Coming out of the Closet: Third-Party Funding in International Arbitration

by Andrii Hubai*

The recent rise of third-party funding in international arbitration has opened a completely new dimension for arbitration itself. An opportunity of funding the parties of the process became a big deal breaker in many aspects that are visible at a first glance and those hidden behind the privacy clauses of funding agreements. This article is prepared in order to dive the readers into the changes of the procedural part: what circumstances change the vectors of development, who benefits from uncovering the financial facts, etc? The new figure comes into play and it is necessary to simulate possible variations of how it can influence the whole “game” of arbitration.

Introduction

Since 2012 the third-party funding (hereinafter – “TPF”) market has grown rapidly by 500%, this figure corresponds to the increase of agreements and actual investors looking for particular cases.[1] Consequently, the topic of uncovering those who sponsor this market is currently on agenda of practitioners.

The urge that drives us to discuss such issue comes from the importance of such field for the business community in general. International commercial arbitration stays on the crossroads of law and trade while providing with solutions and benefits to both. It is important to improve this legal instrument and to keep it up to date so that the end consumers (private companies with impressive turnovers) are facilitated and satisfied. Even more, the world economy depends on arbitration, the GDP of every country directly depends on how the businesses make the deals and, in case it is necessary, solve possible disagreements with the help of arbitration. With this being said, we cannot undermine the importance of a single aspect of international commercial arbitration, especially the third-party funding.

The mentioned above issue starts to be addressed more often by the European research academia and international community on various levels. Notwithstanding, it is necessary to mention following: scientific majority, in most of the cases, while observing such aspect, highlights the issue irregardless of the physical borders since international commercial arbitration presumes no borders in its essence. It is an autonomous field with its own fundamental regulatory acts (New York Convention 1958)[2] but yet very customizable and rather free from local obligations. This article will highlight the progress on different levels (countries, supranational organisations etc) but purely for informative reasons in order to underline the progress that has been done around the globe.

The research is based on the recent academic publications and statistical data from the circle of European and international academics (David Abrahams, Derric Yeoh, Edouard Bertrand, Jeniffer Trusz, Jern-Fei Ng etc.) solely on the matters of the third-party funding. For those readers, who are not fully accustomed with the basics of the international arbitration, the author recommends to refer an attention towards the books of Gaillard Emmanuel[3], Margaret Moses[4] and others. Alongside the work, particular scientific methods were used so to achieve the best result possible, among them: comparison method, historical method, statistical method, model method etc.

While drafting the practical part, the briefings of the private companies, particular cases and recent professional opinions were utilised in order to provide the readers with the insights coming from the real business world (e.g. roundtable discussions of private companies). However, elaborating on the practical part still appears as a challenge due to a high level of privacy. 

  1. The battle of transparency against the privacy

When entering into the TPF, the funder is rather not interested to be revealed due to a simple reason of confidentiality in the business world[5]. It is fair to say that the same reason was one of the triggers for creating the arbitration in general – so to avoid extra eyes glancing the disputes.

However, nowadays trend prioritises the transparency over confidentiality in the matters of international arbitration. In the Queen Mary International Arbitration Survey 2015[6] many practitioners expressed strong desire in the need of TPF being disclosed. However, the most peculiar aspect was that soft law was chosen as the way of how to implement such desire. The business, as usual, wants it to be less radical. Nevertheless, many national legislators have gone further and decided not to limit themselves only with the soft law but to envisage a mandatory clause obligating the parties to disclose the TPF in arbitration relations.

It seems rather clear that this aspect starts to be addressed more often on all the levels: (a) National, (b) Regional and (c) Institutional. In author’s opinion, such differentiation represents the best overall picture by going one layer after another with providing the notorious examples on each level.

(a) National level

Australia is considered as a forerunner in funding the arbitration by third parties. It is a big industry that was first limited to bankruptcy cases but subsequently expanded on civil matters of all kinds. One of the major cases that helped the TPF to spread and gain its power was Campbells Cash & Carry Party, Ltd. v Fostif Party Ltd.[7] that provided the funder with a wide range of control over the case itself.

The Australian High Court confirmed that funding agreement was not in abuse of local laws.  Thus, the claim of the opponent based on such ground was dismissed. The panel justified the presence of the funders and the influence over the case in various matters: appointment of own legal team, deciding on the crucial aspects concerning settlements, variations in choosing the defence tactics etc. Such case, accordingly, triggered the changes on the legislative level based on the argument of support of consumer rights.

The High Court of Australia added that any risk of over influencing the case should be precluded by the professional code of conduct, which always stands, regardless of the legislation gaps concerning the TPF. Such rules oblige the advocates to perform on behalf and in the best interest of the client.[8]

Recent legislative update coming from Singapore prescribes the requirements necessary for the TPF being revealed to the parties. It became obligatory to disclose the fact of funding together with the identity of the funder.[9] Nevertheless, the terms of the agreement may still be kept confidential.

Furthermore, there are some sanctions expected to appear when the funder constitutes non-compliance with the funding agreement in Singapore. This is done so to avoid any bias happening during the arbitration process when the other party may expect the opponent to have the financial support but be mistaken by that.

The reason for such updates lies behind the aspirations of Singapore to strengthen its position at the arbitration market in Asia[10] and to keep up with the modern trend of sponsoring arbitration, which has been already utilised by other well-known arbitration arenas (London, Hong Kong, Vienna etc).[11]

(b) Regional level

The update concerning the disclosure of TPF also came from the European Union, which is currently seeking the conclusion of FTA agreement with Vietnam and other international partners[12]. The clauses requiring the TPF to be disclosed in the arbitration proceedings have been envisaged into the mentioned above FTA agreements. Such clause prescribes to notify the tribunal of arbitrators about the fact of TPF, nature of the agreement itself and the contact details of the funder (full name, address). No other details are required.[13]

The same applies for the EU-Canada relations – the update on the free trade agreement was carried out by the partners and constituted into the Comprehensive Economic and Trade Agreement (hereinafter – CETA)[14]. While resolving the disputes in a specially created tribunals, CETA obliges third-party funders to be immediately uncovered.[15] Even more, the fact of sponsorship may be taken into account by the tribunal while deciding on allocating the security costs. The usage of such controversial method does not receive much of appreciation from the side of the author. The funders are not amused of the possibility to be engaged as a party of the process since this might oblige to pay more than the funding contract prescribes.

