Archive for February, 2012

DC Circuit’s Iran Decision Spurns Invitation to Fashion Federal Common Law Expropriation Claims

Wednesday, February 29th, 2012

For those whose careers in international arbitration have origins connected to the Iran-US Claims Tribunal (Tribunal) — and I am one of many — yesterday’s decision by the federal court of appeals in Washington, allowing a US company to recover damages for expropriation from the Islamic Republic of Iran under the 1955 US-Iran Treaty of Amity, as interpreted under Iranian law, resonates like a fondly-remembered ballad from the American Songbook. (McKesson Corp. v. Islamic Republic of Iran, 2012 WL 615831 (D.C. Cir. Feb. 28, 2012)). I leave it to others to consider the potential for future US litigation against Iran under this venerable treaty, and for the bearing of a heavier jurisdictional burden by the Foreign Sovereign Immunities Act (FSIA), should Iran in the future take measures against US investors and investments. And I invite readers to read more elsewhere about the Court’s necessary and important preliminary holding that the “Act of State” doctrine did not shield Iran from US jurisdiction where its conduct, distinctly non-sovereign in the Court’s view, consisted of the takeover of the board of directors of a private company and the subsequent making of corporate governance decisions about dividends to the US shareholder.

Instead I will focus this post on the Court’s holding that the FSIA provides no basis for an implied cause of action based on violations of customary international law.

To summarize the case’s background very briefly: McKesson since 1960 had been in a joint venture with private parties in Iran in the dairy business. After the Islamic Revolution of 1979, the Islamic Republic took over the joint venture’s Board of Directors and effectively froze out McKesson. But in its claim in the Iran-US Claims Tribunal, the Tribunal held that the expropriation of McKesson’s property rights in the joint venture did not culminate until after the outside date (provided in the formative Algiers Accords) for actions taken by the Islamic Republic to be within the subject matter jurisdiction of the Tribunal. Thus McKesson achieved only a limited recovery in the Tribunal and, after the Tribunal’s final award, revived in federal court case against Iran. After more than 25 years of litigation since this revival of suit in 1986, and after four prior trips to the DC Circuit, McKesson obtained a final judgment from the district court for expropriation damages in excess of $43 million.

The important element of the DC Circuit’s decision that I highlight here is its ruling that no implied federal judicial cause of action for expropriation arises from customary international law or the FSIA.  The consequences of that ruling, which reverses the order of the district court, are considerable. Had the Court accepted the position of the district court that a right to sue for expropriation compensation is implicit in the certain exceptions to sovereign immunity under the FSIA, an area of international investment law essentially regulated by treaties and through arbitrations would have found a new domain in the federal court system.  This would have expanded the potential for investment claim litigation against foreign states with which the US does not have investment treaties.  Further, US investors with investment claims against State parties to investment treaties with the US that provide for arbitration might have brought lawsuits instead, thus raising the question of the exclusivity or arbitration under the treaties.

But it was not to be. The DC Circuit disagreed with the district court’s view that the FSIA was, like the Alien Tort Statute (ATS), not exclusively a jurisdiction-conferring statute but also one that provides a substantive cause of action for redress of a limited number of violations of customary international law.

In this regard the appellate court cited Supreme Court and federal circuit cases (its own and the 9th Circuit) for the position that the FSIA is “purely jurisdictional,” and found no evidence that Congress in enacting the commercial activity exception to sovereign immunity intended that the FSIA would also serve as a source of substantive rights. The ATS, the Court observed, was enacted against a very different practical backdrop — i.e. Congress’s desire to facilitate certain substantive causes of action such as tort claims by ambassadors — whereas the FSIA was enacted one year after the Supreme Court had (in Cort v. Ash) “signaled its reluctance to imply causes of action when faced with statutory silence.”

The Court also observed that given the substantial judicial discretion involved in fashioning common law causes of action from customary international law norms, it was strongly disinclined to allow the use of such discretion in regard to claims against foreign States — a matter in the Court’s view that is better left to Congress in view of the potential impact on foreign relations.

