EMTA SPECIAL SEMINAR: ARBITRATION IN THE EMERGING MARKETS
Monday, October 26, 2015
360 Madison Avenue, 17th floor
(on 45th St. between Madison and 5th Aves.)
New York City
This EMTA Special Seminar will provide analysis and commentary by a panel of legal experts on the differing contexts in which arbitration arises in the Emerging Markets.
Specific topics will include:
11:45 a.m. Registration
12:00 noon – 2:00 p.m. Panel Discussion
Whitney Debevoise (Arnold & Porter) - Moderator
Jeffrey Sullivan (Allen & Overy)
Mark Cymrot (BakerHostetler)
Alexander de Gramont (Dechert)
Lunch will be provided
Support provided by Allen & Overy, BakerHostetler and Dechert.
This Special Seminar is part of a continuing series of panels and presentations that EMTA is pleased to sponsor on various topics of interest to Emerging Markets investors and other market participants, and is part of EMTA’s Legal & Compliance Seminars*.
*CLE credit will be available for NY attorneys. This seminar is non-transitional and appropriate for experienced attorneys only. Please click here for details on EMTA’s Financial Hardship Policy.
Registration fee for EMTA Members US$95 / US$695 for non-members.
Arbitration in the Emerging Markets Panel
EMTA presented a panel of legal experts on the differing contexts in which arbitration arises in the Emerging Markets on October 26, 2015 at its NYC offices. Whitney Debevoise (Arnold & Porter) moderated the panel, with the following panelists: Jeffrey Sullivan (Allen & Overy), Mark Cymrot (BakerHostetler) and Alexandre de Gramont (Dechert). The event was sponsored by Allen & Overy, BakerHostetler and Dechert. Click Here for relevant documents addressed during the panel discussion, Click Here for Mr Sullivan’s presentation and Click Here for Mr. de Gramont’s presentation.
Whitney Debevoise provided some background information on arbitration generally, describing it as an alternative to going to international or local courts. Understanding the appropriate dispute settlement mechanism and its advantages and limitations is vital. Recognizing the role that arbitration plays in restructuring techniques, and adding arbitration to one’s due diligence toolkit to evaluate sovereign risk (i.e., what judgments are outstanding on a sovereign, what are the amount of the claims and are they collectible and what are the threats to disbursement under a bond) is also crucial.
Alexandre de Gramont provided an introduction to international commercial and investor-state arbitration. He explained that the primary purpose of international arbitration is to act as a neutral forum for the resolution of disputes between persons of different nationalities, with the added benefits of speed, cost, party autonomy and specialized expertise. Recognition and enforcement of an arbitral award (where court judgments are not always enforceable abroad) was another advantage, as was the ability to choose the language, choice of law and other procedural matters. There was some historical skepticism of banks and financial institutions against international arbitration because of the concern that arbitrators decided cases based on the equities, there was a lack of appellate review and collateral security and high interest rates made arbitration seem unnecessary. Such commercial arbitration arose in its modern form in the wake of WWI, and was viewed as an instrument of peace and a creature of consent, almost always arising from a pre-existing contract. The rise of this form of arbitration is evidenced by the currently over 120 international arbitration institutions around the world, 70% of them having been created in the past 30 years. Its particular rise in the financial services sector was the result of numerous factors, including the financial crisis of 2008, recession in major economies, increasingly complex cross-border transactions, increased regulation in the financial sector, increased investment in developing countries and unpredictability/bias/extreme delays in local courts. De Gramont also listed the recent developments in this area, which included specialized arbitration rules for banking and finance disputes, the 2013 ISDA Arbitration Guide, with model arbitration clauses, and the creation of specialized arbitral institutions for financial disputes.
While the line is increasingly blurred, international commercial arbitration generally is between private parties (including state-owned enterprises), and arises from a contract between the parties, and investor-state arbitration privity is between an investor and the State (though state-owned enterprises are often involved), and arises from an investment treaty or local investment law (but also from contract).
