The treaty on protection of investments between Russia and Ukraine provides that any disputes between Ukrainian investors and Russia may be resolved:
- in Russian courts;
- at the Arbitration Institute of the Chamber of Commerce in Stockholm (“SCC”); or
- by an ad-hoc arbitration tribunal, in conformity with the Arbitration Regulations of the United Nations Commission for International Trade Law (“UNCITRAL”).
Russian courts, for obvious reasons, are not an option. This article considers various differences between SCC and UNCITRAL arbitration. Its goal is to make the choice between the two easier for businesses which seek to pursue Russia and, the authors hope, assist lawyers in advising their clients which arbitration rules to choose.
In any arbitration, the party wishing to commence arbitration has to do so in accordance with the terms of the arbitration agreement.
Article 9 of the treaty provides for what is known as a “cooling-off period”, i.e. a direction that the parties should negotiate prior to commencing arbitration. Article 9.1 of the treaty provides that “In case of any dispute between … Contracting Party [i.e. Russia] and the investor of the other Contracting Party [i.e. Ukraine] … a notification in writing shall be handed in [to Russia], accompanied with detailed comments… The parties to the dispute shall exert their best efforts to settle that dispute by way of negotiations”.
Article 9.2 provides that “In the event the dispute cannot be resolved through negotiations within six months as of the date of the written notification”, it shall then be referred to arbitration or to the Russian courts.
Accordingly, prior to commencing arbitration against Russia, it is advisable to write to Russia and notify it of the investor’s claim, providing detailed comments. The details have to be sufficient to enable Russia to understand the investor’s claims and to enable the parties to reach a settlement.
While six months is a long time for some investors, especially where it is clear that Russia does not intend to pay, writing the notification letter saves the time and costs you might spend later on discussions with the tribunal (or arguments with Russia’s representatives) as to what the consequences of your failure to write should be.
There could be several such consequences:
- It may be that this is not a problem at all. Many investment tribunals have characterised such cooling-off periods as procedural directions. On this view, nothing happens if they are breached.
- Some tribunals have viewed compliance with cooling-off periods as a condition to the tribunals having jurisdiction. On this view, an investor can only commence arbitration without sending a notification to Russia and waiting for the cooling-off period to expire if its attempts to negotiate are clearly rejected or if he can provide that the negotiation would necessarily have been futile.
- There could be other consequences. For example, the tribunal could rule that it has jurisdiction, but the failure to comply with the cooling-off period has to be cured by staying the arbitration for the duration of the cooling-off period to allow the parties to negotiate. Alternatively, the tribunal could punish the investor in costs (i.e. award less legal costs if the investor wins) for failure to follow the procedure envisaged by the investment treaty.
Why may the consequences be so different? Because there is no system of precedent in international investment law. Each tribunal can adopt the approach that it considers reasonable, based on the specific facts of the case before it.
It is therefore best not to risk, and write to Russia to start the cooling-off period as the first step in your claim preparation. You will then still need time to collect your evidence and properly calculate your losses. Your lawyers will need time to draft all the arbitration documents. If you can wait for six months – wait. If you cannot, ask Russia to reply within a month of your notification and confirm that they are willing to negotiate and pay in principle – with details to be negotiated in the remaining time. If they do not reply, you could argue that it is Russia who breached the requirement to negotiate, and thus you would fully entitled not to wait until the expiry of the 6 months period.
Number of arbitrators
The treaty between Russia and Ukraine does not provide for the number of arbitrators in investor-state disputes. The default position under both the UNCITRAL and the SCC arbitration rules is that, where the parties do not agree, there will be three arbitrators. The SCC Board or the appointing authority acting pursuant to the UNCITRAL rules may decide there shall be a sole arbitrator in view of the circumstances of the case, such as the amount in dispute and complexity of the facts.
Appointment of the Tribunal
Under Article 17 SCC Rules, where there are three arbitrators, each party shall appoint one and the SCC Board shall then appoint the Chairperson. Where the SCC Board stipulates that the parties shall appoint arbitrators by a certain deadline, and one of the parties fails to appoint its arbitrators, the SCC Board then makes an appointment in that party’s stead.
