CIETAC tribunal applies UNIDROIT Principles where parties fail to present case under governing law

While commercial parties are generally free to select the law that governs their contracts, they must also ensure that they understand the law they selected, and can actually apply that law to the contract.  In a CIETAC arbitral award published by CIETAC in its publication “Selection of Arbitration Cases Involving the Belt and Road Countries”, a sole arbitrator came up with a creative solution in a situation where the parties failed to present their cases under the governing law of the contract.  The arbitrator applied the UNIDROIT Principles of International Commercial Contracts to determine the legal issues in dispute.  Despite this arbitrator’s willingness to “think outside of the box”, the case is a reminder that parties must consider the legal and practical implications of their contractual choices.

Background

On 24 September 2012, the Indonesian Respondent EPC contractor entered into an EPC Sub-Contract (Agreement) with the Mainland Chinese First Claimant and Indonesian Second Claimant to build a coal-fired power plant located in Indonesia.  The governing law of the Agreement was Singapore law and disputes were referred to arbitration at the China International Economic and Trade Arbitration Commission (CIETAC).

The Project was stayed at the preliminary design stage.  The Claimants contended that the Respondent had failed to provide permanent use of the road to access the Project’s site and failed to provide location details of the main entrance of the Project, which resulted in the Claimants’ delay in providing the preliminary design drawings to the Respondent.  The Respondent in return blamed the Claimants for their delay in submitting the preliminary design drawing within the time limits as provided under the Agreement; and called the advance payment bonds and performance bond just before the Claimants completed and submitted the preliminary design drawings.  After calling the bonds, the Respondent refused to pass the preliminary design drawing to the Employer for review and approval.  As a result, performance under the Agreement was suspended.

The Claimants commenced arbitration and sought a declaration that the Agreement was terminated due to the Respondent’s breach.  The Claimants also sought an order for the Respondent to return the called amounts of the performance bond; to return the difference between the amount of the advance payment bonds and advance payment to the Claimants; damages, and interest.

The governing law issue

The parties had expressly selected Singaporean law to govern the Agreement.   However, neither party engaged Singaporean counsel or legal experts when arguing their cases in the arbitration. The Claimants submitted their pleadings based on Chinese law.  Whilst the Respondent objected to the application of Chinese law, it merely submitted a Singaporean legal expert report with a few Singapore court cases in support, which was very limited in substance and did not touch upon the major issues in dispute.

Despite the sole arbitrator’s instructions, the parties failed to provide sufficient Singaporean legal authorities.  The sole arbitrator referred to Article 49 of the CIETAC Arbitration Rules, which provides: “[t]he arbitral tribunal shall independently and impartially render a fair and reasonable arbitral award based on the facts of the case and the terms of the contract, in accordance with the law, and with reference to international practices”, and proposed that the parties submit their cases under the UNIDROIT Principles.  If any party considered there was a conflict between Singaporean law and the UNIDROIT Principles, it could make submissions accordingly.   The parties accepted this solution and submitted pleadings based on the UNIDROIT Principles.

The sole arbitrator found that the Claimants had breached the Agreement by delaying the initial design drawings.  However, the sole arbitrator held that the Respondent’s response to the Claimants’ breach, by calling the bonds in full and refusing to submit the initial drawing to the Employer, had been disproportionate to the breach.  In the arbitrator’s view, the Respondent’s call on the bonds made it impossible for the Claimants to continue performing the Agreement.

In the arbitrator’s view, the Respondent’s call on the bonds therefore constituted a fundamental breach of the Agreement.  The arbitrator relied on the UNIDROIT Principles to uphold the Claimants’ claim that they were entitled to terminate the Agreement, and to determine the consequences of that termination.  The arbitrator reasoned that the UNIDROIT Principles reflect good practice and general principles in international commercial contracts.  Unless either party could demonstrate otherwise, the sole arbitrator held that he had no reason to believe there was any inconsistency between Singapore law and the UNIDROIT Principles.

Comment

In practice, many arbitrators would not proactively apply a non-binding codification of transnational legal principles to resolve a dispute where parties have explicitly chosen the governing law of the contract.  The published award does not elaborate on why the tribunal proposed applying the UNIDROIT Principles.  However, it does indicate that Chinese arbitrators may be increasingly open to applying international legal principles when dealing with foreign-related commercial disputes.

