Surely you sometimes wonder why Elena Kagan is a Justice of the Supreme Court and a former Dean of the Harvard Law School, while you, on the other hand, plod along in your quotidian existence as a world-renowned, universally-esteemed, brilliant and magnificently accomplished international arbitrator.  Well, you should read Justice Kagan’s masterful opinion for the nearly-unanimous* Supreme Court in Kindred Nursing Centers v. Clark, 137 S.Ct. 1421, 2017 WL 2039160 (May 15, 2017). If you could write such compelling prose, you might have had a different destiny. (Note: It helps to breathe the air of Manhattan’s Upper West Side, as Justice Kagan did in her youth, and your Commentator has done each day for 28 years. But the Justice re-read Jane Austen’s Pride and Prejudice every year in her youth, whereas for your Commentator that masterpiece remains on a very long to-do list).

You need not read Kindred Nursing to discern any change in US arbitration law. It is a reaffirmation of first principles, a smack-down of a State court that was trying to be too clever by half in its hostility to arbitration. Arbitration agreements stand on equal footing with other contracts under the FAA, and shall not be invalidated or denied enforcement by the individual States on grounds not generally applicable to all contracts. You knew that (or else you have been practicing arbitration law under a rock since 1925).

2017 is the year of alternative facts, and the Supreme Court of Kentucky had contrived a set of alternative facts about why it was OK to deny arbitration where a nursing home made an arbitration agreement with an elderly resident through the agency of a compos mentis relative of the resident who held a valid and broad power of attorney. Presumably so that the outcome would not have the appearance of being the handiwork of the conservative wing of the Court supporting the nursing home industry in the vicitimization of the elderly, the task of writing the opinion of the Court fell to a member of the Blue State liberal quartet.

Referring to the Kentucky court’s so-called “clear statement rule” that a power of attorney must declare in express terms a delegation of authority to enter into a contract that would waive the “sacred” and “God-given” right to a trial by jury, Justice Kagan wrote that the Kentucky court “adopted a legal rule hinging on the primary characteristic of an arbitration agreement — namely, a waiver of the right to go to court and receive a jury trial.” The requirement of special express authorization to delegate such contractual power to an attorney-in-fact “subject[s] [agreements to arbitrate] by virtue of their defining trait, to uncommon barriers …” And answering the arguments advanced by Respondent in support of the Kentucky court’s decision, that the “clear statement rule” applied equally to other kinds of contracts that could forfeit fundamental rights – the examples given at argument were contracts sacrificing freedom of worship, providing for an arranged marriage, or committing the principal to personal servitude – Justice Kagan characterized these examples as “a slim set of both patently objectionable and utterly fanciful contracts that would be subject to its rule.”  She continued: “Placing arbitration agreements within that class reveals the kind of ‘hostility to arbitration’ that led Congress to enact the FAA. … And doing so only makes clear the arbitration-specific character of the rule, much as if it were made applicable to arbitration agreements and black swans.”

I intend to read, and then re-read, Pride and Prejudice….and to breathe more Upper West Side air. Anything for a chance at such vivid clarity in legal writing.

*Justice Thomas insists the FAA does not apply in courts of the individual States. Justice Gorsuch arrived too late participate.

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You are not finished learning from the ICSID annulment committee’s non-annulment of the Suez/Vivendi v. Argentina award, at least not if you actually read these posts (a covert activity that leaves cookies, and suggests you probably did not heavily annotate the latest issue of the ICSID Review). Some number of you will remember that Argentina turned up at the US Supreme Court a few years back, trying to sell the idea that the Supremes should tell British investors they had to spend 18 months cooling off in the Argentine courts day-by-day (with an allowance for Tango and Malbec at night) if they wanted to eventually pursue international arbitration at the World Bank to show that Argentine fiscal policies had sunk the profitability of their investments against settled expectations. The Court did not buy the argument that 18 months in the Cooler was a condition of Argentina’s consent to ICSID arbitration, because the UK-Argentine investment treaty couldn’t fairly be read to say that (not even after a half bottle of REALLY GOOD Malbec). [BG Group PLC v. Republic of Argentina, 134 S. Ct. 1198 (2014)]

So it will not surprise you to know that in the Suez/Vivendi case [Suez & Vivendi Universal v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on Annulment, May 5, 2017], Argentina also tried and failed to convince the arbitrators that the investors should be shut down because they refused to comply with the 18 months in the Cooler clause – this one in the Spain-Argentina investment treaty. What sunk Argentina in this case was that the France-Argentina investment treaty had no such clause, and the Spain-Argentina treaty had a “most favored nation” (MFN, hereinafter Grass-is-Greener) clause. Said the Spanish investor to the ICSID Tribunal: “The Grass-is-Greener in France, so we play by French rules.” Game, set, and match to the Spanish investor. (R. Nadal, citing this precedent, won his round of 64 match at Roland-Garros yesterday, 6-2, 6-4, 6-1. On clay not grass).

So Argentina told the annulment committee that the Grass-is-Greener argument has a long history of not working for investors in regard to dispute resolution provisions in treaties, i.e. that many investment tribunals have rejected similar arguments by investors that MFN clauses gave them an escape from procedural preconditions to investment arbitration that were present in the treaty they invoked to launch arbitration, but not in another treaty between the Host State and another State. Argentina apparently was quite right about this, except for a small problem: that MFN clauses get interpreted one-by-one on their own terms, treaty by treaty, so what’s Green Grass for one may be weeds for another. The problem that sunk Argentina in the Suez/Vivendi case is that the MFN clause in its investment treaty with Spain had been construed as being applicable to dispute settlement procedures – and thus to give Spanish investors the benefit of less-encumbered passage to arbitration found in other States’ investment treaties with Argentina — on approximately four other occasions by four other Tribunals.

The ICSID annulment committee, after duly reminding its readers that its mandate is limited to ensuring that arbitrators act like a Tribunal and not like a lynch mob, found no basis to dislodge the Tribunal’s thoroughly-explicated and case-law-supported position (you get in trouble if you say “precedent”) that the Spanish investor was entitled to the benefit of the France-Argentina treaty rule of No Time in the Cooler Before Arbitration.

