Legal Zone (S2:E3): Int’l Arbitration & Litigation: The Importance of a Governing Law

Transcript

Host: Regina M. Campbell, Esq., The Campbell Law Group (TCLG)

Guest: James Claxton, professor of law, Rikkyo University, and independent arbitrator and mediator

Introduction

Regina Campbell: Hi, good afternoon, everybody. I want to welcome everyone back to episode three of season two of The Legal Zone. I'm your host, Regina Campbell, and I have the pleasure today of bringing you the second part of our three-part series on international arbitration and litigation and the importance of governing law clauses.

Let's take a step back for a moment. If you recall, in the first part we had Mr. George Bermann on the line, so to speak, who gave us pointers and tips to take into consideration when entering into an international business transaction and agreement, as well as the legal issues one should consider when drafting a governing law and venue clause. So today we're bringing you a second expert, and you can see him on the line. I'm going to introduce him, because he has an amazing background, and I think it will help us understand the information and the tips he's giving us, their importance and their rarity, for practitioners and business people alike.

Our guest today is James Claxton. He graduated from Tulane University Law School. He has an LLM in international business law from the London School of Economics and Political Science. He's accredited by leading arbitration and mediation institutions in Asia, and he specializes in commercial and investment disputes under civil and common law, as well as investment treaties, arising particularly from communications, construction, engineering, investments, intellectual property and transportation services. Mr. Claxton is also a full-time academic in Japan outside of his practice. He is a professor of law at Rikkyo University, I hope I'm saying that right, and a member of the adjunct faculty of the White & Case International Arbitration LLM at the University of Miami. Welcome, Mr. Claxton. Thank you for being our guest today.

James Claxton: It is a great pleasure, and I commend you on this initiative. Your range is really extraordinary in the types of legal issues you're taking on. So congratulations. This is a great project.

Regina Campbell: Thank you. Miami is becoming so much more of an international hub, and I think it's so important for us to understand this, not just as attorneys, but to help our clients understand the importance of contracts, what goes into these decisions to go abroad and conduct business, what's involved in it, and what you can do to help yourself, because it is becoming more and more of a globalized economy and world, so to speak.

Investment treaties

Regina Campbell: So the first question I want to ask you, and this caught my attention, was investment disputes brought under investment treaties. That sounds very interesting. Can you tell us about the various investment treaties you have experience with?

James Claxton: Sure. Just as background, there are around 3,000 treaties, bilateral investment treaties, with states on both sides. The intention of those treaties is to promote investment. Then there are around 500 additional treaties that have investor protections built into them. They're not specifically investment treaties, but they have these investment protections.

I worked as an attorney on cases involving these kinds of investment treaties, working for parties, either for states or for investors. I also worked for an institution in Washington called the International Centre for Settlement of Investment Disputes, and there I basically assisted arbitral tribunals who were working on these investment cases. So I've had experience with about 10 different investment treaties, most of them involving parties in Europe, Asia and Africa. I've also had experience with something called the Energy Charter Treaty, which is a very specific investment treaty in the energy sector that has, I think, around 50 state parties. So those are a couple of the different instruments I've worked on.

Maybe just a quick word. I'm sure you have a very sophisticated audience of listeners, but a quick word about investment treaties and what makes them unique, because they are kind of special. As I mentioned, investment treaties are meant to promote investment. The early treaties were really aimed at driving capital from the comparatively capital-rich part of the world toward the developing world. Now the investment treaties don't necessarily target that dynamic. There are plenty of treaties between on-balance capital-importing countries and on-balance capital-exporting countries.

But the treaties are special in the sense that the obligations flow in one direction. It's basically a series of commitments made by states that is intended to encourage investment into the state. Something else interesting about the treaties is that they provide the possibility of arbitration directly between an investor and a state. So although the parties to the treaty obviously are states, or countries, they provide the possibility of arbitration proceedings brought directly by a private investor against the state.