Nevertheless, this case appears to be a one-off, and it would be unwise for parties to rely on an arbitrator’s willingness to adopt creative solutions of this kind.  Parties who take advantage of the contractual freedom to select a neutral governing law must be prepared to argue their cases under that law, i.e. to instruct counsel or experts who are qualified to practice that law.  If parties do not apply the selected governing law in the arbitration, they must be prepared for the additional time and expense involved in determining which laws apply before the substantive claims can be heard, not to mention the risk of an unexpected outcome if the law applied produces an unfavourable decision.

[1] This award was published by CIETAC in the Selection of Arbitration Cases Involving the Belt and Road Countries, at pages 58 to 105.

Helen Tang

Helen Tang
Partner
+86 21 2322 2160

Jean Zhu

Jean Zhu
Counsel, Kewei
+86 10 6535 5041

Yingtong Chen

Yingtong Chen
Legal Assistant, Kewei
+86 10 6535 5133

THE UNITED REPUBLIC OF TANZANIA PROPOSES ARBITRATION REFORMS TO PLACATE FOREIGN INVESTORS. WILL IT WORK?

Authors: Emma Schaafsma and Kemi Wood

Introduction 

In 2017, the Tanzanian government introduced a raft of legislative reforms to the natural resources sector. Through the reforms the new government looked to ensure that investor disputes were resolved locally and that the Tanzanian government would not be subjected to international arbitrations. The new government showed a particular hostility towards international arbitration (especially in the mining and oil and gas sectors) arguing that it was inherently biased against developing countries, with no neutral ground in international arbitration.1 There followed a swathe of international arbitrations commenced against the Tanzanian government over parts of the legal reforms that cancelled the retention licences of foreign investors and transferred rights to the Tanzanian government. In response, by early 2020 the Tanzanian National Assembly passed a bill to enact a new Arbitration Act.2 The bill now awaits Presidential assent before being passed into law. This note looks at the background to the new bill and its key features, and what the potential impact could be on foreign direct investment into Tanzania.

2017 – Looking inwards: Tanzania turns away from international arbitration

As recently as 2014, following the signing of a number of Bilateral Investment Treaties, the United Nations Conference on Trade and Development identified Tanzania as a top destination for foreign direct investment in East Africa.3 However, following the election of President John Magufuli in 2015, a number of legislative reforms were introduced into Tanzania’s natural resources sector which made it a significantly less attractive prospect for foreign direct investment. The legislative reforms included limiting the use of international arbitration to resolve disputes in respect of Tanzania’s natural resources. Article 11 of the Natural Wealth and Resources (Permanent Sovereignty) Act 20174 prohibited investors from resorting to international dispute resolution mechanisms, such as international arbitration, where the subject matter of the dispute concerned natural resources:

“(1) Pursuant to Article 27(1) of the Constitution, permanent sovereignty over natural wealth and resources shall not be a subject of proceedings in any foreign court or tribunal.
(2) For the purpose of subsection (1), disputes arising from extraction, exploitation or acquisition and use of natural wealth and resources shall be adjudicated by judicial bodies or other organs established in the United Republic and accordance with laws of Tanzania.
(3) For the purpose of implementation of subsection (2), judicial bodies or other bodies established in the United Republic and application of laws of Tanzania shall be acknowledged and incorporated in any arrangement or agreement.”

The Tanzanian government also passed legislation in September 2018 prohibiting international arbitration as a method for resolving investor-state disputes. Under Section 22 of the Public-Private Partnership Act (Amendment) Act 20185 , any disputes arising under a PPP contract “shall in case of mediation or arbitration be adjudicated by judicial bodies or other organs established in Tanzania and in accordance with its laws.

These reforms inevitably increased the risks and costs associated with investing in the Tanzanian natural resources sector (including oil, gas and mineral extraction). Somewhat ironically, the restrictions on investors themselves prompted a wave of new arbitration claims, including by several multinational mining companies over revoked retention licences.

2020 – Looking outwards: Tanzania seeks to make local arbitration more attractive

Just a few years since the introduction of restrictions in 2017, the Tanzanian government has taken (an albeit limited) U-turn on its hostility towards international arbitration. On 28 January 2020 the government tabled the Arbitration Bill 2020 (the “Bill”)6 before the Tanzanian National Assembly. According to the public notice issued with the Bill, it is aimed at creating a friendly regime that will encourage alternative dispute resolution in Tanzania, and establish a more conducive framework for enforcement of arbitral awards.

However, restrictions on the use of international arbitration for disputes relating to the natural resources sector remains. Under the Bill, arbitration can be used in the context of natural resource related disputes only where the law and seat of the arbitration is that of the United Republic of Tanzania. The introduction of the Bill to replace its antiquated predecessor therefore appears to be an effort to make local arbitration a more attractive proposition to foreign investors.

