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Testing the boundaries of emergency arbitration in investment and construction disputes

The advent of emergency arbitration can be considered as one of the big success stories of international arbitration in the past decade. Practically no other new arbitral mechanism has found such widespread acceptance in recent revisions of institutional arbitration rules.

What is emergency arbitration all about?

An emergency arbitration allows a disputing party to apply for urgent interim relief prior to the formal constitution of the arbitral tribunal. Once the application is received by an arbitral institution, it will appoint an emergency arbitrator at short notice who will decide on the application within a short period of time, ranging from a few days to one or two weeks.

The proliferation of emergency arbitration shows that there is a practical need to obtain interim measures – e.g. for the preservation of evidence or the factual status quo, the freezing of assets, or preventing the unjustified calling on a bond – within the confines of the arbitral process. Although under most modern arbitration laws and arbitration rules an arbitration agreement does not prevent an application to courts for interim measures, parties may prefer to remain within the arbitral process. The confidentiality of proceedings, the subject matter expertise of the emergency arbitrator, the unwillingness to litigate in the official local court language and, in certain cases, mistrust in the neutrality or expertise of the courts, makes emergency arbitrations particularly attractive.

It will be up to the subsequently constituted arbitral tribunal to uphold or reverse any order issued by the emergency arbitrator. Frequently however, the emergency arbitrator's preliminary assessment of the particular strengths and weaknesses of the issue before him/her can lead to an early settlement of the dispute as such. Where this is not the case, the emergency arbitrator's decisions are very often complied with voluntarily. The losing party will want to avoid that its non-compliance creates a bad impression with the arbitral tribunal once the arbitration proceeds, fearing that such impression might negatively reflect on the final award.

As a relatively new mechanism, emergency arbitration is not without teething problems. It has been pointed out that unlike in court proceedings, interim measures usually cannot be granted ex parte and will not be binding on third parties. However, these limitations are inherent in the arbitral mechanism and not a specific problem of emergency arbitration. More important is the fact that a later arbitral tribunal can reverse or amend an emergency arbitrator's decision. This raises doubts about the "final and binding" nature necessary for its enforcement under the New York Convention. While some courts have considered emergency arbitrator decisions to be enforceable, and progressive arbitral jurisdictions like Hong Kong or Singapore have passed laws explicitly stipulating their enforceability, the questionable enforceability of emergency arbitrator decisions has been considered to be the Achilles' heel of the mechanism and has been at the center of much of the debate about the pros and cons of emergency arbitration. This has distracted attention away from the fact that with its growing popularity, the emergency arbitration mechanism has expanded into new territories where its compatibility is at least questionable. This article will explore how emergency arbitration is testing the boundaries with respect to international investment and construction disputes.

Emergency arbitration in investment disputes

The last three years have seen several instances in which the emergency arbitrator mechanism has been invoked in investment disputes, i.e. arbitrations between a foreign investor and a state in which the investment was made. This may seem surprising, as investment disputes are usually initiated on the basis of international investment treaties and governed by arbitration rules which generally do not include such emergency arbitration mechanisms.

A closer look at the arbitration rules used in investment disputes shows that while emergency arbitration will certainly not become the norm, it should not be ignored either. Almost 90% of all investment arbitration cases are initiated under the ICSID Convention or the UNCITRAL Arbitration Rules, which do not foresee an emergency arbitration mechanism. While the ICC Arbitration Rules 2012/2017 provide for emergency arbitration, Article 29(5) of the Rules is understood to exclude the mechanism in the case of investment disputes based on investment treaties. This leaves the SIAC Investment Arbitration Rules 2017, which require an express opting-in by both disputing parties, as well as the SCC Arbitration Rules, which introduced the emergency arbitrator mechanism in 2010 without making a distinction between commercial and investment arbitrations. It is in fact the SCC Rules which have been the platform of all known investment emergency arbitrations to date. Having been included as arbitration rules in about 60 bilateral investment treaties, and importantly in the Energy Charter Treaty, the SCC Rules form the basis for 5% of all investment disputes. The publicly known investment emergency arbitrations under SCC Rules have tested the boundaries of emergency arbitration in two particular ways.

The first issue is the scope of the state's consent to arbitration. The SCC Rules provide that parties choosing the Rules shall be deemed to have agreed on the Rules in force on the date of the filing of an application for the appointment of an emergency arbitrator. Can investors thus avail themselves of emergency arbitration even where the investment treaty containing the choice of SCC Rules was concluded (long) before the introduction of the mechanism in 2010, as, e.g., is the case for the Energy Charter Treaty of 1994? The argument could be made that an emergency arbitration mechanism was not foreseeable at the time the state parties included the SCC Rules in their investment treaty, and therefore it should not be covered by their consent to arbitration. However, thus far emergency arbitrators dealing with the question have followed a dynamic interpretation of the state's consent and considered the emergency arbitration mechanism to be included.

