Why the LCIA is more needed than ever

| January 13, 2021 | 0 Comments

By Graham Paul

As much as the last-minute Brexit deal was hailed as a success in preventing the UK’s uncontrolled crashing out of the EU, the devil is in the details as many problems are only slowly becoming apparent over time. Case in point is the clause, included in the agreement, that Brussels can impose tariffs on London if EU lawmakers have reasonable cause to believe the UK is giving its firms an unfair advantage. While Boris Johnson has praised the deal as a guarantor of British sovereignty, the fact that London is forced to abide by European rules or face consequences will likely prove a point of ample friction in the future.

It’s unclear how long the UK will be willing or able to adhere to this level-playing field principle. What is already evident, however, is that the resulting disputes will need confident and reliable international arbitration mechanisms accepted by both the EU and UK. While London and Brussels have outlined plans to set up a separate body to enforce the Brexit agreement, cross-border disputes between private actors may move to forums such as the London Court of International Arbitration (LCIA) in order to avoid uncertainties linked to what the final shape of the enforcement regime will take post-Brexit. Thanks to its independence from any country’s legal system or government, international arbitration is likely to grow by leaps and bounds in the years to come.

Unfortunately, the LCIA has been suffering from populist headwinds in recent years that are aiming to undermine its authority and damage its international standing. In one particularly grievous instance, one of its judgements is being defied by the government of Djibouti in the dubious name of national sovereignty. While Djibouti is not the first nation to take the drastic step of questioning the authority of the LCIA – Russia famously refused to recognize the award in the politically fraught Yukos case – the fact that a small African country could get away with this could very well embolden others to follow suit.

The case in question began in 2018, when the government of Djibouti seized the Doraleh Container Terminal SA – a joint venture in Djibouti’s port of Doraleh between Dubai-based global port operator DP World and Djibouti – and unilaterally terminated DP World’s contract to run the terminal. In response, DP World filed claims with the LCIA, which shortly thereafter ruled against Djibouti, arguing that the port seizure was illegal and that DP World’s 30-year concession couldn’t be unilaterally ended.

Although the judgement should have definitively put the issue to an end, Djibouti has never recognized the ruling and has continued to refuse to do so ever since. So far, the LCIA has ruled six times in DP World’s favour all of which have been ignored by the Djibouti’s president Ismail Omar Guelleh on grounds that the arbitral award supposedly qualifies “the law of a sovereign State as illegal.� In a similar vein, a LCIA award of $533 million in compensation and unpaid royalties owed by Djibouti to DP World has gone unheeded for the same reason, with the country even asking its own Supreme Court to nullify the LCIA ruling.

Such behaviour doesn’t bode well for the LCIA’s ability to pull its weight in international affairs. Djibouti’s enforcing of domestic law over established international legal procedures on the flimsy justification of national sovereignty is setting a dangerous precedent.

However, if Djibouti’s breach of international legal practice already poses a serious challenge to international arbitration, a recent blunder the LCIA itself made risks being weaponized even further by other regimes looking for facile excuses not to honour the tribunal’s rulings. Indeed, as was revealed in December 2020, the LCIA became a bizarre example of a tribunal that admitted to making a mistake in the calculation of an award in an arbitration case, only to refuse to change the outcome of its ruling.

The case involved Mikhail Khabarov, a Russian businessman, who in 2015 had secured an option to acquire 30 percent in the Delovye Linii GK holding company for $60 million. However, when the deal fell through, Khabarov submitted a claim for damages to the LCIA, which had to calculate the exact amount of damages suffered by the Russian based on the difference between the actual value of the company’s 30 percent share and the option price of $60 million.

In January 2020, the LCIA awarded Khabarov a compensation of $58 million – as it turned out, a vast over-valuation as a result of a “typo of miscalculation� that occurred when the LCIA panel in charge had added the value of historic tax liabilities, rather than subtracting it. With the actual value closer to $4 million, the English High Court ordered the LCIA to correct the damage, which the arbitration court vehemently refused to do, arguing that the original amount was still in line with its intent to award a fair compensation to the claimant.

The latter case has sparked an entirely separate debate about the models used to calculate the damages in question, although the premise that damages should be paid – even after this clerical error – was never thrown into doubt. It is also widely accepted that errors such as these are a function of human fallibility in the face of vastly complex procedures. However, whereas corrective measures can be taken, it appears little can be done when an entire country refuses to implement a LCIA decision.

In that sense, there is little doubt that Djibouti’s utter disregard for the LCIA is a much greater threat to its credibility. In a norms-based international environment, the rejection of said norms is the first step towards triggering their collapse. If the LCIA’s influence is to be preserved, one must hope that no other country follows down this path. In times like these, an institution like the LCIA is needed as never before.

Source:: EU Reporter Feed



Category: Energy, Uncategorized

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