Nevertheless, such a tribunal is an ad hoc being exclusively created for the purposes of resolving disputes arising from the trade relations between the partners and should not be influencing the trade relations outside of its scope nor be a precedent for other cases.

(c) Institutional level[16]

The first attempts to regulate the TPF by the arbitration institution were carried out by the Association of Litigation Funders of England and Wales. Such organisation came up with the first in kind Code of Conduct for the mentioned above industry.[17] Later one the practitioners commented[18] that such Code was rather vague leaving big blanks in most important areas without being actually binding for those, arbitrating outside the institution.[19] However, the problem of obligation to follow the rules in particular jurisdiction will always stand due to shortcomings of international law. The positive influence that brings such endeavours rests in attempts rather than actual results.

The Singapore International Arbitration Centre has also released new arbitration rules that fit purely for investment arbitration. Such rules provide with explicit power for arbitrators to order the disclosure of TPF while deciding on the particular case.[20]

Additional aspect that should be touched when commenting about the institutional level is an authority of such institutions in creating the lists of trustworthy funders along with the already known lists of arbitrators. The academicians[21] elaborate on this issue as an important aspect of the overall regulation of TPF worldwide. This step may also bring in line all the requirements necessary for the funders to be achieved in order to sponsor the party of the process. It seems quite complicated for the author to imagine unified standards of compliancy for the funders across the world. However, it is a good trend towards regulating the field. To add to this, it is better to have different requirements at different institutions than to have none at all.

  1. The Client-Funder-Lawyer triangle

When the funder swirls into the arbitration, it breaks the standard lineal Client – Lawyer relationships by creating a triangle of Client – Funder – Lawyer relationships. Moreover, the funder himself stands on top of them. Depending on the funding agreement, the sponsor may exercise almost full control over the case, the so called “hands on” approach (deciding the arbitrators panel, lawyer, position of the party and forming the position up until the final order or deal with another party) or take it easy and observe the situation from the side (“hands off” approach).[22] Considering the fact that every investor cares about the income he will receive from the money invested, it is reasonable to think that most of the funders might want to influence the case at least at some manner and engage into the process their own legal team.

Edouard Bertrand, in his book underlined that the funder, in a strictly legal sense, is not a party to arbitration since one does not receive any rights or obligations. However, in an economical sense, the funder is a party due to a reason that if the opponent raises a strong defence, it will influence the defendant and the funder in a direct manner.[23] Thus, even not present at the hearings physically, he receives the same legal “punch” as a defendant.

Due to that, the funder is ought to influence both the client and the lawyer in case he wants to recover his money. The right to decide partially passes to the one who sponsors the whole process. When the client might want to agree on the deal with another party without going further, the funder might not be willing to agree with this and will try to push it forward just because such deal will not bring expected profits. Meanwhile, the lawyer, who de jure owes the duty to the client, de facto shifts such duty to the funder. This turns out in giving such advices to the client that are not necessarily in his best interest simply because the funder has decided on particular lawyer and he is his paymaster.

This triggers the ethical question that might stand on the path of the future of the TPF. However, we might argue in defence that the TPF agreement, as any other private contract, can be terminated by the request of one of the parties. Even though it seems that the funder is on a top of a “TPF triangle”, the client can go beyond that and simply break the deal by refusing the interference of the funder. However, this seems rather illogical since the main idea of TPF is to receive the money for the purpose of arbitration. Thus, both, the client and the funder have one common aim – to win the case and to recover the damages meaning that they are well aware about the rules of the game and are willing to play it. Even more, neither client nor funder will go for such extremes since they both act in a reasonable way with pursuing the same interest.

  1. Modes of disclosure

 While discussing the institutions and countries being concerned by such issue, it is worth mentioning the types of disclosure used in arbitration process. We will explore such phenomena based on distinctive feature of the amount of information that is revealed about the TPF:

(а) Full disclosure

It is a very rare case when full disclosure may occur. The principle it is based on, is giving the full information about the funder, the funding agreement and other details including price, the interest rate etc. Such approach may infringe the sanctity of the private contracts and fundamental principles of civil law. The only justification for full disclosure may be reasoned by the need of affirming the fact that arbitrator is independent while deciding particular case. It might be invoked when there is a negative and possible likelihood for the arbitration process to be terminated in the middle, or even worse – at the final stage due to dependency of the arbitrator.[24]

Nevertheless, it is possible to avoid such an extreme measure with the improvement of arbitration rules, especially on the institutional level. Jeniffer Trusz in the article “Full Disclosure? Conflicts of Interest rising from Thid-Party Funding in International Arbitration” proposed simple but yet extremely useful solution.[25] The professor offers a four-step system of rules that should be incorporated by the arbitration institutions for the mechanism of disclosure of TPF without the need of going into full disclosure.

 

(b) Partial disclosure

This form of disclosure respects the sanctity and privacy of the agreement concluded between the funder and the funded party. It requires disclosing the mere fact of the funding without going into details and informing about the terms of the agreement. One of the issues that may arise in this case is that the TPF may be nominal, meaning that the opponent may not know for what exact amount the party was funded (it can be full funding or partial). On the other side, the influence that it brings for the case may exceed any expectations in a positive manner – another party may be willing to settle the dispute without even having the knowledge about the minimum funding level.