So today’s lesson, readers: get out there in cyberspace and read the bilateral investment treaties of some likely arbitration-target States. The Grass-is-Greener question is a hot topic – not only for dispute resolution, but for substantive protections like “fair and equitable treatment” which might mean one thing between Spain and Ukraine, and something else between the US and Ukraine, and who knows what between the EU and Ukraine, who sort of finalized a new treaty courtesy of a Dutch ratification vote as reported in yesterday’s New York Times.

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Some of you, gluttons for punishment, demand longer, more heavily-annotated versions of these usually short and mainly citation-free posts. Trying to oblige, I draw your attention to:

• “A Glance Into History for the Emergency Arbitrator” just published in the Fordham International Law Journal as part of the collection of papers presented at the Fordham Conference On International Arbitration in November 2016.
• “Efficiency With Dignity: Early Dispositions and the Beleaguered Arbitrator”, a soon to be published manuscript on which your comments are welcomed.

Each is available upon emailed request, and the Fordham article is already uploaded to the Publications page of my website.

Best wishes.

Marc Goldstein

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Engaging in imitation as a sincere form of flattery I begin this post with a warning: very short post, as your author on May 8 is already a week overdue to you, and is threatened with duties not consistent with his devotion to you for the next two weeks.

So, let us consider, quickly and with more than the usual disarray and risk of error from which these posts chronically suffer, what we take away from an ICSID Annulment Committee’s decision dated May 5, 2017 in the Vivendi and Suez v. Argentina case (Suez & Vivendi Universal v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on Annulment, May 5, 2017), in regard to the issue of the Arbitral Tribunal’s refusal to accept a challenge to the service of one of its members – a decision held by the Annulment Committee to have been not manifestly unreasonable. (Faint praise can be a blessing!)

Buffs who follow investment arbitration intensely will recall that a famous Swiss arbitrator famously joined the Board of Directors of a famous if not infamous Swiss bank in 2006, gave the Bank a list of her pending arbitrations, and in effect delegated to the Bank the task of ascertaining if any of her case commitments could result in her being perceived to lack independence of judgment as a Bank fiduciary. She determined not to investigate, on her own, the extent of the Bank’s proprietary or client-based investments in the companies appearing before her in this and another related investment arbitration against Argentina, and elected not to disclose, in either case, the fact of her election to the Bank’s board.

From the Annulment Committee’s holding and its remarks, we may discern that the following key elements of analysis by the Tribunal were at least not manifestly unreasonable: that the Bank’s holdings in the Claimant companies (proprietary and for clients in their accounts, combined), while making it a large if not the largest shareholder of each company with something north of two percent, constituted a very small fraction of the Bank’s investments even though the dollar amount of such investments, more than $2 billion, would appear substantial. Equally, while the stakes in the arbitration were in the hundreds of millions of dollars, in relation to the size and turnover of the Claimant companies the amounts in dispute were not particularly material, certainly not of “bet the company” proportions. Also, the arbitrator determined in 2009, at which point the Tribunal had unanimously upheld its jurisdiction but had not issued an award on liability or quantum, to give up her Board seat at the Bank.

Having promised brevity, I leave you with these questions: Should full time arbitrators, especially those who are regularly called upon to decide high-stakes cases involving large multinationals and States, confine their fiduciary service to predictably conflict-free institutions, mainly in the non-profit sector? Should an arbitrator’s duty to investigate potential conflicts of interest ever be delegable, at least not without disclosure to the parties of the determination to delegate? In the interest of making awards as invulnerable as possible, and of reducing the costs and uncertainties involved in post-Award challenges – whether in Annulment Committees or in ordinary courts – should prominent arbitrators involved with high-stakes disputes and high-profile entities more often err on the side of disclosure even where a strong case can be made under IBA Guidelines and other relevant conflicts guidance that disclosure is not required?

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This month Arbitration Commentaries applauds the ICC for a small but valuable edit made in Article 6(3) as part of the ICC Rules revisions that became effective March 1, 2017. This edit, as explained below, is likely to fix a recent small dent in the armor of compétence-compétence in the US courts.

In a recent case in a US District Court, the Court held that a challenge by the prospective Claimant to the validity of the arbitration agreement, raised in opposition to a motion to compel arbitration made by Respondent in Claimant’s plenary action, was to be decided by the Court not an arbitrator because Article 6(3) in the 2012 version of the Rules did not, as the Court construed it, delegate to the arbitrator arbitrability objections raised in Court by the putative arbitration Claimant in opposition to the putative Respondent’s motion to compel arbitration. (Eisen v Venulum, Ltd., 2017 WL 1126137 (WDNY Mar. 27, 2017, appeal filed, 2d Cir., April 25, 2017).

In the 2012 version of the Rules, presumably still extant when this case was briefed and argued, Article 6(3) provided in relevant part: “If any party against which a claim has been made does not submit an answer, or raises one or more pleas concerning the existence, validity or scope of the agreement to arbitrate … any question of jurisdiction… shall be decided directly by the arbitral tribunal….” One can appreciate why the ICC edited the Rule. Some judge might otherwise read it — in the English version of the Rules — to assign arbitrability issues to the Tribunal only when raised by a “party against which a claim has been made.” This was the interpretation of Article 6(3) advanced by defendant (putative arbitration Respondent) in its motion to compel arbitration in the Eisen case. The District Judge embraced it, and held that the issue of unconscionability of the arbitration clause, clearly a “validity” issue, was for the US District Court because the parties had not clearly and unmistakably delegated it to the arbitrators.

Evidently neither party informed the Court that the ICC had fixed the syntax problem effective March 1, 2017. Article 6(3) as amended reads: “If any party against which a claim has been made does not submit an answer, or if any party raises one or more pleas concerning the existence, validity or scope of the arbitration agreement….” (emphasis supplied). Syntax problem solved. The intent of the Rule is not changed, presumably. Presumably it was always intended that under Article 6(3)  a jurisdiction issue raised by “any party” and not only a party “against which a claim has been made” would be resolved by arbitration. But the language difficulty was only acute in the pre-arbitral setting of a litigation in which the party asserting the claim denies that she is bound to arbitrate the claim. In the courthouse, she is not a party against whom a claim is made but rather is the Plaintiff. And that was the dispositive consideration for the US District Court in Eisen.

