New arbitration rules in Peru (CARC-PUCP) and JAMS Rules for
disputes concerning AI systems plus Brazil promotes use of Dispute
Boards. Various ICSID-related developments in this period: 2023
Caseload Statistics, Background Paper on Annulment and Honduras
denouncing ICSID Convention.
In terms of case developments, Chile affirms its position as an
arbitration-friendly jurisdiction in recent judgments. We also
report on notable court decisions from the US Supreme Court,
Canadian Supreme Court and São Paulo, and an arbitration
concerning Ecuador.
LEGAL DEVELOPMENTS
NEW ARBITRATION RULES AND INTERNAL RULES OF THE CARC-PUCP ARBITRATION CENTER
December 14, 2023
The Center for the Analysis and Solution of Conflicts of the Pontifical Catholic University of Peru ("CARC-PUCP") Arbitration Center recently published new sets of Arbitration Rules and Internal Rules which came into effect on January 1, 2024, replacing the CARC-PUCP 2012 Arbitration Rules and 2012 Internal Rules, respectively.
The new 2024 Arbitration Rules:
- allow non-signatories of an arbitration agreement to be joined to a proceeding by the arbitration center or the arbitral tribunal;
- outline a mechanism for appointing the presiding arbitrator or the sole arbitrator in the absence of an agreement between the parties;
- include the possibility of imposing sanctions on a party for baseless challenges against arbitrators;
- remove the option for emergency arbitral proceedings; and
- implement the possibility of initiating expedited arbitral proceedings.
The new CARC-PUCP 2024 Internal Rules also have significant modifications. Previously, the 2012 Internal Rules required that members of the CARC-PUCP Court be lawyers with at least ten years of experience, whereas nominees for the President of the court needed at least fifteen years of law practice to be eligible. In contrast, the new 2024 Internal Rules eliminate these minimum experience requirements, stating instead that any member of the CARC-PUCP Court must be a lawyer with an "unblemished reputation".
Despite the new 2024 Arbitration Rules and 2024 Internal Rules, the CARC-PUCP Code of Ethics remains unchanged since 2017.
CHILE AFFIRMS ITS POSITION AS AN ARBITRATION-FRIENDLY JURISDICTION
January 24, 2024
The Chilean Supreme Court upheld the exequatur of a foreign arbitration award, authorizing its enforcement in Chile. This decision reinforces that Chile is a pro-arbitration jurisdiction, fostering an environment of respect toward international arbitration agreements and minimal judicial intervention.
The Chilean Supreme Court ruling reaffirmed that exequatur is a special recognition procedure that will not review the merits of the case, but serves to enforce international arbitration awards. The Chilean Supreme Court ruling clarified that the role of the judiciary is limited to verifying the formal validity and enforceability of foreign arbitration awards, without delving into the substantive merits of the case. This delineation ensures that the arbitral tribunal's decisions are respected and upheld unless there are clear violations of public policy or fundamental procedural rights. The ruling thus strengthens the enforceability of foreign arbitral awards in Chile, cultivating a stable arbitration environment.
The Chilean Supreme Court ruling further elucidated that all foreign rulings require an exequatur to be enforced in Chile. According to the Chilean Supreme Court's ruling, the exequatur process is governed by the Law on International Commercial Arbitration ("LACI"), the New York Convention, and articles 242 et seq. of the new Chilean Code of Civil Procedure ("CCPC").
The Chilean Supreme Court ruling also highlights the importance of aligning Chilean arbitration practice with global best practices. The ruling demonstrates a clear intent to prioritize modern arbitration laws over old civil procedure codes, ensuring that Chile remains an attractive venue for international arbitration.
The Chilean Supreme Court's recognition of the foreign arbitration award reaffirms Chile's support for international arbitration, emphasizing that legal provisions such as the LACI and the New York Convention take precedence over the old CCPC.
ICSID PUBLISHES 2023 CASELOAD STATISTICS
February 2024
The International Centre for Settlement of Investment Disputes ("ICSID") published the latest edition of its semi-annual Caseload Statistics report, which analyzes case-related trends in the 2023 calendar year, in addition to data on all ICSID cases since 1972.
