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Publication of international adjudication decisions and arbitral awards: confidentiality v transparency

 

  1. Introduction

In his entertaining and erudite address to celebrate the 150th anniversary of The Incorporated Council of Law Reporting for England and Wales[1], Lord Neuberger drew particular attention to the following wartime words of Lord Atkin in his famous (if not infamous) speech in Liversidge v Sir John Anderson[2], described in the Foreword to the 150th Anniversary Edition of the Law Reports as a dissent of “power, eloquence and passion”.

The Lord Chief Justice went on to point out in his Foreword[3]:

First, the case demonstrates the importance of a dissenting judgment, for, less than 40 years later, Lord Diplock was to accept in R v Inland Revenue Comrs, Ex p Rossminster Limited that Lord Atkin was right:

‘For my part I think the time has come to acknowledge openly that the majority of this House in Liversidge v Anderson were expediently and, at that time, perhaps, excusably, wrong and the dissenting speech of Lord Atkin was right.’

Second, it demonstrates the courage necessary to take an unpopular decision and to withstand all pressures.  The then Lord Chancellor attempted to persuade Lord Atkin to omit his reference to Alice in Wonderland; and Viscount Maugham subsequently wrote to The Times to deplore Lord Atkin’s characterisation of the Crown’s arguments as those which might have been used at the time of Charles I.  The case thus illustrates why Lord Atkin must be regarded as one of our greatest judges”.

(emphasis added)

This quotation of antique authority serves the sole purpose of emphasising the immense importance under Common Law systems of having accurate and comprehensive law reporting, where such systems inherently depend upon reference to precedent cases.

Such a system is inevitably eroded when important cases (and issues) are decided by private “judges”, as has happened, by way of example, in the United Kingdom, following the coming into force of the Housing Grants, Construction and Regeneration Act 1996 (the HGCRA) (as amended by the Local Democracy, Economic Development and Construction Act 2009 (the LDEDCA)) and, on the international stage, by ad hoc, or institutionally administered, arbitration.

This article sets out to weigh in the scales of balance the question of confidentiality, which is so vital to private adjudicatory proceedings (such as domestic UK adjudication proceedings, dispute adjudication boards (DABs) under FIDIC and other standard from contracts and international commercial arbitration), with the perceived need for greater transparency and a “level playing field”, in which all participants (not just the MAFIA[4]!) are able to source any relevant precedent.

The availability of such precedent is seriously eroded when adjudicators, DABs and arbitral tribunals make decisions (for example, upon the proper interpretation of commonly-used standard forms), which never see the light-of-day in the public domain, unless the decision in question happen to become the subject-matter of enforcement proceedings (usually (in England and Wales) in the Technology and Construction Court), or on appeal (usually (in the same jurisdiction) in the Commercial Court).

Confidentiality

As Avv Mauro Rubino-Sammartano accurately observes at section 19.17 of his International Arbitration Law[5] (under the heading “Confidentiality of the award”):

The award, contrary to court decisions, is not in the public domain until it is published, with the consent of a party, or it is attacked before a court or its recognition is applied for.

The problem of classifying a possible breach of confidentiality by the arbitrators, or by participants to the proceedings, has been raised. It has been argued that such conduct would amount to a breach of confidence. The publication of awards is in a border-live region between the duty to preserve confidentiality on the one hand, and the great advantage which their publica­tions provides in the study and progress of the law of arbitration on the other. The formula of publishing long passages of awards, from which the names of the parties has been eliminated, tries to satisfy both requirements.

The publication of awards[6] is expressly allowed by the Russian arbitration rules[7]:

‘With the permission of the President of the Arbitration Court the awards of the Court may be published in periodicals or in special collections of awards. The interests of the parties shall be taken into account and in particular information containing identification of the parties, enterprises commodities and prices shall not be published’

and in the Polish arbitration rules[8]:

‘The President of the Court of Arbitration may order the award to be published in juridical and commercial periodicals, but without designation of the parties’.

 However, the duty of secrecy is expressly specified for the arbitrator by the Polish Court of Arbitration[9]:,

 ‘He shall be bound to observe secrecy’.“

(emphasis added)

In a similar vein, sections 2-818 and 2-819 of Volume 1 of the lilac-hued (and somewhat “long in the tooth”) fourth edition of Bernstein’s Handbook of Arbitration and Dispute Resolution Practice[10] read as follows (under the heading “Confidentiality of the Award”):

“2-818    An arbitration award is confidential. As the cases make clear, it may be disclosed to a third party if it is reasonably necessary for the establishment or protection of an arbitrating party’s legal rights in relation to that third party.[11] It is important to note that this test does not apply to an application for disclosure of the award by a party who was not a party to the original arbitration proceedings. In this situation, the two tests .to be applied are, first, one of relevance, arid secondly, whether disclosure is necessary for a .fair disposal of the action, so as to out­weigh the duty of confidentiality.[12]

In addition, a party to the arbitration may of course disclose the award to the court for the purpose of invoking the court’s supervisory jurisdiction, or en­forcing the award.[13]  Equally, there may be disclosure under compulsion of law, with the leave of the court, or by consent with the other party to the arbitration.

(…)

2-819     The English courts have not yet had to decide a case where it is argued that the public interest requires disclosure, as was the case in Esso Australia. In international arbitration, the confidentiality of arbitration awards may be being slowly eroded due to the public law aspect of many proceedings. The reporting of ICSID, NCAA and Nafta awards and the decisions of the Iran-US Claims Tribunal illustrate cases where it has been recognised that the interest in the arbitration lies in the public, rather than the private, sphere.[14]  Accordingly, it seems likely that as both domestically and internationally, arbitration becomes recognised increasingly as a matter of public law, the public interest exception will be further developed. In so doing it is necessary to draw a proper balance between the protection of the public interest in the transparency and accountabil­ity of public administration, and the legitimate interest of commercial concerns to protect commercial confidence and the privacy of their commercial dealings.

Transparency

At section 3.6 of Rubino-Sammartano, the author seeks to distinguish between arbitral and court precedents, as follows (under the heading “(a) Arbitral precedents”):

 “Awards are generally not published unless they are attacked, or their recognition or enforcement is sought. An exception to this rule is made for the ICC awards published in Clunet (Journal du Droit International) and the decisions of the Iran-US Claims Tribunal. Individual awards are also occasionally presented to law journals and published; they are regularly published by the Yearbook of Commercial Arbitration. Among the other reports one must men­tion, besides Clunet, the Journal of International Arbitration (Geneva), the Revue de l’Arbitrage (Paris), the Rassegna dell’ Arbitrato (Rome), Arbitration International (London), Arbitration Journal (London), the Japan Arbitration Journal, the AAA’s Arbitration Journal, the Collection of Information Ma­terials (USSR), the News from ICSID, the Journal of Commercial Arbitration (Korea) and The Arbitrator (Australia).

Amongst the bulletins which summarise information are the ICA Indian Arbitration Quarterly, the American Arbitration Association Quarterly and the Mediterranean and Middle East Quarterly Report (Cyprus).

Arbitral precedents have no binding nature, as the Arbitral Tribunal (Cremades, Chairman, Pereira and Redfern) stated in Liberian Easterfi Timber[15]:

‘although the Arbitral Tribunal is not bound by the precedents of another ICSID arbitration tribunal’,

but they are carefully examined by the arbitrators, who state:

it is not without interest to note their construction…’

and who, after having quoted several precedents, state that they constitute:

a useful guide to the Arbitral Tribunal for the assessment of the damages’.

One could say that arbitral precedents have a persuasive value, if this is construed as a simple possibility for persuading the arbitrator, instead of an indirectly compulsory directive.

Arbitral precedents are referred to frequently by arbitrators as witnessed in the important oil arbitrations and in express reference to them in several ICC awards[16].  In the award rendered in 1986 in ICC proceedings No. 43811[17] the arbitrators openly refer to arbitral precedents stating:

‘whereas it has been recognised by arbitral precedents…’

Even Derains in his comments on this award[18] states:

The reasons given by the arbitrators in this matter are fundamen­tally based on arbitral precedents, summaries of which have already been published’.

The awards made in 1977 in ICC proceedings Nos. 2745 and 2762 go even further[19]:

It would be paradoxical to hold that an arbitrator sitting in an ICC arbitration would not be bound by a previous award rendered between the same parties and on the same matters by another arbitrator also sitting in an ICC arbitration’.

A further comment by Derains[20] that the publication of arbitral awards contributes to the creation of unity in arbitral precedents, also seems well- founded.

New York Bar survey

In February 2014, the New York City Bar published a Report by its Committee on International Commercial Disputes, entitled Publication of International Arbitration Awards and Decisions, surveying ten major international institutions and identifying (on pages 1 to 3 inclusive thereof) and summarised the following “issues posed by publication” of such awards and decisions:

“A. Confidentiality

International arbitration has traditionally been private though not necessarily confidential. Publication of unredacted decisions certainly lessens that. Even when decisions are just summarised, or are published in heavily redacted form, to eliminate party and arbitrator names and specific facts, that may not hide enough to maintain as much privacy as the parties desire. Parties who are against publication stress the importance of party autonomy in arbitration and note that they bear the costs of every element of the process.  Parties who feel strongly about confidentiality may therefore want to consider drafting arbitration clauses with strong confidentiality provisions and selecting an administering institution that does not publish anything.

B. Opening the Club/Leveling the Playing Field

 International arbitration has been criticized for excessive clubbiness, both as to arbitrators and advocates.  Publication of awards and decisions can exacerbate or alleviate that widely perceived characteristic.  Specifically:

    1. There is a (perceived or actual) tendency of advocates and parties to return to a small group of the ‘usual suspects’ when choosing arbitrators. To the extent that the names of arbitrators are disclosed in published decisions, that tendency could increase if publication bore out the perception that a small group of arbitrators dominate the field, decrease if disclosure shows a great diversity of active, widely used arbitrators, or simply alter the choices to the extent that the parties perceive variations in expertise or biases among specific arbitrators.
    2. Greater access to the content of awards and the arbitrators rendering them confers advantages in the process, and that access can be very uneven. Lawyers or firms with large international arbitration practices develop files and institutional knowledge about the arbitrators, institutions, and procedural customs that may not be available to those at smaller films or firms less immersed in international arbitration. The less information that is publicly available about arbitrators and their decisions, the greater is the advantage of a relatively small group of firms and lawyers. Increased publication of arbitral decisions may tend to level the playing field and open the practice of international arbitration to more lawyers. The extent of levelling may, however, depend on the cost of access to publications and the degree to which published decisions are redacted. Smaller practices may not be able to afford the often high subscription rates of the publications of arbitration institutions, which would tend to counter­balance the greater openness that publication would otherwise bring. Also, publication of only limited numbers of redacted awards may make little difference in this imbalance.

 C. Shift to a Precedent-Driven System

Arbitral awards and decisions have had no formal precedential value, either as to procedural decisions or interpretations of law, but increased publication may alter that as a matter of practice even if not as a formal matter, at least to the extent the decisions involve procedural matters or recurring, general substantive issues, and do not merely turn on idiosyncratic contractual language or factual issues.  The extent to which practitioners and arbitrators are citing and using prior decisions as precedent and whether that will accelerate with greater publication is a topic for further investigation.

 D. Changes in the Content and Style of Awards and Decisions

An arbitrator who knows that his or her decision is likely to be published may write it differently than one whose sole intent is to inform the parties. While some believe that the knowledge that their awards will be published will impose a desirable discipline on arbitrators to articulate coherent legal and factual bases for them findings, others are concerned that publication will undesirably impact the form, substance, and length of awards. Arbitrators writing for a broader public audience than just the parties before them may tend to write awards that are longer and that are driven by considerations beyond those necessary to resolve the particular dispute before them.

This may be more likely if the arbitrator’s name is disclosed, which has so far been the practice of a minority of institutions that publish decisions. The sense that publication may change how decisions are written (whether for better or worse) remains, however, even if the names of the arbitrators are not disclosed.

E. The Cost of Selection and Editing

Selecting and editing awards for publication incur significant costs, and this fact appears to have had an influence on institutions’ decisions. The editing process also carries certain risks – eg, whether the redactions are indeed sufficient to prevent identification of the parties.

F. Publication of Awards vs Challenges

The London Court of International Arbitration (‘LCIA’) has decided that it is more important and useful to the arbitration community, and less threatening to confidentiality, to publish the reasoning of decisions on challenges to arbitrators. The Stockholm Chamber of Commerce (‘Stockholm Chamber’) also publishes summaries of some decisions on challenges along with other more noteworthy awards or decisions.  Decisions on challenges are more specific to arbitration and more difficult to research as compared to arbitrators’ reasoning on substantive law, for which judicial decisions are available and more authoritative.

The publication of institutional decisions on challenges to arbitrators may, depending on the trends they evince, encourage, discourage, or simply sharpen the arguments of such challenges. Some believe that greater disclosure of the low rates of success in such challenges will discourage frivolous challenges.

 G. Impact on Challenges to Arbitrators

To the extent that arbitrators’ names are published, the publication of awards may lead to more challenges to arbitrators on the basis of partiality. While publication of awards may provide useful information about an arbitrator’s or potential arbitrator’s views on particular issues likely to arise in an arbitration, some have expressed concern that it may also lead to more challenges to arbitrators on “issue conflicts” grounds – ie, challenges to an arbitrator on the grounds that he or she is biased as to issues likely to arise in the arbitration by virtue of prior published views on those issues. Such challenges are increasingly seen in investment treaty arbitrations and might, with increased publication of awards with arbitrators’ names, also increase in private commercial arbitration.

 H. The Difference Between Commercial and Investor-State Arbitrations

The policy arguments for publication of awards in sovereign arbitration are quite different from the arguments for publication in the context of private commercial arbitration. Claims by investors against a sovereign state have far greater political and public interest implications, so arguments for greater transparency in that type of international arbitration may not necessarily apply or may be of lesser significance to commercial disputes.

 I. Potential for Publication Beyond Institutional Control

All institutions’ rules on party confidentiality have exceptions for court filings to enforce or vacate awards.  At least in the United States, court filings are public, unless a court permits a party to file the document under seal for reasons of particular confidentiality, which is relatively rare. Court files may therefore be a fertile ground for finding full, unredacted arbitral decisions, and the Committee is aware that some legal publishers have contemplated mining those files to publish the decisions. This may provide more detailed information on the arbitrations and arbitrators, and may also be a reason for a party to hesitate in seeking to confirm or vacate an award.

For better or worse, the criteria for determining disclosure differ between institutional publication and court filings. Institutional selection reflects institutional considerations such as perceived quality and broad applicability of the reasoning.  The selection for court filings is simply the decision of a party to seek judicial relief to vacate or confirm an award, which could reflect the perceived quality of the award or just party strategy[21].”

Further researches

In a similar vein, the author of this article has carried out a simple comparative survey of many major international arbitral institutions, the results of which are set out in tabular form in the appendix hereto. This appendix examines the extent to which the various sets of international rules do (or do not) encourage the publication of redacted awards.

Further reporting encouraged

One particular field can serve by way of an example of when and where such reporting is both eminently desirable and necessary, namely in the interpretation of standard form contracts, such as the FIDIC “rainbow” suite of contracts.

Taking, by way of straightforward example, the enforceability (or otherwise) of FIDIC dispute adjudication board decisions (analogous to those of UK adjudicators under the HGCRA (as amended)) searches of BAILII and similar electronic search engines, throw up the three Persero decisions[22] in the Singapore courts, together with the two further (Swiss and English) Illustrations set out under paragraph 17 below.

One particular issue which arises (particularly under the FIDIC contracts, which use a multi-tiered dispute resolution process) is what the parties should do where a DAB has not been constituted. This question is particularly pertinent in circumstances where one of the parties attempts to delay and disrupt the constitution of an ad hoc DAB, which has to be put in place in order to resolve a specific dispute (as opposed to a standing DAB appointed at the outset of a project). Absent a DAB, how can any dispute be referred to it? Can such a dispute be referred directly to arbitration (or litigation) instead?

The standard FIDIC terms do not themselves provide a clear answer to these questions. However, it has been suggested by some commentators that an answer could be found in sub-clause 20.8. Although entitled “Expiry of Dispute Board’s Appointment” (which could be interpreted as applying solely where a DAB is already implemented), the clause states that the provisions relating to the DAB do not apply and a dispute may be referred directly to arbitration in circumstances where “there is no [DAB] in place, whether by reason of the expiry of the [DAB’s] appointment or otherwise” (emphasis added). The phrase “or otherwise” may, perhaps, offer a possible answer to the question, although it is by no means a clear-cut one.

