Archive for September, 2016

Set Aside Time

Tuesday, September 6th, 2016

If you are a casual reader of recent US case law concerning investment treaty arbitration, and have not committed to spending less time following the US presidential election and more time poring through 400-odd page investment arbitration awards, you might have missed this remark by the Arbitral Tribunal (constituted under the Stockholm Chamber of Commerce Rules pursuant to the arbitration clause of the Energy Charter Treaty) in its December 19, 2013 Final Award in Stati v. Republic of Kazakhstan: “[T]here are only a modest number of investment treaty cases on record in which a state’s mistreatment of an investor was so severe, intentional, and multi-faceted as Kazakhstan’s treatment of Claimants in this dispute. There are even fewer cases on record in which that treatment was admittedly ordered by the Respondent’s Head of State and carried out by dozens of state organs and instrumentalities over a period of years.” (The Award as filed in the District Court for the District of Columbia is published at and also can be found by PACER subscribers in the electronic docket of the US enforcement case, No. 1:14-cv-00175-ABJ).

Before we turn to a US district judge’s ruling last month, granting a stay of the confirmation action to await a Swedish court’s decision on a set-aside application made by Kazakhstan (Stati v. Republic of Kazakhstan, 2016 WL 4191540 (D.D.C. Aug. 5, 2016)), several preliminary points deserve attention. First, this Energy Charter Treaty award given by a Stockholm Chamber of Commerce Tribunal for Kazakhstan’s breach of the treaty’s fair and equitable treatment (FET) requirement is quite large even by the outsize Texan standards of the energy sector — nearly $500 million. Second, among the grounds raised by Kazakhstan for non-enforcement and vacatur of the Award is that it was at least in part procured by fraud — evidently relating to the bona fides of an expert report presented to the Tribunal by the Claimants concerning one of the affected projects. Third, these grounds had been submitted in extenso by Kazakhstan in at least three fora — the High Court in London and the US District Court in Washington, where confirmation of the Award under the New York Convention (as adopted by national arbitration law) was sought, and the Svea Court of Appeal in Stockholm as the competent court under Swedish arbitration law to consider an award annulment action pertaining to an award made in an arbitration conducted at a Stockholm seat. Fourth, Kazakhstan in the confirmation actions in London and New York did not apply to either court to stay the proceedings in favor of the Swedish annulment action but instead made full legal and factual submissions in support of its position that confirmation of the Award under the New York Convention should be denied – but did refer to the pendency of the annulment action and informed the courts that Kazakhstan would not oppose a stay of the confirmation cases if the judges were inclined to go in that direction.

So what has happened here, unusual if not without precedent, is that stays of proceedings for award confirmation under the New York Convention have been granted effectively sua sponte by the Courts of two States where confirmation was requested. This presents a useful opportunity to compare the approaches taken by the UK and US judges in reaching the same result.

For the High Court in London in its sua sponte adjournment Rulings of September 1, 2015 (2015 EWHC 2542 (Comm), also published at, these were the key elements:

1) the annulment application could not be regarded as having been made in bad faith or as having only “a fanciful, as opposed to real, prospect[] of success” (It is not evident in the Judgment whether the High Court had the benefit of reading the Orders of US Southern District of New York Judges Wood and Stein, who had, respectively, granted Kazakhstan’s Section 1782 petition for discovery from a law firm in aid of its annulment proceeding in Sweden, and denied the Stati group’s motion for reconsideration. Those orders reveal that Kazakhstan was seeking evidence that in parallel arbitrations involving one of the same gas exploration projects, a substantially lower valuation had been submitted for purposes of quantifying the loss. The actual submissions made to the Swedish court evidently are confidential, and while they may have been available to the High Court, they are not available to your commentator.)

2) there being a “high degree of overlap,” in the issues, the Swedish court’s reasoning especially on the presented issues of Swedish arbitration law would be helpful and perhaps persuasive to the UK court at a later hearing, and having the hearing at a later date would help to avoid inconsistent judgments and would be in the interests of comity,

3) considering the High Court’s own resource limitations and the demands of other High Court applicants in other urgent matters, there was a public interest in deferring consideration of a complex and time consuming matter that ultimately might not need to be heard and would likely consume time that could more properly be devoted to other cases, and

4) the claimants’ interests in moving forward expeditiously with enforcement against any assets found in the UK, and potential prejudice from delay, could be addressed if appropriate by an award of security (denied, however, in a separate contemporaneous judgment, wherein considerable emphasis was placed on the fact that Kazakhstan stood fully prepare to proceed with a hearing on its opposition to the confirmation application).

