By Vanessa Alarcón Duvanel
This is the third post of a new CPR Speaks feature, “The European View,” offering valuable insights and perspectives from CPR’s European Advisory Board (EAB).
On 31 May 2018, CPR held its annual European Congress on Business Dispute Management in London. Organized by CPR’s European Advisory Board (the “EAB”) and kindly hosted by SwissRe in the incredible Gherkin building, the event convened European and American practitioners for a successful day of discussion led by four interesting panels.
This blog piece reports on two panel discussions that took place in the afternoon of the European Congress on Business Dispute Management on 31 May 2018 in London, in the Gherkin Building, kindly hosted by SwissRe.
The afternoon session started with the keynote address of MasterCard Europe President Javier Perez who shared with the audience the important role of ADR in MasterCard’s business worldwide. In a thought-provoking speech, Mr. Perez emphasized MasterCard’s partnership approach with its clients according to which MasterCard does not initiate disputes (litigation or arbitration) against its clients, and rather uses ADR as a means to save the trust relationship.
“Climate change and ADR”
Moderated by Daniel Schimmel (CPR EAB member, Foley Hoag), the first panel of the European Congress’ afternoon session had four speakers: Kate Cook (Matrix Chambers); Dr. Karl Mackie CBE (CEDR); Nicola Peart (Three Crowns LLP); and Peter Stewart (Interfax Global Energy). Starting from the 2015 Paris Agreement, the panelists discussed how climate change may affect ADR.
The 2015 Paris Agreement signals a significant change and represents concrete actions and timeframes to reduce emissions and adapt to the impact of climate change. It contains strong procedural rules and verification obligations and tells States what to do in respect to climate change. Things have evolved in recent years and changes have been implemented. All States recognize nonetheless that there is a significant gap between where we are and where we should be.
Almost everything in the Paris Agreement is measurable: one can establish whether water is clean/cleaner, what the average temperature is, the number of miscarriages, etc. Liability can be disputed. Climate change matters are therefore likely to generate disputes and ADR processes. Below are a couple of scenarios mentioned by the panelists:
- The risk of investment-treaty claims. Under the Paris Agreement, States must each year implement measures towards the overall long-term objective of stabilization of the temperature; also known as the 2o C global temperature target. The means to maintain the average temperature increase well below 2o C are multiple and include, g., low carbon, no carbon, renewable energyand new building standards.
These measures and changes in legislation may affect investments and lead to investment treaty claims by foreign investors. The measures may also create incentives for foreign investment such as when a State implements incentives on renewable energy. The arrival of foreign renewable energy firms may not please everyone and if the State subsequently takes a step back and imposes a moratorium on foreign investment, this policy change may constitute a breach of the doctrine of legitimate expectations and lead to a fair and equitable treatment claim by the foreign investor (subject to an applicable treaty). This was the case in the NAFTA case Windstream Energy LLC v. Government of Canada (PCA Case No. 2013-22, 27 September 2016).
- New contracts with ADR clauses. The obligations imposed upon States by the Paris Agreement and the 1997 Kyoto Protocol have led to new contracts, many of which contain ADR clauses. One example of this is an international emission system developed under the Kyoto Protocol, whereby parties that exceeded their emission reduction commitments may sell the excess so-called “assigned amount units” (AAUs). Disputes arising out of this system are resolved by arbitration under the Permanent Court of Arbitration (PCA)’s Optional Rules for Arbitration of Disputes Relating to the Environment and/or Natural Resources (“Environmental Rules”). For example, a dispute could arise in respect to a carbon emission registered project if, after the investor has invested, it turns out that the carbon credit was miscalculated, which could affect the value of the investment.
- Investment funds. Several investment funds are dedicated to climate change, including the Green Climate Fund (GCF). States, corporations and individuals who contribute to such a ‘green planet’ fund sign a contribution agreement with ADR clauses. In turn, the fund enters into contracts for its investments and these transactions contain arbitration clauses.