One effect of this uncertain situation is that a party on the receiving end of a notice of arbitration will often challenge the arbitral tribunal’s jurisdiction, if only as a tactical point to be taken in settlement discussions, or to buy more time in which to prepare their defence in the arbitration.

Two decisions in South Africa in 2013 and four decisions in 2014 from the Swiss Supreme Court and the London and Leeds Technology and Construction Courts (as well as Persero in Singapore) have provided some guidance about the precise manner in which this clause ought properly to be interpreted.

ILLUSTRATIONS

Facts:  In a case regarding a contract under the standard FIDIC Conditions of Contract and the effect of sub-clause 20.4 and 20.6 thereof, it was held: by Plessis AJ, that: “The effect of these provisions is that the [DAB] decision shall be binding unless and until it has been revised as provided. There can be no doubt that the binding effect of the decision endures, at least, until it has been so revised….” “… The notice of dissatisfaction does not in any way detract from the obligation of the parties to give prompt effect to the decision until such time, if at all it is revised in arbitration. The notice of dissatisfaction does for these reasons, not suspend the obligation to give effect to the decision. The party must give prompt effect to the decision once it is given”:  Tubular Holding (Pty) Limited v DBT Technologies (Pty) Limited[23].

Facts: In a further case, Wepener J referred to the unreported decision in Esor Africa (Pty) Limited v Bombela Civils JV (Pty) Limited (SGHC case no. 12/7442), which concerned a DAB decision given under sub clause 20.4 of the FIDIC Conditions of Contract.  Held: that, “whilst the DAB decision is not final, the obligation to make payment or otherwise perform under it is …” and further that “… The DAB process ensures that the quid pro quo for continued performance of the contractor’s obligations even if dissatisfied with the DAB decision which it is required to give effect to is the employer’s obligation to made payment in terms of the DAB decision and that there will be a final reconciliation should either party be dissatisfied with the DAB decision…” The court therefore held that the respondent was not entitled to withhold payment of the amount determined by the adjudicator: Stefanutti Stocks (Pty) Limited and S8 Property (Pty) Limited[24]. Held: that (at least for international arbitrators sitting in Switzerland) the DAB procedures under the FIDIC contract must be treated as mandatory.  An arbitration may not be initiated without going first to the DAB, if the contract provides for this.  However, in the particular circumstances of this case, where an ad hoc DAB had not been constituted 18 months after it was requested, R was ultimately found to be unable to continue to rely upon the mandatory nature of the DAB procedure so as to prevent the resolution of the dispute by arbitration.  The decision contains helpful analysis of the relevant FIDIC provisions, which could be applied equally in other jurisdictions.  As part of this analysis, the Swiss Supreme Court considered the wording of sub-clause 20.8, the words “or otherwise” being described as a “very vague expression”, although it stated:

interpreting it literally and extensively would short-cut the multi-tiered alternative dispute resolution system imagined by FIDIC when it came to a DAB ad hoc procedure because, by definition, a dispute always arises before the ad hoc DAB has been set up, in other words, at a time when ‘there is no DAB in place’, however such interpretation would clearly be contrary to the goal the drafters of the system had in mind”: Case 4A_124/2014 (Swiss Federal Tribunal)”.

Facts:  C commenced court proceedings in the Technology and Construction Court, arguing that it was effectively entitled to opt-out of the requirement in sub-clause 20.2 of the FIDIC Silver Book, when it did not wish to have a dispute resolved by the DAB, and to refer the dispute directly to court (which had been chosen by the parties as the final determination procedure, rather than arbitration). C again relied upon sub-clause 20.8 and, in particular, the “or otherwise” wording.  C’s position was that the parties could not be under a mandatory obligation to achieve the appointment of a DAB and that the phrase “or otherwise” was wide enough to include a state of affairs where a DAB was not in place because a Dispute Adjudication Agreement had not been concluded as between the parties and the DAB. Held: by Edwards-Stuart J in the TCC that the clause should be interpreted so that the words “or otherwise” should be viewed narrowly, with the effect that sub-clause 20.8 did not give either party:

a unilateral right to opt out of the [DAB] process save in a case where at the outset the parties have agreed to appoint a standing DAB and that, by the time when the dispute arose, that DAB had ceased to be in place, for whatever reason”.

The court proceedings commenced by C were therefore stayed to enable the parties to “resolve their dispute in accordance with the contractual machinery”, ie by the DAB.

Edwards-Stuart J further rejected the proposition that sub-clauses 20.4-20.7 of the FIDC dispute resolution procedure were unenforceable for lack of certainty.  A number of commentators have commented on a potential “gap” in these provisions, summarised by the judge as follows (at [24]):

[   ] what has been described as ‘the gap’ in those sub-clauses […] arises when the DAB has made a decision and one party has given a notice of dissatisfaction – with the result that the DAB’s decision, whilst binding is not final.  The problem then is that if the unsuccessful party refuses to comply with the decision of the DAB as it is required to do by sub-clause 20.4.4, the only remedy (it is said) available to the other party is to refer the dispute occasioned by the refusal to comply to yet another adjudication. This can have the effect, Ms Sinclair submitted, that the party in default can embark on a course of persistent non-compliance with DAB decisions and thereby deprive the other of any effective remedy”.

Edwards-Stuart J neatly side-stepped this issue, because the contract before him provided for court proceedings, rather than arbitration. He noted that, whilst the point “may be arguable in the context of the standard FIDIC Books which include an arbitration clause”, an English court was not subject to the same jurisdictional limitations as an arbitrator. It could, for example, simply order specific performance of the DAB’s decision, pending final determination of the court proceedings: Peterborough City Council v Enterprise Managed Services Limited (2014)[25].

Facts: This case concerned a dispute to arbitration under a FIDIC contract pursuant to which, obtaining an engineer’s decision a condition precedent to a reference of any dispute to arbitration. The engineer made it clear that it was no longer the engineer under the contract and would not be determining the dispute. Subsequently, MAN Enterprise Sal (D) referred the dispute to arbitration. Al Waddan Hotel (C) claimed that this ignored the condition precedent. Held: by His Honour Judge Raeside QC, that C was not entitled to benefit from its own wrong, ie its failure to appoint an engineer, who could make the necessary decision: All Waddan Hotel Limited v Man Enterprise Sal (Offshore) (2014)[26].

Facts: A contractor (C) obtained a DAB decision for the payment of $17 million against an employer (E). E gave a “notice of dissatisfaction” and C commenced an arbitration to enforce the DAB’s decision. The arbitral tribunal gave a final award, enforcing the DAB’s decision, and declined E’s request to consider the underlying merits of C’s claim. The tribunal ruled that the proper course for E was to seek such a review by a separate arbitration. This final award was struck down by the Singapore Court of Appeal as being without jurisdiction and in breach of the rules of natural justice. The arbitral tribunal was required to determine the full dispute between the parties and had been wrong to decline E’s request to consider the underlying merits of the claim.  The Court noted that a better approach for C would have been to have sought an interim, or partial, award, pending the making of a final award. C took account of the Court’s comments and commenced a further arbitration this time seeking an interim award to enforce the amount of the DAB’s decision. The interim award was granted and E then brought proceedings before a Singapore court to challenge its validity. E contended that the applicable arbitration rules prevented any provisional award being made which might be varied in the tribunal’s final award and also offended against a provision in the rules which prevented the tribunal from varying, amending, or revoking, an award.        Held: that E’s challenge should be rejected. The tribunal’s award (whilst expressed as being “interim”) was final and binding in relation to its subject- matter, namely E’s compliance (or otherwise) with DAB decision. If the DAB decision was reversed in the final award, that would not be an amendment, or revocation, of the interim award, as such, but merely an accounting exercise, given effect to by the final award. It is expected that this issue will be expressly resolved in the revised suite of FIDIC contracts (beginning with the Yellow Book). For the moment, however, though, this case provides welcome confirmation that DAB decisions will be capable of enforcement by some means, despite perceived drafting infelicities): PT Perusakaan Gas Negara (Persero) TBK v CRW Joint Operation (2014)[27].

The ICC has most helpfully also published issue 1 for 2015 of the Dispute Resolution Bulletin, containing 16 ICC interim, partial and final awards and procedural orders in redacted form, thereby assisting legal practitioners to gauge precisely how arbitral tribunals are likely to construe clause 20 and similar provisions.

ILLUSTRATIONS

Facts:  A contractor (C) sought to recover unpaid monies due under a contract for maritime clearance work undertaken for the employer (E), which contract incorporated the 1999 FIDIC Conditions of Contract for Construction (the Red Book) and provided for a permanent dispute adjudication board (DAB). E raised a number of objections, including an allegation that the claims were not admissible, because they had not been submitted to adjudication prior to arbitration (as required by the dispute resolution provisions in the Red Book).  Held, by the arbitral tribunal, in an interim award, that the adjudication procedure was mandatory, that the formal requirements for submitting a dispute to the DAB had not been met and that there were no exceptional circumstances justifying any departure from such requirements. The tribunal ordered that the arbitration should be suspended whilst the parties proceeded with adjudication, but observed that (given the likelihood that at least one of the parties would probably be dissatisfied with the DAB’s decision) they might wish to waive the necessity to adjudicate and to proceed directly to arbitration.  Unusually, in this case, the Engineer under the contract also acted as the DAB: ICC Case 14431 (2008)[28].

Facts: C terminated a Red Book contract for alleged breaches by E. The parties failed to agree on the establishment of the DAB within the time limits provided in the Red Book. An ad hoc DAB was established, upon R’s initiative, rendering two decisions on the issues in dispute. C argued that these decisions were invalid and referred the dispute to arbitration. E challenged the arbitral tribunal’s jurisdiction and requested a partial award to enforce the DAB’s decision. Held, by the arbitral tribunal, that it had jurisdiction over disputes which were sufficiently closely connected to the matters that had been decided by the DAB and thus could be brought directly to arbitration; that the DAB decisions were valid and binding and that C’s request for an interim measure to suspend the execution of the DAB’s decisions should be rejected:  ICC Case 15956 (2010)[29].

Facts:  The parties entered into a contract for the consideration of a power plant. A dispute arose over the validity of the termination by E of the contract in the arbitration commenced by C to obtain compensation for expenses which it had incurred and payments made to a sub-contractor. E contested the arbitral tribunal’s jurisdiction over claims which had not first been submitted to amicable dispute resolution and an ad hoc DAB, in compliance with the contract. Although closely based upon the FIDIC Conditions of Contract for EPC turnkey projects, the contract contained contradictory provisions relating to dispute resolution, one providing for amicable settlement and arbitration and the other adjudication, amicable settlement and arbitration. Held, characterising the issue as one of admissibility rather than jurisdiction and basing its decision upon a good faith interpretation of the parties’ intentions the arbitral tribunal found that the two-step procedure (comprising amicable settlement and arbitration), which was a special condition, ought properly to prevail over the three-step procedure (comprising adjudication, amicable settlement and arbitration), which was part of the general contractual conditions. Moreover E’s insistence that C should have submitted its claims to the DAB was inconsistent with E’s own submission of counterclaims directly to arbitration without first referring these to the DAB.  Given that attempts had been made to settle the dispute amicably, the two-step procedure had been complied with and C’s claims were therefore admissible: ICC Case 16083 (2010)[30].

Facts: Under a Red Book contract a permanent three-member DAB was established. After many referrals to the DAB and notices of dissatisfaction from both parties, E suggested that the parties should agree upon an addendum to the contract, in order to allow disputes to be submitted directly to arbitration, thereby bypassing the DAB. C rejected this suggestion, claiming that the DAB decisions were binding and had to be executed. Held, by the arbitral tribunal, that although the nature of DAB decisions was binding, since in this case the DAB decisions were subject to notices of dissatisfaction (NoDs), C’s claim for a partial award ordering payment of the sums decided by the DAB could not be accepted: ICC Case 16119 (2010)[31].

Facts: C raised concerns with the Engineer regarding E’s ability to make payments during the performance of a Red Book contract and soon gave notification of termination of the contract on the same grounds. E also sought to terminate the contract, alleging contractual breaches by C. The case was submitted to arbitration, with E contending that C’s claim was inadmissible, since the multi-tier dispute resolution mechanism provided under the contract had not been followed. The arbitral tribunal first found that C’s referral of the claim to the Engineer was not invalidated by their failure to substantiate the claim with supporting information and documentation. Held, by the arbitral tribunal, that, as the referral to the DAB had been impossible by reason of E’s refusal to co-operate regarding their appointment, C was entitled to resort directly to arbitration. The dissenting arbitrator argued, however, that this was not a justifiable reason for avoiding adjudication: ICC Case 16155 (2010)[32].

Facts: C referred a dispute to arbitration, E arguing that the arbitral tribunal had no jurisdiction, since the claims had not been previously submitted to a DAB, in accordance with the dispute resolution provisions. The parties’ contract incorporated the 1999 FIDIC Conditions of Contract for Plant and Design-Build (Yellow Book). The parties disagreed about whether the contract provided for an ad hoc, or a standing, DAB. Held, by the arbitral tribunal, that the contract did not depart from the Yellow Book’s provisions requiring an ad hoc DAB and confirmed the validity of the adjudicator’s appointment and that it was not contingent upon the conclusion of a dispute adjudication agreement: thus C’s objection that there had been insufficient consultation prior to the adjudicator’s appointment was dismissed; that, since the DAB had been validly established, it was required to decide upon the clams prior to arbitration and, given that this condition precedent had not been respected, the arbitral tribunal declined jurisdiction:  ICC Case 16262 (2010)[33].

Facts: C referred its claim to arbitration after an adjudicator’s decision that it was not entitled to all the additional costs claimed. E challenged the arbitral tribunal’s jurisdiction on the grounds that C had failed to comply with the agreed dispute resolution procedure to refer the dispute to arbitration within 28 days of the adjudicator’s decision and that as a consequence, the adjudication had become final and binding and could no longer be submitted to arbitration. Held, by the arbitral tribunal, that the 28-day time-limit was triggered, irrespective of the existence of an identifiable dispute, and that a formal referral to arbitration was necessary within such time limit; since there had been no such formal referral, the adjudicator’s decision had become final and binding, and as a consequence, the arbitral tribunal had no jurisdiction to revisit the decision: ICC Case 16435 (2013)[34].

Facts: The parties incorporated the Yellow Book into their contract. C objected to E’s notice of termination for delay in the performance of the contract and established at DAB, which issued two decisions. E issued NoDs against both decisions in the arbitration. C requested an order, enforcing the DAB’s decisions, and E objected on the grounds that C’s claim was time-barred and counterclaimed. Held, by the arbitral tribunal, that E’s counterclaims were time-barred, but C’s claims were not. However, the DAB’s decisions could not be enforced, because it was an ad hoc DAB, whereas the parties’ mutual intention was to have a permanent one and, thus, its decisions could not be binding: ICC Case 16570 (2012)[35].

Facts: Under a Yellow Book contract C submitted a claim to the DAB for an extension of time (EoT), when the Engineer did not respond. The DAB issued two decisions, with E giving a NoD for the second one, whilst C also gave a NoD for matters left undecided in such decision. C initiated arbitration to recover losses and E accused C of breach of contract and counterclaimed for delay damages. Held, by the arbitral tribunal, that the counterclaim was inadmissible, since E had not submitted its claim to the Engineer, or to the DAB, in accordance with the mandatory multi -tier dispute resolution process; that, C’s claim for EoT was time-barred, because it was made outside the 28-day period under sub-clause 20.1: ICC Case 16765 (2013)[36].

Facts:  Under a Red Book contract, C sought, by arbitration, enforcement of a decision (No 4) issued by the DAB, which ordered payment of amounts awarded to it in earlier decision of the DAB. E objected to the arbitral tribunal’s jurisdiction over this decision. Held, by the arbitral tribunal, that decision No 4 was a separate decision from the earlier decisions and concerned a breach of the obligation to comply with the DAB’s decisions under sub-clause 20.4, and as a consequence, C was entitled to damages: ICC Case 16948 (2011)[37].

Facts:  C’s construction of a pipeline contract was terminated by E for failure to complete it within the deadline, leading to C’s expulsion from the site. C referred the matter to the dispute resolution board (DRB), which held that, although E was not entitled to terminate the contract for breach, it was entitled to do so for convenience. E gave a NoD and challenged the jurisdiction of the ICC arbitral tribunal in the ensuing arbitration, on the grounds that the contact did not provide for referral to ICC. C argued that the parties intended that the ICC should have jurisdiction over disputes if no other institution were designated. Held, by the arbitral tribunal, that under applicable principles of contract interpretation, the parties’ intention was to submit disputes to ICC arbitration: ICC Case 17146 (2013)[38].

