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Distilling the Arbitral Law of Corruption

Thursday, June 27th, 2019

Preliminary Remarks

Corruption, usually bribery or solicitation for bribery, occupies much attention among parties and tribunals in international arbitration. In investment arbitration, there is evidence of this in the Awards and other records of proceedings collected at and elsewhere in online repositories. In commercial arbitration, we know this mainly from experience and anecdotal evidence. The discussion in this Commentary pertains to corruption as it bears upon the enforceability of the underlying transactions in the arbitration. Possible corruption in the arbitral process itself – such as attempts (actual or alleged) to bribe an arbitrator or a witness – are a worthy topic but are reserved for future treatment.

The substantive international arbitral law of corruption is rather straightforward (a characterization certainly not intended to diminish its paramount importance). Stated in broad strokes for this introductory purpose: it is a matter of international public policy that corruption should be ousted from the interactions of commercial actors with public officials. In furtherance of that objective, commercial rights and assets obtained by corrupt means should be denied protection, and the withholding of commercial rights and assets based on the commercial party’s refusal to pay a bribe gives rise to a claim of unfair treatment by a State in violation of treaty rights and/or international law.

The procedural arbitral law of corruption is a creature with more tentacles. One reason is that the Arbitral Tribunal is often only one of multiple fora in which the same allegations of corruption have been or may yet be examined. Law enforcement investigations or criminal prosecutions may be on foot in the host State or in the home State of the investor/private actor. Some host States may have also examined the allegations before an administrative body whose charge is to ferret out official corruption. Tribunals are called upon to consider the value of the evidence already adduced, and to assess the incentives parties may have to present evidence in the arbitration for later re-use in such proceedings. Tribunals may also be in the difficult position of having to consider whether a host State’s domestic anti-corruption initiatives are themselves corrupt – proceedings possibly taken, as an adjunct to the arbitration, to bolster a corruption defense to the claims of an investor or commercial counterparty.

Why this subject for a Post, at this time, in this format? Mainly because I find the topic interesting and timely, and I hope others share this view. A final caveat: I have elected to omit citations to cases and decisions examined in connection with this writing. Some of you will recognize cases from the statements of principles. If any of you would like to be directed to the source materials underlying this Commentary, please send an inquiry. Finally, this is an initial, and protean, effort. If you have suggestions for additions to it, they are most welcome.

I. General Legal Framework for Tribunal Consideration of Corruption

1. An Arbitral Tribunal asked to hear and determine a claim or defense based on corruption, and possibly to do so in a bifurcated and accelerated fashion relative to other issues in the case, may initially wish to consider the legal framework for its approach to the matter. General reliance on “international public policy” may seem imprecise as a source of practical guidance.

2. A useful point of departure for thinking systematically about a Tribunal’s powers and duties is the 2005 United Nations Convention Against Corruption. Article 15 of that Convention entitled “Bribery of National Public Officials” provides:

Each State Party shall adopt such legislative and other measures as may be necessary to establish as criminal offences, when committed intentionally:
(a) The promise, offering or giving, to a public official, directly or indirectly, of an undue advantage, for the official himself or herself or another person or entity, in order that the official act or refrain from acting in the exercise of his or her official duties;
(b) The solicitation or acceptance by a public official, directly or indirectly, of an undue advantage, for the official himself or herself or another person or entity, in order that the official act or refrain from acting in the exercise of his or her official duties.

And Article 26 of the Convention entitled “Liability of Legal Persons” provides:

(1) Each State Party shall adopt such measures as may be necessary, consistent with its legal principles, to establish the liability of legal persons for participation in the offences established in accordance with this Convention.
(2) Subject to the legal principles of the State Party, the liability of legal persons may be criminal, civil or administrative.
(3) Such liability shall be without prejudice to the criminal liability of the natural persons who have committed the offences.
(4) Each State Party shall, in particular, ensure that legal persons held liable in accordance with this article are subject to effective, proportionate and dissuasive criminal or non-criminal sanctions, including monetary sanctions.

3. Considering that the Corruption Convention has been ratified by at least 140 countries, and signed by nearly 190, an Arbitral Tribunal may take note that the Convention indicates not only the status of anti-corruption as a principle of customary international law, but also that the Convention itself is likely to have been integrated into the domestic law of the countries of domicile of the parties to the dispute.

4. Thus where a Claimant’s claim is met with a defense that the Claimant bribed a public official to secure valuable contract rights, and that the contract is therefore illegal at least under the laws of the Claimant’s domicile if not also under the laws of the counter-party State, the Tribunal may be invited to stay proceedings on all other issues and to conduct an initial phase of the arbitration on corruption as a preliminary issue. Whether to do so of course is a matter of discretion and will depend on the applicant’s prima facie presentation and other circumstances including the status of domestic proceedings or investigations.

5. Corruption may also be a source of an affirmative claim. A Claimant may have a breach of contract claim or, under an investment treaty, a claim of unfair and inequitable treatment, where an opportunity or benefit has been denied by a State on the basis of the Claimant’s refusal to accede to a solicitation for a bribe. In principle a Claimant might seek to have this issue treated as a preliminary issue and ask that it be given accelerated treatment. Deciding such a question, a Tribunal would have to balance the public policy significance of the bribery solicitation claim against the probability that the claim will be seen in a more fulsome context if it were fully joined to the merits of the other claims.

II. Legal Consequences of Corruption in International Arbitration

6. If corruption is proved in the arbitration, the guilty party will suffer the [non-penal] consequences flowing therefrom under the applicable law.