Defendant/Respondent counsel in Eisen evidently did not inform the Court of the March 1, 2017 amendment, and evidently also did not call the Court’s attention to Article 6(1) (unchanged from 2012 to 2017 version): “Where the parties have agreed to submit to arbitration under the Rules, they shall be deemed to have submitted ipso facto to the Rules in effect on the date of commencement of the arbitration, unless they have agreed to submit to the Rules in effect on the date of their arbitration agreement.” The parties in Eisen did not specify the 2012 Rules, so they are signed up for the 2017 version.

Somebody should tell the Judge! It’s not too late to correct the ruling. But at the moment the case seems destined for the US Second Circuit Court of Appeals, and presumably for a reversal by a Summary Order that finds the case to be squarely within existing Second Circuit precedent (Shaw Group and Linhas cases) that an agreement to arbitrate under ICC Rules delegates arbitrability issues to the Tribunal.

All of this makes a difference, of course, because the Court proceeded to find that the arbitration agreement was unconscionable — itself a close question in the context of the underlying dispute which concerns a securities scam based on fine wine investments, and, of particular note, an agreement between Toronto scammers and their Buffalo NY victim to arbitrate in the British Virgin Islands under BVI law. But chances are this analysis will fall by the wayside save as the Arbitral Tribunal that will hear the case might find it persuasive.

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Specialists of investment arbitration practicing beyond US borders shall take comfort from the decision of a US District Judge in Washington DC confirming a Canadian mining investor’s $1.2 billion award against Venezuela for expropriation and denial of fair and equitable treatment, under the Canada-Venezuela bilateral investment treaty. (Crystallex International Corp. v. Bolivarian Republic of Venezuela, 2017 WL 1155691 (D.D.C. Mar. 25, 2017)).  Why “comfort”?: (1) Because the Court applied relatively well-settled US arbitration law that treats questions of “arbitrability” as having been delegated to the arbitrators when the applicable agreed-upon arbitration rules state that the arbitrators shall have power decide questions relating to the existence of arbitral jurisdiction; (2) Because the Court did not hesitate to conclude that Art. 45 of the ICSID Arbitration (Additional Facility) Rules, which states that “[t]he Tribunal shall have the power to rule on its competence” was a clear and unmistakable delegation to the Tribunal of the arbitrability issues raised by Venezuela, such that the arbitrability decisions of the Tribunal were to be reviewed with substantial deference; (3) Because the Court properly recognized that the Tribunal resolved Treaty/international law claims (fair and equitable treatment, expropriation) that related to a mining contract, and not contract breach claims under that contract, and so the Tribunal was well within its discretion to conclude that the claims presented and decided were within the Tribunal’s jurisdiction and therefore were arbitrable, and (4) Because the Court read and assimilated the Tribunal’s award, and described its relevant conclusions with sufficient precision that readers of the decision may gain confidence in the investment arbitration process as a fair one leading to correct outcomes, and not merely a faulty process whose errors go uncorrected due to a very deferential US judicial standard of review.

Two further points deserve mention, one of general interest and one mainly for the Canadian reader (I believe there may be one). The general interest point is that the Court expressed doubt of the continued vitality of “manifest disregard of the law” as a separate non-statutory ground for vacating an award made at a US seat, and suggested in a footnote without much elaboration that perhaps an argument could be made that in all events “manifest disregard” is not available as a ground to vacate an award that is subject New York Convention standards with respect to confirmation. (Perhaps a point for development in a separate post on this page!). The mainly-for-Canadians point is that Venezuela argued that the Canadian investor was more or less estopped to advocate for a deferential standard of review of arbitrability determinations by investment tribunals deciding the rights of Canadian investors because Canada, as a non-party intervenor before an Ontario court that was asked to confirm a NAFTA award against Mexico in favor of a US investor, had urged a “correctness” standard be applied to arbitrability issues (in particular, the scope of awardable damages). Here the Court declined to delve into the record of the Mexico v Cargill case to determine if indeed the argument made there by Canada was for “de novo” review and was sufficiently similar that it could bind Canada and its investors under the Venezuela BIT. On the record before the Court, it was not convinced that Canada had bound itself to a “de novo review” position.

In these terms I offer Crystallex, crystallized.

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Party autonomy and American litigation custom sometimes collide in disconcerting fashion in arbitrations involving American counsel, whether international or domestic. One such collision involves the establishment early in the case of an agreed or imposed order concerning the confidentiality of exchanged information (“Protective Order”).  The parties have an understandable desire for formal confidentiality restrictions applicable to the data that they will be required to share with adverse parties who may be, or may be aligned with, actual or potential business competitors. But the templates for Protective Orders that many US counsel will retrieve as drafting models for their arbitral confidential orders will come from prior litigations handled by their firms in federal and state courts, and counsel are far more likely to focus on having the most ironclad protections against misuse of their clients’ data than they are to process systematically how the arbitral forum and arbitral process changes the dynamics of confidentiality and in turn the transferability of the litigation Protective Order template to the arbitral forum.

While it is generally understood that an arbitration seated in the United States is not inherently confidential — as regards the ability of the parties to make public reference to the proceedings — there is no public docket for the arbitration as there is for a judicial proceeding, and pleadings, orders and awards in the arbitration will not reach a public judicial docket save insofar as judicial proceedings relating to the arbitration are maintained. This may seem obvious, but counsel sourcing model Protective Orders from their archives, for adaptation to an arbitration, may not pause to reflect on the fact that a great deal of the restrictive regulation of data usage that appears in typical Protective Orders  is motivated by the fact that litigation dockets and proceedings are public (subject to case-specific, episode-specific discretionary exceptions for filing under seal of particular documents or portions thereof, as approved by judges on a case by case basis) and that American courts operate on a principle of the public’s right of access to the proceedings.

