Investment law proceduralists will find much room for debate in the recent decision of a divided ICSID Tribunal, denying the application of an American investor to join additional claims in a BIT arbitration against the former Soviet republic of Georgia. (Itera International Energy LLC and Itera Group NV v. Georgia, ICSID Case No. ARB/08/7, Decision on Admissibility of Ancillary Claims, Dec. 4, 2009)

In broadest terms, the dispute involved non-performance by Georgia under agreements for payment of unpaid bills for natural gas that the Claimant had supplied to state-owned entities. Under one agreement, Claimant purchased a 90% interest in a State-owned company, under a privatization plan; partial payment of the gas supply debt was to take the form of forgiveness of taxes owed by the newly-privatized acquired entity. But Georgia reacquired the 90% interest by official decree, giving rise to an expropriation claim by Claimant under the US-Georgia BIT. A second arrangement for part payment of the natural gas debt entailed a commitment by Georgia’s Energy Ministry, through a financial agent called Sistema, to pay Claimant $46 million in quarterly installments over seven years. When that agreement was breached, Claimant commenced a private commercial arbitration in Russia as provided in the agreement. But in its Request for Arbitration in the ICSID case, Claimant reserved the right to bring claims under the BIT relating to non-performance installment payment contract.

Claimant, motivated in part by Georgia’s objection to the jurisdiction of the commercial arbitration tribunal in Moscow, sought in its memorial on the merits in the BIT case to interject Treaty claims concerning non-performance of the installment payment plan. Claimant relied on Article 46 of the ICSID Convention and Article 40 of the ICSID Arbitration Rules, which in similar terms allow the assertion of “additional claims . . . arising directly out of the subject matter of the dispute.” In this case, the majority of the Tribunal took a restrictive view of “subject matter of the dispute,” following the official explanatory comment to ICSID Rule 40, to the effect that the claims must be so related that resolution of the claim first asserted would necessarily require resolution of the claim proposed to be added. Under this standard, the majority reasoned, the two claims were unrelated, even if they arose from the same “subject matter” of natural gas debt payment by Georgia to Claimant, and even if some procedural efficiencies would be achieved by joinder of the claims.

The dissenting panelist, Professor Francisco Orrega Vicuna, would have concluded instead that these were “two concurrent arrangements directed to reach the same objective of making the Claimant whole for the monies owed,” and that the factual connection of the two claims was “close enough as to require their simultaneous adjudication so that settlement of the dispute will be final.”

One of the dilatory tactics commonly employed by litigants in the arbitration process is the tactical request for adjournment of hearings. Many arbitrators, reluctant to invite a challenge to the award based on alleged procedural unfairness, will succumb to adjounment request even if it is transparently tactical and dilatory.

Arbitrators whose instincts are to resist such tactics will surely take comfort in a recent decision from the federal court in the Southern District of New York. (Bridgepointe Master Fund v. Biometrx, 2009 U. S. Dist. LEXIS 115678 (S.D.N.Y. Dec. 11, 2009)). Here, the Court rejected a motion to vacate the award based on the panel’s refusal to adjourn a hearing on the merits that was scheduled on two business days’ notice. The Court found that the movant had made “a tactical choice to absent itself from the arbitration” from the outset, and that its conduct had included: the CEO’s declaring his intention to file bankruptcy rather than defend the case; conscious refusal to participate in any aspect of the proceedings; failure to respond to the AAA’s request for an update on the plans for a bankruptcy filing; non-attendance at a pre-hearing procedural meeting; and failure to avail itself of the panel’s invitation to renew the request for adjournment on the first day of the merits hearings.

While this record of non-participation is more ample than what the arbitrator may confront in many cases, the Court held that the same legal standard applies — i.e. “barely
colorable justification” — to a motion to vacate based on refusal to postpone a hearing (FAA Section 10(a) (3)) as to motions to vacate based on other Section 10 grounds. Thus the arbitrator has substantial discretion to keep the hearings on schedule and the courts will show great deference.

What liberty of contract do State parties to a bilateral investment treaty have to define broadly the category of “investments” that may be the subject of arbitration between one Contracting State and an investor of the other? The arbitral tribunal in Romak S.A. v. Republic of Uzbekistan (PCA Case No. AA280, available at Permanent Court of Arbitration website, www.pca-cpa.org) appears to fix limitations on such freedom of contract in its award, issued November 26, 2009, dismissing the Claimant’s claims on the basis that an account receivable arising from the sale of tens of thousands of tons of grain was not an “investment” under the Switzerland-Uzbekistan BIT.

