2022 will be remembered as the year that the world moved from pandemic disruption to geopolitical chaos. While many of us welcomed the return to international travel, in-person hearings, and our offices, the biggest story was undoubtedly Russia’s invasion of Ukraine and the seismic shift that has followed.
While the cost of living crisis and an eventful year in British politics held the public’s attention, arbitration practitioners were as busy as ever, with significant commercial disputes moving ahead, the Energy Charter Treaty (ECT) becoming increasingly controversial, and major court decisions in Canada, US and elsewhere. Read on for our recap of the year in arbitration.
The war in Ukraine
No one has felt the impact of Russia’s invasion of Ukraine more than its people. While the war’s effect on legal practice pales in comparison to its humanitarian impact, the invasion has had a significant and sudden impact on the arbitration community.
In the weeks and months following the invasion, global law firms withdrew from representing Russian and Belarusian clients, leaving Russia to represent itself in set-aside proceedings of a USD700 million Yukos award before a Canadian court and disputes before the English, Dutch and American courts, as well as tribunals formed under ICSID and other rules. That said, withdrawals have not gone completely smoothly, with the former Yukos shareholders arguing before a DC Court in December that Russia’s counsel in one ongoing case should be required to continue acting until a replacement is instructed. Arbitrators have been less than sympathetic to Russia’s plight, with the state failing to disqualify the tribunal that refused to stay a Crimea-related claim after Russia’s counsel resigned. US sanctions on Nord Stream 2 left it unable to proceed with its USD8 billion ECT claim against the EU, as the project’s bank accounts had been frozen and it had no funds to pay fees or counsel. In mid-December, the French Supreme Court reinstated an award requiring Russia to pay more than USD1 billion to a state-owned Ukrainian bank for expropriating its Crimean assets.
Unsurprisingly, given Ukraine and Russia’s roles as major energy producers, the invasion has led to significant claims in the energy sector with a resurgence of fossil fuel and potential investment treaty claims expected to follow. Ukraine moved to refuse protection to Russian-owned investments by invoking the ECT’s denial of benefits provision. While Russian entities threatened proceedings against Germany over its seizing of energy assets, Ukraine’s Naftogaz and Germany’s RWE and Uniper each announced proceedings against Gazprom, with billions of dollars claimed against the Russian state-owned entity. After a six-year stay, an American court also gave the greenlight to proceedings to enforce the USD57 billion Yukos awards against Russia, citing concerns that the war may make it more difficult to enforce against Russian assets.
The UN took steps towards creating an international mechanism to seek reparations from Russia for its war in Ukraine and recommending the creation of a register of damage to substantiate future claims.
The UK, USA, EU and others imposed, and then expanded, strict new sanctions on Russia and its Belarusian ally, leaving arbitral institutions playing catch-up. However, by the end of the year, the EU had clarified that its sanctions will not apply to transactions with Russian state-owned entities where they are necessary to ensure access to arbitral proceedings. The LCIA also obtained a general licence to receive payments from sanctioned Russian and Belarussian parties.
Finally, the invasion gave rise to significant sports arbitration with Russian football’s governing body and four clubs losing their appeals at the Court of Arbitration for Sport over their exclusion from international competitions, including the World Cup.
ECT limps along while Achmea continues to bite against intra-EU investment disputes
The ECT remains a perennial topic of discussion, with 2022 being no exception.
Negotiations over modernising the ECT ploughed ahead with an agreement in principle on the next text reached in June 2022. This included carve-outs for fossil fuels and ISDS, the latter designed to allow regional organisations (such as the EU) to disapply certain ECT provisions among their members. However, since June, a cadre of European states (Poland, Spain, Netherlands, France, Slovenia, Germany and Luxembourg) have announced their intention to withdraw from the ECT, with the European Parliament indicating that it would back a future move by the EU itself to withdraw.
Achmea has continued to derail intra-EU ECT claims, with a non-ICSID tribunal seated in Sweden declining justification over a claim by Danish investors against Spain, marking the first time a tribunal has found its own jurisdiction to be vitiated because of an intra-EU law objection. However, Spain’s results haven’t been entirely consistent, with the annulment panel rejecting a challenge to an ICSID award in favour of a Dutch alternative energy investor. The panel took support from the fact that 32 other ICSID tribunals applying the ECT had rejected the alleged primacy of EU law over intra-EU disputes. In mid-December, the Swedish Supreme Court also annulled SCC awards awarding €176 million to a Luxembourg entity on the basis of the ECJ’s rulings in Achmea and Komstroy.
