The Hon’ble Chief Justice of India Mr. Justice R.C. Lahoti, observed that :-
‘The philosophy of Alternate Dispute Resolution systems is
well-stated by Abraham Lincoln: “discourage litigation, persuade your
neighbours to compromise whenever you can. Point out to them how the
normal winner is often a loser in fees, expense, cost and time.”
Litigation does not always lead to a satisfactory result. It is
expensive in terms of time and money. A case won or lost in court of law
does not change the mindset of the litigants who continue to be
adversaries and go on fighting in appeals after appeals. Alternate
Dispute Resolution systems enable the change in mental approach of the
parties ………… A Conference on ADR systems is being held in Mumbai on 20th
November this year where, leading experts in the world on ADR system
would be available for launching the movement on a large scale’.
In a developing country like Bangladesh with major economic reforms
under way within the frame-work of rule of law, strategies for swifter
resolution of disputes for lessening the burden on the Courts and to
provide means for expeditious resolution of disputes, there is no better
option but to strive to develop alternative modes of dispute resolution
by establishing facilities for providing settlement of disputes through
arbitration, conciliation, mediation, negotiation, etc.
The GoB by virtue of Section 89A, 89B, 89 C in the Code of Civil
Procedure (Amendment) Act 2003 encouraged ADR in the civil matters. It
also repealed the old Arbitration Act, 1940 and introduced new and
effective arbitration system by enacting the Arbitration Act, 2001. The
objectives of this Act are to make provision for an arbitral procedure
which is fair, efficient and capable of meeting the needs of the
specific arbitration; and to permit an arbitral tribunal to use
mediation, conciliation or other procedures during the arbitral
proceedings to encourage settlement of disputes.
One distinct advantage of ADR over traditional court proceedings is
its procedural flexibility. It can be conducted in any manner to which
the parties agree. It may be as casual as a discussion around a
conference table or as structured as a private court trial. Also unlike
the courts, the parties have the freedom to choose the applicable law, a
neutral party to act as Arbitrator/Conciliator in their dispute, on
such days and places convenient to them and also fix the fees payable to
the neutral party. ADR being a private process offers confidentiality
which is generally not available in court proceedings. While a court
procedure results in a win-lose situation for the disputants, in an ADR
process such as Mediation or Conciliation, it is a win-win situation for
the disputants because the solution to the dispute emerges with the
consent of the parties. Lastly, as compared to court procedures,
considerable time and money is saved in ADR procedures.
[i]Paper presented by Justice Mustafa
Kemal on the conference organized by (ISDLS) Institute for the Study and
Development of Legal Systems (2005).
Types of ADR.
1.Arbitration generally involves a binding determination of a dispute
by a neutral third party following agreement to such by the disputants.
a. The agreement to arbitrate usually specifies the number of arbitrators and their manner of selection.
b. Many states enforce agreements to arbitrate and bar suits attempting to litigate issues reserved for arbitration.
c. Judicial review of the arbitrator’s decision is limited
to determining whether that arbitrator had jurisdiction over the dispute
and, if so, whether the award was procured by fraud or violates public
policy.
d. Arbitration is an informal process where the technical rules of evidence and precedent are not followed.
2. Private court systems are similar to arbitration and provide for
voluntary submission of disputes to a third party acceptable to both
disputants.
3. Mediation is a process where an impartial third party attempts to
guide the disputants to amutually acceptable settlement rather than to
issue a final decision.
4. A mini-trial is a process whereby lawyers of both sides present
their case to an impartial third party approved in advance by both
disputants and then both sides retire without their lawyers to a private
session in which they attempt to negotiate an agreement.
5. A summary jury trial allows for the presentation of a summary version of the case before a judge and jury.
C.The Seven Cannons of the Arbitrator’s Code of Ethics
Canon 1: An arbitrator will uphold the integrity and fairness of the arbitration process.
Canon 2: If the arbitrator has an interest or relationship that is
likely to affect his or her impartiality or that might create an
appearance of partiality or bias, it must be disclosed.
Canon 3: An arbitrator, in communicating with the parties, should avoid impropriety or the appearance of it.
Canon 4: The arbitrator should conduct the proceedings fairly and diligently.
Canon 5:The arbitrator should make decisions in a just, independent, and deliberate manner.
Canon 6: The arbitrator should be faithful to the relationship of trust and confidentiality inherent in that office.
Canon 7: In a case where there is a board of arbitrators, each party
may select an arbitrator. That arbitrator must ensure that he or she
follows all the ethical considerations in this type of situation.
D.ADR compared to Litigation (i.e. lawsuits)
1.ADR offers: open lines of communication; permits creative remedies;
the parties set the timetable; parties have privacy; it is cheaper and
more flexible; the parties select the arbitrator/mediator.
2.Litigation: is bound by the technical rules of discovery and
evidence; is public and controlled by lawyers; tends to be less
flexible, more costly and slower.
The Arbitration Act, 2001 principally based on the UNCITRAL Model Law
on International Commercial Arbitration (1985), consolidates the law
relating both to domestic and international commercial arbitration. The
new Act thus creates a single and unified legal regime for arbitration
in Bangladesh which has also been the trend in recent years elsewhere.
However, in the context of international commercial arbitration, the Act
has specific prescriptions which are not applicable to domestic
arbitration. In certain respects it has drawn on the Indian Arbitration
and Conciliation Act, 1996. This is obviously in tune with the reality
of the region as a growing popular destination for foreign investment.
The new Act represents a significant improvement over its
predecessor, the Arbitration Act (X of 1940), a legacy of the British
Raj in the Indian subcontinent. Until recently, the 1940 Act governed
arbitration in India and Bangladesh, and it still does in Pakistan. Thus
the 1940 Act is the common heritage of all these countries. Experience
had taught that a change in the arbitral legal regimes in these
countries was a must.