ICSID registered 57 new cases in 2023, marking the third-highest number of cases registered in a single year and representing a significant increase over the 41 new cases registered in 2022. 53 of these cases were registered under the ICSID Convention Rules, and three were registered under the ICSID Additional Facility Rules; one was registered as a conciliation case. As of December 31, 2023, ICSID has registered a total of 967 cases under either the ICSID Convention or Additional Facility Rules.
The report notes that while a majority of new cases in 2023 were brought under a bilateral investment treaty, multilateral treaties have accounted for a growing percentage of cases over time. The North American Free Trade Agreement and United States-Mexico-Canada Agreement led the pack in 2023, with 15% of new ICSID cases each.
There was considerable growth in regional diversity among new cases, consistent with recent historical trends. In 2023, 23% of new cases involved the oil, gas, and mining industry, followed by 18% of cases arising from the construction and transportation sectors. Also prominent in 2023 were cases involving electric power and other energy sources (12%), finance (7%), and water, sanitation, and flood protection (5%).
Finally, the report includes figures on case outcomes and gender equity in arbitral tribunals. Of the cases that concluded in 2023, 69% were decided by a tribunal and 31% were settled or otherwise discontinued. Women accounted for 32% of all appointments to ICSID cases in 2023, up from 15% historically. When appointments were made by ICSID (as opposed to by the parties or co-arbitrators), 49% were men and 51% were women.
HONDURAS DENOUNCES ICSID CONVENTION
February, 24 2024
On February 24, 2024, the Republic of Honduras sent a written notice to the World Bank, denouncing the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID Convention"). According to Article 71 of the ICSID Convention, the denunciation will take effect six months after the World Bank receives the notice from the Republic of Honduras, which will be on August 25, 2024.
Honduras decided to withdraw from the ICSID Convention following a dispute with the US-registered Próspera group ("Próspera"), under the Dominican Republic-Central America Free Trade Agreement ("DR-CAFTA"). The claim was filed with the International Center for Settlement of Investment Disputes ("ICSID") – Case No. ARB/23/2, and is worth USD 11 billion.
The dispute concerns Próspera's partnership with the Honduran government to create a Zone for Employment and Economic Development ("ZEDE") on Roatán Island. Established in 2013, ZEDEs are special economic zones governed by Honduran law. President Xiomara Castro's administration has started to dismantle the legal framework for ZEDEs, considering them a threat to Honduran sovereignty.
In Honduras Próspera Inc. et. al. v. Honduras, Honduras alleged that ICSID breached "law and procedure", by accepting Próspera's claim without verifying that domestic remedies had been exhausted – a condition Honduras had stipulated upon signing the ICSID Convention in 1988. Additionally, Honduras objected to ICSID's decision to appoint Mexican arbitrator Claus von Wobeser, citing alleged conflicts of interest with Próspera's counsel. Thereafter, Honduras moved to disqualify Próspera's appointee, David W. Rivkin on undisclosed grounds.
Próspera claims that Honduras breached the DR-CAFTA's provisions regarding: (a) fair-and-equitable treatment; (b) legal stability; (c) expropriation; and (d) non-interference with fund transfers. The Honduras Próspera Inc. et. al. v. Honduras tribunal, presided by Spanish national Juan Fernández-Armesto, is overseeing the case.
BRAZILIAN GOVERNMENT'S NEW GROWTH ACCELERATION PROGRAM AND DISPUTE BOARDS
March 7, 2024
The Brazilian Federal Government announced the New Growth Acceleration Program ("New PAC"), focusing on investing over USD 340 billion in infrastructure improvements and other sectors over the next four years.
A key highlight is that the projects foreseen in the New PAC may make use of dispute boards, now expressly authorized by the New Public Procurement Law (Law No. 14.133/2021). The New Public Procurement Law expressly authorizes the use of dispute resolution committees in administrative contracts executed by Brazilian State entities. These committees can help prevent common issues seen in previous programs, such as endless delays, stoppages, and cost overruns, by quickly resolving deadlocks in projects.
