Asia Pacific international arbitration update

In brief

In this issue: we look at the inclusion of investor-state arbitration provisions in the recent Korea-Australia Free Trade Agreement and the possible inclusion of such provisions in the Trans-Pacific Partnership; a Singapore Court of Appeal decision that means parties challenging the jurisdiction of a tribunal have a choice of remedies; the ICC's new mediation rules; the commencement of the UNCITRAL Transparency Rules; recent investor state arbitrations involving Papua New Guinea; the termination by Indonesia of its Bilateral Investment Treaty with the Netherlands; appeal mechanisms in arbitration; and some recent Australian court decisions concerning arbitration.
This issue has been edited by Partner Andrea Martignoni , Special Counsel Nicola Nygh and Senior Associate James Morrison.

Investor-state arbitration – Korea-Australia Free Trade Agreement, Japan-Australia Free Trade Agreement and Trans Pacific Partnership

In brief: Partner Peter O'Donahoo and Senior Associate Hilary Birks report on a shift from the previous Australian Government's policy of not including investor-state dispute settlement clauses in trade agreements. Investor state arbitration provisions have been included in the recent Korea-Australia Free Trade Agreement and may also be included in the Trans Pacific Partnership that is currently being negotiated.

Korea-Australia Free Trade Agreement

The text of the Korea-Australia Free Trade Agreement (KAFTA) was released on 17 February 2014. KAFTA is the first free trade agreement concluded by the current Coalition Australian Government. This is significant as the terms of KAFTA represent a shift from the previous Australian Government's express policy that it would not include investor state dispute settlement (ISDS) clauses in any future investment or trade agreements. Consistent with the Coalition Government's current policy, KAFTA includes an ISDS mechanism, subject to some limitations on its scope.

The ISDS mechanism includes a number of safeguards intended to give the governments of Australia and the Republic of Korea greater certainty in the exercise of their discretion to regulate. The safeguards, for example, clarify the scope of conduct that may amount to indirect expropriation and carve out conduct that may otherwise be in breach of national treatment, most favoured nation treatment or fair and equitable treatment obligations, sometimes with reference to particular areas of regulation.

For further information, please refer to our Focus: Investor-State dispute settlement under the Korea-Australia Free Trade Agreement.

Japan Australia Economic Partnership

On 7 April 2014, Prime Minister Tony Abbott announced the conclusion of negotiations for the Japan-Australia Economic Partnership Agreement (the JAEPA), which has been under negotiation since 2007. While the full text and details of the agreement were not available at the time of writing, it has been reported that unlike the KAFTA, the JAEPA does not include an ISDS clause.

Trans-Pacific Partnership

Australia is one of a number of countries that are currently negotiating terms for a Trans-Pacific Partnership Agreement (the TPP). The aim of the TPP is to create a free trade area across the Asia-Pacific. Negotiations are continuing and include five of Australia's top 10 trading partners (Japan, the US, Singapore, New Zealand and Malaysia). Australia's previous position (under the Labour Government) was that it was not prepared to agree to the inclusion of ISDS clauses in the TPP. More recently, since the Coalition Government came to power in 2013, Australia has generally indicated a willingness to consider ISDS provisions in such agreements. It is not yet clear whether this applies in relation to the TPP negotiations.

Challenging the jurisdiction of a tribunal at enforcement

In brief: Special Counsel Nicola Nygh reports on a decision of the Singapore Court of Appeal that an award debtor that failed to challenge a preliminary arbitral award on jurisdiction can nevertheless resist enforcement of an award on the grounds that the arbitration tribunal had no jurisdiction over parties joined to the arbitration.

Background

The decision in PT First Media TBK v Astro Nusantara International BV and others¹ concerned a joint venture between companies belonging to an Indonesian conglomerate (Lippo) and companies belonging to a Malaysian media group (Astro) for multimedia and television services in Indonesia. A dispute between Astro and Lippo was referred to arbitration in Singapore under the 2007 SIAC rules. Astro applied to the tribunal to join to the arbitration certain Astro companies that were not party to the arbitration agreement (the Astro non-signatories). This application was opposed by Lippo. In a preliminary award, the tribunal held that it had power to join parties that were not signatories to the arbitration agreement under rule 24(b) of the 2007 SIAC rules provided the parties consented to being joined.

Lippo did not apply to the Singapore courts to challenge the tribunal's preliminary award on joinder despite having the power to do so under article 16(3) of the UNCITRAL Model Law, which is incorporated into the Singapore International Arbitration Act (the IAA). The tribunal proceeded to issue an interim final award on the merits that required Lippo to pay approximately US$250 million, the majority of which was to be paid to the Astro non-signatories.

