160 Queen Victoria Street
London EC4V 4QQ
This EMTA Special Seminar is aimed at both EM investors and legal advisors and will be led by an expert panel of counsel, arbitrators and third-party fund advisors and that will provide analysis and commentary on how arbitration affects investments in the Emerging Markets, and will address the following questions:
2:45 p.m. Registration
3:00 p.m. – 5:00 p.m. Panel Discussion
Alexandre de Gramont (Dechert) – Moderator
Maddi Azpiroz (ClaimTrading Ltd.)
Peter Griffin (Slaney Advisors)
Sophie Nappert (3VB Barristers' Chambers)
Dalibor Valinčiḉ (Wolf Theiss)
Henry Weisburg (Shearman & Sterling)
5:00 p.m. Cocktail Reception
Additional Support Provided by Shearman & Sterling.
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.
London Panel Discusses Updates to EM Arbitrations, Including Corruption Defenses and Third-Party Funding
EMTA’s Special Seminar “Recent Developments in Emerging Markets Arbitration: Crisis, Chaos and Opportunity” was held on September 26, 2018 at Dechert’s London offices. Alexandre de Gramont (Dechert) moderated the panel, with Maddi Azpiroz (ClaimTrading Ltd.), Peter Griffin (Slaney Advisors), Sophie Nappert (3VB Barristers’ Chambers), Dalibor Valinčiḉ (Wolf Theiss) and Henry Weisburg (Shearman & Sterling) as panelists. Additional support was provided by Shearman & Sterling. The PowerPoint Presentation by Mr. de Gramont, together with relevant documents, can be found below.
de Gramont’s introductory remarks included a summary of the advantageous attributes of using international arbitration instead of litigation for disputes in the Emerging Markets, and how in so doing it mitigates the risks in investing in those markets. Specifically, arbitration guarantees a more neutral forum for the resolution of disputes between parties of different nationalities by avoiding the local courts of the disputing parties and having neutral arbitrators with specialized expertise. Also, the rise in third-party funding (where the disputes themselves are investment opportunities) provides further reasons why arbitration is a good path for those interested in the EM arena, as with greater risks there are greater returns. Arbitral awards are easier to enforce than court judgments because of international treaties, and arbitration is speedier and relatively more efficient than many court proceedings. And, arbitration is particularly well-suited for Emerging Markets where the courts pose particular challenges (including not being independent, sometimes being corrupt and without the proper experience to deal with complex business matters).
Explaining the differences between international commercial arbitration and investor-state arbitration, he stated that the former typically arises from a contract between private parties (including state-owned enterprises), while the latter is typically between an investor and the State (though state-owned enterprises are often involved) and typically arises from an investment treaty (such as NAFTA) or local investment laws that provide similar protections to treaties and have provisions that allow parties to seek arbitration. Occasionally, investor-state arbitration arises from contracts entered into by the investor and the State (or a state-owned enterprise). There are over 200 international arbitration institutions around the world, 70% of which have been created in the past 30 years. Currently, there are over 3,200 investment treaties and over 600 known cases, which are typically high-value cases alleging hundreds of millions and even billions of dollars. There is a great deal of geographical diversity and most cases come from the developing world.
The characterization of treaty “shopping” or prudent investment planning was discussed in connection with a case involving the Czech Republic, where a Japanese company used a Netherlands holding company to bring a claim under the bilateral investment treaty (“BIT”) between the Netherlands and the Czech Republic. Japan did not have a BIT with the Netherlands. Some have argued that allowing BIT cases to be brought through holding companies effectively turns an investment treaty that is supposed to be with one country into an investment treaty with the world. And, finally, de Gramont discussed situations where crisis and chaos pervade this area:
Responding to de Gramont’s question as to whether the Achmea decision was the end for investor-state arbitration between EU members, Valinčiḉ stated that certainly those that were not member States of the EU would be encouraged to enter into bilateral investor treaties with EU members, but that Achmea covers bilateral treaties, not multilateral ones, and it only speaks to the arbitration clause in such treaties, not the whole treaty itself. With Croatia (his residence state) being in the EU, investors are now forced to avail themselves of the local courts, which don’t offer the same protections afforded by investment treaty arbitrations, are not as unbiased and fair as they should be in resolving disputes and are clogged with cases already. And, surprisingly, the EU was also suing some nations for not having the proper courts in place. In addition to how this all will affect the litigation funding market and whether investment risk insurers were less likely to write policies (or make them more expensive), Griffin queried whether after Brexit investors would start channeling their investments through non-EU States as a result of the Achmea decision; he predicted that they may look to assets outside the EU for enforcement as the general antipathy to arbitration is considered a power grab by the EU. He also said that “the biggest existential threat is in the developed world [where] the obstacles to proper functioning of arbitral awards [are the greatest after Achmea]”. Azpiroz claimed the funding market was more nuanced, with investors interested in awards being more likely to enforce them, and some more interested in waiting. Responding to de Gramont’s question as to whether Achmea will be narrowed or revisited by the Court of Justice of the EU, Nappert suggested that the court typically will not overturn itself, and that the irony is that Achmea probably tried to prevent treaty shopping, but instead made it more common.