Under Article 9 UNCITRAL Rules, where there are three arbitrators, each party appoints one arbitrator and the two so chosen appoint the third. Where a party fails to appoint an arbitrator, the other party may request that “the appointing authority” appoint the arbitrator in that party’s stead. Where the two arbitrators fail to appoint the third, again, the third arbitrator shall be appointed by “the appointing authority”.
The appointing authority, pursuant to Article 6 UNCITRAL Rules, is to be agreed by the parties. Where a party makes a proposal for an appointing authority and it is not agreed within 30 days, any party may request that the appointing authority be appointed by the Secretary General of the Permanent Court of Arbitration in the Hague.
Appointing authorities which the Secretary General may select include the Stockholm Chamber of Commerce, the Swiss Arbitration Association, the London Court of International Arbitration, the International Chamber of Commerce and others. They usually have a separate (much shorter) set of rules to govern how they will act in the event that they are selected purely as an appointing authority. Their main rule (e.g. the SCC Arbitration Rules) will not apply, unless the parties agree otherwise, if the SCC merely acts as an appointing authority.
Joinder / consolidation / mass claims
Arbitral tribunals and have drawn a distinction between mass claims and joinder of parties / consolidation of claims. A mass claim is a claim started from the beginning by multiple claimants against the same respondent. Joinder is a mechanism to join an additional party (either claimant or respondent) to the existing arbitration proceedings. Consolidation is a mechanism to join two concurrent arbitrations together into one arbitration.
Consolidation or joinder are often subject to very specific requirements, such as consent of both parties or permission of the arbitration institution (which will only be granted upon certain conditions).
There is no provision for mass claims in either the SCC or the UNCITRAL Rules. However there are multiple examples where mass claims have been started (and permitted) under UNCITRAL Rules.
In AES Solar and others (PV Investors) v Spain, the tribunal acting under the UNCITRAL Rules had to address Spain’s objection to aggregation of claims. Spain objected to aggregation on the basis that it did not provide consent to aggregation in the relevant investment treaty and that aggregation would make the arbitration difficult in terms of case management / allowing due process to all the parties involved. Spain has submitted, specifically, that no consent to aggregation could be found in the UNCITRAL Rules. The tribunal ruled that:
- no separate consent for the aggregation of claims was required, and the consent to the tribunal’s jurisdiction was in itself sufficient;
- no issues of due process arise from the sole fact that the proceedings are conducted in aggregate form;
- for the proceedings to be workable, a sufficient connection had to exist between the claims, as it did because all claimants complained about Spain’s measures in the PV (photovoltaic) sector, involved the same treaty provisions and sought similar relief.
With regard to the SCC Rules, there is no publicly available authority to discuss the principles of when mass claims can or cannot be made in SCC arbitration. A book by Mannheimer Swartling (whose partner now chairs the Arbitration Institute of the Stockholm Chamber of Commerce, appears to suggest that mass claims are possible where they arise under the same arbitration agreement and where aggregation results in saving of time and costs and avoids inconsistent decisions.
Arbitration costs and advances on costs
In institutional arbitration (such as the arbitration under the SCC Rules) the costs and the procedure for payment of costs are set by the arbitral institution. In ad-hoc arbitration, arbitration costs and the procedure for their payment are determined by the tribunal.
Under the UNCITRAL Rules, arbitration is started by sending a notice of arbitration to the respondent. There are no fees to pay in this regard.
Under the SCC Rules, arbitration is started by sending a request for arbitration to the SCC. This requires payment of the registration fee of EUR3,000 plus VAT.
Under the UNCITRAL Rules, if the claimant(s) and the respondent each appoint one arbitrator and the third is appointed by the so chosen – no fees are payable in this regard, beyond the two arbitrator’s hourly rates. The same applies to appointment by the SCC Board under the SCC Rules (albeit SCC’s administrative fees might also be payable based on hourly rates).
If, under the UNCITRAL Rules, the respondent fails to appoint its arbitrator, or the two arbitrators chosen by the parties cannot appoint the third, then (as discussed above) it is necessary to agree or ask the Permanent Court of Arbitration to select an appointing authority.
