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Posted : 12 Aug, 2014 00:00:00

Arbitration: Lesson from the Saipem case

M S Siddiqui

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 Chorzw 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