of arbitrators has already been mentioned; in particular, any affiliation with law firms should end: people should not be both arbitrators and advocates. The appearance of impartiality and independence is as important as the facts and should be maintained at all times when dealing with public policy issues as potential law makers. Investigation, disclosure and information duties of arbitrators should be strictly enforced. The court should be able to remove arbitrators and should not need to give reasons (which invariably would impact reputations and is the ICC model). Question nine asked about ‘Reducing the Risk of Frivolous and Unfounded Cases’ and the court or similar facility established under the Treaty should have the power to summarily dismiss cases which are in its view frivolous. Question ten went into ‘Allowing Claims to Proceed (filter)’. The issue of financial stability is used as an example and is real, as has already been mentioned several times before. In the approach defended here, the key is, however, that it should not be seen as a different area of government intervention, but rather in terms of ‘super’ public purpose or measures incidental to ordinary governmental action. Regulators and others should be allowed to file amicus briefs, but there would appear no need to create a different category of exceptions beyond the two indicated categories. What would be next? This connects to the following Question (eleven), which asks about the appropriateness of ‘Guidance by the [Contracting] Parties on the Interpretation of the Agreement’. The intervention of the Contracting States in a binding manner is a policy issue. It makes ISDS subject to the balance of power between them and their political priorities from time to time and was expressly avoided in modern BITs. In truth, this type of intervention is never a good idea once dispute resolution is judicialised. It goes against the separation of powers in civil society and creates a meddling culture in litigation. As for the issues of uniformity and predictability, also raised by the EU Commission in this Questionnaire, they are desirable abstract objectives but no more than that. To repeat, the facts in these cases are usually far too diverse and it is much more important that cases are decided honestly and promptly on the basis of the facts by people who have no other interests than to apply the rules as they see them upon proper advocacy by both parties. Legal reasoning in international arbitrations is in any event highly problematic and can hardly be sorted out in a Treaty of this nature (see Part IV below). Over-judicialisation should be avoided and creating and clarifying a rule system that are hardly capable of being identified should have no priority. The final Question asked about an ‘Appellate Mechanism and Consistency of Rulings’. This author holds that an appellate mechanism is a very bad idea. There should be a court or similar authority, as has already been mentioned several times, which should supervise arbitrators and give preliminary opinions in the two key areas of concern mentioned above; it should also have the power to summarily dismiss frivolous cases. That would seem more than enough to rebalance ISDS at the moment. It might also be in charge of challenges to the award and of their enforcement. More is likely to create ever greater confusion. It may be politically expedient for the moment but it is bad policy that will give all kind of other vested interests new ideas. A judicial system that is not simple and prompt is no judicial system at all. To repeat, there should not be over-judicialisation. A search for consistency should also not be overriding and motivate appeals of this nature: Lord Bingham thought it a vice, even in judges (see section 4.1.11 below). The question of uniformity and predictability has already been raised in Question ten above. Binding precedent has never been accepted in international law, nor in civil law jurisdictions either, all for very good reasons. As yet, there is no jurisprudence constante or single intellectual system—it was argued that public international law does not lend itself

Volume 2: Foreign Investment Arbitration 261 to it—and we are far away from a mechanical application of rules in foreign investment protection. That idea of certainty is bizarre. The EU should not get distracted by these notions and ideas. It is not its task to look for full clarity either, which cannot be provided at this moment and must be left to others to find.

3.5.6. The EU Concept Paper of May 2015, Overall Assessment After having reviewed the answers to its Questionnaire and upon the completion of the text of the treaty with Canada (CETA) by the end of 2014, see section 3.5.8 below, the EU Commission in its May 2015 Concept Paper, moved in the direction of reserving the ability of states to pursue their public policy objectives subject to strict definition lest all treaty protection became illusory. It also envisaged a special annex for the clarification of indirect expropriation and considered a future appeal mechanism. The notion of F&E was to be defined. Governments were to be given ultimate control in matters of interpretation. There would be a code of conduct for arbitrators. The feeling was, however, that the new set-up missed an anchor, hence the proposal in the above for a supervisory court, which could also give preliminary opinions. One could also become worried that the EU was creating barriers that would only diminish the chances of success for the TTIP, including therefore foreign investment protection, simply due to as lack of a clearer and more realistic vision on dispute resolution. This being said, its concern for the proper representation of overriding domestic public policy issues and also its anxiety about ISDS may be shared. These were written about long before they surfaced in the present manner at EU level,512 but there may be overreaction and the EU should be concerned that the dispute resolution regime does not end up in one big mess. The alternative dispute resolution ideas may present a better picture of how to move forward. It is a question of rebalancing what we have. Again, the key is proper supervision of arbitrators. This eluded ICSID, which has lost a lot of credibility as a consequence. The TTIP should learn from this and make up for it.

3.5.7. The November 2015 EU Proposal for Investment Protection and Resolution of Investment Disputes. An International Court. In November 2015, the EU Commission came out with a new document that summarised the protection it was willing to offer foreign investors, meaning in this case US investors in the EU. Unfortunately, in the opinion of this book, in respect of dispute resolution, it introduced at the same time the idea of a specialised court with a further appeal possibility. The US immediately said that this would give investors another chance. It has already been pointed out that this could promote a litigation culture which serves no one except lawyers. Judiciality seems excessively promoted and legal system thinking favoured, but such a court may only lead to legal sophistry and further delays in the pursuit of finding a legal system in the rules that may not be there.513

512 See Dalhuisen (n 64). 513 cf B Legum, ‘Appellate Mechanisms for Investment Arbitration: Worth a Second Look for the Trans-Pacific Partnership and the Proposed EU-US FTA?’ in J Kalici and A Joubin-Bret (eds), Reshaping the Investor-State Settlement System: Journeys for the 21st Century 437 (Brill, 2015). See also J Risse, ‘A New “Investment Court

262 Volume 2: Foreign Investment Arbitration The project may have been poorly thought out. What about enforcement? The lower Investment Court itself still seems to be in the arbitration mode with parties able to opt for the ICSID or UNCITRAL Models, although the reference is to a fixed panel of judges, the workload being divided between them without party intervention. Nevertheless, in Article 30, the document speaks of awards not judgments. This is apparently done to retain the benefit of the New York Convention in third countries. In the US and EU, the decisions are self-executing subject to local enforcement proceedings against states, but most states will not allow execution against themselves. Interesting, on the other hand, were the references to ICSID, UNCITRAL and to awards still suggesting an investment arbitration approach rather than a court of law, passive in finding the applicable law whilst avoiding justiciality. This is not borne out, however, by Article 13 on the Applicable law. It suggests that the judges are to be spokespersons for the international law. Only local laws are pleaded as fact even though the judges are still able to make the final determination autonomously on their prevailing interpretation. For better or for worse, judicial pro-activity seems here much encouraged. Whether there is to be precedent or a search for a jurisprudence constante remains an open question, but, as already mentioned, much suggests a search for a system and system building, and for systematic unity and certainty merely of an intellectual nature. This is further promoted by an appeal facility. The grounds are (a) error in the applicable law, (b) manifest error in the appreciation of the facts, and (c) procedural reasons (‘akin to annulment or set aside procedures’). But what are errors of law unless one assumes that there is a system that can be automatically applied and has all the answers? Why should they not then be manifest also? The EU Fact Sheet further states that all must be over within two years, but what if not? There are other problems: the ICSID Convention has been much criticised, especially its annulment facility. One must assume that this facility and the direct enforcement rules of the Convention do not apply when ICSID arbitration is chosen. In the case of the UNCITRAL Rules, the New York Convention would not be directly applicable either, except perhaps in third countries, at least that seems to be the hope, see Article 30(1), (5), and (6). As for the substance of the protection, in Section 2, the EU appears to do away with the MFN notion and national treatment (but there are still references to it in Section 3, Article 1: proposals can only be found in the EU discussion document tabled in the negotiation round of 12–17 July 2015). In the cases of emergency, there is still equal treatment with nationals (Article 4) but it does not appear to apply where overriding public policy issues are invoked to eliminate the protection (Article 2). There is no appreciation of the fact that where a ‘super public purpose’ is invoked (see section 3.4.3 above), there might still be a need for some (not full) compensation under the fair and equitable clause, as there may be in the case of indirect non-expropriatory takings when confiscatory (see sections 3.4.4/5 above). It may be noted in relation to this that Article 5.3 refers to ‘fair market value’ as the measure for compensation in the case of expropriation rather than the more common ‘full compensation’ standard. The document invokes ‘greater certainty’ many times, but it must be asked what is meant by the concept. Law and fact are sharply distinguished in the positivist tradition. The idea seems to be that this is all a mathematical exercise, but once more the facts are usually so different that nothing fits very well. This also goes back to the question whether a system of law can be built, what errors of law are in such a situation, and how they can be spotted. It is by no means clear. The true issue is judicial activism. The risk is a great deal more legal obfuscation and sophistry. This was never the idea in arbitration. A further Committee will be set up to give binding interpretations. The November 2015 Document seems to have been a negotiation document and political pamphlet pasted together in haste. From a conceptual point of view, it may be considered disappointing. It may well want to change the entire discussion on foreign investment protection and

Volume 2: Foreign Investment Arbitration 263 the dispute resolution regime, but it would require a great deal more sophistication before it could be convincing. In terms of the approach of this book, an Investment Arbitration Court system would be perfectly acceptable with supervision of arbitration by, but without appeal to, a superior court, especially in matters of conduct of the arbitrators. It could also be asked to give preliminary opinions on public order and public policy issues as we have seen. As for conduct it may be noted that in the EU proposals the judges under Article 11 of Section 3 may not serve as counsel or expert witnesses but could still be commercial and foreign investment arbitrators.

3.5.8. Foreign Investment Protection and Dispute Resolution under the December 2014 Canada-EU Comprehensive Economic and Trade Agreement (CETA) and under the 2020 US-Mexico-Canada Agreement (USMCA or ‘New NAFTA’) The CETA Agreement, which covers both the trade in goods and foreign investments (and services only in a very general manner), was concluded in December 2016514 after long negotiations and a change in plans for dispute resolution in the EU in February 2016.515 It amended the traditional foreign investment protections to allow host governments greater freedom to

System” Reasonable Proposal or Nonstarter?’ Global Arb News (25 September 2015). G van Harten, ‘Key flaws in the European Commission’s proposal for foreign investor protection in TTIP’ (2018) 12 Osgoode Legal Studies Research Paper. The idea for an appellate body is not new and its consideration is common in foreign trade agreements. For foreign investment, ICSID in 2004 published a discussion paper ‘Possible Improvements of the Framework for ICSID Arbitration’. 514 See MM Mbengue and S Schacherer (eds), Foreign Investment under the Comprehensive Economic and Trade Agreement (CETA) (Springer, 2019). 515 Ultimately, the EU seemed particularly concerned to draw foreign investment in the EU within its legal sphere. An opinion of the ECJ pursuant to Art 218(11) TFEU was asked to determine whether the new facility was compatible with EU law and this was found to be so in April 2019, ECLI:EU:2019:341. As a matter of EU law, it was deemed settled the EU could become a party to a treaty providing for the establishment of a new court or tribunal having the competence to interpret that agreement and deliver decisions that bind the EU under it, assuming it does not produce effects on the autonomy of the EU legal order and that external action is not undermined by it as it had been found to be the case in Achmea in matters of agreements between Member States, in the powers of the European Patents Court, and of the European Court of Human Rights. The ECJ considered in this connection the ICS to be a judicial system separate from that of Canada, EU Members and the EU, and it accepted that its own jurisdiction to interpret and apply international agreements as the CETA, which become part of EU law, does not take precedence over either the jurisdiction of the courts or tribunals in non-Member States that are established by such treaties and it also recognised the power of the EU to enter into reciprocal agreements that do so, which was considered part of the need of the EU to exercise powers in international relations which it was allowed to do as long as these courts limited themselves to the provisions of such treaties and did not hinder the operation of the EU constitutional framework. As for the text, it was considered that it did not confer power on ICS to interpret and apply EU law beyond what CETA itself required. A distinction was made with agreements between Member States (the Achmea situation, Case C-284/16, Opinion 1/09). Especially the EU Charter of Fundamental Rights does not apply in relations with non-Member States. It followed also that foreign investors under CETA and ICS may be treated different from local ones. Interestingly, Art 8.31.2 CETA expressly accepts that when establishing the relevant facts, foreign law including EU law must be pleaded as fact and that the ICS does not have law making power in this regard and cannot bind national courts or the ECJ. It was also found that identifying manifest errors in the appreciation of the facts does not confer power to interpret domestic laws. One must indeed hope that the proper distinctions in this respect can always be property be made. It was made clear also that the ICS would not have power to determine either whether the EU or a Member State would be the proper respondent, this being a matter for the EU, and

264 Volume 2: Foreign Investment Arbitration introduce new measures in the public interest and introduced a new investment court system (ICS). The concern expressed was that ISDS did not guarantee fundamental rights and values relating to, notably, the independence of arbitrators, legitimacy, access to courts, transparency, and that it failed to result in a coherent body of case law regarding the interpretation and application of investment protection standards. A new system is introduced: 15 tribunal members are appointed, three of whom are randomly selected to form the tribunal in each dispute. A binding code for their conduct based on the IBA Rules was accepted. Legal errors and manifest errors of fact may be appealed to an appeal body. A similar model is introduced in the agreements between the EU and Mexico, the EU and Singapore, and the EU and Vietnam. It meant mini-courts funder each treaty. Within UNCITRAL there is an important initiative made to come here to a multilateral investment court (MIC), much supported by the EU. Municipal laws are here still pleaded as fact and at least from this perspective it would appear that no law making is envisaged, but the picture is not clear. There is no reference to binding precedent in the texts, but the underlying idea still seems to be consistency and system building and in the UNCITRAL discussions the EU still appears to be pursuing these objectives. At least in the WTO there is a better understanding and a greater weariness of the powers that may then accrue to such a court. Under CETA, frivolous claims may be peremptorily dismissed as is already the ICSID model, uncommon in commercial arbitrations. Damages are limited to monetary damages and restitution of property at market value. The tribunal may order the losing party to pay full cost. The traditional foreign investment protections are insofar clarified that established case law is incorporated allowing host states to continue to impose new rules in public health, safety, environment, public morals, social and consumer protection and the protection of cultural diversity without any danger of indirect expropriation. Indirect expropriation is further limited to situations where there was a substantial deprivation of fundamental attributes of property, especially rights to use the investment. The F&E protection is limited to an exhaustive list of categories. Reliance is only effective if there was a specific government undertaking. Nothing of this is greatly different from what was already discussed in section 3.4 above except that the concept of non-expropriatory taking is not developed. Importantly, the national treatment and most favoured nation clause are made subject to a list of reservations. As for NAFTA, trilateral trade block between the United States, Canada, and Mexico was very successful and created one of the largest trade areas—by gross domestic product (‘GDP’)—in the world and was the model for many others. It eliminated economic barriers to trade and investment between the three countries and also provided for a foreign investment regime in Chapter 11. As a result, investments between NAFTA members grew exponentially—US investments into Mexico grew from $15 billion in 1993 to more than $107.8 billion by 2014 and politically stabilised the Mexican economy. It introduced also an ISDS arbitration regime. Eventually, it came under pressure as NAFTA itself did, being considered too advantageous to Mexico whilst taking jobs away from the US. The ISDS was criticised.516 Opponents argued in ECJ. Given that Art 8.21 CETA dealt with this issue it was considered that there was not need to make provision for a facility of preliminary opinions to the ECJ at least in this regard and it was considered that this distinguished CETA from the draft access agreement of the EU to the European Court of Human Rights (Opinion 2/13). The ECJ also noted that the ICS did not have power to determine whether the level of protection of the public interest established by EU measures was compatible with CETA. 516 According to an article written by the Council on Foreign Relations (2017), there was criticism regarding the effectiveness, specifically the blow to host nation’s power and their own legal system. www.cfr.org/backgrounder/how-are-trade-disputes-resolved. See also Caztherine Titi, ‘Are Investment Tribunals Adjudicating PoliticaI Disputes? Some Reflections on the Repolitization of Investment Disputes and (New) Forms of Diplomatic Protection’, (2015) J Int’l Arb., 261.

Volume 2: Foreign Investment Arbitration 265 particular that the tribunals charged with deciding disputes between foreign investors and host states eroded their country’s national sovereignty by allowing foreign corporations to bypass the domestic legal system. It reflected earlier criticism in the New York Times (2001) which had subsided as ISDS panels seemed more frequently to side with respondent governments whilst tie US won all cases.517 Further concerns arose over the tribunals selected to decide these cases.518 In 2017, a year after a group of more than 200 US law professors sent a letter to congress urging them to oppose the Trans-Pacific Partnership (‘TPP’) because of its ISDS provisions, 230 law and economics professors sent a letter to then-President Donald Trump, requesting the removal of NAFTA’s ISDS provisions,519 stating that, ‘through ISDS, the federal government grants foreign investors the ability to bypass the robust, nuanced, and democratically-responsive U.S. legal framework’, giving them an unfair advantage, supported, it was alleged, by the fact that NAFTA was the only ISDS-enforcement agreement of this nature, meaning that only roughly 10 per cent of foreign investment into the US was subject to ISDS dispute resolution. It led to a replacement of NAFTA, the old Chapter 11 on foreign investment is replaced by Chapter 14, but the real difference was in ISDS. The new NAFTA or USMCA hence takes another attitude to dispute resolution.520 This is so in all disputes between US and Canadian investors against their host state being Canada or the US respectively. The ordinary courts in each country are competent. Between Canada and Mexico there are also no longer special ISDS facilities, but both countries are parties to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which still includes an ISDS provision. Between the US and Mexico, the ISDS facility remains in existence, probably because the Mexican courts were not sufficiently trusted, but it is considerably curtailed. Mexican and American investors still have some protections under ISDS, but under the Annex 14-D only for a violation of direct expropriation and non-discrimination, whilst even then, under its Article 5, an investor seeking redress must first initiate domestic litigation proceedings and maintain them for 30 months or until a final decision, before an arbitration can be initiated (some limited exceptions still apply).521 The fair and equitable treatment standard is eliminated and there can be no claim for indirect expropriation. National treatment is no longer guaranteed either. In the area of anti-dumping and countervailing duties, the old system of arbitration also continues. There are also still ISDS protections for a special sub-category of ‘Covered Government Contracts’ in various sectors such as transportation, infrastructure, oil and natural gas, and telecommunications, where investors are allowed to bring ISDS claims under other violations like fair and equitable treatment. The upshot is two different tendencies. The EU one is in favour of further judicialisation at the international level, the US one essentially returns to the alternative of domestic courts under their laws, even though there are still carve outs. The approach in this book is different. Arbitration with its factual and dispute resolution-oriented approach to be imbued with a 517 https://obamawhitehouse.archives.gov/blog/2015/02/26/investor-state-dispute-settlement-isds-questionsand-answers stating that the United States government won every single case against it when brought before ISDS panels. 518 They are paid for by both the investor and the respondent host government—each selecting one arbitrator and the third arbitrator is selected jointly. Critics wondered why tax payers should pay and there were also worries about independence. There was also concern about ‘double hatting’, see n 58 above. 519 www.citizen.org/wp-content/uploads/migration/case_documents/isds-law-economics-professors-letteroct-2017_2.pdf. 520 Laura Ross, ‘USMCA vs. NAFTA—What Are the Differences?’ Thomas Insights (23 October 2020), www. thomasnet.com/insights/usmca-vs-nafta/. 521 www.alston.com/-/media/files/insights/publications/2019/12/the-new-nafta.pdf.

266 Volume 2: Foreign Investment Arbitration settlement ethos is still believed valid, also in foreign investment and better than courts and their appeal possibilities, but there needs to be supervision of arbitrators when the public interest becomes engaged and there should also be a possibility for them to ask preliminary opinions form such a supervisory court to enhance credibility and legitimacy. It should not amount to appeals on points of fact, law, and procedure. Awards should remain self-executing and the possibility of annulment by such a court should remain narrowly defined. Any appeal court was found to be in particular inappropriate if meant to fill out the large gaps in foreign investment law. These are issues for states to determine through the treaty process and courts should not be given the power to make law on that scale or to create a system of law through a jurisprudence constante, which was always alien to international law formation. It was said before that even the ICJ has never tried to do so for public international law at large and its decisions tend to be narrowly based and confined to the facts of the case and are not precedent (Article 59 of its Statute). Law making on this scale by courts is not credible and in democracies against their basic philosophy in public policy matters. Judicialisation of this nature was also believed not to provide the space that justified sovereignty claims may require against foreign investment protections, which is at the heart of this entire discussion. The present state of public international law gives home states flexibility in the area of non-expropriatory takings as explained in this book (section 3.4 above) and international arbitration is case specific, may well permit diversity in solutions and compromise, and provides parties with some ownership of the process. An international court system especially an MIC, may well undermine this and set the existing protections in concrete in a more universal approach. The international indignation concerning ISDS may yet turn into surprise. One should be careful what one wishes for; local courts may not be much better and likely to be biased in favour of their own public policy objectives. The diplomatic approach may then be better after all. In the meantime, much is still made of these foreign investment treaties but present attitudes may well re-open the question how important they really are and how much difference they truly make. Foreign investors might be unwise to be solely guided by them and their protections.

Part IV The Reasoning of International Arbitrators 4.1. Introduction 4.1.1. The Importance of Legal Reasoning Legal reasoning remains an important subject in dispute resolution especially in the ordinary courts, although at present it is not on the whole attracting much academic attention.522 In adjudication, it is often associated with interpretation and remains as such a key subject even if it may be challenging to shed new light on it.523 The need for legal reasoning is then usually expressed in terms of ‘giving the reasons for the decision’,524 which could technically be any, but it may not be all and other requirements may extend its ambit. As a minimum, parties would appear to require some explanation of the decision in order to show that they were fairly treated so as to promote voluntary compliance even if they may not consider the outcome right—it is a

522 In England, legal philosophers like Hart and Raz at one stage were fully engaged in the subject, later also Dworkin, well summarised in ‘Interpretation and Coherence in Legal Reasoning’, Stanford Encyclopedia of Philosophy (update 2010). In the US, there are the classical studies by Levy and Llewellyn, see E Levi, An Introduction to Legal Reasoning (Chicago, IL, 1949, reprinted in 1962), and K Llewellyn, The Common Law Tradition: Deciding Appeals (Boston, MA, 1960). See for a summary in the US of the views expressed by the end of the 1960s also GC Christie, ‘Objectivity in the Law’ (1969) 78 Yale Law Journal 1310. The subject is now often thought to be too close to the practice of the law to merit great academic thought. Others may think that all that could possibly be said about it has already been said. The subject may be narrowed like in LL Weinreb, Legal Reason, the Use of Analogy in Legal Argument 2nd edn (Cambridge 2016), limited to law and fact finding in common law, cf also MA Eisenberg, Legal Reasoning (forthcoming). 523 Lord Mansfield is often cited as having said that judges should consider what justice requires and decide accordingly, but ‘never give your reasons; for your judgment will probably be right, but your reasons certainly be wrong’ quoted by Lord Bingham (as implausible), ‘Reasons and Reasons for Reasons: Differences Between a Court Judgment and an Arbitration Award’ (1988) 4 Arbitration International 141, 147. 524 In arbitration, the requirement of giving reasons is not universal. It is embedded in the UNCITRAL Model Law, Art 31(2), but the parties may dispense with the requirement. The UNCITRAL Rules in Art 32(5) are similar. It is uncommon for parties to waive the need for reasoning but especially in commodity arbitrations, it may mean very little if the peer group is asked to decide on quality: the ‘look and sniff ’ kind of arbitrations. It may be argued that these are not arbitrations at all but expert binding opinions, see s 1.1.4 above. The ICC Rules 2012, in Art 33, talk about the scrutiny of awards and it is well established that insufficiency of reasoning may motivate the ICC Court to ask arbitrators to do better, insufficient reasoning being seen here importantly as a deficiency in form, not substance. The US Supreme Court does not require reasons in arbitral awards, see United Steel Workers of America v Enterprise Wheel Corp 363 US 593 (1960). For foreign investment arbitrations, the Washington Convention, on the other hand, requires a fully reasoned award in Art 48(3) without exceptions. It will be argued later in s 4.2.2 that this is an awkward and probably unrealistic requirement.

268 Volume 2: The Reasoning of International Arbitrators fact of life that the winner could not care less and the loser is unlikely ever to be convinced.525 It may come down to whether parties have been taken seriously. Reasoning of this nature also enforces discipline in adjudicators and at least in ordinary judgments the legal reasoning enters into the issue and prospects of appeal. The reasoning has additional relevance when guidance is sought in these decisions for the further development of the law. They may even start figuring as precedent, which raises the question what that truly means. But the real issue is here whether this may all be different in international arbitrations.526

4.1.2. Formal and Substantive Aspects of Legal Reasoning There is a formal and a substantive aspect to legal reasoning. It may correspond to the distinction between methodological and ontological hermeneutics and shows the close connection with interpretation. Formally, the most direct reasons must be given, probably selected from and limited by the arguments the parties have presented, although it is often assumed that adjudicators have more freedom on points of law; at least domestically ordinary judges are supposed to know it, which may give them more leeway or may even require them to expand the parties’ arguments in their assumed role of clarifiers of their own legal system and possibly law makers. It may be very different, however, for international arbitrators as was noted in section 1.1.3 above: for them there is no fundamental difference between points of fact and points of law in international arbitrations; in principle all is fact and law must be pleaded as such, like any foreign law must also be pleaded as fact and be proven in ordinary courts. Arbitrators are not judges and do not have any own lex fori to explain, apply and clarify. Rather, it was argued, they are much more like juries. That may give legal reasoning a different twist, and in arbitral awards it may for this reason hardly be a legal expose, it may only be about explaining preferences for certain arguments as a matter of evidence, except perhaps in those limited (but potentially important) areas where international arbitrators may have obtained autonomous powers and may then act more like judges, like in procedural and evidence matters (unless parties have agreed otherwise), issues of severability of the arbitration clause, jurisdiction, arbitrability and admissibility, and indeed legal reasoning, and perhaps also in public policy and public order matters, such as competition issues and situations of market abuse and corruption, or even considerations of justice, social peace and efficiency if sufficiently pressing upon the case, although it can hardly be assumed that they speak here for the public, it was already demonstrated that it raises serious questions where such powers may come from and how they must and can be exercised, it may still not be sufficiently institutional in the international commercial and financial legal order, see sections 1.1.10 and 1.2.5 above. It was submitted that in international arbitrations in such cases all is becoming subject to transnational law, under the modern lex mercatoria or under correcting standards of public policy or public order. The result is international minimum standards (see more particularly for a discussion of the relevant policies or public order aspects at the national and transnational level, section 1.2 above).

525 So much may be obvious but the writer as member of a tribunal led by the late and much missed senior Belgian arbitrator Andre Faures had the extraordinary experience of lawyers for the winning Respondent writing to arbitrators that the award had convinced the losing Claimant to resume normal functioning on the board and restart co-operation. One likes to think that the quality of the award was indeed the reason. 526 Thus, there is a legitimate question whether the subject is different in different dispute resolution scenarios, different therefore for ordinary judges as opposed to arbitrators and for them potentially different in domestic and international arbitrations and even in international commercial and financial disputes and then again in foreign investment arbitration.