The Permanent Court of Arbitration will charge EUR3,000 for this, and the appointing authority will then charge separately for appointing the arbitrators. The SCC charges EUR2,000 for this. The London Court of International Arbitration charges GBP1,250 and hourly rates between GBP150 and GBP250. The Swiss Arbitration Association charges CHF4,000 and CHF500 per additional party.
Then there are fees to pay to the tribunal, once it is appointed. In UNCITRAL arbitration, these will normally be payable on the basis of hourly rates of the tribunal members. There is a requirement that the fees be reasonable in amount, taking into account the amount in dispute, the complexity of the matter, the time spent by the arbitrators and any other relevant circumstances. The tribunal members are required to indicate those rates (or any other method on the basis of which they propose to charge) upon being appointed.
In SCC arbitrations (and the parties can choose that the SCC administer an arbitration under the UNCITRAL Rules), fees will be determined by the SCC. The SCC has a calculator of fees (https://sccinstitute.com/our-services/calculator/), which is based on the amount in dispute. For a dispute of EUR1 million, and a tribunal of three arbitrators, the total fees are likely to be in the region of EUR108,445 excluding VAT.
If a UNCITRAL tribunal is appointed and then the SCC or another arbitration institution is selected as an appointing authority, the tribunal may decide to use that authority’s charging structure for the arbitration. For example, the arbitral tribunal appointed under UNCITRAL Rules by the SCC as appointing authority may decide to apply the SCC’s calculator to determine its fees.
Since UNCITRAL arbitration is ad-hoc (i.e. not administered by an arbitral institution), the arbitrator’s fees are likely to be the same as in SCC arbitration, but the administrative fee will not be chargeable. The SCC’s calculator provides that where the amount in dispute is EUR1 million, the administrative fee is likely to be EUR18,400 excluding VAT.
Both the SCC and UNCITRAL Rules require payment of arbitration costs in advance. The standard position under the SCC Rules is that the entire anticipated costs are payable in advance. However both the SCC and the UNCITRAL rules also contain certain flexibility, such that the SCC Board or the tribunal acting under UNCITRAL Rules may be open to persuasion to split the advance into several instalments. This may be especially relevant where, such as in the Crimean cases against Russia, Russia decided not to participate in the proceedings. It may also be relevant in the case of mass claims, where there are overlapping issues of jurisdiction and the underlying facts are similar (e.g. destruction of businesses by Russian forces in the same region).
Under both sets of rules, arbitration fees are normally split between the parties in equal shares. However if Russia does not pay its share of the fees, it will have to be paid by the claimant(s), who could then seek an award from the tribunal ordering Russia to compensate this payment.
General observations on procedure
Arbitration procedure under both sets of rules is similar:
- arbitration is commenced by a notice or a request for arbitration;
- there has to be a response to that notice or request for the respondent;
- the tribunal is appointed (the mechanics of appointment under the two sets of rules are discussed above);
- the tribunal thereafter either adopts the procedure set out in the rules or decides on its own procedure;
- the standard procedure is exchange of pleadings / written submissions between the parties, of which there are usually three or four (statement of claim, defence, reply and rejoinder); exchange of witness statements and expert reports; requests for disclosure of documents (if required); and a final hearing;
- the tribunal may decide to decide the case in several stages and have several hearings, for example the tribunal may decide to decide issues of jurisdiction, liability and quantum separately.
SCC / appointing authority intervention / challenges in national courts
There are certain issues which may arise in arbitration which cannot be determined by the tribunal and require external intervention. These are:
- appointment of the tribunal;
- replacement of arbitrators;
- challenges to arbitrators; and
- challenges to the tribunal’s findings on their jurisdiction.
Under the SCC Rules, the first three are dealt with by the SCC as arbitration institution (subject to party nomination of their arbitrators in the case of a three person tribunal). In arbitration under the SCC Rules (where, as in the case of the Russia-Ukraine treaty, there is no agreement on the seat of the arbitration), the seat of the arbitration will usually be Stockholm. Any challenge to the tribunal’s findings on jurisdiction will therefore have to be referred to the court in Stockholm.