Third-party funding of arbitration claims remained a hot topic in 2022, with the biggest news being the European Parliament’s adoption of the Voss Report (so named after German MEP Axel Voss), which recommends a new regulatory framework to ensure “responsible” third-party funding, including an up-to 40% cap on a funder’s share of recoveries, an obligation to pay adverse costs and disclosure of funding agreements. All eyes are now on the European Commission which will have to decide whether to propose a directive to reflect the recommendations. Watch this space in 2023.
While the EU was considering Union-wide regulation, member states looked to get ahead of the game, with the government of the Republic of Ireland introducing legislation to regulate third-party funding in international arbitration proceedings either seated in Ireland or subject to Irish law and seated in another EU member state.
Meanwhile, Hong Kong lifted the ban on so-called outcome-related fee structures (that is, success fees) in arbitration and related court proceedings. While this merely brings Hong Kong in line with competitor jurisdictions (for example, Singapore) it signals a trend towards liberalising, as Hong Kong looks to maintain its position as a global arbitration hub.
USC section 1782
The most talked about judgment of the year was the US Supreme Court’s decision in ZF Automotive US Inc v Luxshare Ltd, which finally resolved the question of whether discovery under U.S.C. § 1782 is available in aid of arbitration. The Supreme Court answered this with a firm “no”, although it left the door open in the context of ICSID arbitrations. However, with little discussion, a New York District Court, relying on Luxshare, quashed an order for discovery under U.S.C. § 1782 in relation to an ICSID arbitration. It is not yet known whether that judgment will be appealed or whether other US courts will follow it.
Arbitration and insolvency
Next up is Canada, whose Supreme Court held, by a narrow majority, in Peace River Hydro Partners v Petrowest Corp that Canadian insolvency courts are entitled to deem an arbitration agreement inoperative if enforcing it would compromise the “orderly and efficient” resolution of the insolvency (while emphasising that this would not be appropriate in every case).
One step forward, two steps back for the Yukos shareholders and Micula Brothers
In addition to the setbacks referred to above, Russia also faced losses at the Swiss Supreme Court, which upheld the multibillion-dollar Yukos award and the English High Court, which lifted the stay on enforcement to resolve Russia’s claim to state immunity. The former Yukos shareholders have been prepared to auction off the iconic Russian Vodka trademark Stolichnaya, as they seek to finally cash in on their USD50 billion award.
While the Yukos shareholders made steady strides, the Micula Brothers have not been so lucky. First, in January 2022, the ECJ granted Romania’s appeal, finding that the European Commission had been competent to decide that Romania’s payment of the €178 million ICSID award would be an impermissible violation of state aid rules. This was followed by a decision by the Luxembourg Supreme Court quashing enforcement on the basis that the relevant arbitration clause had been nullified by Romania’s entry into the EU. Meanwhile, the European Commission has begun infringement proceedings against the UK before the ECJ, following the UK Supreme Court’s 2020 judgment, lifting the stay on the Miculas’ action to enforce against Romania.
England moves ahead with reform of AA 1996
In England, significant steps were taken to update the Arbitration Act 1996 with the publication of the Law Commission’s consultation paper, which provided an initial shortlist of eight areas for reform: confidentiality, independence of arbitrators and disclosure, discrimination, immunity of arbitrators, summary disposal, interim measures (section 44), jurisdictional challenges against awards (section 67), and appeals on points of law (section 69). Consultations on the paper will take place over 2023 with final suggestions for reform to follow.
ICSID rules amended
ICSID approved amendments to the ICSID Rules and Regulations that entered into force on 1 July 2022. The rules now contain mandatory timeframes for rendering orders and awards to reduce the time and cost of cases. Expedited arbitration rules are also now available, which will cut case times in half when adopted by parties. The amendments were part of a project launched in 2016 to modernise the rules, making processes more time and cost effective, as well as increasing the use of technology.
Swiss open arbitration of company law disputes
Finally, a new Swiss law allows companies’ articles of association to provide that disputes be settled by arbitration (with the same applicable to partnership agreements).
Reading the tea-leaves into 2023
Expect Yukos’s former shareholders to push ahead with enforcement of their ageing mega award, while Russia, Belarus and their state-owned enterprises will face billions of dollars in claims stemming from the invasion of Ukraine and the possibility of a UN redress mechanism.
2023 looks set to be the make-or-break year for the ECT, which will emerge reformed with a new mandate or hobbled by the departure of most of Europe and the EU. The review of the English Arbitration Act 1996 will push on, while US courts are set to address the availability of USC section 1782 in aid of ICSID arbitrations. While the pace of free trade agreements has slowed, work on the African Continental Free Trade Agreement (ACFTA) is set to continue.