Weisburg noted that the assumption that one can forcibly against the will of a State enforce an ICSID or other award is not wholly true as States typically only pay voluntarily and if they want or consent to pay (as evidenced by the huge lawyers’ fees to obtain arbitral awards that may end up paying pennies on the dollar). And, some court decisions are political, not legal (the suit against Argentina in a NY court being a prime example). de Gramont wondered whether this refusal to pay exhibited in Argentina and Russia will spread to Venezuela or other countries.
Turning to the topic of corruption, de Gramont claimed that States are reluctant to admit that investors are successful in making their investments because State officials received bribes, and he questioned whether tribunals are equipped to handle allegations of bribery and corruption. Weisburg replied that there was a dramatic shift in the landscape, with 1 State using the corruption defense from 2000-2002 and such defense appearing in 16 cases between 2014 and 2016. The first time the defense was used was in 1992 by Egypt unsuccessfully; the titanic change was in 2006 when Kenya used it successfully (with Nappert claiming that the Uzbekistan is the better case for change since Kenya was more a contractual matter even if it was under ICSID). The explanation for the increase in this defense is not that there’s more corruption, but rather that tribunals are looking at where corruption affects the most populated regions. Nappert reminded the audience that tribunals can’t subpoena like civil or criminal courts can, and Weisburg noted the different power structure of judges and arbitrators, both comments thus making it more difficult to counter a corruption defense. de Gramont and Valinčiḉ proceeded to give the audience a glimpse into their work on two related arbitration corruption cases for their client, MOL Hungarian Oil and Gas, against Croatia. One of the arbitration cases is pending; in the other, they defeated the allegations of corruption, even though the government had sentenced its former Prime Minister to 10 years in prison following a criminal judgment that was later quashed by Croatia’s Constitutional Court. (The criminal case is now being re-tried in Croatia.)
Griffin provided a summary of his work in helping people monetize their arbitral awards through sales. He described the whole arbitration area as “a schizophrenic Dr. Jekyll and Mr. Hyde” tale, with “bad” arbitration being very disruptive, good, aggressive arbitration as awarding massive profits to claimants and outlier cases (like Nigeria) changing a sovereign’s debt profile drastically. Arbitration assets are conceivably large, illiquid, hard to find and discounted off benchmarks such as bonds. Sale of arbitral awards may be made for structural reasons (not just for distressed sale reasons) since the claimant may not be able to hold the asset or lack the expertise to deal with it. Crisis and chaos may encourage arbitral award creditors to transact with investors, and “therein lies the opportunity”. On Turkey, he thought we were a long way from seeing arbitral awards against the sovereign because of glacial movements in that direction, but that Turkish corporates may attempt to off-load their arbitral awards.
Nappert highlighted her views on arbitration by claiming that it was only a matter of time (not if) that it would wane and treaty arbitration was under threat, due to a lack of trade, the U.S. Administration turning away from it and NAFTA being renegotiated (with Canada already agreeing to the European court system). Judgments are appealable (which extend the life of the cases) and investors will be subject to judges that are politically appointed (which removes an important right for investment arbitration).
Azpiroz provided background on the rise in third-party claims by noting the 2011 spur for those that needed financing for their arbitrations to those that were in their early stages of funding before a decision was reached to funding for all stages of disputes to looking at this opportunity as purely an investment. Six brokers in 2011 to over 40 today demonstrates this rise in appeal, with financial markets “discovering this new asset class”. She cautioned that it was a risky investment, with 30% of the cases failing so diversification is warranted, and every case is bespoke. Some funders have gone bankrupt, it is rather transparent at times who the funders really are, the funders may not be adequately capitalized and the market is not yet regulated. However, as the market matures, there will be diverse customers with varying appetites and opportunity for yield.
EMTA Special Seminar: Recent Developments in Emerging Markets Arbitration: Crisis, Chaos and Opportunity.