Volume 2: The Reasoning of International Arbitrators 269 Whether in this sense the reasoning is legal or factual, there may also be the deeper issue of how the adjudicators came to their conclusions and what they considered or did not consider and why. Differences may emerge here because of the different backgrounds and cultures of international arbitrators, which may affect their reasoning as well. Why do they exist or persist and what can be required from international arbitrators in this regard? These are conceivably major issues which remain to be explored and are then the more substantial aspect of the reasoning. Must international arbitrators show these considerations in their decision as well and in what detail? Is it rather a cognitive process and can they be sufficiently aware of them? More directly, reasoning may then also explain the way the decision came about, although serious difficulties arise where it is sometimes said that it must also be convincing, give a clear explanation, or a full picture, or must show elementary logic.527 These are subjective criteria that soon become unmanageable beyond prima facie defects. More neutral may be the requirement that the reasoning on points of fact and points of law can be followed to its conclusion. That is much less ambitious and puts the accent for both on plausibility.528 Perhaps such reasoning must then still make sense overall in the light of the applicable law as we have it or perceive it. This veers back towards more formal legal reasoning and poses the question in particular whether adjudicators may amplify the arguments of the parties and this then also raises the issue of furthering the law’s progress. This was earlier identified as a judicial function, more typical in the ordinary state courts, which bears upon the issue of legal education and clarification and the further development of the law. It confirms ordinary judges in their lawmaking function, although it remains contested, even for them, how far they can go and whether, like it is often assumed in civil law, underlying principles or the system are the limits. It poses in particular the question whether law may indeed be perceived as a system of rules to which adjudicators must contribute and beyond which they cannot state. This will be discussed more extensively in section 4.1.6 below and raises the further question what ‘system’ means here,529 which may in turn be closely connected with the issue of consistency in the decision-making process and the meaning of precedent (see section 4.1.11 below). Again, such a task would not automatically extend to international arbitrators who may have no special (law making) authority and in any event no natural lex fori to develop or defend. Can law-making be privatised in this manner? It was submitted all along that arbitrators must concentrate on the facts and the evidence presented in that context, of which the pleaded law is only one part, and they are limited by the submission of the parties also here and their view as to how the pleaded law relates to the pleaded (other) facts. Even where they have acquired autonomous powers, as they might especially in (some) public policy matters, they must still ask for further submissions of the parties and be guided by them. Again, it is not for arbitrators to develop a new line of argument—including raising new legal issues—or clarify the law, and there are normally no appeals. System building of this nature may more properly be the role of academic research and critique even if only a typical civil law preoccupation. International arbitrators only decide (in principle) what is disputed between the parties as the latter define it, no more. That is an important difference between them and judges which have more institutional power but only when it comes to their own legal system. In section 1.1.14 above, judicialisation of 527 For international arbitrators, see further also s 4.2.2 below. 528 See s 4.2.2 below. 529 See for public international law, International Law Commission, Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of International Law: Report of the Study group of the International Law Commission, finalised by Martii Koskenniemi (2006). For foreign investment arbitration, in particular, see WM Reisman, ‘“Case Specific Mandates” versus “Systemic Implications”: How Should Investment Tribunals Decide?’, The Freshfield Arbitration Lecture 2012 (2013) 29 Arbitration International 131, with reference in particular to Glamis Gold, Ltd v The United States of America, Award (UNCITRAL) 8 June 2009.

270 Volume 2: The Reasoning of International Arbitrators international arbitration, arbitrators assuming a law clarifying and law-making function, was in general considered inappropriate and a true challenge to its credibility and legitimacy. It was already said that there may also be cultural issues or simply questions of experience, more likely to surface in international arbitrations with arbitrators from different legal backgrounds. Thus, common and civil lawyers may take different attitudes, which is likely to be reflected in their legal reasoning. As we shall see, this may have to do largely with the dominant role and status of statutory law in civil law countries and indeed with the perception that law, at least private law, is a logical self-contained system of rules, much less a common law attitude, which was always more fact oriented. There may also be differences between more public law- or private law-oriented specialists: the former may be more aware of governmental interests, may then be more public interest supporting, and also more conscious of the potentially direct application of national policies in international cases and perhaps of the operation of international minimum standards in this respect. For more internationalist private law-oriented specialists, it could lead to a search for transnational standards therefore the avoidance of conflicts rules in private law (leading to the application of national laws only) and to more universal policies beyond domestic private laws, and then also more readily to the direct application of transnational private law or the modern lex mercatoria, at least to the extent pleaded by one of the parties. There is evidence of that in international commercial arbitrations, therefore of greater readiness among international commercial arbitrators to consider that type of argument, especially in respect of custom and transnational market practices as was much the subject of the first Volume and will be discussed further later. The Eurobond and swap markets were given as most ready examples. In commercial and financial disputes, adjudicators may act and reason differently for yet other reasons. It was said in section 1.1.2 above that international commercial arbitrator might best be seen as continuing the discussion between the parties after their own efforts at a settlement and possibly mediation have been unable to find a solution, which now requires the intervention of outside decision takers, in principle always still upon the basis of the representation of the parties, who are the only ones to define the dispute and appoint the arbitrators. One could see here a progression. These professional disputes suggest a form of quicker justice by members of the peer group but always within the limits of their task. It may be, however, that in a globalised environment, rationality, sensibility and efficiency may acquire a more special meaning and greater urgency and imply greater responsiveness to newer needs on a very different scale, but again it should not go beyond solving the dispute as raised by the parties. This theme was resumed in section 1.1.14 above and may ultimately well lead to a greater integration of mediation and arbitration proceedings, a further indication that international users do not want legal sophistry and do not see judicialisation of dispute resolution as helpful. Efficiency, sensibility and rationality may indeed sustain a form of rougher justice between professionals and the conscience and knowledge of arbitrators may then also contribute: informed international arbitrators may in particular be concerned with the promotion of the transnational flows, liquidity, and better risk management at that level or efficiency considerations. This may also affect their approach to the applicable law in terms of greater flexibility and sensitivity to transnational trends and to the needs of the international marketplace, here again the modern lex mercatoria directly applied and international minimum standards of behaviour,530 assuming in principle that it is at least pleaded by one of the parties, probably foremost in the form of 530 See in England Deutsche Schachtbau- und Tiefbohrgesellschaft (nn 51, 94 and 101) and Vol 1, s 1.1.12 for other countries. It was already mentioned before, that this creates an unfortunate dichotomy between arbitrations and the operations of the ordinary commercial courts which are left behind, stuck in a more parochial environment, even in England, but it may be the unavoidable consequence of the institutional back up of either facility, which

Volume 2: The Reasoning of International Arbitrators 271 transnational custom. As such, they may also promote speed in the proceedings, even autonomously as another expression of their transnational powers, perhaps increasingly as a fundamental principle of international arbitration. Equally they might ignore revision and appeal provisions in the arbitration agreement.531 In countries that still have separate commercial courts, like France and Belgium, the existence of these specialised courts with lay judges always suggested a difference in commercial matters. This may even affect the reasoning in these courts, more in commercial arbitration, in the latter case probably still more so when the arbitration is international, thus dispensing notably with legal sophistry and academic niceties of the local variety. At least an overly intellectualised approach should be avoided and there may be less ‘system’ sensitivity also from that perspective. Again, in arbitrations, the emphasis is on solving the dispute as defined by the parties also in matters of the applicable law, not on building new law, all the more so, it would appear, in international arbitration which is not meant to build law at all, except again perhaps in the limited areas where international arbitrators have now acquired original powers under transnational law but even then subject to further submissions of the parties. Again, in this connection, it is relevant that international arbitration is often believed to have become too judicial, a virtual parody of the courts in ordinary cases and therefore inimical to the commerce it is meant to serve. This criticism is to be taken seriously;532 see the discussion in section 1.1.11 above. There is still an inclination among international arbitrators, especially of the professorial type, to treat arbitration as if it were some form of appellate jurisdiction. In moot competitions, youngsters are educated in similar attitudes—see for a critique section 1.1.13 above. It has already been said that this is an undesirable development, which ignores the typical nature of this type of dispute resolution and may seriously undermine its credibility, see further section 1.1.14 above. It may also have to do with different perceptions of law in action and law in litigation, international commercial and financial arbitration if properly considered being rather in the former camp: see Volume 1, section 1.4.18. This being said, one does not need to go as far as to suggest that international arbitration is no arbitration at all,533 but it is likely different even from domestic arbitrations (sometimes still seen as a mere replacement of the court of first instance), and more so from ordinary litigation in the domestic courts, see section 1.1.2 above. It was argued before that foreign investment arbitration may be increasingly distinct altogether because public policy issues become more evident. Although arbitration was here often still preferred over the ordinary courts, it has become increasingly a point of contention, see the discussion in section 3.5 above. Many believe that public policy issues should not be decided in private dispute resolution, certainly not if there is also a law-making aspect implied. But even the adjudication of public policy issues does not automatically make international arbitrators judges either, although they may come closer if they may raise these issues autonomously; see section 1.2.5 above. Once raised, it was argued all along that it is still subject to further submissions by the parties and their expert testimony. International arbitrators can hardly go off on their own or spring a surprise as judges may be able to do in explaining and applying their own law. Again, arbitrators do not have the institutional power of judges and have no natural legal system to defend or explain, or it must be the transnational one. They are unlikely to have special knowledge either and may hail from very different legal and cultural backgrounds. as will be argued below, is very different for international arbitration when seen as founded in the transnational commercial and financial legal order, see further also the discussion in s 1.1.9 above. 531 See n 6 above and accompanying text. 532 This view is widely held and not new, see RB Lillich and CN Brower (eds), International Arbitration in the 21st Century: Towards Judicialisation and Conformity (Leyden, 1994). 533 See J Paulsson, ‘International Arbitration is Not Arbitration’ (2008) 2 Stockholm International Arbitration Review 1.

272 Volume 2: The Reasoning of International Arbitrators When properly considered, in commercial cases and in commercial arbitration in particular, some kind of de minimis concept may also operate, which means that it is incumbent on all international commercial arbitrators to concentrate on the major issues in the case and not become distracted. For foreign investment arbitrations, the Washington Convention in Article 48(3) goes against this. In particular, it wants the tribunal to deal with every question presented to it, which, it will be argued in section 4.2.2 below, is an unworldly and irresponsible requirement even for foreign investment arbitration and alien to the concept of arbitration. It must be left to arbitrators to decide what is relevant, as it is also for ordinary judges,534 and it is wholly unclear why more should be expected from them even though they are hemmed in by the submissions of the parties and the way they define their dispute, more so than ordinary judges. It was submitted that at least in commerce and finance, speed, cost and closure are essential concerns in dispute resolution and that may also have a legitimate effect on the reasoning of arbitrators, which must be concise and focused, and the choices they make in this connection. In fact, it may be only prudent for international arbitrators and a common protection to stick to the proven facts (including points of law pleaded as fact) to the extent possible—lining them up in such a way that the solution presents itself—and avoid large tracts, especially on the law and its application. It may more truly reflect the needs in and nature of international arbitration in particular and avoids hair splitting and ponderous exposés. Again, it may be different for foreign investment arbitration or where arbitrators otherwise have acquired autonomous powers of adjudication but such a case would still have to be made and it is not obvious.535 Perhaps without realising it, international arbitrators are likely substantively to use a kind of cocktail in their approach to reasoning in international cases, further promoted by the fact that they will often sit as a tribunal of three persons coming from different legal backgrounds, traditions and experiences so that there will be no single line. But there is little clarity in these matters and it is therefore still of interest to consider what that cocktail may consist of. Again, in international arbitration, it may especially be considered how the requirements of speed, cost control, conciseness and focus are handled and how or to what extent their connection with the reasoning is recognised. Whatever the exigencies, also in commerce and finance, the reasoning of arbitrators may remain relevant as it shows at least some of the debate and this may contribute (or not) to the credibility of this dispute resolution process. It must therefore be taken seriously although, again, not necessarily in the same manner as that of ordinary judges (or even domestic arbitrators) and it would appear wrong to simply copy them. As already mentioned, there is no appeal and there are other considerations. Even so, it may become necessary in this connection also to determine under what law the reasoning operates in international arbitrations but as long as the narrative is plausible and understandable on its face, there may not be much consequence, whatever law may apply, at least not under the New York Convention where the reasoning or lack thereof or its potential flaws are no ground for refusal of recognition and enforcement of arbitral awards and neither is the law applied unless the result rises to a public policy offence. It was already said that, wisely or unwisely, in foreign investment cases the situation is different under Article 52 of the Washington Convention where failure to state the reasons is a ground for annulment of the award, but it leaves wide open the question when there is such failure, whether the reasoning must be sufficient or adequate, what that means, and whether this can ever be a manageable

534 See text at n 609 below for the way this complication is normally handled. 535 See further text following n 608 below, cf also H v Houtte and M Brunetti, ‘Investment Arbitration—Ten Areas of Caution for Commercial Arbitrators’ (2013) 29 Arbitration International 570.

Volume 2: The Reasoning of International Arbitrators 273 criterion beyond obvious prima facie cases: we shall return to this towards the end, therefore especially in foreign investment arbitration, see section 4.2.2 below. Analytically, the essence is that in all disputes of this nature there are relevant rules and there are relevant facts which must be selected and somehow be related to each other in order to determine whether in the particular case there is a cause of action, recourse, and what that is. That is at least the way of looking at the process of reasoning from the positivist perspective, law primarily seen as technique leading to automatic results (see further section 4.1.6 below) and is then on its face the same in the ordinary courts and in arbitrations, except that in the latter, upon a proper analysis, the rules to be applied must be pleaded and are not at the free disposition of arbitrators to select from the applicable legal system. Whatever the rule is, we then like to think or wish that this process of adjudication is objective and can be presented as such but the fact that there are no clear rules in this regard, even in the ordinary courts, suggests a measure of discretion which in turn implies the possibility of (a measure of) subjectivity. This issue is much at the forefront of critical legal studies and has then a direct impact also on the status and meaning of precedent.536 At least in international arbitrations, this type of discretion may allow for special considerations: speed, cost, conciseness and focus have already been mentioned. It is a due process issue conceivably supplemented by other considerations as there may be concerns with overriding notions of justice, social peace and efficiency as perceived in the international marketplace. Again, can arbitrators go beyond what is pleaded? There might be (overriding) other ‘policies’ and values of a transnational nature, although this may leave even more room for ‘the irrational and intuitive, facile shortcuts, or cognitive biases’,537 especially where arbitrators take it upon themselves to exercise autonomous authority, more dramatically in public policy issues. Proper reasoning should help and may enforce here at least some discipline. It may well be its true function, that is, to promote ‘slow thinking’, which at the more mundane level enters also into the determination of damages and may then militate against a natural human tendency to split the difference.538 But how can preferences be explained or, at the practical level, why do we trust some witnesses more than others, or at the more normative level, prefer certain rules over others and perhaps even reformulate them accordingly? The simple fact is that decisions are often explained after they have been taken and the narrative is only created later and looks for a rationalisation that may be hardly related to the decision-making process. In this connection, it should also be considered that there could be no end to the reasoning if all alternatives were discussed and their rejection explained. It would not necessarily make it better either. On a more negative note, much reasoning, especially legal reasoning, might serve to present a rationality which in truth was never really there. It may be that in this aspect judges may need to worry less than arbitrators. Again, institutionally, judges may have a stronger position. However, (unless highest judges) they are subject to appeal and therefore to a review, but it does not affect them personally except perhaps in their prospects of promotion. For the future of an arbitrator’s business, being criticised for the reasoning may have more consequences. Also from this perspective, it would be helpful to have some yardstick to determine how such criticism may be justified. 536 See in particular Duncan Kennedy, A Critique of Adjudication (Cambridge, MA, 1997), see further n 567 below. Here the idea is defended that judges fundamentally engage in strategic behaviour in interpretation, both with regard to legal reasoning and with regard to rights discourse (p 339). All people do this, judges are found to be no different in their work and the same would apply to arbitrators. 537 See Lucy Reed in the Kaplan Lecture Hong Kong 2012, Arbitral Decision Making: Art, Science or Sport? See for a profound insight and modern account into decision making more particularly D Kahneman, Thinking Fast and Slow (London, 2011). 538 See also the comment at n 15 above.

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4.1.3. Modern Theories on Legal Reasoning In the previous section, reference was made to the potentially more irrational aspects of legal reasoning and also to the work of ‘critical legal studies’. Purely deductive reasoning is now virtually universally rejected as the predominant judicial tool.539 Many other considerations will enter consciously or more likely unconsciously into the decision-making process. Although at least for judges, it is not denied that they may be laid back and might be able to detach themselves completely from their case, this is mostly no longer perceived as the normal situation. Modern decision theory has already been referred to in this connection. In the last generation this gave rise to further enquiry. Besides critical legal studies, ‘law and economics’ also became involved.540 Most of these studies concentrate on the situation in the US and suggest indeed that judicial behaviour may be better explained by identifying judges’ ideology and policy preferences. Others concentrate on the maximisation of judges’ preferences in the longer term. Some find judges more guided by texts, others by underlying policies. Empirical studies have focused among other things on the conditions under which appellate court judges follow the legal doctrines set out by the Supreme Court, the impact of shifts in the composition of Congress and the Presidency on the decisions in the DC Circuit Court; and the voting behaviour of justices on the Rehnquist Court. Others541 focused on the voting patterns of judges, evaluated their ideologies or party affiliations and the effect of the composition of tribunals on the final outcome. Interestingly, they also showed that like-minded judges may move to more extreme positions and that whistle blowing may increase the chances of more doctrinal decisions.

539 For treaty law, Art 31 of the 1969 Vienna Convention on the Law of Treaties remains the starting point and may still take a more literal and narrower view of texts. Under subs 1, the ordinary meaning of the terms is the starting point, although under subs 3, object and purpose may be considered but, it is mostly assumed, only as expressed in the relevant treaty and not the extra-textual subjectivities of the parties when one deals with complex socio-legal entities such as states. Indeed, a narrower more traditional positivist attitude may still be detected in the literature distinguishing also between interpretation and supplementation or gap-filling and between law making and law application with the resulting reservations about all judge-made law, see eg, Reisman (n 529) 149, but it is usually accepted that when treaty law cannot move forward, adjudicators may have little choice but to step in (p 135). Institutionally, arbitrators may not have that power although it is conceivable that it is different in finding and formulating customary international law. 540 Earlier studies are those of L Baum, The Puzzle of Judicial Behavior (Ann Arbor, MI, 1997) and Judges and their Audiences (Princeton, NJ, 2006); JR Macey, ‘Judicial Preferences, Public Choice, and the Rules of Procedure’ (1994) 23 Journal of Legal Studies 627. More recent is also the work of RA Posner, How Judges Think (Cambridge, MA, 2008). See for more empirical studies, FB Cross, Decision Taking in the US Courts of Appeal (Stanford, CA, 2007); MA Perino, ‘Law, Ideology, and Strategy in Judicial Decision Making’ (2006) 3 Journal of Empirical Legal Studies 497; RL Revesz, ‘Congressional Influence on Judicial Behavior’ (2001) 76 NYU Law Review 1100; and R Spill Solberg and SA Lindquist, ‘Activism, Ideology, and Federalism’ (2006) 3 Journal of Empirical Legal Studies 237. 541 CR Sunstein, D Schkade, LM Ellman and A Sawicki, Are Judges Political? (Washington, DC, 2006); FB Cross and EH Tiller, ‘Judicial Partisanship and Obedience to Legal Doctrine’ (1998) 107 Yale Law Journal 2155; HT Edwards, ‘The Effects of Collegiality on Judicial Decisions Making’ (2003) 151 University of Pennsylvania Law Review 1639; T Jacobi, ‘Competing Models of Judicial Coalition Formation and Case Outcome Determination’ (2009) 1 J legal Analysis 411; S Alumbaugh and CK Rowland, ‘The Links between Platform-Based Appointment Criteria and Trial Judges? Abortion Judgments’ (1990) 74 Judicature 153; PT Kim, ‘Deliberation and Strategy on the US Courts of Appeals’ (2007) 157 University of Pennsylvania Law Review 1319; SJ Choi and G Mitu Gulati, ‘Trading Votes for Reasoning: Covering Judicial Opinions’ (2008) 81 Southern California Law Review 735.

Volume 2: The Reasoning of International Arbitrators 275 The conclusion may be that the positive law (texts), precedent, argumentation by the parties, composition of, diversity in, leadership of, or the existence of a core group in the tribunal, and its internal court rules or practices, may all be important but that nothing is a priori determining. Arbitration has remained largely but not entirely outside this discussion.542 If all is in principle fact for international arbitrators so that they may operate more like juries as was submitted, perhaps it may also be of interest in this connection to see what juries do. One limitation in this connection is that it is difficult to learn the individual position of arbitrators except in sole arbitrations or dissenting or concurring opinions. Even then, except for ICSID awards, the decisions are not normally published. So, the behaviour of arbitrators may be much more difficult to follow, which has a limiting effect especially on empirical studies. Another problem is that we do not normally know the full submissions of the parties. At least one would expect less political bias in arbitrators working outside a particular national system or political framework (if indeed it could be convincingly demonstrated in ordinary judges especially in public policy issues), but it does not automatically follow that arbitrators are more objective or that their decision taking and reasoning are more rational except to the extent they are limited to the pleadings of the parties even in legal matters, which limits their freedom in this respect. Even so, whatever rule they so choose as being applicable, it still raises the issue of its application to the facts of the case. So even if law is fact, there remains a normative element when it comes to evaluating the facts of the case, but here again arbitrators must foremost be guided by what the parties say and choose between their arguments and the way they have defined their dispute.

4.1.4. Sources of Law and Interpretation As already noted in section 4.1.2 above, in the more traditional discourse on the subject, legal reasoning is often associated with the interpretation of written rules and cases as relating to the facts of the dispute. That is understandable at least in the positivist tradition which separates law and fact in this manner, but it is not only interpretation of these rules and relevant cases that should concern us here, rather more generally the search for all relevant sources of law, where there may be considerable differences in approach, especially in international business dealings. At least in those areas where international arbitrators have autonomy and do not depend on the mere representations of the parties, they have power. Without them, it was submitted that they are in principle limited to the law the parties plead but it could still come from many sources. Which law is potentially relevant in these areas, from where does it hail, and which do arbitrators choose either directly where they have such power or normally upon the pleadings of the parties?

542 See more recently D Kapeliuk, ‘The Repeat Appointment Factor’ (2010) 96 Cornell Law Review 48 and ‘Collegial Games’ (2012) 31(2) Review of Litigation 1; and earlier RD Cooter, ‘The Objectives of Private and Public Judges’ (1983) 41 Publ Ch 107, RD Cooter and D Rubinfeld, ‘Economic Analysis of Legal Disputes and Their Resolution’ (1989) 27 Econ Lit 1067, O Ashenfelter and DE Bloom, ‘Models of Arbitrator Behavior’ (1984) 74 American Economic Review 111; H Farber and MH Bazerman, ‘The General Basis of Arbitrator Behavior Under Conventional Arbitration’ (1986) 68 Review of Economics & Statistics 578; See further also Th Schultz and R Kovacs, ‘The Law is What Arbitrators had for Breakfast, How Income, Justice, and Reprimand Act as Determinants of Arbitrator Behaviour’ in JC Betancourt (ed), Defining Issues in International Arbitration, Celebrating 100 Years of the Chartered |Institute of Arbitrators, 239 (CIArb 2016).

276 Volume 2: The Reasoning of International Arbitrators First, it is one of the basic tenets of this book that there may be no clear divide in this connection between sources of law and interpretation543 or supplementation,544 that is to say that in the interpretation of texts, even if they were deemed the dominant or only relevant source of the applicable law, other sources of law reappear in interpretation and supplementation (which may easily overlap) all the time, especially fundamental principle and (notably in commerce and finance) custom. That could even be so in respect of rules which the parties have pleaded to the exclusion of others. There may be many doubts and questions in this regard, also about the (additional) weight of public order and public policy and deeper values, as was already mentioned. May these policies suggest some minimum mandatory standards or lead to the recognition of some special governmental interests beyond the texts and the submissions of the parties? More generally, may morality, social peace, utility and efficiency considerations also be autonomously introduced, even by arbitrators? Perhaps we may then also think of the need for growth and the effect on the climate or even the perceived requirements of financial stability. Arbitrators might then also consider what is needed to further a better society in terms of stability, lack of abuse, and proper competition. There may also be overriding issues of certainty, predictability and finality, likely to be all the more challenging in international cases. Again, may arbitrators go beyond the submissions of parties in appropriate cases and raise these issues themselves? What is appropriate? Are these considerations separate from the more traditional legal sources, especially in private law, or are all sources of law including these special considerations part of one moral and social discourse, very much the modern attitude in American realism where ‘policy’, whatever it may be, moves us forward and that courts cannot and need not ignore this. If in international commerce and finance we now put ourselves in the international flows with emphasis on the marketplace, which no less pushes the law forward, most may now agree that we must accept and respect it and that these markets must remain clean and efficient. So, there are countervailing powers in the international marketplace, therefore also at the transnational level, but especially in international business dealings it may be less clear what the limits are as between professional parties, where these limits come from, and when they become legally normative in the dispute. If they may as such be autonomously applied by arbitrators in what they consider appropriate cases, so much would have to be explained in their reasoning which may then be more than giving weight to the available evidence. There is then the further question how much room there still remains for purely domestic considerations and values in international transactions, at least in respect of any conduct and effect of international dealings on a given territory, assuming always that the international flows of goods, services, money, technology and information can still be properly spotted and sensibly broken down into domestic parts (see the discussion in sections 1.2.3ff above). It is often thought that that is still the case, but it was already said repeatedly that these flows have an own dynamic and are in any event increasingly virtual and 543 Interpretation is not confined here merely to a linguistic activity that seeks meaning in words, as it may be in literature, but as a search for legal normativity or a duty that requires something to be done or not to be done or something to give, seen here in constant evolution at the macro level of society although perhaps always within the image of some original purpose of the rule (‘originalism’), an important issue especially in the US in constitutional law but not further discussed here. 544 It may still be somewhat different for treaty law, see n 539 above. As is well known, for Dworkin all is law that judges use as decisive argument and much of legal reasoning is exactly to determine this. Indeed, the norms can come from any direction. There are no abstract rules as such or extra-legal (especially moral) considerations to be distinguished (albeit that judge made law is not the only law there is). In this view once invoked by judges, they are law, see Taking Rights Seriously (London, 1977), against others who still make distinctions here as the consequence of their more pronounced legal positivism. Technically, it leaves (international) arbitration in suspense as it was submitted that arbitrators are not judges and institutionally have a different position.