De Gramont then turned to an investor-state arbitration overview. The old rule was that one could not sue States because of sovereign immunity. However, under the new regime, private persons or entities could bring arbitration against States for a variety of claims if the State has consented through a treaty, contract or domestic statute. These instruments provide an advance waiver of sovereign immunity. He pointed to the massive growth in the last 15-20 years, with over 3200 investment treaties and over 600 known cases, which are typically high-value, alleging hundreds of millions and even billions of dollars. Typical fora for investor-state arbitration include International Centre for Settlement of Investment Disputes (“ICSID”), ad hoc arbitration under the United Nations Commission on International Trade Law (UNCITRAL Rules), International Court of Arbitration of the International Chamber of Commerce (“ICC”) and Arbitration of the Stockholm Chamber of Commerce (“SCC”). Most modern investment treaties define “investment” broadly, with the typical substantive protections of expropriation (whereby there is no expropriation (direct or indirect) unless it is non-discriminatory, carried out with due process, for a public purpose and accompanied by fair compensation). Other typical protections include “fair and equitable Treatment” (often applied to changes in regulatory schemes, such as tax codes), “full protection and security”, treatment no less favorable than other domestic or foreign investors (“MFN”) and an “umbrella clause”, which brings other obligations undertaken by the State (e.g., by contract or a statute) within the protection of the treaty. He referred to the somewhat controversial test as whether investors’ legitimate expectations were frustrated vs. whether these types of protections were interfering with the States’ ability to regulate.
He also addressed “treaty shopping” or prudent investment planning (often for tax purposes) as ways to characterize why parties choose international commercial or investor-state arbitration for their disputes. And, finally, he discussed the recent sovereign debt arbitrations, Abaclat v. Argentina (2011) and Poštová Banka v. Greece (2015).
Mark Cymrot discussed the traditional rules that sovereigns couldn’t be sued without their consent. Promissory notes had limited or no waivers of sovereign immunity, while most bonds issued recently have such waivers, which include waivers for enforcement of judgments and awards against a sovereign’s commercial property. An arbitral claim is a waiver of sovereign immunity, with a waiver against execution (but does not broaden the assets that could be collected). Investment arbitration broadened the range of remedies (although it is controversial), and some deem breaches of contracts not to fall within the purview of investment treaties. He echoed de Gramont’s claim that there was a greater possibility that arbitration awards were recognized in more countries than legal suits, that they were quicker and that there were more opportunities for mass claims in the arbitration context vs. class actions that usually require the consent of class litigants. Also, the arbitration route is often more attractive to parties that want to designate which law applies to their dispute, and what the seat of the arbitration should be, which may have a big impact on the procedures used. Cymrot also briefly mentioned Article 54 of the ICSID Convention relating to recognition and enforcement, where in the dispute with Argentina a different interpretation may prevail than the customary one.
Jeffrey Sullivan presented his summary on investment arbitration and sovereign debt disputes. He discussed ICSID arbitration (as just one of particular forums, but the most common), with its recognition and record of enforceability (with States volunteering to pay their arbitration awards (Argentina being the obvious exception)), as ICSID is part of the World Bank (who can put pressure on the States), with a public and high-profile bargaining chip of threatening a reduction in States’ funding. All ICSID cases are listed on its website, providing greater global transparency. He explained how cases are typically brought under a treaty, and whether “investments” are deemed “qualifying” under the “double keyhole approach”, namely under the ICSID Convention and the relevant Bilateral Investment Treaty (“BIT”), is not always crystal clear. For example, tribunals ruled in favor of bondholders in the Argentine case, and in favor of Greece in another case. While States are becoming more specific in their treaties that bonds are qualifying investments, the States also seek to limit protections in those same treaties. Sullivan remarked that, after the Argentine case, some States are excluding bonds as qualifying investments from their treaties.
He questioned whether a sovereign debt restructuring could violate an international investment agreement, and posited that, as a holdout, one would want the ability to threaten arbitration under such investment treaties. He also briefly discussed the practical enforcement alternatives of a secondary market for awards; diplomatic protection and use of the awards for potential settlements; the rise of litigation funding (funds that pay the legal fees for the commencement of arbitral proceedings); and the increase in the amount of insurers that are subrogated and provide insurance for the failure of States to honor their awards – all pointing to the ease and increase in arbitral claims being brought.
Debevoise then asked the panelists for their views on a series of questions, including whether the Executive Branch could request the Legislature to bring these kind of arbitral awards into its budget; if treaties track CACs, what is the likelihood that claims can be made under such treaties; while the secondary market in awards may make them more marketable, if awards are not precedential (though they may be influential for the next tribunal), what is the likelihood that parties will choose arbitration over litigation; and how does Article 54 work – is the ICSID award the final judgment or not, and who interprets a treaty (another country or the International Court of Justice).