Today’s topic is the power of the international arbitrator, or lack of it, to issue an anti-suit/anti-arbitration injunction in a final award.  Assume the parties have a commercial contract, and that an arbitrable dispute has arisen over whether Party A may as a remedy for a default foreclose upon common shares owned by Party B. Party B commences the arbitration to block the foreclosure.

In the years leading up to the arbitration, Party B had also sought related provisional and final relief from courts in the US and abroad and in some cases had pursued appeals when relief was denied. Party A, claiming harassment, asks the arbitrators, as a species of final relief, to broadly enjoin Party B and its officers and directors and shareholders from bringing any more proceedings against Party B, in any forum, relating to the contracts between A and B. The Tribunal grants the requested relief to the extent of enjoining prosecution of any such proceedings by any such persons until the monetary portion of the award (substantial attorney and arbitrator fees) is satisfied by Party B.  (The enjoining of non-parties to the arbitration is a separate issue not treated in this Commentary).

There could be three principal sources of power, potentially, for the arbitrators to issue this anti-proceedings injunction. One would be the agreement of the parties. Another, the rules of arbitration that govern the proceedings. A third, possibly, the arbitration law at the seat, i.e. a statutory mandate. Or, finally, judge-made arbitration law at the seat recognizing the powers of arbitrators to sanction party misconduct.

Assume the agreement of the parties and the arbitration rules permit arbitrators to grant any appropriate form of equitable relief. Is that sufficient power for the permanent anti-proceedings injunction described here?  I submit it is not. It seems right that an arbitral tribunal should have power during the course of its proceedings to protect the jurisdiction conferred upon it by the parties. Thus an arbitral antisuit injunction against parallel litigation between the same parties on the issues before the tribunal should be a perfectly legitimate interim measure.

But the injunction here described does not fit this model. First, it purports to enjoin the commencement of new arbitrations under the arbitration agreement. Thus it is a partial abrogation of the parties’ arbitration agreement. At a seat where national arbitration law provides that arbitration agreements shall be enforced, abrogation of the agreement by an arbitral tribunal other than on grounds provided in the lex arbitri exceeds the powers of the tribunal. Under the Federal Arbitration Act, the agreement to arbitrate must be enforced save upon such grounds as exist for the revocation of any contract. Under the New York Convention, the agreement must be enforced unless it is null and void, inoperative, or incapable of being performed. Overzealous litigation does not fit within any of these categories.   Further, the rules of arbitration adopted by the parties, and/or the lex arbitri, will typically provide that it is not inconsistent with the agreement to arbitrate for a party to seek a judicial provisional measure in an arbitrable dispute. This anti-proceedings injunction abrogates the parties’ arbitration agreement in this respect as well.

What about the “inherent” power of the tribunal to regulate the conduct of the parties appearing before them? While the existence of such power is widely recognized, the injunction described here begins to take effect only after issuance of the final award. Of course, a “sanction” in the form of a cost allocation in the final award is perfectly acceptable. But that is justified  because the rules or lex arbitri or the contract empower the tribunal to allocate costs.  This injunction has no conduct-regulatory purpose even as to future arbitrations. Its purpose is to induce compliance with the award, as demonstrated by its temporal scope, i.e. until payment of the monetary portion of the award. It is an enforcement tool, and it therefore raises squarely the question whether arbitral tribunals may include in a final award provisions calculated to make their awards self-enforcing.

If the power of arbitrators to secure the enforcement of their own awards were widely recognized, we would routinely see final awards that impose an accumulating monetary sanction for each day of non-payment of a damages award.  But those awards do not exist, to this writer’s knowledge.

Why? First, usually it will be clear that the parties agreed to arbitrate their disputes, but not to arbtrate the implementation of the outcome of the disputes. This is most explicit where the arbitration clause provides in terms that the award may be enforced in a court of competent jurisdiction. The parties have made a clear allocation of power: arbitrators resolve disputes; courts implement the solutions. Second, national arbitration laws like the FAA, and international agreements like the New York and Panama Conventions, implement the same allocation of powers. They provide that the award shall upon recognition become a judgment, and then shall be enforced as would a judgment. In US  federal courts, money judgments are to be enforced in accordance with the judgment enforcement law of the State where the Court sits. New York’s money judgment enforcement statute (CPLR Art. 52) does not provide for anti-proceedings injunctions to coerce compliance with money judgments.

An arbitral injunction having this scope was actually entered in a case in New York in which this author now has post-award, post-confirmation involvement — certainly not to relitigate the issue under discussion. But the exercise of power in this instance results in part from a conflation of judicial and arbitral power, a conflation all too prone to occur when parties select experienced courtroom advocates and jurists with relatively little grounding in arbitration law and practice to sit as arbitrators. Parties who select arbitrators without due regard for their expertise concerning the allocation of power between courts and arbitrators risk obtaining anomalous results like this one. 