As the Supreme Court of India once noted:
Interminable, time consuming, complex and expensive court procedures
impelled jurists to search for an alternative forum, less formal, more
effective and speedy for resolution of disputes avoiding procedural
claptrap and this led them to Arbitration Act of 1940. However, the way
in which the proceedings under the Act are conducted and without an
exception challenged in Courts, has made lawyers laugh and legal
philosophers weep. Experience shows and law reports bear ample testimony
that the proceedings under the Act have become highly technical
accompanied by unending prolixity, at every step providing a legal trap
to the unwary. Informal forums chosen by the parties for expeditious
disposal of their disputes has by the decisions of the Courts been
clothed with “legalese” of unforeseeable complexity. (The Gurunanak
Foundation case, (AIR 1981 SC 2075), per Justice D.A. Desai.)
In light of their common historical experience as such, both
Bangladesh and India have recently modernized their arbitration laws
along the lines of the UNCITRAL Model Law. The modernization of law
relating to international commercial arbitration in Bangladesh by the
2001 Act gives her a facelift as an attractive place for dispute
resolution in the field of international trade, commerce and investment.
A commercial dispute between two Bangladeshi nationals having places
of business even in different States cannot be considered the subject
matter of international commercial arbitration under the new Act, which
would be otherwise possible under the Model Law. In this context the
internationality of the nature of the transactions, in that they take
place in different jurisdictions, has been subjugated to the nationality
of the disputing parties.Nationality thus
remains one of the determinative factors of the international character
of arbitration. Such a prescription, however, is found in recent
legislation of some other countries.
On the definition and form of the arbitration agreement, the
Arbitration Act, 2001 adopts verbatim the Model Law provisions. Thus an
arbitration agreement, either in the form of an arbitration clause in a
contract or in the form of a separate agreement, may be concerned with
future and existing disputes respectively. The Act requires the
arbitration agreement to be in writing exactly in the same manner as the
Model Law prescribes. In other words, the new Act follows verbatim the
Model Law prescription on the matter which has, in fact, wider scope
than that of the New York Convention on the Recognition and Enforcement
of Foreign Arbitral Awards of 1958. However, unlike the Model Law or the
New York Convention, the new Act specifically mentions “fax” and
“e-mail” as the modes of writing amongst others, which are, of course,
implied in the expression “other means of telecommunication” in the
former.
In keeping pace with the recent developments in the field of
international commercial arbitration, the new Bangladesh Act has adopted
the doctrines of competence-compétence and autonomy of the arbitration
clause in the context of the jurisdiction of arbitral tribunals. Unlike
the Model Law and the Indian Act of 1996, which have identical
provisions on the matter of compétencecompétence and allow the arbitral
tribunal unbridled freedom in this regard, the new Bangladesh Act
restricts such freedom with the words “unless otherwise agreed by the
parties.” Subject to such proviso, the arbitral tribunal may rule on its
own jurisdiction or any questions concerning its jurisdiction. Section
17 of the new Act, thus dealing with the matter, has enumerated, as a
matter of guidance, five jurisdictional questions, not meant to provide
an exhaustive list, on which the arbitral tribunal may exercise its
power of compétence de la compétence. The enumerated questions are as
follows: (a) whether there is in existence a valid arbitration
agreement; (b) whether the arbitral tribunal is properly constituted;
(c) whether the arbitration agreement is against public policy; (d)
whether the arbitration agreement is incapable of being performed, and
(e) what matters have been submitted to arbitration in accordance with
the arbitration agreement. The arbitral tribunal may, subject, of
course, to the aforementioned proviso, rule on its own jurisdiction on
any questions beyond the above list. It is probable that the arbitral
tribunal may decide questions of jurisdiction not only at the
instigation of the parties but also on its own motion. Thus, whatever
the parties might have agreed otherwise, if, for instance, public policy
issues arise concerning the arbitration agreement or generally in other
respects, it seems incumbent on the arbitral tribunal to look into the
matter in order to decide its own jurisdiction.
Autonomy of the Arbitration Clause
The second doctrine, i.e. “autonomy of the arbitration
clause” described by some as “a conceptual cornerstone of international
arbitration,” buttresses the first one, i.e. thecompétence-compétence doctrine.
As far as the arbitral jurisdictional issues are concerned, both
doctrines prove to be the “two sides of the same coin,” or, for that
matter, “the birds of the same feather.” As Judge (as he then was)
Schwebel noted, “If it is inherent in the arbitral (and judicial)
process that a tribunal is the judge of its own jurisdiction, that it
hascompetence de la compétence, it is no less inherent in that
process that an arbitral tribunal shall have the competence to pass upon
disputes arising out of the agreement which is the immediate source of
the tribunal’s creation even where those disputes engage the initial or
continuing validity of that agreement.” The autonomy of the arbitration
clause doctrine is sometimes expressed as the “separability” or the
“severability” of the arbitration clause. The new Bangladesh Act opted
for the latter expression. Whatever is the expression – “autonomy,”
“separability,” or “severability” of the arbitration clause–it means
that the arbitration clause is separate from the principal contract in
which it is contained. Thus the arbitration clause is given an enclave
status. Whatever happens to the principal contract in which it is
contained should not affect it.
Thus the arbitration clause will always survive the principal
contract. The theoretical foundation on which the doctrine stands has
been well described by Schwebel in the following words : “Thus when the
parties to an agreement containing an arbitration clause enter into that
agreement, they conclude not one but two agreements, the arbitral twin
of which survives any birth defect or acquired disability of the
principal agreement.” This twin sister analogy between the arbitration
clause and the principal agreement might sound like a fiction.
International arbitral practice has, however, embraced the doctrine as a
matter of practical exigency because of the legitimate expectation that
the arbitration clause creates for the parties when it is inserted in
the principal agreement. The insertion of such a clause at least
provides the parties with the chance to ventilate their grievances
through it about the principal agreement whatever they may be. If the
clause is considered to die with the presumed death of the principal
agreement, there would be nothing left for the parties to look for, at
least for one party who is so genuinely hopeful. This is how the
practical exigency lends support to the survival of the arbitration
clause even in the case of the death of the principal agreement in which
it is contained.
