International Arbitration Take Home Exam 2016

PART A
In the event that Kampala Investments Limited commences investor state arbitration proceedings against France, what arguments is the government of France likely to raise in defence with respect to:
1. a jurisdictional challenge (10 marks);
2. any claim that the Regulation gave rise to an indirect expropriation of Kampala Investments investment. (10 marks)

Kampala would be unable to engage in investor state arbitration because a corporation restructuring after the fact would preclude the tribunal from having jurisdiction over the issue.
There was no ‘taking’ by the French government therefore no expropriation occurred. Furthermore, it is likely that regulation was enacted in the public interest and therefore Kampala could not claim an indirect expropriation.

FACTS (“background facts”)
Office Furniture Designs Pty Ltd (“OFD”) is a Queensland based company that manufactures office furniture. Mobilier de Bureau SA (“MDB”) is a company that is incorporated in France and carries on its business in Paris.
On 25th January 2016 OFD made an unsolicited offer to sell MDB 2000 office chairs each year for 5 years at a price of $260,000 each year. OFD made this offer because it understood that MDB had secured a contract with the French government to supply office chairs.
On 26th January 2016 MDB replied to OFD and confirmed it had an arrangement to supply office furniture to the French government and accepted the offer on the basis that the first delivery of chairs arrived not later than 30 April 2016. At the same time MDB supplied its standard form contract.
The contract stated:
15. Regulatory Compliance
The furniture supplied must meet all French regulatory requirements.
33. Applicable Law
The contract is governed by French Law.
34. Arbitration
In the event of a dispute about this agreement the parties can refer the dispute to the Australian Centre for International Commercial Arbitration applying ICC Rules. The place for arbitration will be Brisbane, Australia. The venue will be Paris, France or London, England.
On 25 March 2016 the French government enacted a new regulation that required government departments to use furniture that adheres to high ergonomically standards in order to reduce fatigue and injury on its workers.
On 21 April 2016 the first delivery of chairs was made and payment was made by MDB to OFD the next day.
On 20 May 2016 MDB advised OFD that the chairs supplied did not meet the French standard. OFD then sought:
1. reimbursement of the purchase price
2. collection of the chairs
3. termination of the contract
Immediately (we assume also on 20 May 2016) OFD asked MDB if it could supply different chairs that would comply with the French regulation. MDB refused and maintained the contract was terminated.
OFD refunded the purchase price and arranged collection of the chairs.
On 1 August 2016 Amelie sold 50% of OFD to Kampala Investments Ltd (“Kampala”) an investment company incorporated in Uganda.
Australia, France and Uganda are signatories to the New York Convention.
After seeking legal advice, OFD commenced arbitration against MDB in the Australian Centre for International Commercial Arbitration on 29 August 2016 claiming that the contract satisfied the requirements under Article 35 of the CISG and that damages for Breach of Contract were payable under article 74, being a loss of profit of US$650,000 over the term of the 5 year contract.
MDB has argued that the tribunal lacks jurisdiction to deal with the dispute because the French regulations are beyond the scope of the arbitration agreement and therefore that any award by the tribunal would not be enforceable under the New York Convention.
MDB also argues that if there was a breach but MDB it would be exonerated from paying damages under article 79 CISG.
LAW
Jurisdictional Challenge
Article 7 of the Agreement Between the Government of the Republic of France and the Government of the Republic of Uganda on the Reciprocal Promotion and Protection of Investment (“the Treaty”) states that if a dispute has not been settled within a period of 6 months it shall be submitted to the International Centre for Settlement of Investment Disputes in respect of investments occurring between States and nationals of other States.
Article 7 also states that parties should attempt to settle a dispute amicably.
Amco v. Indonesia held that pre-existing disputes can only be submitted for arbitration if it was “reasonably and legitimately envisaged” by the parties.
Phillip Morris v The Commonwealth of Australia held that a corporate restructuring at a time when a dispute was likely would preclude the tribunal from having jurisdiction over the matter. The Lao Holdings case suggested that silence on a temporal limit does not allow an investor to forum shop through artful restructurings.
Any claim that the Regulation gave rise to an indirect expropriation of Kampala Investments investment.
Article 5 of the Treaty shall take any measures direct or indirect except in the public interest and provided that these measures are neither discriminatory nor contrary to a specific commitment.
Marvin Roy Feldman Karpa (CEMSA) v. United Mexican States held that the regulatory action had not deprived the claimant of being control of his company or interfered with the internal control of his company, he was free to pursue other lines of business that conformed with the regulation.
Also in Marvin Roy Feldman Karpa (CEMSA) v. United Mexican States it was held that governments must be free to act in the broader public interest.
Furthermore, governments frequently change their laws and regulations in response to changing economic, political and social considerations that might make certain activities less profitable.
Contifica Asset Management Corp v Republic of Ruritana held that a claim for expropriation was meritless where government regulation was enacted to protect the health of its population and in any case, did not effect the ownership of property by the claimant.