Numerous federal district courts and a handful of federal courts of appeals have played a part in the ongoing investment treaty arbitration between Chevron Corporation and the Republic of Ecuador. They have entertained and for the most part have granted discovery applications addressed to non-parties residing in the United States, made pursuant to 28 U.S.C. Section 1782. (For the latest installment known to this writer, see In re Applications of the Republic of Ecuador, 2011 WL 4434816 (N.D. Cal. Sept. 23, 2011)). This surfeit of judicial decisions from different district courts in different parts of the country, but involving the same statute and relating to the same international arbitration, warrants some examination to see if a distinctive jurisprudence has evolved whose principles are identifiable and transferable beyond the context of the Chevron-Ecuador case. Based on a review of many but certainly not all the decisions, it appears that for the most part the review of the applications is mechanical and proceeds much in the same fashion as a motion in domestic litigation to enforce a subpoena against a non-party – with a focus on the statutory criteria, first, and then on relevance of the information sought and the burden on the non-party.  But at least a few principles unique to, or more prominent because of, the international arbitration context, can be derived and deserve mention:

1.     The scope of permissible discovery will not be more restrictive than what U.S. courts permit in U.S. litigation merely because the evidence is sought for use in an international arbitral tribunal. Arguments that arbitral tribunals generally permit more narrow document production will not find favor.

2.     Claims of interference with the arbitral tribunal’s control over the discovery process will not receive a warm reception unless there has been an expression of position by the arbitral tribunal. If the arbitral tribunal has not issued any orders that clearly stake out its position concerning the procurement of evidence from non-parties, courts are likely to regard such claims of interference with arbitral control as speculative.

3.     “Bad faith,” even though not expressly identified by the U.S. Supreme Court as one of the discretionary factors to be considered by the courts, will indeed be so considered. Courts will be sensitive to claims that the discovery is sought for tactical reasons to harass non-parties in order to exert pressure on a party to the arbitration, and will examine closely the applicant’s claims that the requested material is indeed relevant to the issues framed in the arbitration.

4.     A request for “reciprocal discovery,” lodged against the Section 1782 applicant by the non-applicant party, will not be routinely accepted on the basis of fairness or proportionality, but will instead itself have to face scrutiny according to the mandatory and discretionary factors governing a Section 1782 application.  Thus, such a request for reciprocity may fail simply because the discovery sought is indeed obtainable in the arbitration.

5.     An application for Section 1782 discovery will not be seen to be in conflict with the rules the arbitral tribunal might apply, notably Rule 3.9 of the IBA Rules of Evidence, concerning recourse for assistance from the tribunal to gather non-party evidence that a party cannot obtain “on its own.” The phrase “on its own” in the IBA Rule is seen as referring to a judicial process such as Section 1782 that permits a party to obtain non-party evidence without necessarily having the support of the arbitral tribunal, and so Section 1782 discovery is not in conflict.

It is worthwhile also to be reminded that the availability of Section 1782 in connection with private commercial arbitrations remains uncertain.  The courts have little difficulty, on the other hand, concluding that an arbitral tribunal constituted pursuant to an international agreement like a bilateral investment treaty is a “foreign or international tribunal” under Section 1782, a conclusion reinforced, in the view of some judges, by a BIT tribunal’s use of the UNCITRAL (United Nations) arbitration rules.  

It is the first day of the new hockey season in North America, a suitable occasion for Arbitration Commentaries to bring you content inspired by our neighbors in the Great White North.

By now the news will probably have reached you that the highest appellate court of the province of Ontario, the Ontario Court of Appeal, earlier this week affirmed a first instance court’s ruling that denied a motion to vacate in part a NAFTA arbitral tribunal’s award against the Government of Mexico and in favor of the US multinational Cargill, Inc. (Mexico v. Cargill, Inc., 2011 ONCA 622 (Oct. 3, 2011)). In case you are learning about the case for this first time here, I report very briefly: Mexico established trade barriers to protect its cane sugar industry from competition from Cargill and other US suppliers of high fructose corn syrup. In Cargill’s NAFTA arbitration case under the UNCITRAL Rules, Cargill claimed and was awarded damages in two categories: lost profits of its Mexican affiliate, and lost profits on trans-border sales from Cargill in the US to the Cargill Mexican affiliate. The Tribunal rejected Mexico’s position that the second category of damages were not sustained by Cargill as an investor in relation to its investment; the Ontario Supreme Court (first instance) agreed with the Tribunal, and in this decision the Ontario Court of Appeal also agreed. Because the arbitration took place in Toronto under the UNCITRAL Rules, rather than under the ICSID Convention as NAFTA also permits, there was the opportunity for a motion to vacate under Ontario’s version of the UNCTIRAL Model Law on International Commercial Arbitration. Mexico took the position that the award of damages for Cargill’s lost US sales from the US to its Mexico affiliate were “beyond the scope of the submission to arbitration” (Model Law Article 34(2)(a)(iii)).