The federal district court in Washington D.C. faced the same stay of confirmation question with regard to the same award, and resolved that issue (and also a series of issues concerning subject matter jurisdiction over Kazakhstan under the Foreign Sovereign Immunities Act) this past month. But with hearings in Sweden on the annulment application now said to be only a few weeks away, pragmatism carried the day in favor of a stay of enforcement, and there was little occasion for nuanced balancing of “the [New York]Convention’s policy favoring confirmation of arbitral awards against the principle of international comity embraced by the Convention” (the quoted language being a formula embraced by at least two federal courts of appeals). What stands out about the US court’s adjudication is how formulaic the decision appears to be, largely because a leading court of appeals case, in particular the Europcar case in the Second Circuit in 1998, set forth a “non-exhaustive list of six factors” to be applied by district court asked to stay confirmation proceedings under the Convention. Multi-factor checklists of this type sometimes discourage a full display of in depth analysis, and move the written opinion in the direction of a more cursory tallying of pluses and minuses.We see here the reference to “international comity” but without any particular analysis of whether issues of Swedish arbitration law predominate in the annulment proceeding. One sees here a hopeful view that the imminence of the hearings in Sweden might foreshadow a near term resolution of the matter, but only a glancing reference is made to the prospect of a further appeal in the Swedish courts, the time that might involve, and how this might relate to the age of the dispute, the years that were involved in reaching a final award, and the eminence of the tribunal that rendered the award and the compendious and evidently meticulous nature of its work product. Certainly one does not see mention in the opinion that the New York Convention’s enforcement design was intended to eliminate the “double exequatur” requirement under its leading forerunner conventions and the arbitration laws of many States (a point which in contrast was duly noted by the High Court in London), and the court does not identify as a concern that too liberal of an attitude favoring stays of confirmation action may creates a drift toward the old regime.

These comments are not meant to suggest that the US court has reached the wrong result. Your commentator has read neither the entirety of the Tribunal’s award nor any of the submissions made to the Swedish court. But it is reasonable to assume that the US judge did that reading. And so there is an opportunity in a case like this, one that has a certain transnational prominence, and an importance to the investment arbitration system, for a US judge to conduct the required “balancing” in a rather more visibly thorough way. It might be said, in opposition to this, that “comity” militates in favor of reticence — i.e. the judge deciding to adjourn the confirmation case should avoid publishing comments that might be seen as an attempt to influence the judgment of the annulment court at the arbitral seat. And while there is merit to that position, still one would hope for an approach wherein there is an inquiry in the published opinion into whether there is a “prima facie” basis for the annulment if the record allows such an inquiry to be made. (Compare, on this point, the High Court’s approach in its separate judgment denying security: “[M]y conclusion is that the challenge to the Award in the Swedish proceedings has a real chance of success. Beyond that, I do not feel able to place the merits at any particular point on a sliding scale between arguable and manifestly valid.”)

The action now shifts back to Sweden, where, according to the District of Columbia opinion, hearings on the annulment questions are to be heard in September-October.

Making US Arbitration Law Great Again

Monday, September 5th, 2016

Dear foreign readers, this is one of those posts about the architecture of American arbitration law that may leave you convinced that the US could make itself great again by shredding the Federal Arbitration Act (FAA) and installing in its place the UNCITRAL Model Law, or at least the Magna Carta. But do read on. This report concerns one of the infamous “circuit splits” — divergent positions among US federal courts of appeals — that may lead to definitive adjudication in the US Supreme Court. And whereas this split derives from opposite positions about what the Supreme Court has said about the FAA in a heretofore rather obscure 2009 case, and the present situation makes for a rather messy polyglot of state court and federal court jurisdiction in FAA cases, the Supremes, with or without a ninth Justice, may find this issue too ripe to resist.

