Out-Law Analysis | 19 Mar 2021 | 2:45 pm | 8 min. read
Official figures show that applicants continue to be deterred from making challenges to arbitral awards by the high hurdle to success set by the English courts.
Figures from the November 2020 Commercial Court Users Group meeting (6-page / 102KB PDF) published by the Judiciary of England and Wales show a low success rate for both challenges to awards under section 68 of the 1996 Arbitration Act ('the Act') and appeals on a point of law under section 69 of the Act during the 2019-20 court year. The figures also show an apparent decrease in the number of applications in comparison to the previous court year.
According to the 2020 figures, there were 16 applications to challenge awards under s68 of the Act on the basis of a procedural irregularity in the 2019-20 court year. The success rate of s68 challenges also remains very low, with only one successful challenge to an award reported in the 2020 figures, and a number of applications dismissed on the papers alone. The one successful challenge referred to in the 2020 figures appears to have been decided very much on the basis of its own particular facts.
In previous years, the court has only reported statistics relating to the number of applications and successful appeals under s69 of the Act. However, the 2020 figures also report the percentage of s69 cases where permission to appeal was granted. Historically, this permission rate hovers around 30%.
The figures from the 2019-20 court year suggest that 31% of applications received permission, in line with the historical figures. However, there are undoubtedly some applications from last year which are yet to be determined and so this figure may change slightly.
Because of the time lag between applications brought under s69 and their completion, the court chose not to reveal the precise number of successful appeals. However, we understand that it sits at around 5%, which would appear to confirm the continued difficulty in bringing an appeal on the basis of an error of law.
Recent cases involving appeals on a point of law under s69 also add further weight to the suggestion that applicants continue to face a high hurdle for success. For example, in a July 2020 decision, the court reiterated that English courts "strive to uphold arbitration awards", reading them in a "commercial and reasonable way" rather than with a "meticulous legal eye to pick holes, inconsistencies and faults in awards and with the object of upsetting or frustrating the process of arbitration".
Perhaps the most significant development in English arbitration law was the Supreme Court's October 2020 decision in Enka v Chubb, which clarified the previously uncertain English choice of law rules for ascertaining the governing law of an arbitration agreement and the role of the court of the seat in granting anti-suit injunctions. From a European perspective, the ramifications of the 2018 Achmea v Republic of Slovakia judgment on arbitration provisions in intra-EU bilateral investment treaties continues to be felt.
Enka v Chubb highlights the importance of the law applicable to the arbitration agreement and why it is important to deal with the issue up-front at the contract drafting stage. In this case the UK Supreme Court was asked to rule on the question of which system of national law governs the validity and scope of an arbitration agreement when the law applicable to the contract containing it differs from the law of the 'seat', or place, of arbitration. The court, by a majority, held that the choice of law for the main contract should generally be treated as the choice of law for the arbitration agreement but that, in the absence of such a choice, the arbitration agreement is governed by the law of the seat as a default rule.
The case is an important reminder to contracting parties of the importance of deliberately thinking about and dealing with the choice of law applicable to the arbitration at the contract drafting stage. The presumption that the law governing the contract will also govern the arbitration agreement such that there is one system of law governing both agreements provides welcome certainty, and an approach that is commercially-minded and pragmatic.
The decision also underlines the importance of deliberately thinking about and dealing with the seat of arbitration. Not only will this govern the procedural laws applicable to the arbitration agreement, but it may also determine the law applicable to your arbitration agreement absent any express choice of law clause.
Of course, while the decision provides welcome certainty as to how the English courts will approach questions of governing law, parties cannot assume that courts in other jurisdictions will adopt the same approach. We have written previously about the approach that would be taken by the courts in different jurisdictions on the facts of the Enka case.
While the English courts' approach to the supervision of arbitral awards has remained very much business as usual, we have witnessed significant changes in the investment treaty arbitration space over the past couple of years - with significant implications for construction and infrastructure arbitrations.
In 2018, in the Achmea v Republic of Slovakia case, the Court of Justice of the EU (CJEU) controversially decided that arbitration provisions in intra-EU bilateral investment treaties (BITs) were incompatible with EU law. Following this decision, in January 2019, all EU member states - including the UK at that time - signed a declaration announcing their intention to terminate their intra-EU BITs in line with the Achmea decision.
In May 2020, a majority of EU member states signed a termination treaty to terminate all of their intra-EU BITs and to bring an end to all arbitration proceedings brought under those treaties. However the UK, which left the EU in January 2020, did not sign this treaty.
The termination treaty sets out three categories of arbitrations by reference to the date of the Achmea decision. For intra-EU arbitrations that had not yet been initiated by the date of the decision, those investors are seemingly out of luck and cannot bring their claims under those BITs. For pending arbitrations, the situation is more complex and there is significant debate about the fate of these cases and how they will or should be resolved.
For pending cases, arbitral tribunals are rejecting the suggestion that they lack jurisdiction on the basis that once a state has consented to arbitration it is unable to unilaterally or retrospectively withdraw that consent.