Court of Appeal decision

The Court of Appeal held that parties seeking to raise a jurisdictional objection to an arbitral award have a 'choice of remedies' between:

• 'actively' initiating proceedings under article 16(3) of the UNCITRAL Model Law to set aside the preliminary award on jurisdiction in the seat of the arbitration; or
• 'passively' relying on a defence in enforcement proceedings under section 19 of the IAA.

In reaching this decision, the Court of Appeal departed from the earlier decision of the Singapore High Court, which held that the failure of a party to challenge jurisdiction within the 30 days specified in article 16(3) prevented a party from later raising a jurisdictional challenge when resisting enforcement of the award.

The Court of Appeal considered the tribunal's decision to join the additional claimants de novo and held that only parties to an arbitration agreement can be joined under rule 24(b) of the 2007 SIAC Rules. As a result of the Court of Appeal's decision, Astro was permitted to recover less than 1 per cent of the total award sum in Singapore.

Conclusion

The decision of the Singapore Court of Appeal may well be applied in other jurisdictions that have adopted the UNCITRAL Model Law, including the Australian federal and state jurisdictions and Hong Kong. It serves as a reminder to those drafting arbitration agreements to ensure that all relevant entities are expressly joined to the arbitration agreement. This is particularly important where there are multiple agreements with different entities. This message has also reinforced by a recent decision of the Singapore High Court that refused to grant a party's application for an order that it be allowed to join arbitration proceedings, on the basis that the court should not override the joinder mechanism in the arbitration rules to which the parties to the existing arbitration had agreed which required their express consent before any other entity could be joined.²

New ICC mediation rules

In brief: Partner Nick Rudge reports on the updated mediation rules issued by the International Chamber of Commerce.

The International Chamber of Commerce (ICC) has recently updated its mediation rules and guidance notes. The new mediation rules are short, succinct and clear. The rules provide for the fundamentals of mediation - in particular, providing for confidentiality and providing that documents and statements made as part of the mediation process are not to be produced as evidence - while retaining sufficient procedural flexibility. The appendix to the rules sets out the fees and costs associated with making a request for mediation under the ICC Mediation Rules. These cover both the filing fee and the administrative expenses of the ICC. In addition to the rules, the ICC has published guidance notes that are a very practical guide to both the rules and the general conduct of mediations.

Drafters should, however, take note of two issues. The first is that article 7(4) provides that the parties shall act in good faith throughout the mediation. However, good faith means different things in different countries. In Australia, the term is not precisely defined and has been the subject of many cases as to what is required by an obligation to act in good faith. Drafters may wish to consider whether they or their client wish to be bound by such an obligation. Secondly, article 10(2) provides that unless the parties have otherwise agreed, the parties may commence or continue any judicial, arbitral or similar proceeding, notwithstanding that the mediation is taking place under the ICC Mediation Rules. Express wording will therefore be required in the parties' arbitration agreement or dispute resolution clause if mediation is to be a precursor to judicial arbitral or similar proceedings.

When incorporating mediation into a tiered dispute resolution clause, it is important that the procedure is provided for with certainty, and yet with sufficient flexibility to deal with the specifics of any particular dispute. The ICC rules achieve that purpose.

UNCITRAL Transparency Rules in force from 1 April 2014

The UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration (the Transparency Rules) entered into force on 1 April 2014. The Transparency Rules were adopted by the United Nations Commission on International Trade Law on 11 July 2013 and will apply to investor-state arbitrations:

• arising out of treaties concluded from 1 April 2014 that refer disputes to the UNCITRAL arbitration rules (unless expressly excluded);
• where state parties to treaties existing before 1 April 2014 agree to their application; or
• by agreement of the parties to an investor-state arbitration under a treaty referring disputes to the UNCITRAL or other rules.

The Transparency Rules generally require greater public access to key documents and hearings in an investor-state arbitration and make provision for third parties to make submissions. However, these provisions are balanced with a requirement that arbitral tribunals protect certain confidential information. While the Transparency Rules will not apply to all investor-state arbitrations, the existence of the rules is likely to increase public expectations for greater transparency in investor-state arbitration. For further information about the transparency rules see our Focus: Shifting investor-state arbitration into the public spotlight.

Papua New Guinea mining disputes submitted to investor state arbitration

In brief: Special Counsel Nicola Nygh reports on two recent mining disputes involving Papua New Guinea that have been submitted to investor-state arbitration.

In the first case, in October 2013, sole arbitrator Murray Gleeson AC QC, former Chief Justice of the High Court of Australia, held the State of Papua New Guinea liable for US$118 million in an UNCITRAL arbitration with Canadian entity, Nautilus Minerals, for failing to honour commitments to invest in a world-first ocean floor mining project.

