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Year 3 | December 2017 | no.69 | www.avdr.nl
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PREFACE Wilmer Cutler Pickering Hale and Dorr LLP offers one of the world’s premier international arbitration and dispute resolution practices. Its multi-national team consists of over 70 lawyers, trained and qualified in jurisdictions around the world, including Austria, France, Germany, Serbia, Switzerland, United Kingdom, the United States, as well as in Latin America and Asia. The firm has extensive experience with arbitration administered by all of the major international arbitration institutions, including the ICC, LCIA, UNCITRAL, AAA/ICDR, SIAC, HKIAC, SCC and others, as well as more specialised forms of institutional arbitration and ad hoc arbitrations. In recent years, the arbitration group has handled more than 650 proceedings, in numerous arbitral seats, and governed by the laws of more than 70 different legal systems. In addition to representing clients as counsel, many of the group’s lawyers regularly sit as arbitrators. The international arbitration practice is consistently acknowledged to be one of the very best in the world. It has been featured every year in the top ranks of Global Arbitration Review’s annual GAR30 listing of leading arbitration practices and it is regularly ranked in the top tier by directories such as Chambers UK and Legal 500. It has been named “Firm of the Year” for International Arbitration by The Legal 500 UK and U.S. News and Best Lawyers have named it “Law Firm of the Year” for International Arbitration for the past five years.
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International Arbitration and Forum Selection Agreements: Drafting and Enforcing
THE REVISED FIFTH EDITION
by Gary Born
www.wilmerhale.com
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Table of contents
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Dharshini Prasad The ‘Close Connection’ Test and State Counterclaims in Investment Arbitration – When is ‘Close’ Close Enough? Let’s get personal...
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John McMillan Paving the Road to Arbitration with Good Intentions: Escalation Clauses in Commercial Contracts Let’s get personal...
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Jonathan Lim Arbitrability of Intellectual Property Disputes - Recent Developments Let’s get personal...
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Krystyna Khripkova Striking the Balance between Pros and Cons of Third-Party Funding in International Arbitration Let’s get personal...
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Dharshini Prasad The ‘Close Connection’ Test and State Counterclaims in Investment Arbitration – When is ‘Close’ Close Enough? Investment arbitrations typically entail an investor alleging breaches by the respondent State of protections conferred on the investor by the State in an investment treaty. However, it is rare for States to assert counterclaims, and even more rare for tribunals to determine those counterclaims on the merits. While there may be practical reasons why States prefer not to raise counterclaims before investor-State tribunals (including a preference to litigate those issues in their national courts), counterclaims are also limited by jurisdictional and admissibility hurdles that do not apply to the investor’s claims. One such admissibility impediment is the requirement that the counterclaim be “closely connected” to the investor’s claim.
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Investor-State tribunals have historically taken a restrictive approach to assessing the “close connection” test. There are various formulations of the test, including that the counterclaim be “indivisible” and “interdependent” on, and have a factual and legal nexus with, the investor’s claim. As a result, while tribunals have accepted jurisdiction over counterclaims that arise from the same (or related) investment contract that gives rise to the investor’s claims, counterclaims alleging violations of the State’s domestic laws, and international treaties and customs have been less successful. However, an award rendered in December 2016 in Urbaser v Argentina adopted a less restrictive approach and suggested that a mere “factual link” between the counterclaim and the investor’s claim would be sufficient to satisfy the “close connection” requirement. This article explores the rationale and evolution of the “close connection” test, why the restrictive approach to assessing “close connection” is incorrect, and the positive implications of the decision in Urbaser v Argentina.
The Requirement for a “Close Connection” Between the Investor’s Claim and the State’s Counterclaim
The constitutive instruments of various international tribunals expressly provide that a counterclaim must share a “connection” with the original claim. For instance, the Rules of Court of the International Court of Justice (“ICJ”) provide that a counterclaim must be “directly connected with the subject-matter of the claim” (Rule 80(1)), while the Algiers Accords that established the US-Iran Claims Tribunal states that a counterclaim must “arise[] of out of the same contract, transaction or occurrence that constitutes the subject matter of the national’s claims” (Article II(1)). In contrast, investment treaties and applicable arbitral rules rarely contain an express requirement for any connection between a counterclaim and the original claim (most investment treaties are in fact entirely silent on counterclaims). One notable exception is the ICSID Convention which provides that
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counterclaims must arise “directly out of the subject-matter of the dispute” (Article 46). However, notwithstanding the absence of any express “connection” based requirements, investment arbitration tribunals – whether under ICSID or otherwise – regularly evaluate the degree of closeness between the original claim and counterclaim to determine the admissibility of a counterclaim. According to the UNCITRAL tribunal in Saluka v Czech Republic, the “close connection” element is now “customary” under international law (at para. 61). The “close connection” test serves an important function in narrowing the scope of disputes before the Tribunal to claims that are related, thereby preventing a respondent from raising unrelated claims as a tactic to obstruct or delay resolution of the claimant’s claims. As the ICJ explained in in its decision on counterclaims in the Bosnia Genocide Case, a respondent cannot “impose on the Applicant any claim it chooses, at the risk of infringing the Applicant’s rights and of compromising the proper administration of justice” (at para. 31).