Regina Campbell: And is that to encourage investors to want to come in, so they have an idea of what to expect? Is that what that's for?

James Claxton: Exactly, right. It's really about legal certainty. If there weren't the possibility of arbitration, the investor may be discouraged, because the best option might be either bringing a case directly against the state in its home courts, or trying to rely on some sort of diplomatic protection involving its home state, putting pressure on the state to make amends where there's been damage to an investment. So you're exactly right, Regina. It's really about certainty and minimizing risk in the eyes of the investor, to try to encourage the investment.

Regina Campbell: That makes sense. And I assume it's been fairly successful with certain countries that are more structured for certainty in these treaties, because the investors are more likely to come in. Correct?

James Claxton: Yes, and we can come on to the certainty point, which is a really interesting one. One other feature that's not specific to treaties, but that is certainly an issue in treaties, is legal certainty. The nature of the commitments made by states in the treaties is often quite vague. For example, treaties will frequently provide that investors will be treated fairly and equitably. So you might ask the question: what does that mean, fairly and equitably? Many tribunals have dealt with this question of what exactly is meant when a treaty says "fair." So although they are meant to promote legal certainty, the nature of the commitments in the treaties does give rise to some interpretive questions.

ICSID and the delocalized system

Regina Campbell: And do these treaties usually announce which arbitration organization will hear the dispute? Do they try to limit it in that way, or structure the procedural or substantive application of law within those arbitration organizations?

James Claxton: Great. So, Regina, I think here we have to talk about the International Centre for Settlement of Investment Disputes, ICSID, because most investment cases are brought under the auspices of that center. That center is an organ of the World Bank, and it has some really unique features that we can talk more about. One of the features is that it is entirely delocalized. When you think about arbitration, you think about a place of arbitration, a seat of arbitration. ICSID proceedings, for the most part, do not have a seat of arbitration.

That's just to point out that this is a very particular system, the ICSID system, and it has certain advantages that are very attractive to investors. One main one is that enforcement of the award should be easy under the ICSID system. It's not always easy, but at least under the ICSID Convention, the enforcement of awards is direct. There is no basis for resisting enforcement the way there would be under, for example, the New York Convention.

So that's ICSID. And I bring up ICSID because your question was about what options investors will have. In most investment treaties, ICSID is one of the options available, and then typically there are other options. Some investment treaties will specifically identify institutions, and others will simply leave it to the investors and the states to choose an institution once a dispute arises.

Regina Campbell: Okay. So it seems like that would be attractive. The New York Convention, of course, has quite a bit of protection and some certainty. But as we were talking about with Mr. Bermann in part one, it's still subject to certain attacks on bias, certain ways that arbitration provisions can be attacked by a country. So it seems it would be more attractive to bring something under ICSID, right?

James Claxton: Yes, exactly. I think enforcement is one of the reasons why, when parties have the choice in the treaty, they will often choose this type of arbitration. ICSID has other advantages. The fact that it's part of the World Bank may suggest a level of formality that is attractive. There are also interesting aspects in terms of the process, and the pricing is different than other arbitration. So there's a whole variety of advantages to ICSID proceedings. It's not always possible, but if the jurisdictional requirements can be met, investors will often choose ICSID proceedings over the other options in the treaties.

Choosing the seat and the governing law under a treaty

Regina Campbell: Okay. So that answers some of my other questions, not only about the differences between the treaties, and I guess we can't get into all 3,000 of them right now. But also: do you have the choice to arbitrate, or to choose the governing law? Do you have the same freedom in these types of contracts that deal with investment treaties that you normally do under the typical Western contracts, which allow for quite a bit of freedom to contract?

James Claxton: Right. So I think the first thing is to go back to ICSID. If the interest is whether or not the investor can choose the place of arbitration: if they choose ICSID proceedings, this particular type of proceeding we've been talking about, then there really is no place of arbitration. It's entirely delocalized. It's an entirely self-contained system.

