Archive for September, 2013

US Law of Foreign Investment Retains Vitality Where BIT Is Absent

Monday, September 30th, 2013

The denunciation in early 2012 of the ICSID Convention by the Venezuelan government of the late Hugo Chavez left some US energy sector investors unaffected, as Venezuela had never seen fit to make a bilateral investment treaty with the United States that would have enable US investors to access ICSID arbitration via a US BIT. And in the absence of an investment treaty to channel disputes into arbitral tribunals, it was predictable that the nationalist economic policies of the Chavez government would attract some afflicted investors to try their luck bringing suits against Venezuela in US federal courts. For those of us who enjoy, as players and spectators, international law as it is applied in US courts, perhaps we can look forward to a new golden era of jurisprudential development in the courts. A case in point: the recent decision of a US District Court in Washington in Helmerich & Payne Int’l Drilling Co. v. Bolivarian Republic of Venezuela, 2013 WL 5290126 (D.D.C. Sept. 20, 2013).

From this decision we gain some helpful development of a handful of international law concepts, most notably the “direct effect in the United States” needed to invoke jurisdiction under the commercial activity exception in the Foreign Sovereign Immunities Act. Here, the plaintiff oilfield services company had seen fit to provide in its contracts with Venezuela’s state-owned petroleum companies that a certain percentage of the dollar value of its invoices would be payable in dollars to its account at the Bank of Oklahoma in Tulsa — unless  Venezuela elected not to so pay but instead to pay in Bolivars in Venezuela.  The District Court invoked the principle (from the Supreme Court’s 1992 Argentina v. Weltover decision) that the qualifying US effects of a foreign sovereign’s commercial activity outside the US must be proximately and logically connected but not necessarily important or substantial. But this principle was not necessarily sufficient, in the Court’s view, to resolve the issue in favor of “direct effects” based on the cessation of a stream of US dollar payments to a US bank account. To resolve the case on that basis would have required the Court to hold that the fact that Venezuela had indeed made dollar payments into the US account, even though having the option not to do so, meant there was a “direct effect” in the US when Venezuela terminated the contract. The Court instead opted for a less controversial avenue to finding “direct effect” in the US of commercial activity abroad. The contracts required the drilling company’s Venezuelan subsidiary to purchase an array of required equipment from particular US vendors in various US locations. These “third party effects,” the Court held were “direct” irrespective of the substantiality of the required purchases so long as these requirements were non-trivial.

On this basis the Helmerich & Payne plaintiffs can hope at least to prevail on their breach of contract claims, having established that Venezuela may be sued under the commercial activity exception to sovereign immunity. How they might fare on their expropriation claims is less certain. This decision also holds that the plaintiff Venezuelan subsidiary is deemed a Venezuelan national based on its place of incorporation and therefore may not invoke international law as the basis of an expropriation claim — with the Court finding the suggestion of a contrary position in the Second Circuit’s well-known Sabbatino case (307 F.2d 845 (1962)) to be an isolated instance that has not influenced customary international law toward its view that the nationality of the shareholders should be attributed to the foreign subsidiary where the foreign Government takes action motivated by the shareholders’ nationality. The Court also reserved judgment on whether the “Act of State” doctrine might furnish a merits defense to the expropriation claim.

The proliferation of BITs and the strategic deployment of foreign investment via countries who have BITs in place with the host state have diminished but not entirely pre-empted the role of US courts in resolving investment disputes. When a US Court has the opportunity to study with care international law principles that apply uniquely to the resolution of such cases in the courts, as is evident in the case here discussed, the analysis is worthy of our close attention.

How Shall We Prove Arbitral Corruption With “Abundant Clarity”??

Sunday, September 1st, 2013

Shall we applaud, or regret, the latest decision from a panel in the US Second Circuit Court of Appeals concerning the quality of proof needed to vacate an international arbitration award for “evident partiality or corruption”? (Kohel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, No. 12-3247-CV (2d Cir. Aug. 30, 2013). Shall we applaud the fact that an arbitral award survived a motion to vacate by the losing side, and see this as another heartening judicial vindication of the arbitral process and an admirable exercise in judicial non-intervention– even though the “process” in this case was an unreasoned majority decision of a three-member rabbinical tribunal operating with non-neutral party appointees and under no rules and no governing law? Shall we applaud a decision that announces a legal standard of “abundantly clear” proof of corruption and bias, and finds the proof in this case unacceptably murky because it consisted of nothing more than a hearsay report of one neutral bystander who claimed to have heard the presiding arbitrator state that the Claimant would have the decision it wanted in a few more days?

Or shall we regret the fact that this Second Circuit panel, even while repeating the settled proposition that proof of actual bias is not required and that objective facts warranting an inference of bias will suffice, seems to inject rigidity into that supposedly flexible standard by holding that the evidence of bias or corruption must be “abundantly clear,” indeed “clear and convincing”? Have we not seen a flurry of recent commentary urging flexibility in the standards applicable to proof of arbitral corruption, to take into account the offense against public policy that arbitral corruption represents, and the intractable difficulty of proving misconduct that is inevitably disguised and concealed? Why do we not see this theme in the Second Circuit’s decision?

I suggest this is not destined to be a landmark case in the jurisprudence of “evident partiality or corruption” as a basis for annulment under US law. The case against the presiding arbitrator rested on hearsay, and the arbitration itself was un-transcribed, depriving the courts of any direct look at the challenged chairman’s conduct. Those who hope for judicial sensitivity to the difficult task of proving arbitral corruption should not despair, but should instead reasonably hope that even a standard of “abundant clarity” will be judiciously applied according to the context in every case.

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This month’s review of the applaudable and regrettable would be incomplete without a brief word about a decision from the US Eleventh Circuit Court of Appeals that also concerned alleged arbitrator bias. (FDIC v. IIG Capital LLC, 2013 WL 4007573 (11th Cir. Aug. 7, 2013). We can applaud the fact that the Court rejected as a non-starter (i.e. not even deserving of an evidentiary hearing) the contention that there might have been improper contact between an eminent arbitrator and the eminent arbitration specialist appearing before him as counsel, when the latter at the invitation of the former joined as a faculty member for a symposium held while the case was sub judice.  We can regret that evidently neither of these widely-admired members of our community saw fit to disclose the matter. In an IBA-colored world of disclosure categories, could there not be a True Blue List — matters not requiring disclosure but which if disclosed as a matter of prudence would do far more good than harm by simply keeping the arbitral air fresh and breathable? Professional conference contact during the case between arbitrator and counsel, or between arbitrator and arbitrator, is on my True Blue List.