Many international followers of Arbitration Commentaries will have recently spent time reading, or reading about, the Judgment of the U.K. Supreme Court in the Dallah v. Pakistan case, where, applying French law (and transnational principles as incorporated therein) to the question of whether a foreign state as a non-signatory was bound by the arbitration agreement signed by a state-created entity, found that the answer to that question depended upon the “common intention” of the foreign state and the party demanding arbitration. (In the event, the Court determined — reviewing the question de novo despite the arbitral tribunal’s partial award confirming its own jurisdiction – that there was no common intention to submit disputes with the foreign state to arbitration, and that the final award granting $20.5 million in damages against the state therefore would be refused enforcement).
But this post is not so much about Dallah as it is about transnational convergence and diversgence in the law of arbitrability, as reflected in U.S case law. My text for today is a new decision from the U.S. District Court in Manhattan, holding that the Republic of Iraq, seeking damages relating to the corruption of the infamous U.N. Oil-for-Food Programme, may not compel arbitration, on a third-party beneficiary theory, under the arbitration agreement contained in the contract between the United Nations and BNP Paribas. (Republic of Iraq v. ABB AG, 2011 U.S. Dist. LEXIS 141766 (S.D.N.Y. Mar. 3, 2011)).
Iraq brought this lawsuit in the federal district court in 2008, and only after two years of litigation did it elect to proceed by arbitration and to file a motion to compel arbitration of its own claims. The arbitration clause in the U.N.-BNP Paribas contract (a contract governing BNP Paribas’s administration of Programme funds) provided for ICC arbitration in terms that led the court to conclude that neither side had manifested any intention for Iraq to be a third-party beneficiary of the arbitration agreement. Thus, the clause provided in pertinent part that arbitration would proceed unless there was amicable settlement “within sixty (60) days of after receipt by one Party of the other Party’s request for such amicable settlement,” and failing such settlement the case would be “referred by either Party to arbitration.” Whereas “Party” was defined in the contract to refer only to the U.N. or to the bank, the Court held that the plain language of the clause conclusively contradicted Iraq’s claim that it was an intended third-party beneficiary of the agreement to arbitrate.
The absence of any mention of third parties generally or Iraq specifically in the contract led the Court to conclude, firstly, that the parties had not agreed to arbitrate over the arbitrability of Iraq’s claims. The could be no “clear and unmistakable evidence” of such an agreement to arbitrate arbitrability where there was no contract between the disputants, no evidence that either signatory intended to arbitrate arbitrability with any third parties, and no evidence that the relationship between the non-signatory and one of the signatories was such that a duty to arbitrate arbitrability with the non-signatory could be inferred from the agreement to arbitrate arbitrability with the signatory. (In this regard the case serves as a useful reminder that, in some circumstances, such so-called “relational sufficiency,” generally a corporate relationship, plus close connection of the non-party’s claims to the contract, can lead to a conclusion under US law that arbitrability disputes with non-signatories must themselves be arbitrated.)
Turning then to the issue of substantive arbitrability of Iraq’s claims, the court first noted that this was a question of New York contract law. Under such law, the court found, third-party beneficiary status of a non-party in relation to the contract sought to be enforced depended upon the intention of the parties who had entered into the contract. And whereas the contract in question was the agreement to arbitrate, not the commercial contract in which that agreement was found, it was necessary to look at the intention of the parties to the arbitration agreement with respect to the arbitration agreement itself. Citing New York decisions that denied third parties the right to compel arbitration even where it was clear that they were intended beneficiaries of commercial terms of the contract, the court found the language of this arbitration clause, notably its use of the defined term “Party,” contradicted in clear terms any suggestion that any third party would have the right to invoke the agreement to arbitrate.
By deciding the case on these terms, the court’s decision did not need to address, and indeed barely alluded to, the issue of whether the true third-party beneficiary of the Oil-for-Food Programme was the Republic of Iraq, or instead the citizens of the Iraqi State.
