Arbitration: Lesson from the Saipem case

Our society has a long tradition of settling family, land or any other dispute through arbitration or 'shalish.' It has an impact on peace and harmony in society. The settlement of any dispute through arbitration is allowed by the judicial system. Arbitration has its impact on the global business and other issues as well. The United Nations (UN) has many bodies to do arbitration on many issues among member countries. The United Nations Commission on International Trade Law (UNCITRAL) was established in 1966 for the purpose of harmonisation and unification of laws on international trade. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) is the Magna Carta of international arbitration. About 145 nations are parties to the New York Convention. It serves to guarantee enforcement of arbitration agreements worldwide, and is largely responsible for the growth and success of arbitration in international commercial agreements.
The New York Convention was established as a mechanism under the auspices of UNCITRAL through which arbitral agreements and awards may be universally enforced. It is used in a wide range of circumstances covering disputes, including those between private parties, between any investor and the state and between two states and in the event of commercial disputes administered by arbitral institutions in all parts of the world.
The term "commercial" has a wide-ranging interpretation that covers matters arising from all relationships of commercial character, whether it is contractual or not. Relationships of the commercial character include as follows: any transaction for supply or exchange of goods or services, distribution agreement, commercial representation or agency, factoring, leasing, consulting, engineering, licensing, investments, financing, banking, insurance, exploitation agreement or concession, joint venture and other forms of industrial or business cooperation, carrying goods or passengers by air, sea, rail or road.
Arbitration not only covers commercial disputes but also much more, where parties have agreed that disputes between them in respect of a defined legal relationship, whether contractual or not, shall be referred to arbitration under the UNCITRAL Arbitration Rules. Treaties and agreements between parties are commitments that remain a foundation for the international law, often expressed in the adage pacta sunt servanda or agreements are to be kept.
The first condition is the recognition and enforcement of foreign arbitral awards, i.e., arbitral awards made in the territory of another state in the field of application as defined in the Article I of the NY Convention. The general obligation for the states concerned to recognise such awards and to enforce them in accordance with their rules of procedure is laid down in the Article III. The second condition, contemplated by the New York Convention, is the referral by a court to arbitration. The Article II(3) stipulates that a court of a Contracting State must at the request of one of the parties refer a related matter to arbitration. The national court will pass on the matter to the Arbitration Centre instead of hearing the case. In summary, the Article II of the New York Convention states that national courts should respect the agreement on arbitration and the Article III imposes a duty to recognise and enforce awards.
A matter of arbitration involving Bangladesh drew the attention of the global community in the areas of commerce and legal affairs. An Italian construction company (Saipem) had won a contract to build a gas pipeline in north-eastern Bangladesh. The counterpart was a state entity-Bangladesh Oil, Gas and Mineral Corporation (Petrobangla). At one stage the contractor claimed additional costs that Petrobangla refused to pay. In 1993 Saipem referred its claim to arbitration, pursuant to a clause in the parties' agreement that provided for dispute resolution in Dhaka under the Rules of the International Chamber of Commerce, Bangladesh (ICCB). An arbitral tribunal was constituted in this connection.
Petrobangla then challenged the tribunal's order and sought revocation of its authority under the Bangladesh Arbitration Act of 1940. During and after the proceedings, courts in Bangladesh made various orders with respect to the arbitration. The Supreme Court issued an injunction restraining Saipem from continuing with the ICC arbitration. Ultimately, that court ruled that there was 'no award in the eye of the law', finding that the arbitral proceedings were illegal and without jurisdiction. The court verdict on the ICC arbitration has apparently gone against the NY Convention.
Saipem filed a second plea for arbitration, this one under the rules of the International Centre for Settlement of Investment Disputes (ICSID).  The ICSID tribunal determined only that the alleged violation of the New York Convention could constitute a breach of the investment treaty. Whether the conduct of the Bangladeshi courts did in fact amount to a 'denial of justice' (thereby breaching treaty protections against improper expropriation) was left to the merits of the arbitration. It was held that the Supreme Court's declaration that the ICC Award was "non-existent."  The tribunal found: "the amount awarded by the ICC Award constitutes the best evaluation of the compensation due under the Chorzów factory principle", given that "the expropriated rights at hand were Saipem's residual contractual rights under the investment as crystalised in the ICC Award". Doubtless the award will serve as a springboard for future claims related to the New York Convention.
The recent decision in the Saipem vs. Bangladesh case shows how disruption of ICC arbitration, allegedly in breach of a New York Convention obligation, can also implicate a bilateral investment treaty that gives direct rights to the prevailing party. By contrast, much judicial failure to respect the Convention will likely remain without any practical sanction.
Singapore and Hong Kong are in the forefront of Asia's growth. In 2008 the International Court of Arbitration of the International Chamber of Commerce (ICC) decided to locate their Asian offices in both Hong Kong and Singapore.
Over the last 10 years in particular, Singapore has improved in leaps and bounds, building the world-class infrastructure to support arbitration-the Singapore International Arbitration Centre (SIAC)-opening up the legal sector to foreign competition and building international arbitration expertise.
Singapore's reputation as a world-class venue for international arbitration has attracted business entities from the region. China is the top global player in international trade and generated the highest number of case filings with the SIAC. The rise in popularity of SIAC arbitration with Chinese parties has proved the popularity and recognition of SIAC. The SIAC also received a significant number of new case filings from Hong Kong. The well-established Singapore centre is a challenge for other countries to gain confidence of disputing parties to avail service from other countries.
Significantly, the business community perceives Singapore as a neutral venue for arbitration, and the repeatedly strong ranking of the country on corruption indices underpin the legislative environment. In turn, Singapore's legal regime is supported by a world-class arbitration infrastructure in the shape of Maxwell Chambers, a purpose-built facility that houses a number of world-class arbitral institutions. Maxwell Chambers promises a one-stop and full-shop experience for all our clients. The Singapore judiciary's philosophy towards arbitration was most succinctly captured in the Court of Appeal judgment in the Tjong Very Sumito v Antig Investments Pte Ltd case.
The ICC, Bangladesh has started non-institutional arbitration at the Bangladesh Centre for International Arbitration (BIAC) in cooperation with the Dhaka Chamber of Commerce & Industry and the Metropolitan Chamber of Commerce. It has already gained global reputation for their judgment in the Saipem case. Bangladesh Indenting Agents' Association (BIAA) has signed an agreement with the China Council for Promotion of International Trade (CCPIT) at its headquarters in Beijing to set up their Bangladesh centre for mediation between Bangladesh and Chinese commercial disputes. Meanwhile, Bangladesh passed the Arbitration Act 2001 in line with the NY Convention.
An unequivocal judicial policy of facilitating and promoting arbitration has firmly taken roots in Singapore. Similarly, the Bangladesh Centre for International Arbitration (BIAC) can play a role in dispute solution in the country. The role of the court should now be to support the arbitral process.
When it comes to dealing with international disputes, Bangladesh's arbitration system has not matured. Bangladesh does not have expert arbitrators and legal practitioners to play a role in global commercial dispute resolution. The overseas parties hardly agree to come to Bangladesh for arbitration and mediation.
This controversial Saipem case highlights the contours of interaction under the New York Convention and the national law. It has given a negative publicity about Bangladesh's legal system. The experience demands a pro-arbitration attitude, good communication and transportation links, and strong government support for arbitration in order to gain global confidence in the capacity of Bangladesh in this particular area.
The writer is a legal economist. shah@banglachemical.com