Dispute boards can play an essential role in the resolution of disputes in Brazilian construction projects. The dispute boards will operate under a "pay now, discuss later" principle. Under this principle, parties must comply with the committees' decisions immediately. Those decisions will remain in effect unless and until a final judicial or arbitral ruling overturns them. Dispute boards remain in place from the beginning of a project, monitor its development, and resolve disputes as arisen. As a result, they are more knowledgeable regarding the details of a project and in a better position to quickly resolve disputes as compared to more traditional arbitral tribunals.
This development marks a significant advancement for arbitration and alternative dispute resolution methods in Brazil and reflects the Federal Government's strong commitment to support alternative dispute resolution. The use of these dispute boards will likely cause many disputes to settle more quickly or otherwise be significantly less complex.
ICSID PUBLISHES NEW BACKGROUND PAPER ON ANNULMENT PROCEEDINGS
March 11, 2024
The International Centre for Settlement of Investment Disputes ("ICSID") has published an updated version of its Background Paper on Annulment, which analyzes data on annulment applications registered under the ICSID Convention since 1966.
An application for annulment is one of a discrete set of post-award remedies available to parties in ICSID Convention proceedings. It is an extraordinary recourse intended to uphold fundamental legal principles in ICSID proceedings, which cannot be appealed and are not subject to any remedies except those provided for in the Convention, unlike other forms of international arbitration.
This update is the third background paper since ICSID began publishing background papers in 2012 and includes developments in case law from April 16, 2016 through to December 31, 2023. During this period, 104 new annulment proceedings were commenced, 73 new annulment decisions were issued, and 78 decisions to stay enforcement of an award were made, all of which arose under the 2006 ICSID Arbitration Rules. As at May 2024, the total number of annulment proceedings has risen to 194.
The report reveals that the rate of annulments of all registered arbitrations under the ICSID Convention remains very low, with 2.3% of awards annulled in full and 5% annulled in part. It also includes figures for applications for the stay of enforcement, 136 of which have been filed since 1966 and 64 of which have been granted.
JAMS RELEASES NEW RULES GOVERNING DISPUTES INVOLVING ARTIFICIAL INTELLIGENCE SYSTEMS
April 2024
Judicial Arbitration and Mediation Services, Inc. ("JAMS") published its new Rules Governing Disputes Involving Artificial Intelligence Systems (the "Rules"). These Rules are the first developed specifically for disputes concerning artificial intelligence ("AI") technologies and are designed to provide helpful safeguards to prevent parties from using the exchange of information process in arbitration proceedings to extract trade secrets or similar sensitive or proprietary information from counterparties.
One major adaptation from JAMS's standard arbitration rules is the default procedure addressing confidentiality and the inspection of the AI systems at issue in the dispute. Under the Rules, "AI systems and related material", which are defined to include AI hardware and software in addition to AI models and training data, are not to be made available to the counterparty in any dispute. Instead, they would only be provided to one or more experts mutually agreed upon by the parties or designated by the tribunal.
The Rules also include a default protective order that allows parties to limit access to sensitive trade or commercial information to another party's attorneys, as well as a model dispute resolution clause interested parties can incorporate into their contracts.
It is important to note, however, that the Rules are designed specifically for disputes in which the subject of the dispute is an AI system. They do not address the use of AI generally in the dispute resolution process, which remains largely unregulated.
UNCITRAL WORKING GROUP III PUBLISHES POSSIBLE INVESTOR STATE DISPUTE SETTLEMENT REFORM WITH PROPOSED ADVISORY CENTER
April 1-5, 2024
During its 48th session in New York, from April 1-5, 2024, the United Nations Commission on International Trade Law ("UNCITRAL") Working Group III made significant progress on investor-state dispute settlement ("ISDS") reform by finalizing a draft statute for a new advisory center. This advisory center is designed to support and potentially represent member states in investment treaty disputes.