To be a little more concrete about that: normally, if the parties to a commercial contract were selecting a seat, they'd be thinking about things like to what extent the courts will help if there's a need for help from the courts in the arbitration. For example, if the respondent fails to appoint an arbitrator, can the claimant go to the courts and ask them for help? That's one of the ways court involvement is important. That is not part of the ICSID system. There is no court system the parties can go to. So at least when talking about the ICSID system, the choice of seat is irrelevant, because there is no formal seat. There's no place the parties can go during the arbitration process for assistance.

The other reason the seat is important, which I think you talked about with Professor Bermann, and what an honor to follow Professor Bermann, is that that's also where the parties will go if they want to challenge an award in commercial arbitration proceedings. On limited grounds, if a party is unhappy with the result of an arbitration, they can go to the courts at the place of arbitration and raise certain arguments to have the award annulled. In the ICSID system, that's not possible. There is a self-contained annulment process that the parties go through if there is a challenge to the award, entirely independent of domestic courts.

Regina Campbell: Amazing. So for the treaties, you can choose the arbitration seat to some extent. If you choose another arbitration seat, or another organization, does the treaty itself control or limit the different seats, or the governing law, within each investment treaty? You can sometimes choose your own arbitration seat, but what other types of restrictions do they have?

James Claxton: Okay, great. One very basic point to make is that, of course, the treaties will be negotiated and decided by states, so the investors won't have any input on these types of decisions, at least on the front end. Normally the law that applies will be the treaty itself, which is international law, in addition to general international law. Then there may also be a provision in the treaty that provides for the application of domestic law in particular circumstances. For example, the laws of the host state, the state hosting the investment, might be relevant to the conditions for having a legal investment. In that case, the host state's law would also be an applicable law under the treaty.

In terms of the place of arbitration, if we're not talking about the delocalized ICSID system, the treaties don't tend to specify a place of arbitration in other arbitration proceedings. They simply leave it to the parties, once the dispute arises, to choose a seat at that point.

Regina Campbell: Okay, so the parties still maintain some freedom of contracting within the parameters of the treaty, it sounds like. I'm sure there are still conditions, particularly with our country, on how much investment, limitations on ownership and things of that nature. But at least it sounds like there's some room for picking the governing law and potentially the venue within the treaty.

James Claxton: Yes, indeed. Venue could certainly be something the parties could negotiate once the dispute arose, again, unless we're talking about this very specific ICSID system.

Regina Campbell: Right. Very, very interesting. It's not something I really hear about, so I was very excited to understand that. When you don't have experience there, and you're not sitting in those circumstances and surroundings to get a feel for it as a lawyer, you don't understand those limitations. You definitely need to lean on someone like you who has the experience: what is this really like, what's the practical reality of getting involved and potentially investing in other countries, and what does this look like?

Commercial arbitration and mediation practice

Regina Campbell: We also wanted to talk about what kinds of commercial cases you arbitrate or mediate as well.

James Claxton: Good. Personally, when I was in practice, I practiced in Paris for about six years. I had a general commercial practice dealing with a whole host of different issues. I had some IP issues and some construction disputes. The last dispute I had was over the manufacture of yachts. I had a big construction dispute involving a South African state entity, or sorry, a North African state entity. So I had a general commercial practice.

These days I work as an arbitrator and mediator. I don't do a whole lot of work directly for clients. I do some consulting, but not a lot of direct client work. And there, too, it's general commercial. Of the last two cases I had as arbitrator, one involved a licensing agreement for a sports figure, and the other involved a technology dispute. So I have a general background, and mediation is pretty much the same. I'm very much oriented toward commercial disputes.

Place of arbitration versus governing law

Regina Campbell: Okay. And do you have any tips, whether from your practice as a lawyer or as an arbitrator or mediator? Obviously an arbitrator isn't acting as an advocate. You've probably seen cases where this could have been more clear in a contract. To stay on topic with the podcast today, maybe a governing law provision became more complicated because of the way it was written, or because of which law it deferred to, when there was uncertainty in those laws. Anything of that nature you can give us tips on, because we always hear some horror stories.