Assessing the “Close Connection” – From “Essential Unity” To A “Factual Link”
The most frequently cited “close connection” test in investment arbitration was laid down by the tribunal in Saluka v Czech Republic. In Saluka, the Czech Republic filed counterclaims in relation to the investor’s breaches of domestic law. After reviewing primarily Iran-US Claims Tribunal and two ICSID precedents, the Saluka tribunal found there was an insufficient connection between the original claims and the counterclaims. In reaching its conclusion, the tribunal considered whether there existed “an interdependence and essential unity of instruments on which the original claim and counterclaim were based” (para. 70). The strict test formulated in Saluka, which focuses on the closeness of the legal basis and instruments underlying the original claims and counterclaims, has since been applied by other tribunals that have similarly rejected counterclaims by respondent States (see e.g. Paushok v Mongolia). However, the Saluka test has been criticized for being wrong
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on both precedent and principal (Douglas, The International Law of Investment Claims, Cambridge; Cambridge University Press (2009), at p. 260-262). The Saluka tribunal relied heavily on jurisprudence of the Iran-US Claims Tribunal. This approach was flawed. The tests formulated in those cases were a direct result of the Algiers Accords (the constitutive instrument of the Iran-US Claims Tribunal), which expressly required that the counterclaims arise from the “same contract, transaction or occurrence that constitutes the subject matter of the national’s claims.” The Iran-US Claims Tribunal was therefore bound by a more limited notion of connectedness. While well-suited to disputes arising out of the same instrument or suite of instruments, the narrow test in the investment arbitration context creates an onerous burden on States seeking to allege breaches by the investor of domestic or international law. Such claims necessarily have a separate legal basis to the investor’s claims which arise out of the investment treaty. The test in Saluka is also problematic from a policy perspective. By narrowly construing the ambit of permissible counterclaims, the Saluka test precludes otherwise factually related claims from being resolved in the same forum, thereby reducing the efficiency of the dispute resolution process and increasing the risk of inconsistent decisions. Furthermore, compelling States to litigate their counterclaims in domestic courts undermines the very premise of denationalizing disputes in investment law. As rightly noted by Professor Michael Reisman in his dissenting opinion in Roussalis v Romania: “In rejecting, … jurisdiction over counterclaims, a neutral tribunal – which was, in fact, selected by the claimant – perforce directs the respondent State to pursue its claims in its own courts where the very investor who had sought a forum outside the State apparatus is now constrained to become the defendant (And if an adverse judgment ensues, that erstwhile defendant might well transform to claimant again, bringing another BIT claim.) Aside for duplication and inefficiency… it is an ironic, if not absurd, outcome, at odds, in my view, with the objectives of international investment law.”
In December 2016, however, the tribunal in Urbaser v Argentina appears to have shifted away from the narrow test in Saluka, choosing to focus instead on the factual link between the original claim and the counterclaim. The dispute in Urbaser related to a concession for water and sewage services to be provided by the investor’s subsidiary in Buenos Aires. Certain fiscal measures taken by the Argentinean government to mitigate the financial crisis in 2001-2002 caused the investor significant financial loss. The investor subsequently commenced proceedings against Argentina alleging violations of the Spain-Argentina BIT. Argentina in turn filed a counterclaim alleging that the investor’s failure to finance the work necessary for the concession “violat[ed] its commitments and its obligations under international law based on the human right to water” (para 34). The parties’ respective submissions on the “close connection” test canvassed precedent, including Saluka. The Urbaser tribunal held that the “factual link” between the original claim and the counterclaim was manifest because they are “based on the same investment, or the alleged lack of sufficient investment, in relation to the same Concession” (para. 1151). Reflecting the concerns voiced by Professor Reisman, the tribunal also went on to state that it would be inconsistent for these related disputes to be heard in separate fora, with the attendant risk of inconsistent decisions (para. 1151). On the facts of the case, the tribunal found that Argentina failed to establish an obligation on the investor to secure the human right to water.
While its conclusions are laudable however, the methodology of the Urbaser tribunal is susceptible to critique. Although raised by the parties, the tribunal did not engage with existing precedent, including Saluka, or explain the reason for its divergence from past case law. In addition, the Urbaser tribunal did not articulate the scope, and in particular, the limits of the “factual link” required to satisfy the close connection test, thereby potentially opening the door to frivolous counterclaims.