So expropriation and other international-law based property claims against foreign sovereigns will, for US investors, remain almost entirely in the domain of treaty-based arbitration. It is this road-not-taken, rather than the Court’s recognizing of a cause of action for the Plaintiff based on an old treaty interpreted under Iranian law, that should be of greatest interest to US foreign investors and their counsel.







E Mail Contracting and the “Agreement in Writing” Requirement of the New York Convention

Monday, February 20th, 2012

1999 was not so very long ago. And over the last dozen years some areas of the law have necessarily moved rapidly to keep pace with developments in technology and their impact on how business is conducted.  That has not necessarily been the case in every corner of the law of international commercial arbitration.

 Until a few weeks ago, counsel looking for guidance in US law on the “agreement in writing” requirement of the New York Convention could read, unhelpfully, a 1999 decision of the US Second Circuit Court of Appeals in Kahn Lucas Lancaster, Inc. v. Lark International, Ltd., 186 F.3d 210 (2d Cir. 1999). That case dated from an era in which international contracting often involved use of the fax machine – e mail was mostly with us, but transmission of sizeable documents via e mail in digitally compressed scanned electronic files was not.

The Court in Kahn Lucas held that the phrase “signed by the parties or contained in an exchange of letters or telegrams” (Convention Art. II) stated a condition for an enforceable agreement to arbitrate under the Convention, whether the agreement was based on (in the Convention’s words) “an arbitral clause in a contract” or a separate “arbitration agreement.” There was no enforceable agreement to arbitrate, the Kahn Lucas court held, because the arbitration clause in the buyer’s purchase order was not signed by the seller nor was it adopted by the seller in an exchange of letters or telegrams – notwithstanding that the parties did enter into a contract for the sale of goods.

But until this year, there was little guidance to the application of  the “agreement in writing” requirement to the contracting methods characteristic of contemporary international goods and commodities procurement – typically involving innumerable e mail exchanges, PDFs of contracts, e-mailed expressions of assent in lieu of signatures,  e-mailed amendments and counteroffers, and – notably in both cases discussed below – sellers’ “General Terms and Conditions” that, because they contain formal legal detail rather than commercial terms, often receive little or no direct attention in the e mail exchanges. 


Glencore Ltd. v. Degussa Engineered Carbons L.P., 2012 WL 223240 (S.D.N.Y. Jan. 24, 2012)




In Glencore v Degussa, the contract, made by email, was for sale and delivery of feedstock oil at the buyer’s Texas and Louisiana chemical plants. The buyer and its insurer brought suit in a Texas court claiming damages resulting for oil deliveries that did not meet specifications. Seller Glencore (a Swiss company) commenced arbitration on the same claims, against the buyer and insurer, relying on a provision in its “General Terms and Conditions” for AAA arbitration in New York.  Buyer and insurer refused to participate in the arbitration or to withdraw the court action, and Glencore petitioned to compel arbitration.

The question presented was whether the Glencore General Terms and Conditions (“GTCs”), seen by buyer only in late stages of the negotiations and received without comment, nevertheless were part of an “agreement in writing” between the Parties by virtue of the sequence and content of their e mail exchanges. The Court held that this was indeed the case, and granted the motion to compel arbitration.

Glencore had sent its standard sales contract by e mail. It did not include the GTCs but rather only a reference to them. The contract stated that the GTCs would govern, and that if this was contrary to buyer’s understanding then buyer should respond immediately by fax with specific points of disagreement. Buyer did not so, but instead two weeks later after Christmas-New Year holidays replied by e mail asking Glencore for only one change: to state its corporate name accurately. In ensuing e mail exchanges, Buyer asked for and received the GTCs, and did not comment.

Additional contracts were made for feedstock oil supply for ensuing calendar quarters. The contract process followed the same pattern: after delivery of seller’s standard contract, buyer requested minor changes, none of which referenced the GTCs.

The District Court considered that there were two separate analytical steps concerning formation of the arbitration agreement. First, there needs to be contract formation “under ordinary state law contract principles.” (The quotation comes from First Options v Kaplan, a domestic arbitration case, and so in its original context it refers to the applicable law of a state of the United States. But if the parties have different nationalities, this could readily mean the applicable contract law of a foreign State). Second, if there is an arbitration contract, it must in addition satisfy the “agreement in writing” requirement of the New York Convention.