Volume 2: The Reasoning of International Arbitrators 277 can therefore hardly be identified any longer in relation to a territory. In any event, the risk in respect of them can easily be shifted through derivatives so that it may become unclear where the economic interest is. If properly argued by one of the parties, when may these (policy and value) considerations be considered overriding? Again, can they ever be so compelling that they may be invoked by international arbitrators on their own motion, in civil law connected with the idea that the applicable law does not need to be pleaded but that the court knows (ius curia novit)?545 See again section 1.2.5 above. Clearly, international arbitrators do not have their own law, but would this power be inherent in international arbitrators assuming that these overriding public order or policy notions or social values can be established?546 Transnational law would be the normal starting point. If pleaded by one of the parties, how do international arbitrators decide these issues and can they still fill in the gaps or use their tools of interpretation of the rules found applicable to introduce other sources of law?547 Considerations may be quite contradictory, for example the balance between national governmental interests among themselves and between them and transnational minimum standards, so that (uncomfortable) choices may have to be made. If we think also of considerations of justice, social peace and efficiency as potentially correcting factors, is what is cost-effective also just or has efficiency always the priority in the international marketplace unless the result becomes manifestly unbearable even for business entities? When is that point reached? There are here also important issues of due process: the parties must be heard, more (expert) witnesses may be called. Such intervention by arbitrators has therefore also a substantial cost element for the parties who may not agree or be unhappy about further argument and expense. The contract or arbitration clause is here a source of rules that may attempt to sort some of this out and above all to try to manage the foreseeable risks better, also in the conduct of the arbitration. But even then, it is to be determined what the status of such a contract (or clause) is among other objective rules of public and private law, which may seek to limit or correct its content in an international arbitration. Again, what is the full scale of the law applicable to the arbitration clause, and what law can parties incorporate or set aside in their contract, especially when it comes to values and policies of whatever nature and origin? A choice of a domestic law by the parties cannot reach any further in these matters than the contract itself and often means much less than parties think or may hope.548 Only issues at their free disposition qualify and

545 In international cases, parties would be most unwise to leave the applicable law to arbitrators to find and it must be pleaded just as much as the facts, but that is not to say that in appropriate cases arbitrators may not raise legal issues themselves if not raised by the parties. This would especially be the case if public policy became an issue as we have seen. 546 In this connection, the practice at the ICJ is often believed normative also in international arbitration, see Nicaragua v US (Merits) [1986] ICJ Rep 24 para 29, but that does not go without saying. ICSID case law is divided, especially on any duties international arbitrators may have in this regard; see also v Houtte and Brunetti (n 535) 571, but in ordinary arbitration cases, this power to clarify the applicable law is normally denied, again unless the public interest imposes itself. 547 In a well-known precedent Judge Lagergren took it upon himself, sua sponte, not to enforce a contract whose object he considered to be the trafficking of influence; see s 1.2.5 above, for the position of the ICJ and ECJ. The problem for arbitrators is that they are not judges who are institutionally supported by a legal system of their own, which they can represent and have power to further develop. 548 What can be set aside in this respect by choosing a foreign law is itself a question of law that cannot be freely determined by the parties, see JH Dalhuisen, ‘What Could the Selection by the Parties of English Law in a Civil Law Contract in Commerce and Finance Truly Mean?’ in M Andenas and D Fairgrieve (eds), Tom Bingham and the Transformation of the Law (Oxford, 2009) 619; see further the discussion in s 1.2.2 above and in Vol 1 s 1.4.14.

278 Volume 2: The Reasoning of International Arbitrators public policy and proprietary issues are beyond their power. They cannot decide on their own capacity and the validity and legitimacy of their actions either. More importantly probably and in any event more fundamentally, it was already suggested in section 1.1.10 above that in international arbitrations the arbitration clause is not the foundation of the arbitral jurisdiction but that this jurisdiction is more properly founded in the transnational commercial and financial legal order and its public order requirements itself, only activated to the effect by the arbitration clause which is also founded therein after separation from the rest of the contract. Once started, there may be much under the applicable arbitration and substantive law that parties do not or no longer control and this again raises the issue whether international arbitrators become judges in these areas, at least on the limited occasions when they obtain autonomous powers and what that means. Indeed, these powers and their application may then need special explaining in the reasoning.

4.1.5. Sources of Law and the Confining Concept of Codification Thinking in Civil Law We know from tradition what the more common sources of law are. Pre-codification thinking on the European Continent—still reflected in Article 38(1) of the Statute of the ICJ and Article 53 of the Vienna Convention on the Law of Treaties (for peremptory norms) and valid for public international law—considered fundamental principle, custom, statutory texts, general principle, and party autonomy the basic sources. It has already been said that this is pure Grotius and much of Volume 1 was devoted to a revival of this thinking in transnational commercial and financial law. In private law, subsequent codification thinking only maintained statutory texts; the law was nationalised; henceforth the other sources of law only operated by licence of the codes, meaning that they were only accepted to the extent these codes referred to them or rather their governments would allow them to operate. That applied even to customary law and party autonomy. Thus, there was only one (top-down) rule system or source of law and the history was set out in Volume 1, sections 1.2.7ff. It allowed the 1804 French Code Civil, for example, to do away early with a myriad of local laws and even the Roman law as a superior form of custom, understandable in the circumstances—it was a cleaning-up operation—although to eliminate or deny in this manner also the autonomous force of (international) customary law was always less convincing in commerce, especially if international. Probably more important, fundamental principle to the extent not expressed in these codes was likely also to be ignored; natural law tendencies became suppressed. We have also seen that the German civil code or BGB, which came about a hundred years later, equally eliminated all other sources of law beyond the statute unless specifically admitted. In that case, it was more than a cleaning-up exercise; the German codification idea was rather based on the notion that the modern state had the deeper insights into human relations and the way they should be organised and how society should move forward. It followed that only rules and values expressly accepted by the state were relevant, all activity outside them was unauthorised. Like in France, however, many of these sources would come back in interpretation—it is one of the basic tenets of this book that they could not be suppressed—perhaps in some uncontrolled way, although that was not the original idea. Rather, in codification thinking this interpretation is always underpinned if not dominated by what is considered the intellectual system underlying these codes—especially clear in Germany. This is the idea of system thinking549 and contradicts the idea of multiple sources of law, even in interpretation. 549 See Vol 1, ss 1.2.11 and 1.4.1.

Volume 2: The Reasoning of International Arbitrators 279 Whatever the philosophy, henceforth in civil law, even for private law, law formation was then considered top-down, statist and territorial. Other sources of law were at best supplementary. It was simply a change in political philosophy or paradigm, 50 years earlier people had held exactly the opposite view that law, private law in particular, was universal except for some local enactments, which, especially in commerce, were usually centred on certain marketplaces, not countries. It was submitted that this view may well be in the process of being reversed, at least in international commerce and finance in a globalising marketplace, although this narrowing attitude is still adopted in the Draft Common Frame of Reference (DCFR), which figured as we have seen as some model for codification of private law for all of the EU (see Volume 1, section 1.4.21 above). Here again, there are no other sources, values or policies except to the extent the text expresses them, meaning that states control them.550 There is no place for custom or practices either unless a special reference is made to them. In this vein, the validity of the contract also derives from state authorisation and there is no true party autonomy. The original idea was that this kind of statutory law was essentially value neutral and could then serve any party, but the more intriguing question became whether people in their dealings among themselves were still free to do whatever they liked in the manner they wanted if the codes did not cover the subjects or whether they could only do what these codes (and their systems) authorised, which would go much further than public policy or order guiding or prohibiting certain activity. No wonder the English became worried that within the EU this attitude could waft over to the markets in London. Their attitude was less dogmatic, the common law was never meant to cover the whole field and remained comfortable with multiple sources of law, although in Benthamite and Austinian nineteenth-century thought, law was also considered to issue from a sovereign and was therefore national and territorial, including private law, but at least there was never a monopoly for statutory law (see Volume 1, section 1.3.1). Although in England (as elsewhere) there is now also much legislation, it is still meant and perceived mainly as streamlining the common law or replacing the equitable jurisdiction of correction and cutting out excess in the courts of Chancery. It remains therefore still limited in character, which has also an effect on statutory interpretation. It is restrictive and literal in order to leave as much room as possible especially for the old common law, even equity, and the law merchant. It is relevant to note in this connection that the status of custom as source of law also suffered in England, international custom especially,551 because it does not issue from the sovereign, but the courts remain pragmatic in commerce while even the 1893 Sales of Goods Act continued to refer to the law merchant (deleted in 1979) and in matters of documents of title and negotiable instruments it is accepted that they remain subject to the transnational law merchant unless relevant domestic law takes a different view.552 More importantly, in the US, Article 1-103 UCC is categorical in demanding a liberal interpretation of the text to permit the continued expansion of commercial practices through custom, usage and agreement of the parties and allows as much room as possible for the common law, equity and law merchant. This is not by special statutory authorisation which is here merely declaratory and reflects

550 In the meantime, the ECJ itself has expressed the opinion that there may be higher values which even override the written texts of the EU foundation treaties, see Case 144/04 Mangold [2005] ECR I-19981 and Case 101/08 Audiolux [2009] ECR I-9823, and further Vol 1, s 1.4.5, something of which the DCFR knew nothing: see further also text at n 576 below. 551 See R Thomas, ‘The Significance of Commercial Customs, Usages, and Practices in the Resolution of Commercial Disputes’, in M Goldby and L Mistelis (eds), The Role of Arbitration in Shipping Law 11 (Oxford, 2016) and the discussion in Vol 1, s 1.4.8. 552 Roy Goode, Commercial Law 4th edn (London, 2010) 513.

280 Volume 2: The Reasoning of International Arbitrators the traditional common law approach. In particular it allows international custom to operate unhindered unless set aside by the contract (except when mandatory) or otherwise (even if mandatory) by the code itself, assuming that international custom will not in practice remain effective and render the code non usus in the effects of international transaction in the US. This issue of desuetude, which remains contentious in the case law of the US Supreme Court, will not be discussed here any further.553 The above shows different attitudes to law, private law in particular, and where it comes from. This is an important issue and is likely also to be reflected (in one form or another) in the approaches, attitudes, and reasoning of international arbitrators, even if they may not be aware of it. Do they look merely for the weight of the presented evidence or also for system in the application and interpretation of whatever law is presented to them, and is that still possible where the representations of the parties in respect of the applicable law are limited, incomplete or perhaps wrong? Is a form of judicial activism implied? One may assume that international arbitrators with a civil law background may still be inclined to look for a statutory system, assume its completeness (if only as a matter of interpretation of what is handed to them), and may be less comfortable with non-statist autonomous sources of law, therefore more generally with the impact of fundamental and general principle (except underlying statutory law), customs and practices, and party autonomy, thus with the modern lex mercatoria that embodies them until they become more experienced. May international arbitrators assume their expansion when transnationalisation or the modern lex mercatoria is properly pleaded? Unless they are public law oriented, they may at first also be less comfortable with overriding public policy and public order issues or other values or policies. It is still to be repeated that the starting point in international arbitrations is always what parties have pleaded, also as to the applicable law; only in those areas where international arbitrators have acquired autonomous powers may it be different. In those limited areas, transnationalisation of the law will probably be increasingly accepted by them.

4.1.6. Law as a System? The question whether law is a system as such to be protected and expanded by adjudicators may need some further attention, and may then also need to be considered in the context of the reasoning of international arbitrators, at least in those limited areas where they may have acquired autonomous legal powers.554 Again it is the issue of judicial activism in arbitrations. In the other areas of law where arbitrators must depend on the representations of the parties, law being fact, it could be argued that systemic thinking is out of the question altogether as no full picture may be presented—it is all a question of proffered evidence—but, if arbitrators are so inclined, it may still come back in the interpretation of the rules that are pleaded and subsequently chosen by 553 See US Supreme Court in Poe v Ulman 367 US 497 (1960) and also Vol 1, s 1.4.9. 554 This is an issue often associated with private law and then more particularly with codification, but system creation and thinking are also an important issue in international law, see Reisman (n 529) 139 and text at n 510 below, where it bears a close connection with the meaning of precedent. In international law, the issue is mostly seen as mere interdependency between parts, components and processes, not necessarily leading to rational coherence, which allows for systematic interpretation. System thinking may then have little operational significance and could refer to little more than ‘greater contextual awareness’, see Glamis Gold, Ltd v United States, Award (NAFTA Ch 11, Arb Trib 8 June 2009). It may nevertheless give rise to thinking in terms of more general policies and objectives, which in foreign investment protection might, however, be less clear than many think: is it the protection of the foreign investor, or of the host state, or what are the true underlying policies? Do they lend themselves to systemic explanation?

Volume 2: The Reasoning of International Arbitrators 281 arbitrators to apply. Whether that is a good thing may be another matter, but it may be expected from those arbitrators educated in that tradition, therefore mostly in civil law academics. In the above, two early nineteenth-century paradigm shifts were noted in this connection. On the European Continent, private law not only became territorial and statist, but statutory texts also excluded all other sources of law unless specifically allowed to operate. Unlike in England, legislation thus took over, hence the codifications. But there was a third paradigm shift in civil law, which again never caught on to the same extent in common law countries. Law, private law in particular, came to be seen as an intellectually complete system operating in this view quite separately from the facts, which became subordinate. When properly applied it was expected henceforth to allow by itself for the resolution of all legal problems, present, past and future. The text and the system underlying it thus were supposed to have all the answers and became everything.555 The rule system comes first, facts come later and whether or not they are legally relevant is determined by that system, the rest is irrelevant. It has often been observed that there is an intellectual prejudice at the heart of this approach (see also the discussion in Volume 1, section 1.4.2). Nevertheless, in the eyes of its proponents, this law is considered just, promotes social peace, and is per definition efficient. No empirical testing is necessary. Intellectual unity in all private law (per country) is here implied and makes it perfect. This law covers all private activity, whether national or international, in the latter case assuming it is applicable under the relevant rules of private international law, which are for each country also part of its system. Again, other sources of law have no place in this lest the purity and virtue of the system be corrupted or destroyed. It is now often associated with German legal rigidity, which does not allow for extra systemic considerations and out of the box thinking.556 555 See also Vol 1, ss 1.2.11ff where it was very much considered the objective and result of nineteenth-century German idealism, which ultimately produced the German BGB as an icon of German intellectual culture and progression in the law. The danger was always ossification or the dictatorship of the framework. The other aspect was nationalism: these systems although ostensibly based on logic were not considered universal, quite the contrary. This type of system thinking and system operation was explained in a more sociological manner by M Weber, Economy and Society: An Outline of Interpretive Sociology (ed Roth and Wittich) (Berkeley, CA, 1968) 976ff; see further also J Habermas, 2 The Theory of Communicative Action, 235 (transl T McCarthy, Cambridge, 1987); see also Vol 1, s 1.2.13. These studies concern more particularly society’s organisation and drift off the point here made, which concerns the legal system as a source of interpretation and completion of the law it covers. 556 See Jan K Schaefer, ‘Focusing a Dispute on the Dispositive Legal and Factual Issues, or How German Arbitrators Think’ (2013) 2 b-Arbitra, and how in this manner facts fall off the plate. The approach is inimical to everything new unless the system can be stretched to cover it, facts are otherwise ignored and become irrelevant; the activity unauthorised. This is also called Relationstechnik in Germany (see Vol 1, s 1.4.2) under which the legal framework is somehow established first on the basis of a cursory review of the facts and this early intellectual characterisation of the issue(s) becomes the test of what must subsequently be satisfied in fact and proven, which may be very little. In this approach, the judges may do the questioning, if necessary, decide on the basis of inferences, and there is no discovery and cross examination proper. Fact finding becomes secondary and a function of intellectual characterisation on the norm side. Much fact may fall of the plate as irrelevant. The common law operates differently: first all the facts, then nearest norm, the judiciary being passive, parties to conduct discovery and cross examination, inferences on the whole being avoided. It is expensive and inefficient but it is likely to present a fuller picture and be more responsive to newer fact situations. Even the good faith notion, which is more fact oriented, cannot break the civil law attitude, see also Vol 3, s 1.3.4 for German system thinking and the good faith concept. Through Fallgrupen and Funktionskreisen (see Palandt/Henrichs, Buergerliches Gesetzbuch (2012) at s 242 nos 2 and 13) German academia primarily tries to reinvent and reinforce the system. For international arbitration, it would appear a mistake, but undoubtedly it saves cost, as all prejudice does. It is the tyranny of the intellectual framework, that is never complete, and its extrapolations, see Vol 1, s 1.2.11, very common in academics of all kind, not only in Germany, and much encouraged by the drafting of legal texts when considered complete. Again, international arbitrators, when hailing from countries with this tradition, should be aware of its confines, arbitrators coming from other backgrounds of its limitations.

282 Volume 2: The Reasoning of International Arbitrators As such it is also the enemy of overriding fundamental principle and changing social values unless recognised by the codes (meaning by the state). It assumes the elevation of this law to a higher level that claims supremacy and clarity per country. The appeal system’s main task is to enhance it. It has already been said that the intellectual model becomes the true expression of reality here; it is the truth. Its legitimacy derives from that state of affairs, not from any democratic process or sanction. The state’s academies are meant to formulate the rules and provide the intellectual rigour. Parliaments have to rubberstamp their work into law; this was not to be a question of political choice but a need lest the system was disturbed and its claim to truth eroded. It is here and in the related elimination of all other sources of law that we see methodologically the true difference between the civil and common law. Largely unrealised by them, it may also determine the approach to reasoning in international arbitrators coming from this tradition. They may see themselves as appellate judges operating in and clarifying a legal system. Although it may be admitted that law upon proper study presents interdependencies between its parts and may show discernible regularities and may manifest a degree of organisation and coherence especially around common values and normative principles in private law, it may not naturally tend towards completeness, however. If on the other hand the accent is on fact finding, a case-specific approach rather than system orientation is more likely to result. Again, this naturally comes about if we understand properly that in international arbitrations law is pleaded as fact; for arbitrators there is no more on the table. To repeat, neither is it for them to sort out the law, clarify or reformulate it. It is not even the common law approach of finding nearest cases or texts for guidance in dispute resolution, where law and fact become intertwined and in each case a new picture emerges. It is simply a matter of evaluation of the relevance of the evidence presented, see further section 4.1.12 below. It is surprising how little understanding there often seems to be of this elementary point in international arbitrations and in the reasoning of international arbitrators—again, they are not judges, rather juries, different perhaps only in those limited areas where international arbitrators have obtained autonomous power and may be able to formulate the law. It leaves the important question how they come by it. It may be repeated in this connection also that the common law was never truly system friendly, not even rule oriented (see the discussion in Volume 1, sections 1.3.1ff). Moved from case to case on the basis of practical needs, it avoided generalisations. Even now the English are often mistrustful of them, although in modern times, the need is also felt in England, at least in academia, to find system in disparate cases and legislative texts and there is a vivid legal positivism in this regard in England also. Again, it goes to the issue of unity and coherence discussed earlier, which always sat less easily with the common law tradition, courts remaining unconvinced, and even statutory interpretation was narrow and textual and soon reverted to case law that was fact oriented and looked first at the case in all its factual elements and then found the nearest decision or, if necessary, the nearest statutory text or applicable rule related to similar fact patterns. Importantly, upon a careful analysis of the facts, it would also recognise new needs, if necessary helped by equity. This approach is not abstract but preferably reduced to real-life examples found in case law that may then be followed or distinguished. Even precedent has a much more limited meaning than most people seem to think, see section 4.1.11 below. That is also likely to guide common law-oriented international arbitrators when asked to find on the applicable law as pleaded by the parties. Domestically, the English approach thus remains cautious, based on precedent perceived narrowly as little pictures or stories or vignettes where facts and rules come together in a non-analytical manner. In the American ‘realist’ approach, on the other hand, much is reduced to considerations of ‘policy’,

Volume 2: The Reasoning of International Arbitrators 283 also in private law. It gives a different dimension to the notion of legal evolution where the responsiveness to practical and social needs is more discernible and paramount in order to keep the law ‘living’. That then becomes very much the issue in all law application in domestic as well as international cases. The essence is that legal reasoning is here not separated from moral and political discourse. It destroys any idea of system thinking, in the US mostly now rejected as legal formalism and leading to doctrinal rigidity. It was already mentioned that in commercial law, the UCC, referring to many sources of law, supports this thinking, which is non-systematic in a logical sense. Whatever its name, it was already noted several times also that the UCC is not a codification in the European tradition at all. Again, this difference in approach, even between English and American lawyers,557 will be reflected in the reasoning of ordinary judges and it may also become apparent among international arbitrators. It is not irrelevant, therefore, where these arbitrators come from, which will determine their natural attitude, often derived from that of the ordinary courts in their own countries. For most adjudicators engaging in international arbitration, this may mean a re-education at the same time, which re-education comes mostly from the interaction with other arbitrators and counsel from different jurisdictions. Upon a proper analysis, it may also be promoted by the fact that international commercial arbitration is substantially fact based, and was thus always more in the common law tradition. Again, system thinking is here mistrusted and often ignored.558

4.1.7. Normative Interpretation. The Meaning of Good Faith. Consumer Law Influences in the Professional Sphere In the foregoing the traditional sources of law were identified and considered autonomous, although in nineteenth-century statist thinking increasingly rejected beyond statutory texts, especially on the European Continent—codification and system thinking replaced them—but even then their connection with interpretation and supplementation of the statutory rules could not continue to be ignored. It has already been said repeatedly that where the sources of law are limited—in civil law to legislation (and the system underlying it, and probably supporting case law, although there is no rule of precedent)—they revive through interpretation or supplementation of the existing texts. The modern central role of case law, when properly analysed, shows this, also in civil law: see Volume 1, section 1.2.13. In contract, this revival happened particularly through an expansive notion of good faith. In civil law, this is also referred to as normative contract interpretation: see Volume 3, section 1.1.7. Thus, higher or general principle again became relevant, in appropriate cases (for example of worker, consumer and small investor protection) overriding the written wording of agreements and possibly also of statutory default rules. That became often expressed through the good faith notion which also introduced fundamental principle in terms of pre-contractual negotiation and disclosure duties, contractual co-operation duties, and post-contractual renegotiation duties. It further concerned itself with reliance and additionally accepted customary practices

557 See PS Atiyah and RS Summers, Form and Substance in Anglo-American Law: A Comparative Study of Legal Reasoning, Legal Theory, and Legal Institutions (Oxford, 1987). 558 It is not uncommon in international arbitrations to see civil law arbitrators come with a good knowledge of the file and a draft award in which they have identified the legal issues and identify what still has to be proven. It may shock common law-oriented arbitrators which are often little prepared and wait for the opening statements and what else comes on the table.

284 Volume 2: The Reasoning of International Arbitrators or perceptions and common notions or more general principles. Most importantly, it may even start to distinguish more fundamentally between consumer and professional dealings, a type of relationship thinking that had always been more fundamental to common law where the law of contract and movable property was developed in commercial law first and was as a consequence always less anthropomorphic, less protection oriented, and more geared to risk management in commerce.559 This is probably one reason why good faith remained less necessary as protection in common law where the concept is less developed because it is less needed. Common law, besides its relationship thinking, also had the notion of reliance, fiduciary duties, implied conditions, and sometimes natural justice to make the necessary adjustments, see also Volume 3, section 1.3. Intent and promises were less important than more objective notions of consideration, conduct and (detrimental) reliance. This in turn had a considerable effect on the defences and excuses which in common law are less easily available, see further also Volume 1, section 1.1.6 for a summary. In business, declarations remain on the whole literally interpreted, especially if the contract is a roadmap and risk management tool as in business it usually is. For this type of relationship thinking, civil law is only at its beginning, although there are green shoots560 which acknowledge that in the professional sphere good faith itself may indeed require a more literal interpretation of the contract and therefore gives fewer protections. The civil law of contract still prefers to distinguish, however, between the types of contract, not the types of party. The more serious consequence is that consumer protection notions quickly move over to professional dealings under the guise of the type of contract being the same for all and also the modern good faith protections concerning it. The cry ‘I did not mean it, I could not help it, it is not my fault’ goes much less far in commercial law of the common law type than it goes in civil law unless the contract itself introduces these defences or excuses. Only the other party not performing a major contractual condition is a perfect defence in common law. It was submitted that this may be increasingly also the attitude in transnational professional dealings. Again, international commercial and financial arbitrators should be well aware of this, so should be the advocates, which could also affect the reasoning especially to the extent they feel they may go beyond the representations of the parties and raise points of law. Even then, civil law oriented arbitrators may not make the necessary distinction in this regard and still think in a consumer mode as this unitary and consumer-inspired approach remains fundamental in much codification thinking as demonstrated also in the DCFR, still entirely in the anthropomorphic civil law codification manner and nineteenth-century model concerned with private dealings between natural persons.561 It may imply at the same time a censorious attitude towards business as a whole and a suspicion of the marketplace that goes well beyond ordinary public policy and public order standards. Good faith is here substantive (rather like another source of law), often still the mere opposite of bad faith, and not essentially a liberal 559 See Vol 3, s 1.1.1.and Bingham LJ in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] 1 QB 433, 439, in which it was held that the English authorities looked at the nature of the transaction and the character of the parties to it, to consider what was necessary to conclude a binding contract, and that particularly onerous or unusual conditions had to be brought to the special attention of consumers. The conventional analysis of offer and acceptance was not followed. 560 See in The Netherlands HR 19 January 2007 (PontMeyer), NJ 575 (2007); 29 June 2007 (Derksen/ Homburg), NJ 576 (2007); 9 April 2009 (UPC/Land), JOR 179 (2010). The idea is here indeed that the good faith notion itself may require a literal interpretation of the commercial contract in which justified reliance plays a major role, especially if the contract is negotiated by outside law firms. 561 JH Dalhuisen, ‘Some Realism about a Common European Sales Law’ (2013) 24 European Business Law Review 299.

Volume 2: The Reasoning of International Arbitrators 285 interpretation technique that reintroduces the other legal sources. It may even be considered mandatory in its protections, the same for consumers and professionals. But as submitted in Volume 3, section 1.3.2, liberal interpretation is its more proper role, at least in professional dealings allowing these other sources of law to revive in international commercial transactions in interpretation and supplementation (if one still wants to distinguish) and focusing on a risk management approach to contract interpretation with a literal explanation of texts when meant as a roadmap and risk management tool as is usual in commercial dealings and recognised in proper relationship thinking. It has already been said that this creates particular challenges in civil law outside contract where the good faith interpretation technique fits less well but there may still be normative or expansive interpretation of texts along similar lines, notably in movable property law, where in arbitration the real issue then is whether arbitrators have power to deal with the interests of third parties as property law commonly does. Again, the essence is that other sources of law revive rather than that an exclusive statutory standard is imposed and maintained. For experienced international arbitrators this may be easier to digest, again because they are or should be less inhibited by system thinking, are not there to promote or clarify any legal system in particular— they have no natural lex fori to consider—and have more freedom, which also may lead them into applying the modern lex mercatoria in appropriate cases (when properly pleaded), even public policy and property law or transnational minimum standards in areas where they may have autonomy, as we shall see in the next section.562 But perhaps the essence remains that international arbitrators may not always be fully aware of their inhibitions in this connection and the impact on the reasoning of their legal background and education.

4.1.8. Objectivity in Interpretation. The Effect of Public Policy, Public Order, and Values We have talked so far about rules, that means basically about the norm side of legal activity. One has to start somewhere, but it was already submitted that mostly this is a contentious abstraction and the consequence of positivist thinking, which analytically makes a sharp distinction between norm and fact. It was rather proposed that the relevant rules must be found among all of the sources of law, and which rule is relevant depends on the facts. The law lives in the facts and only becomes relevant in relation to them. To ask what the legal rule is in the abstract does not have much relevance even if beyond litigation abstract rules serve as warning and daily guidance. To that extent they may have a meaningful general content. They are also an important means of knowing and understanding the law and are equally of use in organising our information, but in daily practice and in litigation much comes down to the facts of the case and the general content of rules disintegrates. In section 4.1.6 above, the effect of system thinking, which is rule driven, was critiqued and its intellectual prejudice mentioned. It is engrained in all system thinking or intellectualisation when becoming the established approach in the mindset of practising lawyers, including arbitrators, now most prevalent in civil law thinking. 562 Art 31 of the Vienna Convention on the Law of Treaties refers in the context of treaty interpretation also to good faith. Here it is connected to finding the ordinary meaning of the terms of the text in dispute. But it is only one source of law, there are others which remain clearly relevant, to which Art 38(1) of the Statute of the ICJ testifies. One may also ask whether international treaties concerning private law need not be interpreted differently. Treaties like the Vienna Convention on the International Sale of Goods have their own interpretation clause (Art 7), however much it may be criticised; see also Vol 1, s 1.4.15.