Conclusion
The “factual link” test advocated by the Urbaser tribunal is a positive development that could result in more related issues being resolved in the same forum, reducing the inefficiencies of litigating claims in multiple fora and the risks of inconsistent decisions. However, it remains to be seen whether future investor-State tribunals embrace the test proposed by the Urbaser tribunal. If so, it will be imperative for tribunals to articulate what constitutes a sufficient factual nexus between the counterclaim and original claim. A failure to do so risks respondent States raising unrelated counterclaims to obstruct proceedings, undermining both the premise and protections offered by the “close connection” test.
The Urbaser tribunal’s reliance on a “factual link” to determine connectedness is a welcome improvement over the strict Saluka formulations of “interdependence” and “essential unity of instruments” between the claims. An emphasis on factual closeness grants tribunals a greater degree of flexibility at the admissibility stage and will therefore allow more respondent States to raise counterclaims in relation to conduct of the investor that violates domestic and international law. Furthermore, it is efficient and reduces the risk of inconsistent decisions for disputes relating to the same investment to be heard by the same tribunal.
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harshini Prasad has advised States, State entities and private sector firms on commercial, investment and international
law issues in Asia, the Middle East, Europe and Latin America. Ms. Prasad has also represented clients in institutional and ad hoc arbitrations (under the ICC, SIAC and UNCITRAL arbitration rules) seated in various jurisdictions and across a range of industries, including oil and gas, mining, manufacturing and technology licensing. Prior to joining Wilmer Cutler Pickering Hale and Dorr, Ms. Prasad worked in a leading law firm in Singapore where her practice focused on international arbitration and litigation. Ms. Prasad has also worked in the United Nations International Law Commission in Geneva on issues of international law, including the immunity of State officials and the scope and application of mostfavoured nation clauses.
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John McMillan Paving the Road to Arbitration with Good Intentions: Escalation Clauses in Commercial Contracts As a means for resolving international commercial disputes, arbitration has many advantages and one big disadvantage: cost. 68% of respondents to the 2015 Queen Mary International Arbitration Survey reported that the worst feature of international arbitration was the cost of the process. As a result, most businesses would prefer to settle disputes amicably, whenever possible, before resorting to arbitration. An increasing number of businesses incorporate escalation clauses (or “multi-tiered dispute resolution clauses”) in their contracts as a means of encouraging early settlement. Escalation clauses require (or encourage) parties to attempt one or more alternative forms of dispute resolution before resorting to arbitration. Typically, parties are required to participate in negotiations, mediation, or conciliation for a certain period
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before commencing arbitration. In other instances, parties are required to participate in a more formal, adjudicative procedure before arbitration (such as expert determination or dispute board proceedings). Escalation clauses are particularly popular in longterm contracts, where it is important for parties to maintain a working, commercial relationship. It is easier for parties to preserve their relationship during a consensual process like negotiation, than during a more confrontational process like arbitration. However, as explained below, escalation clauses are of uncertain legal effect, with divergent approaches being taking by different jurisdictions and even by different courts within the same jurisdiction. This legal uncertainty has given rise to numerous disputes resulting in unnecessary costs and delay. Businesses should therefore consider whether it is worth adopting escalation clauses at all – and in any event, should take care to draft such clauses so that their meaning and effect is as clear as possible.
Legal Difficulties Regarding Escalation Clauses
Escalation clauses have given rise to numerous disputes such as: • whether the pre-arbitral process prescribed by the clause is mandatory or non-mandatory; • whether an arbitral tribunal can excuse noncompliance with an escalation clause or whether non-compliance prevents an arbitral tribunal from assuming jurisdiction over a dispute; • whether an obligation to negotiate is enforceable; • whether an escalation clause is too uncertain to be enforced; • whether the steps taken by one party satisfy the requirements of the clause; • whether a party may seek emergency arbitral relief or interim relief from a court without first complying with the clause; • whether a party can proceed directly to arbitration when the pre-arbitral step would be futile (e.g., when negotiations would be very unlikely to succeed);
• whether a pre-arbitral step can be fulfilled after the commencement of arbitration (e.g., when negotiations or mediation take place at a later stage); and • whether the requirement to comply with a prearbitral step is an impermissible restriction on access to justice. The chances of these disputes arising can be reduced by careful drafting, but they cannot be eliminated. Ultimately, the meaning and effect of any escalation clause will depend on the wording of the provision in question and the treatment of such clauses under the applicable law. In arbitration, parties often spend time and money arguing about the effect of escalation
clauses before the merits of the underlying dispute are even considered. This runs contrary to the motivations for incorporating these clauses in commercial contracts – that is, the desire to resolve disputes quickly and cheaply, and to preserve commercial relationships. However, the risk does not end there. An arbitral tribunal’s decision on the effect of an escalation clause can be reviewed by national courts in annulment and enforcement proceedings. If a national court decides that non-compliance with an escalation clause deprived the arbitral tribunal of jurisdiction over a dispute, it can annul or refuse to recognize an arbitral award.
