Archive for October, 2016

Yukos: Worth the Wait for the Dutch Appeal

Saturday, October 8th, 2016

Just when you thought you knew what you needed to know about enforcement (or not) of annulled foreign awards, along comes the Yukos case in yet another chapter. This one is entitled What to Do While We Wait for the Dutch Appeal?. It is written by a US District Court judge in Washington DC. And the Answer is: Just Wait! (Hulley Enterprises Ltd. v. Russian Federation, 2016 WL 5675348 (D.D.C. Sept. 30, 2016)).

In case you are recently returned from the Gulag, here are the basics: tagged with a $50 billion award by a Dutch-seated Tribunal, for carrying out a tax-based vengeance scheme against the politically hostile oligarchs who came to control the denationalized petrol colossus Yukos, Tsar Vladimir sent his lawyers to a Dutch first instance court to get the Award annulled for lack of jurisdiction. There Vlad won on a point he had lost before the Tribunal: that Russia never validly adopted the arbitration scheme of the Energy Charter Treaty (ECT) — no arbitration agreement=no valid award. The Dutch first instance court, unimpressed with the analysis given by a cobbled-together Tribunal of international law neophytes named Schwebel, Poncet and Fortier, bought this argument, and consumed all the Ossetra Caviar and Stolichnaya-laced Kool-Aid that Vlad presented with it.

America being a land teeming with Russian Federation assets,  Ossetra Caviar being perhaps the most delectable, the Yukos shareholders sought confirmation of the Award in a federal court in Washington D.C.– making their filing in 2014 hard on the heels of Russia’s filing of the annulment case in The Hague. Subject matter jurisdiction of the DC confirmation case was alleged to be based on the Foreign Sovereign Immunities Act (FSIA) — and, for our simple-story purposes, on the FSIA’s “arbitration exception” to sovereign immunity.  That “exception” applies, and permits US courts to exercise jurisdiction over an action against a foreign sovereign, in an action to confirm a foreign arbitral award that “is or may be governed by” the New York Convention. (28 USC §1605 (a)(6)).

The first 18 months or so of this US confirmation action need not concern us here. But once the first instance Dutch Court had annulled the Award , as it did to much consternation in April 2016, the Award-winning Yukos shareholders asked the US Court to stay their own US enforcement case pending an appeal in the Dutch judicial system that might undo the first instance set aside judgment. Putin & Co., Bearish, opposed the motion to stay and insisted that the Court should proceed to address the threshold issue of its subject matter jurisdiction, meaning that the Court should decide upon the applicability or not of the arbitration exception to sovereign immunity under the FSIA with regard to proposed confirmation of an award lawfully judicially annulled at the arbitral seat. Understandably, Russia expected to argue that, with deference to the first instance court in the Hague, the US court should find subject matter jurisdiction absent if, on the view that Russia never signed up for arbitration under the ECT, there would be no possibility of enforcement under the New York Convention.

As a District Court judge concerned with efficiency, comity, and eventually an orderly and thoughtful adjudication, if required, under the New York Convention and the FSIA, to decide as she did in favor of a stay appears to have been an inevitable conclusion. But we should observe closely, and perhaps marvel a bit in this instance, at the method and the analysis. The key points in the view of this observer are these:

1) The proper legal framework for analyzing the stay-versus-adjudicate issue is not Article VI of the New York Convention – which permits the enforcement cofht at the seat. Instead the legal frame of reference is the discretion afforded the court in the exercise of its “inherent power” to manage its own docket, a power well established in American law. That is the situation here because the applicability of the New York Convention is a merits question, and so Article VI may not be invoked as the basis for adjourning the enforcement action in advance of a judicial determination that subject matter jurisdiction exists. Like a dismissal on the basis of the doctrine of forum non conveniens, a stay of proceedings based on the Court “inherent powers to manage its docket” is one of the rare significant adjudications that a federal court may make before its subject matter jurisdiction is determined.

2) Comity, that is to say deference to the adjudicatory power and action of a foreign court, may, and in this case did, favor a stay of the US confirmation of the Yukos award, because the eventual Dutch appellate court judgment sustaining either the Award or the annulment judgment would, under the US case law on enforcement of foreign awards and non-enforcement of annulled foreign awards, decide or substantially influence the eventual decision in the confirmation case. The Court rightly reasoned that if the Dutch appellate courts uphold the annulment as a lawful annulment, the Award-winning Shareholders might well find the chances of confirmation in the US to be so remote that the confirmation case might be withdrawn.  If the Dutch courts reinstate the award, the Court noted, there could be arguments both ways as to whether Russia is entitled under the New York Convention to a de novo examination of the arbitral jurisdiction/ECT issue in the US Court, but even if such de novo review were required the Court might find the Dutch court’s analysis to be helpful and persuasive.

3) An analysis of whether the Shareholders would be entitled to a stay of the confirmation action under NY Convention Article VI served as a useful as a cross check (in dictum) on the court’s “inherent power” analysis — with the Court here finding that the same outcome would have been reached had the Convention been applied.