286 Volume 2: The Reasoning of International Arbitrators This has the advantage of making litigation shorter and cheaper, in civil law countries supported by codification’s pretence to truth and completeness. However, it has already been said that in this manner much fact may fall off the plate and be considered irrelevant as not fitting the system. Hence also the lesser role of discovery in the civil law litigation tradition, although it risks stifling the (re)formulation of the individual rule that must determine the outcome of each case in the light of all the facts and become sensitive in this manner also to new facts and needs especially if becoming sufficiently pressing. The better view is thus that in each case the legally relevant rule depends on the legally relevant facts and vice versa. They cannot be separated and there is an intimate connection.563 This interdependence of norm and fact is analytically an epistemological issue. It means that the nearest rule must be found and is tailored or reformulated so that it can cover the relevant facts but also that the facts are selected or restated in such a way that they connect with the rule which itself must then be considered in its progression. That goes ultimately to the cause of action and the relief on offer. If norm and fact remain too far apart and cannot be formulated as relevant to each other in this manner, there will be no cause of action and no relief can follow. It may be truly in this aspect that judges and arbitrators come into their own and this is also at the heart of their reasoning, with the caveat that arbitrators are bound and limited to the submissions of the parties in principle—again all is for them fact and they are not directly concerned with the norm side, the essence is the evaluation of the evidence before them—unless again there are areas where they have acquired original power. Especially in the latter case, it may leave them considerable discretion.564 Choices must be made. Still, it behoves adjudicators to find as much objective guidance as they can, even if ultimately there is a discretionary element, which at least for judges is generally acknowledged and the cleverest reasoning cannot hide that fact. It has already been said that proper reasoning may impose some rigour, but for arbitrators the outcome might not be the same, hemmed in as they are by the pleadings of the parties (except in the limited areas of their autonomy). On the other hand, when properly pleaded, international arbitrators may have more flexibility and may recognise new situations and needs more readily. Where they have more autonomy, it was submitted, they must still ask for further submissions, they can hardly go by their own knowledge. To keep this process as objective as possible, especially where there is autonomy, there are also the traditional tools in deductive, inductive and analogical reasoning. None of them achieves objectivity entirely unless the situation is pure repeat, which is unlikely. Why incur the cost and bother?565 More importantly, none can easily deal with innovation in terms of meeting 563 The issue becomes more pressing where there is still a possibility for appeal on points of law, see s 69(2) of the English Arbitration Act of 1996, which allows an appeal on points of English law if the other party agrees or with leave of the court. Can fact and law always be distinguished, eg, conduct may lead to reliance and a valid contract, but how much conduct and reliance is needed? Is custom fact or law? Is lack of evidence a point of fact or law? Which law decides about the distinction? 564 One can also say that the norm is here constantly remade, different in every time frame for every case, which connects with the American realist view that all law finding in this manner is part of the general moral and social discourse of the time, which ultimately rises above subjectivity and becomes cultural; see in Germany Hans Georg Gadamer, Wahrheit und Methode (1960), transl Truth and Method, 2nd edn (London, 1989). See further Vol 1, s 1.2.13. 565 It is not necessary to digress and a simple example may suffice. Assume that there is a rule that all vehicles must drive on the right. That is the major in deductive reasoning. You did not, that is the minor, so you broke the law. But, in fact, you drove a moped on the pavement in the opposite direction. Is a moped a vehicle? Here we may have to resort to inductive reasoning by going up to an imagined higher rule which requires that anything that has wheels must drive on the right. So, there may still be an offence, but it is less certain. In any event, is a pavement included in the general prescription that we must drive on the right? That may be more like analogy. Or may

Volume 2: The Reasoning of International Arbitrators 287 new fact situations and needs, which may then also regard the coherence and completeness of the system for those who think in this manner. While logic (deductive and sometimes inductive reasoning) is often considered the key to the application of civil law and fits better or conforms more easily to system thinking, it has been argued in this connection that the common law thrives more on analogy566 in its search for the nearest case or statutory text after all facts in so far as they can be known are put on the table. It may be that newer needs become so more readily apparent through a proper and careful consideration of all the facts. In doing so, common law is supported by binding precedent—a rule of relatively recent vintage, which does not apply in the highest courts. It is mostly explained as finding a ratio decidendi and then veers towards system thinking on the norm side, see also Volume 1, section 1.3.3, but it has already been said that the common law lawyer thinks rather in terms of little pictures or stories where fact and norm combine as examples in an unarticulated manner and are applied to new fact situations, if necessary to be distinguished or invoked as support, often by way of analogy.567 This is not now irrelevant in civil law either and has become much more important in modern times under similar notions of nearest cases and a similar emphasis on comparable fact situations; there is here some approximation. Ever since von Savigny, civil law has also allowed a measure of teleological interpretation, at least in private law, where the English remain more sceptical but sometimes allow a seemingly more limited purposive approach, see also Volume 1, section 1.3.3. Teleological interpretation assumes that the purpose of all rules can be established, but again it is hardly an objective criterion if the purpose is not clear or is changed and it would appear to allow easily for multiple solutions. Social policies are here no better guide either. In Germany in case law, under pressure of the circumstances, a change of circumstances was early on allowed to lead to adaptation or termination of the contract, but the development of pre-contractual disclosure and negotiation duties took much longer, both codified only since 2002. It was already repeatedly said that German scholarship in search for renewed objectivity is keen to find further system even in respect of the mopeds not drive on pavements at all because they are only meant for pedestrians? That looks like teleological interpretation. If so, is there still an exception for small children, etc? The importance is that nothing is here fully objective; everything is a matter of judgement. See further also the discussion in Vol 1, s 1.2.13. 566 See LL Weinreb, Legal Reason, the Use of Analogy in Legal Argument 2nd edn (Cambridge 2016). 567 It may be repeated in this regard that precedent becomes truly only relevant in repeat cases of fact and law and does not merely work on the rule side in terms of ratio decidendi, which depends on extrapolation and is often an uncertain search by no means objective, see Christie (n 522) 1317. See also the reference to Karl Llewellyn in n 522, above, but cf also M Eisenberg, The Nature of the Common Law (Cambridge, MA, 1988), 50ff who has more confidence. In truth, precedent does not go very far in practice, even less far in the US. ‘Critical Legal Studies’ has always been suspicious of precedent as a means to support and safeguard the rules of the establishment, see Duncan Kennedy, A Critique of Adjucation (Cambridge, MA, 1997), see also n 536 above. In this view, there are no reliable criteria for distilling any rule from it. It is only guidance or a matter of persuasive force. Fact situations (unless repetitive) may easily be distinguished, although, while trying to do so, it must be admitted that a more analytical attitude may take over with the accent on rules as such, which, however, may well be formulated quite differently from what the original case might have contemplated. That allows moving forward regardless of the original finding, but also undermines the concept of binding force and precedent. In civil law (and international law), the rule of precedent never had an official status; its role is only relevant when it may lead to custom. Justinian law in C.7.45.13 had expressly rejected the idea: judges must judge only on the basis of the laws, not precedents (exampla), see also Baldus at C.7.45.13 pr. That remains the attitude in civil law to this day. It is also the attitude of international courts, see Art 59 Statute of the International Court of Justice, and, when properly understood, of arbitrators. Even in common law countries, it is also the attitude of the highest courts. The Ius Commune would allow, however, an interpretation to become customary when it acquired the same legal status as custom. This became generally accepted, see Baldus at D.1.1.37 under 2 and at C.9.1.4 under 4, but the status of custom is in modern codification thinking now deprecated as we have seen. This may also have an effect in the area of precedent.

288 Volume 2: The Reasoning of International Arbitrators good faith notion and judges are supposed to contribute to this also, although the German courts have often been forced to take the lead from academia assuming greater freedom even though with a strong predilection to express themselves in a systemic manner.568 Again, we also have public policy and order to think of, while there are also ‘policies’ in terms of moral or other values or objectives, the idea of justice, the demands of social peace, utility, efficiency and growth; the need to keep the marketplace clean, perhaps more stable, and there are also issues of certainty, predictability and finality, already mentioned also. Much is thus dependent on the views of judges in individual cases or on those of arbitrators at least in the limited areas where they have obtained autonomous law application power and need not merely depend on the representations of the parties. Thus, advocacy becomes important and legal reasoning risks becoming ‘rationally indeterminate’ see further Volume 1, section 1.3.4. But again, the position of judges is here different from that of arbitrators; they have institutionally more power but also more responsibility, but in respect of all it can be asked if this really is ever more than accepting what adjudicators simply like and that they have the right to promote some values or policies more than others? At least arbitrators would be hemmed in by the representation of the parties and the way they define their dispute. Even where they might have autonomous powers in public policy issues, they would have to ask for and depend on further representations of the parties. More generally, the question remains how much can be explained beyond preference or inference? It has already been asked how adjudicators can explain why they find some witnesses of fact more truthful or credible than others assuming nobody is openly lying.569 Does expert testimony (even on points of law) need to be further explained and must arbitrators say why it is preferred and explain it in their decisions? It would assume superior knowledge, which is unlikely to exist, and greater plausibility is the only realistic criterion for arbitrators. In fact, in arbitrations, arbitrators with special knowledge might be a danger unless all members of a tribunal have it—a de facto situation of a sole arbitrator could arise. In any event, it is questionable whether arbitrators can take the lead in matters of fact and substitute their own knowledge. It raises in particular the question of the absence of the possibility to cross-examine them.

4.1.9. Sources of Law in Transnational Professional Dealings570 Where a more liberal interpretation technique along the above lines now prevails in international cases, it was submitted that the other traditional sources of law may indirectly revive at least in 568 See also text at n 455 above and Vol 1, n 94. 569 It may explain the greater scepticism generally in England with respect to the reasoning requirement. If it is true that people are not aware of how they think, and are in any event much guided by their subconscious, then they cannot rationally know how they come to their conclusions either. In this vein, everybody tries to rationalise their position in conflicts of the most diverse nature, but most of them produced in the heat of the argument or upon subsequent rationalisation may have little to do with the conflict and its cause. In evaluating a situation, it would appear that there are rational and subconscious processes at work which are difficult to separate and work differently in different people. It may also explain the overturning of earlier precedent and the emergence of new perceptions in identical cases. The most that can be and must be asked is that arbitrators are neutral, have no ulterior motives (and are seen not to have them) and do their best. Indeed, no more could be required from them. For ordinary judges it may still be different as they may have to explain the law at the same time. Again, that is not the task of arbitrators. Protection may be in numbers: three arbitrators may be safer than one. 570 The word ‘transnational’ is used here for private transactions and the law applicable to them. The word ‘international’ is then reserved for public law, which conforms to current terminological practice, see also Vol 1, n 23.

Volume 2: The Reasoning of International Arbitrators 289 contract interpretation and supplementation, even at the domestic level in the ordinary courts and arbitrators should be well aware of it. It may be more obvious in international cases but even in international arbitrations this interplay of many sources of law goes still largely unnoticed. The perception in the mind of many, including international arbitrators, often remains that all law is territorial and it is often still so pleaded. The important consequence is that even in international commercial and financial transactions, it is still axiomatic for many that some local law must be found to apply because there is no other, even where international arbitrators have obtained some autonomy in the application of the law. Yet the true issue is whether other non-statutory laws, such as fundamental legal principle, custom, general principle and party autonomy, also when transnationalised, can still be ignored in this manner even when properly pleaded in international arbitrations, for example the customs of the international marketplace, but in international arbitrations also the customs of international arbitration itself. That is an issue especially when transnational law is not pleaded but arbitrators exercise autonomy in the areas where they may do so, the simplest example being the procedural and evidential areas (unless parties have specifically agreed otherwise) but it may also concern public policy and public order issues as we have seen. That all law is national and territorial was and is indeed the basic tenet of all private international law, which purports to be no more than a conduit to the ‘proper’ domestic laws and is itself part of it. In civil law, the sequel is that the only legitimate law is legislation (and its system), even if subject to some liberal interpretation to maintain its credibility, when other sources of law may indeed revive. Perhaps more surprisingly, it is to be noted that the English accepted this private international law approach also, a result of their variety of legal positivism and nationalistic thinking.571 In essence, this approach is conflicts of laws accepting rather than avoiding. However, it was also shown that as of the 1930s in the US in interstate cases, early cracks appeared in this proposition. Here the idea became instead that the courts seised in each instance in interstate cases are likely always to apply a form of their own law (lex fori), adapted, however, for the foreign elements in the case. This ‘homeward trend’, which is sometimes also seen as a return to the true common law method,572 was not necessarily followed in international cases with contacts outside the US, but it also had an effect in that area. It could not be immediately relevant in international arbitrations as international arbitrators did not have a proper law of their own (lex fori) which they might thus vary. Nevertheless, American arbitrators would bring this newer attitude also to international arbitrations. The true significance was the emergence of a substantive law approach to internationalisation potentially ending in legal transnationalisation. It at least avoided a blind application of domestic laws that had never been written for international transactions. Other sources of law could then also be considered directly relevant in international transactions and different public policies or governmental interests could be better weighed. Again, this reflected the US approach in commerce (see section 1-103 UCC) and could also find more acknowledgement in international arbitrations.

571 Very much in the formal German style to which Dicey, Morris and Collins in their newer editions up to 2012 increasingly testified, pushing back international custom ever further, see eg rule 222 in the 14th edn of 2006 allowing the custom of the mercantile world to operate in the area of international bonds, deleted in the 15th edn of 2012, although maintained in part in the text at p 2099. 572 B Currie, ‘The Verdict of Quiescent Years’ in Selected Essays on the Conflict of Laws (Durham, NC, 1963) 627, see further Vol 1, s 2.2.3.

290 Volume 2: The Reasoning of International Arbitrators In interstate cases, the problem was that in this manner each court or other adjudicator developed its own ‘transborder’ version of state law. In international dealings, the modern concept of the lex mercatoria or transnational law merchant reinstitutes discipline and provides a clearer method. It is conflict of laws avoiding and returns to pre-codification Grotian thinking, it was submitted, basically taking the same approach as public international law does under Article 38(1) of the Statute of the ICJ and Article 53 of the Vienna Convention on the Law of Treaties (in respect of peremptory law) and recognising as sources of law fundamental principle, customary law, treaty law, general principle and party autonomy. When conflicting, it must find a hierarchy between these various sources of law, see further Volume 1, section 1.4.14. That is one challenge of the new lex mercatoria, with which courts and more particularly international arbitrators may be confronted, the latter more especially upon the pleadings of at least one of the parties.573 But as we have seen, the further challenge is to deal in appropriate cases also with overriding public order, public policy and social values or policies (or governmental interests) and determine in each case which one is relevant and whether they may themselves be transnationalised, particularly as minimum transnational standards. Or to put it in American realist language: dispute resolution in international cases becomes part of the moral and social discourse about the applicable law in a globalised world. It requires a paradigm shift. In respect of relevant local governmental interests (or regulation), finding the relevant or pertinent ones was never truly a question of private international law (as it is not a private law issue), never mind Article 9 of the 2008 EU Regulation on the Law Applicable to Contractual Obligations (Rome I), which in any event does not apply in international arbitrations conducted in the EU. Perhaps sections 402 and 403 of the Restatement (Third) of Foreign Relations Law in the US (1987) are more to the point, see further Volume 1, section 2.6.6. It is a question of what the Americans call the ‘jurisdiction to prescribe’ in respect of all that happens in terms of conduct and effect under an international transaction on the territory of a state whose policies and values cannot then be ignored. It has already been said several times that a sovereign must be obeyed in its own territory and the international transaction to the extent it comes demonstrably onshore must be deferential to domestic overriding values and notions unless treaty law (or customary international law) says otherwise. The modern lex mercatoria supports this, but it was also noted that if states claim for their companies the benefits of globalisation, national policies may have to yield to international minimum standards. Thus, local bankruptcy laws may have to accept transnational floating charges created and operating in globalised production chains. Modern BITs present important examples for international investments, although conflicting state policies in international commercial transactions may still have to be balanced in individual cases. In any event, to the extent the international flows can hardly be localised any longer, there may have to be transnationalisation of public policy in the international minimum standards: see section 1.2.3 above. This is not a matter of the new lex mercatoria proper (although it may become reflected in fundamental principle), which is private law, but of other norms that compete with it and will often be found to prevail as mandatory policy. Competition law still provides a good example. In any event, regulation in many areas can often no longer be efficient on a purely national basis; one may think of the environment or of financial stability. Foreign investment protection is already substantially internationalised and has become in truth an aspect of transnational

573 It should be noted that this hierarchy is not at the moment at the forefront of concern under Art 38(1) of the Statute of the ICJ where the same problem nevertheless arises, see Vol 1, s 1.4.5.

Volume 2: The Reasoning of International Arbitrators 291 administrative law.574 The law in international transactions thus loses its purely territorial flavour and ambition. The marketplace itself is transnational and at least in terms of stability and abuse can hardly be regulated any longer on a domestic basis. It was argued before that the idea that all law is domestic per se has run its rational course. It cannot or can no longer effectively respond or, when applied to international cases, may lead to low-quality results. It should be recalled in this connection that the value of the international flows of goods, services and money now far exceeds the GDP of the largest countries in the world and that national laws were seldom written for them. Of course, one could ask for treaty law instead and it can be helpful but there is much beyond it that cannot wait or be fully captured by treaty texts alone; in private law unification, its quality is often poor and its coverage only partial, its nature being mostly compromise that does not allow for much deeper thought nor easy adaptation. It tends to be intellectual, not practice oriented. Again, facts become secondary. The international sales law of the CISG of 1980 is a vivid example of the limits; it is excluded on the whole by transnational professional practice. More importantly, it needs interpretation too so that treaty law of this nature cannot be seen in isolation and when properly understood cannot ignore the other sources of law either, among which it must find its own place in the hierarchy of norms. It cannot itself determine that place, although Articles 4, 7 and 9 make some attempt: see further the discussion in Volume 1, section 1.4.15. Mandatory transnational principle and practice prevail over it: see Volume1, section 1.4.14. The EU, which has an infrastructure in this respect, may do better but has other problems and only limited authority in private law formation while its sales law initiative (CESL) was not promising, confused and lacked sufficient quality.575 It was promptly withdrawn. But at least it is acknowledged in its case law that it does not produce national law but constitutes a legal order of its own, which, in appropriate cases, will also allow for fundamental principle to prevail even over the texts of its founding treaties576 (see further also Volume 1, section 1.4.6). A similar attitude may be expected in the transnational commercial and financial legal order if its workings are properly understood. Indeed, it may now be similarly argued that in the professional sphere we have a commercial and financial legal order with the lex mercatoria and its hierarchy of legal sources as its private law and with its own public order and policy requirements, potentially expressed in international

574 Dalhuisen and Guzman (n 356) and s 3.3.1 above. 575 Dalhuisen (n 561); see further also H Eidenmueller, ‘What Can Be Wrong with an Option? An Optional Common European sales Law as a Regulatory Tool’, SSRN.com (2012). 576 Case C-144/04 Werner Mangold v Rüdiger Helm [2005] ECR I-19981, upholding as fundamental principle the concept of non-discrimination on the basis of age. This has become a check on private law legislation, although it may not (yet) be invoked directly between private parties. Non-discrimination according to nationality is no less fundamental, see Case 115/08 Land Oberoestereich v Cez [2009] ECR I-10265 and also applies in private dealings under EU laws, in this case directly. See further also Case C-101/08 Audiolux a.o v Groupe Bruxelles Lambert SA [2009] ECR I-9823 and in particular para 40 of the Opinion of AG Trstenjak, see further Vol 1, s 1.4.5. This case law may also be seen in the light of the extension of the Court’s jurisprudence following Case C-33/76 Rewe v Landswirtschaftskammer fur das Saarland, [1976] ECR 1989, disallowing, even in the absence of precise EU rules, restrictive rules of national laws if affecting private law aspects such as damage calculations, statutes of limitation, interest charges, res judicata effect, etc. when these national laws obstruct the effectiveness of EU principle, enforcing notably the basic EU freedoms of movement of goods, services, capital, information and persons. See further also D Kraus, ‘Die Anwendung allgemeiner Grundsätze des Gemeinschaftsrecht in Privatrechtsbeziehungen’ in K Riesenhuber (ed), Entwicklungen nicht-legislatorischere Rechtsangleichung in Europäischen Privatrecht (Tubingen 2008) 54, and A Metzger, ‘Allgemeine Rechtsgrundsätze in Europa’ (2011) 75 RabelsZeitung 845.

292 Volume 2: The Reasoning of International Arbitrators minimum standards, notably in respect of competition issues and other market abuse.577 This law may be applied by arbitrators and become part of their reasoning,578 upheld by state courts recognising their awards.579 It means that whilst international arbitrators on the one hand have less power than judges to impose their own views, they may on the other hand show much greater sensitivity to legal transnationalisation and favour it in appropriate cases especially when pleaded by one of the parties but no less in those limited areas where they have acquired autonomous powers of law finding and decision taking.

4.1.10. The Powers of International Arbitrators In the foregoing it was submitted that we must place the role of the modern arbitrator in international commercial and financial cases and dispute resolution firmly in the international flows and in law formation and application in that context, therefore in the transnational commercial and financial legal order. Only then may we gain a proper perspective, it was submitted, which in these matters can no longer be rationally obtained from a national or territorial point of view and from the practices in the ordinary courts. It follows that we must see the challenges of legal reasoning in international dispute resolution also in that light. Without it, it may hardly be possible to understand what is going on and what the problems truly are. Purely local law and dispute resolution, especially if limited to statutory law (and the system underlying it and cases supporting it) as applied by state courts present too narrow a picture. That means in particular that the civil law method of reasoning in its ordinary courts may come short in international business dealings unless it accepts all modern sources of law and can also take the internationality of transactions and their unity into account. 577 JH Dalhuisen, ‘Legal Orders and their Manifestation: The Operation of the International Commercial and Financial Legal Order and its Lex Mercatoria’ (2006) 24 Berkeley Journal of International Law 129. See further also G Shaffer, ‘Transnational Legal Ordering and State Change’ in G Shaffer (ed), Transnational Legal Ordering and State Change (Cambridge, 2013) 1. 578 See ICC Case No 3131, 26 October 1979 (Bernardo Cremades, President) (1984) IX Yearbook Commercial Arbitration 109. It was probably the first major international arbitration in which the modern lex mercatoria was applied. 579 The French Cour de Cassation accepts the application of the modern lex mercatoria, see Compania Valenciana de Cementos Portland SA v Primary Coal Inc Cass Civ (1) 22 October 1991, 1991 Bull Civil I, no 275; and earlier Pabalk Ticaret Ltd Sirketi (Turkey) v Norsolor SA (France), (1984) IX Yearbook Commercial Arbitration 109. So did the Austrian Supreme Court after much soul searching on 18 November 1982 in the ICC Case No 3131, (1984) IX Yearbook Commercial Arbitration 159; see also AJ van den Berg, The New York Arbitration Convention of 1958 (Deventer, 1981) 29, who accepts the enforceability of a-national awards under the Convention provided the awards are themselves not detached from a national arbitration law. As these cases show, this is in itself increasingly contentious. The English courts, after having consistently rejected awards based on equity until 1978, see Maritime Insurance Co Ltd v Assecuranz-Union Von 1865 [1935] 52 L1LR 16 and Orion v Belfort [1962] 2 Lloyd’s Rep 251 (QB Com Ct), changed their attitude thereafter: Eagle Star v Yuval [1978] 1 Lloyd’s Rep 357. Application of general principles may now be acceptable in England: see Deutsche Schachtbau- und Tiefbohrgesellschaft [1987] 3 WLR 1023, see also n 37 above, in which the Court of Appeal under Sir John Donaldson held unanimously that at least international arbitrators could rely for the applicable law on internationally accepted principles, thus accepting not only general principle as a source of law but allowing international principles and customs to operate in that connection also. Again, one may, however, regret the divergence here between arbitration and ordinary courts, which is, however, becoming increasingly accepted. In the US, arbitrators may have less trouble in applying the modern lex mercatoria in international commercial disputes when properly pleaded, and this is not normally challenged, see DW Rivkin, ‘Enforceability of Arbitral Awards Based on Lex Mercatoria’ (1993) 9 Arbitration International 67. It is also reflected in the UCC explicitly recognising the force of custom, see s 1-103 UCC.

Volume 2: The Reasoning of International Arbitrators 293 This is so far hardly the approach in Europe in the ordinary courts, not only on the Continent and is not much in view in England either, where a narrow private international law ethos and statist view now often also prevail in the ordinary courts. It may be better in international arbitrations as was noted in the previous section assuming that international arbitrators are sufficiently aware of the dilemmas and challenges and especially the differences. Notably they should not consider themselves pseudo judges even if the judicialisation of the arbitration process has worked against this, see again section 1.1.14 above. Although international commercial arbitrators may be better placed in this regard and may do more justice to the international commercial aspects of the case, their role must still be further considered and explained. This was in summary done at the end of the previous section. It has already been said several times that this is particularly relevant as to the question whether they can invoke and apply the law independently, that is regardless of the representation of the parties. The easy answer is that the arbitrators’ powers are determined by the arbitration clause and the rules that may be incorporated into it, supplemented or corrected by the lex arbitri of the seat, usually the seat’s arbitration statute, but it was doubted before whether that still gives the full picture or any satisfactory answer, especially in applying the modern lex mercatoria when properly pleaded or international minimum standards or other public policy or public order concepts, even if not pleaded: see especially the discussion in section 1.1.10 above. Another view is that the international arbitrators’ powers institutionally derive rather from the international commercial and financial legal order itself, or what the French now call the ‘international arbitral order’ in which they deem the arbitration and its award to be founded,580 see the discussion in section 1.1.8 above. It follows that the arbitration clause (split out to this effect) and the powers of arbitrators are founded in and covered by the laws of that order as may still be corrected by the mandatory laws and public policies of individual countries to the extent the arbitration plays out on their territory or needs support there. That gives the lex arbitri of the seat powers only to the extent there is conduct and effect of the arbitration on its own territory but no more and they are not extraterritorial per se.581 It was explained before that leges arbitri of other countries may be similarly relevant in as far as the arbitration plays out on their territory especially in terms of support and recognition and enforcement of any awards and the conditions in this regard. Another issue is one of characterisation. Is the power of the international arbitrator indeed contractual or has it become judicial in the international legal order? This question is often posed primarily in connection with the liability of arbitrators or their immunity but is more profound as we have seen in section 1.1.11 above.582 In particular and as a model, it would now appear preferable to look at the arbitrators’ powers as sui generis, or judicial only in a special manner or in special areas, and not therefore compare them to ordinary judges, (although there may still be a similar immunity). Rather it was assumed that these powers are founded in the transnational 580 See Cour de Cass Civ 1, 29 June 2007 in Ste PT Putrabali Adyamulia v Société Rena Holding et Société Mnugotia Est Epices, Arrêt no 1021, 207 Revue de l’Arbitrage, 507 and for the delocalisation issue see s 1.1.5 above. It may still be true that this International Arbitral Order remains French style, but there is in France some significant acceptance of a more transnational approach, more recently perhaps best represented before the Hague Academy by Emanuel Gaillard, ‘Aspects Philosophiques du Droit de l’Arbitrage International’ (2008) 329 Receuil des Cours 49. 581 It is well established that there is no longer a double exequatur and that the annulment at the seat is not dispositive of recognition of an award elsewhere, see s 1.5.2 above. Similarly for support. It should be asked from the courts in countries where it is needed and the prior intervention of the court of the seat would not appear relevant any longer. 582 See the discussion of Redfern and Hunter on International Arbitration, 5th edn, 2009 and 6th edn, 2015 in this regard in s 1.1.13 above.