The second issue pertains to pre-arbitral prerequisites to emergency arbitration. Investment treaties commonly contain "cooling off" or "waiting" clauses, providing that an investor has to undertake efforts towards an amicable resolution of the dispute for a period of 3 to 6 months before it may initiate arbitration. In the relevant cases, the investors needed interim measures urgently and therefore did not comply with the applicable waiting periods. This raises the question whether the waiting period can be seen as an obstacle to initiating emergency arbitration proceedings if it has not been complied with. Up until now, emergency arbitrators have answered the question in the negative. They found either that forcing an investor to comply with the waiting period in light of (prima facie) imminent harm would defeat the purpose of the emergency arbitration mechanism, or that compliance with the waiting period would be obviously futile, considering that the state had rejected all efforts towards an amicable settlement.

As these examples show, the emergency arbitration mechanism was able to test the boundaries in investment disputes. However, in the end it all comes back to enforcement. Apparently less concerned than commercial parties about leaving a bad impression with the arbitral tribunal, states thus far have generally failed to voluntarily comply with the emergency arbitrator decisions rendered against them. Currently there is only one known case in which an investor was able to convince a lower instance court of the host state to declare an emergency arbitrator decision in the investor's favor enforceable.

Emergency arbitration in construction disputes

While emergency arbitration in the area of construction disputes operates in a commercial sphere different to that in investment disputes, analogous issues may arise.

This will particularly be the case where construction contracts contain arbitration only as a final option within a multi-tiered dispute resolution clause. Such clauses are often found in construction contracts and provide for amicable settlement attempts or interim assessments before the initiation of arbitral proceedings. The "first tier" may consist of informal dispute resolution processes, such as commercial negotiations or mediation, potentially in combination with more (preliminarily) binding mechanisms, such as dispute adjudication boards ("DAB") that may render decisions on select issues in an ongoing project. Only once these initial steps have been undertaken – including the timely filing of a notice of dissatisfaction with respect to a rendered DAB decision – will the parties be able to initiate arbitral proceedings.

In construction projects there will often be instances where emergency relief is required, and a party will not want to make its way through a possibly lengthy multi-tiered dispute resolution process. Such instances might be to prevent the calling on a performance bond, either for amounts allegedly owed or for allegedly defective work, an injunction to prevent a contractor from "walking off site", or interim relief to preserve evidence or assets. The particular expertise of the decision maker, the confidentiality of the proceedings, or any of the reasons explained above may make an emergency arbitration more attractive than interim relief in state courts – at least if there is no need to bind third parties to the relief granted (although such need is actually quite common in construction disputes involving principals, contractors and subcontractors).

Where arbitral emergency relief is required, there may be an inherent tension between compliance with the multi-tiered dispute resolution process agreed to in the construction contract, and the ability of a party to immediately request interim measures from an emergency arbitrator. One interpretative approach is to consider compliance with the agreed pre-arbitral procedures as a mandatory condition for the initiation of (emergency) arbitral proceedings. After all, multi-tiered dispute resolution clauses in construction contracts are often drafted by sophisticated business partners that are expected to adhere to the detailed dispute resolution mechanism they have negotiated. Yet, this approach may not reflect the practical realities of construction projects, where parties regularly require immediate action in order to avoid imminent harm and to minimize disruption to the works on site.

The interpretation of such clauses will therefore likely depend on various possible scenarios. Where multi-tiered dispute resolution clauses contain mere amicable settlement or negotiation requirements before commencing arbitration, emergency arbitrators in construction disputes might take inspiration from similar decisions in the investment arbitration sphere. Should this be the case, they are likely to conclude that in light of (prima facie) imminent harm, holding a party to lengthy negotiations would defeat the purpose of the emergency arbitration mechanism, or – depending on the facts of the case – consider negotiations to be obviously futile. The issue will become more complex where multi-tiered dispute resolution clauses provide for potentially competing mechanisms to emergency arbitration commonly provided for in construction contracts. Where in an international construction project a DAB has been established from the outset of the project and is vested with powers to issue interim measures (see e.g. Sub-Clause 20.2 of the FIDIC Red Book and Procedural Rule 8(g) of Annex 1), certain arbitration rules (ICC) or emergency arbitrators will consider this to be a binding contractual choice of an existing interim relief mechanism, precluding emergency arbitral relief. However, where a DAB is not mandatory and not established at the time of the application for emergency arbitral relief, the assessment may well differ. Relying on the arguments from the investment disputes sphere, emergency arbitrators might consider sufficiently prompt DAB relief within the given time constraints to be obviously futile and therefore decide to assume jurisdiction.

Without publicly available case law addressing these various scenarios in construction disputes, it remains to be seen whether emergency arbitration will be able to test boundaries and introduce avenues for interim relief that parties had not contemplated when agreeing on arbitration rules in their construction contracts. This uncertainty also applies to the question of voluntary compliance with emergency arbitrator decisions rendered under these circumstances.

Conclusion

The enforceability of emergency arbitrator decisions will stay in focus for some time to come. This should, however, not distract from the fact that there are complex issues that will need to be worked out when considering the interplay between emergency arbitral relief and investment and construction disputes. Until there is more legal certainty on these matters, commercial parties and states are advised to carefully consider and delimit the boundaries of emergency arbitration when drafting their dispute settlement provisions.