Like the Model Law, the new Bangladesh Act specifies the time within
which an objection to the jurisdiction of the arbitral tribunal may be
raised. Thus, it provides that such an objection “shall be raised not
later than the submission of the statement of defense.” However, it
should be mentioned that any International Chamber of Commerce (“ICC”)
arbitration taking place in Bangladesh under the 1998 ICC Arbitration
Rules, according to which such jurisdictional objections may be raised
throughout the proceedings and not just at the time of the submission of
the statement of defense, might contradict the prescription of the new
Bangladesh Act . In such a conflict the Bangladesh courts would prefer
the lex fori, i.e. the Act 2001, as the lex arbitri on the matter
concerned over the parties’ chosen international institutional
arbitration rules as the procedural law. One may wonder whether with the
tide of delocalization of international arbitration in the age of
globalization the parties’ choice would still be subservient to the lex
fori as represented in the “jurisdictional or the arbitral forum theory
of arbitration.” International business people intending to arbitrate in
Bangladesh might suffer from the John Holland or the Dermajaya syndrome
of uncertainty, only to be cured by a legislative prescription for
clarification as has recently happened in Singapore. There is no denying
the fact that following Article 19(1) of the Model Law the new
Bangladesh Act, 2001 provides in Article 25(1) that “[s]ubject to this
Act, the arbitral tribunal shall follow the procedure to be agreed on by
all or any of the parties in conducting its proceedings.” The questions
still remain as to what extent the parties’ choice of the arbitral
procedural law will prevail when such choice proves inconsistent with
the Act itself, or simply whether the choice of any foreign procedural
law or any international institutional arbitration rules will
automatically exclude the application of the Act to the procedural
matters unless the parties have expressly so stated in their contract.
It is noteworthy that unlike the Model Law and the Indian Act, 1996,
the new Bangladesh Act does not contain any provision for interim
measures by the court. This is a marked weakness of the new Act as far
as it relates to the protection of parties who intend to arbitrate in
Bangladesh. Even before the constitution of the arbitral tribunal or the
commencement of arbitral proceedings, situations or circumstances might
warrant interim measures to be taken by the court to protect the
interest of a party, otherwise the whole purpose of such arbitration
will be frustrated. If there is no statutory obligation to offer such
protection, the court may not take an interest in it.
It is desirable that the modern arbitration law of a country should
demarcate the boundaries of authority between the court and the arbitral
tribunal, though it is not always easy to do so. Thus, one scholar
notes, “As powers to grant interim measures are shared between arbitral
tribunals and domestic courts, it seems necessary to draw boundaries
between their respective areas of competence and to address the issue of
the enforcement of such measures.
PARTIES’ OPTION FOR MEDIATION OR CONCILIATION IN ARBITRATION PROCEEDINGS
Section 22(1) of the new Bangladesh Act manifests a typical Asian
approach to dispute resolution. It provides, “It shall not be
incompatible with an arbitration agreement for an arbitral tribunal to
encourage settlement of the dispute otherwise than by arbitration and,
with the agreement of all the parties, the arbitral tribunal may use
mediation, conciliation or any other procedures at any time during the
arbitral proceedings to encourage settlement.” Thus, the encouragement
of settlement between the parties is the main thrust of the provision,
and is the role of the arbitral tribunal. The new Act also provides:
“If, during arbitral proceedings, the parties settle the dispute, the
arbitral tribunal shall, if requested by the parties, record the
settlement in the form of an award on agreed terms.” The new Act does
not distinguish between such an award on agreed terms and any other
award in respect of the dispute in terms of status and effect. In many
other Asian countries the combination of conciliation/mediation and
arbitration in the same proceeding subject, of course, to the parties’
consent, seems to be a common trend. Thus Article 45 of the China
International Economic and Trade Arbitration Commission (“CIETAC”)
Arbitration Rules provides, “If both parties have a desire for
conciliation or one party so desires and the other party agrees to it
when consulted by the arbitration tribunal, the arbitration tribunal may
conciliate the case under its cognizance in the process of
arbitration.” The CIETAC Arbitration Rules allow the arbitral tribunal
to render the settlement reached through conciliation in the course of
arbitral proceedings as an arbitral award. Similar provisions are found
in the Hong Kong Arbitration Ordinance of 1996, Singapore International
Arbitration Act of 1995, and the Indian Arbitration and Conciliation Act
of 1996. It is noteworthy that in some of the aforementioned laws of
various countries the same approach applies to both domestic and
international arbitration.
ARBITRAL AWARD AND THE TERMINATION OF PROCEEDING
Chapter VII of the Bangladesh Act deals with the rules applicable to
the merits of the dispute, decision-making by the panel of arbitrators,
form and contents of the award, decision on costs, finality and binding
nature of the arbitral award, correction and interpretation of awards,
and termination of proceedings. It has to be noted that although the
Bangladesh Act followed in this chapter Articles 28, 29, 31, 32 and 33
of the UNCITRAL Model Law, it has deviated in some respects from the
Model Law provisions and introduced some innovation and added new
provisions. These deviations, innovations and additions are not
surprising as they are in keeping with the post-Model Law recent
developments in the field of international arbitration. Like the
UNCITRAL Model Law, the new Bangladesh Act upholds party autonomy or the
parties’ freedom of choice and allows the parties to choose any rules
of law, not necessarily the law or the legal system of the country whose
law is applicable to the substance of the dispute. This choice is so
expansive that the parties can choose the lex mercatoria or the
rules of transnational commercial law, rules of specific international
trade or anything which is not characteristically the legal system of a
particular country. It further provides that if the law or the legal
system of a country is designated by the parties, such designated law is
meant to refer directly to the substantive law of that country and not
to its conflict of laws rules. Like the UNCITRAL Model Law, the Act thus
expressly avoids the renvoisituation. However, unlike the
Model Law, the new Bangladesh Act allows the arbitral tribunal, in the
absence of the parties’ choice of applicable substantive law, the
freedom to apply any rules of law as it objectively deems appropriate in
the circumstances of the dispute. Thus in the absence of the parties’
choice the arbitral tribunal is no longer required to have recourse to
the applicable conflict of laws rules as under the Model Law to
determine the applicable substantive law.