Notable features of the Bill

The Bill is divided into thirteen parts and appears to have been broadly modelled on the English Arbitration Act 1996.
The Bill, if passed, will:

  • Repeal and replace the Tanzanian Arbitration Act 1931 (Section 91(1));
  • Provide a definition of both ‘domestic commercial arbitration’ and ‘international commercial arbitration’ (Section 3);
  • Apply where the seat of arbitration is Mainland Tanzania (Section 5);
  • Introduce provisions on the enforcement of foreign arbitral awards (Section 78);
  • Establish the Tanzania Arbitration Centre (“TAC”) for the conduct and management of arbitration (Section 77). The TAC would also maintain a list of accredited arbitrators and provide education for arbitrators.

The Bill, as currently drafted, requires any arbitration arrangements concluded in the past but which have not yet materialised to be renegotiated to comply with the requirements of the proposed law (Sections 91(3) and 91(4)). The same requirement is also imposed on any pending arbitral proceedings. This could pose a significant practical challenge for entities with multiple arbitration agreements, who would prefer consistency across their contract suite.

Potential Impact of the Bill

While the proposed law has largely been welcomed by local and international commentators, there are those who have expressed concern that the Bill does not more closely align with the UNCITRAL Model Law and makes no mention of the New York Convention, as well as affording a multiplicity of opportunities for court intervention in the arbitration process.7 It remains to be seen whether it will in fact make local arbitration more attractive to foreign investors. While Tanzania is now offering the ‘carrot’ of an updated arbitration regime, the ‘stick’ of prohibitions on international arbitration introduced in 2017 will likely still sit heavily on investors’ minds.

 

  1. https://www.theeastafrican.co.ke/business/Tanzania-cites-bias-as-it-changes-laws-governing-arbitration/2560-4763234-timkl6z/index.html
  2. Available at: https://www.bunge.go.tz/polis/uploads/bills/1580219386-The%20Arbitration%20Bill.%202020.pdf
  3. United Nations Conference on Trade and Development (2014), World Investment Report 2014, New York and Geneva, United Nations Publication, p.37.Available at: https://unctad.org/en/PublicationsLibrary/wir2014_en.pdf
  4. Available at: https://tanzlii.org/tz/legislation/act/2017/5-0
  5. Available at: http://parliament.go.tz/polis/uploads/bills/acts/1553699390-Amendment%20of%20PUBLIC%20PRIVATE%20PARTNERSHIP%2012%20SEPTEMBA,%202018%20CHAPA.pdf
  6. Available at: https://www.bunge.go.tz/polis/uploads/bills/1580219386-The%20Arbitration%20Bill.%202020.pdf
  7. iResolve (2020), Comments on the Arbitration Bill 2020. Available at: https://www.iresolve.co.tz/webmak2/wp-content/uploads/2020/02/iResolve-Comments-on-Arbitration-Bill-2020.pdf

For more information, please contact Emma Schaafsma and Kemi Wood or your usual Herbert Smith Freehills contact:

Emma Schaafsma

Emma Schaafsma
Partner, London

Kemi Wood

Kemi Wood
Associate, London
+44 20 7466 2161

23RD ANNUAL IBA ARBITRATION DAY: “INNOVATION 360: NEW AND NOVEL IDEAS FOR THE PRACTICE OF ARBITRATION—CRITICALLY TESTED”

12-13 March 2020

Ciragan Palace Kempinski, Istanbul, Turkey

A conference presented by the IBA Arbitration Committee

Under the theme of “Innovation 360: new and novel ideas for the practice of arbitration – critically tested”, the 2020 Arbitration Day will present a series of panels, with each panel presenting one new idea that challenges a key aspect of the way in which international arbitration is presently practiced. Each panel discussion will start with the proponents of the new idea making their case. Both the other panelists and the audience will then subject the new idea to critical testing and rigorous assessment.

Topics include:

  • Procedural Timetable No. 1—topped and tailed: improved case management
  • Quantum academy: training and certification on assessing damages
  • Creating an independent technology and document management hub
  • Prosecuting and adjudicating fraud claims in international arbitration

To book tickets, or for more information, please visit: https://www.ibanet.org/Conferences/conf1004.aspx

Paula Hodges QC, Head of Herbert Smith Freehills’ Global Arbitration Practice, is a member of the organising committee of the conference.

For more information, please contact Paula Hodges QC, Head of Global Arbitration Practice, Craig Tevendale, Partner, or your usual Herbert Smith Freehills contact.