1. The “Use Restriction”

Arbitrators will have this principle in mind when they see in a party-drafted confidentiality order a ubiquitous provision of such orders — the so called “use restriction.” Typically couched in language reciting that the purpose of the Protective Order is to avoid use of disclosed information for business purposes and to avoid public disclosure, the typical use restriction literally reads more broadly: that disclosed information designated as confidential “shall not be used for any purpose except the prosecution and defense of this Action.“

Taken literally and apart from context, this language might be held to prohibit any litigation-related “use” of disclosed information. Suppose the arbitrating party obtains from the adverse party information designated as “highly confidential, attorneys eyes only” under, and subject to, the Protective Order (see Section 2 below concerning tiers of confidentiality), and the information so obtained might support causes of action in court against a third party with whom the receiving party has no agreement to arbitrate. Suppose further that the receiving party applies to the Tribunal to remove the “attorneys eyes only” designation so that she might discuss with her client the documents’ significance in regard to potential new litigation against third party? Should the arbitral tribunal adopt the producing party’s objection, supported by an intervention from the third party who has been notified of the initiative, that even such a pre-litigation exploratory discussion is a “use” for a purpose other than “this Action” and is prohibited by the Protective Order?

One can see that quite rapidly a seemingly standard (for US civil litigation) Protective Order provision could embroil the Tribunal in a controversy that has nothing to do with protection of business secrets against competitive use, nothing to do with maintaining a non-public profile of the arbitral proceeding, but everything to do with regulation of substantive rights between a party to the arbitration and a stranger to it. Would the Tribunal be well advised to insert in the parties’ version of the use restriction “except as the Tribunal may permit for good cause shown“? This arguably captures the intent of the parties, which was not — at the time of drafting — to squelch potential new claims derived from the content of produced documents but simply to avoid the drafting difficulties and potential for circumvention that would be involved in stating in the Order a more particularized list of prohibited uses.

2. Tiers of Confidentiality

The typical litigation model Protective Order submitted to arbitrators by the parties, or one of them, via US counsel will contain a so-called “two-tier” confidentiality regimen, permitting a party producing data to designate its data as “confidential” (generally, subject only to the use restriction) or “highly confidential” (generally, restricted to viewing and handling by outside counsel and consulting/testifying experts). In the US court system, the two-tier model often results in over-designation of documents as “highly confidential” by the producing party, with the task of deciding on requests to downgrade the tier designation delegated to a US Magistrate Judge. In the court system an application by the receiving party to downgrade the tier designation typically would be made during the discovery phase of the case, before the setting of a trial date or a schedule for briefing on proposed summary disposition. Therefore such disputes in a court litigation do not disrupt the trial schedule expectations of the trial judge or the parties. The dynamics of an arbitration in regard to this question are self-evidently quite different. The Tribunal has no institutionalized subordinate to whom tier-designation disputes may be delegated and efficiently resolved. The parties may well not have factored into their vision for the arbitration procedure and timetable the enlistment of a three-person Tribunal to the urgent task of deciding which persons other than counsel may consider the producing party’s documents for purposes of assisting in the prosecution or defense of the arbitration. Further, the full procedural timetable culminating in the merits hearing often will be fixed before there is information exchange, and a time-consuming dispute about which persons other than outside counsel may view produced documents threatens to disrupt set schedules for the submission of pre-hearing witness and expert statements and in turn the agreed merits hearing dates.

Will it be an advantage to the arbitral process for the Tribunal to insist upon or at least express its strong preference for a presumptive one-tier confidentiality protocol (“confidential” but not “highly confidential”)? Placing the initial burden to justify a higher tier of confidentiality on the producing party should ordinarily discourage over-designation of documents at the “highly confidential attorneys’ eyes only ” tier, by forcing the party to justify the designations before making them and to do so in such a time that the schedule fixed for information exchange can be met. The Tribunal’s burden of deciding designation disputes should be reduced, and more of the initially set procedural timetables will be able to be met without alteration.

3. Production Inadvertently of Privileged Communications

One further provision that has become part of the “boilerplate” of stipulated confidentiality orders in complex US federal civil litigation, and may warrant different handling by arbitrators, concerns the consequences of allegedly inadvertent disclosure of data that is subject to a claim of attorney-client privilege. US Federal Rule of Civil Procedure 26(b)(5)(b) specifies how the party in receipt of such data shall act upon being notified by a producing party of a claim of inadvertent disclosure, and how that party may contest the claim before the Court. Generally the recipient must embargo all use of the data, apply to the Court if it wishes to contest the privilege claim, and maintain the embargo until and unless the challenge to the privilege claim is resolved. Some parties represented by US counsel will be wont submit a draft Protective Order that, without thoughtful adaptation to the arbitral context, essentially incorporates Rule 26(b)(5)(b), and if the draft is approved as a ministerial act of So-Ordering by the Tribunal there are at least two not necessarily desirable consequences: (1) a US rule of civil procedure designed for judicial application is adopted into the arbitration without serious consideration for its suitability in the arbitral context, and (2) a foundation is laid for the party asserting a claim of privilege to maintain that US attorney-client privilege law has been enshrined as the applicable law in the arbitration. These consequences would be regrettable in an international arbitration where the applicable privilege law is an open and seriously debatable issue, and where the privilege law that the Tribunal may find to be applicable to a particular communication may treat inadvertent disclosure in a fashion quite different from the American model.

The US law of inadvertent disclosure of privileged communications is constructed around the concept of “claw back” — a restitutionary equitable remedy that seeks to put the disclosing party in the same position as if the communication had never been revealed (although such restitution is necessarily imperfect, as the recipients’ recollections of the documents’ contents, absorbed without knowledge of the possibility of a claim of privilege, cannot be erased). Rule 26(b)(5)(b) is designed to preserve the effectiveness of the “claw back”, for the duration of any dispute over the right to that remedy, by imposing a stringent moratorium on use of the communication by the receiving party, who must return, destroy or sequester all copies of the communication. But foreign law of attorney-client privilege that the Tribunal might determine to be applicable might not recognize the “claw back” remedy.  The foreign law might simply provide that factual information in the communication may be used as evidence but legal advice reflected in the communication may not be used as evidence and the inadvertent disclosure entails no subject-matter privilege waiver. Even in a US domestic arbitration where the applicable privilege law is not in doubt, the Tribunal might prefer a different method of adjudication, for example shifting the burden to initiate a claw back claim to the disclosing party and addressing the question of interim restriction of the recipient’s use of the communication on a case-by-case basis. Thus in lieu of the boilerplate Rule 26(b)(5)(b) clause in the submitted Protective Order the Tribunal for example might prefer: “A party aggrieved by an alleged inadvertent disclosure of a communication subject to a claim of privilege shall prompt apply to the Tribunal for relief, making full disclosure of all relevant circumstances, and specifying the remedies sought and the law applicable.”