Notwithstanding, what if the price of the funding agreement is $1 USD? The opponent and the panel will not be aware about such details since, usually, they are not revealed – only the mere fact of sponsorship is communicated to the parties of the process. Thus, the opponent may make an offer based on the knowledge that the other party is sponsored without realising that the amount of investments equals to almost nothing. This creates a negative influence on the arbitration process leaving the opponent being not well informed and because of that, the opponent might be forced to make an offer which he would not make otherwise. This issue is something fresh on the “TPF market” since it has not been discussed yet.[26] In order to eliminate this gap, the arbitration institutions might consider including the obligation to reveal the price while drafting the update of rules.

For better or for worse, TPF has conquered most major arbitration arenas leaving the practitioners and academics with the urge of proposing the way how such mechanism may be smoothly implemented into the whole architecture of arbitration.

  1. The changes: positive-negative ratio

If we consider the benefits of disclosure, many positive aspects may be mentioned. One of the most important – elimination of the possible conflict of interest between the revealed funder and other parties of the process, support of justice by providing the weaker party with an opportunity for defence, rise of economy by boosting the investment industry and, the last but not least, changing the negative approach towards the mechanism of TPF.

Australian experience shows the following: it is confirmed statistically that the cases being funded by the TPF are less likely to be reversed and are more citied in the scientific researches. The reason behind that is the funder himself, who assesses the case thoroughly with selecting the lawsuits that have prediction of winning at least of 70%.[27] It may sound as an exaggeration, but the TPF will be a story of success because it deals with successful cases in the matters of the trustful parties, reliable panel of arbitrators etc. Thus, there is no reason for the funder to hide in the shade. The presence of the investments should be considered as an indication of quality mark.

These day, it is no longer a problem to get the side funding which was previously called maintenance or champerty in common law practise and was prohibited by most of the States.[28] Such definition traces back to the medieval ages aiming against fraudulent practices of high figures intermeddling into the court procedures.[29] The justification against that was straightforward: no gambling should be done when the justice is dispensed

Thus, no medieval practices are applied any more. There are many instruments available in order to indicate the fraud rather than prohibiting the whole industry based on the “once and for all” principle. Both parties of the process are free to get the funding; the only matter is to check whether it does not influence the arbitration process in a negative manner. A good way to ensure this is to come up with an update of institutional rules, which is already on its way. Even more, the author suggests to consider the opportunity of creating the new treaty –  the New York Convention II [30]aimed to facilitate this sphere and other potential fields lacking the uniformity in regulation. Such proposal will become a new chapter and logical continuation of the original Convention.  Additionally, it as a chance to power up the positive influence over the arbitration industry while sticking to the uniformity principle.

The pro argument of proposing the New York Convention II is the interest of the states to become signatories due to purely economic reason. It may sound harsh, however it is a proven fact that majority, if not all signatory states follow the New York Convention 1958 impeccably. Even such a big player at the international arena as Russia, which at times is not willing to implement he decisions of the European Court of Human Rights[31], strictly follows the New York Convention 1958 on the matters of arbitration. The reason for that is simple – the money matter makes its influence. It is in the best interests of every state to create good conditions for arbitration in order to gain from that. Unlike, for example, the Convention on Human Rights[32] which brings to the State nothing but the economic loss.[33]

The same mechanism of “money reason” was put before and should be inserted into the fundaments of the new international treaty again. This will unify the rules on third-party funding in international commercial arbitration, and provide with the useful method of regulating the TPF industry.

What are the negative sides? While deciding, the arbitrator may put an obligation to cover the security costs by the funder, despite the mentioned already fact, that the funder is not a party of the process in a strictly legal sense. This pushes the investors to go behind the “curtain” of privacy clauses, again. Such fears have been offset by the recent cases. In Kardassopoulos v. Georgia case of 2010, it was confirmed by the arbitrators that the funder should cover no security costs[34]. However, it is quite complicated to change the overall attitude of the funders[35] just by a handful of cases. What needs to be addressed in here is the solid assurance of preventive clauses being put into arbitration rules of particular institutions confirming such approach.

The academician Derric Yeoh expresses an idea that TPF can become a slippery slope for the arbitration process due to many factors that have been mentioned already. However, it is not only the TPF that can do so, there are many potential risks arising every day in different legal fields, and not only the legal ones. Thus, much wiser move would be not to prohibit the TPF in particular parts but to create an instrument that regulates it.[36]

Meanwhile, it is obvious that positive aspects outweigh the negative ones without any doubts. Yet, the main approach in international arbitration concerning TPF was in applying the policy “Don’t ask, Don’t tell” which evidently has seen better days. This article became an opportunity to underline phenomena of third-party funding and guide the readers through the new path of more transparent arbitration process. The approach that is transparent not towards the public, but exclusively towards the parties of the process, meaning, that arbitration itself does not lose its major benefit – the privacy. It is fair to say that both parties including the arbitrators’ panel deserve to know who are the players behind the curtains, and whether they exist in general.

Overall, the main message that needs to be addressed as a closing line: TPF comes out of the closet. Third-party funding becomes public not in harm to the parties but for the benefits of the process.

Conclusions

Following the thorough research of the topic and applying various approaches so to receive the best result possible, following conclusions may be provided:

  1. The TPF is a recent trend in arbitration that becomes popular with astronomic progression. The statistical data shows the rise of interest among investors for more than 500%. This triggers the developing of new field of arbitration that is, however, lacks some primary regulation and universal approach.
  2. The countries, which are known as being world arenas for the international arbitration have already adopted the regulations concerning the TPF. This is a signal of importance of TPF and the call to the world governments to do the same.
  3. It is not only countries who update their laws, such changes have also reached out the regional and supranational organisations especially in the field of trade, for example, the trade agreements that have been highlighted (EU-Canada, EU-Vietnam) in this article give a clear understanding of importance of TPF on all the levels.
  4. International arbitration institutions that are relatively autonomous make their own effort towards updating the rules so to assist the TPF and to make it more efficient. Such institutions might become the locomotives, influencing the creation of more unified legislation for TPF.
  5. The changes of classical lineal relations “client-lawyer” in procedural part of arbitration were discussed. The entrance of the new figure into play – the funder, changes the weight system and shifts the lawyer’s duty to the person who sponsors him. Eventually this heavily influences the decisions of the party of the process who is behaving under the money influence from the funder.
  6. Additional attention was given to procedural aspect in the case where the party of the process is nominally funded so just to be called funded (e.g. the fact of the funding is existent, however the party receives only 1 US dollar). When the party receives the title of being funded, it changes the approach the opponent will take, without even realising that the funding agreement is nominal.
  7. The proposal of drafting the new international Treaty aimed towards regulating the TPF in international arbitration by example of the New York Convention 1958 was communicated. The author proposed simple but yet efficient method of assuring the implementation of such Treaty by the governments.
  8. Overall message that was distilled from the article comes as follows: “The changes make no harm to the essential value of arbitration – its privacy – but rather serve as an extra instrument in supporting the justice, if the process of sponsorship is done according to the commonly accepted standards.”