Paula Hodges QC

Paula Hodges QC
Head of Global Arbitration Practice
+44 20 7466 2027

Craig Tevendale

Craig Tevendale
Partner
+44 20 7466 2445

 

 

SECTION 1782 UPDATE: U.S. DISCOVERY IN AID OF INTERNATIONAL COMMERCIAL ARBITRATIONS

As we have explained in a previous post, Section 1782 of the United States Code (28 USC § 1782, titled “Assistance to foreign and international tribunals and to litigants before such tribunals”) is a means by which “an interested person” in non-US proceedings can request an order compelling discovery from a US-based entity “for use in a proceeding in a foreign or international tribunal.” It remains an open question, however, whether such proceedings include international commercial arbitrations.

In 2004, the Supreme Court of the United States in Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004) held that Section 1782 gave United States District Court judges broad discretion to permit foreign litigants to obtain discovery in the United States, subject to certain guidelines. But in interpreting this case – and the statute itself – US federal courts remain split as to whether parties to international commercial arbitrations may seek discovery under Section 1782, or whether the provision is meant only to extend to foreign court proceedings or perhaps arbitrations conducted under the auspices of state-sanctioned authorities.

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HERBERT SMITH FREEHILLS OPENS APPLICATIONS FOR INTERNATIONAL ARBITRATION INTERNSHIPS IN ITS MARKET-LEADING LONDON OFFICE

Herbert Smith Freehills is now accepting applications for two internship opportunities in our international arbitration team in London. The programme offers aspiring arbitration lawyers a chance to work within one of the world’s leading specialist arbitration groups.

The two paid internships are for three months each, starting in September 2019 and December 2019.

Interns will have a varied workload, including: assisting with current arbitrations and other client work; arbitration-related research; assisting with blog posts and articles; producing arbitration-related know-how, and similar projects.

For more details of the role, please click here.

To apply, please visit our careers page.

Applications must be received on or before Sunday 6 July.

HONG KONG COURT FINDS THAT DEFENDANT WAIVED RIGHT TO CHALLENGE JURISDICTION

Israel Sorin Shohat, the Third Defendant in proceedings commenced by Mr Balram Chainrai, sought to challenge the jurisdiction of Hong Kong courts to hear a matter related to an Israeli arbitral award issued in 2013. The court held that, while the deadline for challenging jurisdiction had not passed, Shohat had ultimately taken steps which indicated that he had submitted to the jurisdiction of the Hong Kong courts and therefore waived his right to challenge.

Balram Chainrai v Kushnir Family (Holdings) Ltd [2019] HKCFI 234

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JAPAN AND HONG KONG AGREE ARBITRATION & MEDIATION COOPERATION

On 9 January 2019, Hong Kong’s Department of Justice and the Ministry of Justice of Japan signed a Memorandum of Cooperation (MoC) to “strengthen collaboration on international arbitration and mediation“. The MoC, a copy of which is available here, provides a general administrative framework for cooperation between Japan and Hong Kong in relation to international arbitration and mediation.

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Trends in choice of governing law & jurisdiction in cross-border transactions in Asia: Singapore Academy of Law publishes study

On 10 January 2016, the Singapore Academy of Law (SAL) published the results of its study on preferences for the choice of governing law and jurisdiction made by those involved in cross-border transactions "in Singapore and the region" (the Study).  The Study, which was commissioned by the SAL's International Promotion of Singapore Law Committee, reflects the views of around 500 commercial law practitioners and in-house counsel who have involvement in cross-border transactions. The Study results can be accessed here

The Study responses suggest the growth in (i) the internationalisation of transactions in the region, (ii) the importance of Singapore law and (iii) Singapore as a preferred choice of forum for the resolution of disputes.  The most noteworthy points are highlighted below.

However, the value in the Study in signalling the comparative strength of Singapore's position as an international centre of dispute resolution will be determined by the demographics of the Study population, and, in particular, how many of the respondents are based outside Singapore and in which jurisdictions. 

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Recent Developments in India-related international arbitration

Herbert Smith Freehills has issued the latest edition of its Indian international arbitration e-bulletin. This issue considers a number of interesting decisions of the Indian courts, in particular a Delhi High Court judgment which clarifies issues of currency conversion and interest claims when enforcing foreign awards in India, as well as a Bombay High Court ruling that non-signatories to an arbitration agreement were nonetheless bound by it.

We also highlight a decision of the English High Court relating to the enforcement of an LCIA London arbitral award against an Indian party, followed by a round-up of recent Indian arbitration-related news.