In 2017, UNCITRAL tasked its Working Group III with addressing issues related to the outdated ISDS system, which has been used for settling conflicts between foreign investors and States under investment treaties. Investors have allegedly used ISDS to obstruct climate initiatives, interfere with environmental conservation, and infringe the rights of local communities. Since 2019, Working Group III has been discussing the potential establishment of an advisory center, to enhance the capabilities of States and regional organizations to effectively manage and prevent international investment disputes.
The draft statute, enriched by input from over 70 State delegations and 40 international organizations, is scheduled for a UNCITRAL vote in July 2024. As outlined in the draft statute, the advisory center would offer legal assistance, such as initial case assessments, aid in selecting arbitrators and experts, and support in preparing various procedural documents. If directed, the advisory center could also represent members in ISDS proceedings actively participating in hearings.
Membership in the advisory center would be open to any State or regional economic organization, and services would also be available to non-members. The proposed governance structure of the advisory center includes a governing committee of member representatives, an executive committee to oversee operations, and an executive director managing daily functions.
UNCITRAL is enhancing its tools for preventing disputes and resolving international investment disputes, including introducing an appeals process. The next session of Working Group III is planned for September 2024.
CASE DEVELOPMENTS
WORLEY AND ECUADOR ARBITRATE OVER ALLEGED CORRUPTION, NON-PAYMENT, CONTRACT VIOLATIONS AND TAX LIABILITIES
December 22, 2023
A PCA tribunal issued a final award in an investment treaty case between Worley International Inc. ("Worley") and the Republic of Ecuador ("Ecuador"). The dispute concerned agreements for the development of four oil-and-gas infrastructure projects in which Worley acted as project manager.
Worley argued that Ecuador violated the US-Ecuador Bilateral Investment Treaty ("BIT") by:
- causing Petroecuador (the Ecuadorian national oil company) to cease payments to Worley following a Presidential Directive;
- launching a harassment campaign; and
- causing the Ecuadorian Internal Revenue Service to improperly audit Worley's tax returns and impose biased fines for unpaid taxes following a Presidential Directive.
Ecuador, on the other hand, challenged the tribunal's jurisdiction and accused Worley of engaging in corruption and other illegal acts during both the establishment of the investment and its operation. In particular, Ecuador claimed that Worley improperly obtained confidential information to win the bid for the Pacific Refinery Project and misrepresented its intention to comply with the subcontracting limits mandated under the Ecuadorian Public Procurement Law. Ecuador also claimed that Worley bribed officials of Petroecuador to secure six complementary agreements related to the Esmeraldas Refinery and failed to investigate one of its subcontractors, who allegedly bribed Petroecuador's employees.
The tribunal held that Worley engaged in: pervasive illegality and bad faith from the start; corruption during the investment's operation, and that Worley wilfully ignored its subcontractor's corrupt activities.
CHILEAN COURT CONFIRMS INTERIM MEASURE IN AID OF POTENTIAL ICSID CLAIM
December 29, 2023
In a landmark decision, the Chilean First Instance Court confirmed a previous decision rendered in November 2023, which granted an interim measure. The interim measure enjoined the Telecommunications Regulatory Authority of Chile from calling on performance bonds, in support of a potential arbitration before the International Center for Settlement of Investment Disputes ("ICSID"). The Chilean Court's decision reaffirms Chile's long-standing pro-arbitration stance.
In 2021, WOM S.A. ("WOM"), a telecommunications company owned by the private investment fund Novator Partners (Norwegian), won a contract to deploy 5G technology across Chile. The company encountered numerous challenges that hindered its ability to fulfill its obligations. These challenges included permit denials, delays in accessing State-controlled lands caused by poor coordination among government agencies, pandemic-related disruptions in obtaining essential construction materials, and issues with the electricity supply. Meanwhile, the Chilean authorities allegedly threatened to call on bonds citing WOM's lack of performance.
Fearing the threats from the Telecommunications Regulatory Authority of Chile, WOM applied to the First Civil Court of Santiago for an injunction to prevent the authorities from calling on performance bonds worth approximately USD 50 million. WOM's application before the Chilean Court triggered a six-month cooling-off period for amicable negotiations and consultations under the Chile-Norway Bilateral Investment Treaty.