294 Volume 2: The Reasoning of International Arbitrators commercial and financial legal order itself and are merely activated by the relevant arbitration clause, which could further delineate them but which is not the origin of these powers. In fact, in this approach, the arbitration clause itself is also governed by the law of that order (after proper separation from the rest of the agreement and its applicable law, itself a facility also derived from transnational law),583 meaning by the modern lex mercatoria and its various legal sources, therefore not or no longer the law of the seat. It will be argued in section 4.1.12 below that internationally this dispute resolution facility is part of the law in action rather than the law in litigation, another key insight, it is submitted, see further Volume 1, section 1.4.18. Founding these powers in the transnational legal order itself allows for a more objective view of what they are in the areas where international arbitrators have obtained their own authority, as in procedure and evidence, jurisdiction, arbitrability and reasoning. In property they may even have acquired equitable powers;584 also to give relief in public policy and order issues they may now also have (some) autonomy. Competition issues and issues of market abuse were mentioned before. In pressing cases they might conceivably even consider to use transnationalised notions of justice, social peace and efficiency as correctives and here again they may have acquired some autonomy in their powers under transnational law, as discussed in sections 1.1.10 and 1.2.5 above. It was said before that this does not make these arbitrators amiable compositeurs; they decide on the basis of the (transnational) law as they find or construe it. It reflects the fact that arbitrators may increasingly exert considerable powers in areas of their autonomy, but they are not free, even if they become more like judges at least in these areas, and may then also see it as their task to clarify the law, but again that would be the transnational law as the law of the order for which they then speak and in which their powers are founded. Even so, it was submitted that they must still ask for further submissions of the parties, they can hardly pretend full knowledge of this law as ordinary judges can in respect of their own. The question remains where international arbitrators would get their wisdom from? In international arbitration, the international arbitrators’ transnational powers are mostly recognised first with regard to the law of procedure and evidence and it also applies to the determination of the applicable substantive law in the sense that arbitrators no longer need to follow conflict of laws or other rules in this regard, certainly not those of the seat if they find the result improper, and they may in appropriate cases opt instead also for the modern lex mercatoria as the substantive private law as we have seen (at least to the extent pleaded by one of the parties).585 This is what transnationalisation means. Importantly for our purposes, once this is understood and accepted, this also applies to the method of reasoning, which is then also determined by the requirements and law in this regard emerging in the international commercial and financial legal order itself and which in principle international arbitrators define also. It applies equally to the notion of arbitrability: regulatory issues may thus become arbitrable under transnational law, and in finance also issues of financial stability, market abuse and money laundering. It was submitted that this may have a special importance in international financial arbitration as the important set-off and netting facilities (see section 2.2.2 above) may then also become arbitrable and the decision conclusive even in respect of their effect on third parties, not themselves

583 If parties still want a domestic law to apply, they can choose it but in doing so they risk domesticating their arbitration and it is not advisable. 584 Dalhuisen (n 40) 510. 585 As was shown in nn 579ff above, the application of the modern lex mercatoria by international arbitrators has constantly been upheld in recognition and enforcement cases and may be deemed accepted. A proper analysis of the lex mercatoria will also discount a party choice in favour of a domestic law, which must still find its place among the other rules and is subject to higher mandatory ones in the transnational order, see s 1.2.2 above.

Volume 2: The Reasoning of International Arbitrators 295 party to the arbitration when it comes to determining the extent of the set-off.586 It is then a matter of custom in that order which affects all participants. This may also have a bearing on the effect of an intervening bankruptcy concerning any of the parties,587 even if bankruptcy law remains domestic, the consequence of all enforcement power remaining in sovereigns. To determine the rank of security interests in relation to outside interests and its bankruptcy effect may then also enter the powers of international arbitrators, just as it does for ordinary judges. Related issues of public policy and public order, either of the national or transnational type, may then also come within the ambit of international arbitration588 and international arbitrators may even be able to determine which governmental interests are to prevail in international business transactions. Again, these powers under transnational law could not possibly derive from the arbitration clause as these are issues not at the free disposition of the parties.589 In other words, parties may not be truly able to determine who decides public policy issues for them. Although they may be able to amplify these powers, they cannot create them but the international legal order might confer them on international arbitrators and that appears to be increasingly acknowledged. It was already said several times that overriding issues or values or international minimum standards might then also be raised even at the initiative of the arbitrators (always subject to a proper hearing and equality between the parties).590 It may well be that as a consequence financial arbitration is acquiring a different slant altogether as foreign investment arbitration already has, this being the reason why it was treated as a special type of arbitration in Part II above.591 Again, for better or worse, the consequence is that international arbitrators become more like judges at least in those areas where they acquire original power, in finance in proprietary matters, probably in the manner of equity judges, although, even then, they will have to ask for further submission of the parties and/or outside organisations and cannot merely rely on their own judgment. They do not have that institutional status and power. In any event where would it come from and how could it prevail without cross examination? And this will come out also in the reasoning. If legal reasoning is then also governed by the law and practices of the transnational commercial and financial legal order, it still has to be plausible and international arbitrators must show restraint and good sense. These are minimum standards for them but they are few and only geared to avoiding excess, especially exceeding their powers (largely starting to behave like ordinary judges). Even if these powers are original, judicial activism and proactivity in system thinking is notably not their task. These may be seen as transnational arbitration principles which underline that international arbitrators are not in full control or principal spokespersons for the transnational commercial and financial legal order or for the law that prevails in it. 586 This area of third-party effect of arbitral awards may then have to be rethought, also in the light of the US Supreme Court’s positive attitude towards class actions in arbitration, see Green Tree Financial Corporation v Bazzle, 539 US 444 (2003). 587 See s 2.3.3 above. 588 See also ss 1.2.3–1.2.4 above. 589 International practice is also cited in connection with the separability of the arbitration clause, see Art 19 Arbitration Act People’s Republic of China and Art 5(4) CIETAC Rules. It would appear to follow that the arbitration clause is then also covered by such practices, therefore by transnational law, unless parties have clearly indicated that they want it differently. Again, it is not or no longer a matter of the law of the seat. In any event, parties can choose another, whether wise or not, but any choice of this nature is still subject to the hierarchy of all sources of law within the modern lex mercatoria, here concerning international arbitration. 590 See s 1.1.4 above. 591 See also JH Dalhuisen, ‘The Applicable Law in International Financial Disputes’ in J Golden and C Lamm (eds), International Financial Disputes (Oxford, 2015) 169.

296 Volume 2: The Reasoning of International Arbitrators To the extent they have power, they can avail themselves in this regard of the modern functional methods if they so wish, but it has already been said that large abstract tracts, legal sophistry and hair splitting are much to be avoided. Especially, they must be aware of the submissions of the parties, ask for more wherever they may raise legal points themselves, may even have to go outside for the opinions of international organisations and NGOs, but should not merely expand or complicate the dispute, understand the need for speed and the cost, and also be aware of the cost consequences of their own interventions. In this connection, in the transnational commercial and financial legal order, they must also remain aware of the commercial nature of the dispute, which may impose its own efficiency considerations. To repeat, international arbitrators are there primarily diligently to solve a dispute as defined by the parties, no more, and they are unwise to see themselves in any other role, especially as law makers, even if on occasion that may be the result.

4.1.11. The Issue of Consistency and the Meaning of Precedent Ultimately the issue of consistency may need some further attention in the context of international arbitration and the reasoning of arbitrators before we can move on. Is consistency in their findings relevant and, if so, is it within the ability of international arbitrators to achieve this, notably need in this connection ordinary court decisions be considered whether or not pleaded? In practice, there may result inner inconsistency in the award itself (as there may be in ordinary judgments), but also between the legal findings and the broader tenets of the applicable law. This may go to the question of legal systems and whether arbitral awards can or must make any particular contribution to them, and to the feasibility and appropriateness of doing so. It then also goes to the meaning of precedent592 and ultimately reaches into the issue of legal certainty (beyond the paramount need for transactional and payment finality).593 Reasoning from any such system or from the power of analogy then become closely related issues as they suggest some unity. Again, are there differences between ordinary judges and international arbitrators, business and consumer lawyers, common and civil law lawyers, public law- or private law-oriented practitioners? That might then also be reflected in their reasoning. First, it is submitted that there is nothing obvious about coherence in the law;594 we know this very well from regulation but also from interpretation. Law is always work in progress, unless one adopts the academic civil law codification view in private law and its intellectual

592 See also Gilbert Guillaume, ‘The Use of Precedent by International Judges and Arbitrators’ (2012) 2(1) Journal of International Dispute Settlement 5. Famously, Karl Llewellyn demonstrated early on the problem with all precedent: it is Janus-faced, the process being driven by getting rid of precedents that are troublesome and by promoting precedents that seem helpful, see KN Llewellyn, ‘Remarks on the Theory of Appellate Decisions and the Rules and Canons about How Statutes Are to be Construed’ (1950) 3 Vanderbilt Law Review 395. See further also the comment in n 567 above. See for foreign investments, n 611 below. 593 Certainty is an unclear objective but finality is much more concrete and is a proprietary concept, see s 2.2.6 above. It raises problems as to the third-party effect of any awards that is its effect on persons or entities not party to the arbitration, obvious in proprietary issues and those that raise public policy where the public at large becomes involved. 594 See K Kress, ‘Legal Reasoning and Coherence Theories: Dworkin’s Rights Thesis, Retroactivity, and the Linear Order of Decisions’ (1984) 72 California Law Review 369. See further also Th Schultz, ‘Against Consistency in Investment Arbitration’, in Z Douglas et al (eds), The Foundations of International Investment Law 297 (Oxford, 2014).

Volume 2: The Reasoning of International Arbitrators 297 pretence, which indeed assumes one coherent rational system that by definition stands for reality (seeing it as entirely separate from the facts to which it applies) that must be promoted by all dispute resolution facilities. It was discussed in section 4.1.6 above. In any event, there are other considerations concerned foremost with ever evolving values, needs and practicalities, which may seriously conflict: pressing aims of justice, social peace and efficiency were also already mentioned. All the same, it is often still assumed that consistency is inherent in all law once properly understood or that adjudicators must strive for it at least in civil dispute resolution. It has already been said that it may be a legitimate academic pursuit where finding order in disparate cases and legislative texts becomes an objective. Indeed, as academics, we must look for structure, see also Volume 1, section 1.1.7 above, although this may be quite different from presuming systematic unity and assuming some higher truth in each case that may help solve other disputes more satisfactorily or objectively in the future and which could then motivate and support a measure of consistency. As just mentioned, even in codification countries, the search for unity or system has never been very obvious in regulation and in other more politically motivated parts of the law and its formation. In section 4.2.2 below the issue will be briefly revisited for foreign investment law. But in international arbitrations, it may be more fundamentally undermined by arbitrators being limited to the representation of the parties, also on points of law, except perhaps in those limited areas where they have more original power. In any event, is consistency merely an issue of logic depending on some assumed intrinsic unity in the law or is there also some overriding unitary notion of virtue or of social policy to be considered?595 In truth, it is seriously problematic to have consistency arguments enter legal reasoning as an overriding requirement even if consistency were easy to determine beyond the obvious. Few experienced lawyers would believe that consistency is innate in the law although many would accept that there is linkage and that there are common principles or notions. But we are far from being able to draw conclusive inferences from this to achieve consistency in outcome and a coherent narrative or account, probably even less so in international disputes. Much would be mere opinion and suggests unity or a form of rationality which may not be there. The law hardly speaks with one voice, certainly in international cases, and there may in any event be many (conflicting) rules and in individual cases other overriding considerations as just mentioned. Fact situations and practical needs may be too different. Decisions will reflect this and can hardly go beyond it. As already mentioned, in international arbitration the picture is further complicated by the requirement that parties must plead fact and law and that no other dispute is on the table in respect of either beyond what the parties have represented and must prove to the arbitrators’ satisfaction. The consistency argument becomes thus moot; consistent with what? Precedents are truly irrelevant also, because the whole array of legal argument may not have been shown or tested. All depends in principle on what the parties have put forward, and it may be very little or, in terms of the applicable law, wrong or incomplete. It has already been said several times that it can only be different where international arbitrators have acquired autonomous legal power, but even then, in the practice of adjudication, arbitrators cannot merely depend on their own

595 N MacCormick, ‘Coherence in Legal Justification’ in A Peczenick, L Lindahl and GC van Roermund (eds), Theory of Legal Science (D Reidel Publishing Company, 1984). Finding unity is not at the moment a priority in advanced American scholarship, which is more interested in policies and in keeping the law living for the next generation and what that takes. See for system thinking n 556 above and n 611 below.

298 Volume 2: The Reasoning of International Arbitrators feelings or insights. No less important, each case needs still to be decided promptly in order for this dispute resolution facility to remain credible. We must move on and not doing so is draining, inefficient and costly, no less so in international commerce and finance. Again, in commercial arbitration, there is a need for speed, cost control, conciseness, focus and closure; disputes must finish, it is an old rule: litis finiri—hence also the possibility of rougher justice in commercial cases and, importantly, in international commercial arbitrations commonly the absence of appeals or similar types of review and much procedural flexibility. In any event, who is to say that appeal judges always know better. It is often believed that speed comes at the cost of justice, but that remains very much to be seen. There is no justice if it cannot be obtained within a reasonable period of time and legal decision taking at whatever level is rightly seen and characterised as no more than (legal) opinion. It follows that beyond the obvious, even a search for consistency, which itself may only be imaginary, cannot be an overriding priority and cause of delay, certainly not in international arbitrations. It is easy to get lost in theory but in the circumstances a search for consistency beyond the obvious could not reasonably or realistically be the task of international arbitrators who are in any event ill-equipped for it, especially when considering the applicability of the law from many different sources. In a perfect world the whole law would be consistent but there may not then be much need for it. Again, beyond the obvious, it is an unmanageable concept and the search for it may be very destructive. Lord Bingham thought that looking for consistency was a vice even in ordinary judges,596 and it cannot be more strongly expressed. It would be all the more erroneous in international arbitrations. Asking for it means not understanding it.

4.1.12. Relevance and Materiality of Evidence The issue of arbitral powers, consistency and reasoning may come to a particular head in matters of evidence, since this is the key issue in all matters pertaining to fact, of which in international arbitrations the applicable law is itself a part and it must be pleaded as such unless there is original law application power in international arbitrators which, it was submitted, remains the exception. The 1999 non-binding but authoritative IBA Rules on the Taking of Evidence in International Commercial Arbitration in its Article 9 covers the subject of admissibility and assessment of evidence and indeed leaves it to the tribunal to determine these issues. Article 9(2) excludes in this connection from evidence or production of documents, statements, oral testimony or inspection all that lacks sufficient relevance or materiality or is privileged or imposes unreasonable burdens to produce. Confidentiality, political or institutional sensitivity may also be invoked. Article 9(5) deals with inferences when no satisfactory explanation for not producing is available. If one accepts that international arbitrations are now delocalised and operate under transnational law, one may consider these Rules general principle and as such a part of that law. It could even become customary law and then move up in the hierarchy of legal sources. Relevance and materiality are not defined. They are usually not distinguished but taken together. The true meaning may nevertheless remain problematic. Again, it must be assumed that the tribunal has the last word (except perhaps in prima facie cases). See also Article 20(6) of the AAA International Arbitration Rules, and further Article 27(4) UNCITRAL Arbitration

596 See Obituary in the Daily Telegraph, 13 September 2010.

Volume 2: The Reasoning of International Arbitrators 299 Rules, and for this discretion also section 34 English Arbitration Act and section 599(1) German Code of Civil Procedure. Challenges in the courts of the seat or elsewhere hardly seem possible on the basis of an improper evaluation of evidence.597 Common sense likely to be embodied in arbitral practices are likely to be decisive. What arbitrators may find helpful and relevant in their reasoning figures then large. On the other hand, issues of credibility (or reliability) and sufficiency are sometimes distinguished. This concerns more particularly the weight of the evidence presented and its more precise probative value, which also goes to inferences, but all is in principle determined by arbitrators. A question may be in this connection how far the attitude of arbitrators in this regard can be an issue in the arbitration itself and subject to argument. Are the parties still in ultimate control when it comes to these issues also? The rules cited above are not mandatory. The question of admissibility and sufficiency would indeed appear to be subject to further agreement between the parties but the evaluation of the evidence presented and whether it rationally supports a party’s allegations may still be considered a typical arbitral function which cannot be pre-empted by the parties or be delegated. Transnational due process may also be an issue here. What is relevant for the present discussion is that the established rules do not give a great deal of guidance as to how and why certain evidence should be preferred and substantially leave this to international arbitrators whose findings in this regard can hardly be challenged in domestic courts or be the subject of review in recognition and enforcement proceedings under the New York Convention. Arbitrators may say something about it in their reasoning but it has already been said that it is often difficult to explain why one prefers one witness or argument over another beyond plausibility. Again, it is not dissimilar in juries and it may be the proper analogy, an area where more empirical research has been done in the US, see section 4.1.3 above. It may show all the irrationalities in decision making, its unpredictable nature, and its sensitivity to being hijacked by one preponderant voice. Cross-examination which is geared to questioning the credibility of the witness might not always make much difference.598 It often requires a great deal of experience and courage in decision takers, which may not always be sufficiently present and there must also be room for new entrant arbitrators who will feel less secure. In any event, much cannot be easily explained, decision taking of this nature is not a mathematical equation. The process is further complicated if there is some expertise in the tribunal itself, not shared by all members. It may even go into the direction of replacing the opinions of expert witnesses without cross-examination, another undesirable twist in arbitrations as already mentioned.

4.2. A Proper Perspective 4.2.1. Conclusions So Far What does this all add up to for the task and reasoning of international arbitrators in international commercial and financial disputes? Again, they are substantially in charge of the proceedings, determine the rules to the extent parties have not done so and can only be faulted for excess, 597 See also GM von Mehren and CT Salomon, ‘Submitting Evidence in an International Arbitration: The Common Lawyer’s Guide’ (2003) 20(3) Journal of International Arbitration 290. 598 See also the discussion at n 537 above.

300 Volume 2: The Reasoning of International Arbitrators especially breach of due process, which in international arbitration might still acquire a more distinct meaning. At least in these matters they would appear now to operate under transnational law. They do so in procedural and evidence matters, probably also in matters of jurisdiction and arbitrability. That is delocalisation. We have seen that public order may present a different world for them altogether. Whatever it is, it was said earlier that when it comes to their reasoning, international arbitrators have great freedom and are likely to arrive at some cocktail of considerations, which may even remain unexpressed, probably the result of the different legal backgrounds from which they hail. They may give (some) reasons, probably the more proximate ones, but might in particular not find it necessary or useful to explain their method. The subject is difficult to unravel, but there are a number of aspects and elements that were identified. (a) The first conclusion is that the reasoning of international arbitrators could hardly be more ‘rationally determinate’ than the reasoning of ordinary judges. In particular, they are hemmed in by the submissions of the parties and arbitrators are not even ‘bouches de la loi’, as judges were once supposed to have been on the European Continent, let alone law makers. Institutionally, they do not have such status. Even then, adjudication was never a mathematical or systematic exercise; causality and rationality acquire a distinct legal meaning, probably more readily acknowledged and understood in international arbitrations. (b) Most importantly, law must be pleaded as fact and international arbitrators are not judges. It means that all is in principle a question of evaluating the available evidence upon proper cross examination by the parties. International arbitrators are much more like juries and legal activism should remain far removed from their involvement and aspirations. They can only apply the law as parties see it and must make a choice among their submissions. Even where they have autonomous powers in procedural matters and in matters of evidence, failing any agreement of the parties, these powers can only be exercised with these constraints in mind. (c) There may be powers to overcome these constraints in certain areas or situations, but they must be exercised with the greatest of care for arbitrators to retain their legitimacy and credibility. Thus, even if international arbitrators may be able to do so especially when they consider overriding public policy or order imperatives (and/or in foreign investment), as a minimum, there will have to be a hearing and parties must be treated equally as a matter of due process and further submissions must be asked and they remain central in the decision making process. Delays and costs must be avoided, but in appropriate cases NGOs and others who attempt to articulate the public interest may be asked to help and clarify. It is not for arbitrators to follow here an own course; they do not speak for any policies and are not supposed to clarify them autonomously. (d) Although considerations of justice, social peace and efficiency may be pleaded by the parties as extra-legal considerations and may in pressing cases be applied by arbitrators, here again they have no autonomous function to amend or correct the law as ordinary judges may have when it comes to their own law. (e) Although arbitrators may thus have great powers on occasion, they are not free, not in their reasoning either. Their freedom in these matters is in particular subject to the practices developing in the transnational commercial and financial legal order itself (and to its due process and public order requirements) in which the powers of the international arbitrator are (it was argued) themselves founded, which may indeed allow them also to raise public policy issues but only in appropriate cases and not without further submissions of the parties.

Volume 2: The Reasoning of International Arbitrators 301 (f) Within these confines, international arbitrators determine the rules concerning their reasoning, much as they determine their own jurisdiction, issues of arbitrability and admissibility, and rules of procedure and evidence unless parties have decided otherwise. The true test is recognition in countries where enforcement is needed, which will only be denied on the basis of clear excess. That is the gist of the New York Convention, which does not cover the reasoning of arbitrators. It is therefore not a bar to recognition and enforcement unless it rises to the level of public policy and raises concern in that respect in recognising jurisdictions. (g) Whilst evaluating all evidence upon cross examination, the commercial nature of the transaction between professional parties may also enter the reasoning in which literal interpretation of texts may figure large, particularly of contracts when a roadmap and risk management tool was intended. The need for transactional and payment finality may also figure and property issues affecting third parties might be covered as well, but like the coverage of public policy issuers, it may be a great expansion of arbitral powers which may not go unchallenged, see further the discussion in Section 1.1.14 above. There may be rougher but also quicker justice. Concerns for efficiency, speed and cost, also figure, demonstrated by conciseness and focus in the drafting of the award. There is an acknowledged need for closure, further supported by the absence of appeal and reviews. Ordinary judges should not be copied. The objective is always to decide the dispute between the parties as they have formulated them in the most expeditious and cost-effective manner. (h) It means that international arbitrators must promptly decide the case, focus on the essence, not go beyond what is in dispute, not formulate rules or issue general dispositions, not set examples nor create precedents (or contribute to a system through a jurisprudence constante), whose binding force would in any event be contested in international law. They do not speak for the public at large; tracts on their method and attempts at deeper insights are to be avoided. (i) Here again international arbitrators are different from ordinary judges; especially they need not worry about the impact on the system while a search for consistency is also inappropriate beyond the obvious. Not having a lex fori of their own (or it would be the transnational law itself), it is not their task to promote and explain local laws or any other. It is for parties to do so in their submissions or upon cross examination of experts, except perhaps in areas where arbitrators have been given autonomous powers when even then they remain in principle dependent on further submissions of the parties. (j) Other elements discussed above were the power of international arbitrators to apply the modern lex mercatoria (and its hierarchy in which domestic private law may still be the residual rule) upon the proper pleading of (one of) the parties, validate the direct or indirect parties’ choice of such law or other laws and assess in the latter case the rank and meaning of different legal sources, and in international transactions also determine and recognise the relevant domestic governmental interests in terms of regulation and any other overriding domestic values subject to formulating, in appropriate cases, minimum transnational standards (or policies). (k) A large measure of discretion (or comity) in international cases is confirmed, but always within a legal framework that defines the powers of international arbitrators, which for them comes down to transnational fundamental principle, and customary law or arbitral practices, therefore to what has become normal to expect in international arbitrations as part of the modern lex mercatoria in this regard. On the procedural side, these various sources of law figure in particular, notably due process, the arbitral practice, treaty law especially the New York Convention, and general principle as represented notably by the Model Law or

302 Volume 2: The Reasoning of International Arbitrators IBA Rules besides the wording of the arbitration clause and any rules incorporated therein, which clause itself is also governed by transnational law and accordingly separated from the rest of the contract. The lex arbitri of the seat becomes here the residual rule, will be adjusted where necessary to serve the transnational legal order, and its extraterritorial application cannot be assumed. This method of law finding may then also determine the arbitrators’ approach to and role in the reasoning. It was noted that in these matters international arbitrators unavoidably bring to the arbitration the ‘ballast’ of the legal regimes from which they hail, although especially the example of ordinary judges in their own countries is unlikely to be helpful and they should be aware of it. It was also noted already that in this connection, there may result important differences between a more structured or rule-based civil law approach as compared to a more searching fact-finding common law approach, a more formal European approach as against a more ‘realist’ or policy oriented American approach, and a more commercial rather than consumer law approach, or perhaps even a more public oriented rather than private law-oriented approach. That is all likely to be discounted in the way international arbitrators’ reason, even if they may not themselves fully realise it. In selecting arbitrators, parties should be aware, but also must accept the result of this cocktail from a tribunal that they have (mostly) installed themselves. To repeat, in their reasoning, international commercial arbitrators have and may exercise great freedom or must be allowed to do so. Under customary transnational law, they largely determine themselves how to proceed in this regard except if showing excess, basically because there is hardly a realistic alternative. Asking for a ‘clear explanation’, or a ‘full picture’, or even ‘elementary logic’ suggests insufficient understanding of the situation and of the possibilities.599 It was already said that these are criteria that soon become unmanageable beyond prima facie defects. Especially the traditional tools of logic: deductive and inductive reasoning, and analogy are unlikely to move the law forward when needed, could even lead to the pleading and application of the modern lex mercatoria being considered illegitimate. It was also noted that realistically, arbitrators cannot even vouch for the possibility that their preferences for some arguments in some aspects of the case may contrast or conflict with their preferences for other arguments in others, if only because it may depend on what parties have pleaded. More neutral may be the requirement that the reasoning on points of fact and points of law can be followed to its conclusion.600 Besides the other elements already mentioned, such as speed, cost, focus and conciseness, that again puts the accent on mere plausibility. Again, it might be repeated that these narratives and the rationalisations embodied therein are often produced after the fact and may not closely relate to the decision making process itself. Thus only the most obvious contradictions can and should be the source of criticism. Consistency within the award, let alone with other awards or with the entire law of international business and investments is not a realistic demand and finding it no autonomous function of international arbitrators, even if it was clear what the concept of consistency really meant. One does not need to have a class of the best students in front of one to realise that little of the law and of the cases concerning it hangs together. If that is true, why should it be a special concern in arbitration with its more limited ambitions and scope?