4. Compliance Obligations of Service Providers for the Arbitration

Another typical provision of litigation-based Protective Orders addresses the relationship to the Court of a non-party service provider, such as an expert witness. When the arbitral tribunal receives from counsel a proposed Protective Order addressing this question, it will often include a subscription form to be signed by the non-party service provider, whereby she agrees to be bound by and to comply with the terms of the Protective Order and to submit to the jurisdiction of the Court/Tribunal for its enforcement. Whereas the power of arbitrators to impose disciplinary measures upon counsel who appear in the case remains a controversial and unsettled domain, arbitrators should be reluctant to assert by approving such an Order that they might in appropriate circumstances impose a sanction upon a consulting firm or a document management firm, engaged by a party to the arbitration or by the parties jointly, for a violation of the Protective Order. Would it not be more sensible for an arbitral Protective Order to provide that a party by contracting with third parties for support services that entail exposure to confidential information bears full responsibility for the service providers’ compliance and accepts that the tribunal may impose sanctions upon the party for the provider’s violation?  The service contract between the party and the provider can in turn be drafted/modified to provide for shifting of responsibility to the provider in certain circumstances, with disputes in this regard to be resolved in such fashion as the parties to this contract might agree. In this fashion substantially effective compliance of service providers with the Protective Order should be achieved without the prospect of a controversial extension of arbitral disciplinary powers to non-parties.

***

These are but a few of the more prominent provisions in arbitral Protective Orders that have their origins in US litigation Protective Orders adapted as drafting templates. Arbitrators who recognize the adaptability issues will be well positioned to deal with them, and to made suitable changes even when a proposed Order has been submitted as a stipulation between the parties.

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After the decision of the US Second Circuit Court of Appeals in the Gusa case (CBF Industria De Gusa S/A v. AMCI Holdings, Inc., 846 F.3d 35, 2017 WL 191944 (2d Cir. Jan. 18, 2017)), there is much to know about enforcing foreign arbitral awards against alter egos of award debtors that we did not know before. Most importantly, it would appear that the award debtor, named in the award, need not be named as a Respondent in the award confirmation case under FAA Section 207. If Gusa were limited to its facts, that might only be the case where that award debtor is legally defunct, such that it has lost its capacity to be sued in the courts of the United States. But the Gusa panel does not state that its holding is limited to its facts, so Gusa apparently holds that the award enforcement proceeding under FAA Section 207 may be brought directly against alleged alter egos or successors in interest of the award debtor who were not parties to the arbitration. The Gusa panel adopts this position notwithstanding, and without addressing expressly, the fact that FAA Section 207 identifies, as the party against whom a foreign arbitral award that falls under the New York Convention may be confirmed, only “a party to the arbitration.”  This question is the topic of the Commentary here.

Gusa also furnishes guidance on how a Section 207 Convention award enforcement case against an alleged alter ego of the award debtor should proceed. The panel holds that whether the award should be enforced against the alleged alter egos is to be decided “under the standards set out in the New York Convention and Chapter 2 of the FAA.” In turn, this means that if the Section 207 Respondent denies alter ego status, this Respondent must persuade the district court that enforcement of the award should be refused under Article V(2)(a) of the Convention which permits such refusal where “the subject matter of the difference is not capable of settlement by arbitration under…” ”the law of … the country where recognition and enforcement is sought.” (Under Second Circuit precedent, per the Gusa panel, this is the Convention framework for a party to resist enforcement on the basis that it would not be treated as bound by the arbitration agreement under US arbitrability law). And when that arbitrability issue is addressed, Gusa instructs, the district court should consider whether the court or the arbitral tribunal should decide the arbitrability issues, using the analytical framework provided by First Options v. Kaplan. These issues may be topics for future Commentaries.

Prior Law in the Second Circuit on Extending the Obligation of Award Debtors to Alter Egos

The Second Circuit in a 1963 pre-New York Convention case (that is, prior to the US accession to the Convention) called Orion Shipping had held that a proceeding for confirmation of an arbitral award (in that case, brought under Section 9 of the FAA, as it involved an international award made in the US), had held that a confirmation action was not a proper occasion to seek the extend the binding effect of an arbitration award to an alleged alter ego of the award debtor. Because confirmation was intended to be a streamlined, summary proceeding, while issues of alter ego obligation were generally factually and legally complex and time consuming, the Orion Shipping court held, such claims should be presented in a separate action. The Orion panel held that “an action to confirm the arbitrator’s award [under 9 U.S.C. 9] cannot be employed as a substitute” for “a separate action against [the alleged alter ego] seeking to “enforce the award” that had been rendered against the award debtor. Evidently, but not explicitly, the Orion panel used the phrase “enforce the award” in the common law sense of extending its obligations to third parties.

Orion Shipping remained good law up to the Gusa decision, and at least in the context of award confirmation under FAA Chapter 1 Gusa does not overrule Orion. But according to the Gusa court “confirmation” under FAA Section 207 with respect to a Convention award made at a non-US seat of arbitration embraces “recognition and enforcement” under the New York Convention, and accordingly “enforcement” of such a foreign arbitral award against an alleged alter ego is properly sought under FAA Section 207. This appears however to be a significant departure from prior application of Orion Shipping to alter ego enforcement claims in the district courts. Whether asked to enforce against alter egos under FAA Section 9 with regard to a Convention award made in the US, or to enforce a foreign-made award under Section 207, the district courts had previously required a separate basis for subject matter jurisdiction of the claims against the alleged alter egos. And while the Second Circuit had carved out an exception to Orion Shipping where the enforcement against a non-party was based on successorship, not alter ego, because the complexity-of-adjudication rationale would not apply, no decision appears to have extended this exception to the alter ego enforcement context. The case law left rather murky the precise legal basis of alter ego liability. If the alter ego claims were allowed to be pursued as “a separate action” but in the same proceeding as the confirmation action, was this because a finding of alter ego would make the alter ego, in retrospect, a party to the arbitration, against whom the award could be confirmed? Or was it simply a case that the Judgment confirming the award against the award debtor, but not the award itself, would be determined to be binding upon the alter ego, in the same way that the Judgment would become binding if the alter ego claim were pursued in a separate action after entry of the confirmation Judgment? There was no practical reason to answer this question so long as the named award debtor was a party to the confirmation action. And where confirmation was sought of a US-seated Convention award under FAA Section 9, there was no “against a party to the arbitration” language in Section 9, as there is in FAA Section 207, to motivate a court to address whether there could be award confirmation against, as opposed to extension of the confirmation judgment to, an alter ego.