The First Civil Court of Santiago's decision to grant WOM's request is noteworthy. The Chilean Court adopted an arguably expansive interpretation of the concept of "action" or "claim" under Article 280 of the Chilean Code of Civil Procedure ("CCPC"), ensuring the protection of a potential ICSID claim under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. The Chilean Court's decision reaffirms its longstanding pro-arbitration stance.
US DISTRICT COURT DECLINES TO INTERFERE IN ARBITRATION DESPITE ALLEGATIONS OF UNDISCLOSED FUNDER TIES TO TRIBUNAL
January 9, 2024
In Epicenter Loss Recovery LLC v. Burford Capital Ltd et al., the US District Court for the District of Arizona declined to review or modify an LCIA arbitral award and granted defendant Burford Capital Ltd.'s ("Burford") motion to dismiss. The dispute arose out of a subordination and intercreditor agreement (the "Agreement") entered into in 2013 between Burford and plaintiff Epicenter Loss Recovery LLC ("Epicenter"). The agreement provided for LCIA arbitration, seated in London.
In 2019, Epicenter sued Burford in a federal district court for breach of good faith, tortious interference, and alter ego, notwithstanding the Agreement's arbitration provision. The federal district court stayed the case and compelled LCIA arbitration, which concluded in February 2023. The tribunal issued its final award in December 2023, which dismissed all of Epicenter's claims and ordered an anti-suit injunction against Epicenter.
Burford filed a motion to dismiss in federal district court, arguing that the litigation should be dismissed in light of the conclusion of the arbitral proceedings. Epicenter opposed the motion, arguing that the court should continue to stay the proceeding, pending the outcome of its request to have the LCIA "void the arbitration due to undisclosed conflicts and bias." In its request, Epicenter argued that the arbitration should be void because the tribunal was biased in favor of Burford. Epicenter alleged that it found evidence that an undisclosed Burford funder was a major source of revenue for the LCIA due to the large number of arbitrations it funds.
The district court denied Epicenter's request and granted Burford's motion to dismiss. The court held that neither the LCIA Rules nor the Federal Arbitration Act provided it with jurisdiction over disputes arising out of international arbitration proceedings. It held that any challenge to the arbitration proceedings must instead be submitted to the English courts.
NINTH CIRCUIT RULING PROVIDES GUIDANCE ON SERVING NOTICE TO ADVERSE FOREIGN PARTIES WHEN CONFIRMING ARBITRAL AWARDS
February 5, 2024
In Voltage Pictures LLC v. Gussi, SA de CV, the US Court of Appeals for the Ninth Circuit held that service under Federal Rule of Civil Procedure 5(b) applied to foreign non-residents, including those subject to a confirmation action, in federal court. The court affirmed the confirmation of an arbitral award in favor of Voltage, a California-based film production and distribution company.
The underlying arbitration involved Voltage and Gussi, SA ("Gussi"), a Mexican corporation, over the parties' rights and obligations under a distribution and licensing agreement. The agreement contained an arbitration clause invoking Independent Film & Television Alliance ("IFTA") rules.
Voltage moved to confirm the award in the US District Court for the Central District of California, mailing notice to Gussi's attorneys. After Gussi moved to quash service, the court ordered Voltage to complete service in accordance with California law. Voltage then mailed notice to Gussi's Mexico address and served the registered agent for a Delaware corporation owned by the same holding company as Gussi. Again, Gussi moved to quash service and dismiss the action, but the district court confirmed the award.
On appeal, Gussi argued that Voltage's service was not proper under the IFTA rules because Section 9 of the Federal Arbitration Act and Federal Rule of Civil Procedure 4 should have governed service. The Ninth Circuit agreed that federal law—not California law—governed service of Voltage's notice, because the confirmation action had been filed in federal court. However, the court determined that, because Gussi was a foreign non-resident, Federal Rule of Civil Procedure 5(b) applied, and notice to Gussi's counsel was therefore sufficient. This ruling contradicts a prior ruling by the Second Circuit on the issue of which federal procedural rule should govern service of a summons for a motion to confirm an arbitral award against a foreign non-resident, creating a circuit split among federal appellate courts in the United States on this issue.