599 To require the award to be convincing, see Lalive (n 311), does not introduce an objective standard either and also presents an unmanageable test. 600 The view in MINE v Guinea ICSID Case No ARB/84/4 Decision on Annulment, 22 December 1989 that the minimum requirement is not satisfied by contradictory reasons seems therefore untenable. Frivolous reasons, to which this decision also refers, may be more to the point.

Volume 2: The Reasoning of International Arbitrators 303 In its generality, with present insights, not much more can be said on how international arbitrators should conduct themselves in their approach to dispute resolution and in their reasoning. Although much can be made of the different approaches and the impact of legal cultures upon them, they come together in international arbitration and it is then the principal task of international arbitrators to reason in the best way they can, ultimately as they deem fit, again being aware of the central role of facts and evidence evaluation, the need for efficiency and speed, the limitation of cost and the need for efficiency, conciseness and focus in that context and the need for closure. Legal sophistry is to be avoided. If there is a risk here, it is one which the parties selecting the arbitrators are usually willing to take; if not or if they sense that things are getting out of hand they will settle. In the formative era of legal transnationalisation, also in the dispute resolution facilities, greater clarity will perhaps come in due course but cannot be expected now. This should not deter or embarrass us and does not have the appearance of calamity. Transnationalisation is work in progress as all law always is and so are the dispute resolution facilities it favours and supports. There is one further comment to make. If it is true that common law lawyers commonly reason differently because they are fact oriented, are more comfortable with considering several sources of law, assume the proceedings to be adversarial rather than inquisitive, also look differently at interpretation, and do not believe in system thinking, then it should be clear that the common law approach to reasoning is more likely to gain in importance transnationally since the transnational law in this area is equally based on various sources of law and does not at this stage aspire to system thinking or intellectualisation either. That may also include its approach to precedents, not so much in that they would be considered binding—it is unlikely in international dispute resolution—but as a collection of pictures among which the ones found closest to the case in question will acquire the most significance and may provide the more decisive guidance. It may be observed that this is already largely the approach to and application of foreign investment law and its application, which, as part of public international law, has its variety of legal sources confirmed under Article 38(1) of the Statute of the ICJ and Article 53 of the Vienna Convention on the Law of Treaties, while cases seem to be argued out in a common law manner. There is or should be no system building here either, see section 4.1.6 above.

4.2.2. The Situation in Foreign Investment Disputes It was concluded in the foregoing that international arbitrators must find on the basis of the facts as presented by the parties and on the basis of the law as the parties formulate it in the case, although they are given great freedom especially in procedural and evidence matters, determine their own jurisdiction and arbitrability, and are also in charge of their reasoning beyond excess. They must explain but beyond being plausible, concise and focused, taking into account the need for speed and the limitation of cost, they must be given the benefit of the doubt. Under the New York Convention, the quality of the reasoning is not a matter of legal review. It is submitted that international arbitration cannot prosper without this insight. Any other attitude amounts to an ethos of appeal and pseudo-judiciality. In particular, it is necessary that the awards remain short and are promptly delivered. Legal tracts should never be written. Arbitrators should not get lost in recitals and arguments, must be to the point, and should not hesitate to cut knots. In fact, this should be encouraged;601 in commerce, the nature of 601 In Mohsen Asgari Nazari v Islamic Republic of Iran (24 August 1994), Judge Howard Holtzmann mentioned ‘the Tribunal’s growing tendency to write Awards that are overly long and excessively detailed’. This is now much a more general complaint. The reason is that many international arbitrators do not seem to have a clear idea of

304 Volume 2: The Reasoning of International Arbitrators disputes resolution requires it. Here we may not at the moment be moving in the right direction, at least partly because there may be little understanding of what international arbitration truly is and tries to achieve as an alternative dispute resolution facility. The subject was already approached in section 1.1.14 above It also enters into the legal reasoning, what it is and requires in international arbitrations, and what the task and powers of international arbitrators are in this respect. Commentators often have little idea of the operation of the international marketplace and its needs and the meaning of the transnational commercial and financial legal order and how disputes arise in it and resolution functions. They are often in the mindset of domestic appellate courts. As is well known, the issue acquires greater importance and relevance under the Washington Convention where failure to state the reasons on which the award is based is a ground for annulment (Article 52(1)(e)). This is notably different from the admitted ground for refusal of recognition under the New York Convention as we have seen and may indeed suggest a more judicial approach in foreign investment arbitration, further supported by its (often) stronger public policy content. Of all the grounds for annulment in Article 52(1), this one comes closest to an appeal, but it is not—so much is clear and that is a crucial point. The discretion of international arbitrators in their legal reasoning is not therefore truly at issue nor is the fact that they have the last word here, but what Article 52(1)(e) then still is or means to achieve, becomes unclear.602 The Lucchetti case603 elaborating on the earlier decision in MINE604 suggests that as a minimum it must be possible to follow the reasoning of the Tribunal on points of fact and law to its conclusion. The requirement to state reasons may then be considered satisfied even if there is an error of fact or law. In the annulment decision concerning Vivendi II (paragraph 247(iii)),605 arbitrators—burdened by the fact that virtually everything in the award was contested—thought unanimously that the reasoning used by the Tribunal must have been ‘plausible, that means adequate to understand how the Tribunal reached its decisions, it being given the benefit of the doubt if there is room for a difference of opinion in the matter’. This was also believed above to be the bottom line in international commercial arbitrations and bears out the findings in the Azurix annulment case (paragraph 53) on the subject606 stating that ‘It is generally accepted that this ground of annulment only applies in a clear case when there has been a failure by the tribunal to state any reasons, and not in a case where there has merely been a failure by the tribunal to state correct or convincing reasons’ and in the Vivendi I annulment case (paragraphs 64 and 65)607 stating that ‘annulment … should only occur in a clear case’.

their role, probably never thought much about it and implicitly believe that they are some kind of surrogate judge, see further s 1.1.11 above. 602 It can even be argued that all grounds for annulment under Art 52 can be summarised in the reasoning requirement, cf Guillermo Alvarez and WM Reisman (eds), The Reasons Requirement in International Investment Arbitration: Critical Case Studies (Brill Leyden, 2008) 1. 603 Industria Nacional de Alimentos SA (Lucchetti) v the Republic of Peru, ICSID Case No ARB/03/04, Decision on Annulment, 5 September 2007. The requirement of a properly conducted interpretative process or ‘proper fact-finding procedure’ per Sir Frank Berman (dissenting under para 15) is troublesome. What is proper beyond the most obvious aberration? When three original arbitrators and two in annulment proceedings thought differently, it is less convincing for one dissenting arbitrator in annulment to persist. Cf further also F Ortino, ‘Legal Reasoning of International Investment Tribunals: A Typology of Egregious Failures’ (2012) 3 JIDS 31. 604 See n 600 above. 605 Compania de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/3, Decision on Annulment II, 20 August 2010. 606 Azurix v The Argentine Republic, ICSID Case No ARB/01/12, 1 September 2009. 607 Compania de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, ICSID Case No ARB/97/3, Decision on Annulment I, 3 July 2002.

Volume 2: The Reasoning of International Arbitrators 305 It is submitted that the annulment ground of Article 52(1)(e) was always poorly conceived and should never have entered Article 52 in this form without clarification. As already mentioned, the New York Convention in its recognition and enforcement conditions of foreign awards does not refer to anything similar. In investment arbitrations, the problem is compounded by the fact that Article 48(3) of the Washington Convention requires that the award deals with every question submitted to the tribunal and states the reasons upon which it is based. This sounds reasonable enough but is upon proper analysis highly undesirable, as already submitted, makes the awards potentially endless, gives arbitrators every incentive to increase the already considerable costs, and is likely to require a great deal more time— important elements in the present discomfort with ICSID arbitrations, where speed and cost concerns often appear of little concern to arbitrators. With the consent of the relevant party, in practice the requirement to deal with every question may be whittled down to what arbitrators consider to be the fundamental arguments in the case.608 This should be the default rule. From the history of the Convention, it is in any event clear that the normal remedy is a request for a supplementary decision under Article 49(2), not annulment under Article 52(1)(e).609 It may be recalled in this connection that ordinary judges normally only choose those arguments which they consider relevant for their decision; no more is expected from them. If it sometimes makes sense to follow the attitudes of ordinary judges in international arbitrations that should in this instance also be the approach in international commercial and investment arbitrations and if necessary the arbitration clause or rules should make that increasingly clear. There is absolutely no reason why international arbitrators are bound to do more. Of course, the Washington Convention in its approach to reasoning is hard to change and we have to live with the present text in investment arbitrations, although the Convention evolves in the view of this book under the influence of the other sources of transnational law and their hierarchy as the New York Convention also does. In any event, the arbitrating community and ICSID annulment arbitrators in particular may be well advised to show restraint. It should be noted also that except again if there is a prima facie case, the issue is not the sufficiency, quality or adequacy of the reasoning, but simply the lack of the reasons on which the award is based.610 Technically they could be any or only the most immediate ones. The argument is heard that ICSID awards are different because the public interest is engaged so that the world at large has an interest and special care must be taken. It is then often also argued that only arbitrators with special expertise in this field can be chosen. This is self-serving and overstates in its generality the role and importance of arbitrators—and the drafters of the Washington Convention while opting for arbitration must have been aware of the confines regarding arbitrators and accepted them; they could have created a court instead. It may also be noted that at the domestic level, this point is not normally made in respect of ordinary judges either, who can be quite brief and straightforward also in high-level constitutional and administrative cases. But it could still be said that since ICSID arbitrators do not have the same institutional status and standing as ordinary judges, they must do more.

608 See Vivendi Annulment II n 605 above. 609 See also the important Background Paper on Annulment for the Administrative Counsel of ICSID, August 2012 n 104. 610 That is also how the author understands Professor Lalive, see n 311 above, who considers investment arbitrations a different category, but see for a similar attitude in this respect in investment and commercial arbitration MINE, n 600 above, at para 5.08 and earlier Asia Corporation and others v Republic of Indonesia Arb/81/1 Resubmission (Amco II) para 7.55.

306 Volume 2: The Reasoning of International Arbitrators This is a misconception: the many cases we now have, including a considerable number of annulment cases, do not truly show that they can or should. Most are modest in their elucidation and in their contribution to our knowledge, others confuse, but this is common in all case law and a more aspiring form of reasoning is unlikely to make much difference. Rather it may lead to preciousness and self-consciousness or pedantry or to a show-off culture on the part of arbitrators, which serves nobody; again, it also slows down the process and increases cost considerably for no obvious reason. If present arbitral practices now favour this (and arbitrators benefit from it financially), this may be considered a misfortune and a serious self-inflicted challenge to the credibility of international arbitration. It again raises the important issue of the increasingly judicial nature of these proceedings. Such a sentiment may nevertheless also be behind a desire in some to develop a jurisprudence constante as a coherent system of rules, at least in foreign investment law through arbitration.611 Again, system thinking of this nature raises many questions and suggests a degree of legal activism that may sit uneasily with arbitration even in areas where arbitrators have obtained autonomy and may have law-making powers. It has already been submitted that it is a bad idea in international arbitration612 and finding structure (if any) in the foreign investment cases under a host of different BITs must at this stage be left to academic analysis. In truth trying to find it in international law, where there may not be any, may prove to be a phantasy and it is not up to arbitrators to find or make it. It is a considerable weakness in the present ICSID practice that many seem to think differently and assume that arbitrators and annulment committee members have a broader remit. This would go far beyond their capabilities and authority. Again, the Washington Convention, having accepted arbitration as the normal dispute resolution facility in foreign investments (rather than setting up its own court), does not suggest it in any way. A more modest disposition in international arbitrators, in first instance appointed by the parties themselves, would not be detrimental, including foreign investment arbitration. The key is that a genuine effort to solve the dispute is made in each case by the arbitrators and that there is clarity (rather than obfuscation). Arbitrators should not take upon themselves more than they

611 But cf also Reisman (n 529). Foreign investment arbitrators are divided. In Methanex v United States, UNCITRAL, Decision of the Tribunal on Petitions from Third Persons to Intervene as ‘Amici Curiae’, 15 January 2001, it was clearly spelled out that ‘this tribunal can set no legal precedent, in general or at all’, while in AES v Argentine Republic, ICSID Case No ARB/02/17, Decision on Jurisdiction, 26 April 2005, para 30, it was said that ‘this tribunal remains sovereign and may retain … a different solution for resolving the same problem’. Others have, however, referred to the ‘need to ensure the coherence and wellbeing to the system of justice established by the drafters of the ICSID Convention’, see Bureau Veritas; Inspection, Valuation, and Control, BIVAC BV v Republic of Paraguay, ICSID Case No ARB/07/9, Decision of the Tribunal on Objections to Jurisdiction, 29 May 2009. There is sometimes also emphasis on like cases being decided alike, see Daimler Financial Services AG v Argentine Republic, ICSID Case No ARB/05/1, Award 22 August 2012. Other cases have referred to the goal of establishing a predictable, stable legal framework for investments, Suez and Vivendi Universal v The Argentine Republic, ICSID Case No ARB/03/19, 30 July 2010, n 189, or to legitimate expectations, EDF International v Argentine Republic, ICSID Case No ARB/03/23, Award 11 June 2012. 612 The reference in Glamis, cited in n 554 above, to ‘greater contextual awareness’ was not followed by an identification of the ‘systemic implications’. In the meantime, nobody denies the persuasive force of earlier decisions, but we are still far away from systemic interpretation. Restraint is mostly counselled unless perhaps there are lacuna which, in a non-positivist mindset, are hard to distinguish from interpretation. A case-specific attitude remains therefore the more prudent in international arbitration, see also Reisman (n 529). This also results simply from the fact that arbitrators are limited to the disputes in the facts as presented by the parties, law being pleaded as fact also, although international arbitrators may have more of an independent role when the public interest is engaged, therefore particularly in foreign investment, as has been intimated throughout.

Volume 2: The Reasoning of International Arbitrators 307 can handle. It puts the much criticised ICSID annulment facility in the spotlight. Here again, unless a prima facie case can be shown to exist in any of the five annulment grounds, especially the last one on the legal reasoning, the awards should stand. That is of much greater importance than splitting hairs on the details of the decision including the reasoning where, as the annulment cases have amply shown, reasonable people my easily differ while the status and true powers and authority of the original arbitrators in this area and, in so far as the reasoning is concerned, the problems with it are often poorly understood. In sum, where the public interest is engaged, the general task of international arbitrators does not change but there may be a need for greater support, potentially from an international court or similar institution, which may also more generally supervise international arbitrators’ behaviour, and, if requested to do so, give preliminary opinions in public policy and public order issues, primarily to support the legitimacy and accountability of international arbitrators which is more than necessary in these matters.613 Such a court would not be an appeal court meant in time to fill out all the gaps in international law, including foreign investment. That is also a bridge too far and an unrealistic objective, the idea being that eventually full clarity can be obtained and all can be reduced to technique. Nobody can have that ambition. It is an important reason why arbitration in this area is not broken, assuming that it is properly supervised, even though CETA is moving away from it and also the successor USMCA Treaty following NAFTA (although in different ways). Its more modest aim and lack of law-making prowess should be recognised and valued as a benefit, see further the discussion in section 3.5.5 above.

4.3. Conclusions It is innate in international arbitrations that there are potentially great differences in the manner and method of reasoning, which must in essence be resolved autonomously by arbitrators who are likely to come from different backgrounds and traditions. This being the general position, it was also noted that in the practice of international dispute resolution, the reasoning may become closer to that of common law dispute resolution because of its emphasis on facts, the multiple sources of this law, the different approach to interpretation, and the use of the English language and its legal terminology. There is no system thinking, no natural search for consistency, and not much for precedent either; much depends in this respect on what the parties have pleaded and that may be very little or could be overly self-serving or wrong. In doing so, international commercial arbitrators are not, however, merely in charge of their own reasoning as guided by the submissions of the parties and the latter’s definition of their dispute, but they also determine the rules on the basis of the practices developing in this connection in the transnational legal order itself and its dispute resolution facilities. The reasoning then becomes largely an issue of customary law in which more fundamental (arbitration and due process) principle will also figure. That is the consequence of the institutional status international arbitrators have and their limited powers in the international commercial and financial legal order, where they nevertheless also determine their own jurisdiction and the arbitrability/ admissibility of the issues, as well as the applicable procedural rules unless the parties want it otherwise while as to the substance of the law, in commercial cases, they may even resort to the modern lex mercatoria unless parties mean differently. Even then, international arbitrators will

613 See the discussion in s 3.5.4 above.

308 Volume 2: The Reasoning of International Arbitrators have to determine how far such a choice goes, especially in respect of governmental interests or proprietary interests and overriding values or other mandatory rules or policies at the relevant national and now even transnational level. All needs an explanation or reasoning in that sense. In the views here presented, it follows that these powers are exercised under transnational law, especially the transnational practices that have so far developed, thus including minimum requirements for the reasoning of international arbitrators, but they are few and are principally directed towards excess. Speed, the limitation of cost, the need for conciseness, focus and closure are (more) important considerations in this connection. The situation is not basically different in foreign investment disputes, even in annulment cases. It follows also that in both international commercial and foreign investment disputes, the reasoning sustaining the awards should be given the benefit of the doubt, assuming the findings are plausibly sustained and parties in their own arguments have made that possible. Only prima facie cases should be treated differently and they would be rare. Anything more is destructive of international dispute resolution and its effective functioning and operation, not least also in foreign investment disputes, and suggests an appeal ethos. Indeed, if there is to be criticism, it should be foremost in the area of delays, added cost, and lack of conciseness and focus in the award. It has already been said that help may be needed in public policy issues and probably also in proprietary matters when the public or third parties become involved. Here the creation of an international court or similar institution becomes relevant. It could then also go into the supervision of arbitrators, not as a matter of appeal but rather as a facility to strengthen their credibility and support their legitimacy, even to the point of these arbitrators being able to ask preliminary opinions from such a tribunal, which could also become involved in international enforcement. This exceeds the issue of reasoning and enters into the world of international arbitration more generally, touching also on the internal procedures of arbitration institutes especially in matters of appointment, fees, and billing practices, or guidance. As international arbitration is a business for the arbitrators, attitudes, even in the reasoning, are intertwined with other considerations, notably conflicts of interest, for which the requirement of ‘independence’ stands as a common metaphor,614 but there are broader issues, more clearly expressed in the IBA’s Guidelines on Conflicts of Interest (2004) and the ABA’s Code of Ethics (2004), see section 1.1.12 above. The concern is here not only impartiality and independence, but rather the undiluted appearance of them. A connected issue and other impediment is the progressive commercialisation of the international arbitration practice, which is increasingly laying it low in the international estimation and rendering it suspect in civil society as the problem with ISDS in the Transatlantic Trade and Investment Partnership (TTIP) shows (see section 3.5 above), see further the discussion in section 1.1.14 above.

614 The hunger for cases is obvious and there is an urgent need for billing practices and amounts charged for fees and expenses to be disclosed. ICSID should do so in respect of all past, present and future cases. In the rare (UNCITRAL) cases, where this must be done, of which the Merrill & Ring Forestry LP v Government of Canada, ICSID Administered Case, 31 March 2010, was a prominent example, it may give raise to amazement. Transparency in this regard is appropriate and would clear some of the air. The ICSID Secretariat and the other main arbitration centres should also publish their internal procedure manuals and resist being seen as appointing agencies for the insiders. Cross-appointments between the various arbitrations institutions and their boards should be avoided. The close relationship between the law firms and the arbitrators they appoint should end. Judges should curb their eagerness to become international arbitrators at the same time. International arbitrators should learn to keep their distance, much as ordinary judges do. In this aspect they may learn from them. It would also be helpful if they could consider their appointments as honorific and reputational rather than a source of substantial extra income.

Volume 2: The Reasoning of International Arbitrators 309 With international arbitration having become a major force in international dispute resolution—often the only realistic alternative, if by no means a perfect one—it suggests a need for proper oversight, more in particular when the dispute reaches public policy, which is not principally a reasoning issue but narrower. More generally, it is time for the international arbitration practice to mature and recognise and reinforce its status to avoid a deficit in credibility, accountability, and confidence. As already noted, there is too strong a tendency towards copying judicial proceedings, also in the reasoning, and arrogating judicial powers. It may be a search for greater legitimacy, but this is a false departure and better oversight is a more adequate response. To repeat, this oversight is not a matter of reasoning in the sense of an appeal function or even one of reducing the powers of international arbitrators which derive from necessity not from choice, but rather one of confirming international arbitrators in their true task of facilitators where transparency and accountability, independence and impartiality (as well as the appearance of them), professionalism and moral standing are important further aspects, but no less the ability and confidence to decide promptly, avoid legal sophistry, and cut knots.615 To protect the distinctive nature of international arbitration and to preserve its standing more fundamentally, it was submitted that we may need a new supervisory authority, not to replace international arbitration but to reinforce it. It may need treaty status and could also provide direction, giving preliminary opinions to arbitrators when asked, especially if the public interest becomes engaged,616 maintain order and set standards, which can hardly be left to often erratic reviews where existing, either under local challenges at the seat, under the New York Convention in terms of the conditions for recognition and enforcement of international commercial awards, or under the Washington Convention for the annulment of foreign investment awards and its accent on the reasoning, or in any other form or manner as in LCIA or ICC courts under their respective rules. The project for a TTIP between the US and the EU, if revived, or any successor would appear to require a dispute resolution mechanism in which international arbitration may still play an important role but the creation of such an international supervisory body should then be urgently considered. It may take much of the animosity towards foreign investment arbitration off the table and a similar body may also reinforce the credibility and legitimacy of commercial and financial arbitration especially where public policy becomes increasingly engaged.617 In this connection it was argued that CETA with its appeal court system, see section 3.5.8, may not be the proper response. Especially if it is meant to create greater certainty, that would assume system building in an area of the law that hardly lends itself to it. In any event, it would seem inappropriate for a court to build such a system. This is a form of advanced law making that is not for courts to indulge in but must be left to sovereigns or customary international law.

615 The 2014 UNCITRAL Rules on Transparency in Treaty Based Investor-State Arbitration may help for proceedings under the UNCITRAL Rules. 616 It is important especially when ‘super’ public purpose must be established to override investors’ protections although conceivably still subject to some compensation. The same could apply to determine when indirect takings become confiscatory, see for these problems Dalhuisen and Guzman (n 413) and s 3.4 above. 617 See also JH Dalhuisen, Letter to the Editor of the Financial Times (7 May 2015).

310

INDEX Introductory Note References such as ‘178–9’ indicate (not necessarily continuous) discussion of a topic across a range of pages. Wherever possible in the case of topics with many references, these have either been divided into sub-topics or only the most significant discussions of the topic are listed. Because the entire work is about ‘transnational law’ and ‘commercial law’, the use of these terms (and certain others which occur constantly throughout the book) as entry points has been minimised. Information will be found under the corresponding detailed topics. AAA (American Arbitration Association) 16, 98 absence of appeals 4, 11, 178, 298, 301 abstract system 150 abstraction 149 academia 8, 10, 282, 288 academic models 72, 171 accountability 29, 39, 53, 70–71, 181, 254, 259, 309 activism, judicial 53, 180, 262, 280, 295 ad hoc arbitrations 16, 86, 95 administrative contracts 200, 205, 224–25 administrative law 117, 155, 162, 164, 200–1, 225, 231, 291 admissibility 27–28, 56–57, 94, 98, 100, 212, 298–99, 301 ADR (alternative dispute resolution) 7, 14–15, 49, 261, 304 agency 1–2, 17, 148, 161, 196, 259 agents 102, 148, 161 aggregation principle 130 aircraft 137 alternative dispute resolution, see ADR ambiguity 224, 231, 246 American Arbitration Association (AAA) 16, 98 amiable compositeurs 9, 14–15, 32, 57, 188, 294 amicus curiae 260 annulment 104, 106–7, 109, 111, 213–14, 222, 262, 304–9 proceedings 49, 89, 178, 213 anthropomorphic attitude 284 anti-competitive behaviour 155, 165, 175, 190 appeal courts 1, 43, 91, 97, 254, 259, 266, 274 appeal facilities 2, 261–62 appeals 1–6, 8–9, 17–20, 36, 49, 182–83, 213, 251–52 absence of 4, 11, 178, 298, 301 on points of fact 3, 110 on points of law 250 appellate judges 1, 282 applicability 22, 30, 130, 136, 153, 298 applicable domestic law 125–26, 156, 163

applicable law 13–14, 31–33, 58–61, 122–25, 186, 209–10, 219–23, 230–31 clauses 62, 89, 123, 187 applicable private law 119, 146, 155, 227, 231 applicable substantive law 29, 36, 58, 61, 219, 294 appointment of arbitrators 8–9, 55, 79, 100, 104, 111, 181 arbitrability 31–33, 76–78, 81–82, 90, 94–96, 108–12, 165–67, 300–1 and jurisdiction 82, 91, 94, 108, 110, 170, 300, 303 arbitral awards 5, 7, 25, 30, 107, 109, 171–73, 295–96 international 19, 64, 109, 112, 140, 165, 169, 174 recognition and enforcement of international awards 19, 112 arbitral jurisdiction 27, 30–31, 33, 68, 79, 90, 173, 259 arbitral powers, see powers, of arbitrators arbitral tribunals 56, 58–59, 66–67, 78, 81, 92–93, 104–5, 188–89 arbitration 2–18, 20–27, 29–39, 43–45, 51–56, 76–83, 85–91, 165–72; see also Introductory Note agreements 75–76, 81–83, 89, 93–94, 106–8, 110–11, 219–20, 230–31 BIT 201, 212, 218 clauses 16–17, 27–33, 54–57, 75–79, 89, 103–4, 109–10, 293–95 commercial 7, 120, 210, 212, 251, 254, 264, 271–72 domestic 18, 21–23, 39–40, 100, 271 facilities 16, 175, 181, 202–3, 215, 217, 248–49 financial 16, 115–16, 120–23, 139–41, 175–76, 178, 180–81, 185–87 international, see international arbitration and its nature 7–11 laws 17, 19, 21, 23–24, 29, 45, 54, 56 multi-party 99–100 process 27, 51, 57–58, 79, 171, 293 UNCITRAL 207, 212, 215, 298 arbitrators 12–15, 31–44, 83–90, 93–102, 170–80, 189–92, 245–54, 299–309 appointment 9, 55, 79, 100, 104, 111, 181