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An entire arbitration can be wasted – and a party forced to start arbitration again – because of a dispute regarding an escalation clause. Such cases are thankfully rare, with most courts reaching pragmatic decisions about compliance with pre-arbitral processes, but these disputes have the potential to add years and significant expense to the enforcement process.
Do You Need an Escalation Clause?
In light of these legal difficulties, the first question for any business should be whether it is desirable to incorporate an escalation clause in its contracts at all. These clauses can perform a useful function by forcing parties to meet or talk before disputes become too heated or parties become too entrenched in their positions. They can stop resolvable commercial disagreements (or misunderstandings) spilling over into multi-million dollar arbitrations. This author has witnessed the benefits of such clauses. But businesses do not rush into arbitration in any event. Most disputes begin with telephone calls, meetings, and exchanges of letters where the parties explore each other’s positions and the chances of an amicable resolution. And most disputes are actually resolved in this way, whether or not the parties are bound by an escalation clause. It is unclear whether adopting an escalation clause increases the chances of early settlement. Furthermore, it is difficult to decide the best method of resolving a dispute in advance. In some cases, it is useful to attempt mediation before arbitration; in others, negotiation is more appropriate and cost-effective; and sometimes, parties can only arrive at a negotiating position once a dispute is more advanced. Businesses have more flexibility to adopt case-specific forms of dispute resolution if they do not incorporate escalation clauses into their contracts.
Drafting Escalation Clauses
If a business does decide to include an escalation clause in its contract (or is negotiating with a counter-party that is strongly in favour of including such a clause), it is important to draft the clause in a way that reduces the risk of serious disputes arising at a later stage. (Business should, in any
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event, always seek legal advice on the treatment of escalation clauses under the applicable law of their agreement.) When drafting escalation clauses, it is of primary importance to consider the consequences of non-compliance with the clause – in particular, whether non-compliance is a procedural matter that can be excused by the arbitral tribunal or a jurisdictional matter that prevents the tribunal from assuming jurisdiction over the dispute. This author submits that in almost every instance it is better to specify in the contract that noncompliance shall not deprive the tribunal of jurisdiction over the dispute. Instead, parties should specify that non-compliance shall be taken into account by the tribunal when it makes its decision on costs (i.e., its decision on whether one party can recover its legal costs from the other party), but that non-compliance will not deprive the tribunal of jurisdiction. Drafting clauses in this way has a number of advantages: • Parties can be effectively sanctioned for noncompliance by being ordered to pay part of the other side’s legal costs or by being prevented from recovering part of their legal costs from the other side; • The arbitral tribunal has the discretion to excuse non-compliance if a party has good reason for non-compliance (e.g., cases of extreme urgency); • The tribunal can proceed directly to consider the underlying merits of the dispute, since noncompliance will only be considered at the end of the arbitration; and • Most importantly, national courts are much less likely to annul or refuse recognition of an award on the grounds of non-compliance, when the escalation clause states expressly that it does not have jurisdictional effect. It is good business to settle disputes early, without great expense, while maintaining commercial relationships. It is understandable that escalation clauses, which are intended to achieve just that, should be increasingly popular. But, when amicable settlement is unachievable, escalation clauses should not be allowed to imperil the efficiency, integrity, and finality of the arbitral process. When drafting escalation
clauses, the best way to reduce that risk is to provide expressly that the escalation clause is non-jurisdictional, but that non-compliance shall be taken into account when the tribunal makes its decision on costs.
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ohn McMillan focuses on international arbitration and English High Court litigation. He has experience of arbitrations under a variety of institutional
rules (including the ICC, LCIA, SIAC, and UNCITRAL rules) involving both common law and civil law disputes. He has particular experience in construction, technology, engineering, energy, M&A and joint venture disputes. He also regularly advises government and private sector clients on international law issues.