Facts: Under a Red Book contract, C and R1 entered into a dispute adjudication agreement (DAA) with R2, sole member of the DAB. The DAB issued an initial decision, awarding a sum of money to R1. When C failed to pay, R1 sought a second decision from the DAB, claiming that C was in breach of contract and should pay immediately also initiating arbitration proceedings, C also initiated arbitration requesting the arbitration tribunal to find that the DAB had no jurisdiction to issue a second decision, since it was an ad hoc DAB, whose mandate expired when the first decision was issued.  Held, by the arbitral tribunal, that the DAA could be terminated only with the consent of both parties and, since that consent was lacking, the DAB had the power to render its second decision. However, R1’s initiation of an arbitration in relation to the first DAB’s first decision, following a NoD, put an end to the DAB’s jurisdiction over the dispute:  ICC Case 18096 (2012)[39].

Facts: The parties submitted various claims to a DAB under a Yellow Book contract. E issued a NoD against the DAB’s decision and C and a company to which it had assigned part of its claim sought arbitration in order to enforce the DAB’s decision. E argued that the arbitral tribunal lack of power to enforce a DAB’s decision, against which a NoD had been issued. C challenged the validity of the NoD. Held, by the arbitral tribunal, that the NoD was validly given and that, since C’s request was limited to enforcement of the DAB’s decision, it would not issue a final award ordering specific performance of a DAB decision which had been contested before it:  ICC Case 18320 (2013)[40].

Facts: E terminated C’s contract due to delays in performance and changes in the joint venture, both parties having signed a Yellow Book contract. C requested the arbitral tribunal to declare that the contract had been unlawfully terminated and to order E to pay the moneys allegedly due. E asked for the proceedings to be bifurcated and for the arbitral tribunal to issue a partial award, rejecting jurisdiction over the dispute for non-compliance with the multi-tier dispute resolution clause. Held, by the arbitral tribunal, that a dispute could be brought directly to arbitration where no DAB was in place and that there was no obligation first to submit the dispute to the Engineer: ICC Case 18505 (2013)[41].

Facts:  C referred a claim to the Engineer, alleging E’s failure to provide within the applicable deadline certain design documents. The parties had signed a Yellow Book contract. E objected to the Engineer’s determination and referred the dispute to the DAB. Both parties issued NoDs against the DAB’s decision.  C initiated arbitration, seeking delay damaged in reliance upon the Engineers determination and claiming that E’s NoD had been given late and that, as a consequence, that part of the DAB decision to which it related had become final and binding and could not therefore be submitted to arbitration.  E argued that the DAB decision was not binding upon the parties. Held, by the arbitral tribunal, that the scope of its jurisdiction was determined by the dispute as originally submitted to the DAB and it could therefore examine all the issues covered by that decision:  ICC Case 19346 (2014)[42].

Facts: The parties signed a Red Book contract, appointing a sole member of a standing DAB. E referred to the Engineer and then the DAB certain disputes over payments, with C objecting to the DAB’s decision and initiating arbitration directly. E thought that C first needed to refer the dispute to the Engineer, or the DAB. Held, by the arbitral tribunal, that C was correct in referring the dispute directly to arbitration, since the DAB must be considered non-existent, given that its sole member lacked the required independence and impartially and that, in these circumstances, there was no obligation to seek an amicable settlement, nor had the dispute first to be referred to the Engineer:  ICC Case 19581 (2014)[43].

The ICC is to be warmly commended upon this initiative and it would surely not be too much to expect other bodies such as the Chartered Institute of Arbitrators (CIArb) and Glasgow Caledonian University (which publishes annual adjudication updates), to name but two, to take measures also to follow the ICC’s helpful suit.

This theme is reflected in a recent article[44] by Elina Zlatanska, who wrote as follows (on page 36 thereof):

“… the arbitral institutions need to amend their rules to include express provisions as to the publication of awards with reasons and also provide model clauses dealing with confidentiality before and after the award is rendered[45]. Institutions that have some publishing experience should publish guidelines for the publication of awards that others can follow. The efforts of the Milan Chamber of Commerce to that effect are commendable and serve as a useful example[46].

Last but not least, it would also be desirable for the international arbitral community to reach a consensus on the value of the duty of confidentiality and whether it presents a genuine obstacle to systematic publication of awards[47]. It is advisable that uniform standards for the application of the duty of confidentiality be developed. This can be done by way of guidelines. The most appropriate venue appears to be CIArb[48].

International commercial arbitration is a dynamic and constantly evolving process. The protection of confidentiality is without a doubt essential for the smooth functioning of arbitration proceedings. However, confidentiality, whilst considered to be one of the cornerstones of arbitration, is not reliable[49]… Balancing the parties’ private interests with the publication of reasoned awards is not an easy task. But if we want to promote international commercial arbitration as an efficient and reliable method for settling business disputes, information needs to be made available to everyone who has an interest in it, or as Fouchard once put it:

“If the international community of merchants aspire to give itself an autonomous system of law, this law has to be made known to all those who have an interest in it: the arbitrators should not resemble the ancient pontiflex of antique Rome, who jealously kept the knowledge of law for themselves and with it the religious and political power[50].

The same theme is further developed in another recent article by Nicholas Towers, who wrote[51] as follows:

“… a possible draft… amendment [to the Arbitration Act 1996] is as follows:

Confidentiality of the award

Unless otherwise agreed by the parties –

(1) ny award may be published 30 days after the award becomes available to the parties and no earlier, and any such publication shall be in a redacted format as may be prescribed, and shall preserve the anonymity of the parties and their representatives and identify only the members of the tribunal.

(2) Notwithstanding (1), if any party, at any time before the expiry of 30 days after the award becomes available to the parties, makes a request in writing to the tribunal asking that the award not be published, the award shall not be published unless otherwise provided for by law.

The hundreds of arbitrations in England each year could provide an important source of arbitral jurisprudence; the LCIA alone reported that it administered 290 disputes in 2013[52], but the procedural legal and practical knowledge contained in those awards is currently largely unavailable[53]. The London Maritime Arbitrators Association (LMAA) Arbitration Terms (2012) cl.26 encourages tribunals to release meritorious awards within that narrow field for publication, but this approach is rare.

 What is proposed in this article is a relatively small change but one which could provide substantial practical benefits for English arbitration. In effect, the reform maintains the confidentiality of awards because the parties are not identified, but allows the generation of an accessible body of arbitration knowledge originating in England. This will improve the conduct of proceedings and the quality of awards, as well as increasing competition and choice within the industry and assist legislative developments – all highly positive outcomes. The suggested reform represents a pragmatic compromise between maximising the utility of awards and allowing a slightly higher level of confidentiality where required by certain users. A portion of awards would necessarily be sacrificed in order to avoid diminishing England’s role as a leading arbitral seat but the remainder will go on to contribute to an invaluable set of resources for participants in arbitration around the world.”

Having began this article with a decision which cited Humpty Dumpty in a House of Lords’ dissenting speech, the author cannot resist reverting to Through the Looking Glass[54], hoping that this does not turn out to be his epigraph:

                        “The little fishes of the sea,

They sent an answer back to me.

The little fishes’ answer was

‘We cannot do it, Sir, because ……….”!

 

Andrew Burr

3 March 2017

www.arbdb.com

[1]              Delivered in the Great Hall of Lincoln’s Inn on 6 October 2015.
[2]              [1942] AC 206 at pages 244 – 5.
[3]              By Lord Thomas of Cwmgiedd, the Lord Chief Justice.
[4]              Most Appropriate For International Arbitration!
[5]              (1990, Deventer, Boston, Kluwer Law and Taxation Publishing).
[6]              Honduras v Nicaragua, awarded by the King of Spain, 23 November 1960, ICJ Reports 1960,  at 192.
[7]              Paragraph 42, Rules of the Arbitration Court of the USSR Chambers of Commerce and Industry.
[8]              Paragraph 33, Rules of the Court of Arbitration at the Polish Chamber of Foreign Trade in Warsaw.
[9]              Paragraph 16, Rules of the Court of Arbitration at the Polish Chamber of Foreign Trade in Warsaw, cit.
[10]             Edited by John Tackaberry QC and the late, great, Arthur Marriott QC (2003, London, Sweet and Maxwell, in conjunction with The Chartered Institute of Arbitrators).
[11]             Hassneh at 247.
[12]             Dolling-Baker v Merrett and Another [1990] 1 WLR 1205.
[13]             Hassneh at 249.
[14]             And see the decision of the UNCC to post recommendations of its commissioners on its website: the process is quasi arbitral and potentially concerns sensitive matters since the claimants were in many cases carrying out work in Iraq, see also appendix.5.
[15]             Liberian Eastern Timber Corporation (LETCO) v. Government of the Republic of Liberia, award 31 March 1986, Clunet 1988, 166 et seq.
[16]             The decision in ICC proceedings No 3344 of 1981, Clunet, 1982, 986
[17]             See, for example, the award rendered in ICC proceedings No 4381, 1986 Clunet, 1986,1106.
[18]             In Derains-Jarvin, Chronique des sentences arbitrales, Clunet, 1986, 1107.
[19]             Y Derains, Chronique des sentences arbitrales, Clunet, 1978, 992.
[20]             Derains, Chronique des sentences arbitrales, Clunet, 1976.
[21]             Professor Catherine Rogers has begun an interesting attempt to counteract the bias inherent in publication of decisions determined by institutional selection, or court filings, and to increase publicly available knowledge about arbitrators. Her plan is to encourage parties to disclose decisions that will be available and searchable on a website with minimal editing to protect especially sensitive information and trade secrets.
[22]             See Christopher Seppälä, “An Excellent Decision From Singapore Which Should Enhance the Enforceability of Dispute Adjudication Boards – The Second Persero Case Before the Court of Appeal” (2015) 31 Const LJ 367.
[23]              SGHC case no. 06757/2013
[24]              SGHC case no 20088/2013
[25]            [2014] EWHC 3193 (TCC) [2014] 2 All ER (Comm) 423; [2014] BLR 735.
[26]                  [2014] EWHC 4796 (TCC).
[27]             [2014] SGHC 146 [2015] BLR 119, [2015] 155 Con LR 169.
[28]             Place of arbitration:  Zurich Switzerland. Origin of parties: America and Europe. Applicable substantive law: Law of E’s country in Eastern Europe
[29]             Place of arbitration: A city in East Europe. Origin of parties: Europe.  Applicable substantive law:  Law of E’s country in Eastern Europe.
[30]             Place of arbitration: Paris, France. Origin of parties: Middle East and Sub-Saharan Africa. Applicable substantive law:  Law of E’s country in Sub-Saharan Africa.
[31]             Place of arbitration:  Capital city of an Eastern European country. Origin of Parties: Europe. Applicable substantive law:  Law of E’s country in Eastern Europe.
[32]             Place of arbitration: Paris, France. Origin of Parties: Africa, Asia Applicable substantive law:  Law of E’s country in Sub-Saharan Africa.
[33]             Place of arbitration: London, United Kingdom. Origin of Parties: Europe. Applicable substantive law: Law of E’s country in Eastern Europe.
[34]             Place of arbitration: Port-Louis, Mauritius.  Origin of Parties: Sub-Saharan Africa Applicable substantive law: Law of E’s country in Sub-Saharan Africa.
[35]             Place of arbitration: capital city of an East European country. Origin of Parties: Europe Applicable substantive law:  Law of E’s country in East Europe.
[36]              Place of arbitration: capital city of an Eastern European country. Origin of Parties: Europe Applicable substantive law:  Law of E’s country in Eastern Europe.
[37]             Place of arbitration: capital city of an Eastern European country. Origin of Parties: Europe Applicable substantive law:  Law of E’s country in Eastern Europe.
[38]             Place of arbitration:  Paris, France.  Origin of Parties:  Europe Applicable substantive law: Law of E’s country in Eastern Europe.
[39]             Place of arbitration:  capital city of an Eastern European country. Origin of Parties: Europe Applicable substantive law:  Law of E’s country in Eastern Europe.
[40]             Place of arbitration:  capital city of an Eastern European country. Origin of Parties: Europe Applicable substantive law:  Law of E’s country in Eastern Europe.
[41]             Place of arbitration:  capital city of an Eastern European country. Origin of Parties: Europe Applicable substantive law:  Law of E’s country in Eastern Europe.
[42]             Place of arbitration:  capital city of an Eastern European country. Origin of Parties: Europe Applicable substantive law:  Law of E’s country in Eastern Europe.
[43]             Place of arbitration:  capital city of an Eastern European country. Origin of Parties: Europe Applicable substantive law:  Law of E’s country in Eastern Europe.
[44]             E Zlatanska, “To Publish or Not To Publish, Arbitral Awards: That is the Question” (2015) 81 Arbitration 25.
[45]             Hwang and Chung, “Defining the Indefinable” (2009) Journal of International Arbitration 642, 644.
[46]             See, eg Milan Chamber of Commerce, Guidelines for Anonymous Publication of Arbitral Awards (Milan: Milan Chamber of Commerce and Università Carlo Catteneo, n.d.), http://www.camera-arbitrale.it/Documents/guidelines_anonym-aw-pdf [Accessed 9 December 2014].
[47]              Kyriaki Noussia, Confidentiality in International Arbitration:  A Comparative Analysis of the Position under English, US, German and French Law (Heidelberg: Springer 2010), p.181
[48]             A full list of CIArb Guildelines, Protocols and Rules is available at http://www.ciarb.org/resources [Accessed December 9, 2014].
[49]             Paulsson and Rawding, “The Trouble with Confidentiality” (1994) ICC Bulletin 48.
[50]             Klaus Peter Burger, The Creeping Codification of Lex Mercatoria, citing Philippe Fouchard, L’arbitrage commercial international (Alphen aan den Rijn: Kluwer Law International, 2010), p.85.
[51]             N Towers, “Expanding Horizons in Commercial Arbitration: The Case for the Default Publication of Awards” (2015) 81 Arbitration 131.
[52]              LCIA Registrar’s Report 2013, available online at http://www.lcia.org/LCIA/reports.aspx [Accessed February 27 2015].
[53]             LCIA Rules Art.30 makes arbitration awards confidential.
[54]             (1872) chapter 6.

 

What really is the ‘law firm of the future’?

It’s a struggle to think of an industry that hasn’t been disrupted by advances in technology – marketing, finance and retail, to name a few.

The legal industry, however, has typically been seen as late to the party. But as we know from our latest report, firms in the sector are now taking tech adoption seriously in a bid to become the “law firm of the future.” In fact, the industry is taking technologies such as artificial intelligence (AI) and machine learning more seriously than other industries, with 55% of IT staff in the legal sector currently using predictive coding and 48% using machine-learning technologies. That’s compared to only about a third of CIOs in non-legal sectors (30% and 38%, respectively).

Steeped in tradition, there is no denying that some firms are more hesitant when it comes to technology – those that are “set in their ways” regarding the structure of the business. However, they need to realise that it’s sink or swim if they choose not to adapt to the digital age.

Competition from start-ups

The new kids on the block are causing senior executives at law firms to think seriously about the way they do business. Now experiencing what legacy banks have been struggling with for almost seven years, law firms are facing fresh competition from start-ups that have a vast knowledge of technology and a huge set of IT skills, enabling them to operate new business models.

Working with four of the five Magic Circle firms, we know that by operationalising IT systems, law firms have the opportunity to work more efficiently and increase their billable hours. If every episode of The Good Wife, Suits or Law & Order were to show the true amount of time spent shuffling paper, they wouldn’t make it to air!
However, a law firm’s ability to increase billable hours is limited when they fail to adopt an IT system that allows them to benefit from new technology in a safe way.

With the help of new technologies, less time will be spent on tedious administrative tasks and employees will no longer need to refer to the “files cupboard” when researching past cases, as so many still do. Luminance is an example of beneficial technology for the sector. Its AI software understands language at speeds no human could, providing an immediate and global overview of any company and picking out warning signs without needing any instruction. Firms using analytics tool Brainspace, for example, are able to better understand unstructured data faster than ever before.

Due to security fears, it’s understandable that firms have been slow to utilise cloud technologies, despite the fact that moving to a cloud platform could make them easily accessible from many different offices across the world. However, what firms need to understand is that with the right platform and security offering they could increase billable hours and grant global access. After all, every hour spent searching through the files cupboard or scanning documents is an hour that can’t be billed to a client.

