August 19, 2010

D.C. Federal Court Rejects Investor’s Section 1782 Petition As Circumvention of ICSID Tribunal’s Powers

As the debate rages on concerning the potential use of 28 USC 1782 to secure non-party discovery for use in international commercial arbitrations, rather little attention is paid to the fact that judicial assistance under section 1782 is a matter of discretion not of right, and that federal judges may not wish to interfere with the arbitral tribunal’s control over the proceedings.

Such reluctance to interfere figured prominently last week in the decision of a federal district judge in Washington to deny section 1782 relief, sought by the American claimant in an ICSID bilateral investment treaty (“BIT”) arbitration against the Republic of Kazakhstan. (In re Caratube Int’l Oil Co., 2010 U.S. Dist. LEXIS 81512 (D.D.C. Aug. 11, 2010)).

The Court devoted nearly no attention to the question of whether a tribunal constituted under the ICSID Rules, per the investor-1782 petitioner’s decision under the US-Kazakhstan BIT to have ICSID-administered rather than UNCITRAL Rules ad hoc arbitration, is a “foreign or international tribunal” under section 1782. The court proceeded directly to what it viewed as the critical questions: What had the parties agreed upon concerning discovery? And what was the position of the arbitral tribunal concerning the scope of discovery and where discovery fit into the procedural flow of the case?

On the first question — what had the parties agreed — the Court took note of the simple fact that the investor had opted for ICSID arbitration and therefore for dispute resolution in a forum where the “‘set[ting] (of) procedural rules for the arbitrators to follow,” is part of the “parties’ bargained-for expectations concerning the arbitration process.”

The court also noted that the petition was ill-timed, having been filed long after a discovery timetable had been fixed by the tribunal and, indeed, after the tribunal had resolved discovery disputes and ordered completion of discovery in four weeks.

The court further noted that ICSID Rule 43 puts the scope of disclosure in the control of the tribunal, and that the parties had additionally agreed that the IBA Rules of Evidence would serve as a guidelines for the discovery process. The court quoted at length Rule 3.8 of the IBA Rules (1999 version) which indicates that an application should be made to the tribunal to determine whether and how disclosure may be sought from a non-party. The court also read ICSID Rule 44 — vesting discretion in the Tribunal on all procedural matters not otherwise specifically addressed in the rules or by agreement of the parties — to have the same effect.

Thus the court concluded that while the section 1782 petition did not violate any judicial “exhaustion” rule, the ICSID and IBA Rules required or at least weighed heavily in favor of a request for permission of the tribunal to proceed under section 1782, and the investor “side-stepped these guidelines” by proceeding unilaterally.

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Investment treaty arbitration is a fertile ground for the judicious use by investors and States of the discovery opportunities afforded by section 1782. It is rather well-accepted that an ICSID tribunal is effectively a creature of an inter-governmental agreement and therefore is the kind of “tribunal” contemplated by section 1782. But whereas the arbitral body exists because the State parties, to the Washington Convention or a particular BIT or both, have ceded a part of the sovereign judicial function, it makes good sense and good policy that discovery should be the exclusive domain of the tribunal except as the parties may agree. One should expect to find investment arbitration parties making 1782 discovery a well-defined aspect of a proposed discovery program in the earliest stages of

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