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Program Notes for the NAFTA Renegotiation

Canada celebrated Canada Day two weeks early in Washington DC, completing its NAFTA Chapter 11 arbitration takedown of T. Boone Pickens’ Mesa Power with a New York Convention award confirmation in the US District Court of a NAFTA Arbitral Tribunal’s rejection of Mesa’s unfair treatment claims against the Government of Ontario in regard to Ontario’s procurement of wind-powered electricity from Mesa’s Canadian renewable energy venture.  (Mesa Power Group, LLC v. Government of Canada, 2017 WL 2592414 (D.D.C. June 15, 2017)). Your Commentator, having failed despite mighty efforts to determine if Mr. Pickens called his friend the incumbent President to affirm that NAFTA is “a total disaster” and “the worst trade deal ever,” instead devoted some quiet hours of the Independence Weekend to compiling some program notes for the gripping drama that is to unfold starting later this summer:  the US-requested renegotiation of NAFTA. Whereas I maintain, in my modest free trade zone, an adequate supply of softwood lumber and a sturdy vehicle assuredly not manufactured in a factory on the soil of a NAFTA Party, I focus here on prospects for changes to the investment protection chapter (#11) of the treaty.

  1. Devotees of Investor State Dispute Settlement (ISDS) looking for hints of what might be Canada’s Chapter 11 agenda would take interest in prominent think-tank analysis that might make its way to PM Justin Trudeau’s nightstand: A report by scholars at Waterloo, Ontario-based Center for International Governance Innovation (CIGI) urging that measures already adopted by the parties via the NAFTA Free Trade Commission, or better yet those adopted in the EU-Canada Comprehensive Economic and Trade Agreement (CETA), for transparency of and access to investment arbitration proceedings (including amicus participation) should be incorporated in the revised text. And while giving a full account of the CETA permanent investment tribunal and appellate tribunal features, the report stops short of urging that this be a key element of Canada’s Chapter 11 renegotiation agenda. They do however endorse adoption of CETA’s provisions for accelerated dismissal of frivolous claims. (“Modernizing NAFTA: A New Deal for the North American Economy in the Twenty-first Century,” CIGI Papers No. 123 March 2017).
  2. A recent submission by the US Council on International Business (USCIB) to the US Trade Representative devotes only three paragraphs to ISDS in a 16-page submission, and in general terms endorses reference to the 2012 US Model Bilateral Investment Treaty as a reference point for modernizing Chapter 11. (“USCIB Comments on Negotiating Objectives Regarding NAFTA Modernization,” Dkt. No.: USTR-2017-0006, June 12, 2017).
  3. The Trump Team at the NAFTA negotiation table may have its eye on maintaining the US’s unblemished records of wins in ISDS cases, perhaps anxiously taking note of recent published reports that the US withdrawal from the Paris climate change accord might lead to a surge in ISDS claims against the US by foreign investors who claim to have relied on a US regulatory framework favorable to (for example) renewable energy. (See “Could the US Withdrawal from the Paris Agreement Spur ISDS Claims?,” Stockholm Chamber of Commerce ISDS Blog, posted June 21, 2017). If so, and even if the Trump-led US trade team remains as resolute in remaining outside the Trans-Pacific Partnership (TPP) as many of the other TPP nations are in their resolve to forge ahead (see “Canada, other countries will move forward on new Trans-Pacific Partnership after U.S. withdrawal,” Toronto Sun, May 21, 2017), we could see a US pitch to add to Chapter 11 a pro-State-regulatory-power provision akin to TPP Article 9.15: “Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity units territory is undertaken in manner consistent with environmental, health or other regulatory objectives.”
  4. Some one or more persons on the Trump Team will have read (perhaps out of view of colleagues and superiors) an excellent brief report by Brookings Institution analyst Geoffrey Gertz entitled “Renegotiating NAFTA: Options for Investment Protection” (Global Views, No. 7, March 2017), which briefly sketches:

four broad options for the future of investment protection in NAFTA:

  1. Upgrading the treaty’s investment chapter while leaving the main substantive and procedural aspects of investment protection in place.
  2. Abandoning legalized treaty-based investment protections, leaving any provisions on investment not directly legally enforceable.
  3. Shifting from an investor-state framework to a state-state framework, in which states would be responsible for legal enforcement of investment regulations.
  4. Linking NAFTA to the recently proposed multilateral investment court.

The report takes no prescriptive position but advocates “for more ambitious and creative thinking on investment protection policy, particularly in the US.”

To date there appear to be no particular indications that Chapter 11 on investor protection is a priority agenda item for negotiators from any of the NAFTA Parties. But the fact that negotiation of changes to Chapter 11 lacks the high political profile of issues like import tariffs and government subsidies need not mean the issues will receive no attention. Perhaps thoughtful investment arbitration specialists will make useful progress, out of the spotlight, in a quiet room at the far end of the hotel corridor.