The issue to which the Court of Appeal devotes the most time and energy, and which will be of greatest transnational interest, is: what is the scope of review in a national court, applying the Model Law, when presented with a motion to vacate the award on jurisdiction of an UNCITRAL Rules investment treaty arbitral tribunal? The Ontario Court of Appeal held that the scope of review is “correctness” but precisely what this means and what it transnational implications are is open to debate and is the subject of this commentary.

Under American arbitration law, an arbitral tribunal’s decision concerning its own jurisdiction is reviewed de novo, without deference, unless the parties clearly and unmistakably agreed to submit the jurisdiction issues to arbitration. These American law rules are grounded in the notion that arbitration agreements are simple bilateral contracts between commercial parties, and that their existence and validity are suitable for courts to decide independently (without deference) because the decisions involve ordinary state law contract principles that courts apply every day. Equally, issues of the scope of disputes that are arbitrable fall normally within the province of courts to resolve independently, albeit with the benefit of a presumption based on the “pro-arbitration policy” that the US Supreme Court has engrafted on the FAA. But one reason for permitting courts to decide scope issues independently, even on review of an award, is that construing an arbitration clause normally should not be that different from construing other contract language, and with the benefit of contract interpretation jurisprudence this exercise usually will be well within the judicial “wheelhouse.”

But how would or should these rules apply when and if the Government of Mexico comes before a US court to vacate the award of a NAFTA arbitral tribunal in favor of a Canadian investor, on the ground that the damages awarded did not involve the investor’s investment in Mexico, and therefore were outside the jurisdiction of the tribunal?

What is immediately apparent — but the Ontario Court of Appeal does not confront directly — is that the NAFTA arbitral tribunal has an enormous comparative advantage over a national court in regard to the skills and knowledge applicable to deciding this “jurisdiction” question. The question is not remotely comparable to what passes for an arbitral jurisdiction issue in commercial arbitration. It involves fundamental issues of investment law, as to which depth of knowledge is presumably a main criterion for selection of the arbitrators (both in the treaty partners’ fashioning of their rosters, and in the parties’ case-specific choices). The Ontario decision reflects that the Tribunal’s decision on the jurisdiction issue brought into play NAFTA’s text, drafting history, and subsequent practice and understanding among the treaty parties; the Vienna Convention on the Law of Treaties; NAFTA arbitral case law dealing with similar issues of the territoriality vel non of claimed investor losses; principles of international law; and fact-intensive consideration of how Cargill structured its operations to sell high fructose corn syrup to food and beverage producers in Mexico. As appears often to be the case in investment arbitration, what is called jurisdiction is actually the heart of the matter — “the merits” — because the main issue is not what happened, nor whether the investor was harmed, but whether there is redress under the investment treaty for the harm that occurred as a result of the measures taken by the host State.

Why, then, would the Ontario court opt for a standard of review (“correctness”) that treats the NAFTA tribunal’s decision of a jurisdiction issue with any less deference than it would treat that tribunal’s award “on the merits”? The Ontario court’s opinion devotes considerable space to quotation of the UK Supreme Court’s decision in Dallah v Ministry of  Religious Affairs of the Government of Pakistan, wherein that Court maintained that an international arbitral tribunal (at least when it is a private tribunal in a commercial case) is normally entitled to no deference in its own determination of its own jurisdiction to adjudicate.  But Dallah was a commercial arbitration case, and the jurisdiction issue was a relatively straightforward one of whether the Pakistani ministry as a non-signatory of the agreement was bound to arbitrate. That is the kind of contract-agency law issue on which parties normally would expect judicial control of arbitral jurisdiction.

The Ontario Court of Appeal holds that the proper standard of review of the tribunal’s determination is “correctness,” and not (as proposed by Cargill) “reasonableness.” But to this reader/writer — a Canadian in spirit but not in Bar admission — there is less than satisfying clarity on what “correctness” means. The Court says that a court hearing a motion to vacate under the Model Law must be careful to determine if it is reviewing “a true question of jurisdiction,” because “courts are expected to intervene only in rare circumstances where there is a true question of jurisdiction.” But that does not seem to meaningfully limit the kinds of complicated questions involved in jurisdiction decisions of investment tribunals.

The Court gives as a hypothetical example of a jurisdiction ruling in a NAFTA case that could be vacated as incorrect a purported award to a Brazilian citizen, one who is manifestly not eligible to arbitrate as she is not a citizen of any of the treaty parties. But whereas the tribunal’s decision that Cargill’s lost US sales to its Mexican affiliate were within the tribunal’s jurisdiction to award was upheld as “correct,” does this not perhaps imply that an opposite decision by the tribunal would have been incorrect? The Ontario court does not appear to intend that we should understand its decision in this way. It rejects “reasonableness” as a standard of review, but one gets the clear sense that if the tribunal had ruled that Cargill’s distribution arrangements did not suffice to bring its lost US sales to its Mexican affiliate within NAFTA’s coverage, that outcome also would not have been set aside.