APPLICATION
Jurisdictional Challenge
Kampala in any event would be unable to bring any action under the treaty until the preliminary 6 month period had expired.
The states have contracted by treaty to allow investors to initiate compulsory arbitration. This general consent allows investors to arbitrate an investment dispute without having a contractual relationship between the investor and the state and therefore regulations are brought within the jurisdiction of international arbitration tribunals.
However, the French government is likely to argue, as affirmed in Phillip Morris v The Commonwealth of Australia, jurisdiction does not extend to allow investors to creatively restructure after the fact. Any jurisdiction ceased to exist when Kampala acquired its shareholding in OFD, which is, on the balance of probabilities, likely to be seen as a transaction to gain the protection of the Treaty.
Because Kampala acquired the shares in OFD substantially after the dispute arriving it is extremely likely that jurisdiction would not extend to a claim brought by Kampala against the French government as it was neither reasonably or legitimately envisaged.
Claim for indirect expropriation
Article 5 clearly states that either party must not take any measures of expropriation, direct or indirect, except in the public interest.
The question of expropriation or wealth requires property to be ‘taken’ or a dispossession to occur as discussed in Marvin Roy Feldman Karpa (CEMSA) v. United Mexican States. An indirect expropriation is an action that is tantamount to having all the effects of a dispossession.
The French government is certain to argue that there has been no direct or indirect taking of property. OFD is free to continue its course of business in any way it choses as long as it complies with the regulation and the regulation has no bearing on any form of ownership or operation of the subject company.
Furthermore, Article 5 states that the government can take measures in the public interest.
Typically, governments are the largest employers in any country. Preventing injury from the government workers, who likely make up a significant part of the population is likely to be in the public interest. The government can make changes to regulation in the face of social and economic considerations such as having workers injured and suffering political and economic consequences.
CONCLUSION
The French government will argue that the corporate restructuring that made Kampala a shareholder happened after the fact and therefore Kampala the jurisdiction would not extend to include it.
The French government is certain to argue that there has been no taking or effect of dispossession of property by the French government and therefore any claim for indirect expropriation is meritless. Even if Kampala is able to demonstrate some expropriation it would be exempt from the protection of the treaty because it was in the public interest.
PART B
If the dispute concerning the French regulations is beyond the scope of the arbitration clause in the contract between OFD and MDB, is there a risk that any arbitral award against MDB would not be enforced under the New York Convention, or that it might be set aside under the relevant lex arbitri? In answering this question, identify which State’s arbitration laws will be the relevant lex arbitri, but assume in any event that that law adopts/ mirrors the UNCITRAL Model Law on International Commercial Arbitration. (20 marks)
An award would not be enforced pursuant to Article 5 of the Convention because the arbitration clause deals with matters within the contract and not resulting from the contract and therefore the award is beyond the scope of the arbitration
The award could be set aside under S34 of the Commercial Arbitration Act 2013 (QLD) if MDB can establish grounds of misconduct, failure to give reasons or public policy.
FACTS
The background facts are relied on and where more specifically;
33. Applicable Law
The contract is governed by French Law.
34. Arbitration
In the event of a dispute about this agreement the parties can refer the dispute to the Australian Centre for International Commercial Arbitration applying ICC Rules. The place for arbitration will be Brisbane, Australia. The venue will be Paris, France or London, England.
LAW
Article 1 of the New York Convention (“the Convention”) sets out its scope.
Article 3 of the Convention requires contracting states to recognize arbitral awards as binding
Article 5 of the Convention recognises seven grounds for refusing to enforce an award.
Article 5(1)(c) (i) that the award deals with a difference not contemplated by or not falling within the terms of submission to arbitration; or (ii) it contains decisions on matters beyond the scope of submission to arbitration provided that, if the decisions on matters submitted to arbitration can be separated from those not submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognised and enforced.
The UNICITRAL Model Law Article 5 provides that “in matters governed by this law, no court shall intervene except where so provided in the Law”.
Both Green v Australian Industrial Investment Ltd and Akai Pty Ltd v The People’s Insurance Camp Ltd found that despite a contract expressly stating that it should governed by a foreign law it not prevent Australian courts from hearing the dispute under a domestic law.
The Commercial Arbitration Act 2013 (QLD) s34A (3) considers that grounds upon which leave for appeal can be granted and specifically (c)(i)&(ii) that the decision of the tribunal is obviously wrong and the question is one of general public importance and the decision of the tribunal is at least open to serious doubt.
There are three avenues for review and the potential to have an award set aside through the lex arbitri those being
1. failure to give reasons;
2. public policy grounds; and
3. misconduct.