312 Index challenges 42, 88, 95 foreign investment 122, 179, 209–10, 213, 263 international, see international arbitrators jurisdiction 27, 31, 33, 259 party-appointed 40–41, 84 powers 33, 118–20, 165, 167, 250, 293, 298, 301 reasoning 98, 272, 296, 301 supervision 104, 106, 259, 308 Argentina 178, 197, 199, 201, 222, 235, 244 asset-backed financing 28, 67, 74, 121–22, 134, 161, 165, 170 assets 123–24, 136, 138–40, 142–44, 146, 148, 153–54, 156–57 intangible 72, 139 loan 156–57 movable 124, 153, 174 physical 124, 136, 153 underlying 134, 153 assignability 125 assignees 78, 124–27, 139, 150 bona fide 74 assignments 116, 122–27, 134, 137, 139, 141, 150, 156 bulk 124–26, 156 international 124–26, 137 assignors 124–26 Australia 7, 208 autonomous authority 29, 273 autonomous legal sources, see autonomous sources of law autonomous powers 9, 12–13, 47, 56–58, 101, 268–69, 272, 280 autonomous sources of law 103, 109, 139, 280 autonomy 23–24, 35, 66–67, 70, 75, 285–86, 289, 294 international financial arbitrators 176–78 party 27, 60–61, 123–24, 184–86, 191–92, 220–21, 227–28, 278–80 back-up 142–43 bad faith 35, 243, 284 balance 62–63, 97, 99, 167–69, 174, 183, 185, 257 Bank of International Settlement, see BIS banking 144, 152, 155, 159–60 bankrupt estates 148, 156, 170, 183 bankruptcy 120–22, 127–32, 134–37, 146–49, 151, 165–75, 182–85, 191–93 courts 116, 120–21, 155, 165–68, 172, 184, 189, 192–93 domestic/local 64, 74, 116, 122, 127, 133, 169, 185 domestic 124, 167–68, 172 foreign 134, 136, 166, 168, 172, 192 international 168, 172, 174 intervening 118, 143, 160, 167, 172, 175, 181, 295 jurisdiction 129, 166–69 law 131, 146–47, 154, 188, 192 domestic 191 local 51, 112, 139, 154, 165, 169–70, 181, 187 orders 51, 64, 112–13, 121, 167, 172, 174–75

primary 167–68 secondary 168, 192 trustees 128, 134, 136, 146, 166–67, 170, 175 banks 116, 123, 153, 156, 158, 161–62, 164, 169–70 Belgium 106, 143, 271 bias 84–85, 92, 177 bilateral investment treaties, see BITs bilateral netting 128, 130 binding precedent 53, 236, 260, 264, 287 BITs (bilateral investment treaties) 65–66, 197–98, 201–8, 217–21, 226–27, 229–32, 248–53, 255–57 bona fide assignees 74 bona fide purchasers 143–44, 147, 150, 169, 184 bonds 143, 156, 205, 207, 256; see also Eurobonds book-entry systems 142–44, 160 Brexit 19, 126, 132 brokerage 117, 164 brokers 117, 142–43, 146, 152, 160–61 bulk assignments 124–26, 156 international 124, 126 bulk transfers 74, 116, 123, 125, 141, 153 burden of proof 28, 96–98 bureaucracies 102, 254 business community 10, 47, 62, 72, 76, 186 Calvo doctrine 198, 201 Canada 40, 43, 86, 88, 213–14, 255–56, 261, 264–65 Canada-EU Agreement, see CETA capacity 73, 81, 110, 152, 222, 278 capital 63, 153, 159, 173 adequacy 160 markets 116–17, 120 working 63, 153, 159 case law 68, 70, 206–7, 234, 238, 240, 264, 282–83; see also Table of Cases cash flows 115, 122, 141, 153–54 causality 178, 300 cause of action 74, 80, 102, 152, 218, 273, 286 CCPs (Central Counterparties) 21–22, 57, 117, 132, 146, 159, 169, 190 CDSs (credit default swaps) 115, 157–59 Central Counterparties, see CCPs centralisation 104–5 certainty 151 CETA (Canada-EU Agreement) 42–43, 51, 53, 210–11, 213–14, 255–56, 261, 263–64 challenges 87–89, 94, 104, 106, 110–11, 117–18, 181, 292–93 of arbitrators 42, 87–88, 95 charges, floating 123–24, 132, 134, 138, 147–48, 153–54, 156, 183 chattels 125, 133, 136 China 202, 295 choice of law 73, 200, 205, 222, 225, 230–31 clauses 73, 188, 226, 230 contractual 60, 118, 129, 142, 145, 201

Index 313 church law, see Canon law CIL, see customary international law CISG, see Vienna Convention on the International Sale of Goods civil law 96, 128–29, 138–39, 148, 178–79, 277–79, 283–85, 287 approach 180 codification 2 countries 3, 80, 95, 153, 159, 270, 286 lawyers 96, 139, 296 civil liability 118, 155, 162, 164–65 civil society 161, 186, 202, 260, 308 class arbitrations 99–100 clearing, systems 143, 159 Clearstream 143, 146 codification 75, 122, 281, 283 civil law 2, 284, 296 countries 297 narrowing of concept 280 thinking 278–80, 284 coherence 282, 287, 296 collateral 132, 139, 144, 159–60 Directives 132, 140, 144–45, 160, 183 comity 90, 163, 179, 301 commentators 53, 304 commercial arbitration 7, 120, 251, 254, 271–72, 298 ordinary 7, 13, 119, 186–87 commercial courts 38, 86, 271 international 39, 42, 175, 180–81 commercial flows 74, 118, 134, 139, 175, 190–91, 208 commercial law 27, 74, 186, 283–84 commercial practices 279 commerciality 20–21 commoditised products 74, 139 common creditors 89, 156, 159, 169, 184, 187, 190 common law 74–75, 96–97, 146, 148, 279, 282, 284, 287 countries 34, 38, 74, 80, 117, 146, 148, 153 courts 250 jurisdictions 28, 148 lawyers 94, 287, 303 old 279 tradition 95–96, 282–83 common sense 52, 98, 299 common values 282 compatibility 39, 83, 185 compensation 197–99, 201, 218, 228–30, 232–33, 240–42, 244–49, 258 full 262 competence 212 competencies 83 competition 28–29, 63–64, 70, 77, 83, 162–63, 188, 192 issues 83, 91, 173, 176, 251, 258, 292, 294 laws 43, 49, 62, 161, 163, 222–23, 227, 231 completeness 280, 282, 286–87 concession agreements 199, 201, 205, 214, 219, 257

concessions 199–200, 204–5, 213, 218, 222, 224, 227, 256 conciseness 178, 180, 272–73, 298, 301–3, 308 conditional ownership, rights 138 conditional sales 136–39, 144 confidential information 7 confidentiality 6–7, 10, 19–20, 47, 79, 86, 298 conflicts rules 73, 128, 145, 163, 270 conscience 42, 118, 178, 270 consensus 57, 67, 74, 84, 93, 108, 242, 246 consent 3, 73, 79, 93–94, 100, 115, 132, 166 consistency 34, 36–37, 180, 250–52, 255, 260, 296–98, 302 search for 179, 209, 260, 298, 301, 307 consolidation 75, 78, 99–100 constructive trusts 146, 148, 183 consumer law 2, 4, 180, 302 consumer protection 238, 264 consumers 3, 16, 22, 64, 119, 229, 257–58, 283–85 contract law 73, 103, 126, 134 private 217, 258 contract terms, see terms contracts administrative 200, 205, 224–25 for differences 130, 132 formation 74 interpretation 285, 289 contractual choice of law 60, 118, 129, 142, 145, 201 contractual validity 73 control 24, 31, 44–45, 71, 73, 131–32, 229–30, 255–56 Convention on the International Sale of Goods, see Vienna Convention on the International Sale of Goods (CISG)/ICSG cooperation 10, 57, 93, 97, 219, 245 duties 283 corruption 68–69, 119, 173, 175, 186, 188, 190, 251 cost 1–3, 9–10, 18–20, 87–88, 101–2, 177–80, 300–3, 305–6 cost limitation 10, 106 counterclaims 95–96, 129, 212 counterparties 115, 119–20, 128, 146, 148, 200 country of destination 134, 136 country of origin 45, 134, 136 country of recognition 21, 54, 134 courts, see also individual countries and court names local 33–34, 63–64, 92–93, 106, 108–9, 182, 184–85, 255 lower 1–3, 253, 255 ordinary 2–7, 14–15, 35–36, 46–47, 79–83, 92–93, 267–69, 292–93 recognising 65, 90, 98, 109–10, 112 specialised 213–14, 261, 271 supervisory 259, 261, 266 coverage 23, 60, 77, 107, 137, 291, 301 credibility 1–2, 4–5, 8–9, 43, 46–47, 270–72, 299–300, 308–9 credit default swaps, see CDSs

314 Index creditors 124, 129, 131, 148–49, 166, 172–73, 183, 195–96 common 89, 156, 159, 169, 184, 187, 190 secured 147, 159, 183 unsecured 134, 147, 160 critical legal studies 273–74 cross-examination 10–13, 43, 46, 49, 97, 99, 299 cultures 269, 306 currencies 128, 198, 218, 237 custodians 115, 142, 183 customary international law (CIL) 202, 205, 221, 228–33, 242, 247, 249, 256–58 customary law 53, 56, 75–76, 140, 142, 249, 252, 278 customs 29, 32, 122, 186, 188, 192, 280, 289 transnational 56, 73, 76, 139, 142, 154, 271 damages 1, 11, 101–2, 198, 200, 244–47, 264, 273 measure of 198, 217, 245–47 for non-expropriatory takings 217, 246 DCFR, see Draft Common Frame of Reference de minimis 234–36, 246–47, 249, 272 debtors 124–27, 129, 148, 156, 166–69, 172 decision-taking 47, 97, 252, 275 declarations 21, 108, 284 default rules 30–31, 34, 81, 90, 184, 305 defences 125, 127–29, 135, 190, 195, 199–200, 253, 284 deference 162, 172–73, 290 delivery 15, 150, 152, 160 delocalisation 17, 21, 25, 33, 35, 43–45, 54–55, 171 major consequences 26–31 democratic process 282 depositories 142 deposits 17, 86–87, 164 deprivation 235, 264 derivatives 130, 190, 277 markets 146, 158 desuetude 280 dialogue 66, 70 differences, contracts for 130, 132 Digests, Justinian 285 diplomatic process 214 diplomatic protection 196–97 direct expropriation 217, 233, 240, 265 disclosure 40, 42, 87, 96, 212, 240, 260, 283 pre-contractual 74, 191, 287 discovery 11, 36, 43, 93–96, 105, 212, 286 discretion 196, 198, 247, 250–52, 273, 286, 299, 301 discrimination 252, 257 dismissal, summary 80, 92, 212 disposition rights 142, 159 dispute resolution 1–5, 14–16, 25–27, 39–41, 248–51, 255–57, 259–61, 270–72 alternative, see ADR facilities 7, 9, 27, 47–49, 294, 297–98, 303–4, 307 international 23, 26, 32, 37, 120, 182, 303, 307–9 private 9–10, 12, 42, 49, 83, 88, 248, 253 problems and challenges 7 process 19, 33, 213, 272

distribution 115, 146–47, 166, 189, 208 diversity 83–84, 252, 275 cultural 264 documents of title 139, 279 domestic bankruptcy 124, 167–68, 172 laws 191 orders 51, 112, 172, 174 domestic courts, see national courts domestic laws 55–57, 73, 80, 124, 131, 134, 142–44, 227–28 applicable 125–26, 156, 163 application 122, 127, 135 contractual choice of, see choice of law domestic legal orders/systems 2, 63, 138, 162, 222, 265 domestic private law 179, 231, 270, 301 domestic public policies 2, 54, 56, 63, 131, 174–75, 255, 257 domestic regulation 164, 174, 191 domestic values, overriding 68, 179, 301 double exequatur 25, 30, 45, 107 double hatting 39–40, 83 draft awards 84, 86 Draft Common Frame of Reference (DCFR) 61, 72–73, 122, 124, 138, 140–41, 150, 279 due process 27–29, 46, 52, 110–11, 236–37, 244–47, 252–53, 299–301 Dutch law 138 duties 42, 57, 77, 102, 167, 176, 179–80, 183 cooperation 283 fiduciary 117, 155, 160–61, 284 information 40, 42, 74, 87, 212, 260, 283, 287 negotiation 191, 287 post-contractual 74, 283 search 74, 134, 184 dynamic concepts of law 18, 74, 151 economic considerations 109 economics, law and 274 effectiveness 2, 93, 103, 115–16, 127, 133, 149, 152 efficiency 2–3, 5, 31–33, 118–19, 270, 277, 300–1, 303 considerations 67, 161, 270, 276, 296 electronic payments 150 emergency arbitration 12 empirical research 274–75, 299 end-investors 142–43 enforceability 101 enforcement 16, 18–20, 24–26, 30, 106–13, 134–37, 195–97, 202–3 agencies 3, 116 countries 20, 26 facilities 19, 110 function 33, 189 international 18–19, 25, 116, 136, 308 proceedings 14, 88, 136, 209, 299 England, see United Kingdom enjoyment 153 enrichment, unjust 148, 152, 246, 258 equality 29, 40, 96, 112, 147, 177, 295

Index 315 equitable interests 126, 141, 169, 184 equitable jurisdiction 279 equitable powers 90, 119, 140, 171, 209, 294 equitable treatment 204, 215, 228, 232, 265 equity 74, 124, 126, 129, 148, 153, 279, 282 judges 28, 31, 38, 51, 67, 178, 184, 189 errors 159, 255, 262, 304 estoppel 103 EU (European Union) Proposal for Investment Protection and Resolution of Investment Disputes 261–63 Questionnaire 248, 256, 260–61 Eurobonds 120, 127, 139, 141–43, 146, 270 markets 60, 120, 146 Euroclear 143, 146 European Continent 178, 278, 281, 283, 300; see also individual countries European Union, see EU evidence 12–13, 15, 27–29, 54–57, 96–98, 209, 268–70, 298–301 relevance and materiality 298–99 rules of 98 ex parte facilities 92–93, 105, 188, 212 execution sales 134, 138, 146, 195 exequatur, double 25, 30, 45 expansive interpretation 241–42, 285 expectations, fair 200, 244 expedited proceedings 12, 188 expert witnesses 13–14, 32, 43, 46, 85, 97, 99, 263 expertise 1, 84–85, 98, 176–78, 181, 189, 210, 212 experts 10, 16, 22, 46, 98–99, 104, 187, 189 decisions 14, 16 expropriatory takings 249 expropriation 197–99, 214–15, 228–29, 232–35, 239–42, 244, 246–49, 258 direct 217, 233, 240, 265 indirect 215–18, 230, 233–34, 236, 240–41, 258, 261–62, 264–65 lawful and unlawful 241–42, 244–46 extended set-off rights 160 extrapolation 151 extraterritorial effect 23–24, 26, 30, 33, 103, 163, 166, 168 extraterritoriality 24–25, 54–55, 107, 163, 166–69, 191, 293, 302 fact finding 43, 96, 282 fact situations 38, 249, 252, 255, 287, 297 factoring 124, 134, 137, 139 failure to state reasons 272, 304 fair and equitable treatment (F&E) 201, 204, 232–33, 239, 241–44, 246–47, 249, 258 clauses 202, 241–42, 256–58 fair expectations 200, 244 fair market value 245, 262 fairness 140, 163 FCNs (Friendship, Commerce and Navigation treaties) 196, 202, 255 F&E, see fair and equitable treatment

fees 16–17, 86–87, 259, 308 fiduciary duties 117, 155, 160–61, 284 finality 2, 72, 101, 143–44, 149–52, 159, 190, 192 payment 54, 60, 115, 149–50, 188, 191, 296, 301 finance international 118–19, 122–23, 126–27, 139, 174–75, 179, 181–82, 186–90 leasing 116, 135, 137, 159 sales 74, 115, 121, 124, 133–34, 138, 140, 144 financial arbitrations 16, 115–16, 120–23, 139–41, 175–76, 178, 180–81, 185–87 financial crisis 158–59, 209 financial dealings 138, 149, 164, 191 financial flows 10, 20, 26, 55, 150, 153, 186, 188 financial instruments 130, 142–43 public policy concerning 154 financial intermediaries, see intermediaries 62, 162 financial law 27, 75, 278 financial practices 120, 140 financial products 64, 68, 115, 139, 154–55, 159–61, 170 financial regulation 119, 164, 173, 187, 254 financial services 186 financial stability 162, 164, 173, 175, 186, 188, 190, 192 financial transactions 127, 132, 139, 141, 173, 175, 189, 191 flexibility 105 procedural 8, 11, 19, 29, 96, 250, 298 floating charges 123–24, 132, 134, 138, 147–48, 153–54, 156, 183 flows 55, 58, 60, 63–64, 68, 71–74, 140, 153 financial 10, 20, 26, 55, 122, 150, 153, 188 international, see international flows force majeure 57, 74, 190 foreign bankruptcies 134, 136, 166, 168, 172, 192 foreign charges 136 foreign elements 173, 289 foreign exchange regimes 198–99, 204 foreign interests 134, 136, 175 foreign investments 195, 198, 202, 205–8, 234, 246–49, 251–52, 256–58 applicable law 219–31 arbitration 5–6, 42–43, 49, 51, 84, 88, 195–266, 271–73 arbitrators 122, 179, 210, 213, 263 powers 209 concept 205–7 disputes 13, 16, 206, 208, 211, 214, 254–55, 308 law 229, 266, 297, 303, 306 proceedings against states 195 proprietary and non-proprietary takings 232–48 protection 195, 197, 202, 205, 207, 217–18, 248–49, 261–63 foreign investors 198–99, 201–7, 235–36, 240, 244, 253, 256–57, 265–66 foreign law 4, 9, 12, 37, 46, 176, 182, 195 foreign proprietary interests 135, 137 foreign proprietary rights 134, 136 formal seat 22, 24–25, 30, 44, 110–11

316 Index formalism 1–2, 9, 11, 23, 41, 49, 53, 283 procedural 2 formalities 51, 81, 101, 124–26, 140, 154 forum 7, 20, 91, 140, 165 states 163 France 22, 25, 38, 45, 128–29, 159, 271, 278 Cour de Cassation 25, 44–45, 55, 65, 100 fraud 9, 150, 152, 238 free disposition 58, 60, 62, 73, 127, 188–89, 191–92, 227–28 freedom 178–79, 182, 185, 190, 192, 237–38, 285, 288 Friendship, Commerce and Navigation treaties, see FCNs functional approaches 138 functions 42, 44, 87–88, 116–17, 119, 208, 210–11, 255 fundamental principles 25–27, 29–30, 32–33, 54, 56, 61–63, 278, 289–91 futures 115, 132, 157 GATT 217, 257 gender 84 general international law 236–37 general principles 29–30, 72–73, 75–76, 137, 188–90, 222–24, 283–84, 289–90 Germany 8, 123, 128, 131, 154, 160, 278, 287 globalisation 55, 60, 64, 67, 120, 122, 171–72, 175 globalised world 290 globalising world 162 good faith 74, 78, 126, 184–85, 191, 258, 283–84, 288 goods, replacement 148 government actions, ordinary 232, 235, 239–41, 246, 249, 252, 257–60 governmental interests 63, 162, 165, 270, 276, 289–90, 295, 301 governmental intervention, see intervention governmental undertakings 217, 246, 249, 258 Greece 229 gross negligence 164 Grotius, H 278 groupings of companies 78 guidance 42, 45, 91, 233, 236, 238, 256, 260 Hague Conference 19 harmonisation 139, 144 health 235–38 hearings, proper 29, 80, 111, 173, 175, 177, 189, 192 hierarchy of legal sources 25–26, 29–30, 56, 59–61, 76, 80, 82, 290–91 hierarchy of norms 27, 61, 131–32, 211, 291 higher norms 76 home states/countries 196–97, 207–8, 222–23, 229, 253 honesty 186 horizontal effect 62, 155, 162 host countries/states 195–203, 205–8, 211–15, 220–31, 237–38, 251–53, 255–57, 264–65 host governments 198–200, 206–8, 213, 215, 223, 225, 249, 256–58 human rights 48, 62, 253, 264

IBA (International Bar Association) 42, 97, 264, 302 IBRD, see World Bank ICC (International Chamber of Commerce) 15–17, 76, 79, 81, 86, 88, 92, 110–11 Rules 79, 87, 92, 94, 100, 102 ICJ (International Court of Justice) 3, 32, 36, 180, 197, 202, 214, 221–23 ICMA (International Capital Market Association) 73, 138, 141 ICSID (International Centre for Settlement of Investment Disputes) 197–98, 201–3, 206–7, 211–12, 219–23, 250–51, 262–63, 305 illegality 110, 233, 244, 249, 258 IMF (International Monetary Fund) 158 immunity 118, 197, 293 sovereign 110, 196–97 impartiality 29, 39–41, 52, 83, 87–89, 181, 189, 308–9 implementation 20, 32, 57, 72, 77–78, 183 impossibility 142, 160 incentives 305 incorporation 108, 113 independence 32, 39–41, 52, 87–89, 181, 189, 260, 308–9 indirect expropriation 215–18, 230, 233–34, 236, 240–41, 258, 261–62, 264–65 individualisation 124, 153 inductive reasoning 287, 302 inferences 96, 288, 297–99 informality 7 procedural 4 information duties 40, 42, 74, 87, 212, 260, 283, 287 infrastructure 17, 54, 61, 63, 104, 150, 265, 291 injunctions 82–83, 97, 101, 106–7 innovation 30, 286 inquisitive approach 34–35, 38, 85, 96, 101, 180, 190, 250 insiders 41–42, 74, 134, 169, 173, 175, 184–85, 190 insolvency 118, 120–21, 142, 148, 165–66, 168, 182–83, 186; see also bankruptcy International Centre for Dispute Resolution (ICDR) 16 institutional power 9, 31, 46, 121, 161, 187, 269, 271 institutional rules 16–17, 27, 29, 32, 56, 76, 95, 111 institutional status 5, 36, 46, 170, 295, 305, 307 insurance 157 intangible assets 72, 139 integrity 87 intellectual prejudice 281, 285 intellectual property 6, 62, 67, 85, 206 intellectual systems 159, 278 intellectualisation 285, 303 intent 74, 110, 124–25, 152, 163, 227, 284 interference 55, 215–16, 234–35 interim measures 92–94, 101 intermediaries 62, 100, 116–18, 142–44, 150–52, 155, 160, 162 internal market 63, 66, 238 internalisation 160

Index 317 international arbitral awards 19, 64, 109, 112, 140, 165, 169, 174 international arbitral order 25, 76, 107, 293 international arbitration 20–27, 29–49, 51–58, 75–90, 101–5, 166–71, 293–98, 303–9 credibility 13, 44, 46–49, 166, 306 delocalisation 33, 175, 181 initial steps and complications 75–95 nature 22, 49, 272 practices 24, 47, 54, 111, 308–9 process 33, 54, 56, 79 recognition and enforcement 109 role of national courts 103–7 international arbitrators 34–38, 45–47, 49–53, 67–71, 176–82, 268–69, 292–303, 305–7 powers 31, 34, 76, 78, 174, 176, 292–96, 301 proper perspective 299–307 reasoning 20, 104, 178, 267–309 role 118, 186 status 31, 52 international assignment 124–26, 137 international bankruptcies 168, 172, 174 International Bar Association, see IBA International Capital Market Association, see ICMA International Centre for Settlement of Investment Disputes, see ICSID International Chamber of Commerce, see ICC international commerce 140, 186, 276, 279, 298 international commercial courts 39, 42, 175, 180–81, 259 international commercial disputes, defined 20 International Court of Justice, see ICJ international courts 32, 181, 221, 252–55, 266, 307–8; see also individual court names international dealings 276, 290 international enforcement 18–19, 25, 116, 136, 308 international finance 118–19, 122–23, 126–27, 139, 174–75, 179, 181–82, 186–90 building blocks of private law 123–54 international financial arbitration 115, 120–23, 126, 135, 139–41, 175–76, 180–81, 185–86 complications 178–85 special needs 118–23 special problems 115–18 international financial arbitrators 119, 121–23, 126, 152, 154, 178–79, 181, 184–85 autonomy 176–78 international flows (goods, services, etc.) 18–19, 58–60, 63–64, 71–75, 139–41, 153–54, 207–9, 290–92 complications arising from 207 international legal orders 51, 66, 293, 295 international marketplace 22, 60–64, 71–72, 127, 131–32, 149–50, 152–54, 276–77 international markets 61, 131, 142, 146, 172, 186, 189 international minimum standards 29, 62, 120, 122, 161, 200–1, 270, 290–91 International Monetary Fund (IMF) 158

international moot competitions 43, 97, 271 International Organisation of Securities Commissions, see IOSCO international practices 9, 12, 78, 128, 131, 182–83, 189, 191 international public order 34, 112, 163 international recognition, see recognition international sales 72 international status 20, 82, 136, 200–1 International Swap Dealers Association, see ISDA international trade 90, 126, 141, 152, 207, 248 international transactions 58, 60, 63–65, 67–68, 71, 135, 162, 289–91 internationalisation 2, 122, 289 internationality 20–21, 27, 56, 110, 136, 172, 292 interpretation 182–83, 221, 225–27, 260–62, 275–78, 280, 283, 285 contracts 285, 289 expansive 241–42, 285 liberal, see liberal interpretation literal 190, 284, 301 normative 283–85 objectivity in 285–88 purposive 131–32, 182–83 and sources of law 275–78 teleological 287 uniform 76, 108, 112 interpretational freedom 73 interstate conflicts 289–90 intervening bankruptcy 118, 143, 160, 167, 172, 175, 181, 295 intervention 52, 58, 63, 83, 192, 260, 270, 277 investment securities 122, 142–43, 146, 150, 152, 155, 160, 183 investments 204–8, 225–26, 230–32, 234, 236–37, 240, 246–47, 256 TTIP (Transatlantic Trade and Investment Partnership) 42–43, 88, 209, 228, 248, 255–57, 261, 308 Investor-State Dispute Settlement, see ISDS investors 160–64, 197–98, 201–5, 222–23, 225–26, 228–31, 242–47, 255–56 IOSCO (International Organisation of Securities Commissions) 173 Iran-US Claims Tribunal 235 irrationalities 299 ISDA (International Swap Dealers Association) 118, 120, 127, 130–31, 172–73, 182, 184, 191 ISDS (Investment State/Investor-States Dispute Settlement) 66, 248, 250, 252, 257–61, 264–66, 308 Italy 8 ius cogens 222, 226 ius curia novit 46, 61, 67, 70, 176, 179, 189 Iustinian Digests, see Justinian Digests joinder 75, 78–79, 99 Judicature Acts 3