It should be noted that this prescription reflects the recent trend
in many international institutional arbitration rules as well as in some
national legislative enactments on international commercial
arbitration. It is striking that unlike the Model Law, the Bangladesh
Act makes no provision on the matter of the arbitral tribunal’s
authority to decide ex aequo et bono or asamiable compositeur,
nor does it expressly prohibit such authority. This means that if the
parties to a dispute refer to international institutional arbitration
rules, for example, the ICC Arbitration Rules (1998), which provide for
the arbitral tribunal’s authority as such (of course, provided the
parties have expressly authorized it to do so), the arbitral tribunal
having its seat in Bangladesh will have no problem deciding ex aequo et bono or as amiable compositeur.
As under the Model Law, the tribunal is also mandatorily required under
the new Bangladesh Act to decide in accordance with the terms of the
contract and to take into account the usages of the trade applicable to
the transaction. However, unlike the Model Law, the Act expressly states
the purpose of this specific requirement to be the “ends of justice.”
But the question still remains – if justice is done otherwise, would
this requirement be superfluous? It is noteworthy that the Act does not
say expressly that this requirement is to obtain “in all cases”
as does the Model Law. The upshot may be that if justice is done
somehow, there is perhaps no need to fulfill the requirement by the
arbitral tribunal, hence the omission of the phrase “in all cases” in
the relevant provision of the new Bangladesh Act.
The Act preserves the rule of decision-making by the majority, unless
otherwise agreed by the parties, in arbitral proceedings before a
multi-arbitrator arbitral tribunal. The Act also provides that if
authorized by the parties or all the members of the arbitral tribunal,
questions of procedure may be decided by the chairman of the arbitral
tribunal. The Act incorporates the Model Law provisions on the matters.
What the Act does not deal with, nor does the Model Law, is the issue of
decision-making by a truncated tribunal or of its authority. There
seems to be an increasing tendency to deal with this issue in modern
arbitration rules, however on various other matters as mentioned earlier
such as form and contents of the award, termination of proceedings,
correction and interpretation of the award and additional award, the new
Bangladesh Act has almost identical provisions to that of the Model
Law. However, unlike the Model Law, the new Bangladesh Act, in tune with
pragmatic developments elsewhere, expressly provides for the authority
of the arbitral tribunal to decide on the costs of the arbitration
unless the parties agree otherwise. In this respect, the new Bangladesh
Act follows the similar provisions adopted by the Indian Arbitration and
Conciliation Act 1996. The only difference between the relevant
provisions of these two Acts concerns the interest rate from the date of
the award to the date of payment. Thus the Bangladesh Act provides : “A
sum directed to be paid by an arbitral award shall, unless the award
otherwise directs, carry interest at the rate of two percent per annum
which is more than the usual Bank rate from the date of the award to the
date of payment.” The Indian Act provides for interest at the rate of
eighteen percent per annum. Both Acts provide in identical provisions
that, unless the parties agree otherwise, the arbitral tribunal shall
fix the costs of an arbitration and also specify (i) the party entitled
to costs; (ii) the party who shall pay the costs; (iii) the amount of
costs or method of determining that amount; and (iv) the manner in which
the costs shall be paid.
ENFORCEMENT
As far as the recognition and enforcement of foreign arbitral awards
are concerned, the new Bangladesh Act differs in some respects from the
Model Law as well as from the New York Convention. Concerning the rules
about the recognition and enforcement and about the grounds for refusing
recognition or enforcement of awards, the Model Law distinguishes
between “international” and “non-international” awards rather than
between “domestic” and “foreign” arbitral awards as traditional
categories. It was noted that the grounds on which recognition or
enforcement may be refused under the Model Law “are relevant not merely
to foreign awards but to all awards rendered in international commercial
arbitration.”The recognition and enforcement regime of the Model Law
entertains an arbitral award “irrespective of the country in which it
was made” so long it is an international award. Although the New York
Convention distinguishes between foreign and domestic arbitral awards
for the application of the Convention to the former, it also applies to
awards that are domestic from the territoriality point of view in the
sense that they are made in the country of enforcement but are
considered non-domestic in that country for various other reasons.
CASE REFERENCE IN DETAIL
Although many arbitration awards are voluntarily complied,
enforcement of arbitration awards is a current challenge in
international arbitration. S.p.A. v. The People’s Republic of Bangladesh1 (“Saipem v. Bangladesh”)
apparently creates a new tier of protection when foreign investors are
affected by the actions of a host country’s judiciary system. This might
be an interesting trend, especially for those foreign investors that
have investments in countries where the interference of the national
court systems in arbitration proceedings is commonplace.
Saipem S.p.A., an Italian oil & gas company, and Petrobangla
(Bangladesh Oil, Gas & Mineral Corporation), a Bangladeshi public
entity, entered into an agreement on February 14, 1990, to build a
natural gas pipeline in Bangladesh. This contract was governed by the
laws of Bangladesh and set forth an arbitration clause. Such clause
referred any dispute between the parties to the Rules of Conciliation
and Arbitration of the International Chamber of Commerce (ICC) and
established Dhaka, Bangladesh as the venue of the arbitration.
The whole project was significantly delayed because of strong
opposition by the local population. Although the parties agreed on
extending the completion date, they could not reach an agreement
regarding compensation and additional costs as a consequence of such
delay. Also, a controversy arose in relation to a warranty bond and
retention monies. In accordance with the original contract’s arbitration
clause, Saipem initiated an ICC arbitration tribunal seeking
outstanding payments owed under both the original contract and the
subsequent extension agreement.
During the ICC arbitration, Petrobangla brought before the ICC tribunal various procedural requests.2
Since the ICC tribunal denied such requests, Petrobangla brought an
action before the First Court of the Subordinate Judge of Dhaka seeking
the revocation of the ICC Tribunal’s authority. The grounds of this
action were an alleged misconduct of the arbitrators and a breach of the
parties’ procedural rights when deciding the above-mentioned procedural
requests made by Petrobangla.