US COURT UPHOLDS ARBITRAL AWARD AGAINST PARTY THAT REFUSED CROSS-EXAMINATION UNDER PRIVILEGE AGAINST SELF-INCRIMINATION
March 21, 2024
In Black Soil Asset Management Ltd. v. Qian Wang, the US District Court for the Northern District of California confirmed a USD 44.3 million award for Black Soil Asset Management Ltd. ("BSAM"), a British Virgin Islands investment company, against SICCO Investment ("SICCO"), a Seychelles company, and its American director and shareholder, Qian Wang.
The dispute arose out of SICCO's default on a loan issued by BSAM to fund a real estate project in Shanghai. Two large shareholders of SICCO, Mr. Wang and Minkai Shen, had agreed to guarantee repayment of the loans if SICCO defaulted. Upon failure to resolve the default, BSAM brought an arbitration under Hong Kong International Arbitration Centre ("HKIAC") rules, naming only SICCO and Wang as respondents.
Before the arbitration hearing, Wang submitted two witness statements in support of contentions that he should be held liable for only 50% of SICCO's loan obligations and that BSAM should have done more to contact Shen, SICCO's other guarantor. When BSAM attempted to cross-examine Wang during the hearing, however, Wang refused and told the three-judge panel that his testimony could be used to incriminate him in an ongoing criminal investigation in China. The tribunal, in turn, informed Wang that his witness statements could not be credited and ultimately issued its award in favor of BSAM, stating that Wang could separately "seek contribution against [Shen]."
Upon BSAM's motion to confirm the HKIAC award in the Northern District of California, Wang opposed the confirmation and moved to vacate the award, in part because he could not fully present his case in the arbitration. The district court rejected these arguments, holding that Wang had not been denied fundamental fairness because the privilege against self-incrimination does not allow a witness to avoid cross-examination on matters the witness puts in dispute. It reasoned that Wang would have received similar treatment in a US court trial and found that the tribunal had reasonably exercised its discretion.
CANADIAN SUPREME COURT UPHOLDS GREEK DEFENCE MINISTRY COMMITTED FRAUD IN ICC ARBITRATION
April 5, 2024
In Eurobank Ergasias S.A. v. Bombardier Inc., the Canadian
Supreme Court affirmed that the National Bank of Canada
("NBC") was entitled to refuse to pay nearly USD 14
million to Eurobank Ergasias, SA ("Eurobank"), a Greek
bank, because of the fraud exception to the principle of autonomy
of letters of credit.
The dispute arose out of a USD 252 million procurement agreement between the Hellenic Ministry of National Defence ("HMOD") and Bombardier, a Canadian aircraft company, for the purchase of firefighting aircraft. The agreement incorporated an offsets contract requiring Bombardier to pay HMOD liquidated damages, secured by two letters of credit issued by Eurobank and NBC, should it fail to meet certain subcontracting obligations.
Bombardier commenced ICC arbitration proceedings under the offsets contract due to its inability to meet subcontracting obligations. HMOD formally undertook not to demand payment under the letters of credit. Seven days before the issuance of the final award, however, HMOD demanded payment from Eurobank, threatening civil and criminal legal action. Eurobank paid HMOD pursuant to its letter of credit and demanded payment from NBC pursuant to NBC's letter of credit
In 2013, the ICC tribunal issued its final award, voiding the offsets contract as contrary to EU law and holding that Bombardier owed no liquidated damages to HMOD. Eurobank unsuccessfully sought repayment from HMOD in Greek courts, which affirmed that HMOD's conduct was not fraudulent under Greek law. Bombardier brought parallel proceedings in Quebec, seeking a permanent injunction to prevent NBC from paying any amount to Eurobank, resulting in this appeal.
The majority upheld a Quebec court's finding that HMOD had engaged in "a fraudulent attempt" to circumvent the orders of an ICC tribunal. Because Eurobank "knew of and participated" in the ministry's fraud, the court held that fraud could be attributed to Eurobank, and NBC was accordingly entitled to refuse payment under the counter-guarantee that it had issued to Eurobank.
