International Arbitration and Discovery
By B. Ted Howes and Robert A. Weiner
Discovery Not Permitted Under Most International Arbitration Rules
The arbitration rules of the most widely used international arbitration organizations provide for very limited discovery (or pre-hearing fact-finding) in the arbitral process. The International Chamber of Commerce (ICC) rules, for example, do not even address depositions, document production or other discovery. The only relevant ICC rule is Article 20(1), which simply gives the arbitrator the authority to "establish the facts of the case by all appropriate means." Practically speaking, this means that the ICC arbitrator has the discretion, but not the obligation, to order parties to engage in discovery prior to an arbitration hearing.
Although it is not uncommon for an ICC arbitrator to order the pre-hearing production of important documents, which are specifically identified by the requesting party, ICC tribunals typically decline to enforce requests for broad categories of documents. Similarly, ICC arbitrators are generally extremely reluctant to order parties to submit to pre-hearing witness depositions. In short, the ICC arbitrator has total discretion as to whether to order discovery, and the refusal to do so is not a basis for challenging an arbitration award in the courts.
The International Arbitration Rules of the American Arbitration Association (AAA) also do not provide for discovery as a matter of right. The AAA International Arbitration Rule on "evidence" simply provides that the arbitration "tribunal may order a party to deliver to the tribunal and to the other parties a summary of the documents and other evidence which that party intends to present in support of its claim, counterclaim or defense [and] [a]t any time during the proceeding the tribunal may order parties to produce other documents, exhibits or other evidence it deems necessary or appropriate."
Because discovery in arbitration is, therefore, a discretionary matter, a party hoping to review an opponent’s documentary evidence or question an opponent’s witnesses prior to the arbitration hearings may be unpleasantly surprised when requests are denied.
Discovery Less Likely to Be Enforced Abroad
One of the factors that should be considered in deciding whether to include a discovery provision in an arbitration clause, particularly in the international arbitration setting, is the nationality of the other contracting party.
The extensive amount of discovery permitted in the U.S. is unique. Other countries do not provide for any discovery in litigation or, at best, provide for very limited discovery. As a result, non-U.S. parties, non-U.S. lawyers and non-U.S. courts tend, understandably, to show considerably fewer deferences to discovery requests than their U.S. counterparts.
Accordingly, if a U.S. party is contracting with a foreign entity, the U.S. party should consider the non-U.S. status of the other party as a point against adding discovery language to the arbitration clause. Not only may non-U.S. companies be less than thorough in their production of documents, but the non-U.S. lawyers who represent them are often not constricted by local ethics rules to insure that their clients comply with discovery requests. Moreover, non-U.S. courts are generally less than willing than U.S. courts to enforce discovery orders issued by arbitrators.
Enforcement of U.S. Judgements in South Africa
by Michael Judin, Attorney, Goldman Judin Inc.
A successful plaintiff that is awarded a judgement in the United States may often experience frustration if the proper enforcement thereof is, to some extent, dependent upon its recognition in a jurisdiction outside the United States. Historically, enforcement of such judgements in South Africa involved a fair amount of red tape and diplomatic effort due to the country’s political isolation and resultant inexperience in these matters. Fortunately, South African law has caught up with the need for the enforcement of foreign civil judgements by prescribing a few basic requirements:
1) The judgement to be enforced must be final. The court that pronounced on the matter must be functus officio and therefore must be unable to alter the judgement. Provisional judgements will not comply with this criterion. If an appeal has been noted against the judgement, the South African court has discretion whether it will enforce or stay the recognition pending the decision by the court of appeal.
2) The foreign court must have had jurisdiction over the matter in terms of the South African law pertaining to the jurisdiction of foreign courts, in other words, the South African Private International Law.
3) The judgement will not be enforced if it is contrary to the South African public policy or the rules of natural justice. The principles of natural justice are summarized in the rules of nemo iudex in sua causa and audi alteram partem, which are followed strictly in South African law.
4) The judgement must not be contrary to the provision in Section 1 of the Protection of Businesses Act 99 of 1978. This section provides that certain foreign orders, judgements, interrogatories or arbitration awards will not be enforceable, unless with the consent of the Minister of Trade and Industry. These orders are widely defined as those that have been handed down in connection with any mining activity, any type of production, possession of any tangible property and almost any other act or transaction in, outside, into or from South Africa. It is submitted that this act is still a vestige of the previous dispensation under apartheid when the aim was to protect domestic policy against foreign influence. As a practical matter, the Minister’s consent is rarely withheld. Furthermore, in 1995 it was held by the South African High Court that the act does not apply to judgements sounding in money which arose from a delict (tort) or contract, and that the prohibition on the enforcement of punitive awards pertain only to cases of product liability.