Additionally, Petrobangla filed an action in the High Court Division
of the Supreme Court of Bangladesh to stay all further proceedings of
the ICC arbitration. A week later, an injunction restraining Saipem from
proceeding with the ICC arbitration was issued by the Supreme Court of
Bangladesh. Subsequently, Saipem filed an objection to the injunction
restraining it from proceeding with the ICC arbitration. Thereafter, on
April 5, 2000, a decision revoking the authority of the ICC arbitration
Tribunal was issued by the First Court of the Subordinate Judge of
Dhaka. Even though this last decision was subject to two degrees of
appeals, Saipem decided not to do so. According to Saipem, “the latter
decided not to file an appeal because any expectations to succeed
appeared unsustainable under the circumstances.”3
Despite the decision revoking the authority of the ICC tribunal
rendered by the Bangladeshi courts, the ICC tribunal decided to resume
proceedings. Subsequently, Petrobangla secured various injunctions from
the High Court Division of the Supreme Court of Bangladesh restraining
the continuance of the ICC arbitration tribunal.4 Nevertheless, on May 9, 2003, the ICC arbitration tribunal issued a final arbitration award holding inter alia that Petrobangla had breached its contractual obligation to compensate Saipem for the time extension and additional works.
In order to set aside the arbitration award, Petrobangla filed an
action before the High Court Division of the Supreme Court of Bangladesh
under Sections 42(2) and 43 of the Bangladeshi Arbitration Act 2001.
This court denied the petition on April 21, 2004 stating that it was
“misconceived and incompetent inasmuch as there is no Award in the eye
of the law, which can be set aside…A non-existent award can neither be
set aside nor can it be enforced.”5 According to this
decision, the ICC award was rendered non-existent and was unenforceable
in Bangladesh. Nonetheless, Saipem did not appeal this decision.
Saipem, on October 5, 2004, filed a request for arbitration with the
International Centre for Settlement of Investment Disputes (ICSID). The
parties in the ICSID arbitration were Saipem and the Government of
Bangladesh and the claims were based on the breach of the Bilateral
Investment Treaty (BIT) between Italy and Bangladesh.6 The
basis of Saipem’s claims was the undue intervention of the Bangladeshi
courts in the ICC arbitration, which precluded the enforcement of the
ICC award in Bangladesh or elsewhere. According to Saipem, those acts
constituted an expropriation and deprived Saipem of any compensation.
Thus, Saipem in its request for arbitration sought inter alia a
declaration that Bangladesh expropriated Saipem of its investments
without compensation and that Bangladesh breached its obligations under
the BIT.
On June 30, 2009, the ICSID Tribunal rendered the final award. The
Tribunal considered that the expropriated “property” consisted of
“Saipem´s residual contractual rights under the investment as
crystallized in the ICC Award.”7 Also, the ICSID Tribunal
concluded that the actions of the Bangladeshi courts were not a direct
expropriation, but “measures having similar effects” within the meaning
of Article 5(2) of the BIT.8 These actions deprived Saipem of the benefit of the ICC Award.9
The decision of the Supreme Court of Bangladesh that the ICC Award was a
nullity “is tantamount to a taking of the residual contractual rights
arising from the investments as crystallized in the ICC Award. As such,
it amounts to an expropriation within the meaning of Article 5 of the
BIT”.10
However, the ICSID Tribunal held that the “substantial deprivation of
Saipem´s ability to enjoy the benefits of the ICC Award is not
sufficient to conclude that the Bangladeshi courts’ intervention is
tantamount to an expropriation.”11 Otherwise, any setting
aside of an arbitration award would lead to a claim for expropriation.
The ICSID Tribunal, accordingly, stated that in order to give rise to a
claim for expropriation the actions of Bangladesh must be illegal in
addition to fulfilling the requirements for expropriation as set forth
in Article 5 of the BIT.12
The ICSID Tribunal concluded that the revocation of the arbitrators’
authority by the Bangladeshi courts was contrary to international law,
specifically to the principle of abuse of rights and the New York
Convention and, therefore, such revocation constituted an expropriation
within the meaning of Article 5 of the BIT.
The ICSID Tribunal concluded that courts of Bangladesh abused their
rights when exercising supervisory jurisdiction over the ICC arbitration
process. Although national courts have discretion to revoke an
arbitrator´s authority in cases of misconduct, they cannot use this
discretion to revoke the authority of arbitrators based on reasons
wholly unrelated to such misconduct. As the ICSID Tribunal mentioned:
“taken together, the standard for revocation used by the Bangladesh
courts and the manner in which the judge applied that standard for the
facts indeed constituted an abuse of rights.”13 In other
words, the Bangladeshi courts exercised their supervisory jurisdiction
for an end different from which it was instituted and, therefore,
violated the principle of abuse of rights.
In addition, the ICSID Tribunal determined that the actions of the
courts of Bangladesh were against the New York Convention, specifically
Article II (1), which imposes on Contracting States the obligation of
honoring arbitration agreements. Even though the Bangladeshi courts did
not target the arbitration agreement itself, the revocation of the
arbitrators’ authority can amount to a violation of Article II (1)
“whenever it de facto prevents or immobilizes the arbitration that seeks to implement that arbitration agreement.”14 In fact, this was the situation before the ICSID Tribunal, since different Bangladeshi courts de facto frustrated the arbitration agreement, by issuing several injunctions against the continuation of the ICC Arbitration.
Furthermore, the ICSID Tribunal deemed that “the expropriation of the
right to arbitrate the dispute in Bangladesh … corresponds to the value
of the award rendered without the undue intervention of the court of
Bangladesh.”15 Thus, the ICSID Tribunal established that
Saipem was entitled for relief, which was equivalent to the amount
awarded in the ICC award plus interest.
Saipem v. Bangladesh is most likely the first ICSID Award
that holds a state responsible for expropriation based on the illegal
interference by its judiciary in arbitration proceedings.16 Although some commentators foresee that the theory behind Saipem v. Bangladesh will be a mechanism for countering to some degree the interference by national courts with international arbitration,17 this article will show why the application of the legal rule established in Saipem v. Bangladesh is rather remote.18 The very unique circumstances of the case as well as the departure from previous ICSID awards would make the rationale of Saipem v. Bangladesh most likely inapplicable in other cases.