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The British Museum The British Museum is dedicated to human history, art and culture, and is located in the Bloomsbury area of London. Its permanent collection, numbering some 8 million works, is among the largest and most comprehensive in existence and originates from all continents, illustrating and documenting the story of human culture from its beginnings to the present. The British Museum was established in 1753, largely based on the collections of the physician and scientist Sir Hans Sloane. The museum first opened to the public on 15 January 1759, in Montagu House, on the site of the current building. Its expansion over the following two and a half centuries was largely a result of an expanding British colonial footprint and has resulted in the creation of several branch institutions, the first being the British Museum of Natural History in South Kensington in 1881 (it is nowadays simply called the Natural History Museum). In 1973, the British Library Act 1972 detached the library department from the British Museum, but it continued to host the now separated British Library in the same Reading Room and building as the museum until 1997. The museum is a non-departmental public body sponsored by the Department for Culture, Media and Sport, and as with all other national museums in the United Kingdom it charges no admission fee, except for loan exhibitions. Today the museum no longer houses collections of natural history, and the books and manuscripts it once held now form part of the independent British Library. The Museum nevertheless preserves its universality in its collections of artefacts representing the cultures of the world, ancient and modern. The original 1753 collection has grown to over thirteen million objects at the British Museum, 70 million at the Natural History Museum and 150 million at the British Library.
The British Museum Great Russell Street London www.britishmuseum.org December 2017 | 023 - https://en.wikipedia.org/wiki/British_Museum#The_British_Museum_today - https://upload.wikimedia.org/wikipedia/commons/5/5a/British_Museum_Great_Court%2C_ London%2C_UK_-_Diliff.jpg
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Jonathan Lim Arbitrability of Intellectual Property Disputes - Recent Developments International arbitration provides, in theory, an attractive alternative to litigation for resolving cross-border intellectual property (“IP”) disputes. Yet IP arbitration has not gained as much traction in practice as one might expect. One of the main obstacles to the ubiquity of IP arbitration is subject-matter non-arbitrability, and the traditional view that IP disputes, particularly disputes relating to the validity of registered IP rights, are not capable of settlement by arbitration. There are, however, trends indicating a progressive retreat from this position. This article discusses these trends, including certain recent developments in Hong Kong and their implications.
IP Disputes
IP refers to a broad range of property rights that enable the protection, sharing and transfer of intangible but valuable objects, including creative expressions, industrial inventions, and commercial names.1 Depending on the nature of the IP and the applicable national law, IP rights may require 1 See e.g. T. Cook and A. Garcia, International Intellectual Property Arbitration, 2010, at p. 5.
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registration and may subsist only for a fixed duration. Well-known examples of IP rights are copyrights, patents and trademarks. IP rights generally have a limited territorial scope of application. The laws that enable the protection of IP rights do not apply extraterritorially. This is especially the case for IP rights that require registration, such as patents: patent infringement under the United States Patent Act is not possible outside of the United States. IP rights that do not require registration, such as copyright, are also territorial in scope, although some of them are subject to international protection under international treaties and conventions. In the case of copyright, for example, the Berne Convention for the Protection of Literary and Artistic Works (the “Berne Convention”) allows authors from member States to protect their IP rights in foreign jurisdictions that are also member States, based on the law of the foreign jurisdiction. IP disputes can take many forms. They may include: disputes arising out of breaches of a licensing agreement, disputes regarding the scope of an IP license, royalty payment disputes, IP infringement disputes, and disputes regarding the validity of the IP rights. These disputes can become subject to arbitration where they arise out of or in connection with an agreement which also contains an arbitration clause submitting such disputes to arbitration.
Arbitration and IP disputes
Arbitration is a private and often confidential adjudicative process that involves the final resolution of a dispute by a neutral arbitrator or arbitrators appointed by the parties. Arbitrators can be chosen for their expertise in a particular subject matter or area of law. The parties and arbitrators have much more flexibility, as compared to court litigation, to fashion an appropriate procedure for the case. The process results in an arbitral award, which is enforceable in more than 150 jurisdictions under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). Arbitration therefore offers certain advantages that litigation does not, including confidentiality, flexibility, expertise, and global enforceability.
These features make arbitration particularly suitable for the settlement of certain types of IP disputes, particularly multi-jurisdictional IP disputes. In a litigation context, courts may be reluctant to assume jurisdiction over foreign IP disputes, and therefore separate litigation proceedings in multiple jurisdictions may be involved, even for disputes arising out of a single agreement or transaction. The international enforcement of court judgments is also subject to multiple uncertainties. In contrast, disputes subject to an arbitration agreement, even if they involve parties and activities across multiple jurisdictions, can be resolved in a single arbitration proceeding if the parties so contract. The arbitral award is then more easily enforceable in over 150 jurisdictions by virtue of the New York Convention. Arbitration can also be suitable for the resolution of confidential IP disputes involving sensitive and confidential information, such as trade secrets or confidential industry know-how. Arbitration is often, although not necessarily, confidential; whether or not an arbitration is confidential depends upon parties’ agreement and the applicable law, and many national laws and arbitration rules provide for implied or presumptive confidentiality of the arbitral proceedings and the arbitral award.2 It is also possible to expressly provide for confidentiality of arbitral proceedings in IP contracts, and such an express confidentiality provision is likely to be upheld and enforceable in many jurisdictions.