Footnotes

[1] DELANEY, J. Mistakes to avoid while approaching third-party funders. Global Arbitration Review, 2014, p..9.

[2] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, New York.

[3] GAILLARD, E. Legal Theory of International Arbitration, Martinus  Nijhof Publishers, 2010

[4] MOSES, M. The Principles and Practice of International Commercial Arbitration, Cambridge Press, 2008

[5] Roundtable discussion: Third Party Funding in international arbitration in Europe: Part 1 – Funders’ perspectives, International Business Law Journal, 2012, p.207.

[6] See official web-site http://www.arbitration.qmul.ac.uk/research/2015/ [last accessed 8 May 2017].

[7] Campbells Cash & Carry Party, Ltd. v Fostif Party Ltd (2006) 229 ALR 58 (Australia).

[8] Singapore Legal Profession (Professional Conduct) Rules, r. 2(2)(c).

[9] See official web site of the Parliament of Singapore https://www.parliament.gov.sg/sites/default/files/Civil%20Law%20%28Amendment%29%20Bill%2038-2016.pdf [last accessed 21 May.2017].

[10] KUSHUBO, H. Third-Party Funding in International Arbitration: Regulating the Treacherous Trajectory, Asian International Arbitration Journal, 2016

[11] News channel: see the web site http://www.channelnewsasia.com/news/singapore/two-bills-passed-to-boost-singapore-s-position-as-dispute-resolu-7554516 [last accessed 21 May.2017].

[12] Ashurst web-site: Third Party Funding in International Arbitration, 2017 see electronic article https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—third-party-funding-in-international-arbitration/ [last accessed 19 May 2017].

[13] EU-Vietnam Free Trade Agreement Article 11, p. 33. See the electronic copy: http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154210.pdf

[14] Comprehensive Economic and Trade Agreement between EU and Canada. See the text on the official web site http://trade.ec.europa.eu/doclib/docs/2014/september/tradoc_152806.pdf [last accessed 07 June 2017].

[15] Dechert’s Law Firm, Theh EU succeeds in establishing a permanent investment court in its trade treaties with Canada and Vietnam,  Legal briefing from the Dechert’s International Arbitration,  2016.

[16] Author’s commentary: by the institutional level the author implies to the international arbitration institutions that are established by private entities or governments and provide their own rules (e.g. the Arbitration Institute of the Stockholm Chamber of Commerce etc). The research would not be full without mentioning such institutions.

[17] Association of Litigation Funders of England and Wales, Code of Conduct for Litigation Funders, 2011.

[18] BLACKABY, N. & REDFERN, A. Law and Practice on International Commercial Arbitration, Sweet & Maxwell London 2004 p.34-12

[19] U.S. Chamber Institute for Legal Reform Comments on the Code of Conduct for Litigation Funders, U.S. Chamber Institute for Legal Reform 2-6, 2011.

[20] SIAC Investment Arbitration Rules 2017; and the official web-site http://www.siac.org.sg [last accessed 05 May 2017]

[21] SAHANI, V. Judging the Third-Party Funding. UCLA Law Review, 2016, p.389.

[22] BENCH, L. & SHANNON, V. Third Party Funding in International Arbitration, 2012, p. 4-12

[23] BERTRAND, E. The Brave New World of Arbitration: Third-Party Funding, ASA Bulletin, 2011 p.610.

[24] LANDI, N. The Arbitrator and the Arbitration Procedure: Third Party Funding in International Commercial Arbitration – An Overview, Austrian Yearbook of International Arbitration 85, 2012, p.96

[25] TRUSZ, J. Full Disclosure? Conflicts of Interest Arising from Third-Party Funding in International Arbitration, 2013, p.1661-1673.

[26] Such comment is made based on the best knowledge of the author/

[27] ABRAHAMAS, D. & CHIEN. D, A Market of Justice: A First Empirical Look at The Third Party Litigation Funding, 15(4) J.Bus. L. 1075, 2014, p.1105-1106.

[28] REDERN, A. & HUNTER, M. International Commercial Arbitration, Thomson Sweet & Maxwell 2004, p.10-17

[29] JERN-FEI, N. The Roles of the Doctrines of Champerty and Maintenance in Arbitration, Essex Court Chambers, 2010.

[30] In this matter the author refers to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 as a great example of unified regulation of international commercial arbitration across the world.

[31] News article: Russian Federation: Constitutional Court Allows Country to Ignore ECHR Rulings, Library of Congress 18.05.2016 see the official web site http://www.loc.gov/law/foreign-news/article/russian-federation-constitutional-court-allows-country-to-ignore-echr-rulings/ [ last accessed 09 June 2017].

[32] The Convention for the Protection of Human Rights and Fundamental Freedoms, 4.11.1950, Rome.

[33] Author’s commentary: by highlighting this aspect, the author does not, in any matter, tries to undermine the importance of the European Court of Human Rights or deprive the importance of fundamental rights. This comment rather serves as a message to the society on nowadays disbalance in various rights and how different the approaches of governments to different corpus of rights. The same situation is applied not only to the Russian Federation but also to Ukraine and other European States.