In order to keep up with the competition, we will no doubt see many of the “traditional” firms take on the characteristics of legal start-ups that not only enable firms to increase billable hours but also aid and improve client interaction. For example, AI chatbots, like DoNotPay’s, could offer standard legal advice via a mobile phone or tablet, giving the enquirer an answer immediately, or direct them to the best solution/department. The result would be a seamless and quality customer experience, while freeing up time for lawyers to work on more bespoke cases.
Competitive salaries aren’t everything

As a way to enhance their services, many industries, like financial services, are recognising the importance of attracting top tech talent. Those who have been slow to provide roles focused on innovation have fallen victim to global tech corporations, like Facebook and Google, which are a larger cultural draw for millennials.

Top law firms with tough entry requirements but competitive salaries have previously been an attractive option for law students. However, those entering the industry want more from a job than just a chunky wage packet at the end of the month – they want to be sold a lifestyle.

According to PwC (2011), millennials crave a better work/life balance ahead of wanting more money, and would like technology to be better incorporated into their job. Many industries have answered these desires – plenty of financial corporations have opened innovation labs as a response, whilst other industries offer employees the option of working remotely or on the move, supplying them with smartphones or tablets to access databases. But law firms have a long way to go in attracting top tech talent who will be the key to bringing fresh and innovative ideas to challenge the archaic business model. Law firms also need change at the top of the partnership to allow tech experts in the firm to drive the changes needed.

In-house isn’t necessarily best

Previously, law firms have been confident in deciding which IT network their firm requires. Understandably, as guardians of highly sensitive documents, firms tended to keep everything in- house. However, as the competitive threat from start-ups increases and more and more firms look to adopt technology to keep up, organisations are recognising that they simply don’t have the resources to consult on the best possible IT strategy for their needs. In addition to this, General Data Protection Regulation (GDPR), which comes into force in May 2018, will put pressure on firms from a data control/processing standpoint. Ahead of this date, to get their “data house in order,” firms must partner with reputable third parties who are focused on meeting compliance regulations.

In response to industry challenges, we will undoubtedly see an increased number of mergers and consolidations, as firms look to expand globally. That being said, the lack of IT knowledge within firms will only become more problematic. Without a scalable and robust network, these transitions will be next to impossible, take far longer than needed and will be a risk to a firm’s security.

There needs to be a cultural shift in educating firms around the need for digital transformation. It’s understandable that the industry is cautious of “handing over” its data – news stories like the Panama Papers scandal and the increasing threat of cyber-attacks being reported daily in the media have made law firms wary of outsourcing solutions and services. However, if data protection regulations aren’t met, a firm’s clients are at risk, and its own finances and reputation could also suffer. Outsourcing this responsibility to an organisation that is dedicated to ensuring data is stored securely, and that complies with regulation, means one less worry for the corporate team.

Legal firms are at a crossroads – they either digitally transform and adapt to the needs of their employees and customers, or face the consequences. However, it’s not just about adopting tech for the sake of it. Consideration as to how workloads can be eased, billable hours increased and how the quality of client interaction can be improved will put such firms in a good position to survive, and thrive, in the digital age.

A STRATEGIC APPROACH TO EFFECTIVE WORKPLACE INVESTIGATIONS.

 

Employers often question how they can avoid the impact and expenses associated with defending against claims raised by employees for misconduct in the workplace.  The employer wants to take employment action against an employee but hesitates to do so because of the risk of costly litigation for a claim of wrongful termination.  When a complaint about employee misconduct is received, or the employer becomes aware of employee misconduct through an anonymous source or a demand letter, the employer may inquire whether it can go on with “business as usual” or be required to take steps to address the alleged conduct.  In such cases, as well as those in which any claim of harassment, discrimination, breach of confidentiality, security, or any other form of employee misconduct comes to the attention of the employer, the employer’s investigative response can potentially increase or decrease the employer’s risk of liability.

Employers are tasked with the duty of ensuring its workplace complies with federal and state laws which prohibit a hostile, discriminatory or retaliatory work environment, and which are intended to protect employee safety.  This duty requires the employer to promptly determine whether there is any merit to a claim of employee misconduct, and effectively act to address such misconduct to prevent any further recurrence.  In addressing allegations of improper workplace conduct, the manner in which the employer responds is of critical importance to its ability to assert defenses. A faulty investigation can result in the employer’s failure to prevent repeated misconduct, failure to remedy conduct which violates state and federal law, failure to comply with its own employment policies against harassment, discrimination, retaliation, and safety regulations in the workplace, and can also result in claims of defamation and intentional infliction of emotional distress by employees who participated in the investigation process.  By implementing an effective and responsive workplace investigation plan, employers can establish a defense to such claims and increase the likelihood of being successful if faced with litigation.

  1. EMPLOYER’S AFFIRMATIVE DEFENSE

 The United States Supreme Court has determined that investigations of workplace harassment[1] are a key component of an employer’s response to allegations of employee misconduct, providing employers with an affirmative defense to vicarious liability for a supervisor’s hostile work environment where the employer’s action does not result in a tangible employment action, provided that: (1) The employer exercised reasonable care to prevent and correct promptly harassment; and (2) the employee unreasonably failed to take advantage of any preventative or corrective opportunities provided by the employer to avoid harm otherwise.  Burlington Industries, Inc. v. Ellerth, 524 U.S. 742, 765 (1998); Faragher v. City of Boca Raton, 524 U.S. 775, 807 (1998).

Employer liability may be premised on negligence based on failure to have effective policies and procedures for addressing employee complaints.  See Lehmann v. Toys ‘R’ Us, 132 N.J. 587, 621 (1993) (finding that “a plaintiff may show that an employer was negligent by its failure to have in place well-publicized and enforced anti-harassment policies, effective formal and informal complaint structures, training and monitoring mechanisms).   An employer may avoid liability if its procedures for investigating and remediating alleged discrimination are sufficiently effective.  See e.g., Bouton v. BMW of North America, Inc., 29 F.3d 103, 106 (3rd Cir. 1994).  Through an effective investigation, an employer reaffirms commitment to, and enforcement of, policies against employee misconduct.  See Ilda Aguas v. State of New Jersey, 220 N.J. 494 (2015).  The goal of deterring employee misconduct is promoted by an employer’s “responsible efforts to detect, address and punish it” to prevent violations.  Aguas, supra, at 519, citing Burlington, supra, 524 U.S. at 764; Faragher, supra, 524 U.S. at 805-06) (Employer may have an affirmative defense if it exercised reasonable care to prevent and correct misconduct).  An affirmative defense cannot be asserted by employers who fail to implement effective anti-harassment policies, and “employers whose policies exist in name only.”  Aguas, supra, at 523; see also Gaines v. Bellino, 173 N.J. 301, 314 (2002) (finding that employer’s due care is demonstrated through effective complaint, sensing and monitoring mechanisms, and through showing of commitment to workplace policies through consistent practice).

An employer’s remedial action is adequate if it is “reasonably calculated to prevent further harassment.  Knabe v. Boury Corp., 114 F.3d 407, 412, n.8 (3rd Cir. 1997).  “The prospect of an affirmative defense in litigation is a powerful incentive for an employer to unequivocally warn its workforce that [harassment] will not be tolerated, to provide consistent training, and to strictly enforce its policy… [A]n employer that implements an ineffective anti-harassment policy, or fails to enforce its policy, may not assert the affirmative defense.”  Aguas, supra, at 523.  Effective remedial measures include the process by which the employer arrives at the sanction that it imposes on the alleged harasser.  If the effective measures are those reasonably calculated to end the harassment, then neither a court nor a jury can evaluate the effectiveness without considering the entire remedial process…. [t]he effectiveness is gauged by the process of investigation – including timeliness, thoroughness, attitude toward the allegedly harassed employee, and the like.”  Lehmann, supra, at 623; Payton v. New Jersey Turnpike Authority, 148 N.J. 524, 537 (1997).

  1. ENFORCEMENT THROUGH AN EFFECTIVE WORKPLACE INVESTIGATION

             An investigation is not only worth doing, it is worth doing well.  An employer’s policy against harassment, discrimination and retaliation, and policies for the protection of its employees, are only as effective as the measures utilized to implement and enforce such policies.  A poorly conducted investigation can compound an employee’s complaints about wrongful conduct in the workplace, and provide evidence that the employer knew of unlawful conduct and failed to take appropriate action to remedy it.  A properly conducted workplace investigation sends a message to employees that the employer is committed to enforcing its policies on workplace conduct and employee protection.

  1. Employer’s Pit-falls in Investigating Employee Complaints.

 An employer may be defeated in asserting an investigation as an affirmative defense if it engages in action or inaction that is reflective of a “sham” investigation rather than an effective investigation.  Examples of such conduct include:  delaying the commencement of an investigation or taking too long to complete an investigation; conducting the investigation with pre-determined intention to shield the employer from liability or protect the accused, rather than address the employee’s legitimate concerns; failure to select an unbiased investigator; making an employment decision before the investigation even commences, or reaching conclusions based on one-sided information; showing disrespect for the individual interviewed, or not affording a full opportunity to respond (e.g., rolling eyes, raising voice, aggressive questioning); making pre-judgment statements during the interview (e.g., “I don’t believe this, that does not sound like something he/she would do”); failing to take down names of additional witnesses; refusing to interview key witnesses; interviewing key witnesses in the presence of company management showing lack of independence; taking a dismissive approach to the investigation, particularly if the complaining employee has a history of making complaints; failing to conduct an investigation when the employee says that he or she wants to make the employer aware of a concern, but does not want anything done or said about it at this time; promising the complaining employee that the employer will keep the complaint completely confidential, [2] (complaint and investigation should be kept on a need-to-know basis); failing to conduct a sufficiently thorough investigation, including interviews of all parties, or not talking to all relevant witnesses; failing to properly and appropriately document the investigation; failing to monitor the workforce, address and remedy potential situations or interactions which violate employer policies.

  1. Employer’s Investigation Plan.

The primary goal of an investigation is to provide the employer with the appropriate findings and facts to make a decision regarding the matter.  For an employer to legitimately rely on the results of an investigation, the investigation must commence promptly upon receipt of complaint or notice of misconduct; be conducted thoroughly through review of all allegations, interviews with all relevant witnesses, review of all relevant documentation and applicable employment policies; be conducted by the investigator in an objective, fair and neutral manner; and the investigation’s findings must create a proper foundation for carrying out effective remedial measures, and provide the company with the grounds upon which to initiate appropriate steps for resolution of the matter.

The company should be prepared to promptly identify employees who may have information pertinent to the investigation, and gather all relevant documents to be reviewed as part of the investigation.  These include:  written allegations of complaints by complainant (or by anonymous note or other employee writing); written policies and procedures; personnel files; electronic files; e-mails; texts; voice mail messages; prior complaints and investigation files; organizational charts; and information from social media websites to the extent permitted by state law.

  1. Selection of Investigator

An employer should give careful consideration to the selection of an investigator to conduct the workplace investigation.  The investigator selected must be impartial, objective, fair, and unbiased; be knowledgeable about relevant laws and applicable workplace policies; have effective communication and interviewing skills; be sensitive to the situation and persons involved; and be able to conduct a thorough investigation and prepare an accurate report.

Investigations may be conducted internally by in-house counsel or a member of the employer’s human resources department or senior management team, or by outside counsel for the employer, or by an independent third party investigator.  There are certain pros and cons depending upon whether the employer elects to have the investigation conducted internally or through an outside third party, particularly outside counsel.  Some benefits to having an investigation conducted by in-house counsel or a member of the Human Resources department or management, is that the investigator will have a pre-existing knowledge of the corporation, its structure, its policies and procedures, its record-keeping practices, its culture, and possibly even the personalities and politics involved in the underlying claims, and be in a position to start the investigation almost immediately.

In contrast, an “internal” investigator may not be viewed as independent enough to conduct a thorough and impartial inquiry; may become a witness in litigation resulting from the matter being investigated; and if the in-house investigator is also legal advisor to the company, may face issues relating to the confidentiality and privilege of information obtained during the course of the internal investigation.

In circumstances where the attorney conducts the investigation and becomes a witness to the content of information and documentation obtained during an investigation, it must be understood that the attorney may later be disqualified from representing the company as its legal counsel in litigation ensuing from the allegations of workplace misconduct and/or accompanying investigation.  Similarly, an attorney who appears at an investigation interview with his/her client, the complainant, and thus becomes an investigation witness, may be disqualified from representing the complainant in subsequent litigation.

Regardless of how time and cost efficient an internal investigation could be, if it fails to thoroughly and fairly address the allegations or workplace misconduct, or is seen as partial or otherwise lacking in credibility, it could ultimately cause the employer more expense and risk of liability in the event the matter proceeds to litigation.

  1. Application of Privileges in an Investigation

The role of in-house or outside counsel in an investigation presents the risk that communications with the lawyer during the investigation may not be protected by the attorney-client privilege or the work-product privilege.  When an employer intends to rely on the investigation as a defense that it took reasonable and justified responsive and remedial action, documents related to the employer’s internal investigation are subject to discovery since it demonstrates the employer’s response to an employee’s complaint, inclusive of facts obtained, the timing of the investigation, the employer’s evaluation of the facts, and any action taken by the employer in response to the findings of the investigation.  See Payton, supra.

What may remain privileged from disclosure, however, is the attorney’s legal advice and recommendations.  Privilege only applies to confidential communications made to a client “by an attorney acting as such.”  Upjohn v. United States, 449 U.S. 383, 394-95 (1981) (holding that… “where communications at issue were made by corporate employees to counsel for corporation acting as such, at direction of corporate superiors in order to secure legal advice from counsel, and employees were aware that they were being questioned so that corporation could obtain advice, such communications were protected.”  See also, Waugh v. Pathmark Stores, Inc., 141 F.R.D. 427 (D.N.J. 2000) (finding that attorney-client privilege was not waived where employer’s in-house counsel attended meeting with employer’s decision-makers after internal investigation into employee’s discrimination complaints, and reviewed related documents in his capacity as attorney for employer, to provide legal advice on remediation efforts; counsel did not conduct investigation himself or act as decision-maker in employer’s remediation efforts); Harding v. Dana Transport, Inc., 914 F.Supp. 1084 (D.N.J. 1996) (finding that any communications between company and counsel involving legal opinions and legal advice was subject to attorney-client privilege).

It should be noted, however, that the attorney-client privilege may be waived if an attorney will be presenting evidence at a trial which was developed during the course of the investigation.  The attorney cannot assert the attorney-client privilege for the purpose of restricting disclosure of matters related to the investigation, and subsequently seek to introduce the information, or even selected portions of the information, as evidence on behalf of the employer at trial.  See Harding, supra, 914 F.Supp. at 1096) (attorney-client privilege waived as to investigatory files of counsel who conducted investigation of harassment allegations, when employer raised reasonableness of investigation as an affirmative defense; “by asking [the attorney] to serve multiple duties, the defendants have fused the roles of internal investigator and legal advisor.  Consequently, [the employer] cannot now argue that its own processes are shielded from discovery.”)  The waiver of the attorney-client privilege and work product privilege in this context also extends to documents which relate to the investigation, although the documents may be redacted to exclude attorney communications which reflect legal advice or legal opinion.  Id.; see also Payton, 148 N.J. at 551-52.

Where the attorney is acting in a business role, i.e., fact-finder, rather than in a legal role for purposes of offering legal advice or preparing for pending or threatened litigation, privileges may not apply.  In addition, the privileges will not protect the underlying facts from disclosure, even if those facts were contained in a communication to the attorney.  Upjohn, 449 U.S. at 395-96; see also XYZ Corp. v. United States, 509 U.S. 905 (1993) (communications between attorney and client regarding an internal investigation were privileged, but factual information contained in written communications, including the results of investigation, were not shielded from discovery).

For these reasons, both the attorney and employer should recognize that even where the employer has retained the attorney for purposes of investigating an internal complaint, only the attorney’s legal analysis and advice is privileged from disclosure, and the facts uncovered during the investigation are discoverable.

  • CONCLUSION

While no two investigations are exactly the same and there are no mandatory procedural rules or court imposed deadlines for conducting an investigation, an employer is well guided to ensure that any workplace investigation is conducted in a prompt and thorough manner by an unbiased and experienced investigator, resulting in effective remedial action in response to complaints of employee misconduct.

[1] These guidelines are not limited to charges of sexual harassment but also apply to all forms of workplace harassment that violate Title VII of the Civil Rights Act of 1964.  EEOC Enforcement Guidelines (1999). 