 

 

A Quick Read Before Your Next Emergency …

Linked below is my article “A Glance Into History for the Emergency Arbitrator”, published last month in the Fordham International Law Journal. The article was written in conjunction with my presentation on the same topic at the Fordham Conference in New York in October 2016.

http://ir.lawnet.fordham.edu/ilj/vol40/iss3/3

Be Careful What You Wish For: A Vision of Life Without Witness Statements

It has been fashionable in some international arbitration circles of late to bemoan the shortcomings of a staple of the arbitral diet: the written testimonial statement of a fact witness, submitted in advance of the merits hearing and intended to stand as the testimony-in-chief (direct). For arbitrators who thrive on a constant regimen of procedural nourishment, this pot-stirring resonates like an anti-croissants diatribe at a conference of the French bakery association: too flaky, too buttery, too … prévisible! (Francophobes, use your Google Translator!).

Avid readers of the burgeoning literature on this subject, and even workaday arbitrators and advocates, will be familiar with the essential virtues of the witness statement (it brings coherent organization to complex facts, and affords disclosure in advance of the party’s evidence) and with its vices (mainly due mainly to its preparation by counsel, it may be tendentious, prolix, and a crude approximation of “the truth”). Your commentator, while reluctant to expose the hazards of a croissant-free French breakfast, does boldly venture below several observations about the more indigestible attributes of arbitration without witness statements:

  1. The advocate’s theory of the case may remain a work in progress at the time of submitting the pre-hearing memorandum of law. This being rather late in the game for a party to have a case in search of a theory, arbitrators at the hearing and post-hearing stage can contribute rather less than they might to a focusing of the parties’ attention on potentially decisive issues. And the advocates in turn have less opportunity to advocate on issues the Arbitral Tribunal genuinely cares about. If theories of claim and defense are modified from the pre-hearing to the post-hearing brief, the Tribunal, except in the unlikely event that counsel will confirm the abandonment of positions earlier articulated, now has a greater number of liability theories and defenses to address in deliberations and in the Award.
  2. The advocate, lacking confidence that the direct testimony of two witnesses rather than six will be sufficient and effective, protectively names six on the witness list. Seeing the list of six, opposing counsel protectively expands its own provisional witness list of four into an actual list of eight. The Tribunal now wonders, aloud, how it will hear 14 fact witnesses (plus experts) in a four-day hearing, when there promises to be direct, cross, re-direct, re-cross, Tribunal questions, and follow-up to Tribunal questions, for each witness.
  3. Lacking adequate foreknowledge of the adverse party’s witnesses’ testimony, the advocate’s preparation for cross-examination is unfocused. What can most safely be done by the advocate is to prepare to read, on cross, helpful highlights of documents the adverse witness is associated with (followed by the unhelpful question “Did I read that correctly?”).
  4. The parties’ lists of witnesses being hedged promises of those they may call and not necessarily those they will call, each side insists on the right to call two of the adverse party’s listed witnesses on its own case. Skirmishes ensue about what the adverse party could possibly want from these witnesses that cannot be adduced from its own employees or in cross-examination, and the Tribunal, having only a vague sense of what any witness might contribute, is reluctant to limit any procedural option for either side. Undesirable outcomes abound — such as witnesses waiting, sequestered, for a testimonial appearance that may not materialize (not to mention the legal costs of preparing the witness for the unknown examination by opposing counsel), or, to avoid such a scenario, a commitment is made by the party that employs the witness that she will be called, and this adds a witness who might otherwise not be needed, in service of control over the timing and presentation.
  5. The Claimant having no advance disclosure of what the Respondent’s fact witnesses will actual say in their testimony, seeks to reserve the ability to call new witnesses on a “rebuttal case” as well as the opportunity to re-call witnesses who will have already testified in the Claimant’s case-in-chief. The parties are unlikely to have anticipated this hearing-lengthening prospect at the time the hearing schedule was fixed, and the potential necessity to add hearing days for the rebuttal case, after a lengthy hiatus, may loom as the first hearing dates approach.

These are serious disadvantages to proceeding without written witness statements in a complex international arbitration. It is desirable that arbitrators and advocates should become familiar with them so that decisions on witness procedure made at the early stages of the case will be well-informed, and will neither opt in favor of written witness statements merely because their use is customary nor opt against them merely because the backlash against custom has come into fashion.

 

Justice Kagan and the Kindred Spirit


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.

 

What We Learn from the Suez/Vivendi v. Argentina Non-Annulment (2) — Greener Grass in More-Favored Nations

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.

 

 

Hot Off the Press ….

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

What We Learn from the Suez/Vivendi v. Argentina Non-Annulment (1) — Arbitrator Disclosure

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?

In Praise of Small Edits in the ICC Rules!

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.

 

 

Crystallex, Crystallized

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.

 

Parsing Protective Orders

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.

  1. 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.

  1. 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.”

  1. 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.

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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.