It should be recalled that in US domestic arbitration cases, those not qualifying as international under the New York or Panama Convention, access to the US federal courts for FAA remedies requires an “independent” basis of jurisdiction because the domestic FAA (Chapter One) does not confer jurisdiction on US District Courts but only specifies the relief they have power to grant if criteria for subject matter jurisdiction are satisfied. A question of federal law (“federal question”) is such a criterion, but it must be a question other than one of federal arbitration law. Thus, whether a domestic award should be vacated for manifest disregard of Montana contract law presents no federal question, whilst vacatur for manifest disregard of the US antitrust laws assuredly does. When the FAA action is a non-diverse one between Montana’s two human residents, their FAA issues related to commercial disputes over grazing lands for bison herds that straddle the Montana-Idaho border are cognizable only in the Montana and Idaho state courts, unless for instance the underlying commercial dispute concerns the scope of federal statutory grazing easements in the Wallowa-Whitman National Forest, in which case there is a “federal question” in controversy and this (plus a modest filing fee) unfurls the welcome mat on the federal courthouse veranda.

Now suppose these two herdsmen have an agreement to arbitrate, but one is recalcitrant and files a plenary action in the Montana state court. If the other files a petition in the federal court for an order compelling arbitration under FAA Section 4, what is the basis for federal jurisdiction? Petitioner says the arbitration involves a federal question. Respondent says the federal court petition presents only the question of arbitrability, governed by state contract law, and thus no independent basis for federal jurisdiction exists. Does the federal court “look through” the Section 4 petition to compel arbitration to see if there is a “federal question” presented in the underlying putative arbitrable controversy? This, in essence, was the main question decided by the Supreme Court in Vaden v Discover Bank, 556 US 49 (2009) (alas, the case involved credit cards in Maryland not bison in Montana, but no matter).

“Looking through” to the underlying arbitration to see if, on the merits, it involves a question federal law is indeed the way to go, held the Supreme Court in the  Vaden case. (And only federal claims count, not federal counterclaims or defenses, – a detail US lawyers know very well and foreign lawyers may bypass). And that conclusion, in a case (Vaden) that concerned only federal subject matter jurisdiction over an FAA Section 4 petition to compel arbitration, and contained no intended hint about the outcome if a different FAA application for relief had been made (confirm or vacate an award, enforce an arbitral subpoena, etc.), was held to be “driven by” the particular language of FAA Section 4 that instructs federal courts that they may be asked to grant a petition to compel arbitration if “save for” the arbitration agreement the controversy between the parties would be judicially cognizable in the federal court. (“A party aggrieved… may petition any United States district court which, save for such agreement, would have [subject matter] jurisdiction …in a civil action… arising out of the controversy between the parties…”).

The day had to come – post-Vaden —  when federal courts of appeals would need to confront this “look through” (or not) question in the framework of a party’s quest for federal jurisdiction over an FAA application for relief other than a Section 4  petition to compel arbitration. And indeed two such days did arrive – August 11 and 22, 2016 — in cases decided by the US Second and Third Circuit Courts of Appeals, each addressing whether to “look through” to the underlying arbitrated dispute in search of a “federal question” when the petition before the US district court is one that seeks to set aside the final arbitration award under FAA Section 10. (Doscher v. Sea Port Group Securities, 2016 WL 4245427 (2d Cir. Aug. 11, 2016); Goldman v. Citigroup Global Markets, 2016 WL 4434401 (3d Cir. Aug. 22, 2016)).

The Second Circuit in Doscher held that Vaden‘s reasoning as understood by the court mandates the same “look through” approach to jurisdiction over a Section 10 petition to vacate as was applied in Vaden to a Section 4 petition to compel. And the court’s analysis strongly implies that the same approach would be required no matter what relief is sought under FAA Chapter 1. For the Second Circuit, the main analytical challenge was to reconcile the Vaden case’s statement that its conclusion was “driven by” the “save for the arbitration agreement” language in FAA Section 4 with Vaden‘s assertion that nothing in FAA Chapter 1 purports to enlarge federal jurisdiction (the Court, per Justice Ginsburg, having referred to FAA Chapter 1 as a statute with an “antijurisdictional cast”). If Section 4’s “save for” clause justified a “look through” approach to Section 4 petitions to compel arbitration, but not other FAA Chapter 1 petitions (e.g. to confirm or vacate an award, or to enforce an arbitral subpoena or appoint an arbitrator) then Section 4’s language would have a federal jurisdiction-enlarging consequence relative to other FAA petitions for relief. The position of the Second Circuit in Doscher is that the “look through” expressly endorsed for Section 4 by the Supreme Court in Vaden is by implication the approach to be taken across the board under FAA Chapter 1. This approach also commends itself, per the Second Circuit, because it negates the utility of a familiar arbitration lawyer’s gambit whereby a party seeking to arbitrate first brings a federal court plenary action merely to vest the federal court with jurisdiction, and then moves to compel arbitration and for a stay under FAA Section 3. The gambit triggers a federal arbitration law rule that the district court’s subject matter jurisdiction, once properly vested notwithstanding that the case belonged in arbitration to begin with, endures throughout a stay pending arbitration and on into the post-award stage, such that the subject matter jurisdiction initially established may later be relied on to make applications for FAA remedies during or after the arbitration. Under the Second Circuit’s reasoning, the access advantage until now often gained by such artifice is available to all parties that could have, but for the arbitration clause, proceeded with a jurisdictionally-proper plenary action in the federal district court.