What Gusa Means for US Enforcement of Foreign New York Convention Awards

Gusa does not purport to overrule Orion Shipping, and one possible interpretation is that Gusa has simply created another category of exception to Orion: i.e. where only the purported alter egos and not the named award debtor are parties to the confirmation proceeding, there is no possibility to fulfill the FAA’s objective of a simple, streamlined confirmation proceeding, and therefore no statutory policy reason to require the award creditor to proceed against the alter egos in a separate action. But this is not the Court’s stated rationale.

The Gusa panel holds that the nub of the error made by the District Court was that, in requiring the award to be “confirmed” for New York Convention purposes (i.e. recognized and enforced) in some jurisdiction where the award debtor could be a party to the action, before it could be “enforced” in the United States against alleged alter egos, the District Court was mistakenly applying FAA Section 9’s more limited concept of “confirmation” to an FAA Section 207 proceeding, in which the statutory term “confirm” is a proxy for the Convention term “recognition and enforcement.”  But the Second Circuit does not hold that “enforcement” under the New York Convention includes the process of extending the binding effect of a Convention award to a non-party to the award. Indeed the panel cites the Restatement (Third) of the Law of International Commercial Arbitration for the proposition that the meaning of “enforcement” under the Convention is simply the conversion of the award into a judgment of the court in which recognition and enforcement are sought. Upon this definition of Convention “enforcement,” FAA Section 9 confirmation of a US-made Convention award, and FAA Section 207 confirmation of a foreign-made Convention award, are equally “enforcement.” To some readers at least, the Gusa panel’s effort to distinguish Section 9 and Section 207 confirmation will only make sense if the Section 207 confirmation more broadly includes one meaning of “enforcement” in the domestic common law sense, i.e. extension of the obligations of the award (or the judgment) to a non-party to the award on the basis of a legal relationship between the award debtor and the non-party. But since the panel proceeds from a correct definition of “enforcement” as a Convention term of art, one if left to wonder if this was what the panel intended.

An alternative way to reconcile Gusa with the text of Section 207 is to conclude that the language “against a party to the arbitration” in Section 207 does not necessarily require a named party to the arbitration to be the respondent in the confirmation action involving putative alter egos, but requires only well-pleaded allegations of alter ego status that, if proved, would result in a judgment that the alter ego was, de jure if not de facto, a party to the arbitration.  That is a plausible view, but it is not one the Gusa panel adopts; instead, the “against a party to the arbitration” language of Section 207 is not quoted or otherwise mentioned in the decision. Further, adoption of this view would seemingly have required a closer examination of Orion Shipping and its progeny, as it appears to have been a premise (albeit not very well explicated) of those cases that the extension of the binding effect of an award (or a judgment in a confirmation action) to a non-party is not an FAA-based cause of action at all, but rather a common law cause of action to extend to a non-signatory of the contract, based on legal status, an obligation of the contract that gave rise to the obligation.

If anything is clear from Gusa, it is that this extension process, at least in regard to a foreign-made Convention award, and at least in regard to putative alter egos of the award debtor, is henceforth to be governed by the Convention and FAA Chapter Two. How this result should be harmonized with prior case law will be left to future decisions – or, possibly, to refinement or change in the en banc proceeding for which application has been made by the respondents in the Gusa case.

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Received wisdom in selecting an arbitration seat, if the goal is arbitration unencumbered by “American-style discovery,” is to avoid America. Today we take a close look at one factor in that supposedly common calculus — obtaining evidence from non-parties.

In an arbitration seated in London (or elsewhere beyond US borders), pre-hearing discovery in the United States may quite possibly be had by a subpoena for documents or deposition testimony issued by US counsel in the name of a US court after the grant of an order permitting such discovery issued by the US District Court in the district where the witness resides or is found. The order is (quite possibly) issued upon the authority of the famous US foreign judicial assistance statute, 28 USC §1782. Such an order may be granted ex parte — a useful tool when there are concerns that the witness will take steps to evade service of process. There is no legal requirement that the Court issuing the discovery order take into account the rules and procedural law applicable to the arbitration, or consider or invite the position of the Arbitral Tribunal concerning the proposed discovery. Notwithstanding the view, more widely held, that the statutory powers to furnish judicial assistance to gathering evidence for use in foreign courts and tribunals do not apply to commercial arbitrations conducted under private auspices rather than through governmental or intergovernmental bodies, there is enough support for the opposite position that US judges inclined to permit the discovery can hold that private arbitration is covered by §1782, and find non-appellate US precedents, and one famous US Supreme Court dictum to support the position. For a very recent instance, see In re Ex Parte Application of Kleimar N.V., 2016 WL 6906712 (S.D.N.Y. Nov. 16, 2016), the decision that motivates this post.

Kleimar is a curious case mainly because the US Second Circuit Court of Appeals, whose decisions are binding precedents, stare decisis for New York’s federal district judges, held in 1999 that a private arbitral tribunal is not covered by the famous statute 28 USC §1782. And while a few courts in other parts of the US have found solace in a phrase in the US Supreme Court’s 2004 decision in the Intel case (Intel Corp. v. Advanced Micro Devices, 542 U.S. 241, 258), that so-called dictum until now has not motivated the Second Circuit or its district judges to walk away from the 1999 position (NBC v. Bear Stearns, 165 F.3d 184). But in this Kleimar case two respected judges on the Manhattan federal bench have now walked that walk (one judge who issued the discovery order, another who denied a motion to vacate that order and to quash the subpoena issued in furtherance of the order) — and they have not done so  with any probing analysis, but rather with just a glancing comment, that the Intel so-called dictum of 2004 casts doubt on NBC holding of 1999. [I have twice now used the “so called” label, because as will be seen below, what is referred to as a dictum is not that, unless dictum embraces everything appearing in a Supreme Court opinion other than its holding. Dear skeptics, see the excellent deconstruction of the Intel “Dictum” Overreading in In re Application of the Government of the Lao People’s Democratic Republic, 2016 WL 1389764 (D.N.M.I. April 7, 2016). A federal district court in the Northern Mariana Islands — who knew?).