Historical Non-Arbitrability of IP Disputes
Case law and legislation in many jurisdictions provide that certain categories of disputes are not “arbitrable,� i.e. they are not capable of settlement by arbitration, usually for reasons of public policy. Non-arbitrability is a ground for non-enforcement of arbitral awards under the New York Convention and a basis for setting aside an award under many national laws. However, there is no uniform approach to arbitrability. Each jurisdiction judges for itself what categories of dispute are not arbitrable. 3 Typical examples of non-arbitrable disputes include criminal law disputes or family law disputes. 2 See e.g. Australia International Arbitration Act, Section 23C; Emmott v Michael Wilson & Partners Ltd [2008] EWCA Civ 184; LCIA Rules, Article 30; SIAC Rules, Rule 39. 3 G. Born, International Commercial Arbitration, p. 973.
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The arbitrability of IP disputes is a stilldeveloping area of the law. Historically, IP disputes were regarded as non-arbitrable,4 and therefore agreements to arbitrate IP disputes were not enforceable and IP arbitral awards faced significant enforcement risks. This was based on the theory that IP rights are exclusive property rights granted by sovereign governments and reflect the balancing of particular public policy interests, and that they therefore could not be altered or adjudicated upon in private by the agreement of private parties.5 On the other hand, commentators took the view that there is no reason in principle why IP disputes, including issues of validity that involve property rights granted by sovereign governments and related public policy issues, could not be resolved by arbitration – so long as the decision of the arbitral tribunal is limited to the parties to the arbitration.
Recent Developments in Arbitrability of IP Disputes
The historical position on the non-arbitrability of IP disputes has been in progressive retreat. There is now an emerging consensus that IP disputes are arbitrable. As an indication of this consensus, the World Intellectual Property Organization (“WIPO”), a United Nations Specialized Agency focused on the protection of IP rights globally, has established an Arbitration and Mediation Center for the private settlement of IP disputes. An increasing number of jurisdictions now provide for IP disputes to be generally arbitrable, although differences still remain as to the arbitrability of IP validity issues. For example, European Union law provides that IP disputes and IP claims are generally arbitrable, save that disputes directly concerning the validity or existence of IP rights are not arbitrable and must be decided upon exclusively by specified national courts.6
4 See G. Born, International Commercial Arbitration, 2014, at p. 992. See also Lear, Inc. v. Adkins, 395 U.S. 653, 677 (U.S. S.Ct. 1969). 5 See L. Boo, “Arbitrability of Intellectual Property Disputes”, at p. 1, available at https://www.aippi.org/download/reports/forum/forum07/12/ ForumSession12_Presentation_Lawrence_Boo.pdf. 6 See EC Regulation 44/2001, Art. 22(4); EC Regulation 1215/2012, Art. 24(4). See also T. Cook and A. Garcia, International Intellectual Property Arbitration, 2010, at p. 65.
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Under Chinese law, matters concerning the validity of patents and trademarks must be handled exclusively by administrative state organs and courts, and therefore commentators take the view that Chinese courts are unlikely to regard IP validity issues as arbitrable.7 On the other end of the spectrum, some jurisdictions, including Switzerland and the United States, go further and have legislation or definitive rulings that that make clear that all IP disputes, virtually without limitation and including issues of validity, are arbitrable as between parties to the arbitration agreement.8 Many other jurisdictions, including prominent seats of arbitration such as Singapore and Stockholm, have not expressly addressed the arbitrability of IP disputes.
The Hong Kong Amendments
Most recently, on 14 June 2017, Hong Kong enacted amendments to its Arbitration Ordinance that clarified the arbitrability of IP disputes in Hong Kong. The amendments expressly provided that all disputes over the enforceability, infringement, subsistence, validity, ownership, scope, duration or any other aspect of an IP right would be arbitrable as between the parties to the IP dispute. Hong Kong thus joins jurisdictions such as Switzerland and the United States in expressly permitting issues relating to the validity of IP rights to be arbitrable. It remains to be seen whether Hong Kong’s amendments will mark the start of a trend in encouraging IP arbitrations, and if so, what form that trend will take. One of the differences between Hong Kong’s and the United States’ model of IP arbitration is that the United States provides that the United States Patent and Trademark Office must be given notice of an arbitral award in relation to a patent dispute before such award can be enforced, and that such awards would be recorded on the relevant register.9
7 Art. 45 of the People’s Republic of China Patent Act and Arts 41 and 42 of the People’s Republic of China Trade Mark Act; M. Smith et al, “Arbitration of Patent Infringement and Validity Issues Worldwide,” 19 Harv. J. Law. Tech. 299, 2006, at p. 346. 8 See Blessing, “Arbitrability of Intellectual Property Disputes,” 1996, 12 Arb. Int’l 191; United States Code, Title 35: Patents, Section 294: Voluntary Arbitration (35 U.S.C. § 294). 9 See 35 U.S. Code § 294; 37 CFR 1.335.