Rather, what “correctness” appears to mean is that the award will only be set aside if the error is plain on the face of the award in relation to the plain meaning of the NAFTA. It is akin to the “clerical or computational error” correction rules of most international arbitral institutions and national statutes: If the award adds two and two and gets to five not four, that outcome is entitled to no deference and may be changed by a competent court.

The reason such a rule makes sense is that it makes vacatur for jurisdictional error depend on criteria that a national court is no less competent than a NAFTA tribunal to apply. And so we may, without taking too much liberty, conclude that the transnational lesson of the Cargill decision from Ontario is that jurisdiction determinations of investment treaty tribunals, when they are subject to vacatur under an arbitration statute based on the UNCITRAL Model Law, shall not be vacated if the jurisdiction decision was based on criteria within the core competence of an investment treaty tribunal. The Ontario court says that the question whether lost capacity in Cargill’s US plants constituted damages by reason of Mexico’s breaches of treaty obligations “is a quintessential question for the expertise of the tribunal, rather than an issue of jurisdiction.” But one could equally say that the question was whether the damage was sustained by an investor in relation to its investment and so it was indeed an issue of jurisdiction. The key element is that this issue was in the tribunal’s “wheelhouse”! It is unhelpful to tack on an ill-defined dichotomy between jurisdiction and the merits in the context of investment arbitration.

In the US, perhaps happily, such a “core competence” principle would not be needed, because we have the First Options-derived rule that when parties agree to arbitrate according to rules that permit arbitrators to decide upon their own jurisdiction, then judicial review in the context of a vacatur motion of the award on jurisdiction is as limited as review of any other issue decided in an award. The UNCITRAL arbitration rules of course give arbitrators such power and US courts (notably the Second Circuit in the Chevron-Ecuador saga) have treated BIT-based arbitration under those rules as an agreement to “arbitrate arbitrability.”  The ICSID Additional Facility Arbitration Rules confer similar power. So any investment treaty arbitration award on jurisdiction that one could reasonably imagine being the subject of a motion to vacate in a US court would fall within the limited scope of review rule of First Options and its progeny.  Nevertheless, it is helpful to US practitioners, as well as those abroad, to take away from the Cargill case the useful lesson that jurisdiction determinations of investment treaty tribunals that involve issues within the core competency of the tribunal shall be vacated only where it can be said that the error is one that the reviewing court has equivalent competency to detect and correct.

Today Arbitration Commentaries briefly notes a new decision from a respected federal district judge in Houston, Texas, holding that a sale of goods contract that was between two US companies, but which provided for discharge of the shipped goods in a foreign port to be designated by the buyer created a sufficient international nexus to make the New York Convention applicable to the contract’s arbitration clause. (Tricon Energy, Ltd. v. Vinmar International, Ltd., 2011 WL 4424802 (S.D. Tex. Sept. 21, 2011).

The issue is litigated from time to time, especially when one party sees a tactical advantage to holding award confirmation or vacatur proceedings in a state court, and federal jurisdiction based on diversity of citizenship would not exist.

Curiously the Convention itself does not directly address when an award between domiciliaries of the same Convention State is governed by the Convention. This is expressly left to domestic law by Article I(1): “[The Convention] shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.” Chapter Two of the Federal Arbitration Act (FAA) in Section 202 provides that an agreement or award entirely between US citizens “shall  be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.”

The Court in Tricon, calling the Section 202 standard “expansive,” had no difficulty in concluding that where the entire contracted product volume was to be delivered abroad, the award was a Convention award.

But suppose the contract had provided for a series of deliveries, most of which were to US ports? Suppose further, or alternatively, that the dispute arose over the deliveries scheduled for US rather than foreign ports? Perhaps the most critical words in Section 202 are “reasonable relation with one or more foreign states.” It is doubtful that Congress intended for the Convention’s coverage to extend to an entirely domestic dispute merely because a portion of the contract’s scope involves performance or property abroad. Nor is there any reason of arbitration policy why coverage should be so extended. If a contract involves a series of instances of performance, some of which have will occur abroad, it makes sense to look at the performance giving rise to the dispute as the relevant contract for purposes of the Convention’s coverage. (See,  e.g., Amato v. KPMG LLP, 433 F. Supp.2d 460 (M.D. Pa. 2006),  in which US investors contracts with a US affilate of Deutsche Bank to provide a. Certain iinvestment strategy, but execution of the strategy on each transaction at issue in the case involved significant elements of foreign performance including the purchase of foreign securities and a swap transaction with a foreign taxpayer).