It is difficult to know from the opinion how extensively the parties briefed the question that is presented in the Dutch courts, that is to say, how much weight the Shareholders placed on the argument that the Dutch appeal was likely to result in reinstatement of the Award. Many sources in the arbitration community have expressed the view that the appeal has a significant chance of success. It would have been a possible outcome for the Court to deny the stay, deny subject matter jurisdiction under the FSIA, dismiss the enforcement action, and leave the Shareholders with the option to apply for reconsideration in case of a reversal in the Dutch courts. This was the outcome sought by the Russian Federation, which made little effort to conceal its desire for the immediate political victory of a US judgment rejecting US jurisdiction over the Russian State. The Court here determined that, on balance, there was more hardship involved for the Shareholders in requiring them potentially to apply for reconsideration than there was for Russia in having the inert confirmation case remain pending during the estimated 2-3 years needed for the Dutch appellate proceedings to be completed.


Do Tell

Saturday, October 8th, 2016

Your commentator can get cranky about arbitrator disclosure. Okay, okay, I can get cranky about many subjects, but still. Party-appointed arbitrators are not going away any time soon, and courts (at least US courts) are not adopting a strong law-and-order stand on “evident partiality.” So, as you think about the disconnect between the disclosure/independence standards of big providers like the AAA, and the test for vacating awards for “evident partiality” in big reviewing courts like the US Second Circuit Court of Appeals, read Merck & Co. v. Pericor Therapeutics, Inc., 2016 WL 4491441 (SDNY Aug. 24, 2016) and maybe weep just a little bit.

This was a Big Pharma license arbitration and the Big Pharma Respondent selected as its party-appointed arbitrator one of “its own” — a recently retired Big Pharma chief of global litigation who prior to a 13 year stint in that position had been 14 years as a partner in a big Manhattan law firm that did plenty of Big Pharma work including work for joint ventures between members of that club including Respondent.

Nothing against Big Pharma from this commentator, or against companies selecting One of Their Own Kind as a party-nominated arbitrator. But let’s take a look at the candidate’s AAA initial disclosures as reported in the cited case:

 1) “[I] had infrequent professional dealings over the years” with Respondent’s General Counsel. Oh really? But what kind of dealings might such disclosure hypothetically mask? Do you (appointee) mean that maybe over 25 years you only did eight $30 billion deals for Respondent, one every three years, but those particulars aren’t important enough to deserve mention? And in between the deals maybe you had two lunches per year together at Le Bernardin, not very “frequent” but consistent, sumptuous, and memorable? But why mention such trifling details that would not justifiably create any doubts about your impeccable impartiality?

 2)  “[I] had occasional professional dealings with other members of the [Respondent’s] law department[].” What kind of dealings might is disclosure hypothetically mask? Do you (appointee) mean maybe that on each of those eight $30 billion deals you worked hand in hand with the Deputy GC for M&A and the Deputy GC for Regulatory? And maybe that one or both of them attended roughly half of those Le Bernardin lunches?

Now dear readers obviously I am being a provocateur here. But it is a serious question why such vague and prophylactic disclosures are not systematically rejected by provider organizations as patently inadequate. Assessment of impartiality under the standards stated in arbitration rules and arbitrator codes of ethics would seem to demand particulars that enable an adverse party to judge the texture of a relationship and its probable impact on the candidate’s mindset. The candidate in the cited case made supplemental disclosures but still they do not seem to reveal any contextual details of the relevant relationships. A challenge to his appointment was rejected by the AAA.

This kind of disclosure is perhaps more frequent among candidates who are “friends and family” appointees, in contrast to the disclosures typically made by those who arbitrate for a living or aspire to do so. For the latter group, the parties’ full satisfaction with their independence and impartiality generally evokes very fulsome disclosure, because the candidate is making an investment not only in the pending appointment but in her long-term credibility and stature.

The disclosure standards observed by nominees and imposed by the provider organizations are critical in the US because federal law treads very lightly lest the law interfere with the efficient functioning of the arbitral system. Judicial challenges to an arbitrator during the course of an arbitration are not accepted; the recourse available is against the award, on the basis that it should be vacated because of “evident partiality.” So an impure process may be nullified but not purified. Moreover, as readers of the Merck case will be reminded, for partiality to be “evident” the applicant for award vacatur must show that it is nearly inevitable that the decision was the product of bias. This is an exceedingly difficult showing to make, and will very rarely be made successfully when the only basis for the motion is that some disclosure details were omitted that probably should have been provided. (Thus Award-losers that hire investigators to dig dirt on arbitrators who they perceive to have been biased, in service of a judicial attack on the award, rarely get their money’s worth for the effort).

Some of this post-award dirt-digging however is not just sour grapes by sore losers. It is a derivative of a system that at the provider level allows arbitrators to pass muster without making robust disclosures. The providers are not well suited to conduct a discovery process if an adverse party believes more questions should be answered more pointedly. Challenges often fail because the challengers cannot effectively conduct pre-appointment discovery and the information challengers are able to obtain, largely from their own sources, in a narrow time window, will often be inconclusive.

Are we asking too much to call upon the providers to act more aggressively, especially with “friends and family” party nominees, so that extensive professional relationships especially in a business setting are described extensively and not with generic phrases like “infrequent professional dealings” that do little more than put the non-appointing party on inquiry notice for an inquiry it is not then in an effective position to undertake?