The Third Circuit in Goldman did not adopt this position, and wrote its opinion without reference to the Second Circuit’s decision eleven days earlier. For the Third Circuit, the presence of the “save for the arbitration agreement” language in FAA Section 4, the absence of comparable language in FAA Section 10 (or any other Section in FAA Chapter 1), and the Vaden Court’s statement that its decision was “driven by” the “save for” language in Section 4, combine to support the conclusion that the “look through” approach does not apply to a FAA Section 10 petition to vacate an award.  In the Third Circuit’s view, it is plausible to suppose that the US Congress when it enacted the FAA (in 1925) placed greater emphasis on enforcement of arbitration agreements than on other arbitration-related judicial relief, and for this reason included in Section 4 special language to facilitate access to federal court to compel a recalcitrant party to arbitrate. The Third Circuit panel took note of the fact that its approach was in harmony with that taken by the District of Columbia Circuit in 1999 (ten years before Vaden) and by the Seventh Circuit earlier this year.

Which is the more cogent analysis? The Third Circuit follows a traditional path to statutory construction, noting the presence of important language in Section 4 (“save for…”) that is absent in Section 10 and elsewhere in Chapter One. But the Vaden Court per Justice Ginsburg referred to the “anti jurisdictional cast” of FAA Chapter 1. And the Third Circuit does not come to terms with this phrase. If the “save for” language in Section 4 allows for federal subject matter jurisdiction of Section 4 petitions in circumstances where other FAA petitions must be filed in state court, i.e. when there is an issue of federal law raised in the arbitration by the Claimant, then it would seem that Section 4 does have a “jurisdictional cast” while other Sections in FAA Chapter 1 do not. Reading the “save for” language of Section 4, by implication, into the other Sections of FAA Chapter 1 concerning judicial relief, which is what the Second Circuit has done, leaves the statute’s neutrality on the question of subject matter jurisdiction intact.

Stay tuned, dear readers, for possible certiorari petitions, and perhaps a petition for rehearing en banc in the Third Circuit, where a different three-judge panel in an earlier (but still post-Vaden) case had taken the “look through” view of jurisdiction under FAA Section 10 in what amounted to a dictum. In the Second Circuit, in contrast, we are told in a footnote to the Doscher opinion that it was pre-screened by every judge of the Second Circuit and that not one judge disagreed with it.

And for those of you international arbitrators who remain unconvinced that you have any stake in this arcane American quarrel, consider this: When you sit as an international arbitrator at a US seat, and issue an arbitral subpoena under FAA Section 7, you may wonder, even in the drafting of the subpoena, in what court the subpoena may be enforced if the witness is recalcitrant. FAA Section 7 is another of those Sections that appears to confer remedial powers on US district courts, but evidently does so only upon the condition that subject matter jurisdiction is independently established. (Section 7 states that the US district court for the federal judicial district in which the arbitrators, or a majority of them, are sitting, may compel compliance and sanction non-compliance).  The witness may be a former executive of the Montana-seated corporation appearing before you as the Claimant in an energy dispute against a company from the neighboring Province of Alberta. Does the US district court in Montana lack subject-matter jurisdiction because the motion to compel compliance with the subpoena involves non-diverse citizens of the same State, leaving your subpoena to be enforced, or not, on some unknown timetable and subject to state law rules on appealability, in the Montana state trial court? Or may the federal court in Montana “look through” the jurisdictionally non-diverse petition to enforce the subpoena to the underlying arbitration which is plainly based on an arbitration agreement that “falls under the [New York or Panama] Convention” as per FAA Chapter Two where arbitration issues are expressly declared to be federal questions (“aris[ing] under the laws and treaties of the United States”) for purposes of subject matter jurisdiction?

Do stay tuned, and beware of the wildlife during your Montana holidays and hearings.