Although the ICSID Tribunal determined that the acts of the
Bangladeshi courts amounted to an expropriation, even Saipem
acknowledged during the ICSID Arbitration that the facts of the case
most likely constituted denial of justice rather than expropriation.19 The
BIT between Italy and Bangladesh narrows investment arbitration only to
those cases based on expropriation. Indeed, Saipem acknowledged during
the ICSID Arbitration that the reason why the plaintiff based its claims
on expropriation and not on denial of justice was only because the
Article 9.1 of the BIT did not confer jurisdiction to the ICSID Tribunal
over a claim based on denial of justice.20 Additionally, Saipem made the same argument regarding equitable treatment.21
From the facts of the case, it is clear that the intervention of the
Bangladeshi courts by not allowing the continuation of the ICC Tribunal
was abusive. Even though the courts from Bangladesh abused their
supervisory jurisdiction over the ICC Arbitration process, it should not
allow the ICSID Tribunal to broaden the scope of the BIT beyond what
was agreed upon the States. The BIT between Italy and Bangladesh
protects investments in those situations specifically agreed by both
States, that is, nationalization and expropriation. Hence, arbitrators
should be bound to protect investments only under these two
circumstances established in the BIT.
Moreover, the investor did not exhaust local remedies –as already
mentioned, Saipem decided not to appeal the decisions of the Bangladeshi
courts that revoked the authority of the arbitrators and the one that
declared the ICC Award a nullity, which is normally a substantive
condition to initiating an ICSID arbitration based on acts of the
judiciary, particularly in cases related to denial of justice.22
The main rationale is that “the prohibition of denial of justice
presupposes a duty of the host state to provide a fair and effective
system of justice. Therefore, until the whole system has been tried and
failed, no claim of denial of justice can arise in international law.”23
This explanation “rests on the special nature of the administration of
justice as a system” and leads to the conclusion that “any international
wrong committed in the process of administering justice is actionable
only after the whole system has been unsuccessfully tried.”24 Nevertheless,
the ICSID Tribunal determined that, as opposed to denial of justice,
exhaustion of local remedies is not a substantive requirement of a
finding of expropriation by acts of the judiciary.25 The
ICSID Tribunal did not elaborate on the reasons why the exhaustion of
local remedies applies to cases of denial of justice, but not to those
of expropriation by the judiciary. In this regard, commentators have
stated that “[if] the special application of the local remedies rule to
denial of justice claims is rationalised by reference to the special
nature of the judicial system, it would seem logical that the same
considerations be applied to all forms of judicial misconduct, including
expropriation by courts.”26 Thus, exhaustion of local
remedies should also be a substantive condition to trigger the
investor’s right to initiate arbitration based on expropriation by the
judiciary.
The ICSID Tribunal when analyzing whether the acts of the judiciary constituted indirect expropriation27
did not base its decision on the so-called “sole effects” doctrine.
According to this doctrine, the most important aspect for determining
indirect expropriation is the impact of the measure; the deprivation has
to be substantial in order to lead to expropriation.28
Although the ICSID Tribunal acknowledged that the fact of not enjoying
the benefits of the ICC Award constituted a substantial deprivation, it
considered that in this particular case the substantial deprivation was
not sufficient to declare an expropriation, because it was also required
that the actions of the Bangladeshi courts were illegal. For this
reason, the ICSID Tribunal applied a legality test to determine whether
the actions of the Bangladeshi courts amounted to an expropriation. In
other words, in addition to the substantial deprivation, which
characterizes the “sole effects” doctrine, the ICSID Tribunal also
applied a legality test. The ICSID Tribunal pointed out that applying
the legality test in this case “should not be understood as a departure
from the ´sole effects doctrine´. It is due to the particular
circumstances of this dispute and to the manner in which the parties
have pleaded their case, both being in agreement that the unlawful
character of the actions was a necessary condition.”29
This clarification, on one hand, confirms the very unique
circumstances of the case and, on the other, illustrates the limited
application of the analysis made by the ICSID Tribunal to future cases.
That is because not any illegality by the judiciary can lead to a claim
for expropriation. The notion of “illegality” should be also restricted
to avoid that ICSID arbitrators’ jurisdiction being improperly
broadened. This is because judicial errors are a kind of illegality. For
instance, if a judge resolves a case by applying an improper law, or if
the judge applies the right law but interprets it incorrectly, in both
events the adopted decision would be illegal. Nevertheless, such
illegality should not give rise to a claim for expropriation; otherwise,
the ICSID tribunal would end up exercising a control of legality over
local courts, which are vested with supervisory jurisdiction over
commercial arbitration awards. This indeed would largely exceed the
jurisdiction of any ICSID tribunal. Therefore, the notion of illegality
for a claim for expropriation cannot encompass these kinds of judicial
mistakes. In sum, the legality test of Saipem v. Bangladesh might
only be applied in future cases with extreme circumstances like the
ones where national courts, in abuse of their supervisory jurisdiction
over arbitration awards, unlawfully impede the issuance of the award or
deny its existence without even analyzing its grounds.
Furthermore, the facts of this case are unique; so a similar situation is very unlikely to happen in future cases. In Saipem v. Bangladesh the
courts from Bangladesh did not respect the arbitration agreement.
Although these courts did not specifically target the arbitration
agreement, the decision to revoke the authority of the arbitrators and
the decision of the Supreme Court of Bangladesh that the ICC Award was
“a nullity” or “non-existent” frustrated the arbitration agreement. This
absence of arbitration award allowed the ICSID Tribunal to hold that
the disputes were within the jurisdiction of the ICSID and the
competence of the ICSID Tribunal.30 The result would be
different if the ICC Award would have existed, that is, if the Supreme
Court instead of having declared that “there is no Award in the eye of
the law”, the Supreme Court would have concluded –after examining its
basis- that such award was null and void. Even if such conclusion were
mistaking it will not lead to ICSID arbitration, as otherwise the ICSID
arbitration would become another possibility to enforce ICC awards; and
the ICSID arbitration is not intended to create a new tier of protection
when the judiciary interferes with ICC arbitration. Given the fact that
in most cases local courts will declare the nullity of an international
commercial arbitration award based on its grounds, whatsoever the
decision might be, it will not lead to investment arbitration. Indeed,
miscarriage of justice is a risk that either national or foreign
investors should equally bear. Additionally, the basis of the ICSID
arbitration would be contractual matters, which are not within the scope
of the ICSID Convention.31
In sum, the circumstances of this case were unique and it is very
unlikely that they will happen again. According to previous ICSID
awards, an investor should exhaust local remedies in order to initiate
investment arbitration based on acts of the judiciary. The ICSID
Tribunal in this case found that this condition is not applicable in the
case of expropriation, with no further explanation. Additionally, prior
ICSID awards have used only the “sole effects” doctrine to determine
whether the disputed actions amount to indirect expropriation, but the
ICSID Tribunal here also applied a legality test. This test should be
limited to those extraordinary cases where national courts, in abuse of
their supervisory jurisdiction over arbitration awards, unlawfully
impede the issuance of the award or deny its existence without even
analyzing its grounds. Therefore, the ICSID Tribunal’s holding in Saipem v. Bangladesh seems to be restricted in such a way that most likely will not be applied in future cases.
