Emerging Trends in International Arbitration: Post-Pandemic Consequences

By Tolu Aderemi

Introduction 

International commercial arbitration has taken on a new lease of life, since the Covid-19 pandemic began. Stable access to raw materials and reliable transportation, have become lingering challenges. The ensuing supply chain volatility has caused a myriad of unforeseen operational and financial difficulties, leading to an increase in complex international commercial disputes due to contractual non-performance; often described as an “Act of God”. Three of the hardest hit sectors are Energy, Maritime and Life Sciences. The International Chamber of Commerce (ICC) recorded a 240% increase in the value of disputes (cases) registered between January and October 2021 to US$184 million, compared with US$54.1 million the previous year.

Though the situation might seem grim, there are some admittedly positive consequences – for arbitration parties and practitioners – that attend such a spike in international commercial disputes. 90% of respondents in a 2021 White and Case International Arbitration Survey, still favour arbitration for resolving commercial disputes, due to innate features of neutrality, flexibility, confidentiality, and multi-jurisdictional enforceability – in line with the tenets of the New York Convention. This paper will discuss those emerging trends and opportunities in their post-pandemic context.

Trends and Opportunities

Third Party Funding

Third-Party Funding (TPF) was originally conceptualised to support corporate entities in accessing justice in the courts, where costs may have otherwise been prohibitive. Costs are an important feature of arbitral proceedings. These include arbitrator’s fees, fees for expert witnesses, cost of venue, and other miscellaneous costs. Prohibitive arbitration costs, have worked to deny parties access to justice. This where TPF comes in.

TPF has attained popularity in international arbitration in recent years. It allows an aggrieved party with limited means, to seek investment from third parties. These third parties provide funding to prosecute an arbitration party’s claim, and in exchange, take all or a part of the award granted. Noiana Marigo puts it this way “What is key is that today, with third-party funding, companies struggling with the prolonged effects of the pandemic can still bring arbitration claims without impacting their liquidity”. However, some argue that TPF erodes a core feature of arbitration, as a private and secret method of resolving dispute. Claimants are often required to disclose the record of proceedings to the investor.

With the boom in international commercial arbitration, TPF seems here to stay, and ought to be considered as a viable funding mechanism in appropriate cases. In Tenke Fungurume Mining S.A. v Katanga Contracting Services, the English Court expressed judicial acceptance of TPF, albeit limiting the extent of information that may be divulged. The Court also rejected the proposition that the arbitral tribunal had exceeded its powers, by awarding the Claimant the costs that it had incurred in obtaining funding.

Environmental, Social and Governance (ESG)

In the energy and construction sectors, many companies are striving for net zero and plan, over the coming years, to implement ambitious global energy transition programs. Shareholders’ growing environmental, social and governance (ESG) expectations of their companies, and the implementation of broader climate change goals, are expected to lead to an increase in ESG-related disputes being referred to arbitration. ESG clauses are novel, complex, and largely untested; factors that are likely to spur disputes about how they should be interpreted and applied. By design these disputes will mostly be determined by arbitration.

Investor-State Claims

Investor-State claims have risen in recent times. These are claims brought by investors against a sovereign state, for breach of international investment protection agreements. In the wake of the pandemic there was a need to innovate and develop critical drugs and vaccines. Under normal circumstances, these drugs would be protected as the developer’s intellectual property (IP). However, the magnitude of the pandemic’s impact on global public health institutions, led to mass private and public sector advocacy to expand access to lifesaving vaccine IP in the public interest.

The PharmTech 2021 report notes that since October 2020, developing countries like India and South Africa have spearheaded a proposal for the World Trade Organisation (WTO) to adopt a formal waiver of the Agreement on Trade-Related Aspects of IP Rights (TRIPS Agreement) for Covid-19-related vaccines and pharmaceuticals. If a waiver of the TRIPS Agreement is adopted, governments could potentially legitimately deny IP protection to certain Covid-19 products, resulting in their mass production without any compensation to the original developer. This would have massive consequences for the expected return on investment of life sciences companies developing these products.

Government emergency measures adopted during the pandemic are also likely to lead to an increase in the number of Covid-19-related investor-State disputes. Proceedings have already been commenced in the air travel sector, including those against Chile’s alleged failure to provide relief to an airport’s concession; Moldova’s claimed use of Covid-19 as justification for terminating a concession; and Cabo Verde’s nationalisation of an airline. Legal proceedings have also been threatened in relation to energy reforms prompted by Covid-19 and pension fund withdrawal measures.

Merger and Acquisition Disputes

Earnout disputes are frequently resolved through international arbitration, and such disputes are anticipated to increase due to increased market volatility since the pandemic. Earn-out arrangements bridge the gap between diverging valuations of the target company by the buyer and the seller at the time of closing. In addition to the upfront purchase price, the seller of a business receives further pay-outs if and when the target company achieves certain agreed performance targets by closing time.

2021 recorded a high number of merger and acquisition (M&A) transactions. However, many of those transactions have been stalled in one way or another during the pandemic. In some cases, the target companies have sought specific performance of the M&A agreement. Consequently, there is an increased use of earn-out clauses. However, earn-out arrangements frequently result in disputes over valuation issues and the often-ambiguous causes of underperformance.

Pre-closing covenants constitute another high risk area. These covenants seek to protect the buyer against damage to the business of the target company between signing and closing, by requiring the target to operate ‘in the ordinary course of business’. Many measures taken by governments to fight COVID-19 outbreaks led to temporary closure of operations, impacting regulatory compliance and lowering profitability of the target company. Buyers could seek to avoid completion of transactions by relying on these pre-closing covenants, especially given the reduced appetite for investment caused by the pandemic.

Renewable Energy Disputes

Renewable energy is still in its relatively nascent stages. Institutional approaches are therefore, required to develop and implement stable policy frameworks for a just and inclusive energy transition process. These approaches will span across deployment, integration and other structural changes. At each of these stages’ disputes are bound to arise, and arbitration is expected to play a key role in resolving them.

Conclusion

If there was ever any doubt, it can no longer be the case: arbitration boasts a greenfield of opportunity for all stakeholders. Sectoral expertise is now in demand, to facilitate expert adjudication of arbitration disputes likely to arise in the contexts highlighted above, to name but only a few. Arbitration institutions must urgently consider developing international collaboration with skilled, sector-focused entities for mutual knowledge exchange programmes. One area to watch, will be the confidentiality principles for resolving disputes in this new world order. There will always remain a need to balance commercial expediency in facilitating knowledge-exchange, with the rights and protections of the parties.

Tolu Aderemi CIArb (UK), Partner, Perchstone & Graeys LP; Chairman, Arbitration Committee of the International Law Association (ILA)

Note: This article was originally published by ThisDay on 11/10/2022