The rule against the enforcement of a foreign judgement for punitive damages has been part of the South African law for a long time. Recently, the judiciary pronounced that the fact that the ground on which the award is based is unknown in South Africa does not constitute a reason to refuse its enforcement. If the enforcement would serve justice, our courts will allow it. This serves as yet another milestone in the process of aligning and integrating the South African judicial system with international principles.
Another effective way of enforcement is by way of a provisional sentence action, whereby the plaintiff is granted a judgement with the exact contents of the original foreign judgement provisionally. Provisional sentences only can be given on a so-called liquid document, (i.e., a document containing an unconditional acknowledgement of indebtedness, a court order, etc.). For the defendant to be allowed to present his whole case to court, he must first provide security for the full amount of the judgement. Those with a weak defense are thereby dissuaded from opposing the matter.
Thus, it is clear that the South African judiciary already has come a long way in making the process accessible and eliminating the possibility of debtors and other liable parties to use South Africa as a haven against performance of foreign judgements.
Mr. J. Michael Judin
Goldman Judin Inc.
15 Scott Street
Johannesburg, South Africa
Phone: 011/27 11-440-0044
Fax: 011/27 11-786-1059
E-mail: mjudin iafrica.com
Canadian "Thin Capitalization" Rules Under Review
by J. Scott Wilkie, Attorney, Osler, Hoskin & Harcourt, LLP
On February 28, 2000 the Minister of Finance announced proposed changes to Canada’s "thin capitalization rules" in subsections 18(4) to 18(6) of the Income Tax Act (Canada) (the "Act"), as part of his 2000 Federal Budget. The Act has included rules of this nature for some time. Their purpose, essentially, is to limit tax base erosion through distributions by Canadian corporations to substantial non-resident shareholders in the guise of tax-deductible interest. To the extent that indebtedness, which includes, but is not limited to, loans to significant non-resident shareholders (generally, holdings of 25 percent or more of the votes or value of all outstanding shares) and those not at arm’s length with them, exceeds three times a statutory calculation of equity, which includes the retained earnings of the debtor corporation, and surplus and share capital contributed by such shareholders, interest on the excess is not deductible. A supporting anti-avoidance rule addresses the manipulation of these restrictions using back-to-back arrangements.
In its 1997 report, made public in the spring of 1998, the Technical Committee on Business Taxation made recommendations to the Minister of Finance advising that the thin capitalization regime be tightened. In particular, it was suggested that the existing three-to-one debt to equity ratio be reduced to two-to-one, the rules be extended to the financing of Canadian branches of non-Canadian corporations as well as to partnerships and trusts, and that the back-to-back limitations be refined. The Committee considered whether debt guaranteed by significant shareholders should be assimilated to the treatment of inter-affiliate debt, but on balance recommended against such a change.
The proposal by the Minister of Finance reflects a number of the issues that were considered by the Committee and indeed takes the general tone of the Committee’s proposals somewhat farther. It is proposed that for taxation years commencing after December 31, 2000:
The debt-to-equity threshold be reduced from three-to-one to two-to-one;
The calculation required under these rules be based upon an average debt-to-equity ratio for an entire year rather than a point-in-time determination at the end of the year, taking into account retained earnings as of the beginning of the year, contributed surplus and paid-up capital furnished by significant non-resident shareholders calculated at the beginning of each month of the year and the greatest amount of outstanding debt to such shareholders at any time in each month of the year; and
The back-to-back anti-avoidance rule incorporate debt to third parties guaranteed by significant non-resident shareholders (i.e., thereby effectively assimilating to the status of shareholder-corporation debt the amount of financial guarantees).
Although all of these proposed changes are somewhat controversial, the proposed assimilation of guarantees to the status of debt has attracted the most attention and conceivably is very significant for financial relationships between U.S. corporations and their Canadian subsidiaries. At first blush, it would seem that the proposed change would apply even to financings from Canadian sources guaranteed by non-resident shareholders, raising the possibility of double taxation as interest deductions to the debtor would be limited but the interest income received by a Canadian financier nevertheless would be fully taxable. The proposal also does not specify whether transitional rules will exclude existing outstanding indebtedness from the compass of the new rules. Nor is there any indication at this stage of whether all guarantees would be subsumed within the new restrictions or they will apply only in circumstances where a guarantee is tantamount to a direct extension of credit by the shareholder ostensibly on the basis that the corporation otherwise is financially incapable of raising financing itself. This would be a situation, for example, that extended beyond usual functions of the guarantees to secure a financing cost advantage, and to provide administrative simplicity and efficiency in the placement of debt.
It is understood that discussions will continue throughout the balance of this year with officials of the Department of Finance in order to consider and refine this proposal. Any limitations on the financial dealings between non-resident shareholders and Canadian corporations are, of course, significant in terms of overall corporate group planning. Accordingly, these proposals bear careful watching.
J. Scott Wilkie
Osler, Hoskin & Harcourt, LLP
100 King Street West
Toronto, Ontario M5X 1B8 Canada
E-mail: swilkie osler.com