Footnotes:
1. Saipem v Bangladesh (ICSID Case No.ARB/05/7) Unreported award June 20, 2009.
2. “In particular (i) a request to strike from the record the
witness statement of Mr. Clark [a key witness on behalf of Saipem], (ii)
a request that all witnesses be allowed to be present in the hearing
room during the entire hearing, (iii) a request that a letter from
Petrobangla which was not on record be filed during cross-examination of
a witness, (iv) a request to strike from the record a “draft
aide-mémoire” of the World Bank and certain cost calculations prepared
by Saipem, and (v) a request that transcripts be made of the tape
recordings of the hearing.”Saipem v Bangladesh Unreported June 20, 2009, at 31.
3. “Because of the hostile climate in Bangladesh and because we were
firmly convinced that the revocation of the authority of the Arbitral
Tribunal was completely illegal by all standards, we knew that we had no
alternative but to proceed with the arbitration. Our Indian counsel
advised us that an appeal against the injunction against the
continuation of the arbitration was possible in theory, but
unsustainable in substance. It was clear that we would not be in a
position to defend ourselves before the local courts and that the
climate was incompatible with a fair trial. As is confirmed by the
witness statement of Mr. Nassauto, our witnesses, including the members
of the arbitral tribunal, would have risked being in physical danger had
they come to testify in Dhaka. Clearly the members of the ICC Tribunal
would have been key witnesses in those proceedings. The testimony of the
Arbitrators would have been crucial, since the only reason for the
revocation of the authority of the ICC tribunal was the alleged
misconduct of the proceedings imputed to the Arbitrators. They could
have demonstrated that no misconduct had ever been committed by them and
that they had properly conducted the arbitration proceedings pursuant
to the ICC Rules and even to the provisions of the Bangladeshi
Arbitration Act.” Saipem v Bangladesh Unreported June 20, 2009, at 43.
4. Petrobangla filed an action in the First Court of the Subordinate
Judge of Dhaka in order to set aside the ICC tribunal’s decision to
resume the proceedings. In addition, Petrobangla filed a request seeking
a declaration that the ICC Arbitration Tribunal was unlawful based on
the decision of the Dhaka Subordinate Judge that revoked the authority
of the ICC Tribunal. Also, Petrobangla asked for an interim and a
permanent injunction against the continuance of the ICC Arbitration
Tribunal, which was refused the same day. On May 27, 2001, Petrobangla
appealed this decision before the High Court Division of the Supreme
Court. Within the same day, the High Court Division issued an injunction
restraining Saipem from pursuing the ICC Tribunal. Thereafter, this
injunction was confirmed by several decisions of the High Court Division
of the Supreme Court.
5. Saipem v Bangladesh Unreported June 20, 2009, at 50.
6. Agreement of 20 March 1990 between Government of the Republic of
Italy and Government of the People’s Republic of Banglaesh on the
Promotion and Protection of Investments. The treaty entered into force
on 20 September 1994.
7. Saipem v Bangladesh Unreported June 20, 2009, at 128.
8. Article 5 defines expropriation as follows: “(1) The investments
to which this Agreement relates shall not be subject to any measure
which might limit permanently or temporarily their joined rights of
ownership, possession, control or enjoyment, save where specifically
provided by law and by judgments or orders issued by Courts or Tribunals
having jurisdiction. (2) Investments of investors of one of the
Contracting Parties shall not be directly or indirectly nationalized,
expropriated, requisitioned or subjected to any measures having similar
effects in the territory of the other Contracting Party, except for
public purposes, or national interest, against immediate full and
effective compensation, and on condition that these measures are taken
on a non-discriminatory basis and in conformity with all legal
provisions and procedures.” Agreement of 20 March 1990 between
Government of the Republic of Italy and Government of the People’s
Republic of Bangladesh on the Promotion and Protection of Investments.
The treaty entered into force on 20 September 1994.
9. Saipem v Bangladesh Unreported June 20, 2009, at 129.
10. Saipem v Bangladesh Unreported June 20, 2009, at 129;
Accord “[t]he taking away or destruction of rights acquired, transmitted
and defined by a contract is as much a wrong, entitling the suffer to
redress, as the taking away or destruction of tangible property”.
Rudloff Case (Interlocutory), American-Venezuelan Commission, IX United
Nations Reports of International Arbitral Awards (Recueil des Sentences
Arbitrales) 250. In Ruth Teitelbaum. “Case Report on Saipem v.
Bangladesh”. Arbitration International, Volume 26, Issue 2 (2010), at
320
11. Saipem v Bangladesh Unreported June 20, 2009, at 133.
12. At this point the Tribunal mentioned that “[for] the sake of
clarity the Tribunal emphasizes that the following analysis should not
be understood as departure from the “sole effects doctrine” [In which
there is an expropriation if the deprivation is substantial. See Compañia del Desarrollo de Santa Elena, S.A. v. Republic of Costa Rica ICSID
Case No. ARB/96/1, Award of 17 February 2000, 5 ICSID Reports 153, at
77-78]. It is due to the particular circumstances of the dispute and to
the manner in which the parties have pleaded their case, both being in
agreement that the unlawful character of the actions was a necessary
condition”. Saipem v Bangladesh Unreported June 20, 2009, at 135.