James Claxton: Right. Maybe one thing I would say is that parties may be in a position in negotiations to give on the law or to give on the place of arbitration. So strategically, the question is: what should I value more if there is this kind of negotiation?

My own take on this is that the choice of the place of arbitration is really important, because if the parties have to rely on the courts for assistance during the proceeding, or if there's a challenge to the award at the end, the courts become very, very important in the process. The choice of governing law can also be very important. But in my own experience, disputes are often decided on the facts. I'm sure, Regina, you have had the same experience.

And even where the law is relevant, in terms of preparing and where it comes up in cases, at least in my part of the world, the laws in this part of Asia are often based on laws more familiar to me, from Europe and the United States. So it may not be as difficult to come up to speed on small differences between a law an attorney is familiar with and the law chosen to apply in an arbitration. That may be less of a hurdle than being stuck in courts where there's a lot of uncertainty about the outcome. So one strategic thing I might mention is that where there is a choice between pressing for a particular law or pressing for a particular place of arbitration, the seat of arbitration, it might be worth thinking seriously about the importance of the place of arbitration.

Regina Campbell: Okay. That makes a lot of sense, because even if you choose the governing law, the courts where you're sitting might not apply it the same way, or may not apply it fairly. There could be a lot of factors involved, and bias. So at least if it's a venue where you think you can get a fair shot, and you can potentially learn the governing law, that might be a better trade-off.

James Claxton: Yes, I totally agree with that.

Legal systems and contract culture in Asia

Regina Campbell: Interesting. So what other tips do you have? It seems like you work a lot in the Asia-Pacific region: China, Korea, Japan, of course. Talk to us a little bit about what it's like. What are the legal systems there? How firmly do they adhere to contracts, to transparency, to different issues of law?

James Claxton: Good. There's of course a lot of variance between the different countries in Asia. But I would say, probably for people watching this and for your clients, it's important to talk to local counsel if at all possible, or at least to parties who have experience in the particular jurisdiction where a business activity or investment is possible, to get specific advice, because there is quite a lot of variance, for example, from Japan to China.

One thing I would say is that even the idea of contract can be culturally different as you move from one country to the next. The importance, for example, of a huge amount of detail in contracts that we have as U.S.-trained lawyers might not be there in an Asian jurisdiction, where things are a little more bare bones and a lot goes unsaid in the contract. So at least in terms of contracting, I think it's useful to speak to someone who actually has experience with a particular jurisdiction, to avoid any potential problems.

Regina Campbell: That makes sense, because I'm often asked if we're charged by the minute or by the word. We're always concerned, and I don't know if it's a common law issue, because we deal with common law. We're trying to cover everything: "We meant this, we meant that, just in case this," because we're trying to avoid certain precedents, either state or federal, depending on the circumstances. So I might look crazy if I bring one of my paragraphs somewhere else. That makes all the sense.

Courts versus arbitration in Asia

Regina Campbell: In China, let's say, for instance, do most business people use the court systems a lot, or do they use the arbitration systems more? Do you have any knowledge as to whether there's a preference in the East for the use of courts versus arbitration?

James Claxton: I think it really depends on the jurisdiction. Singapore, speaking about East Asia and Southeast Asia, has really taken off as a hub for international arbitration, and that's had knock-on effects in the region. Companies are increasingly comfortable with the idea of arbitrating disputes they may have wanted to push toward the courts previously.

I'm most familiar with Japan. I won't pretend to be an expert in all these different jurisdictions. But in Japan, historically, there hasn't been a whole lot of use of commercial arbitration or investment arbitration. Recently, though, there have been lots of different initiatives to try to promote the use of arbitration, and they do seem to be getting some traction. So I think it's a mixed bag in terms of how much uptake there is for arbitration. But the general trend in this part of the world is an increase in the number of arbitrations, and also an increasing interest, it seems to me, in the use of mediation, both as a way of avoiding arbitration outright and of better managing an arbitration once it's underway.