Ultimately the instrumental test for deciding the arbitrability of claims with a non-signatory is the same in Republic of Iraq as it was in Dallah: the common intention of the parties as objectively manifested in the words of the agreement. The route to this conclusion was more circuitous for the Dallah court. As it was a UK court asked to refuse enforcement in the UK of an award made by an arbitral tribunal that had its seat in France, the Dallah court first had to determine what was meant by the language of the New York Convention and the 1996 UK Arbitration Act permitting refusal of enforcement if the arbitration agreement had been invalid under law of place where the award was made. Ultimately the UK Supreme Court accepted the agreed position of both parties experts’ that while the Convention and the Arbitration Act certainly required reference to French law as the law of the seat, this did not mean domestic French contract law or arbitration law, but rather transnational principles regarding the enforceability of arbitration agreements that have been incorporated into the French law of arbitrability by French courts and commentators. But the essential principle French law principle so stated, and applied by the UK Supreme Court, was that of the “common intention of the parties” as objectively manifested in their words and actions. The federal district court in Republic of Iraq, using New York contract law, arrived at the same destination, and certainly with less expenditure of analytical fuel.
In another respect however, the Dallah and Republic of Iraq cases show wide divergence between US and UK/Continental arbitration law and practice – over the matter of agreements to arbitrate arbitrability. Each of the decisions cites the US Supreme Court’s decision in First Options v. Kaplan, and its now-talismanic formula of “clear and unmistakable evidence.” But Dallah provides observers of American law with a useful reminder that the “clear and unmistakable evidence” formula, in its inception in First Options, was a test to determine what would be the scope of judicial review of an arbitrator’s decision that a claim was arbitrable. The Dallah court (in the lead opinion of Lord Mance) uses First Options in precisely that way, to support the conclusion that UK courts, when asked to enforce an award, would review the arbitral tribunal’s determination that it had jurisdiction de novo (“independently” in the word of Justice Breyer, repeated by Lord Mance) unless the parties had clearly agreed to arbitrate over jurisdiction, in which case the jurisdiction award should be treated like any other merits determination by the tribunal. But in US jurisprudence, the First Options formula has become a gateway formula, used by courts to decide whether to refer arbitrability issues to an arbitral tribunal – a tribunal that, if it has even been constituted, has not yet addressed the arbitrability issue.
That this has happened in the US is a byproduct of a litigation system that, even 86 years after the Federal Arbitration Act, has residual vestiges of hostility toward arbitration. Parties who have signed arbitration agreements routinely bring their claims in litigation despite the arbitration clause, seeking the advantages in court of broader discovery and appeal rights. These usually face, or at least believe they face, no adverse consequences other than dismissal/stay if a motion to compel arbitration succeeds. (However there is momentum behind the view that even where arbitrability was questioned in good faith, a judicial determination that the claims are arbitrable might lead to an award of damages by the arbitral tribunal for breach of the arbitration clause.) And parties named as Respondents in commenced arbitration proceedings have no compunction to respond by filing collateral litigation over the same claims or some subgroup of the claims in the arbitration that, they assert, are outside the scope of the arbitration agreement. If there are any court rules or statutes in the United States that require courts to dismiss such suits immediately upon presentation of a prima facie valid arbitration agreement between some parties and governing some disputes, I am not aware of them. As a result, pre-arbitration litigation over arbitrability is a cottage industry for lawyers in the United States, and a major obstacle to the efficiency of arbitral dispute resolution here. In contrast, both the UK and French systems, by statute, push a far wider swath of initial arbitrability decisions to the arbitrators, as is noted by Lord Collins in his concurring opinion in Dallah. French law apparently requires dismissal of litigation if a prima facie valid arbitration agreement may govern the dispute – something roughly equivalent to the ICC’s Article 6 (2) prima facie threshold for launching a case. The UK Act requires the arbitrability decision to be made by arbitrators unless both parties agree to have a judicial determination, or unless the arbitrators themselves ask the court to decide.
These are the fundamental differences that have prompted some American international arbitration practitioners to remark that “compétence-compétence” as it is known in Europe is essentially non-existent in the United States. And until courts and legislatures in the United States come to grips with this issue, litigation over arbitrability will continue to be an aspect of international arbitration in the United States that fosters an unfavorable image for US venues as potential seats of international arbitrations.