13. Saipem v Bangladesh Unreported June 20, 2009, at 159.
14. Saipem v Bangladesh Unreported June 20, 2009, at 167.
15. Saipem v Bangladesh Unreported June 20, 2009, at 204.
16. See S. Sattar, National Courts and International Arbitration: A Double-edged Sword?Journal of International Arbitration 27 (1): 51-73, 2010. p, 72.
17. See L. Radicati di Brozolo, “Interference by National
Courts with International Arbitration: the Situation after Saipem v.
Bangladesh. in C. Müller and A. Rigozzi (eds), New Developments in International Commercial Arbitration 2009 (Schulthess Éditions Romandes, 2009), pp 1-28.
18. C. Schreuer, ‘Diversity and Harmonization of Treaty Interpretation in Investment Arbitration’, 3(2) Transnational Dispute Management (2006) 11. in I. Kalnina. “Case Note: Saipem S.p.A. v. Bangladesh: Local
Judiciary’s Interference with Claimant’s Right to Arbitration under
Contract found to Constitute an Expropriation under the BIT”, 7 (1) Transnational Dispute Management (2010),
at 5 (“As is well known, each [ICSID] tribunal is constituted ad hoc
and therefore, at least in theory, ICSID tribunals should carry out
their duties without any reference to the case law of other courts and
tribunals”); I. Kalnina. “Case Note: Saipem S.p.A. v. Bangladesh: Local
Judiciary’s Interference with Claimant’s Right to Arbitration under
Contract found to constitute an Expropriation under the BIT”, 7 (1)
Transnational Dispute Management (2010) at 5 (“While ICSID tribunals are
usually clear as to their autonomy from previous decisions, most
tribunals do stress the need to look at previous awards to acquire
guidance and support. Examples of such dicta can be found in Amco v.
Indonesia, LETCO v Liberia, Pan American v. Argentina, and Gas Natural v
Argentina. In fact, nearly every published ICSID award shows
substantial reliance on ICSID case law”); Gabrielle Kaufmann-Kohler,
Arbitral Precedent: Dream, Necessity or Excuse? – The 2006 Freshfields
Lecture, 23(3) ARB. INT’L 357 (2007), at 368 (“While tribunals seem to
agree that there is no doctrine of precedent per se, they also concur on
the need to take earlier cases into account”); Id., at 373 (“in
investment arbitration, there is a progressive emergence of rules
through lines of consistent cases on certain issues, though there are
still contradictory outcomes on others.”)
19. Saipem v Bangladesh Unreported June 20, 2009, at 121.
20. Saipem v Bangladesh Unreported June 20, 2009, at 121
(“Article 9.1 of the BIT does not confer to your Tribunal jurisdiction
over a claim based on denial of justice, and restricts your jurisdiction
to a claim for expropriation. This is why we did not bring a claim on
the ground of denial of justice before you.”); Accord L. Radicati di
Brozolo, “Interference by National Courts with International
Arbitration: the Situation after Saipem v. Bangladesh. in C. Müller and
A. Rigozzi (eds), New Developments in International Commercial
Arbitration 2009 (Schulthess Éditions Romandes, 2009), p. 15 (“Saipem’s
claim was formulated as one for expropriation and not, as would perhaps
been the more obvious solution, as one for denial of justice.”)
21. Saipem v Bangladesh Unreported June 20, 2009, at 121
(“Saipem does equally consider that through the misbehaviors of
Petroblanga (a State organ) and its courts, Bangladesh has certainly,
according to us, undoubtedly treated Saipem unfairly and inequitably,
and in a manner that is below the standard required by international
law. However, again, Article 9.1 of the BIT does not confer to your
Tribunal jurisdiction over a claim based on breach of the standard of
treatment, in particular of the fair and equitable treatment, restricts
your jurisdiction to expropriation.”)
22. See Loewen v United States (ICSID Case No.ARB(AF)/98/3) (2003) 42 I.L.M. 811 (award June 25, 2003), at 156-159
23. M. Sattorova. “Judicial expropriation or denial of justice? A note on Saipem v Bangladesh”. Int. A.L.R. 2010, 13(2), at 38
24. M. Sattorova. “Judicial expropriation or denial of justice? A note on Saipem v Bangladesh”. Int. A.L.R. 2010, 13(2), at 38
25. Saipem v Bangladesh Unreported June 20, 2009, at 181.
26. M. Sattorova. “Judicial expropriation or denial of justice? A note on Saipem v Bangladesh”. Int. A.L.R. 2010, 13(2), at 38
27. SeeReisman, W. Michael and Sloane, Robert D., “Indirect
Expropriation and its Valuation in the BIT Generation”(2004). Faculty
Scholarship Series. Paper 1002.
http://digitalcommons.law.yale.edu/fss_papers/1002.
at, 118-119 (The concept of indirect expropriation includes “not simply
intentional and obvious indirect expropriations, nor only intentional
creeping expropriations, a frequent form of taking in prior generations.
It also captures the multiplicity of inappropriate regulatory acts,
omissions, and other deleterious conduct that undermines the vital
normative framework created and maintained by BITs—and by which
governments can…now be deemed to have expropriated a foreign national’s
investment.”)
28. See Compañía del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica ICSID Case No. ARB/96/1, Award of February 17, 2000, 5 ICSID Reports 153, at 77-78. In Saipem v Bangladesh Unreported June 20, 2009, at 133.
29. Saipem v Bangladesh Unreported June 20, 2009, at 134.
30 Accord “The interference of the Bangladesh courts in
finding that the ICC award was “no award in the eye of the law” is the
point at which, according to Saipem ICSID tribunal, a new dispute was
triggered, one between Saipem and the Government of Bangladesh,
concerning Bangladesh’s responsibility under general principles of
international law, under a BIT, and under the New York Convention”. R.
Teitelbaum. “Case Report on Saipem v. Bangladesh”. Arbitration International, Volume 26, Issue 2 (2010), at 321.
31 “The extent to which contract claims and treaty claims overlap,
intersect or take entirely separate paths is a highly fact-specific
matter that will continue to be fought in investment arbitration on a
case-by-case basis”. R. Teitelbaum. “Case Report on Saipem v. Bangladesh”. Arbitration International, Volume 26, Issue 2 (2010), at 320.