As to the first, “state law,” contract inquiry, the Court found an agreement to arbitrate on two different theories — each under Texas’s version of the Uniform Commercial Code (“UCC”), which it found applicable based on a traditional grouping of contacts choice of law approach. Under the UCC, the buyer had objectively manifested its assent to the seller’s contract including the General Terms. Alternatively, under UCC §2-207(2) which concerns proposed additional terms to an existing contract between merchants, the arbitration clause became part of the contract because it did not “materially alter” the commercial agreement — under a legal standard that treats as a “material alteration” a term that would “impose surprise or hardship” were it included in the contract without having been specifically discussed.

Turning next to the question whether the Convention’s “agreement in writing” requirement was satisfied, the Court first observed that this requirement imposes a more stringent test that the UCC standards of contract formation. To illustrate this point, the Court noted that incorporation of additional terms under UCC 2-207(2) is essentially presumptive absent special circumstances, and that the presumptive inclusion does not satisfy the Convention’s alternative criteria of signature of “an exchange of letters of telegrams.”

Here, the Court held, the “exchange” requirement of the Convention was satisfied because the arbitration clause was incorporated by reference in the contract when it was sent, the buyer replied asking for other changes but not mentioning the GTCs, the buyer further confirmed that the seller’s contract was the agreement by referring to it as such in e mail communications about its parent company’s payment guaranty, and, finally, there was a specific request for delivery of the GTCs and delivery of same followed by no comment and contract discussions for new contracts in subsequent calendar quarters.

Copape Produtos de Petroleo Ltda. v. Glencore Ltd., 2012 WL 398596 (S.D.N.Y. Feb. 8, 2012)



Copape v Glencore involved some different twists in the contract negotiations, and ultimately some differences in the Court’s approach (which notably included no reference to the Glencore-Degussa decision). Here the buyer was a Brazilian company that contracted with Glencore in Brazil through a Glencore affilate in Brazil.  The contract at issue was the fifth between the parties, and in each of the four prior contract negotiations by e mail Glencore had sent it standard contract referencing the Glencore GTCs, without buyer ever requesting a copy. The fifth contract’s negotiation began with an indicative offer by Glencore that referenced its standard contract.  The buyer replied that the contract would be governed only by the Glencore GTCs insofar as buyer specifically approved them. As the exchange of e mails t progressed, Glencore eventually sent the standard contract that referenced its GTCs. But buyer never requested a copy of the GTCs, and in the final exChange of e mails Glencore wrote “Other terms and conditions remain unchanged” and buyer replied “OK.”

After buyer allegedly breached the contract, buyer commenced suit in Brazil. Glencore commenced an ICDR arbitration, buyer moved in federal court in New York to enjoin the arbitration, and Glencore cross-moved to compel arbitration.

In contrast to the two-level approach taken in Glencore-DeGussa, the distrIct court in Glencore-Copape considered that, even though jurisdiction was based on the New York Convention,  the court was presented with only “a single question — whether Copape ever became bound by the arbitration clause…” and that the law governing this question was “the federal law of arbitrability,” law which the court said includes “general principles of contract law including the Uniform Commercial Code.

This brought into play, as in Glencore-Degussa, Section 2-207(2) of the UCC.

As we have seen, the approach of that Section is to avoid having an acceptance that contains proposed additional terms operate as a counter-offer only. And it further provides for presumptive incorporation of the proposed additional terms unless the party who made the original offer shows that one of three situations exist: the offer strictly prohibited additional terms, or the additional terms make a material alteration, or objection to the added terms is made within a reasonable time.

Thus an arbitration clause could readily become binding under the UCC without either the signature or the “exchange of letters or telegrams” required by the New York Convention. If the clause is contained in a set of proposed additional terms, and no timely objection is made in response, the UCC recognizes the silence as acquiescence, while the Convention evidently does not.