One may readily agree that a one-off sale of goods transaction fails to qualify under the ordinary meaning of the term “investment,” normally lacking the basic and well-understood attributes of an “investment”: an economic contribution by the investor, a certain duration of the contribution, and an element of economic risk.

But what should be the outcome when the BIT defines “investment” to be “every kind of assets, and particularly. . . claims to money or to any performance having an economic value” ?

The Tribunal acknowledged that its mission, in observance of the Vienna Convention on the Law of Treaties Article 31(1), was to “resort to the ‘ordinary meaning’ of the terms of the BIT ‘in their context and in the light of its object and purpose.'” What seems curious in the reasoning of the Tribunal is that its point of departure was to seek out the ordinary meaning of “investment” — in the first instance, from Black’s Law Dictionary — notwithstanding that the Treaty established “investment” as a defined term, rather than turn immediately to the ordinary meaning of the words used in the definition. The central definitional phrase — “every kind of asset….” — appears to offer relatively clear guidance, albeit guidance that may be at loggerheads with evolving investment law conceptions of “investment,” and of what investment lawyers and arbitrators may regard as a sensible allocation of jurisdiction among State courts and BIT arbitral tribunals.

Just as provocative of debate is the Tribunal’s handling of the “object and purpose” and the “context” of the defined term “investment” in this BIT. The Tribunal refers to recitals in the preamble of the Treaty, wherein the parties declare that they are “[r]ecognizing the need to promote and protect foreign investments with the aim to foster economic prosperity of both States,” and “[d]esiring to intensify economic cooperation to the mutual benefit of both States.” The Tribunal thought it self-evident that these recitals contradict the notion that “every kind of asset” including a “claim for money” can sensibly include the account receivable arising from a large grain supply contract between a Swiss supplier and a State-owned Uzbek buyer. And the Tribunal took as guidance to the “context” of the BIT’s definition of “investment” the fact that, on the same day the BIT was signed, Switzerland and Uzbekistan also entered into an Agreement on Trade and Economic Cooperation. The Tribunal, making no specific findings, apart from the date of signature, as to whether, for purposes of Vienna Convention on the Law of Treaties Article 32((2), the Trade Agreement was an “agreement relating to the treaty which was made … in connection with the conclusion of the treaty,” nevertheless concluded that the two agreements, juxtaposed, raised an inference that sales of goods transactions were intended to be excluded from the BIT definition of “investments.”

The Tribunal also considered that it would be “manifestly absurd and unreasonable” (Vienna Treaties Convention Article 32(2)) to make a literal application of “every kind of asset” including a “claim for money,” as to do so would create a broad swath of concurrent jurisdiction, between domestic courts and international arbitral tribunals, over commercial transactions between private actors of one Contracting State and State entities of the other.
But the case stated for absurdity is not cast in terms of the Contracting States’ objectives — one can well understand why a developing country with an unstable judiciary might create such concurrent jurisdiction as an inducement to investment. Rather, the absurdity is said to lie in the prospect of a broad domain of concurrent jurisdiction over commercial matters — a conception that sales contracts “‘are not investment contracts, except in exceptional circumstances, and are to be kept separate and distinct for the sake of a stable legal order.'” (Award Par. 185, quoting from the ICSID Tribunal award in Joy Mining Machinery Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction, August 6, 20045, par. 58).

Perhaps more analytically convincing is the Tribunal’s reliance on the fact that the Swiss-Uzbek BIT adopted two arbitration alternatives from which the investor might choose: ad hoc UNCITRAL Arbitration and ICSID Arbitration. For that choice to be an effective one, the Tribunal reasoned, the “investments” qualifying for arbitration under either mechanism should be the same, and thus an interpretation should be avoided that would make “investments” eligible for UNCITRAL arbitration but not ICSID Arbitration. Correspondingly, ICSID jurisprudence was held to provide suitable inspiration and guidance (but not precedent in a stare decisis sense) for deciding the treaty interpretation issue here. Of course, here again there was at least one other way of looking at things: that ad hoc arbitration under the UNCITRAL Rules was included to ensure that disputes that would not jurisdictionally qualify for ICSID arbitration under the ICSID Convention conception of “investment,” but were intended to be arbitrable under the BIT, would find their way to an arbitral forum.

With these analytical premises in place, the Tribunal proceeded to rely on ICSID jurisprudence for its conclusion that “the term ‘investments’ under the BIT has an inherent meaning (irrespective of whether the investor resorts to ICSIDE or UNCITRAL arbitral proceedings) entailing a contribution that extends over a certain period of time and that involves some risk.” And the Tribunal took pains to insist that it was completely accepting of the notion that State parties to a BIT have freedom of contract to decide what scope to give to the term “investments” — but that the parties here had not, at least not in sufficiently plain terms, elected to treat sales of goods transactions as such. This latter declaration by the Tribunal might well have been included to anticipate that some readers would raise the concern stated in the first sentence of this commentary. And the reasoning in this award appears to underscore that, in the jurisprudence of arbitral jurisdiction under investment treaties, there is an unresolved tension for arbitrators between engaging in principled treaty interpretation and choreographing a “sensible” transnational system for the resolution of disputes.