318 Index judicial activism 53, 180, 262, 280, 295 judicial function 34, 269 judicialisation 5–6, 8–10, 40, 42, 48–49, 52, 265–66, 269–70 juries 4, 9, 13, 29, 268, 275, 282, 299–300 jurisdiction 18–20, 31–32, 66–68, 75–77, 81–83, 88–90, 172–74, 248–49 and arbitrability 82, 94, 108, 110, 193, 300 arbitral 27, 31, 33, 79, 90, 173, 259, 278 bankruptcy 129, 166–69, 175 to prescribe 63, 290 jurisprudence constante 34–35, 178–79, 252, 260, 262, 266, 301, 306 jus cogens rules, see ius cogens justice 2, 4, 8, 10, 67, 273–74, 293–94, 297–98 natural 284 rougher 38, 270, 298 Justinian Digests 285 knowledge 10, 13, 84, 86, 88, 177–78, 286, 288 Kompetenz/Kompetenz 27–29, 56, 82, 89 language 18, 77, 110–11, 201, 206, 221–22, 225, 227 law and economics 274 law as a system 280–83 law as fact 15, 46 law firms 10, 41–42, 47–48, 85, 105, 254, 259–60 law formation 8, 12, 21, 53, 62, 69, 214, 279 transnational 72 law makers 5, 9, 13, 36, 209–10, 214, 296, 300 law-making function 36, 53, 85, 90, 190, 249, 252, 269–70 law-making powers 36, 50, 306 law merchant 279; see also lex mercatoria lawfulness 241–42, 258 LCIA (London Court of International Arbitration) 12–13, 15–17, 76–77, 79, 86–88, 94–95, 101, 110–11 leases 115, 137–39, 170 legal capacity, see capacity legal education 269 legal formalism, see formalism legal nationalism 26 legal orders 30, 33, 35–36, 61–62, 64, 106–7, 122, 162–63 domestic 63, 162 international 51, 66, 293, 295 new 62 legal profession 2, 5, 8, 13, 26, 47–48, 52, 251 legal reasoning 267–68, 270, 273–75, 292, 295, 297, 304, 307 formal and substantive aspects 268–73 importance 267–68 modern theories 274–75 legal relationships 23, 81, 108 legal risk 20, 35, 146, 160 legal sophistry 9–10, 13, 150, 152, 157, 251–52, 270–71, 303

legal sources, see sources of law legal status 60, 115, 122, 144, 154, 232 legal system 1–2, 4, 14, 46, 200, 222, 224, 268–69 legal transnationalisation 10, 28, 54, 63, 75, 119–20, 289, 292 legality 46, 218, 232–33, 241–42, 244, 246–49 legitimacy 27, 29, 39, 53, 70–71, 79, 88, 307–9 Lehman cases 131, 181–85 letters of credit 149–50 lex arbitri 24–27, 29–30, 32–33, 44–45, 56–57, 80, 88–89, 91–92 lex concursus 134, 136 lex fori 71, 80, 86, 129–30, 179, 186, 285, 289 natural 31, 46, 129, 179, 209, 269, 285 lex mercatoria, see also Introductory Note transnational 61, 76, 109, 143 lex rei sitae, see lex situs lex situs 133–34, 136–37, 146, 150, 153, 174, 192 liability 34–35, 117, 155, 240, 293 non-contractual 155, 164–65 liberal interpretation 2, 257, 279, 285, 289 techniques 249, 284, 288 liberalisation 257 licensing 62, 117, 119, 162, 164 liens 147 liquidity 68, 72, 74, 115, 118, 120, 140–41, 153 risk 160 lis pendens 18, 20, 91, 103 literal interpretation 190, 284, 301 litigation 2–4, 10, 18, 22, 121, 128, 135, 285–86 culture 258–59, 261 ordinary 3, 6, 271 living law 161 loans 115, 123, 138, 148–49, 156–57, 205–7, 256 local authorities 104–5 local bankruptcies 51, 127, 132, 139, 165, 169–70, 181, 187 local courts 33–34, 63–64, 92–93, 106, 108–9, 182, 184–85, 255 local law(s) 25–27, 51–52, 55, 65, 73, 76, 143, 230–31 local values 58 localisation 23, 44–45, 48, 52, 54, 77, 108 location 143, 146, 150, 156, 192 London Court of International Arbitration, see LCIA lower courts 1–3, 253, 255 Luxembourg 143 mandatory law(s) 5, 9, 58, 60, 62, 65, 227–28, 231 mandatory rules 14, 185, 308 market abuse 63, 68–69, 119, 188, 190, 192, 292, 294 market forces 157 market practices 122, 131, 143–45, 169, 172, 186, 188, 192 market value 218, 264 fair 245, 262 markets 117, 120, 131–32, 142–43, 149–50, 164, 186–87, 276 capital 115–17, 120

Index 319 derivative 146, 158 Eurobond 60, 120, 146 international 61, 131, 142, 146, 172, 186, 189 open 198 repo 160 swap 120, 160, 270 master agreements 73, 118, 120, 127, 130–31, 160, 171, 182–85 measure of damages 198, 217, 245–47 mediation 9–11, 14–15, 41, 52, 84, 88, 217, 270 methodology 32, 61, 73, 145 Mexico 51, 202, 210, 214, 255, 264–65 MFN (most favoured nation) 202, 204, 215, 217, 249, 256–57, 264 MIC (multilateral investment court) 66, 264, 266 minimis, de 234–36, 246–47, 249, 272 minimum standards international 62, 120, 122, 161, 163, 165, 200–1, 290–91 transnational 33, 51, 54, 56, 63–64, 68, 285, 290 models 25–26, 29, 248, 251, 256, 258, 279, 282 academic 72, 171 modern state 58, 209, 278 monetary claims 72, 74, 116, 125, 165 money laundering 29, 119, 155, 160, 164, 173, 186, 188 monopolisation 42, 48, 86, 153, 251, 254, 259, 279 moot competitions 43, 97, 271 morality 237, 276 most favoured nation, see MFN movable assets 124, 153, 174 movable property 73–74, 284 law 18, 73, 75, 285 multi-party arbitrations 99–100 multilateral investment court (MIC) 66, 264, 266 NAFTA (North American Free Trade Agreement) 202, 204, 213–14, 220–21, 226, 230–32, 251, 264–65 national courts 10, 12, 76–77, 82, 90, 248, 255, 259 role 103–7 national treatment 204, 215, 217, 256, 262, 264–65 nationalisation 198 nationalism 175 legal 26 nationalistic system thinking 30 nationality 45, 212 natural justice 284 natural law 278 natural lex fori 31, 46, 129, 209, 269, 285 natural sciences 3 negligence 34, 77, 155, 164 negotiable instruments 127, 142, 149–50, 279 negotiation 43, 262 duties 191, 287 Netherlands 16, 123–24, 128–29, 187 netting 73, 127–33, 138, 159–60, 171–75, 187, 189, 191–92 agreements 128–29, 131, 160

bilateral 128, 130 clauses 73, 120, 146–47, 169, 171 facilities 51, 116, 130, 132, 147, 169, 294 multilateral 128 novation 128, 130 neutral seat 55, 64 neutrality 10, 18–20, 24, 104, 202 new legal orders 62 New York Convention 18–21, 24–27, 29–30, 75–77, 81–83, 89–94, 105–10, 164–70 nineteenth century 4, 279, 281, 283–84 early 281 non-contractual liability 155, 164–65 non-defaulting parties 134, 184–85 non-discrimination 236–38, 240–41, 244, 246, 265 non-expropriatory takings 217–18, 232–37, 239–42, 244, 246–47, 249, 258, 264 damages for 217, 246 non-statist law 125, 192 normal government action, see ordinary government action normative interpretation 283–85 norms 2, 61, 65, 131–32, 285–87, 290–91 hierarchy of 27, 61, 131–32, 291 higher 76 North American Free Trade Agreement, see NAFTA notification 80, 125–26, 128 novation 132, 146 netting 128, 130 numerus clausus 74 objective approach 152, 184 objective law 165 objectivity 19, 286 in interpretation 285–88 obligations 42, 66, 68, 72, 74, 229, 241–42, 246; see also duties onshore, coming 18, 23, 33, 55–56, 58, 63–65, 68, 107 openness 210–11 ordinary commercial flows 134 ordinary court proceedings 4–5, 7–8, 15, 43, 47 ordinary courts 2–7, 9–10, 14–15, 46–47, 79–83, 92–93, 267–69, 292–93 ordinary government action 232, 235, 239–41, 246, 249, 252, 257–60 ordinary judges 36, 176, 179–82, 268–69, 272, 293–96, 301–2, 305 reasoning 178, 283, 300 original powers 28–29, 31, 47, 49, 79, 271, 286, 295 outsiders 51, 116, 129, 141, 187, 190 over-judicialisation 11, 260 overriding domestic values 68, 179, 301 overriding public policy 101, 122, 141, 179, 262, 280, 300 overvalue 124, 134, 138, 147 owners 124, 138, 183, 215 ownership 138–39, 149, 169, 184, 266 concepts 140

320 Index rights conditional 138 temporary 143, 148 transfer of 139 transnational 127 Pakistan 226 Panel of Recognised International Market Experts in Finance, see P.R.I.M.E. parallel proceedings 259 parochial concepts 44–45, 71–72, 140 participation 41, 78–79, 151 party-appointed arbitrators 40–41, 84 party arbitration 52, 83, 100 party autonomy 27, 60–61, 123–24, 184–86, 191–92, 220–21, 227–28, 278–80 party choice 205, 221, 227–28 payment finality 54, 60, 115, 149–50, 188, 191, 296, 301 payment systems 116, 152, 159 payments 130, 132, 146, 149–53, 159–60, 190, 192, 195–96 electronic 150 PCA (Permanent Court of Arbitration) 17, 86, 196 peace 10, 297 peer groups 16, 38, 270 peremptory law 59, 290 perfection 2, 134 performance 90, 101, 109–10, 148, 219, 245 Permanent Court of Arbitration, see PCA personal property 139 philosophy 2, 279 physical assets 124, 136, 153 plausibility 4, 98, 180, 209, 269, 288, 299, 302 pleadings 14–15, 18–19, 29, 62–64, 67–68, 93–95, 231, 301–2 pledging 143, 146 points of fact 3, 6, 13, 53, 180, 268–69, 302, 304 points of law 8, 12–15, 43, 97, 255, 268–69, 272, 284 police force 109–10 police powers 109, 198, 236, 249 pooling 148, 157 Popes 243 portfolios 124, 205, 256 Portugal 94, 106 positive law 275 possession 96, 146 post-contractual duties 74, 283 powers 31, 61–62, 77–78, 165–67, 178–82, 227–28, 260, 292–94 of arbitrators 33, 118–20, 165, 167, 250, 293, 298, 301 autonomous 9, 12–13, 47, 56–58, 101, 268–69, 272, 280 equitable 90, 119, 140, 171, 209, 294 institutional 9, 31, 46, 121, 161, 187, 269, 271 of international arbitrators 31, 34, 73, 76, 78, 292–96, 301, 304 original 28–29, 31, 47, 49, 79, 271, 286, 295

police 109, 198, 236, 249 regulatory 191 practices 29–31, 54–57, 72–73, 75–76, 144–46, 186–92, 279–80, 306–8 financial 120, 140 practitioners 30, 186, 285 pre-contractual disclosure 74, 191, 287 precedence 37, 59, 83, 163, 228 precedent 4–5, 34–37, 177–79, 189–90, 252, 268–69, 282–83, 296–97 binding 53, 236, 260, 264, 287 predictability 4, 38, 71, 151, 252, 255, 260, 276 preliminary issues 22, 80, 88, 91–94, 100, 165, 188 preliminary opinions 53, 65–66, 91, 211, 213–14, 258–61, 263–64, 307–9 preliminary orders 92–93 prescription periods 80 PRIMA rule 144 PRIME (Panel of Recognised International Market Experts in Finance) 18, 51, 120, 123, 175–76, 181, 192–93 applicable law clause 187–88 applicable law issues 192 bankruptcy issues 191–92 contractual issues 190–91 emergence 185–93 preliminary issues 188–89 procedural issues 190 proprietary issues 191 regulatory issues 191 status, powers and operation of arbitrators 189–90 taxation issues 191 principles fundamental 25–27, 29, 31–33, 39–40, 56, 61–63, 278, 290–91 general 29–30, 72–73, 75–76, 137, 188–90, 222–24, 283–84, 289–90 priorities 73, 119, 124, 146–48, 169, 186–87, 189, 191 privacy 7 private contract law 217, 258 private dispute resolution 8–10, 12, 42, 49, 83, 88, 248, 253 private international law 24, 29–30, 103, 108, 122, 125–28, 135–36, 289–90; see also conflicts rules approach 122, 125, 136, 139, 154, 289 rules 163 private land 195, 206 private law 62–63, 71–73, 117–19, 161, 226–28, 231, 276–83, 290–91 applicable 119, 146, 155, 227, 231 codification 72, 279 domestic 179, 231, 270, 301 formation 61, 117, 291 intervention 161 substantive 294 transnationalisation 62, 173

Index 321 private parties 50, 66, 164, 195, 200, 202, 208, 224–26 private property 195, 206 private relationships 64 privity 103 procedural flexibility 8, 11, 19, 29, 96, 250, 298 procedural formalism 2 procedural informality 4 procedural matters 3, 46–47, 56, 79–80, 93–94, 96, 129, 190 Procedural Order No 1 93–95, 97, 101 procedural rules 17, 96 procedure 31, 35–36, 53–54, 56–57, 102–4, 119–21, 211, 213–14 professional dealings 4–5, 10, 22, 72–74, 140, 270, 284–85 professional parties 2–3, 8, 10, 73–74, 140, 190, 270, 276 professional sphere 8, 10, 140, 143, 150, 283–84, 291 professionals, see professional parties promises 74, 198, 226, 284 promissory notes 116 proof burden of 28, 96–98 of claim 121, 166, 192 property 140, 165–66, 168, 195–96, 235, 237, 241, 264 law 56, 62, 73–74, 122, 153–54, 170, 224, 285 movable 73–74, 284 personal 139 private 195, 206 public 7 rights, see proprietary rights proportionality 238, 244, 246, 252 proprietary interests 134, 136–37, 139, 308 equitable 169, 184 foreign 135, 137 proprietary matters 60, 76–77, 103, 119, 149–50, 169–71, 183–85, 191–92 proprietary rights 74, 123, 125, 140–41, 147–48, 150, 153, 166 foreign 134, 136 limited 134, 147 proprietary structures 154, 175, 181, 189, 191 proprietary takings 204, 232 protection diplomatic 196–97 special 155, 160, 248 of weaker parties 117, 155 provisional measures 12, 94, 212 prudential supervision 119, 155, 164 public authority 3, 68, 224 public interest 5–7, 43, 61–63, 67–70, 88, 119–20, 154–56, 185–87 public international law 197, 199, 201, 203, 205, 215, 225, 266 public law 53, 186, 226–27, 270, 280, 296 public order 34, 49, 54, 109–11, 154–55, 168–69, 173–76, 268 concepts 293

considerations 36, 68, 80, 101, 169, 182, 228, 230 international 34, 112, 163 requirements 76, 128, 131, 140–41, 163, 172, 175, 178 public policy 29, 31–33, 49–51, 64–66, 161–63, 260–63, 288–90, 293–95 bar 51, 56, 64, 68, 116, 168, 170, 175 concerning financial instruments 154–78 overriding 101, 122, 141, 179, 262, 280, 300 standards 38, 186 public purpose 195–96, 232, 236–37, 239, 241, 244, 247, 257 super 67, 232, 235, 237–40, 247, 250, 257–60, 262 public welfare 232, 235–36, 238–41, 246–47 takings 217, 239, 241, 246 publicity 6–7, 105, 109, 259 purchasers 103, 139–40, 143, 150, 153, 169, 184 bona fide, see bona fide purchasers in the ordinary course of business of commoditised products 74 purposive interpretation 131–32, 182–83 quality 60, 83–84, 87, 100, 291, 303, 305 ranking 51, 119–21, 136–37, 145–48, 165–66, 169–70, 172, 191 of security interests 38, 51, 120–21, 165, 169 ratifications 19, 137, 143, 145, 182 rationality 3, 99, 118, 154, 270, 273, 297, 300 re-characterisation 134, 137–39, 143, 156–57 re-education 283 real estate 195 reasonableness 140, 163 reasoning 31–32, 178–80, 268–69, 271–73, 275–76, 284–86, 294–96, 298–309 inductive 287, 302 of international arbitrators 20, 104, 155, 178, 267–309 legal, see legal reasoning on points of fact 180, 269, 302 receivables 123, 126, 139–41, 153–54, 156, 170, 174, 188 financing 115, 123–24, 139, 156 reciprocity 108, 172 recognising courts 65, 90, 98, 110 recognition 18–21, 54–56, 64–66, 75–77, 81–83, 104–13, 133–36, 166–71 courts 20, 37, 64, 106, 111, 179 mutual 19, 120 proceedings 7, 14, 20, 76, 82, 102, 177 refusal of 106, 110–11, 272, 304 recovery rights 185 refusal of recognition 106, 110–11, 272, 304 registration 124–25, 134 regulation 18–19, 62–63, 82–83, 125–26, 163–65, 173–74, 238–40, 290 financial 119, 164, 173, 187, 254 regulators 73, 77, 117–18, 155–56, 158, 160, 162, 164–65

322 Index regulatory issues 28–29, 78, 83, 165, 181, 184, 187, 190–91 regulatory laws 38, 73, 120, 227 regulatory powers 191 regulatory takings 236 rehypothecation 143 reinstatement 232, 245 relationship thinking 284–85 relevant facts 88, 94, 96, 273, 286 reliance 198–99, 217, 223, 229, 242–44, 258, 264, 283–84 relief 19, 101, 119, 148, 203, 209, 286, 294 renegotiation duties 74, 283 renewal 30 reorganisation 166–67, 189 replacement goods 148 repo financing 116, 134, 144, 170 repo markets 160 repo sellers 170, 183 repos 115, 127, 132, 134, 138–39, 143–44, 160, 183 repurchase agreements 73, 134 res judicata 91, 102–3, 167 residence 104, 167, 196 residual rules 26, 29, 32–33, 39, 44, 65, 80, 301–2 resources 157, 202, 209 responsiveness 118, 270, 283 Restatements, United States 63, 163, 290 restitution 219, 246, 248, 264 retention rights 148 retransfer 132 rights disposition 142, 159 human 48, 62, 253, 264 ownership, see ownership, rights proprietary, see proprietary rights retention 148 set-off 125, 148, 181, 192 rigidity 1, 49 risk layering 157 legal 20, 35, 146, 160 liquidity 160 management 68, 73–74, 127–28, 159–60, 184, 188, 190, 192 tools 18, 73–74, 116, 130, 139, 158, 173, 284–85 re-characterisation 139, 143, 157 systemic 158, 160 roadmaps 190, 247, 284–85, 301 Roman law 278 romanticism 58 rougher justice 38, 270, 298 rules of evidence 98 institutional 16–17, 27, 29, 32, 56, 76, 95, 111 residual 26, 29, 32–33, 39, 44, 65, 80, 301–2 safety 159, 198, 235–38, 264 sales 63, 123–25, 136, 138, 142, 146–47, 155–57, 208 conditional 136–39, 144

execution 134, 138, 146, 195 finance 74, 115–16, 121–22, 124, 133–34, 138, 140, 144 sanctions 20, 30, 282 SCC (Stockholm Chamber of Commerce) 16–17 search duty 74, 134, 184 seat 23–30, 32–33, 44–46, 54–57, 88–93, 103–11, 192–93, 293–95 secured creditors 147, 159, 183 secured interests 134, 138 secured transactions 116, 122, 133–34, 138, 140–41, 148, 157 securities 28–29, 123–24, 139, 141–44, 147, 164, 183, 237–38 entitlements 142–44 underlying 142–43 securitisations 115, 123–27, 156, 190 security interests 116, 124–25, 134, 136, 143–44, 165, 169–71, 175 ranking 38, 51, 120–21, 165, 169 segregation 74, 76, 104, 115, 122, 144, 146, 183 seizure 240–41 sellers 100, 205 separation 25, 27, 30, 32, 54, 56, 146–48, 154 services 19, 21, 30, 34, 75, 78, 153–54, 237–38 set-off 73, 119–22, 127–31, 146–48, 169, 171–72, 174–75, 191–92 extended rights 160 rights 125, 148, 181, 192 settlement 9, 11, 52, 101, 109, 143, 146, 151 severability 268 Sharia law 192, 222 ships 137 shortened proceedings 14, 79, 94 situs 63, 124–25, 134–36, 150, 153–54, 156, 159, 188 Slovak Republic 67, 238 social peace 67, 71, 273, 276–77, 281, 294, 297, 300 social policies 287, 297 social values 10, 161, 164, 277, 282, 290 society 4, 7, 62, 70, 185, 237, 278 soft law 16 sophistication 24, 164, 174, 185, 263 sophistry, legal 9–10, 13, 150, 152, 157, 251–52, 270–71, 303 sources of law 25, 61, 75–76, 80–81, 276–79, 281–85, 289–91, 303 hierarchy 25–26, 29–30, 56, 59–61, 76, 80, 82, 290–91 multiple 278–79, 307 traditional 288 transnational 27, 32, 34, 44, 54–56, 288–92, 305 sovereign authority 196, 223 sovereign immunity 110, 196–97, 203 sovereigns 53, 198, 200–1, 224, 252, 256, 279, 290 sovereignty 34, 131, 198–99, 202, 218, 223, 249 Special Purpose Vehicles, see SPVs special status 18, 46, 193 specialised courts 213–14, 261, 271 speed 1–3, 10, 18–20, 31, 94, 271–73, 298, 301–3

Index 323 SPVs (Special Purpose Vehicles) 156, 158 stabilisation 256–57 clauses 198, 223, 226, 228 stability 151, 159, 197, 200–1, 214–15, 244, 249, 276 financial 162, 164, 173, 175, 186, 188, 190, 192 standards 40, 72, 161, 164, 201, 229, 246 international minimum 29, 62, 120, 122, 161, 200–1, 270, 290–91 transnational minimum 33, 56, 63–64, 68, 104, 110, 285, 290 state intervention, see intervention states home 196–97, 207, 222–23, 229, 253 modern 58, 209, 278 proceedings against 195 statism 22, 58, 279, 281, 293 status 20, 26–27, 30–31, 34–35, 39, 136–37, 180, 250–51 institutional 5, 36, 46, 170, 295, 305, 307 international 20, 82, 136, 200–1 of international arbitrators 31, 52 legal 60, 115, 122, 144, 154, 232 special 18, 46, 193 treaty 43, 181, 309 statutes of limitation(s) 79–80, 91, 94, 212, 222–23 statutory interpretation, see interpretation 279, 282 statutory law 138, 152, 203, 270, 279, 292 Stockholm Chamber of Commerce, see SCC streamlining 279 subject matter 21–23, 81 subjectivity 99, 273 submission agreements 76–77, 166, 203, 219–20 subordination 149 substantive law 46, 58, 65, 77, 116, 187, 278 applicable 29, 36, 58, 61, 219, 294 substantive rules 96, 145 successors 11, 77, 101, 214, 309 summary dismissal 80, 92, 212 super public purpose 67, 232, 235, 237–40, 247, 250, 257–60, 262 supervision 22, 24, 175–76, 181, 211, 213, 251, 259–60 of arbitrators 104, 106, 259, 308 proper 90, 254, 261 prudential 119, 155, 164 supervisory courts 259, 261, 266 supplementation 183, 258, 276, 283, 285, 289 support function 42, 44, 55–56, 86 swap markets 120, 160, 270 swaps 115, 120, 127, 130, 132, 141, 157, 184 system building 179, 182, 255, 262, 264, 269, 303, 309 system thinking 278, 280, 283, 285, 287, 295, 303, 306–7 nationalistic 30 systemic risk 158, 160 takings 190–91, 198, 232–37, 239–43, 245–47, 249, 252, 298–99 direct 241 expropriatory, see expropriation

indirect 233, 241 non-expropriatory 217–18, 232–37, 239–42, 244, 246–47, 249, 258, 264 proprietary 204, 232 public welfare 217, 239, 241, 246 regulatory 236 tariffs 198, 217 taxation 191, 198–99, 217, 223, 227, 231, 237, 240 technology 19, 58, 72, 75, 153, 207, 276 teleological interpretation 287 temporary ownership 144 rights 143, 148 terminology 215, 233, 239, 307 third countries 134, 167–68, 170, 172, 174, 185, 262 third parties 53–54, 102–3, 119–23, 142–43, 165–66, 172, 186–89, 191 time bombs 36, 47, 49, 53, 70, 187 title 21, 92, 107, 134, 137–39, 169, 171–72, 240–41 documents of 139, 279 reservation of 134, 137–38, 169, 195 transfers 139, 145, 150–51 tort 74, 77, 90 tracing 132, 148, 183 trade organisations 172 traditional sources of law 288 transactions 19, 21, 63, 150–52, 158–59, 162, 188, 190–91 secured 116, 122, 133–34, 138, 140–41, 148, 157 transferability 154 transfers bank 152, 160 bulk 74, 116, 123, 125, 141, 153 of ownership 139 of title 139, 150–51 transnational custom 56, 73, 76, 139, 142, 154, 271 transnational law 22–27, 31–33, 35–41, 46–47, 54–57, 179–80, 294–95, 300–3 customary 54, 302 formation 72 sources 27, 32, 34, 44, 54–56, 288–92, 305 transnational minimum standards 33, 51, 54, 56, 63–64, 68, 285, 290 transnational ownership 127 transnational status 48, 131 transnationalisation 19–21, 33–34, 61–62, 80–82, 90, 123–25, 142–43, 181–82 of international arbitration 56 legal 10, 28, 54, 63, 75, 119–20, 289, 292 process 54 transnationalised concepts 24, 34, 54, 82, 90, 139, 175, 192 transparency 6–7, 29, 39, 42–43, 175, 181, 259, 264 treaty law 60–61, 75–76, 210–11, 217, 221, 231–33, 255–57, 290–91 uniform, see uniform treaty law treaty status 43, 181, 309 truncated tribunals 82–83

324 Index trustees 134, 147–48, 166 bankruptcy 128, 134, 136, 146, 166–67, 170, 175 trusts 19, 115, 121, 148, 273 constructive 146, 148, 183 truth 1–4, 8–11, 13, 142, 146, 282, 286, 290 TTIP (Transatlantic Trade and Investment Partnership) 42–43, 88, 209, 211, 213, 248–61, 263, 308–9 umbrella clauses 201, 205, 215, 218, 224–28, 230, 249, 257 UNCITRAL (United Nations Commission on International Trade Law) 17, 66, 72, 262 Model Law 7, 17, 21, 27, 30, 32, 166, 168 Rules 17, 21, 86, 88, 95, 101, 203, 211–12 undertakings 243–44, 257 governmental 217, 246, 249, 258 underwriting 117, 164 UNIDROIT 72, 137, 145 uniform interpretation 108 uniform treaty law 137 uniformity 34, 81, 110, 113, 193, 260 unitary system 138, 140 United Kingdom 14–15, 17, 55, 126, 128–29, 182–83, 279, 281–82 United States 19, 134, 158–60, 163, 196, 248, 255, 264–65 interstate conflicts, see interstate conflicts Restatements 63, 163, 290 Supreme Court 90–91, 100, 104–5, 280, 295 unity 2, 63, 124, 154, 168, 282, 292, 296–97 systematic 2, 262, 297 universal natural law, see natural law unjust enrichment 148, 152, 246, 258

unlawful expropriations 241–42, 244–46 unsecured creditors 134, 147, 160 updating 108, 161 USA, see United States USMCA 265 usage 142, 188, 279 utility 61, 276, 288 vacuum filling 26, 239 validity 25, 28, 81, 83, 125, 150, 221–22, 278–79 contractual 73 values 62–63, 162, 206, 234–35, 246–47, 276–80, 288, 290–91 economic 206, 234 local 58 social 10, 161, 164, 277, 282, 290 vested interests 2, 260 Vienna Convention on the International Sale of Goods (CISG)/ICSG 32, 60, 72, 108, 199, 221, 278, 290–91 virtual world 55, 68, 72 Washington Convention 195, 201–3, 205–6, 211–13, 215, 219–20, 272, 304–6 weaker parties, protection 117 Wernerius, see Irnerius witnesses 84, 93–94, 97, 101–2, 104, 273, 277, 299 expert 13–14, 32, 43, 46, 85, 97, 99, 263 of fact 97, 288 workers’ protection 163 working capital 63, 153, 159 World Bank 203, 212 WTO (World Trade Organisation) 208, 248, 250, 255, 264