Hong Kong declined to follow this and require the recording of IP or patent arbitral awards, on the basis that confidentiality is an important feature of Hong Kong’s arbitration regime, that valid safeguards already exist for third parties to protect their interests, and that no competition law issues arise.10 Different jurisdictions looking to introduce IP arbitration reform may take a different stance from both the Hong Kong and the United States. Awards that deal with the validity of IP rights, even if they only have inter partes effect, may give rise to competition law concerns as third parties are placed at a competitive disadvantage vis-à -vis the parties to the arbitration, even though the underlying IP right that justifies that disadvantage may be subject to some defect. Such concerns may justify making an arbitral finding on the validity of IP rights (but not arbitral awards more generally) publicly available, particularly those IP rights that are recorded on a register. This is ultimately a policy question for each jurisdiction on how the balance between competition law concerns and the confidentiality of arbitration should be struck.
10 Supplemental Paper on the Government’s Response to the Issues Raised by the Bills Committee at the Meeting of 5 January 2017 - Views of the Competition Commission, LC Paper No. CB(4)579/16-17(01).
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onathan Lim focuses his practice on international arbitration matters and complex multi-jurisdictional disputes. He has experience with representation of clients in ad hoc and institutional arbitrations (including under the HKIAC, ICC, LCIA, SIAC and UNCITRAL Rules) sited in various jurisdictions, including both common law and civil law jurisdictions in Europe and Asia. Mr. Lim has also advised governments in Africa and Asia on public international law issues and international arbitration law reform. Mr. Lim is also a Visiting Senior Fellow at the National University of Singapore, where he teaches a course on commercial and investment arbitration each year. He publishes and speaks regularly on international arbitration and financial regulation. He has also lectured on international arbitration and financial regulation at the Singapore Management University and the London School of Economics. Prior to joining the firm, Mr. Lim worked with the World Bank’s Finance, Private Sector and Infrastructure Practice Group in Washington DC. There, his portfolio included providing legal advisory services, on financial regulation, corporate insolvency and infrastructure-related issues, to developing country governments in Asia, Eastern Europe and the Pacific Islands. Mr. Lim also worked as a research fellow and associate for the Committee on Capital Markets Regulation in Cambridge, MA. He trained with a major Singapore law firm.
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Krystyna Khripkova Striking the Balance between Pros and Cons of Third-Party Funding in International Arbitration Necessity is the mother of invention. The introduction of third-party funding (‘TPF’) in international arbitration creates a necessary opportunity for a party, whether in financial distress or otherwise, to pursue its meritorious claims against a much more powerful and resourceful opponent. TPF is an increasing reality in the evolving world of high-priced international arbitrations. Since 2012 the market for arbitration funding has grown by well over 500 percent. TPF establishes relationships whereby a funder finances, partly or fully, one of the parties’ arbitration costs. In cases where claimants are being funded and there is a favourable award, the funder is generally remunerated by a previously agreed percentage of the proceeds. In case of an unfavourable award, the funder’s investment is lost. If a respondent is funded, then the funder contracts to receive a predetermined
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payment from the respondent, similar to an insurance premium. This agreement may include an extra payment to the funder if the respondent wins the case. The discussion in this article is limited to the scenario in which the claimant procures the funding.
Definition
TPF appears in a multiplicity of forms, such as contingency fees, debt instruments, or a full transfer of underlying claims. The basic definition is found in the International Bar Association Guidelines on Conflicts of Interest in International Arbitration (the ‘IBA Guidelines’), where TPF refers to “any person or entity that is contributing funds, or other material support, to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration.”
How it works
Large-scale arbitration funders typically start the process of selecting potential claims to be funded by considering a range of factors associated with potential risks of losing the case. Such due diligence may often focus on the jurisdictional hurdles, the merits of the dispute, the prospects of success and enforcement of the arbitral award, the amount of potential compensation, and the expertise of the legal team representing a funded party. Once the funder has decided to finance a claimant, they sign a funding agreement setting out, inter alia, the funder’s level of control over the arbitral strategy, its fraction of the proceeds if the claimant succeeds, and disclosure restrictions.
What are the benefits of engaging TPF in arbitration?
In some instances, external financing of claims is the only way for a claimant to obtain vindication. Claimants who are impecunious or unable to bear the financial risk of arbitration often benefit from TPF. Claimants may have other considerations for utilizing TPF, such as a willingness to maintain cash-flow and offset the risk of an uncertain arbitration outcome. The presence of TPF backing the claim enhances the claimant’s ability to sustain a protracted legal
battle, thereby minimizing the threat of dilatory tactics aimed at exhausting the financial resources of the claimant. During the settlement discussions, the claimant would gain more leverage by showing the funder’s confidence in the claimant’s meritorious claim and claimant’s ability to sustain a long trial. Moreover, professional funders provide strategic advice, necessary expertise, and experience to which the claimant would not usually have access.