[34] Kardassapoulos case, ICISD Case Nos. ARB/05/18, ARB/07/15.

[35] KIRTLEY, W. & WIETRZYKOWSKI, K. Should an Arbitral Tribunal Order Security for Costs When Impecunious Claimant Is Relying Upon Third-Party Funding, Journal of International Arbitration, 2013, p.17-30

[36] YEOH, D. Third Party Funding in International Arbitration: A Slippery Slope or Levelling the Playing Field? Journal of International Arbitration 33, no.1, 2016, p.115-122.


* Andrii Hubai, Vilnius University, Law Faculty, LL.M student in International and European Union Law; email: andrii.hubai@gmail.com

Arbitration in Iran: With Focus on International Commercial Arbitration (Part II)

Nasim Gheidi & Parham ZahediGheidi & Associates

(See Part 1 of this post here)

Part two – Article 139 of Iranian Constitutional Law, a fundamental challenge in arbitrability

In case the national law of the place of arbitration or the law of the state where award enforcement is being sought imposes a restriction on referring to arbitration either regarding the subject matter of the dispute or against a party, it is quite likely that an award would be vacated by the national court on the grounds that the dispute was not capable of arbitrability in the first place. Courts often refer to “public policy” as the basis of such restriction. Thus, the issue of arbitrability is of great importance in determining whether to refer a dispute to arbitration from the beginning stage of contract execution.

In this regard Iranian law is faced with some ambiguous provisions, requirements of which might be quite discouraging for foreign companies hoping to invest in Iran as most of them are more willing to refer their disputes to arbitration rather than Iranian domestic courts. A very fundamental challenge in arbitrability lies in Article 139 of the Iranian Constitution Law that mandates as follow:

“The settlement of claims relating to public and state property or the referral thereof to arbitration is in every case contingent on the approval of the Board of Ministers, and the Parliament must be informed of these matters. In cases where one party to the dispute is a foreigner, as well as in important domestic cases, the approval of the Parliament must also be obtained. Law will specify the cases which are considered to be important.”

In line with above-said Article 139, Iranian Civil Procedural Law establishes the exactly same restriction in terms of arbitrability.  Legal scholars and professionals with their interpretation are trying to limit the applicability scope of above-said provisions.

In this article first a distinction line will be drawn between state entities and the properties belonging to those entities and then we will discuss which properties are considered as public and state property under Iran legal system.

One shall differ between subjective arbitrability and objective arbitrability. Subjective arbitrability refers to the restrictions relating to the parties to the dispute. For example, in some jurisdictions, states or state entities may not be allowed to enter into arbitration agreements at all or may require a special permission.  However, objective arbitrability restrictions, which are based on the limitations imposed on subject matter of the dispute are even more challenging. In other words, certain subject matters may have the potentials to threaten public policy or national interest so that they should be dealt only by national courts or be referred to arbitration under certain conditions. The restriction that Art. 139 imposes on the arbitrability is of the objective nature and applies to the subject matter of the dispute not the parties to the dispute. Therefore, it could be said that Iranian state entities can be a party to an arbitration proceeding without a need to obtain approval from the Board of Ministers or the Parliament as far as the dispute is not related to or arising out of state or public properties.

Despite the fact that state and public properties are referred to under Iranian Constitutional Law, and Civil Procedural Law, they are not yet subject of a Parliamentary enacted provision. Hence, to reach a definition on the terms public or state properties under Iranian legal system, we must refer to some executive bylaws and commentaries. Based on some Iranian scholars’ opinion, public properties are owned by the entire people and they do not have a specific owner and can be utilized by the entire people. Furthermore, they cannot be sold or seized by an order, judgment or award. They include mineral resources, jungles, mountains, roads, bridges, etc. Also it should be noted that public properties are ruled by the state to be used as public good. Therefore, such properties cannot be either owned or notarized.

The Executive Bylaw on State-Owned Properties adopted in 1993 and adjusted in 1995 by the Council of Ministers defines state properties as “those which are bought by ministries and the state-agencies or possessed by the state through any other legally permitted manner”. Accordingly, in contrast to public properties, state-owned properties can be sold, rented out or mortgaged. However, in order to determine the scope of this definition of state properties according to one interpretation, it shall be distinguished between the properties that the state is possessing in its sovereign capacity or in its contractual capacity. Based on this doctrine, which was first proposed by French scholars, only properties in possession of government in its sovereign capacity shall be considered as state properties. In fact, when state-owned entities are acting in their contractual capacities, they shall be treated like any other private entities running their businesses.

Iranian courts have different opinions in this regard. However, there is a positive trend to limit the scope of state properties definition. According to a verdict of a branch in Tehran Public Court, “properties that are subject of Art. 139 of Constitutional Law are confined to the properties that the government has possessed while acting in its sovereign capacity, like properties of national army or , rather than properties that the government has possessed in its contractual capacity. In general, actions undertaken by the government in its contractual capacity and the properties thereof like those of national Shipping Company are out of the scope of article 139 of Constitutional Law.”

Furthermore, in an arbitration proceeding in Arbitration Center of Iran Chamber (“ACIC”), a private company, the claimant, resorted to arbitration to force the defendant, which was a State-owned company, to compensate the loss of claimant due to non-conformity of the goods with the contract. The defendant argued that since it is a state-owned company and its properties are subject of Art 139 of Constitutional Law, the permission of the Board of Ministers should have been obtained, otherwise arbitral tribunal has no jurisdiction. The arbitral tribunal based on below reasoning found that conditions of Art 130 of Constitutional Law are not applicable here.

“Art. 139 of Constitutional Law is not in principle an obstacle to the jurisdiction of the tribunal in a commercial dispute that a state-owned company is a party of the dispute since the properties that are subject of the dispute are considered private properties and are being possessed by the defendant in its contractual and commercial capacity.”