APPLICATION
Risks that an award may not be enforced under the Convention
Despite the fact that the contract Clause 34 of the Agreement clearly states ‘in the event of a dispute about this agreement’. It is possible, and foreseeable that a defence might argue that the clause is not sufficiently broad to capture the issue resulting from the change in French regulations and therefore the clause does not cover disputes arising out of the agreement but rather only covered disputes contained within the agreement.
The construction of the clause suggesting ‘dispute about this agreement’ rather than a ‘dispute resulting from this agreement’ suggests that a defence under Article 5(1)(c) of the Convention may be upheld.
Whether the arbitration was not within the scope of the arbitration clause would depend upon the contract itself (Article 2(a)).
An award set aside under the relevant lex arbitri
Because the seat, or place of arbitration is Brisbane, Queensland, Australia the relevant State law that would apply to the arbitration is the Commercial Arbitration Act 2013 (QLD).
Specifically, an application for the setting aside of an award must be made within 3 months.
Whilst the courts are generally pro-enforcement if MDB can establish any of the following grounds it may be able to have the awards set aside under s34A (3) of the Commercial Arbitration Act 2013 (QLD):
1. Failure to give reasons;
2. Misconduct; or
3. Public Policy Grounds.
If MDB can demonstrate that the award is wholly offensive to the ordinary reasonable and fully informed member of the public and fundamentally offends the basic and explicit principles of justice and fairness it may be able to have the award set aside.
CONCLUSION
If the issue of the French government changing its regulation is beyond the scope of the arbitration clause it is unlikely that an award would be enforceable under the New York Convention because the award is related to an issue not covered by the arbitration under Article 5(1)(c).
MDB could apply to the court to have the award set aside under s34A of the Commercial Arbitration Act 2013 (QLD). If MDB can establish the arbitration either, failed to give reasons for its decision, there was misconduct, or a public policy ground, it may be able to have the award set aside.

PART C
1. Has OFD complied with its obligations under this contract concerning conformity of the goods in accordance with Article 35 CISG? (10 marks)
2. In relation to any claim OFD has against MDB for loss of profit, would MDB be exonerated from liability to pay any damages to OFD in accordance with Article 79 CISG? (10 marks)

OFD has not complied with its obligations under Article 35 CISG because it was expressly stated that the goods must comply to French standards and any reasonable manufacturer, particularly a French national in this scenario, would conduct due diligence to ensure their goods met those standards.
FACTS
The background facts apply, in particular.
OFD was aware that the chairs were to be supplied to the French government by MDB. OFD provided a photo to MDB depicting the chairs.
MDB required the chairs to be delivered no later than 30 April 2016.
On 25 March 2016 the French government enacted a new regulation that required government departments to use furniture that adheres to high ergonomically standards in order to reduce fatigue and injury on its workers.
MDB accepted delivery on 21 April 2016.
MDB notified OFD of non-conformity on 20 May 2016.
The contract states
15. Regulatory compliance. The furniture supplied must meet all French regulatory requirements
LAW
Article 8 CISG states that statements and conducts are to be according to intent where the other party knew or could not have been unaware what that intent was, or interpreted by a reasonable person considering all the circumstances.
Article 38 and 39 CISG state that a buyer must notify the seller of a lack of conformity within as short a time as possible and loses the right to rely on the lack of conformity of goods if they do not do so.
A reasonable time has been considered to include looking at the circumstances as a whole and:
1. Any party derogation from article 39(1)
2. The seller might reasonably expect notice to be given within a certain timeframe
3. The type of remedy chosen
4. The type of goods sold
5. The nature of the contract and the duty of the buyer to limit the seller’s loss.
The ‘noble month’ as propounded by commentator Ingeborg Swenzer has been widely regarded as the touchstone for reasonable time, even being suggested as being ‘very generous’ CLOUT Case 123.
Article 35 states the seller must deliver goods that conform with the contract unless they are fit for the purposes as described, are fit for the purpose at the time of the contract and the seller is not liable if the buyer knew or could not have been unaware of a lack of conformity.
APPLICATION
It is apparent from the outset that OFD knew that MDB intended on supplying the subject chairs to the French government, the issue of compliance with French regulations is specifically dealt with in Clause 15 of the contract. A failure to comply with any government regulations would ordinarily indicate to any reasonable person that issues would then arise with the commercial use of the subject item.
Compliance with regulations therefore is a fundamental requirement of the contract.
The question then becomes one of whether MDB notified OFD of the lack of conformity within a reasonable time period.
The ‘noble month’ has often been cited as the touchstone for reasonable time period to give notice of a non-conformity. Considering the practicalities of the agreement however MDB is based in France, is in the business of supplying furniture to the government and perhaps therefore should have become immediately aware of some defect. On the other hand however, the regulations are new, a lack of conformity might have been interpreted differently by the supplier and government and the issue only arose when the chairs were delivered to the end user. Based on the evidence it is difficult to say either way whether sufficient notice was given, however, on the balance, given that notice was given within a calendar month, we take it that sufficient notice was given.
We assume that the chairs are fit for sitting on at the very least, however whether they are expressly or impliedly fit for re-sale to the French government at the time of the contract is less clear. Clearly OFB was aware both expressly and impliedly that the chairs were being supplied to the French government and needed to conform to French standards.
The issue then is whether it unreasonable for the buyer to rely on the seller’s skill and judgement to ensure that the goods complied with French standards under Article 35 (2)(b)
Clearly Amelie is originally from France, she is in the business of manufacturing office furniture, the contract states that the chairs must comply with French standards. Prima Facie, there are no barriers that would prevent OFD from conducting the necessary due diligence to ensure that the chairs supplied met the required standards. A simple google search is likely to have enlivened OFD to a future change in regulations that they should have reasonably been aware of.
Could MDB have been aware of the lack of conformity at the time of the conclusion of the contract under Article 35(3)? MDB is in France, OFD in Australia, there is no evidence that samples were exchanged merely a photo depicting the chairs. It is likely that MDB would rely on the contract and argue that the requirements were clearly set out, in that the chairs simply needed to comply with French standards. At the time the contract was signed, it is difficult to say whether MDB could have been aware of the lack of conformity because we do not know what the deformity was. On the balance of probabilities, unless there was a significant defect that MDB failed to pick up from the photo, ie a missing leg, it is unlikely that MDB could have been aware that the chairs did not conform with the contract.