The U.S. Third Circuit Court of Appeals has issued an important reaffirmation of certain core principles in the American jurisprudence of the New York Convention. In a “non-precedential” opinion that will nevertheless be very persuasive in future cases, the Court:
1. Declared, consistent with prior case law in other federal courts, that Convention Article V(1)(e)’s reference to “a competent authority of the country… under the law of which the award was made” refers “‘exclusively to procedural and not substantive law, and more precisely, to the regimen or scheme of arbitral procedural law under which the arbitration was conducted.'” Here, the Court held, the arbitration award was made in Singapore under Singapore arbitration procedural law, and so the order of a Philippine court that might have been construed as setting aside the award furnished no basis for a U. S. court to refuse enforcement.
2. The “public policy” defense to enforcement under Convention Article V(2)(b) extends only to “‘violat[ions] [of] the forum state’s most basic notions of morality and justice.'”
Here, the Court found, not only was there no violation of public policy by the District Cour proceeding with enforcement while set aside proceedings were pending in Singapore, but such action was fully consistent with the policy objectives underlying U.S. accession to the Convention.
Steel Corp. of the Philippines v. Int’l Steel Services, 2009 U. S. App. LEXIS 25404 (3d Cir. Nov. 19, 2009).

Does Chapter Two of the Federal Arbitration Act confer federal subject matter jurisdiction, in a federal district court at the seat of the arbitration, over a motion to vacate a Convention award?

A senior federal district judge in Chicago has raised this issue, sua sponte, in an action to vacate a Convention award that was brought to the federal court from an Illinois state court by a Notice of Removal. In a published order, the Court expressed doubt that federal subject matter jurisdiction exists, and invited the parties to brief the issue by December 9. Virginia Surety Co. v. Certain Underwriters at Lloyd’s, 2009 U. S. Dist LEXIS 110320 (N.D. Ill Nov. 25, 2009).

It may be assumed that the issue arises because the underlying arbitration, and the action for vacatur brought in the Illinois court, are between two parties of non-U.S. nationality. Thus the case falls within that anomalous lacuna of federal diversity jurisdiction: that an action between a French corporation and a German corporation, for example, must be brought in a state court unless a federal statute or treaty, or the U.S. Constitution, is involved.

Chapter Two of the FAA, enacted in 1970, was motivated by the desire to pass enabling legislation to adopt the New York Convention as a fully effective treaty of the United States within the body of domestic law. Section 201 of the FAA states that the Convention “shall be enforced in accordance with this Chapter.” But does this mean that Chapter Two’s jurisdiction-conferring sections only operate to confer jurisdiction over an action or proceeding that the Convention and/or Chapter Two recognizes expressly, i.e. an action to enforce an agreement to arbitrate or to recognize and enforce an award?

Parsing of the text of Chapter Two suggests that it is not so limited. Section 202 sets about to define when an arbitration agreement or award — not an action or proceeding — “falls under the Convention.” These are defined to be arbitral agreements and awards “arising out of a legal relationship…which is considered as commercial,” but excluding those relationships that are entirely between U.S. citizens unless that relationship involves property located abroad or some other substantial relationship with a foreign state.

Section 203 then confers subject matter jurisdiction on federal courts by stating that “any action or proceeding falling under the Convention” shall be deemed to arise under the laws and treaties of the United States.” There is no definition given of “action or proceeding falling under the Convention.” Had the drafters intended “falling under the Convention” in Section 203 to have a more limited scope than what “falls under the Convention” in Section 202 — i.e. had they meant only actions to enforce agreements or awards — one would think Section 203 would have been written in a different way. It could have referred, narrowly, to the actions and proceedings authorized by Chapter Two. The compelling inference from the consecutive repetition of “fall[…] under the Convention” in Sections 202 and 203 is that any action or proceeding authorized by law that involves a Convention agreement or award is within the subject matter jurisdiction conferred on the federal courts by Section 203 — and it would be for a federal court also to decide whether a particular action or proceedings relating to a Convention agreement or award does in fact exist as a matter of law.

The Court in Virginia Surety points out that Section 207 of the FAA expressly provides for an application in federal court to confirm a Convention award. The Court then goes on to note the absence of any similar express reference to an application to set aside an award.