Arbitral institutions in Asia

Regina Campbell: Okay. And do you have any other recommendations for arbitration? I know you don't want to state preferences, since you work with a lot of them. But from a business or commercial point of view, are there arbitral seats or organizations that are more suited for business transactions or international transactions in Asia? Any specific ones you can recommend, or ones that might be better than others for certain cases or situations?

James Claxton: Right. Well, with Japan, there's the Japan Commercial Arbitration Association, and Japanese counterparties to contracts will be very familiar with this institution, so that might be worth putting on the table. It's an institution that's undergone a lot of recent change: modernizing its rules, increasing its staff and becoming increasingly transparent. They've taken a lot of steps recently to provide information to the public about the way they operate and about the arbitrators who have worked on their cases in the past. So for Japan-related business, I think it's always an option worth putting on the table.

Otherwise, I think the obvious choices would be Hong Kong and Singapore. In particular, Singapore really stands out in this part of the world. Both the institution, the Singapore International Arbitration Centre, and the platform for arbitration are really sophisticated. There are great hearing facilities in Singapore where arbitration hearings can take place. The Singapore institution is very international: there's a governing body made up of arbitration practitioners from around the world. So it truly is an international organization, with a very sophisticated secretariat, and the number of cases they administer keeps increasing.

Even within the Asia-Pacific region, there's often an instinctive choice of Singapore. Even where there's a local institution, like here in Japan or in Korea, there may be an instinctive preference for Singapore, because they've done so well with arbitration recently. That's not to denigrate the Japanese institution or the Korean institution, which are both excellent. But for historical reasons, parties are often most comfortable with Singapore.

Regina Campbell: Very interesting. Great tips. We love it, because we won't always know. That's why we lean on people like you for that expertise, to help us navigate. And if anyone needs assistance, it helps people know where to go and where to start. So these are tips for practitioners and business people alike, because I know a lot of business owners, CEOs and directors who are always looking at how they can improve things, or, if they want to go into a certain area, how to deal with certain issues. So they're interested in this information as well.

James Claxton: Good. Well, it was a pleasure.

Closing thought: treaty protection for investors

Regina Campbell: I think we got through our questions, sort of like this, but we got through them. I want to thank you so much for coming on. Would you like to add anything else for the audience, any tips we haven't thought of?

James Claxton: Maybe, because we began with investment treaties, one thing listeners might try to keep in mind is that there may be a treaty protection behind their commercial activity that they're not even aware of. And it may actually have relevance to how investments are structured. For example, to take advantage of an investment treaty, it may make more sense to organize the investment through a subsidiary in a country that has lots of treaties with favorable conditions for investors.

So maybe that's my closing thought: sometimes this investment treaty system is underutilized, or not well known to certain investors. From the investor's perspective, it's worth doing a little homework to find out what kind of treaty protection there is and how investments can be structured to take advantage of these treaties.

Regina Campbell: That's a great tip. I didn't even think about that. That's wonderful. That's why we have you on. Right when you were saying it, my light bulb went off, and I was like, "Oh, so wonderful." Thank you so much for coming on. We appreciate it so much, Mr. Claxton. It must be early there, right? Early in the morning?

James Claxton: No, it's a very civilized 7:30 in the morning, so it's really no problem.

Regina Campbell: Well, thank you for being up early with us this morning.

James Claxton: Thank you so much. Maybe we can do it again someday in Miami, if I have the good fortune to be in Miami.

Regina Campbell: Yes, let us know if you're going to be here. We'd love to do it in person. And if I can get down to Japan, we'll do something there too.

James Claxton: I'd love to. Like we talked about, it's a beautiful time of year to come. You're warmly welcome.

Regina Campbell: Thank you. Thank you very much. Okay. Bye, everyone.