In the past 20 years, offshore firms and investors have piled into emerging markets. In many cases, these offshore investors enter into a partnership or joint venture with a local entity for regulatory or commercial reasons, and the relevant partnership or investment agreements often contain arbitration clauses, particularly in Asia Pacific, because of concerns with the reliability of many local courts and the difficulty with enforcing foreign court judgments. By contrast, a large majority of developing states are amongst the 156 state parties to the New York Convention of 1958, which grants recognition and enforcement of arbitral awards made in other contracting states.
Whilst it is common for differences to arise during the life of a partnership or joint venture, it is less common for the parties to react by immediately commencing formal arbitration proceedings. Instead, they usually engage in discussions to try and resolve the issues amicably; more often than not, these talks succeed and the partnership continues. However, should such discussions fail and formal arbitration proceedings ensue, a party may find itself disadvantaged as a result of certain acts or omissions during this pre-arbitration stage. What should investors consider when a dispute is on the horizon?
Communications: without prejudice and other forms of privilege
The very nature of this pre-arbitral stage necessitates a certain flow of information:
- Externally with the other side in negotiating a resolution.
- Internally to figure out what has gone wrong.
In both situations, parties often make concessions of fault (for example, failure to strictly comply with contractual requirements). However, it is important for parties to properly manage their correspondence and to consider, even at such a preliminary stage, what they would rather not see admitted to the arbitration record (for example, admissions of fault) and that which they would want to bring to the attention of the tribunal (for example, best efforts to comply with contractual requirements on appointing experts/valuers that have been frustrated by the other side).
With regard to the first category of materials, most common law systems recognise a form of privilege, although its precise scope and application varies across jurisdictions. Privilege usually operates to exclude certain types of material from being admitted to the record. International arbitration typically respects this form of privilege. For example, under English law, without prejudice privilege operates to prevent statements (oral or written) made in a genuine attempt to settle an existing dispute from being admitted as evidence in subsequent arbitral proceedings against the party making such a statement. Accordingly, it would be advisable for correspondence or meetings to be labelled “without prejudice” where admissions of misconduct are being made to the other side, so as to facilitate frank negotiations.
Parties should also be cautious in generating internal documents which contain similarly disadvantageous information. These may become disclosable at the document production stage of arbitral proceedings. Depending on the circumstances and applicable law, these internal documents could benefit from other forms of privilege, such as legal advice or litigation privilege.
Equally, it is not suggested that all internal and external materials from the pre-arbitration stage should be excluded from the record. Parties should consider carefully issues they would want the tribunal to be alive to, especially where a certain contractual procedure is frustrated by the other side’s refusal to cooperate, and to position themselves by recording that all reasonable steps have been taken. One danger with overextending without prejudice privilege is that it belongs to both parties; therefore, both parties will have to agree to waive it for the material to be placed before the tribunal.
Waiver and preserving causes of action
In seeking amicable resolution of a dispute, parties inevitably delay taking formal action. However, such delays could later turn out to be costly if they are construed as waivers or failures to comply with contractual deadlines.
Most investment contracts provide for specific termination rights exercisable on the occurrence of certain events. Under English and Hong Kong law, a party could be found to have abandoned its rights if it acts in a manner consistent with electing to affirm the contract. The right to terminate is a clear example of how this waiver works. It is an “either or” scenario: a party either terminates or it affirms the contract, but it cannot do both. In the context of delays, the English court in Force India Formula One Team Ltd v Etihad Airways PJSC considered that a three month delay under the circumstances did not amount to a waiver.
It is also common for many shareholder contracts to include exit rights, exercisable through put or call options during a specific, limited period of time. A party should make clear that it continues to reserve all rights and, with the other side, either agree to extend deadlines or agree a standstill period, so as to minimise the risk of a dispute over whether such pre-arbitral discussions caused the expiry of critical time periods.
Many shareholder agreements require discussions or meetings before formal arbitration proceedings can be commenced. There are two separate issues here:
- Are these requirements enforceable?
- How strictly must they be complied with?
Both depend on the precise wording of the contract and the governing law. For example, whilst both English and Singapore law consider these provisions enforceable where they identify the processes in a sufficiently certain matter, English courts require substantial compliance whereas Singapore courts have insisted on strict compliance. In the context of a detailed clause, the Singapore Court of Appeal considered it insufficient, in International Research Corp PLC v Lufthansa that “some meetings between some people in their respective organisations discussing some variety of matters” had occurred, even if the meetings did discuss the disputed issue. The Singapore court went on to set aside the entire award because of its finding of non-compliance. Clearly, it is very important to consider this issue, as a later finding of non-compliance has the potential of undermining the entire arbitration.
In joint ventures in emerging markets, the disputes often involve a struggle for control between the offshore investor who has strong, heavily-negotiated contractual protections, and the local partner who has actual operational control over the joint venture’s assets and operations. When the relationship deteriorates, the very nature of the struggle for control means the offshore party is often left disadvantaged and in need of immediate legal protection, usually to stop or prevent certain acts by the onshore party (for example, dissipating assets or acquiring onerous obligations through bank loans) who has been frustrated by the contractual inhibitions requiring unanimous consent.
In these circumstances, the three main fora open to a requesting party for such urgent interim relief are:
- Emergency arbitrator proceedings.
- Court relief in support of arbitration.
- Interim relief from a tribunal.
The availability of each option depends on the circumstances, and for emergency arbitrators the date of the arbitration agreement is particularly important. Most institutional emergency arbitrator rules are relatively recent. Some do not apply to agreements predating their introduction. However, in broad terms, the advantages and limitations of the three options are as follows:
|Option||Emergency Arbitrator (EA)||Court relief||Interim relief from Tribunal|
|(1) Timing||EA appointments usually completed within 1-2 business days but the full procedure still usually requires three weeks for an order.||Courts in many systems are available at very short notice, within hours, if the paperwork is complete.||Delay in awaiting the constitution of the tribunal.|
|(2) Confidentiality||Private and confidential.||Generally public by nature.||Same as EA proceedings.|
|(3) Enforcement||Parties generally comply with EA orders to avoid prejudicing their position before the tribunal. Certain jurisdictions (Hong Kong and Singapore) have amended their statutes to grant courts the power to enforce EA orders as if they were court orders.||Breach of a court order can constitute contempt of court with potentially serious repercussions. Particularly effective if the court is located where the other party is based or has assets.||Similar issues with an EA order: whilst voluntary compliance is common, remedying non-compliance requires court assistance.|
|(4) Ex parte basis||Most institutional rules require all parties to be notified and this is problematic if notifying the other party would exacerbate problem, for example, asset dissipation.||Courts are usually able to make orders on an ex parte basis. Note the onerous duty of full and frank disclosure and undertaking as to damages under English and Hong Kong law.||Similar to the EA procedure, arbitral proceedings are conducted on an “on notice” basis.|
|(6) Third parties||An EA order can only bind parties to the arbitration agreement.||A court order is automatically binding on all third parties as soon as a person has notice of the order.||Same as EA order.|
The foregoing analysis assumes a continuing deterioration in the relationship between the parties which, particularly in emerging markets, can occur very quickly and sometimes in a matter of days. Such rapid escalation, together with the concerns outlined above, mean that it is important for parties to think ahead and consider future issues as soon as possible once a dispute is on the horizon.