Under the UNCITRAL Rules, the parties appoint the arbitrators themselves. If a party’s arbitrator has to be replaced (e.g. due to illness, death or a successful challenge) a party can appoint another arbitrator. Where, however, there is no agreement on appointment or on a replacement arbitrator, or a party wishes to challenge an arbitrator (e.g. because there are reasons to doubt his impartiality), an appointing authority has to be involved. As discussed above, the appointing authority may be chosen by the parties or appointed by the Permanent Court of Arbitration in the Hague. Any challenges to the tribunal’s findings on jurisdiction, similarly to the SCC, have to be submitted to the national court of the seat of the arbitration. Crimean cases were seated in several jurisdictions including Amsterdam, Geneva and Paris.
Length of proceedings
Length of proceedings depends very much on the complexity of the case (both in terms of legal issues and underlying facts) and participation or otherwise of the respondent (i.e. Russia).
The SCC Rules provide that a final award shall be issued within 6 months of a case being referred to the tribunal. This limit, however, is extendable by the SCC and is rarely complied with. There is no such limit in the UNCITRAL Rules.
The Crimean cases under the UNCITRAL Rules have lasted between 2 and 4 years. Russia did not participate in those cases at the stage of the arbitration beyond filing letters objecting to the tribunals’ jurisdiction (albeit it later actively pursued appeals in national courts). However the tribunals were themselves concerned with the jurisdictional issue and in many cases decided to bifurcate proceedings and have two hearings: one on jurisdiction and the other one on the merits. It may be that this will no longer be required, since there is now a line of precedents (both in terms of arbitration awards and rules of national courts) created by the Crimean cases establishing jurisdiction of investment tribunals to determine claims against Russia in respect of investments on occupied territories. It is therefore to be expected that future UNCITRAL cases arising out of Russia’s occupation of parts of Ukraine will be determined faster.
If the same Crimean cases were run before the SCC, they could be decided marginally faster. Since Russia failed to participate in proceedings beyond a letter objecting to jurisdiction, the cases had to be referred to the Permanent Court of Arbitration. By way of example, the relevant chronology was as follows in Stabil LLC and others v the Russian Federation:
- on 3 June 2015 Stabil filed the notice of arbitration;
- since Russia did not appoint an arbitrator, on 17 July 2015 Stabil requested that the Permanent Court of Arbitration designate an appointing authority;
- after some correspondence with Russia and Stabil, the appointing authority appointed the second arbitrator on 28 September 2015;
- the two arbitrators then appointed the third on 7 October 2015.
Appointment of the tribunal therefore took just over four months from the notice of arbitration. Under the SCC Rules, the process would likely have taken closer to two months.
There are many similarities in investment arbitration against Russia under the SCC and the UNCITRAL Rules:
- in both cases, it is advisable to write a notification letter to Russia; and
- following appointment of the tribunal, the arbitration procedure is likely to be very similar.
- the process of appointing the tribunal: the SCC appointment process might be faster by 1-2 months, since there is no need to ask the Permanent Court of Arbitration to select an appointing authority;
- there is precedent under the UNCITRAL Rules permitting mass claims and explaining the principles which tribunals may apply when deciding whether the claims should be run together – currently there is no such precedent under the SCC Rules, albeit arguably mass claims can also be run under those rules;
- the SCC’s charging structure and calculation of advances on costs is based on the amount in dispute and the standard rule is that the entire anticipated costs have to be paid in advance – in UNCITRAL arbitrations there may be more flexibility in this regard;
- UNCITRAL arbitration might be slightly cheaper (by approximately EUR20,000 on a EUR1 million claim), since there are no administrative fees payable to an arbitration institution; and
- SCC arbitrations will likely be seated in Stockholm – UNCITRAL arbitrations may be seated in many different places – but Crimean arbitrations seated in Geneva and Amsterdam have resulted in wins for Ukrainian investors (confirmed on appeal to national courts).
In conclusion, if you want to run your claim separately, several months of delay do not matter to you and you want to save some money on arbitral institution’s fees, it might be best for you to pursue Russia under the UNCITRAL Rules. If you want to be part of a mass claim (which could result in very substantial costs savings) then you should run your case under the UNCITRAL Rules, because there is precedent for such claims under those rules. If a saving of EUR20,000 on a million claim is not substantial to you and you want to save time, it might be best to choose the SCC Rules.