In conclusion, by adopting these interpretations we can limit the scope of Art. 139 Constitutional Law, removing major obstacle to recourse to arbitration in Iran. In fact, the requirements of Article 139 of Constitutional Law, if otherwise treated and interpreted, will be inconsistent with the principle of rapidity in international commercial trade and also in contrary with good faith. Foreign investors expect from the host government to ensure the implementation of the agreement and arbitration clause rather than disregarding the investor’s rights and hampering the arbitration process. Moreover, laws and regulations must not be interpreted in a way that allows state-owned entities to be unilaterally relieved from their contractual commitments. Therefore, differentiation between the properties possessed by the government in its sovereign capacity and in its contractual capacity is a key point to resolve this problem. Having discussed the applicability of Art. 139 of Iran Constitutional Law, in the next article we will provide an overview regarding various dispute settlement mechanisms as per determined in BIT(s) concluded between Iran and other countries. Moreover, we will see how requirements of Art. 139 may affect arbitration as a major dispute settlement method under such BITs.

When Public Interests, State Strategy, and International Law Clash in One Confidential Commercial Arbitration

Ira Ryk-Lakhman*

Much ink has been spilt throughout the years on States’ and the public interest’s role in international commercial arbitration. These issues are of particular importance where the litigants in a given arbitration come from neighboring – and not necessarily allied – states, and even more so when the particular neighborhood in question is the volatile Middle East and the case concerns natural resources. The recent International Chamber of Commerce (ICC) Award, rendered 6 December 2015, in the matter of East Mediterranean Gas Company (EMG) against the Egyptian Natural Gas Holding Company (EGAS), the Egyptian General Petroleum Corporation (EGPC), and the Israel Electric Corporation (IEC) – is perhaps the best illustration of how public international law, international strategy and relations, and the public interests – all collide in one confidential commercial arbitration between corporations. It is suggested that apart from the known (or rather, confidential) aspect of the private commercial arbitration, there is a less known, yet public, inter-State aspect to the case.

Private Commercial Arbitration

IEC is a governmental public company, whose shares are almost entirely (99.846%) held by the State of Israel. IEC is a vertically integrated utility, solely providing and supplying services in the electrical interface (officially declared as a monopoly on 5 January 1999 by the then General-Director of the Israeli Antitrust Authority). In July 2005 IEC entered into a natural gas supply agreement with EMG. According to the agreement, starting 2008 and over a period of 15 years, with an option to extend the agreement for 5 additional years, IEC shall purchase from EMG approximately 25 billion m3 of gas. The long and detailed agreement stipulated the risk and responsibility allocation between the parties (using Israeli territorial boundaries as a shifting point). It further provided detailed compensation mechanisms for cases of various contractual breaches, and prescribed the circumstances for the agreement’s suspension and termination.

The contractual period officially commenced on 1 July 2008 (after a 2 months trial period). Since the early days of the contract’s life, both parties raised various contentions concerning the contract’s performance. Namely, IEC contended that EMG repeatedly failed to meet its obligations, while the latter argued that circumstances outside its control (namely, supply and demand, regulatory difficulties causing overall gas shortage in Egypt, etc.) prevented it from fully complying with the contract. Consequently, the contract was amended on 5 occasions, starting September 2009, so to include revised gas prices and reduced purchasing volumes of gas.

The events subject matter of the ICC Award began in 2011 with the Arab Spring and the end of the Mubarak era. Since February 2011 more than a dozen of attacks and explosions in the proximity of EMG’s pipelines harmed the gas supply. Ultimately, the annual supplied volume of gas for 2011 amounted to barely 30% of the contractually prescribed quantity. On November 2011, an EMG gas pipeline was damaged in 2 subsequent explosions in Bir El Abd, the northern Sinai desert. According to Israel’s Ministry of National Infrastructures, by 5AM 10 November 2011, the gas flow to Israel was brought to a complete halt. The Egyptian Ministry attributed the events to terrorist attacks, while EMG contended that the events constitute “Force Majeure” entitling it to, again, suspend the gas supply to IEC.

EMG is a Joint Venture between US, Thai, German, and Israeli investors, and the Egyptian State oil company.  EMG was party to a “tripartite gas agreement” with EGAS and EGPC, the purpose of which was to enable gas export from Egypt to Israel and Jordan. According to this agreement, EGPC & EGAS were to guarantee a steady gas flow through EMG’s pipelines.  As a result of the described events, in July 2011 EMG’s shareholders announced that they would commence proceedings against EGPC & EGAS, seeking compensation for the damages inflicted due to EGPC & EGAS’ failure to meet their contractual obligations. Additionally, EMG named IEC as third respondent in these proceedings, seeking a declaratory relief that EGPC & EGAS are responsible for the failures to supply gas. Following EMG’s ICC claim, and after a steady gas supply of less than 30 days for the year 2012, on 22 April 2012 EGPC & EGAS terminated their agreement with EMG, alleging that EMG failed to pay for past gas deliveries. EMG (and IEC) in turn argued that the termination constituted repudiation. Notably, though IEC argued that the termination forced it to opt for more expensive fuels to produce electricity, EMG’s agreement with IEC was not ipso facto terminated.

 On 6 December 2015, a tribunal composed of Fernandes-Armesto (chair), and Marrin and Gürzumar (appointed by the ICC) rendered the Award. The Tribunal mostly found in favour of EMG and ordered EGPC & EGAS to pay USD 288 million (and pre-award interest) in compensation. Additionally, the Tribunal sided, to a certain extent, with EMG ordering EGPC & EGAS to pay additional USD 1.7 billion to IEC for the damages for the disrupted gas supply. No grand parties were registered in Egypt when the outcome of the proceedings became public, on the contrary. Almost simultaneously with the release of the Award, EGPC & EGAS announced their intention to apply for the Award’s annulment in the Federal Tribunal of Switzerland.

International, Public, and Inter-State Arbitration

An important piece of information is required to properly understand the puzzle. One of the highly debated topics in Israel today, and has been for over a year, is the contested “Natural Gas Deal” (currently pending final governmental approval).