TPF’s other side of the coin
While external funding helps to level the playing field for an impecunious party by granting access to justice, it may create more imbalances than it eliminates. For example, detractors of TPF question the benefits of external funding, arguing that it creates conflicts of interest, fuels a rise in frivolous and vexatious claims, shifts control over the claim, and forces claimants to sign unfair funding contracts. First, TPF contracts typically include a confidentiality clause that restricts disclosure of the contract. As the number of professional funders active on the market of international arbitration is limited, the introduction of TPF into the proceedings may impede the impartiality and independence of the tribunal, creating potential conflicts of interest for arbitrators and endangering the legitimacy of the proceedings. A way of resolving this issue might be to impose an obligation on a funded party to disclose the presence of TPF to
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the tribunal, without going into the details of the agreement, at an early stage of the proceedings. The ordered disclosure would help to assess and eliminate any potential conflicts of interest at the early stage of the proceedings and thus prevent any potential challenges to arbitrators. The IBA Guidelines have taken the first steps in requiring upfront disclosure of TPF and providing that a funder shall be considered the ‘equivalent of the party’ for conflict check purposes. However, main arbitration rules (except the 2017 Singapore International Arbitration Centre Investment Arbitration Rules) have not expressly addressed the issue of mandatory disclosure yet. Second, TPF may simply mean an increase in claims – both, meritorious and frivolous – that affects respondents. TPF may open the floodgates for frivolous claims and may expose the respondent to a ‘hit-and-run arbitration,’ when the defeated claimant and a funder both fail to pay a costs award. Although the advocates of TPF argue that professional funders rigorously filter meritless cases to maximize the funders’ chances to return their investments, the reality may be different. Professional funders appear to curtail the risks of losses by spreading that risk over many cases. A funder may be keen to take a bigger risk by financing a frivolous claim if it promises a higher return rate or can maximize the value of the funder’s portfolio. In addition, motivated by a pure incentive to maximize a financial gain, a funder may try to force a claimant to inflate its claims beyond their actual value. The tribunal, however, could mitigate the risk of frivolous claims and ‘hit-and-run arbitration’ by ordering a funded party to place a security for costs in appropriate circumstances. Typically, tribunals order the successful party to recover its costs from the losing party. Under prevailing standards, a tribunal may order security for costs if a party shows that (i) it has a prima facie case of succeeding on the merits; and (ii) the other party has no financial means and thus is unlikely to satisfy a future adverse costs award. The presence of TPF backing the claim may be a relevant factor in the tribunal’s analysis, and thus should be disclosed. Once TPF has been disclosed, the tribunal would be able to assess whether there are sufficient grounds for ordering the security for costs.
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Third, there is a concern about shifting control over the claim. As a funder always retains the power of the purse, it can refuse further financing if the claimant does not follow the strategy proposed by the funder. By controlling future payments, the funder can influence various aspects of claim management (e.g. by refusing to settle a claim). However, the claimant’s lawyers should generally act in their client’s best interest according to the rules of professional conduct. These rules (which can also be set out in the funding agreement) may prevent the funders’ attempt to influence the lawyers’ professional advice. Finally, a funder may use its stronger bargaining power to force the claimant to sign an unfair contract that could entitle the funder to more than 50% of the proceeds of the award. Such risk could be minimized if the claimant seeks professional advice on the terms of the funding agreement, and in parallel negotiates with several competing funders to choose the best deal on the market.
Conclusion
While the presence of TPF remains beneficial in levelling the playing field by offering claimants the financial support to pursue their claims, it may also create imbalances which need to be tackled. With the upfront disclosure of the funder’s involvement and the careful use of security for costs to protect the respondent’s interests, many potential risks and pitfalls can be minimized or even avoided.
Let’s get personal... K
rystyna Khripkova’s international arbitration practice includes representation in both institutional
and
ad
hoc
arbitrations
(including under the ICSID, ICC, LCIA, SCC, UNCITRAL and ICAC at the UCCI rules) sited in both common and civil law jurisdictions, and has particular experience with issues relating to CIS jurisdictions. Ms. Khripkova’s international arbitration practice covers a wide range of industries, including construction, financial services, telecommunications and oil and gas. Ms. Khripkova is qualified in Ukraine. Ms. Khripkova is a graduate of Stockholm University (LL.M., 2014) and Ukrainian State University of Finance and International Trade (LL.M., 2008).
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this is magna charta