In this possibly short-lived new Golden Age for the Intel “Dictum” Overreaders, consider how much less enthusiasm US arbitration law shows for third-party discovery in international arbitrations conducted with (and maybe at) an agreed US seat. For a start, the subpoena power resides with the arbitrators not with the courts. And the majority view by a wide margin is that discovery as we understand it in litigation is not permitted because the statute (FAA Section 7) refers to the appearance of a non-party witness before one or more of the arbitrators to give testimony and to bring along to the testimonial hearing any relevant and material documents. (Supporting this position recently, see CVS Health Corp. v. Vividius LLC, 2016 WL 3227160 (D. Ariz. June 13, 2016), appeal filed at No. 16-16187 (9th Cir. July 6, 2016)).

In a rationally-ordered US arbitration law universe, the deference shown to arbitrators as the primary regulators of the evidence-gathering process would not be less for foreign-seated private arbitrations than for those seated within US borders. (If you will, call this Goldstein’s Buffalo-Toronto Equivalency Principle). It seems obvious that considerations of comity weigh against imposing US discovery on a proceeding that the parties have agreed to subject to the arbitral procedural law of a foreign State. Indeed, whereas the FAA mandates enforcement of the parties’ agreement to arbitrate at a foreign seat (and therefore under that arbitral procedural law of that seat, or another State’s procedural law designated in the arbitration agreement), the protracted conundrum over  § 1782’s application to foreign private arbitration might be solved if US courts decided that the FAA in all events bars use of  § 1782 to obtain discovery for use in foreign private arbitrations unless the applicable lex arbitri permits a court other than a court of the Seat State to direct the collection of evidence.

But rational ordering of the arbitration world might not be the route most  judges would adopt to construe § 1782. So it is critical for judges, and those who seek to persuade them, to understand why Intel “Dictum” Overreaders are overreading. To repeat what many others have written many times: The Intel case had nothing to do with commercial arbitration; it concerned antitrust proceedings before the European Commission. In the passage from Intel cited by Overreaders as a hint that private arbitration is within §1782, the Court’s plurality opinion (Justice Ginsburg as author) took note of the fact that §1782 emerged from a task force set up by Congress in 1958 called the Commission on International Rules of Judicial Procedure. The plurality opinion noted that this Commission’s draft revision of Section 1782 replaced  “judicial proceeding” in the extant version of § 1782 with “proceeding in a foreign or international tribunal.” Justice Ginsburg’s opinion cited the Senate Report on this 1964 amendment as evidence that the amendment was motivated by a desire to extend judicial assistance not merely to foreign courts but also to “administrative and quasi-judicial proceedings abroad.” The Court then quoted from footnote in a 1965 Columbia Law Review article by Professor Hans Smit entitled “International Litigation Under the United States Code” (65 Colum. L. Rev. 1015 at 1026-27 n. 71,73) where Professor Smit — a redoubtable expert on international commercial arbitration but also the author of the amended text of §1782 adopted by Congress — stated that “[t]he term ‘tribunal’ … includes investigating magistrates, administrative and arbitral tribunals, and quasi-judicial agencies, as well as conventional civil, commercial, criminal, and administrative courts.” (emphasis supplied). The Overreaders lift the phrase “arbitral tribunals” out of its proper Intel context — within the quoted excerpt from the Smit article —  to read a tea leaf of an opening to private commercial arbitration. (One can only imagine, and cringe at, how many briefs to how many courts have stated, shamelessly, that “the Intel Court in dictum indicated that 1782 applies to ‘arbitral tribunals’.”).  This tea leaf reading seems rather wishful. The litany of adjudicative bodies in which Professor Smit included arbitral tribunals was evidently invoked by Justice Ginsburg (and her subscribers) to illustrate that non-“conventional” governmental or intergovernmental adjudicators were included. Whether or not that was what Professor Smit believed in 1965, that was the Supreme Court’s purpose in using this quotation from his 1965 article, as the question before the Court  was whether the European Commission had functioned as an adjudicative body.

Finally the Intel Overreaders might reconsider their position if they consider how the Supreme Court as currently composed might regard the Intel “dictum”. Justice Breyer wrote a dissent in Intel cautioning against interjecting US discovery into foreign proceedings and admonished that in interpreting and applying §1782, US courts should “pay[] particular attention to the views of the very foreign nations that Congress sought to help….” If at least two other Justices (Kagan?, Sotomayor?) share the view that §1782 was meant to help foreign nations, the position of the Intel Overreader view is only two votes away from defeat. Justice Scalia of blessed memory, who concurred in the judgment in Intel, criticized the plurality for relying on legislative history (and, by implication, on the later-expressed Law Review views of Professor Smit, which would seem to qualify as post-legislative history). Justice Scalia thought the words of §1782 were sufficient to decide the case, and it seems likely that at least three members of the current Court (Justices Alito?, Roberts?, Thomas?) would take that view and would find that, in statutory context, “foreign or international” was meant in at least a geopolitical sense, that is to say, a tribunal created by, not merely situated in, a foreign State or States. (It is controversial whether parties appearing before a geopolitically international tribunal like an ICSID tribunal, when the tribunal is seated in the United States, may seek discovery under §1782, as the US-seated ICSID tribunal will generally have subpoena powers under FAA Section 7. In a rational world, §1782 would only apply when an arbitral tribunal is “foreign or international” both geopolitically and territorially).