The piece missing from the Court’s discussion is Section 208. It provides that Chapter 1 of the FAA shall apply “to actions and proceedings brought under this chapter” to the extent Chapter One is not in conflict with Chapter Two or the Convention.

But Section 208 is not necessarily dispositive. Strictly construed, Section 208 could be interpreted not as folding into Chapter Two the “actions and proceedings” mentioned only in Chapter One, but only as applying Chapter One procedures, residually, to actions and proceedings authorized by Chapter Two. But this interpretive dilemma perhaps does not need to be resolved. Instead, one may refer back to the jurisdiction-conferring Section 203. Notably, it speaks in terms of “actions and proceedings falling under the Convention” and not merely those actions and proceedings authorized by Chapter Two. If, as seems evident, Section 203 “actions and proceedings” includes more than the Section 206 motion to compel arbitration and the Section 207 motion to confirm an award, then the “more” almost certainly includes a motion to vacate, modify, or correct an award. And Section 208 would seem to be corroborative of that construction of Section 203, even if it is not unambiguously and autonomously the source of the incorporation of Sections 10 and 11 into Chapter Two.

Sections 10 and 11 of the FAA, providing the procedures and grounds to vacate, modify, or correct an award are not in conflict with Chapter Two or the Convention. Neither Chapter Two nor the Convention prohibits such a motion in regard to a Convention award. Indeed the Convention, while it does not state grounds or procedures for a motion to vacate, does provide in Article V(1)(e) that recognition and enforcement may be refused if an award has been set aside by a competent court of the country in which, or under the law of which, an award was made.

Chapter One of the FAA does not provide for federal subject matter jurisdiction over a motion to vacate, and so in a non-Convention case the motion may be made in federal court only if the parties to the vacatur proceeding have diverse citizenship under the diversity statute, or if a federal question claim was adjudicated in the award and thus could have appeared on the face of a well-pleaded federal complaint had there been no agreement to arbitrate. But in a non-Convention case this allocation of jurisdiction is simply one aspect of a Congressional judgment made when the FAA was enacted in 1925, to overcome hostility to arbitration in state courts not by divesting them of jurisdiction, but only by requiring them to apply federal law where the “commerce” requirement is met.

Chapter Two’s jurisdiction-conferring provisions reflect a policy choice to ensure uniform national application of the Convention and of its core undertaking to secure enforcement of international arbitral awards except of the very limited grounds for refusal or recognition and enforcement that are stated in the Convention. The policy decision very decidedly was the opposite of the one made in 1925 — uniformity is to be achieved by application of federal law by federal judges. Whereas vacatur of an award by a competent court at the seat of the arbitration is one of the grounds for denial of recognition and enforcement stated in the Convention, a construction of Chapter Two that places motions to vacate an award within the federal subject matter jurisdiction conferred by Section 203 is entirely consistent with the underlying goal of uniformity of treatment.

Further, a decision to the contrary could have serious practical consequences. Suppose a motion to vacate a Convention award is brought in state court and may not be removed under Chapter Two. The winning side may feel pressure to seek recognition and enforcement in the state court, to avoid multiple actions. Alternatively the winning side might move in federal court for recognition and enforcement. The state court vacatur movant then would ask the federal court to stay the proceedings until the vacatur action runs its course. If the stay is granted, the federal court effectively cedes control over the pace and the substance of the enforcement process to the state court. If the stay is denied, the federal court effectively adjudicates the vacatur action by permitting the award to become an enforceable federal judgment while the vacatur action may still be in the starting gate. Possibly this situation could be addressed by removal of the vacatur action based on principles of Supplementary Jurisdiction. But this is relatively uncharted territory: Removal would have to be under the general removal statute, not Section 205 of the FAA, and 28 USC 1441(a) permits removal of state court actions over which federal courts would have “original” (not Supplementary) jurisdiction.

Perhaps a bit of common sense helps to solve the problem as well. A motion to vacate a Convention award made by a losing U.S. party against a French party may be adjudicated in federal court, based on diversity if not on the jurisdiction conferred by Chapter Two. If the award is instead against a Canadian party and in favor of a French party, it simply makes no sense that the Canadian party should have lesser access to the federal courts on a matter related to the effectiveness of a Convention award than would a U.S. party. Indeed that outcome discriminates against the foreign party that consented to arbitrate in the United States, giving it different (if not necessarily less favorable) procedural rights under the New York Convention than a U.S. party would have. In this situation, then, the operative principle of statutory construction should be that legislation implementing a multilateral treaty like the New York Convention should be construed where possible so as not to accord different treatment to U.S. nationals and nationals of our treaty partners. This principle should trump the more general principle that grants of federal subject matter jurisdiction should be narrowly construed.