What is International Arbitration?
International arbitration is a means of
alternative dispute resolution (ADR) which is consensual and binding. It is preferred
for resolving disputes that cross national borders outside of state courts
between two or more parties.
While arbitration is known for
providing the parties with a quick and effective solution, it is sometimes
possible that adverse inferences may be drawn from its results. This can become
a significant problem and can make it difficult for the parties to accept the
outcome of the arbitration.
International arbitration is conducted in accordance with international law and international arbitration agreements. These agreements are also made in accordance with the rules and principles regulated by international arbitration institutions. The decisions taken as a result of arbitration enter into force in accordance with international law. In the rest of the article, I will be analysing the "adverse inferences" that affect the decision of the arbitral tribunals due to lack of evidence.
How Does International Arbitration Work?
Arbitration begins before a lawsuit is
filed to resolve a dispute between two parties. At the beginning, the parties mutually
agree that they are seeking a quick resolution of the dispute by applying for
arbitration. In case of disputes, instead of resorting to the court, an
impartial and independent third-party arbitral tribunal is used.
In international arbitration, one of
the most important issues is the selection of the arbitral tribunal. After the
parties apply for arbitration, they must apply to an arbitral institution for
continuation of the process. The arbitration institution is selected according
to the nature of the parties' application. This institution forms an arbitral
tribunal to resolve the dispute. The arbitral tribunal acts as a fair
decision-making mechanism between the parties, endeavouring to resolve the
dispute.
The award rendered by the arbitral
tribunal is approved by the arbitration institution. The approved award is
implemented by the same arbitration institution and the dispute between the
parties is resolved.
While arbitration generally follows a certain
legal procedure, the parties have the freedom to determine their method of
resolving the dispute. As the parties undertake to comply with the arbitral
tribunal, the arbitral award is final and finalized by the court. This process
is widely used to resolve international employment and investment disputes.
Arbitration provides advantages to the parties such as confidentiality, flexibility,
and expertise. It also provides an impartial medium for disputes that are
subject to the legal systems of more than one country. It is an effective
method that allows the parties to resolve their dispute independently. This
process encourages the parties to find a solution without exposing them to
delays, high costs and uncertainties experienced in the courts.
Alexander Sevan Bedrosyan analyses the
situation wherein a party withholds evidence from the arbitral tribunal in his
article "ADVERSE INFERENCES IN INTERNATIONAL ARBITRATION: TOOTHLESS OR
TERRIFYING?".
According to the above-mentioned article,
the arbitral tribunal may take three different measures. The first option is to
impose pecuniary damages on the party found to have submitted incomplete
evidence or no evidence at all. The second option is to reimburse the costs
of the arbitration and other party's legal proceedings. The third option is
to draw an unfavourable conclusion from the situation wherein no evidence is
submitted.
Pursuant to the London Court of International
Arbitration (LCIA), the above-mentioned three options were considered separately.
[1] Accordingly, firstly, it
was stated that it is difficult to
impose pecuniary damages in international arbitration and it is still a matter of debate whether
the arbitral tribunal is authorized to impose such damages. Secondly, it is
concluded that the reimbursement of the costs of the arbitration and other
party's legal proceedings does not have a favourable effect on evaluation of
the missing evidence or in making a sound judgement on this issue. [2] For this
reason, the "adverse inference” is the most suitable method for the arbitral
tribunal among the existing ones since it can encourage the parties to submit
complete evidence.
Adverse inference is a legal principle
used to ensure justice and encourage the proper presentation of the evidence. If
a party fails to provide clarity or presents incomplete evidence, the arbitral
tribunal can make a judgement accordingly and reach an award.
What
is "Adverse Inference" and What is its Effect on Inferences in
Arbitration?
"Adverse Inference" is a rule
of evidence that enables to form indirect evidence. When the arbitral tribunal
requests evidence from the parties for the matter in question and one party fails
to provide evidence, the arbitral tribunal recognizes that refusal of providing
evidence is indirect evidence. Accordingly, the fact that the evidence has not
been submitted is also interpreted as evidence and has an impact on the
assessment at the decision-making stage. In other words, if a party fails to
present certain evidence or fails to clarify the facts, the arbitral tribunal
may draw a conclusion against that party. In this case, it is accepted that
missing evidence will harm the judicial process and an adverse assessment may
be made.
For example, the claimant may allege
that the goods delivered to them by the respondent are of poor quality, and the
respondent may refuse to present the results of the quality control tests of
the goods. The arbitral tribunal may infer or accept that the failure to
provide this evidence as indirect evidence that the goods are of poor quality
(since the direct evidence of poor goods can only be conclusively established by
test results, the "adverse inference" may be used in arbitration).