It is also unclear whether 'sunset clauses', which extend the life of BIT protections for investments made prior to the date of a BIT's termination for a typical 10 or 20 year period, remain effective. The termination treaty provided for the express termination of sunset clauses along with the BITs they are contained in, but international treaties of this nature cannot normally have retrospective effect.
Unsurprisingly, EU states have already used the Achmea decision to block new claims and to object to pending claims brought under intra-EU BITs, but for pending cases, arbitral tribunals are rejecting the suggestion that they lack jurisdiction on the basis that once a state has consented to arbitration it is unable to unilaterally or retrospectively withdraw that consent. Various tribunals have already gone on to render awards in these pending cases.
However, questions remain over the enforceability of such awards. While it's unlikely that national courts of EU member states will enforce intra-EU BIT awards, investors may have better luck in non-EU national courts. Indeed, the Micula family recently succeeded in enforcing an award rendered under the Sweden-Romania BIT before the US courts. While enforcement will always be decided on a case-by-case basis, investors with an intra-EU BIT award may stand a better chance of recovery outside the EU. Early identification of assets against which you might seek to enforce an aware is therefore more important than ever.
EU investors pursuing or thinking of pursuing construction projects or other infrastructure investments in EU states should consider these changes carefully. Disputes with the state that now arise in the context of those investments will arguably be precluded from pursuing relief under a BIT as they normally would have done.
As the UK did not sign the termination treaty, EU and UK investors wishing to rely on the UK's BITs with EU member states have been left in a very uncertain position. The UK/EU Trade and Cooperation Agreement (TCA) will not necessarily assist here, since it contains neither any investor-state dispute settlement mechanism nor any of the hallmark substantive BIT protections such as expropriation, fair and equitable treatment or full protection and security.
In practice, this means that aggrieved EU/UK investors who want to challenge measures taken by host states will have to lobby their own state to initiate state-to-state arbitration. The alternative, more likely, impact will be that investors who until now have relied on the UK's intra-EU BITs for protection may seek to structure their investments through other non-EU jurisdictions. The challenge for investors and their lawyers will be to find jurisdictions with treaties that provide appropriate investor protections and dispute settlement mechanisms.
Another option is to seek to negotiate classic investment protections directly into a contract with a state or state entity. An investor's ability to do so will depend very much on its bargaining power, and this approach will require careful consideration at the negotiation and planning stage.
The number of renewable energy disputes going to arbitration has increased in recent years, with these now accounting for around 60% of all disputes brought under the Energy Charter Treaty (ECT), according to ECT figures. This increase has been driven by the heightened urgency of states to address the climate crisis, leading in turn to various reforms and initiatives at state level to address reliance on fossil fuels and to increase access to renewable energy sources.
Spain, Italy, Romania, Germany and, most recently, Ukraine have all been hit with numerous claims under the ECT for changes made to their renewables regimes, particularly regarding cuts to investment incentives in the solar and wind energy sectors.
When the CJEU made its ruling in the Achmea case, it was held not to apply to intra-EU disputes under the ECT. Nevertheless, EU states are obviously keen to extend the reach of Achmea to ECT disputes, and are pushing the CJEU to rule on whether intra-EU ACT arbitration is permissible. This month, a CJEU advocate general issued a non-binding opinion that the investor-state dispute settlement clause found in the ECT is incompatible with EU law, for the same reasons as the provisions found incompatible in the Achmea case.
The CJEU will issue its judgment in the case in the coming months. For the time being, investors seeking to bring renewable energy disputes continue to face uncertainty as to how such disputes might be resolved where there is an intra-EU dynamic.
The Covid-19 pandemic has had a hugely disruptive effect on the construction sector. Many states have passed some form of legislation to deal with the pandemic, affecting construction projects through site closures, lockdowns, temporary requisitions, cancelled bids and restrictions on imports and exports.
We can expect to see an increase in investor-state disputes as a result. For example:
As recently as January of this year, it was reported that two French companies, Aeroports de Paris and Vinci Airports, had submitted a notice of dispute to Chile invoking the protections of the Chile-France BIT in respect of an airport concession agreement which has suffered following the significant decrease in air passenger traffic. We can expect investors will seek to recover whatever and wherever they can in respect of the disruption and harm suffered over the course of 2020.
Notwithstanding the limitations described above, there are nevertheless things that construction stakeholders can and should be doing now. In scenarios where disputes have already arisen, ensure that you seek expert advice as to what instruments exist under which claims can be brought by investors in respect of an investment that's been harmed by acts of the state;
If you are at the planning stage and looking to make an international investment, contractors should be looking to ensure that their investments are structured in in such a way that the investment is suitably well protected by treaty mechanisms. Being mindful of the uncertainties surrounding intra-EU BITs, the UK-EU Trade and Cooperation Agreement and the ECT, contractors should be thinking about organising their investments in jurisdictions that allow them to benefit from the provisions and protections of a particular treaty. This of course needs to be done carefully to avoid impermissible treaty shopping that may exclude an investor or the investment from treaty protection.
International arbitration is one of the topics that was addressed during the Pinsent Masons global infrastructure law review of the year series of events. The events addressed both sector-wide pivotal issues of global impact and local construction law issues affecting the infrastructure industry.
15 Feb 2021
23 Mar 2020