Whereas the court in Glencore-Copape did not discuss the potential divergence between UCC and Convention criteria for a binding agreement to arbitrate, it is helpful to note that the further e mails dispatched by Copape with reference to Glencore’s GTCs would appear to satisfy the “exchange” requirement of the Convention. Critically: (i) Copape raised objections to certain other provisions of the Glencore standard contract but did not object to the provision incorporating by reference the GTCs; (ii) when Glencore e mailed what were intended at the time as final commercial terms, it wrote “other terms and conditions remain unchanged” and asked Copape to “reconfirm by return,” and (iii) Copape replied “OK.”.  And while the court states that this would have been sufficient to find a duty to arbitrate, the court then noted that after further exchanges about business terms and timing, Glencore revised and re-sent the standard contract and Copape confirmed acceptance of it (presumably be e mail).

Although the Glencore-Copape decision, unlike Glencore-DeGussa, fails to take note of the Convention’s “agreement in writing” requirement as a separate and distinct prerequisite to finding an enforceable agreement to arbitrate in a case falling under the New York Convention, Copape does not in the final analysis stretch the limits of “exchange of letters or telegrams” to include the kind of silent acquiescence/contract by estoppel that is permitted by UCC 2-207(2).  This is simply a case of incorporation of the arbitration clause by reference to General Terms and Conditions, with a responsive e mail expressly accepting the contract that references the General Terms, among which is the agreement to arbitrate that the buyer could have, but elected not to, become specifically aware of.


Concluding Remarks

It is evident from the two decisions that the Convention’s requirement that the arbitration agreement be “contained in” a written exchange, as understood in New York federal courts, does not require that arbitration be mentioned in the communications, but only that arbitration be part of the documentation referenced in the communication. What is however troublesome in the Glencore-Copape decision is that it may be read to imply that in a US federal court the “agreement in writing” requirement presents an issue of federal common law of contracts derived from uniform state law, i.e. the UCC. That should not be the case. The Convention’s “agreement in writing” requirement, and the term “contained in an exchange of letters or telegrams,” as treaty language, should have a uniform  whas applied to particular facts, using established principles of treaty interpretation, and taking into consideration decisions of foreign and international tribunals, the opinions of leading commentators, and transnational sources of commercial principles.

An examination of the “agreement in writing” requirement under such transnational principles is beyond the modest scope of the post.  But US courts should not fail to consider them. There is no indication in the New York Convention that Contracting States are meant to reference only their own domestic law of contractual consent when deciding whether an “agreement in writing” to arbitrate exists in proceedings to compel arbitration.



US Second Circuit’s View of “Evident Partiality”: Out of Synch With International Practice?

Wednesday, February 8th, 2012

A tale from the Second Circuit: Two reinsurance executives regularly sitting as arbitrators were appointed, respectively, as party-appointed arbitrator and “umpire” (presiding arbitrator) in a reinsurance arbitration. While the case was pending but before the hearing, the same individuals were appointed, again as party-appointed arbitrator and umpire, in a second arbitration that bore certain relationships to the first. There was a similar but not identical issue of contract interpretation. There was a common witness whose testimony was important in each case. And there was a business connection, essentially successorship, between Claimant in Arbitration 1 and Respondent in Arbitration 2. These arbitrators elected not to disclose their appointments in Arbitration 2 to the parties in Arbitration 1.

After the Award in Arbitration 1, the loser learned of Arbitration 2, moved to vacate the award in a New York federal district court based on “evident partiality,” (FAA Section 10(a)(2)), and obtained the vacatur order. But last week, the US Second Circuit Court of Appeals reversed, holding that “evident partiality” depends upon objective evidence of bias, and that there no such evidence on the facts of this case. (Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 2012 WL 335772 (2d Cir. Feb. 3, 2012)).


The Second Circuit declined to adopt any particular criteria by which to evaluate allegations of bias. But the Court did find “useful,” but not “mandatory, exclusive, or dispositive” considerations such as


(1) the extent and character of the personal interest,pecuniary or otherwise, of the arbitrator in the proceedings; (2) the directness of the relationship between the arbitrator and the party he is alleged to favor; (3) the connection of that relationship to the arbitrator; and (4) the proximity in time between the relationship and the arbitration proceeding.”


However the Court did fashion a legal standard of sorts that will probably be cited often, stating: “[A] court must focus on the question of how strongly the relationship tends to indicate the possibility of bias in favor or against one party, and not how closely that relationship appears to relate to the facts of the arbitration.”