"In Europe Cement v. Turkey, drawing
an adverse inference, the arbitral tribunal concluded that the claimant had
engaged in a conduct worthy of punishment, but did not punish the claimant for
that conduct. Seeking $3.8 billion in damages, the claimant alleged that Turkey
expropriated the claimant's investment by terminating a concession agreement
with a local electricity supplier. However, Turkey questioned the validity of
the copies of share certificates submitted by the claimant, alleging that the
claimant had no shares in the supplier company. The arbitral tribunal requested
that the claimant submits the original share certificates for forensic analysis.
If the claimant fails to comply with this request, Turkey can advise the arbitral
tribunal on these inferences. The claimant stated that they were unable to
submit the shares due to the former administrator's mishandling of the records and
requested that the tribunal unconditionally rejects its request due to lack of
jurisdiction. Turkey appealed to the tribunal to infer that the claimant's submission
was fraudulent. It also sought damages for "emotional distress"
caused by the claimant's abuse of the arbitration process. The tribunal concluded
that the claim was fraudulent but did not order the claimant to pay any
damages." [3]
However, in Coleman Holdings
Inc. v. Morgan Stanley & Co, the arbitral tribunal ruled against Morgan
Stanley on the grounds that the evidence was deliberately withheld.
Consequently, a heavy damage was imposed. However, although it was concluded
that there was fraud in the above example, no heavy damage was imposed on the
other party as in the Morgan Stanley example. [4]
Adverse Inference is mostly used to
show a party's bad faith or tendency to conceal facts based on information
known or controlled by the said party only. In this case, the tribunal may
decide that the silent party may be subject to an adverse result because of its
failure to supplement or explain the evidence.
Considering the two examples given above separately, the arbitral
tribunal may consider the lack of evidence in both ways.
In international arbitration, various
measures may be taken by the parties to prevent the above-mentioned situation.
Clearer and more detailed arbitration rules may help to protect the rights of
the parties and render more impartial awards. Moreover, bad faith behaviour,
such as deliberately presenting misleading evidence or concealing evidence, can
have serious consequences. By cooperating with the arbitral tribunal and
advocates (the legal representatives of the parties involved in the
arbitration), the parties can minimize adverse inferences and contribute to a
fairer process.
Alexander Sevan Bedrosyan's article
"ADVERSE INFERENCES IN INTERNATIONAL ARBITRATION: TOOTHLESS OR
TERRIFYING?" [5] analyses the impact and importance of adverse inferences
in international arbitration. It is also explored whether these adverse
inferences will lead to penalization or incentivization of the parties, or
whether they are ineffective and insignificant. In the above-mentioned article,
the existing literature on "adverse inferences" is analysed to
determine how effective they are in arbitration.
According to Bedrosyan, adverse inferences
may also provide grounds for questioning the independence and impartiality of
arbitral tribunals. Parties may believe that decisions are made under the
influence of political or economic pressures. This may lead to a loss of
confidence in the justice system and question the effectiveness of arbitration.
However, it would be wrong to say that
adverse inferences have the power to render international arbitration
completely ineffective. Given the collection and presentation of evidence used
in arbitration, adverse inferences can have a significant impact. Parties may
be confronted with ambiguous or contradictory evidence that may influence
awards and question the fairness of the results. Therefore, it is important
that adverse inferences are considered, particularly at the evidence evaluation
stage.
Bedrosyan’s article also emphasizes how
these inferences may affect the accuracy of international arbitration and their
importance in ensuring justice for the parties. In this regard, Bedrosyan
argues that adverse inferences are a controversial issue both for the defence
of the respondent and the arbitral tribunal's decision-making process.
Adverse inferences are a tool used to
encourage parties to provide reliable and accurate evidence in international
arbitration. However, it should be noted that these inferences do not have the
power to render the arbitration completely ineffective. To protect the rights
of the parties and ensure a fair process, minimizing adverse inferences in international
arbitration is necessary for the consistency of the awards. The principles
regarding the obligation to present evidence and witness statements are
important to achieve an impartial outcome and to ensure fairness. This can
enhance the credibility of international arbitration and provide a more robust
method of ADR between the parties.
Tuana Sarıaydın, Legal Intern
Translated By: Sude Çapoğlu
References:
1. IBA Rules
on the Taking of Evidence in International Arbitration, Article 9 Admissibility
and Assessment of Evidence 9.7
2. LCIA
Arbitration Rules (2014) art. 28.4, http://www.lcia.org/ Dispute
ResolutionServices/lcia-arbitration-rules-2014.aspx [https://perma.cc/5MVW-22QN]
3. Europe Cement v. Turkey, Europe Cement Investment and Trade S.A.
v. Republic of Turkey (ICSID Case No. ARB(AF)/07/2) 2007
4. Coleman
(Parent) Holdings, Inc. v. Morgan Stanley & Co., Case No.
502003CA005045XXOCAI, 2005 WL 4947328 (Fla. 15th Cir. Ct. Mar. 1, 2005)
5. "Adverse Inferences
in International Arbitration: toothless or terrifying?", Alexander Sevan
Bedrosyan, Published by Penn Law: Legal Scholarship Repository, 2016