STJ EXTENDS EFFECTS OF ARBITRAL AWARD TO A NON-PARTICIPANT REGULATORY AGENCY
April 30, 2024
Mirassol Sanitation – Sanessol S.A. ("Sanessol"), the public utility provider for water supply and sewage services in the Municipality of Mirassol, successfully challenged Ordinance No. 2, issued by the Regulatory Agency for Water and Sewage Services of the Municipality of Mirassol ("ARSAE"), which prohibited tariff adjustments.
The conflict arose under Administrative Contract No. 387/2007 ("Contract") between Sanessol and the Municipality of Mirassol, which includes an arbitration clause. In 2016, Sanessol initiated an arbitration against the Municipality seeking to restore the Contract's economic equilibrium via a tariff adjustment of 17.96% over the rates in place as of July 2016. The arbitral tribunal rendered an award in favor of Sanessol, approving the tariff review. After the award was rendered, ARSAE issued Ordinance No. 2, which barred any tariff applications, readjustments, or revisions of water and sewage tariffs without ARSAE's express authorization. Sanessol sought legal action to invalidate Ordinance No. 2.
The Court of Justice of São Paulo initially upheld the validity of Ordinance No. 2. Sanessol then appealed the matter, filing a Special Appeal to the Superior Court of Justice ("STJ"). Sanessol argued that ARSAE should have been included as a party in the arbitration agreement, or, alternatively, that the arbitral award should be valid independent of ARSAE's approval.
The STJ ruled that, although ARSAE did not participate directly in the arbitration, the arbitration clause in the Contract was autonomous and valid. Justice Rapporteur Francisco Falcão concluded that "ARSAE participated in the arbitration procedure when it, by using its position as the regulatory agency for water and sewage of Mirassol, authorized the contractors to submit to arbitration." The STJ granted Sanessol's Special Appeal, declaring Ordinance No. 2 illegitimate, and allowing the application of the tariff readjustment. The STJ also confirmed the validity of arbitral proceedings related to contracts involving public administration as long as they pertain to available patrimonial rights.
US SUPREME COURT HOLDS THAT COURTS MUST ISSUE STAY RATHER THAN DISMISSAL WHILE ARBITRATION IS PENDING
May 16, 2024
In Smith v. Spizzirri, the Supreme Court of the United States ("SCOTUS") unanimously held that under the US Federal Arbitration Act ("FAA"), when a party in a matter subject to arbitration properly seeks to stay a lawsuit while an arbitration is pending, the court does not have discretion to dismiss the suit, and must instead issue a stay.
Plaintiffs filed suit in Arizona State court, alleging employment law violations. Respondents removed the case to the US District Court for the District of Arizona and subsequently moved to compel arbitration and dismiss the lawsuit. Plaintiffs agreed that the case was arbitrable, but argued that Section 3 of the FAA required the court to stay the court action pending arbitration, rather than dismiss it. The District Court dismissed the case and issued an order compelling arbitration which was affirmed by the US Court of Appeals for the Ninth Circuit. SCOTUS granted certiorari, in part to resolve a circuit split under which some courts read FAA § 3 to mandate a stay when properly requested, while others recognized a court's discretion to dismiss the suit instead.
SCOTUS reversed and remanded the Court of Appeals' ruling, noting that it was incompatible with the statutory construction of FAA § 3. Section 3 states that a court "shall on application of one of the parties stay the trial of the action until [the] arbitration" has concluded. The court held that the word "'shall' create[d] an obligation impervious to judicial discretion."
FAA § 16 authorizes immediate interlocutory appeals of orders denying arbitration, but not of orders compelling arbitration. Dismissals thus created an end-run around Section 16 by allowing appeals of an otherwise unappealable order. Since Congress's purpose in passing the FAA was to move the parties out of court and into arbitration quickly and efficiently, allowing courts to dismiss rather than stay was inconsistent with Congress's intent to limit such appeals. Keeping the action on the court's docket also comports with the supervisory role of courts envisioned in the FAA, which includes mechanisms for assisting parties in arbitration.
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