In a nutshell, in 2010 the Leviathan gas field, one of the largest offshore gas finds of the first decade of the 21st century, was discovered. Leviathan is located in the Mediterranean Sea off the coast of Israel, less than 50km away from the Tamar gas field where substantial gas reserves were discovered in 2009, and about 100km away from the Karish and Tanin fields where gas discoveries were made in 2012 and 2013 respectively. According to official governmental estimations, the gas volume in these reserves amounts to over 900 billion m3 which may provide for Israel’s needs for 38 years (29 years if partially exported). And here’s the rub: the licenses to these fields are held by investors, with whom the Israeli government has been negotiating the sale and supply of gas. Simultaneously, the licenses’ holders, with Israel’s support, have been negotiating gas export and supply agreements to neighboring States. In April 2014 Nobel Energy (holder of 39.66% of the rights in Leviathan) signed a Memorandum of Understanding with the Jordanian Electricity Company for the export of gas to Jordan. The final agreement was scheduled for signing for 22 January 2015 in Washington DC in the presence of the Israeli, Jordanian, and US heads of State. However, no agreement was signed due to the disapproval the General Director of the Israeli Antitrust Authority expressed of the agreement. Similarly, on 25 November 2015, the fields’ developers announced that a preliminary deal was reached between them and Dolphinus Holdings, a company that represents non-governmental, Egyptian industrial and commercial consumers. According to this agreement, the production is to commence in 2020 and is expected to supply Egypt with some 4 billion m3 of gas over a period of 10-15 years. The planned method to export the Israeli gas to Egypt is by using EMG’s existing pipelines – same ones used to import gas from Egypt to Israel.

The Israeli government approved and encouraged these export agreements in the framework of the Deal, citing in support – regional strategy, security interests, and international relations. The official position of the Israeli Ministry of Foreign Affairs (1 July 2015) argued that “the discovered gas reserves constitute a pivotal strategic asset. Beyond the commercial and economic aspects, the gas serves as a catalyst in Israeli foreign relations, and contributes to the regional stability… [It] supports the development of diplomatic relations and political ties with countries in the Middle East, promoting regional cooperation, and consolidates Israel’s position as a major player in the global gas market, thus promoting Israeli political and economic interests in the world.” This position is also used by Israeli PM Netanyahu to support to use of a never-before-triggered provision to circumvent antitrust scrutiny, and bring to the final approval of the Deal. Importantly, this position is highly contested and debated in Israel, facing substantial objections from Israeli Parliament, public, press, and academia. Nonetheless, PM Netanyahu is not alone in his perception of the strategic regional value natural resources entail. A similar, if not verbatim, view was put forward on 9 December 2015 in a meeting between Greek PM Tsipras, Egyptian President el-Sisi, and Cypriot President Anastasiades. During this meeting President Anastasiades opined that “[t]he discovery of significant hydrocarbon reserves in the east Mediterranean and at Zohr, can and must be a catalyst for wider regional cooperation.”

And here is the point where the [Israeli] public interest, the [Israeli] governmental international agenda, and the private arbitration clash yet again. Once the Award was rendered the Egyptian government (reportedly) instructed EGPC & EGAS, the State-owned instrumentalities regulating gas and fuel, to suspend all negotiations for the export of gas from the Israeli fields to Egypt. On the same day, Israel’s Minister of National Infrastructure announced that “Israel attributes great importance to the security and energy ties with Egypt, and hopes that due to these close bilateral relations, it will be possible to proceed and advance the gas [agreements] in the near future.” He added, however, that “in any event, Israel must expedite the exploration and development of the discovered gas fields, thus we shall continue to advance export possibilities, not only to Egypt but to other neighboring States as – Jordan, Turkey, Greece, and even Western Europe.”  The Minister did not mention the Award in his announcement in a single word, nonetheless the timing and content of his announcement is self-explanatory. This announcement was perceived, and duly so, as signaling to Egypt that IEC (or rather, Israel) will not pursue the Award’s enforcement, so to expedite the export agreements. Moreover, a day after the Award was rendered PM Netanyahu announced his intention to send a special envoy to Egypt to “resolve the issue”.  Put differently: Israel is willing to “waive” the IEC compensation in the framework of a “lump-sum” export deal from Leviathan to Egypt.

Ostensibly, neither Israel nor Egypt were parties to the ICC proceedings, it is however abundantly clear, that the Award is only a small fraction in a much wider geopolitical puzzle between the real actors – the States. Seemingly, the Egyptian instructions to suspend export negotiations revealed that we are not dealing here with a mere case of confidential commercial arbitration between 3 corporations. We are clearly playing a different ball game.

Considered this way, various legal questions may be duly raised. First, from the procedural aspect pertaining to the confidential nature of the ICC proceedings, asking should these proceedings, and Award, not be made public given the clear public and international interests involved? Second, raising questions of States’ control and attribution; what are the grounds for Egypt’s (alleged) ability to suspend negotiations and agreements between Dolphinus – a non-governmental Egyptian company, and other non-governmental corporations? More pointedly, one will rightly ask – can the State of Israel, the main owner of IEC, “waive” the compensation awarded to IEC in proceedings to which Israel was not a party? More so, can Israel do so in the framework of an export deal which will directly and mainly benefit non-governmental corporations, which it does not own? Third, a close examination of IEC reveals that in a long pedigree of cases, the Israeli Supreme Court considered it to be a “Hybrid-entity” which is bound by enhanced obligations to the public. If so, can IEC, minded of its public/administrative nature and enhanced obligations “waive” its compensation in the framework of an export deal to which it is not privy? Furthermore, and to recall, after the explosions subject-matter of the ICC Award, IEC opted for more expensive alternatives to the Egyptian gas, raising consumer electricity prices by 30%. Thus, it was the Israeli public who bore the costs of EMG’s pipeline explosion, should it not have a say in the possible waiver of any compensations IEC was awarded thereof?