Data available to the panelists show that not all companies have reacted to climate change in the same manner. The measures required can be important and may give management the feeling that they are losing the agenda. The panelists praised certain companies, including CPR members in the oil & gas industry, for their efforts in lowering emissions from both their own operations as well as from the plants they operate on.
The entire panel agreed that climate-related disputes involve complex issues that ordinary state courts cannot deal with and require a very thoughtful and structured process. In this context, mediation is here again an efficient solution able to address the specificities of climate-change cases, such as the need for a fast resolution, the political implications, the status of the parties (NGOs, multinationals, government), etc.
Climate change is one of the new fields to watch and learn about, for ADR practitioners.
“Complex financing of dispute resolution”
The last panel of the day was moderated by Mark McNeil (EAB member, Sherman & Sterling) and composed of two lawyers, Matthew Bate (Winston & Strawn) and Robert Wheal (White & Case), along with a representative of litigation finance and funding providers, Leeor Cohen (Burford Capital).
Starting with a short reminder of the origin of disputes financing, the panel then discussed the important aspects to consider when working with third party funders, the advantages and downsides of financing of claims, the impact on arbitration and the concept of portfolios of claims.
Initially, ADR financing was developed for parties who could afford the costs of “access to justice.” The concept has evolved and increased in many respects and all claimants now have the option to consider whether they wish their claim to be funded, insured, or otherwise monetarized. More and more well-financed companies use third party funders who have become a risk management tool, most particularly in so-called fee-shifting jurisdictions where court and arbitrators apply the loser-pays rule.
From the perspective of the lawyer trialing the case, the success of ADR financing depends on the good relationship with the funder; a good collaboration is important to avoid the risk that the funder withdraws its funding.
The rapid expansion of ADR financing testifies to its success. Yet, the panel identified potential downsides and risks associated with third party funding:
- Financing of ADR is a complex world and the panelists described funding contracts as a “nightmare.” Getting to a funding contract also takes significant time and involves lengthy due diligence, questionnaires and the signing of NDAs. Third party beauty contests quickly multiply the work as funders have different approaches and hence different sets of questions.
- The use of a party funder often limits the party’s ability to negotiate a settlement. By the time the parties reach a settlement, the funder will have spent money and will often want to be involved and approve any settlement amount. A so-called “waterfall provision,” according to which the funder gets first a portion of any settlement amount and the client receives something only if anything is left, impacts on settlement negotiation.
- A funder may influence the conduct of the proceedings. Some funding agreements contain language reserving the funder’s right participate in decisions relating to the conduct of the proceedings, including with a right to agree to finance the case only as long as it is satisfied that it is worth pursuing. According to the panelists, this could translate negatively on the conduct of the proceedings and the claim must remain 100% with the claimant.
The financing of claims affects the arbitral proceedings in various ways. Respondents have sought disclosure of third party funding agreements, or applied for security for cost on the ground that the claimant’s need for funding suggests that it will not have the necessary funds to pay the costs of the arbitration if it is ordered to. Claimants have sought in their statement of costs recovery of funding costs, which the panelists confirmed, under most arbitration rules the arbitrators have the power to award.
Finally, the panel discussed the debated concept of portfolios of claims, i.e., the financing of multiple claims together. Under this structure, the funder calculates its return based on the performance of the entire portfolio and not each individual claim. Portfolio financing brings down the cost of financing by grouping several claims of a single claimant; it also secures the availability of financing throughout the proceedings. Several law firms have preferred to stay away from portfolios of claims and favor the financing of claims individually.
The European Advisory Board will share the date of 2019 CPR European Congress on Business Dispute Management within the coming months.
 https://pca-cpa.org/wp-content/uploads/sites/175/2016/01/Optional-Rules-for-Arbitration-of-Disputes-Relating-to-the-Environment-and_or-Natural-Resources.pdf ; see also, for more details: https://pca-cpa.org/en/services/arbitration-services/environmental-dispute-resolution/
Vanessa Alarcon Duvanel is a member of White & Case’s international arbitration group and is based in the firm’s Geneva office. She is also the Secretary of CPR’s European Advisory Board. She can be reached at email@example.com.