[2] Employers may not tell employees who make a complaint not to discuss the matter with co-workers while an investigation is ongoing, since such a request violates employees’ rights to discuss the terms and conditions of their employment as protected under Section 7 of the National Labor Relations Act.  See Banner Health Systems d/b/a Banner Estrella Medical Center, 358 NLRB No. 93 (July 30, 2012) (holding that employers could not apply a general rule prohibiting employees from discussing ongoing investigations of employee misconduct and that instead, it must first determine whether in any investigation there are grounds to justify a requirement of confidentiality, e.g., for protection of investigation witnesses, to protect evidence that is in danger of being destroyed, where testimony is in danger of being fabricated, or where there is a need to prevent a cover up).

 

Current Hot Topics in UK Employment Law

Current hot topics in UK employment law

What a difference the Brexit vote has already made. This time last year we were anticipating, with some certainty, various employment-related proposals from an established government. Now, what lies ahead is much less predictable, given a different prime minister, the prospect of Brexit and renewed calls for increased delegation of powers amongst the devolved governments, if not independence. In addition, the drain on government resources caused by Brexit preparations is already resulting in delays to legislation and consultations.

Brexit

The outcome of last year’s EU referendum did not result in any immediate changes to UK employment law and is unlikely to do so for some two years. The prime minister has committed that “as we translate the body of European law into our domestic regulations, we will ensure that workers’ rights are fully protected and maintained”. However, whilst no employment law changes are envisaged in the short-term, of immediate concern to many employers is the impact Brexit may have on the movement of workers. It is currently unclear how immigration will be managed post-Brexit, although the indications are that new controls on European immigration will seek to accommodate an ongoing need for skilled and seasonal workers.

Gender pay reporting

Addressing a reducing but persistent gender pay gap has been on the government agenda for some time. Regulations taking effect in April 2017 require larger employers in the private sector to report on their gender pay gap. There are similar regulations covering public sector employers operating in England.

The regulations require employers to publish the difference between the median and mean average hourly rate of pay paid to male and female employees; the difference between the median and mean average bonus paid to male and female employees; the proportions of male and of female employees who receive bonuses; and the relative proportions of male and female employees in each quartile pay band of the workforce.

In the private sector, employers’ first gender pay reports will have to be published no later than 4 April 2018, based on hourly pay rates as at 5 April 2017 and bonuses paid between 6 April 2016 and 5 April 2017. The public sector regulations will require the first pay reports to be published no later than 30 March 2018, based on hourly pay rates as at 31 March 2017 and bonuses paid between 1 April 2016 and 31 March 2017.

For private sector employers, there is no specific penalty for non-compliance. A key incentive is the risk of adverse publicity and reputational damage. However, compliance is also not risk-free, depending upon the data collated and how it is presented. Employers concerned that publication could prompt negative perception may therefore choose to volunteer additional information, explaining the context of any pay gap and how they are responding.

Labour law developments

Changes affecting the way trade unions organise industrial action came into force on 1 March 2017. These Trade Union Act provisions are aimed at stopping unrepresentative strike action, such as where disruption occurs despite a low turnout for the strike ballot. A new 50% threshold for voter-turnout during strike ballots now applies. An additional 40% support threshold applies for industrial action in important public services (including some health, education, fire, transport and border security services) where the majority of those entitled to vote are normally engaged in the provision of such services. Accompanying these changes are steps to tighten the supervision of picketing, longer advance notice of strikes, changes to the ballot paper and the re-balloting of ongoing disputes.

The balloting changes are anticipated to result in more focused, and possibly fewer, ballots, as trade unions seek to ensure the new thresholds are met. It is conceivable, however, that alternative forms of protest may also manifest where a minority of workers harbour strong grievances which are not supported more widely by colleagues. In addition, unions may challenge some of the changes on human rights grounds and the Welsh government is also disputing the application of some to Welsh devolved services.

The way in which trade unions operate has also come under recent government scrutiny. The result is a series of measures which will introduce new public sector check-off arrangements (where the employer deducts union subscriptions from pay), reporting on public sector facility time and an extension of the role of the Certification Officer (a form of regulator for trade unions). A phased implementation of these changes will take place over this year and next.

Hot topic litigation

The calculation of holiday pay has been a significant and high-profile employment law issue before the courts over recent years. The critical question under review was whether UK legislation could be read to conform with EU requirements in terms of what elements of pay fall due during periods of statutory holiday.

In February 2017 the UK Supreme Court refused permission to appeal and we now know that representative results-based commission and non-guaranteed overtime (overtime which workers are contractually required to perform) must be included in the calculation of holiday pay for the first four weeks of holiday under the Working Time Regulations. However, the position with respect to truly voluntary overtime (overtime which workers are not contractually required to perform) remains unclear. Although there are a number of first instance tribunal decisions which do suggest that truly voluntary overtime should be included, there is no binding UK authority on the point.

The other emerging hot topic relates to the employment status of workers, typically in the gig economy. A tribunal has ruled that two Uber drivers who brought test cases against the company were ‘workers’, not independent contractors, and were therefore entitled to holiday pay and to be paid at least the national minimum wage while working.

In UK law, having ‘worker’ status is a passport to a range of employment rights such as the national minimum wage, holiday pay and access to a pension scheme, although the full array of employment rights, including statutory sick pay and protection against unfair dismissal, is reserved for the narrower category of workers commonly referred to as ‘employees’.  Uber is appealing this decision.

Two further cases, one at first instance involving a cycle courier and the other in the Court of Appeal involving a self-employed plumber, were also successful in claiming ‘worker’ status.

At the same time, the government and MPs are conducting separate reviews into new forms of work, including the gig economy and worker status issues. There are also concerns that the growth in self-employment is reducing national tax revenue, which may result in a defensive response from the Treasury. Organisations reliant on contractors, freelancers, agency workers and the self-employed need to ensure that their staffing models keep pace with change in this area.

A national living wage

In 2016, the national minimum wage rate in UK increased significantly for workers aged 25 and over, with the introduction of a supplement the government termed, “the National Living Wage”.  This increment was accompanied by a promise of further rises in the following four years, the first of which takes effect from 1 April 2017, raising the statutory minimum pay level to £7.50 per hour for those aged 25 and to £7.05 for 21 to 24 year olds.

Applying these revised minimum pay rates has been a challenge for many UK employers. Employers need to be careful if they plan to vary employees’ existing terms and conditions to absorb the higher rate national living wage. Depending on the approach taken, such actions could be challenged by staff as unlawful.

Employment tribunal changes

There is one aspect of employment tribunal practice that has dominated the headlines in recent years and that is the introduction of tribunal fees. There is no doubt that the government is coming under increasing pressure to justify current fee-levels. In January 2017 it revealed the outcome of its fee review and launched a consultation on new proposals to change the fees remission scheme. The planned changes are relatively minor and fall a long way short of satisfying those who have called for an overhaul of the fees regime. That fight continues on 27 March, when the Supreme Court hears Unison’s appeal against the rejection of its legal challenge by the Court of Appeal. Although the government acknowledges that “there does appear to be evidence that fees have discouraged some people from bringing proceedings” it states that there is “no conclusive evidence that anyone has been prevented from doing so.”

Of more immediate impact is the introduction of a new online database of employment tribunal decisions allowing new decisions of the tribunal to be viewed online. Previously, the fact a claim has been pursued and the names of the parties required a trawl through paper documents held centrally at Bury St Edmunds, meaning many cases passed unnoticed by the wider public. Employers and claimants should be prepared for increased press interest and the potential use of such information by both sides to support their own contentions.

 Boosting apprenticeship funding

A high-profile manifesto pledge of the UK government on re-election in 2015 was the improvement and expansion of apprenticeships over a five year period. Pivotal to the government plans for apprenticeship growth is the question of funding and to generate greater financial support, from April 2017, an apprenticeship levy is to be introduced for employers with a payroll bill exceeding £3 million. The levy, of 0.5% of the salary bill, will be collected through the employer’s normal PAYE systems, alongside usual income tax and national insurance contributions. Employers paying the levy will have full access to their contributions to fund their apprenticeship needs but it also envisaged that many will not utilise their contributions in full, leaving a surplus the government can apply for the benefit of others, especially smaller, non-levy paying organisations.

In summary, while it is true that Brexit is diverting the government’s attention, it is also apparent from the above that there is still much to occupy employers and their lawyers in the interim.

The Wait is Over: The ICC’s New Expedited Procedure Rules (and other Updates)

The year 2017 could mark an important turning point for institutional international arbitration. On 20 October 2016, the International Chamber of Commerce (“ICC”) adopted a list of important revisions to its Rules of Arbitration (“ICC Rules”)[1].  By the time this article is published, for example, new “Expedited Procedure Rules” will have come into effect on 1 March 2017. These revisions aim to improve the efficiency and transparency of ICC arbitration.  Time will tell if they actually will.

Through the years, a number of concerns have been raised by parties – individuals, businesses, states, and international organizations – adopting or considering adopting institutional arbitration as a means of resolving their international disputes. These concerns are numerous, yet three common threads are a general desire to make international arbitration more affordable, a wish for more efficient tribunals, and a call for a change in a culture that is often seen as opaque. At the heart of this debate, and fueling calls for change, are an increase in the length of hearings, a significant increase in the breadth and volume of document production, delays in obtaining awards, and the absence of an obligation on the part of certain institutions to provide reasons for institutional decisions that impact an arbitration. Such calls are not surprising since international arbitration was born of the desire to provide parties with a low-cost, effective and efficient alternative to litigation before the courts.  One illustration of the problem has been a significant decline in the number of so-called small cases (i.e. claims involving amounts below US$ 1 million) administered by the ICC[2].

The adoption and implementation of the Expedited Procedure is an attempt by the ICC to address these concerns and to ensure that ICC arbitration remains an attractive means of international dispute resolution notwithstanding the level of complexity of the case and the amount at stake. While some critics may argue that these changes long overdue, they should nevertheless be welcomed by users of international arbitration as well as by counsel and arbitrators.

In December 2016, in a text published in the ICC Dispute Resolution Bulletin, the President of the ICC International Court of Arbitration, Alexi Mourre, described as follows the spirit and rationale behind the Expedited Procedure Rules:

“Some of our colleagues sometimes say in conferences – half jokingly perhaps, but half seriously as well – that in arbitration parties get to choose two out of the three advantages of quality, speed and limited costs; if you have speed and quality, you should be prepared for increased costs, but with less speed, etc. ICC takes issue with that. Our message is that if the parties so decide, they can get quality, speed and limited costs. This is the aim of ICC’s new Expedited Procedure Rules, adopted by the ICC Executive Board on 20 October 2016.”[3]

As to the Expedited Procedure itself, three elements are particularly noteworthy:

  • Under the Expedited Procedure Rules, notwithstanding any contrary term or provision of the arbitration agreement binding the parties, the Court may now submit the arbitration case to a sole arbitrator (as opposed to a three-person tribunal)[4];
  • Under the Expedited Procedures Rules, the arbitrator has six months from the date of the case management conference to render the award[5];
  • The Expedited Procedures Rules expressly confers very extensive powers on the arbitrator with regard to procedure.

The first of these has obvious and broad ramifications. It has the potential to reduce the problems relating to the constitution of the tribunal including its fees, the number of objections raised, the question of the availability of its members, and the time needed to deliberate and agree on the award. On the other hand, it limits party autonomy in a way that has rarely been seen before. It deprives parties of the traditional ability to appoint one arbitrator each – an arbitrator who may, at least in their view, have a better understanding of their concerns – as members of a three-person tribunal, potentially impacting, some say, the legitimacy or integrity of the award itself.

The second of these elements is also significant. Under the Expedited Procedure Rules, the case management conference has to take place at the latest 15 days after the transmission of the file to the arbitrator[6]. The analysis and the drafting of the award will usually take about a month. If the arbitral tribunal has six months after the case management conference to render the award – which might include one month of deliberation and drafting – the remaining time does not leave much time for the process to unfold. Although in all cases the ICC Court may grant an extension if necessary[7], there will be a tremendous pressure on each participant to the arbitration process to get the work done within a short delay.

Also noteworthy, the Expedited Procedures Rules expressly confers very extensive powers on the arbitrator with regard to procedure. Article 3 provides that:

  • “[…] the arbitral tribunal may, after consultation with the parties, decide not to allow requests for document production or to limit the number, length and scope of written submissions and written witness evidence (both fact witnesses and experts)” (para. 4);
  • “[t]he arbitral tribunal may, after consulting the parties, decide the dispute solely on the basis of the documents submitted by the parties, with no hearing and no examination of witnesses or experts”(para. 5).

It is to be expected that these rules will give rise to claims of due process violation by unsatisfied parties.

In addition to the innovations described above, it is to be noted that Article 23 of the ICC Rules which provides that the first task of a tribunal is to prepare, in collaboration with the parties, a document referred to as “Terms of References” – one of the hallmarks of ICC arbitration – will not apply to the Expedited Procedure[8]. Furthermore, once the arbitral tribunal is constituted under the Expedited Procedure Rules, the parties will not be entitled to present new claims without authorization of the tribunal[9]. Article 3 of Appendix VI of the ICC Rules sets up the elements that the arbitral tribunal could consider to decide whether a new claim should or should not be authorized, namely its nature, its cost implications, the stage of the arbitration, and any other relevant circumstances.

Most importantly, the rules contained in the new Article 30 of the ICC Rules and in the Appendix VI will apply automatically if three conditions are met: (1) the arbitration agreement is concluded after 1 March 2017, (2) the amount in dispute is below US$ 2 million, and (3) the parties have not explicitly chosen to derogate from the expedited procedure[10].  Going forward this means among other things that parties negotiating an arbitration agreement should consider seriously the possibility of “opting-out” where they feel that the Expedited Procedure is not ideally suited to the type of dispute envisaged. An example of an opting-out clause is available at the end of the revised ICC Rules. Such a clause should be drafted carefully keeping in mind that if it is not clear enough, the Expedited Procedure Rules will apply and the parties will be deemed to have agreed to them. In other words, problems might inadvertently arise where arbitration agreements contradict the provisions contained in the Expedited Rules. Without entirely opting-out, the parties could also potentially decide in advance to derogate to some sections of the Rules only, for example to have three arbitrators instead of a sole one. The ICC Court might however have the power to ignore such exemption if it finds that it violates the spirit of the Rules and the Appendix (see: Article 5 of Appendix VI of the ICC’s Rules).

While these Expedited Procedure Rules will apply on an opt-out basis to all arbitration agreements satisfying the conditions mentioned above, the ICC Court retains the power to decide that the Expedited Procedure Rules should not apply in a particular case[11]. The current Rules and explanatory Note to Parties do not indicate on what basis such a decision would be made. One may presume that a key factor will be the level of complexity of the case. This is based on the premise that the amount in dispute does not always – although often – reflect the level of complexity of a case. Following the same logic, parties to a dispute for which the amount in dispute is greater than US$ 2 million, should also consider, where appropriate, the possibility of “opting-in”. Indeed, nothing prevents parties from agreeing to use the Expedited Procedure. On the contrary, this should even be encouraged where the circumstances allow it.

Finally, it is worth mentioning that the fees under the Expedited Procedures Rules, which include the administrative fees paid to the ICC and the fees due to the sole arbitrator, are 20% lower than the fees applicable to other ICC proceedings[12].

These new rules, while novel in the context of ICC arbitration, are largely inspired by the existing rules of arbitration institutions, for example the Singapore International Arbitration Centre (SIAC), and the International Centre for Dispute Resolution (ICDR). As mentioned above, this set of changes form part of a broader effort by the ICC to enhance efficiency and transparency in international arbitration. They are part of a broader reform in which the streamlining procedure has not been left out. The following changes to the ordinary procedure should also be mentioned:

  • Article 23(2) has been amended to reduce the time-limit for the establishment of Terms of Reference from two months to one month;
  • Article 11(4) has been amended, in order to allow the ICC Court to provide reasons for its decisions made on challenges, as well as for other decisions;

Survey after survey shows that arbitration is the preferred disputed resolution mechanism for cross-border disputes. When it comes to decide between institutional arbitration and ad hoc arbitration, users more often than not choose the former. The ICC is itself the love-child of institutional arbitration. In 2016, the annual International Dispute Resolution Survey for Technology, Media and Telecoms Dispute showed that the ICC was the choice of 64% of the respondents. For EU based respondents, this number goes up to 74%[13]. If these revisions to the ICC Rules have the intended effect, that is to reduce the time and cost of arbitrating these claims, they could confirm and increase the existing trend. The manner in which the Expedited Procedure Rules will be applied will be of significant importance considering the many applicable exceptions. This will determine whether or not the entry into force of these rules will be a turning point for the ICC or more like a stone thrown into a pond.