Nevertheless, there is something to be said about a State’s right to act in conformity with its essential – including security – interests, and prioritize these over other trade and investment considerations (here, the Award). There is also something to the very subtle use of terminology; the key distinction here being between a “waiver” of a right to receive money on the one hand, and peaceful international “settlement”, on the other. Indeed Israel is principally entitled to invoke Diplomatic Protection vis-à-vis Egypt. However, it seems slightly artificial to suggest that Israel exercises Diplomatic Protection against Egypt’s reluctance to abide the Award, just so it can “waive” the Award. But is this not what Diplomatic Protection is practically all about – a State acting on behalf of its national in means of peaceful settlement and as it sees fit?

Finally, and bringing the issue closer to the currently debated TTIP deal and Investor-State Dispute Settlement, one may wonder if proceedings of this nature should not be adjudicated transparently in an international court in lieu of arbitration, so as to take these interests into account? Or is it not preferable to have in these cases a confidential arbitration which leaves the real players – the States – more wiggle room?


Notably, there are additional pending proceedings between the parties: EGPC & EGAS commenced arbitration against EMG under a Gas Supply and Purchase Agreement (GSPA) under the rules of the Cairo Regional Centre for International Arbitration (CRCIA). Additionally, 2 investment claims (ICSID and UNCITRAL) were filed by the Israeli entities investing in EMG under the US-Egypt BIT, Germany-Egypt BIT, and the Poland-Egypt BIT.


Ira Ryk-Lakhman, MPhil/PhD student Faculty of Laws, University College London; Associate in the private sector, specializing in commercial litigation and dispute resolution (Tel Aviv). The views expressed in this paper are solely those of the author and not necessarily represent those of the author’s professional affiliation.   ira.lakhman.14@ucl.ac.uk.

Protecting International Commercial Arbitration in Europe

by Chris Wilford, Chartered Institute of Arbitrators*

The current highly politicised debate surrounding the inclusion of investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership (TTIP), which allows investors to bring claims against a State before an international arbitral tribunal, has brought arbitration into the spotlight.

While ISDS is a special form of arbitration and the circulation of myths about the investment protection regime, such as the characterisation of arbitration tribunals as “secret courts” and that they are somehow biased towards investors continue to be spread, this development threatens to bring other forms of arbitration into disrepute: including international commercial arbitration.

In light of this threat of mixing ISDS with international commercial arbitration, it is important to recall the basic notions of arbitration and emphasise the advantages of international commercial arbitration.

Arbitration is a formal and private dispute resolution process where arbitrators imposes an impartial and independent judgement on the parties, with their authority derived from private agreement. Its strengths are that it provides a final and binding award, it is confidential and that those in dispute can choose an independent neutral who usually has significant expertise in the relevant field.

More specifically, international commercial arbitration plays a key role in supporting global commerce and gives businesses confidence that they will have access to redress across the world.

International commercial arbitration is a tool that is regularly used to resolve complex contractual disputes across every sector of the economy. This includes the confidential resolution of disputes associated with construction and infrastructure projects, high value technology solutions, and the pharmaceutical industry.

Europe is the leading centre for international commercial arbitration. It is estimated that over a third of arbitrations in the world that take place annually are seated in Europe, which is home to leading centres such as London, Paris and The Hague. The value of legal exports to the UK economy alone is estimated to be worth some £3.1 billion per annum by TheCityUK.

It is important to highlight that international commercial arbitration is operating within a well functioning legal framework, such as the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (the “New York Convention”). This Convention ensures that the over 150 States that are party to it respect arbitration agreements and enforce them by their court systems. In addition, numerous arbitration institutions, such as the ICC and the LCIA, provide the necessary institutional and administrative support for allowing international commercial arbitration to take place effectively and efficiently.

CIArb, which celebrates its 100th anniversary, is itself an important institution that ensures and the high level quality of arbitrators through its training and development programme. It is mandated by its Royal Charter to promote all forms of private dispute resolution worldwide. As well as delivering education, training and qualifications, CIArb works through its international network of members to develop the learned society within alternative dispute resolution (ADR).

With the unprecedented scrutiny of private dispute resolution as a result the inclusion of ISDS in TTIP and the Trans-Pacific Partnership (TPP) negotiations, CIArb has been playing a leading role in engaging politicians, policymakers and wider civil society to tackle the myths being circulated about ADR and promote its benefits. This has included the launch of the CIArb London Centenary Principles for an effective, efficient and ‘safe’ seat in international arbitration at our London Centenary Conference.

The CIArb London Centenary Principles are not another set of model rules for an arbitral institution. They are principles which recognise that the importance of international arbitration today and the loosening of ties between international arbitration and national law requires a number of key characteristics to make a particular place an appropriate and effective arena in which to conduct international arbitration; including professional bodies helping to provide a framework for the ethical conduct of international arbitration at work.

Investors frequently use arbitration to settle disputes between themselves. If arbitration was indeed biased, businesses would not have the confidence to use it international commercial arbitration as a dispute settlement mechanism in commercial contracts.

Indeed, a recent study of the European Parliament came to the conclusion that commercial arbitration may facilitate the EU’s goals of ensuring access to efficiently-delivered justice and dispute resolution.

At a time when Europe is emerging from a deep economic crisis, the EU should recognise that international commercial arbitration supports international investment, jobs and economic growth. Europe also faces increasing competition in international commercial arbitration from emergent centres in the Americas and the Far East. It is therefore critical that any action taken in relation to ISDS does not jeopardise Europe’s leading position in international commercial arbitration.

These are just some of the reasons why international commercial arbitration must be protected in Europe. For the same reasons, international commercial arbitration and ISDS need to be clearly distinguished in the public debate. If not, Europe’s reputation as a neutral and independent destination for commercial arbitration, where the rule and law and right to property as expressed in the Charter of Fundamental Rights of the European Union are respected and upheld, could be tarnished for a generation.


Chris Wilford, Head of Policy & Public Affairs, Chartered Institute of Arbitrators (CIArb), London, CWilford@ciarb.org