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September 06, 2016

Set Aside Time

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 www.italaw.com 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 www.italaw.com), 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.