The Second Circuit framed the question presented as whether “the failure of two arbitrators to disclose their concurrent service as arbitrators in another, arguably similar, arbitration constitutes ‘evident partiality’ ….”, But the Court devoted relatively sparse attention to the implications of the commonalities between the cases. And one might have hoped for a more searching discussion of the ways in which pre-disposition to particular result, formed in an undisclosed second arbitration, might possibly constitute evidence of bias.


While essentially accepting the Distirct Court’s view of the relatedness of the two arbitrations, the Court observed that “the fact that one arbitration resembles another in some respects does not suggest to us that an arbitrator presiding in both is somehow therefore likely to be biased in favor of or against a party. And in support of this position the Court cites “Cf.” (i.e. by analogy) a remark of US Supreme Court Justice Anthony Kennedy to the effect that “the fact that the same judge presides over related cases ordinarily does not suggest that judge is biased.”

But the Court did not address or even acknowledge the imperfections in extending that analogy to commercial arbitration.

Suppose US District Judge X was presiding over multiple related but unconsolidated cases involving the same Ponzi scheme, and in each case was hearing claims of different investors, against the same investment manager, concerning that investment manager’s due diligence in regard to the same investment vehicle. Most observers would presumably agree there is no issue of judicial bias and no issue of procedural unfairness. The fact that the judge will, in each case before her, be influenced by evidence and legal argument in each of the cases is a known and assumed systemic risk of litigation. But that risk is offset by the public nature of federal court litigation, including full electronic access to the dockets in each case. Competent counsel may monitor the progress of each case and, indeed, by judicial process may obtain the evidence in the related cases, and have adequate opportunity to credit or discredit that evidence.

The privacy of related commercial arbitrations results in an entirely different dynamic. If not made aware of a pending related proceeding before the same arbitral tribunal, or one or more arbitrators in common to the two separate tribunals, a party is in no position even to assess the risk of that the arbitrators will develop a pre-disposition in the course of Arbitration 2 on issues central to resolution of Arbitration 1. 

Does this mean that the Second Circuit came to the wrong conclusion in Scandinavian Re? Not necessarily, especially under existing American law.

The American law concept of “evident partiality” is mainly albeit not exclusively focused on the relationships, personal and economic, between the arbitrator and the parties or their counsel. The Federal Arbitration Act does not distinguish, as international arbitration rules do, between “independence” and “impartiality.” Lack of impartiality, as it is widely understood under international arbitration rules, and in international arbitral practice, would include, for example, an arbitrator forming a judgment on crucial issues based upon her own fact investigation or her own legal research – especially if the results of such investigation or research are not disclosed to the parties during the proceedings so that they have an adequate opportunity for comments.

The arbitrator who fails to disclose her appointment in related Arbitration 2 to the parties in Arbitration 1 does not reveal any bias by the omission, but she does fail to alert the parties to the risk that an issue will be pre-judged by her and that she will seek to influence her fellow arbitrators in Arbitration 1 based on what she heard and read in Arbitration 2. Assuming Arbitration 2 is a private proceeding, the parties in Arbitration 1 proceed in ignorance of the fact that probative evidence and/or relevant legal argument is being presented to a member of the tribunal (or in the Scandinavian Re case, two members) in another case.  If the arbitrator, acting in an unbiased fashion in Arbitration 2, is persuaded by the evidence, legal argument, or witness credibility of a party positionally aligned with a party in Arbitration 1, the arbitrator has an undisclosed pre-disposition.  The election not to disclose the pre-disposition, prior to the award in Arbitration 1, implies that the arbitrator intends to deprive the party in Arbitration 1 who is disadvantaged by the pre-disposition of the ability to effectively persuade that arbitrator and the other members of the tribunal to adopt the opposite view. The arbitrator who in this fashion covertly subverts the what may be called the transparency of the arbitral decision process —  i.e. the  shared but often unstated assumptions that the tribunal will render its decision based on the record developed by the parties — may, on this view, be found to have been “evidently partial” if the undisclosed pre-disposition relates to a material matter.