How long will the new Golden Age last for §1782 in the world of private commercial arbitration? Perhaps only long enough for the Second Circuit to reverse the Kleimar case in a Summary Order reaffirming that the NBC v. Bear Stearns case from 1999 is still good law. But perhaps there will be no appeal and Kleimar could snowball for a period of time. Perhaps arbitrators will take control of the matter, and enter procedural orders prohibiting parties before them from resorting to §1782 without first applying to the Tribunal for an order permitting this to be done. That is not a complete solution, because some §1782 applications are made before the Tribunal is constituted precisely to avoid having the Tribunal pre-empt the initiative. But Tribunals mindful of the issue can make substantial inroads by preventative action.

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Just when you thought you knew what you needed to know about enforcement (or not) of annulled foreign awards, along comes the Yukos case in yet another chapter. This one is entitled What to Do While We Wait for the Dutch Appeal?. It is written by a US District Court judge in Washington DC. And the Answer is: Just Wait! (Hulley Enterprises Ltd. v. Russian Federation, 2016 WL 5675348 (D.D.C. Sept. 30, 2016)).

In case you are recently returned from the Gulag, here are the basics: tagged with a $50 billion award by a Dutch-seated Tribunal, for carrying out a tax-based vengeance scheme against the politically hostile oligarchs who came to control the denationalized petrol colossus Yukos, Tsar Vladimir sent his lawyers to a Dutch first instance court to get the Award annulled for lack of jurisdiction. There Vlad won on a point he had lost before the Tribunal: that Russia never validly adopted the arbitration scheme of the Energy Charter Treaty (ECT) — no arbitration agreement=no valid award. The Dutch first instance court, unimpressed with the analysis given by a cobbled-together Tribunal of international law neophytes named Schwebel, Poncet and Fortier, bought this argument, and consumed all the Ossetra Caviar and Stolichnaya-laced Kool-Aid that Vlad presented with it.

America being a land teeming with Russian Federation assets,  Ossetra Caviar being perhaps the most delectable, the Yukos shareholders sought confirmation of the Award in a federal court in Washington D.C.– making their filing in 2014 hard on the heels of Russia’s filing of the annulment case in The Hague. Subject matter jurisdiction of the DC confirmation case was alleged to be based on the Foreign Sovereign Immunities Act (FSIA) — and, for our simple-story purposes, on the FSIA’s “arbitration exception” to sovereign immunity.  That “exception” applies, and permits US courts to exercise jurisdiction over an action against a foreign sovereign, in an action to confirm a foreign arbitral award that “is or may be governed by” the New York Convention. (28 USC §1605 (a)(6)).

The first 18 months or so of this US confirmation action need not concern us here. But once the first instance Dutch Court had annulled the Award , as it did to much consternation in April 2016, the Award-winning Yukos shareholders asked the US Court to stay their own US enforcement case pending an appeal in the Dutch judicial system that might undo the first instance set aside judgment. Putin & Co., Bearish, opposed the motion to stay and insisted that the Court should proceed to address the threshold issue of its subject matter jurisdiction, meaning that the Court should decide upon the applicability or not of the arbitration exception to sovereign immunity under the FSIA with regard to proposed confirmation of an award lawfully judicially annulled at the arbitral seat. Understandably, Russia expected to argue that, with deference to the first instance court in the Hague, the US court should find subject matter jurisdiction absent if, on the view that Russia never signed up for arbitration under the ECT, there would be no possibility of enforcement under the New York Convention.

As a District Court judge concerned with efficiency, comity, and eventually an orderly and thoughtful adjudication, if required, under the New York Convention and the FSIA, to decide as she did in favor of a stay appears to have been an inevitable conclusion. But we should observe closely, and perhaps marvel a bit in this instance, at the method and the analysis. The key points in the view of this observer are these:

1) The proper legal framework for analyzing the stay-versus-adjudicate issue is not Article VI of the New York Convention – which permits the enforcement cofht at the seat. Instead the legal frame of reference is the discretion afforded the court in the exercise of its “inherent power” to manage its own docket, a power well established in American law. That is the situation here because the applicability of the New York Convention is a merits question, and so Article VI may not be invoked as the basis for adjourning the enforcement action in advance of a judicial determination that subject matter jurisdiction exists. Like a dismissal on the basis of the doctrine of forum non conveniens, a stay of proceedings based on the Court “inherent powers to manage its docket” is one of the rare significant adjudications that a federal court may make before its subject matter jurisdiction is determined.

2) Comity, that is to say deference to the adjudicatory power and action of a foreign court, may, and in this case did, favor a stay of the US confirmation of the Yukos award, because the eventual Dutch appellate court judgment sustaining either the Award or the annulment judgment would, under the US case law on enforcement of foreign awards and non-enforcement of annulled foreign awards, decide or substantially influence the eventual decision in the confirmation case. The Court rightly reasoned that if the Dutch appellate courts uphold the annulment as a lawful annulment, the Award-winning Shareholders might well find the chances of confirmation in the US to be so remote that the confirmation case might be withdrawn.  If the Dutch courts reinstate the award, the Court noted, there could be arguments both ways as to whether Russia is entitled under the New York Convention to a de novo examination of the arbitral jurisdiction/ECT issue in the US Court, but even if such de novo review were required the Court might find the Dutch court’s analysis to be helpful and persuasive.

3) An analysis of whether the Shareholders would be entitled to a stay of the confirmation action under NY Convention Article VI served as a useful as a cross check (in dictum) on the court’s “inherent power” analysis — with the Court here finding that the same outcome would have been reached had the Convention been applied.

It is difficult to know from the opinion how extensively the parties briefed the question that is presented in the Dutch courts, that is to say, how much weight the Shareholders placed on the argument that the Dutch appeal was likely to result in reinstatement of the Award. Many sources in the arbitration community have expressed the view that the appeal has a significant chance of success. It would have been a possible outcome for the Court to deny the stay, deny subject matter jurisdiction under the FSIA, dismiss the enforcement action, and leave the Shareholders with the option to apply for reconsideration in case of a reversal in the Dutch courts. This was the outcome sought by the Russian Federation, which made little effort to conceal its desire for the immediate political victory of a US judgment rejecting US jurisdiction over the Russian State. The Court here determined that, on balance, there was more hardship involved for the Shareholders in requiring them potentially to apply for reconsideration than there was for Russia in having the inert confirmation case remain pending during the estimated 2-3 years needed for the Dutch appellate proceedings to be completed.

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