CONCLUSION
Amelie is originally from France, she is in the business of manufacturing office furniture. It was reasonable for MDB to rely on her skill to supply goods that were fit to be supplied to the French government, a condition which Amelie was specifically aware of. Therefore, OFD has not met its obligations under Article 35 CISG.

In relation to any claim OFD has against MDB for loss of profit, would MDB be exonerated from liability to pay any damages to OFD in accordance with Article 79 CISG? (10 marks)

MDB should have been able to reasonably expect OFD to supply chairs that met French regulations and taken the new regulation in to account. Any amount of due diligence is likely to have brought the potential for a new regulation to the attention of OFD which should have been conducted prior to the signing of the contract. In any event OFD did not give MDB notice of the impediment and therefore cannot rely on Article 79.

FACTS
The background facts apply, in particular.
OFD was aware that the chairs were to be supplied to the French government by MDB. OFD provided a photo to MDB depicting the chairs.
MDB required the chairs to be delivered no later than 30 April 2016.
On 25 March 2016 the French government enacted a new regulation that required government departments to use furniture that adheres to high ergonomically standards in order to reduce fatigue and injury on its workers.
MDB accepted delivery on 21 April 2016.
MDB notified OFD of non-conformity on 20 May 2016.
The contract states
15. Regulatory compliance. The furniture supplied must meet all French regulatory requirements

LAW

Article 79(1) states that a party is not liable for a failure to perform their obligations if the impediment was beyond their control and could not reasonably have taken the impediment into account at the time the contract was concluded.
Article 79(4) states that a party who fails to perform must give notice of the impediment within a reasonable time or is liable for damages.

APPLICATION

Whilst it is clear that OFD has no control over what the French government does, a company in the business of manufacturing office furniture, particularly entering in to a contract that expressly states that the items must conform to French regulations, should have been reasonably have expected to conduct such due diligence so as to know what those regulations were as it was in her sphere of control.
Any amount of due diligence is likely to have enlivened OFD to the possibility of new French regulations.
Such due diligence would have reasonably been conducted prior to entering in to the contract and therefore OFD should have been aware of the impediment and the time the contract was made.
It does not appear that OFD has given notice MDB notice of the impediment on the lack of conformity of the chairs and simply offered to replace those chairs. In any event, even if OFD was able to establish that the failure to perform was the result of an impediment beyond their control, they have not given notice of the impediment and therefore would be liable for damages.

CONCLUSION
MDB should have been able to reasonably expect OFD to supply chairs that met French regulations and taken the new regulation in to account. Any amount of due diligence is likely to have brought the potential for a new regulation to the attention of OFD which should have been conducted prior to the signing of the contract. In any event OFD did not give MDB notice of the impediment and therefore cannot rely on Article 79.