 

[1] These rules are available at http://www.iccwbo.org/Data/Documents/Business-Services/Dispute-Resolution-Services/Arbitration/Arbitration-Rules/ICC-Rules-of-Arbitration-2017-Revision/.

[2] See the ICC Statistics from 1999 to 2015 available at http://www.iccwbo.org/Products-and-Services/Arbitration-and-ADR/Arbitration/Introduction-to-ICC-Arbitration/Statistics/.

[3] Alexis Mourre, “Message from the President” (2016) 2 ICC Bull. 3, at 4.

[4] See Expedited Rules at Appendix VI, Art. 2(1)-(2).

[5] See id, Art. 4(1).

[6] See id, Art. 3(3).

[7] See id, Art. 3(3) and 4(1).

[8] See id, Art. 3(1).

[9] See id, Art. 3(2).

[10] See ICC Rules, Art. 30(1)-(3).

[11] See Expedited Rules at Appendix VI, Art. 1(4).

[12] See id, Art. 4(2) and Appendix III of the ICC Rules.

[13] The report from Queen Mary University of London and Pinsent Masons is available at http://www.arbitration.qmul.ac.uk/research/2016/.

Automatic Exchange of Information & the end of the Bank Secrecy era

International automatic exchange of financial account information (AEoI) – an issue of global importance[1] closely discussed and analyzed by professionals and market players during the last year – is constantly evolving, and, thus, requires further analysis and attention. We have already provided the basics of AEoI and its global standard in previous articles while in this article we would like to present a brief update hereof and implications for businesses, in light of the actual commencement of AEoI by countries in 2017.

As a reminder, a landmark Agreement introducing international AEoI, namely the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA) prepared by the OECD, was signed on October 29th, 2014 at the 7th meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes. Prior to the MCAA execution, in 2013, the G20 Finance Ministers and Central Banks’ Governors endorsed the European initiative of information exchange based on US FATCA codes (which gave rise to such international phenomena as the AEoI), and in September 2014 they proceeded to approve the global AEoI standard. This standard – called the ‘Standard for Automatic Exchange of Financial Account Information – Common Reporting Standard’ (CRS) – will be used as the standard for reporting purposes, while the MCAA is the international agreement activating the OECD AEoI.

By the end of 2016 more than 101 jurisdictions had either signed MCAA or committed to implement AEoI via the CRS. Some of these jurisdictions (early adopters) have undertaken to commit first information exchanges in 2017 and the others (late adopters) will do so during 2018. The list of such jurisdictions is constantly growing. According to the latest news, Pakistan, Switzerland and Liechtenstein has ratified OECD Convention on Mutual Administrative Assistance in Tax Matters, thus soon we can expect those countries to join the Global Standard on AEOI. At the same time, a number of jurisdictions have neither signed MCAA nor officially committed to implement CRS, including in particular Armenia, Azerbaijan, Belarus, Georgia and some other countries.

In the official press release of the OECD dated 22 December 2016, it was stated that there are now more than 1,300 bilateral relationships in place across the globe, most of them based on the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (the CRS MCAA). Thus, bilateral agreements based on the CRS MCAA are the most popular way of implementing the AEoI between a pair of jurisdictions. Besides, CRS can be also implemented by countries based on double tax treaties and bilateral tax information exchange agreements. The largest amount of bilateral information exchange relationships established, as well as CRS implementations, was made by and between EU countries.

In 2016, countries have only begun to collect the reportable financial account information to be automatically exchanged while the first such exchanges will take place during 2017.

In regards to Cyprus, on October 29, 2014, the Republic of Cyprus – following a Council of Ministers decision dated October 22, 2014 – signed the CRS MCAA, and determined September 2017 to be the first date of exchange (i.e. with respect to exchange of data pertaining to the year 2016). Cyprus banks have already started gathering the information for the CRS reporting. In January 2017, Cyprus banks commenced reporting to the local tax authorities. It is expected that by September 2017 the first exchange of information between tax authorities will take place. Information will be exchanged on automatic basis only with jurisdictions with which Cyprus has mutually agreed to exchange information based the relevant bilateral agreements.

We would like to separately note several specific issues which are worth taking into account by actual businesses in view of the commencement of the global AEoI, and, if necessary, to take relevant timely measures in order to avoid respective negative consequences with this regard. In particular:

  • reporting under CRS shall be made by the reportable financial institutions which should report to relevant competent authorities of their respective jurisdictions about reportable persons accordingly. Once a financial institution is classified and determined as the “financial institution”, further its necessary to determine whether its reportable or not reportable. . Reportable institution shall be subject to relevant due diligence and reporting requirements. Accordingly, strong due diligence procedures and relevant technical infrastructure will need to be in place to facilitate the recognition of reportable accounts and gather the accountholder identifying information that needs to be reported for such accounts, and to also ensure the protection of personal information within the AEoI;
  • reportable persons under CRS will include any individual or entity that is resident in a reportable jurisdiction under the tax laws of such jurisdiction, other than a corporation, the stock of which is regularly traded on one or more established securities market; any corporation that is a related entity of a corporation described above; a governmental entity; an international organization; a central bank, a financial institution; and pre-existing entity accounts (those that are open on 31 December 2015, starting from 1 January 2016 – new accounts) the aggregate account balance of which does not exceed USD 250,000 as of December 31, 2015 or in any subsequent year. The accounts of financial institutions themselves are not reportable based on CRS. The above exemptions from reporting can be considered for purposes of businesses structuring or restructuring in the new global reality.
  • only passive Non-Financial entities (NFEs) will be obliged to disclose their controlling persons – which, in most cases, are the ultimate beneficiary owners (UBOs) of such entities. The criterion for determining whether the NFE is active or passive is the following: active NFE is an entity whose gross income for the preceding calendar year or other relevant reporting period consists of no more than 50% passive income (i.e. dividends, interests and royalties), and less than 50% of the assets held by the NFE during the preceding calendar year or other relevant reporting period are assets that produce or are held for the production of passive income. All the other NFEs which do not qualify as active ones are considered to be passive NFEs.
  • The controlling person (natural persons), to be reported automatically by passive NFEs, are the following persons:
  • for companies and cooperative societies: UBO(s), who ultimately owns or controls a legal entity through direct or indirect ownership of 10% and more shares in the company`s capital (for Cyprus – 25% and more). In case no natural person(s) can be identified as exercising control of the entity, the controlling person(s) of the entity will be the natural person(s) who holds the position of senior managing official, except for entities that are (or are majority owned subsidiaries) an entity listed on a stock exchange;

–      for unions, administrative committees, foundations, clubs, association and funds raising committees: members of the Board of Directors/Committee and administrators of accounts;

–      for trusts (if trust qualifies as passive NFI): the settlor(s), trustee(s), the protector(s) (if any), the beneficiary(ies) and any other natural persons exercising ultimate effective control over the trust. If trust qualifies as a financial institution, then different reporting requirements apply.

Despite the above mentioned strict requirements and rules, there is a number of legitimate, doable and practicable options of escaping reporting under CRS for the reason of being exempt therefrom, or not covered by the relevant requirements. In any case, regardless of whether you will be subject to AEoI under the CRS or will be excluded, the fact is that all businesses will be either directly or indirectly affected by new rules in the international tax sphere. As such, businesses will need to quickly adapt to the new reality.

We at Eurofast are ready to meet all your needs and assist you with any requests which you may have with respect to the introduction of AEoI and provide you with practical solutions which would meet your financial and business needs.

 

[1] AEoI is a global instrument for the prevention and fighting against tax avoidance and the hiding of taxable assets abroad. It has been first initiated by OECD in order to put dividends, interest, royalties, proceeds of the sale of financial assets, other income and account balances within the scope of AEoI.

The EU General Court Endorses the Reasoning of the European Commission in Relation to Reverse Payment Settlements

With the Lundbeck Decision, the European Commission’s (the “Commission” and the “Decision,” respectively) ended its ten-year investigation on reverse payment settlements and found that the Danish pharmaceutical company, Lundbeck, and four generics producers had concluded anticompetitive agreements, in breach of Article 101 of the Treaty on the Functioning of the European Union (the “TFEU”).[2]  According to the Commission, this would have allowed Lundbeck to keep the price of its drug citalopram artificially high.

On 8 September 2016, the EU General Court (the “General Court”) confirmed that certain pharmaceutical “reverse payment settlements” can constitute a breach of the EU antitrust rules (the “Ruling”).[3]  Under the so-called “reverse payment settlement agreements”, an original pharmaceutical manufacturer, or “originator”, settles an IP challenge from a manufacturer of generics by paying the latter to stay out of the market.

II. Background

According to its website, Lundbeck is “ a global pharmaceutical company specializing in psychiatric and neurological disorders”.[4]  These include medicinal products for treating depression .[5]  From the late 1970s, Lundbeck developed and patented an antidepressant medicinal product containing the active ingredient ‘citalopram’.[6]

After its basic patent for the citalopram molecule had expired, Lundbeck only held a number of the so-called “process” patents, which, according to the Commission, provided only “a more limited protection”.[7]  In particular, Lundbeck had filed a salt crystallisation process patent.[8]

According to the Commission, in 2002, Lundbeck concluded six agreements concerning citalopram with four entities active in the production or sale of generic medicinal products, namely Generics (UK), Alpharma, Arrow and Ranbaxy.  Always according to the Commission, in return for the generic undertakings’ commitment not to enter the citalopram market, Lundbeck paid them substantial amounts .[9]  In addition, Lundbeck purchased stocks of generic products for the sole purpose of destroying them, and offered guaranteed profits in a distribution agreement.[10]

In October 2003, the Commission was informed of the existence of the agreements at issue by the Konkurrence- og Forbrugerstyrelsen (the “KFST”, the Danish authority for competition and consumers).[11]  The Commission took over the case and, by decision of 19 June 2013, made the following findings:  (i) Lundbeck and the generic undertakings were at least potential competitors;[12] and (ii) the agreements at issue constituted restrictions of competition by object, in breach of the prohibition of anticompetitive agreements provided for under Article 101 TFEU.[13]  The Commission imposed a total fine of €93.7 million on Lundbeck and € 52.2 million on the generic undertakings.  The Commission took into consideration the length of its investigation (almost ten years) as a mitigating circumstance which led to fine reductions of 10%.[14]  Lundbeck and the generic undertakings brought actions before the General Court, seeking the annulment of the Commission’s decision.  The Court dismissed the actions brought by Lundbeck and the generic undertakings and confirmed the fines imposed on them by the Commission.[15]

After the Lundbeck case, in 2013 and 2014, the Commission imposed fines on companies in two other reverse settlement investigations – one concerning fentanyl, a pain-killer[16], and the other concerning perindopril, a cardiovascular medicine.[17]  The Fentanyl decision was not appealed.  Several appeals against the Servier decision are pending before the General Court.[18]  In 2016 in the Paroxetine Investigation, the UK Competition and Market Authority issued infringement decisions to a number of companies regarding ‘pay-for-delay’ agreements over the supply of an antidepressant.[19]

In addition, since 2009, the Commission has been continuously monitoring patent settlements in order to identify settlements which it regards as “potentially problematic” from an antitrust perspective, namely those that limit generic entry against a value transfer from an originator to a generic company.  The latest report was published in December 2015.[20]

III. The Ruling

First, like the Commission, the Court analysed whether Lundbeck and the generic manufacturers concerned were indeed potential competitors at the time the agreements at issue were concluded.[21]  The General Court made the following findings in this regard:

In order for an agreement to restrict potential competition, it must be established that, had agreement not been concluded, the competitors would have had “real concrete possibilities” of entering that market.[22]  The Court held that the Commission had carried out a careful examination, as regards each of the generic undertakings concerned, of the real concrete possibilities they had of entering the market.  In doing so, the Commission relied on evidence such as the investments already made and the steps taken in order to obtain a marketing authorisation[23]

Moreover, the Court noted that in general the generic undertakings had several real concrete possibilities of entering the market at the time the agreements at issue were concluded.[24]  Those possible routes included, inter alia, launching the generic product with the possibility of having to face infringement proceedings brought by Lundbeck (i.e., the so-called launching ‘at risk’).[25]  More precisely, the General Court was of the view that “the presumption of validity cannot be equated with a presumption of illegality of generic products validly placed on the market which the patent holder deems to be infringing the patent”.[26]  Consequently, the Court, continued, “’at risk’ entry is not unlawful in itself”.[27]

As rightly noted by commentators, these considerations introduce a further layer of complexity in the already intricate relationship between EU Competition law and IP law. In addition, since the right to exclude lies at the core of any IP right, it can be argued that the Commission’s findings infringes Article 345 TFEU, according to which “[t]he Treaties shall not prejudice the rules in the Member States governing the system of property ownership”.  Thus, Ibañez Colomo has noted that “Lundbeck departs from the principle whereby an agreement is not restrictive by object where it remains within the substantive scope of an intellectual property right”.[28]  This principle would derive from the Eraw-Jacquery,[29] Coditel II,[30] BAT v. Commission and Nungesser[31] rulings of the ECJ.  Ibañez Colomo’s point becomes particularly clear at para. 335 of the (Lundbeck) Ruling where the General Court expressly noted that “even if the restrictions set out in the agreements at issue fall within the scope of the Lundbeck patents – that is to say that the agreements prevented only the market entry of generic citalopram deemed to potentially infringe those patents by the parties to the agreements and not that of every type of generic citalopram – they would nonetheless constitute restrictions on competition ‘by object’ since, inter alia, they prevented or rendered pointless any type of challenge to Lundbeck’s patents before the national courts, whereas, according to the Commission, that type of challenge is part of normal competition in relation to patents (recitals 603 to 605, 625, 641 and 674)”.[32]

Second, the Court analysed whether the Commission was entitled to conclude that the agreements at issue constituted a restriction of competition by object, a point to which we will turn next.

IV. Conclusions:  On Reverse Payments as Restrictions of Competition by Object

The Lundbeck ruling brings a number of what Donald Rumsfeld would probably refer to as “known unknowns”, that is things we know we do not know, in relation to reverse payment settlements.[33]  Indeed, the findings of the Lundbeck ruling can be summarised as follows:

  1. There are certain patent settlements which are likely to be considered compatible with Article 101 TFEU. This is the case of settlements:

    a. In which, in the words of the General Court, “(i) payment is linked to the strength of the patent, as perceived by each of the parties; (ii) [payment] is necessary in order to find an acceptable and acceptable and legitimate solution in the eyes of two parties and (iii) [payment] is not accompanied by restrictions intended to delay the market entry of generic”.[34]

    The inclusion of the word “and” is worrying.  The requirements set out in the preceding paragraph should be alternative and not cumulative.  Otherwise for a settlement to be lawful it must not delay entry (which probably is enough, in and of itself, to avoid the antitrust concern, namely, a delayed entry of generics) and it must be necessary (i.e., it probably needs to meet the requirements of an ancillary restraints defence, more on which below) and the payment might be linked to the strength of the patent “as perceived by each of the parties”.  Such an intrinsically subjective requirement appears to the writer as particularly complicated to administrate and at odds with the objective nature of Article 101(1) TFEU.  It would appear that the Court is encouraging conversations such as the following: “let’s settle, but only if we can ensure the settlement reflects (and comes across as reflecting) your and my perception of the strength of the patent (and a number of other cumulative requirements my lawyers and I need to meet), otherwise we might have an antitrust concern”.

    b. Qualifying for an ancillary restraints defence. e., settlements in relation to which the parties to the settlement (for the burden of proof will be on them) can demonstrate they are objectively necessary and proportionate in order to defend their IP rights.[35]

  1. There are certain patent settlements which are likely to be considered incompatible with Article 101 TFEU as restrictions of competition by object. The ruling is not particularly clear in this regard.

    a. Aliteral reading of paragraph 334 of Lundbeck could potentially make “problematic” each patent settlement “where they [provide] for the exclusion from the market of one of the parties, which was at the very least a potential competitor of the other party, for a certain period, and where they were accompanied by a transfer of value from the patent holder to the generic undertaking liable to infringe that patent (‘reverse payments’).”

    b. A more holistic reading of Lundbeck would confine the Commission’s finding to the facts of the case. Even though it is difficult to pinpoint what the court considered to be the decisive factors when stating that a reserve settlement constituted a restriction by object, the following factors appear to have been relevant:

    1. The allegedly “disproportionate nature” of such payments “combined with other factors, such as the fact that the amounts of those payments seemed to correspond at least to the profit anticipated by the generic undertaking”.[36] Referring to the US Supreme Court ruling in Actavis,[37] the Court indicated that “the size of a reverse payment may constitute an indicator of the strength or weakness of a patent”.[38]  According to the Commission “the higher the originator undertaking estimates the chance of its patent being found invalid or not infringed, and the higher the damage to the originator undertaking resulting from successful generic entry, the more money it will be willing to pay the generic undertaking to avoid that risk”.[39]
    2. Indeed, the correspondence between the amount of the payment that seemed and the profit anticipated by the generic undertakings if they had entered the market.[40] According to the Commission “the value which Lundbeck transferred, took into consideration the turnover or profit the generic undertaking expected if it had successfully entered the market”. [41]
    3. The absence of provisions allowing the generic undertakings to launch their product on the market upon the expiry of the agreement without having to fear infringement actions brought by Lundbeck.[42]
    4. The presence in those agreements of restrictions going beyond the scope of Lundbeck’ s patents,[43] such as restrictions with regard to citalopram products that could have been produced in a non-infringing manner.[44]
    5. According to the Court, “the agreement at issue transformed the uncertainty in relation to the outcome of such litigation into the certainty that the generics would not enter the market which may also constitute a restriction on competition by object when such limits do not result from an assessment, by the parties of the merits of the exclusive right at issue, but rather from the size of the reverse payment which, in such case, overshadows that assessment and induces the generic undertaking not to pursue its independent efforts to enter the market”.[45] The generics thus no longer had an incentive to continue their independent efforts to enter the market[46].
  1. There are certain patent settlements which (presumably) are considered to be incompatible with Article 101 TFEU as restrictions of competition by their effects. Hic sunt dracones.  More precisely, given that none of the pay-for-delay decisions dealt with by the  Commission conducted an effects analysis, we are left without guidance as to how that analysis will be conducted.  Again, a known unknown.  The Commission’s ten-year investigation on reverse payment settlements has not shed light to how to conduct an effects analysis under Article 101(1) TFEU.  We are left, perhaps, with the findings of the US Supreme Court in Actavis, according to which, “the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payer’s anticipated future litigation costs, its independence from other services for which it might represent payment and the lack of any other convincing justification.  The existence and degree of any anticompetitive consequences may also vary among industries”.[47]

Moreover, to the extent that the case for restrictions of competition by object is administrability, this author cannot but note that the Lundbeck ruling does not constitute a positive evolution.  The General Court noted that “it is established that certain collusive behaviour […] may be considered so likely to have negative effects, in particular on the price, quantity or quality of the goods and services, that it may be considered redundant, for the purposes of applying Article 101 TFEU to prove that they have actual effects on the market”.[48]  However, the Decision has 464 pages.  Given that the Fentanyl and Servier decisions occupy 147 and 813 pages, respectively, in investigations that lasted for almost ten years, 27 months and 5 years (again, respectively), one cannot but wonder whether the Commission’s resources would have been better spent analysing the actual effects of the agreement and not defending a legal category.

*                                              *                                              *

   [1]   Pablo Figueroa and Suzanne Nusselder are, respectively, a senior associate and a trainee with Gibson, Dunn & Crutcher LLP’s Brussels office.  In addition, Pablo Figueroa is a visiting Lecturer at Queen Mary University (London, United Kingdom), a guest lecturer at Oxford University and a guest lecturer and senior external researcher at Deusto Translaw Research Group.  The author is grateful to Fredrik Löwhagen, from Linklaters, Rais Amils, from Clifford Chance, Paulius Mencas from Valiunas Ellex and Professors Herbert Hovenkamp, Stephen Calkins and Pablo Ibañez, and to Rakhal Zamal, trainee at the Brussels office of Gibson Dunn & Crutcher LLP, for their comments.  Any remaining mistake is of the authors.  The views in this article do not represent those of Gibson, Dunn & Crutcher LLP or its clients.

   [2]   Commission Decision C(2013) 3803 of 19 June 2013 relating to a proceeding under Article 101 [TFEU] and Article 53 of the EEA Agreement, Case AT.39226 — Lundbeck (the “Decision”).

   [3]   See T-472/13 Lundbeck v. Commission [NYR] (the “Ruling”).

   [4]   See, for more detail, http://www.lundbeck.com/global/about-us.

   [5]   See Ruling, at para. 1.

   [6]   See Ruling, at para. 16.

   [7]   See European Commission Press Release IP/13/563, 19 June 2013, available athttp://europa.eu/rapid/press-release_IP-13-563_en.htm?locale=en.  It should be recalled, in this regard, that, according to Article 27 of the TRIPS (WTO) Agreement, “patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application“.

   [8]   See Ruling, at para. 20.

   [9]   See Ruling, at paras. 26; 35; 39; 42-43 and 47-48.

  [10]   See Ruling, at para. 26; 35; 39; 42-43; 47-48.

  [11]   See Danish Competition and Consumer Authority Press Release 1120-0289-0039/VIS/SEK, 28 January 2004 , available at: http://www.kfst.dk/Afgoerelsesdatabase/Konkurrenceomraadet/Styrelsesafgoerelser/2004/Undersoegelse-af-Lundbeck?tc=E538038EB1E04A96B9964BE4C0F85F46 (Only available in Danish)

  [12]   See Decision at paras. 610 ff.

  [13]   See Decision at paras. 647 ff.

  [14]   See Decision, at paras. 1306, 1349 and 1380.

  [15]   See Ruling, Operative part.

  [16]   See European Commission Press Release IP/13/1233, 10 December 2013, available at: http://europa.eu/rapid/press-release_IP-13-1233_en.htm.

  [17]   See European Commission Press Release IP/14/799, 9 July 2014, available at: http://europa.eu/rapid/press-release_IP-14-799_en.htm.

  [18]   See OJ L C-462/25, 22.12.2014

  [19]   See Case CE/9531-11 Paroxetine 12 February 2016.  For a comment on the case see Ezrachi, A., EU Competition Law: An Analytical Guide to the Leading Cases, 5th Edition, Bloomsbury, 2016, 396

  [20]   See, European Commission, “6th Report on the Monitoring of Patent Settlements (period: January-December 2014)”, 2 December 2015, available athttp://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/patent_settlements_report6_en.pdf.

  [21]   See Ruling.  The General Court separately analysed each agreement.  See, inter alia, in relation to Lundbeck and Merck, para. 225; in relation to Lundbeck and Arrow, paras. 266-270, in relation to Lundbeck and Alpharma, para. 290 and, in relation to Lundbeck and Ranbaxy, para. 330.

  [22]   See Ruling, at para. 100.  See further Case T-360/90 E.ON Ruhrgas and E.ON v Commission, at para. 98.

  [23]   See Ruling, at para. 129.

  [24]   See Ruling, at para. 97.  See further Decision, at para. 635.

  [25]   See Ruling, at paras. 121.

  [26]   See Ruling, at paras. 97.

  [27]   See Ruling, at para. 122.

  [28]   See Ibañez Colomo, P., “GC Judgment in Case T-472/13, Lundbeck v Commission: on patents and Schrödinger’s cat”, at Chillin’ Competition, 13 September 2016, available athttps://chillingcompetition.com/2016/09/13/gc-judgment-in-case-t-47213-lundbeck-v-commission-on-patents-and-schrodingers-cat/.

  [29]   See Case 27/87 SPRL Louis Erauw-Jacquery v La Hesbignonne SC.

  [30]   See Case 262/81 Coditel SA, Compagnie generale pour la diffusion de la television, and others v Cine-Vog Films SA and others.

  [31]   See Case 258/78 Nungesser v Commission.

  [32]   See Ruling, at paragraph. 335.

  [33]   See Rumsfeld, D., Known Unknown:  A Memoir, Sentinel, 2011.

  [34]   See Ruling, at para. 350.

  [35]   See Ruling, at paras. 451 ff, in particular, at paras. 458 and 460.

  [36]   See Ruling, at paras. 354; 355.

  [37]   See Federal Trade Commission v. Actavis, 570 US (2013).

  [38]   See Ruling, at paragraph 353.

  [39]   See Decision, at para. 640.

  [40]   See Ruling, at paras. 354; 383; 414.

  [41]   See Decision, at paras. 6; 788; 824; 874; 962; 1013; 1087.

  [42]   See Ruling, at paras. 354; 383; 410.

  [43]   See Ruling, at paras. 354; 383.

  [44]   See Decision para. 693.

  [45]   See Ruling, at para. 336.

  [46]   See Ruling, at paras. 355; 360.

  [47]   See Federal Trade Commission v Actavis 570 US 2013.

  [48]   See Ruing, at para. 341.

RECENT DEVELOPMENTS – COMPANY FORMATIONS IN GREECE

The Greek Private Capital Company and recent legislative initiatives to meet current business requirements.  

According to the Greek legislation, the following types are the main capital company formations for conducting business in Greece and are usually preferred over entrepreneurships, in principal due to the limited liability of their shareholders : (i) the Greek limited liability by shares company (“Societe Anonyme” – “SA”), (ii) the limited liability company (“EPE”), (iii) the Private Capital Company (“PCC”- “I.K.E.”) and (iv) the European company (“Societas Europea” -“SE”). While the SA has been for years the most common company formation in Greece, recently the P.C.C. has started to gain significant ground due to fewer formal requirements for incorporation that enable its operation literally few days after its registration at the Business Register.

Introduced in Greece in virtue of the law n. 4072/2012, the P.C.C is incorporated pursuant to a simple private agreement signed by its founders. The articles of association are included in the agreement and can be customized according to the special needs or objects of the desired business. The agreement for the company’s incorporation should then be filed with the competent – determined by the place of the company’s registered seat and main business activity – Business Register and the whole procedure for the company’s establishment is completed at the One-Stop-Shop department of the Business Register, within 10-15 days after the submission of the required documentation. Simultaneously with the company’s registration at the Business Register, the company is also directly registered at the Greek Tax Authorities, obtaining a Tax Identification Number, which is necessary for starting conducting business according to its objects. For any amendments to the articles of association or for any shares sale and purchase agreements thereof during the lifetime of the company, a simple private agreement suffices; amendments to the articles of association should be also filed with the Business Register and they come into force upon their registration.

The articles of association of a P.C.C, any amendments thereof and the shareholders’ resolutions could be drafted in one of the official EU languages, but the Greek version shall prevail concerning relations between the company and its shareholders on one hand and third parties on the other hand. The founders of a P.C.C. resolve upon the amount of the share capital, without any limitation as per its minimum amount (this could be even zero). Since the previously imposed tax of 1% on the company’s initial share capital has been abolished (according to law n. 4254/2014, yet remaining for any share capital increase), actually there are not any restrictions towards determining the initial share capital, apart from that this should be deposited at the company’s treasury or bank account within 30 days of registration.

Regarding management, the P.C.C. is managed by one or more administrator(s), whose powers of representation are determined in the articles of association and by the shareholders’ resolutions. The administrator should be a natural person/individual, Greek or European citizen holding a Tax Payer Identification number in Greece, and in case of a non-European resident, a Visa is normally requested (Visa-D for business executives), according to the provisions of law n. 4251/2014 (Greek Immigration and Social Integration Code). The administrator should be also registered at the Greek social security system and pay the respective social security contributions. The administrator is liable towards the company for any breach of the company’s articles of association, of the law or of the shareholders’ resolutions, as well as for any damage caused as a result of breach of duties. Such liability does not exist in case of actions or omissions based on a lawful resolution taken by the shareholders or on reasonable business decision, conducted in good faith, based on sufficient information and only towards the corporate interest. If more managers acted together, they are jointly and severally liable. The shareholders may discharge the administrator(s) from any and all liability during the annual General Meeting of the shareholders which resolves upon the approval of the financial statements of the previous fiscal year.

As per the reporting requirements, apart from obligation to file with the Business Register any amendment to the articles of association as well as any resolution taken by the shareholders or the administrator that should be filed according to the law, the annual financial statements should be also filed with the Business Register and then approved by the shareholders. Greek Law n. 4403/2016, which incorporated into the Greek legal system the EU Directive 2013/34/EC, has recently introduced several developments concerning the commercial companies’ financial statements by regulating their preparation and publication based on their classification, aiming at the facilitation of cross-border investment and the improvement of Union-wide comparability and public confidence in financial statements and reports through enhanced and consistent specific disclosures. This regulation, which is applicable to all capital –by shares – companies, attempts to balance between the interests of the addressees of financial statements and the interest of undertakings in not being unduly burdened with reporting requirements.

The main advantages of the P.C.C. and the flexibility for its incorporation and operation are obvious when compared with the corresponding legal requirements for the incorporation of a Societe Anonyme (“SA”); governed by mandatory legislation (“ius cogens”), i.e. the codified law n. 2190/1920, the Greek SA is incorporated through a notarial deed, executed before a notary public in Greece, which includes the company’s articles of association. The share capital should be always indicated in money even if the shareholders’ contributions consist in kind. The share capital, which should be at least 24.000,00 Euro, must be paid either in cash or in kind within two (2) months after registration. After the execution of the notarial deed for the incorporation, the company should be registered at the competent Business Register and upon its registration, it acquires legal personality. The rest of corporate documentation (minutes of General Meetings of the shareholders and minutes/resolutions of the Board of Directors) do not have to be notarized, except for the General Meetings of the Shareholders in case of one sole shareholder. The SA is managed by a Board of Directors, consisted of at least three members, which may be either individuals or legal entities (in such case for the exercise of management a representative should be appointed). There is not any restriction as per the nationality or residence of the members of the Board of Directors. It should be noted that for some specific activities, SA is the only available company type according to the law and several parameters, beyond the abovementioned basic framework, should be taken into consideration in order to decide upon between P.C.C. and S.A.

The Business Register in Greece has been recently reformed providing access to the existing data base via its website (www.businessregistry.gr), which can be used both by the registered businesses and the public. Until the full integration of all Greek companies/businesses at the general Business Registry at the end of year 2012, different registration systems and registers existed for each company/business type. Thereupon, the reformation of the Business Register has facilitated significantly the capability of the companies to comply with their reporting obligations under the law through its portal (www.businessportal.gr) but has also enhanced the actual publicity of the companies’ data, as required by the law, and thus has reinforced the transparency and the security of the transactions.  Through the platform www.businessportal.gr any business can carry out the entire procedure for submitting a registration request to the Business Register, filing the necessary documents and payment of the relevant fees. The processing and verification of any request as well as the completion of registration are also conducted electronically through the system.

Recently in virtue of Greek Law n. 4441/2016, “e-One Stop Shop” has been introduced. This new, modern institution aims at the incorporation of the most popular types of companies in Greece, through a procedure completed entirely on an electronic platform practicing techniques like “e-ID Authentication Process” (EU REG 910/2014), links between other e-platforms like “TAXIS” (Greek Tax Online Platform) and taking all necessary actions in order for a company to be incorporated online, thus accelerating and facilitating business and corporate activity in Greece.

The combination of a single general Business Register with the establishment of the one-stop-shops for the incorporation of companies constitutes a major step towards simplification of the basic procedures of the Greek business environment, aiming to meet the needs and requirements of the parties involved and the effective use and exploitation of information collected.

In 2017, Greece while being at the heart of the economic recession affecting all financial markets globally and especially EU, struggles to keep up with the current requirements in business activity, by amending its relevant legislation towards the modernization of its corporate, tax and business system thus making great efforts to further promote productivity, investment and employment. Newly introduced, flexible, corporate forms like P.C.C, new institutions and platforms like the Business Register where most of the ordinary corporate actions are completed online, constitute the modern ‘’tools” provided to any entrepreneur who wishes to make business in the country, forming an effective solution by putting in place a flexible framework which can reduce obstacles to the smooth functioning of the market, hoping to make Greece an attractive country not only to visit and explore but also to invest.

The UK Offshore oil and gas industry – current challenges and recent trends

The UK’s offshore oil and gas industry has undergone a torrid few years, starting even before the oil price crash of 2014. The industry has of course been here before and has demonstrated itself to be adaptable and resilient. In 2014, with oil prices which had averaged over $100 for several years, production was 1.4 million barrels of oil equivalent (boe) a day, down from a peak of almost 3 million boe a day in 1999, while operating expenditure was through the roof, production efficiency was poor and exploration was at historically low levels, offering little prospect of staving off a slow decline.

Since then the price has crashed to lows below $30, recovering somewhat to the mid-$50s.  The scale of the crisis hitting the industry is demonstrated by the fact that for the first time since the offshore industry began production in 1968, tax revenues in the tax year ending 2016 were net negative i.e. the government paid out £24 million more in tax relief than it received in taxes, while the industry took in less cash than it spent in 2016, for the fourth year in row. With minimal attention in the national press, the brutal discipline of the marketplace has cut the workforce supporting the offshore industry from 450,000 to 330,000 with wave after wave of redundancies.