Papua New Guinea now faces a further investor-state arbitration, this time concerning the Ok Tedi copper and gold mine in Papua New Guinea's western province. A claim has been submitted to the International Centre for Settlement of Investment Disputes (ICSID) by Singapore-registered entity, PNG Sustainable Development Program (PNGSDP), under Papua New Guinea's 1992 domestic law on investment promotion. The claim concerns the alleged expropriation of PNGSDP's 63 per cent interest in Ok Tedi after the PNG Government passed legislation purporting to cancel PNGSDP's shares in Ok Tedi and issue an equivalent number of new shares to the State. This is the second ICSID arbitration that has been brought against PNG. The first ICSID arbitration, brought in 1996 by gold-mining investor Misima Mines, was discontinued at the request of one of the parties in 2001.

Threat to investment treaty protections in Indonesia

In brief: Senior Associate James Morrison reports on recent developments in Indonesia.

Indonesia has announced that it will terminate its bilateral investment treaty (BIT) with the Netherlands on 1 July 2015. Under the treaty's sunset clause, however, all investments made prior to this date will remain subject to the BIT until 2030. Although not confirmed by the Indonesian government, the Netherlands Embassy in Jakarta has also suggested that Indonesia will be terminating all of its 67 bilateral investment treaties.

Some observers have suggested that Indonesia's decision to terminate the BIT with the Netherlands was made in response to recent adverse decisions in investor-state arbitrations, including proceedings commenced by a UK company and an Australian subsidiary under Indonesia's BITs with Australia and Indonesia. If Indonesia terminates its BITs, this may adversely impact on foreign investment in Indonesia and result in existing foreign investments being restructured, including to ensure they receive the protection of investor-state arbitration provisions.

Appeal mechanisms in arbitration

In brief: Lawyer Rowan Platt reports on optional rules issued by the American Arbitration Association for appellate review of decisions by an arbitration panel and comments more broadly on appeal mechanisms in arbitration.

Under many national legal systems, there is little or no scope for appeals to a national court from international arbitral awards. For parties concerned about the lack of appeal from arbitral awards, one solution is to develop or adopt arbitral rules that provide for an appeal mechanism. On 1 November 2013, the American Arbitration Association (AAA) and its international branch, the International Centre for Dispute Resolution (ICDR), introduced new Optional Appellate Arbitration Rules. The new rules, which apply only where the parties have agreed to them in advance of any dispute arising, permit a dissatisfied party to obtain private appellate review of alleged 'material and prejudicial' errors of law and/or 'clearly erroneous' determinations of fact made by the arbitration panel at first instance.

This is just the most recent example of an international arbitration institute amending its rules to provide an internal appeal mechanism in its arbitral procedure, reflecting the perceived need by some users for an alternative to the strict finality provided for in the rules of major institutions. By amending its rules, the AAA has internationalised a feature provided by domestic arbitration service providers in the US for more than a decade. The AAA's new rules also continue an emerging trend of international arbitral bodies in Europe.

Another solution for parties concerned about the lack of appeal from arbitral awards is to choose a seat which allows appeals to its national courts. Section 69 of the English Arbitration Act 1996 provides for a right of appeal to the courts on a question of law. Under legislation in Hong Kong, New Zealand and Malaysia, parties to international arbitrations are also entitled to appeal to the courts on a question of law, but only where they have agreed to opt-in prior to the award being made. The Uniform Commercial Arbitration Acts in each Australian state also provide for a limited right of appeal from domestic arbitral awards (subject to the leave of the court) on an opt-in basis.

To read more about the various appeal mechanisms that exist in international arbitration and their impact on the principle of finality in arbitration, see Platt, R., 'The Appeal of Appeal Mechanisms in International Arbitration: Fairness over Finality?'³

Recent Australian decisions

We have recently reported on the following Australian court decisions concerning the interpretation of arbitration clauses and the enforcement of arbitral awards, which reinforce the pro arbitration stance taken by Australian courts:

• a decision of the Supreme Court of Western Australia to enforce an arbitration clause. In doing so the court rejected arguments that compliance with the clause had been waived, that the clause was void for uncertainty and that the clause did not survive termination of the contract⁴;
• a decision of the Full Federal Court of Australia upholding the enforcement of the arbitral award rendered in London where the English High Court refused to set the award aside on procedural grounds⁵; and
• a decision of the Full Federal Court of Australia interpreting legislation that restricted the party's ability to choose arbitration in 'sea carriage documents' so as to give effect to the party's choice of arbitration in London as the dispute resolution method in a charter party for shipping goods in Australia.⁶