As a result of relentless pressure on contractor rates, down-manning and the pruning of discretionary spending, operating costs have fallen from an average of £18 a barrel in 2014 to £11.30 last year while a focus on production efficiency has led to an improvement from 65% to 71% over the same period. This improvement in production efficiency, as well as record levels of capital investment approved while the oil price was still above $100, has resulted in a turnaround in production which has been on the increase for the first time in many years: the 322 oil, gas and condensate fields currently in production produced over 1.7 million boe per day in 2016.  However, new investment is very dependent on the oil price.  Professor Alex Kemp, a leading oil economist based at the University of Aberdeen, argues that at $50 a barrel, new investment activity is stifled and few projects pass investment hurdle rates. Even if Brent crude reaches $60 a barrel, it will be helpful butit is not going to transform the industry as there will still be many fields which remain uneconomic. In the longer term further cost reductions and/or price increases are needed to enhance activity further.

As capital investment is expected to continue to fall from its peak in 2014, the improvement in production levels is likely to be a short-lived respite and total production is expected to begin to fall again within a couple of years, depending on the timing of start-ups.  Nine new fields started up in 2016 including Cygnus, Solan, Laggan and Tormore, but only two new fields were approved, though the forecasts for 2017 are slightly better. With just 23 exploration and appraisal wells being spudded in 2013, down from highs of over 100 in the mid-2000s, discovering new fields to replace those reaching the end of their life is increasingly challenging.  Most new discoveries are small, expected to produce between 10 and 30 million boe, though some of 2016’s start-ups are exceptions – Cygnus is expected to supply 5% of UK gas demand at its peak while Laggan and Tormore have estimated reserves of 170 million barrels. It’s worth remembering, also, that UK domestic production is still meeting around two-thirds of our oil demand and more than half of our gas demand.

While dealing with the day to day pressures of this financial shock, the industry has also been getting to grips with an overhaul of its regulatory regime.  In 2013, recognising the problems facing the industry even then, the government appointed Sir Ian Wood to review existing regulation to see if it was fit for purpose.  He recommended a new tri-partite relationship between the industry, a new better-resourced and independent regulator, and the Treasury representing the interest of the nation in its hydrocarbon resources, to make the most of the remaining reserves of the UK Continental Shelf (UKCS).

Swiftly implementing the recommendations of the Wood Review, which reported in February 2014, the government established a new regulator, the Oil & Gas Authority (“OGA”), initially in April 2015 as a government agency and since May 2016 as a government company.  The OGA is designed to regulate, influence and promote the offshore sector in a manner better suited to the challenges of an ageing basin, with numerous marginal fields dependent on a network of highly-interconnected infrastructure which is reaching the end of its life.  The industry has new legal obligations, incorporated into the Petroleum Act 1998 by the Infrastructure Act 2015, to seek to maximise economic recovery of hydrocarbons in the UK’s territorial waters and Continental Shelf, in particular through collaboration with other industry players, and to comply with a Strategy produced by the regulator to achieve that end, known as “MER UK”.

The OGA has taken over many of the powers and responsibilities formerly held by the Offshore Licensing Unit of DECC, including the power to award licences and grant field development approvals, but the Energy Act 2016 has also given it new powers and greater resources, funded by a significant industry levy.  The new powers include powers to attend industry meetings, to request a broad range of information, and to give non-binding recommendations to resolve disputes.  The OGA also has a greater range of sanctions to impose on those who fail to comply with their obligations under the licence or the MER UK Strategy, including powers to impose fines of up to £1 million and to issue enforcement notices, in addition to the existing powers to revoke, or partially revoke, licences and remove operators.  While the OGA can neither rewrite existing contracts, nor force licensees to invest, it can declare that reliance on existing legal rights is contrary to MER UK, and require licensees who do not wish to invest to divest or relinquish the relevant assets. While such draconian interventions are likely to be rare, and the OGA has to bear in mind the need not to deter investment in the UK, there is a degree of nervousness in the industry as to how the OGA will exercise its very broad discretion.

So far the signals are that the OGA will seek to influence and encourage far more than to compel. This is important. From its relatively recent establishment, the OGA has hit the ground running, having issued a large number of subsidiary strategy documents and delivery plans, as well as establishing a wide-ranging stewardship survey to measure the performance of operators and enable it to benchmark performance, prioritise its regulatory activities, and to develop regional plans for the development of many of the currently uneconomic discoveries.  It has also funded seismic studies to open up new exploration possibilities and is investing in better technology to store and share data.  The organisation is less than 180 people and so will not be able to solve all of the industry’s problems but its proactive approach is showing signs of success – it claims to have successfully intervened in more than 70 cases already to enable development of discoveries, extensions of field life, unblocking of commercial issues, cost savings and improved plant operations.

A significant legal issue for the industry is how to balance its new statutory duty to collaborate to achieve MER UK with its duties to comply with competition law – this is likely to require more frequent substantive analysis of competition law issues to determine whether or not proposals for collaboration, particularly between operators rather than vertical collaboration between operators and the supply chain, are justifiable on competition grounds.

Not all is gloom. The oil and gas industry is resilient and has been at the cliff edge before. A degree of stability in the oil price, closing the valuation gap between buyers and sellers, has enabled something of a resurgence in oil and gas M&A activity.  In the last six months, deals have been signed over almost £5 billion worth of North Sea assets, including Shell’s recent £3billion sale of North Sea assets to Chrysaor, the £993million acquisition of Ithaca Energy by Israeli-based Delek Group and BP’s disposal of an interest in Magnus to Enquest for £68million. Recent transactions have also shown a new appetite for banks to lend and private equity to invest in the sector (the Chrysaor deal was backed by EIG Partners as well with a reserve-based lending package from a consortium of banks while Blackstone and Bluewater Energy have put over £400million into Siccar Point Energy).  One of the factors in enabling deals to proceed is the use of innovative structures, such as those offering upside for the seller (for example, in the Shell/Chrysaor deal, an additional $600 million is payable contingent on the average price of oil between 2018 and 2021 exceeding $60 a barrel and a further $180 million contingent payment is dependent on future discoveries by Chrysoar). The sharing of decommissioning liability is also key to transactions since many assets are at the point where their remaining production will not generate sufficient tax capacity to offset decommissioning costs and allow full relief of those costs: Shell has reportedly accepted continued decommissioning liability of $1bn (about 25% of the total cost) of the assets sold to Chrysaor while in its transaction with Enquest, BP has retained the decommissioning liability. EnQuest will pay BP additional deferred consideration of 7.5% of the actual decommissioning costs on an after tax basis, subject to a cap equal to the amount of cumulative positive cash flows received by EnQuest from the transaction assets.

Given the maturity of the basin and its financial challenges, decommissioning is one of the most significant issues facing the industry over the next decades but also a substantial opportunity for the development of a strong specialist supply chain.  There are about 250 fixed installations, 250 subsea installations, 5000 wells and 3000 pipelines in the UK sector of the North Sea, with much of that infrastructure being well past its original design life. There is evidence that the oil price crash has resulted in some acceleration of decisions to cease production, but this should not be overstated – while COP dates for 72 assets were brought forward in 2016, 33 were deferred and 135 remained the same.  Decommissioning expenditure is currently running at over £1billion annually and it is estimated that over the next ten years around £17.6 billion will be spent on decommissioning. A key plank of the OGA’s activity is to reduce decommissioning costs and therefore the cost to the Exchequer of decommissioning tax relief.  Collaboration between operators and the supply chain over best practice and the use of new technology and between operators on multi-well programmes will form part of this initiative but there are also new legal obligations for licensees to consult the OGA before submitting decommissioning programmes for approval. Lawyers are awaiting revised guidelines from BEIS, which now has responsibility for approval of decommissioning programmes, and from the OGA, to see how this process will work in practice. Reducing decommissioning costs will also reduce the ever increasing burden of decommissioning security, required to protect licensees from joint and several liability for the execution of decommissioning programmes, and vendors from the risk of being brought back to conduct decommissioning under the wide powers of Part IV of the Petroleum Act 1998.

Technology however, will absolutely be the key to the continued success of the sector, demonstrated by the opening in Aberdeen of the Oil and Gas Technology Centre, but along with high-tech tools and innovative methods, the industry is continuing to focus on more efficient ways of working to keep costs down, especially through collaboration under the auspices of Oil & Gas UK and other trade bodies. 2017 sees the industry in a more optimistic mood, but aware of the challenges that lie ahead.

Tips on Preparing for and Navigating through Working Capital Disputes.

When engaged in M&A activity, companies and their counsel must be well prepared to address working capital disputes (post-acquisition disputes that arise due to working capital adjustments). Working capital adjustments, which protect buyers and sellers from working capital volatility after they agree upon a purchase price (and a related working capital target), involve a mix of both legal and accounting concepts and are often filled with contract interpretation and accounting-related nuances.

It is particularly important that counsel understand the intricacies of working capital adjustments in order to best serve clients and address working capital disputes, which most often arise when final working capital is significantly different from target working capital. Although each deal’s working capital adjustment is unique, below we provide some guidance for counsel on addressing working capital matters and navigating disputes if and when they arise.

Guidance for Counsel

We find it is most common for sellers to prepare estimated closing balance sheets and the related working capital, for buyers to prepare final closing balance sheets and the related working capital (in transactions other than carve-outs), and for sellers to prepare objection notices. Therefore, we have made these assumptions in the comments below.

Pre-Closing Target and Estimates: The process begins with the parties agreeing on a target working capital amount. Immediately before or after closing, the seller provides an estimated closing statement to determine the amount the buyer is to pay at closing.

The majority of issues and dollars associated with a working capital dispute are decided based upon the wording in the purchase agreement. Buyers often negotiate language favoring a generally accepted accounting principles (GAAP) based closing balance sheet (and associated working capital). Sellers often negotiate language favoring accounting consistent with past practices for the closing balance sheet (and associated working capital). Therefore, counsel should be focused on the working capital and associated definitions as well as the dispute resolution process when constructing the purchase agreement.

Closing Statement: Within a specified number of days after closing, the buyer prepares the closing statement (including the closing balance sheet) with calculations of net working capital, cash, transaction expenses and/or debt as of the closing date in accordance with the terms of the purchase agreement.

Counsel should consider advising clients to be thorough in identifying potential adjustments in their favor at this stage, since buyers normally have only one bite at the apple. In most post-closing disputes, the original buyer-prepared closing statements will be considered final if a dispute arises. Buyers will not normally have an opportunity to make additional adjustments in their favor after issuing the closing statements. Keep in mind, buyers can subsequently agree to sellers’ objections and effectively adjust closing statements when the adjustments are in sellers’ favor.

Objection Notice: After the buyer issues the closing statement, the seller identifies any objections within a specified number of days and issues its objection notice.

Counsel should advise clients to ensure their listings of objections are complete because, similar to buyers’ closing statements, sellers’ objection notices cannot normally be adjusted in their favor after the objection notice is issued. Especially in circumstances in which sellers struggle to get the information needed to properly analyze working capital accounts, objections to entire account balances at the trial balance level can be an effective way to encourage buyers to provide the information needed to analyze accounts and/or continue settlement discussions with buyers.

Settlement Negotiations and Arbitration: Following the issuance of an objection notice, the parties engage in settlement discussions. If they cannot settle the disputed items, the matter is submitted to arbitration.

We suggest buyers and sellers extend the settlement process if they are making progress. Progress includes removing items from an objection notice thereby narrowing the items to be brought to an arbitration. It is normally in both parties’ interests to settle as many items as possible rather than bring all objections to arbitration.

If arbitration is imminent, ensure the parties select a knowledgeable arbitrator experienced in interpreting purchase agreements, addressing discovery requests and structuring the process to ensure both parties receive due process without expanding the scope of the arbitration beyond that mandated in the purchase agreement.

 What You Should Know About the Common Types of Working Capital Disputes

 As mentioned earlier, working capital disputes are unique. That said, many disputes have common themes. Below we present some common types of working capital disputes and what you should be aware of with each.

  1. GAAP vs. Consistency

 One of the most common types of disputes centers on whether an item should be accounted for consistently or in accordance with GAAP (if indeed an argument can be made that the item is not accounted for in accordance with GAAP). This may involve, for example, corrections to historical errors. Note that if an item was historically accounted for in a certain manner and the related financial statements were audited and received, an unqualified opinion does not necessarily mean the item was accounted for in accordance with GAAP. One reason for a difference might be materiality. Materiality normally does not apply in accounting arbitrations unless specified in the purchase agreement. Further, accounting arbitrators typically do not rely on another firm to determine whether or not an item was accounted for in accordance with GAAP. Instead, they make that decision themselves.

This issue can be especially contentious because in nearly all cases, an arbitrator is unable to adjust the target. Therefore, it is possible an item in dispute may be accounted for one way in the target working capital and another in the final working capital.

We recently consulted the buyer of a company with significant amounts of inventory recorded on its balance sheet. The purchase agreement required net working capital be calculated in accordance with GAAP consistently applied. After closing, the buyer performed a physical inventory count and determined more than 25 percent of the non-rental inventory balance did not physically exist as of the closing date. The buyer asserted the balances had built up over a number of years due to the seller’s failure to properly relieve inventory as items were used / sold and failure to historically perform physical counts. The seller argued the buyer’s count methodology was inappropriate and that a physical count could not be used to calculate net working capital because similar counts had not been performed historically. The arbitrator agreed with the buyer’s adjustment and concluded the results of the physical count needed to be considered under GAAP per the terms of the purchase agreement.

  1. Consideration of Subsequent Events

 Working capital disputes often involve a disagreement over the relevance of post-closing events to the closing date net working capital, such as the settlement of contested accounts receivable, write-downs of inventories and settlement of contingent liabilities. Buyers should beware of making post-close business decisions such as granting credit to a customer for a disputed invoice in exchange for future business and believing the disputed invoice (accounts receivable) will be reserved and result in a reduction to the closing working capital calculation.

We were the neutral arbitrator for a dispute involving a distributor of residential and commercial products. The purchase agreement provided for baseball-style arbitration, in which the arbitrator must fully rule in favor of one or the other party’s position. Prior to the closing date, the seller began the process of transitioning its product lines to a different vendor. That action arguably rendered certain inventories obsolete. The buyer’s net working capital calculation included a reserve to account for this obsolescence. The seller argued the buyer’s obsolescence reserves were overly aggressive in light of the liquidation value of the inventory and that they resulted from the buyer’s post-closing actions to aggressively change the vendor rather than making the change over a longer time period. The arbitrator agreed with the buyer’s position that the seller’s pre-closing actions reduced the value of the inventory and considered the post-closing events as seller-initiated events. Although the seller’s arguments had some merit, because the arbitration was baseball-style, the arbitrator was forced to accept the full value of the buyer’s reserve rather than give the seller credit for some of its liquidation value arguments.

  1. Procedural Objections

 Typical procedural issues involve the arbitrability of disputes, as well as the timeliness of disputes or the ability to introduce new disputes. Lawyers should advise their clients that entering into an arbitration does not mean a party can introduce new disputes. Quite the contrary, disputes are limited by closing statements, objection notices and even the engagement letter with the neutral accounting arbitrator.

We consulted on behalf of the seller of a manufacturing company. The purchase agreement contained separate purchase price adjustment mechanisms for debt and net working capital. The buyer’s closing net working capital calculation included the balance of outstanding checks as a liability, causing the seller to dispute the calculation because the purchase agreement stated outstanding checks were to be included in the calculation of debt, not net working capital. The buyer argued that even if the outstanding checks liability could not be included in net working capital, it should be reclassified to debt, which would have the same net effect on the purchase price. The accounting arbitrator agreed with the buyer’s position; however, the arbitrator also determined he had no authority to consider the buyer-proposed offsetting adjustment to debt because the seller did not dispute the buyer’s calculation of debt within its objection notice.

Conclusion

Understanding why working capital disputes arise and how they are most often resolved can help counsel bring value to clients when constructing the purchase agreement. It can even help avoid these types of disputes altogether. Advising clients on what purchase agreement language best positions them for potential disputes, how to prepare an effective closing statement or objection notice, what they can expect when requesting closing statement accounting information and support, how to handle discovery and settlement discussions, how to negotiate the arbitration process should settlement discussions fail, how to select an arbitrator, and what type of support and presentations are necessary to be best positioned to win an arbitration are all things on which counsel should be ready to advise its clients regarding each deal.