III. Sufficiency of Evidence of Corruption

1. Generally

7. Corruption must be proved by evidence that convinces the Tribunal that the allegation has been made out.

2. Role of the Procedural Law of the State Party

8. Where corruption of an official of a State party is alleged, the Tribunal will take into account (but not necessarily apply) the law of the State defining corruption, and its elements as a criminal and/or civil offense. So too, the civil and criminal consequences of establishment of a corruption offense under the law of the State will be taken into account.

9. As regards the standard of proof, the Tribunal will take into consideration the procedural law of the State whose officials are alleged to have acted corruptly. But the Tribunal will also take into consideration principles of international law relevant to the standard of proof, unless bound to apply mandatory principles of the State law.

3. Articulation (or not) of an Arbitral Standard of Proof of Corruption

10. Also as regards the standard of proof, the Tribunal will be mindful that an accusation of bribery raises the spectre of serious misconduct, at least on a par with misrepresentation or willful endangerment, but at the same time will also be mindful that before the Arbitral Tribunal the party accused of bribery does not face criminal penalties such as incarceration. Therefore a standard of proof more stringent that “preponderance of the evidence” or “balance of probabilities,” but not as exacting as “beyond a reasonable doubt” may be found to be appropriate.

11. And yet it is difficult and perhaps unnecessary in many cases for a Tribunal to attempt to articulate its instinct for stringency in the standard of proof with a catch-phrase such as “clear and convincing” or “comfortable satisfaction,” or the like. A Tribunal may instead simply acknowledge that the severe gravity of a bribery accusation calls for the sufficiency of the evidence to be measured with commensurate stringency.

12. In fashioning a satisfactory articulation of the standard of proof appropriate to the particular case, a Tribunal may factor in the possibility that efforts were made to conceal the corrupt activity, and that difficulties to prove corruption have resulted from such concealment.

4. The Burden of Proof

13. While the burden of proof as to corruption ordinarily will fall upon the party alleging that there has been such an occurrence, this general rule does not foreclose the possibility of a context-specific shifting of the burden. For example, if an accused Claimant admits to the making of a payment to an intermediary that the accusing State contends was forwarded on as a bribe to a State official, the burden may be shifted to the accused Claimant to explain actual legitimate purposes of the questioned payment.

5. Issues of Evidentiary Privilege

14. Issues of lawyer-client and “work product” (or comparable) privilege are apt to arise in the context of arbitration where corruption issues arise. It will not be unusual for a corporation facing allegations of bribery in an arbitration context – and perhaps in parallel criminal or regulatory investigations — to engage outside counsel to conduct an internal investigation, and the outside counsel may in turn engage forensic consultants. Where this occurs, an initial question for the Tribunal may be what law of privilege applies, and if this is disputed a Tribunal will likely apply general principles of conflicts to select the applicable privilege law based on the locus of the activity giving rise to the privilege claim.

6. A “Best Evidence” Rule Applicable to the State Party?

15. An Arbitral Tribunal often will be sensitive to the opportunism that might underlie a State’s initiative to nullify a large claim on the basis of the alleged corruption of a State official. And while a Tribunal maybe understandably reluctant to refer to such motives directly, this concern is reflected in the rigors Tribunals may impose on a State in the presentation of its case. Thus in one recent case, the State produced as a testifying witness the allegedly corrupt official, but relied on the record from a criminal investigation. The State failed to put questions to the witness to allow him to explain his conduct, and for this reason of “fairness” the Tribunal rejected the State’s claim of corruption as not adequately proven. This seems to be more or less a “best evidence rule.” If the allegedly corrupt State official testifies before the Tribunal, the Tribunal need not rely as heavily on the record in a prior State administrative or judicial proceeding whose procedural regularity is not fully transparent to the Tribunal.

IV. Tribunal Requests to Domestic Courts For Assistance in Collection of Evidence

16. Whether an ICSID Tribunal is empowered to make its own legal assistance request to a domestic court is controversial. The ICSID Convention and Additional Facility Rules neither expressly permit nor prohibit such a request for support in gathering evidence. This may be seen as a measure that is at odds with the overall design of ICSID arbitration as an autonomous self-contained process. However, proponents of the exercise of such power may respond that it entails no intrusion of domestic courts into the deliberations or decisions of the Tribunal.

17. This question may arise in the corruption context when, for example, a Claimant investor accused by the Respondent State of bribery in connection with the investment has been investigated by law enforcement in the investor’s home State. The investigators may have interviewed witnesses whose testimony before the Tribunal cannot be secured by the parties. Further the party seeking the evidence may regard the investigators’ impressions of the witnesses as having probative value especially to resolve credibility issues.

18. Tribunals may be generally inclined to leave evidence gathering to the parties, especially in regard to requests for legal assistance to domestic courts, because the authority of an interested party to submit such a request is well defined in municipal law. But the party seeking the evidence may contend that a legal assistance request made by the Tribunal in its own name carries more persuasive force with a domestic court than the party could evoke by reporting to that court that it has leave from the Tribunal to submit the request.

19. The controversial question of the Tribunal’s authority to submit such a legal assistance request may tend to be avoided where the Tribunal as a matter of discretion is disinclined to present the request. For example if the Tribunal concludes that the proponent of the request has other access to substantially all of the probative evidence that might be obtained, and/or has not fully explained its efforts to secure the evidence by other means, the Tribunal might deny the request without ultimately deciding the question of its power.

V. Corruption In An Arbitral Interim Measures Context

20. A corruption claim may be the central factual issue in a case, as where a State seeks to void an investor’s contractual rights based on alleged bribery of a former State official who made or influenced the selection of the investor to receive the contract. If the State seeks provisional measures, its prima facie case on the merits may consist entirely of a controversial record of proceedings in the State’s criminal court. A Tribunal may be even more reluctant than is typically the case in a provisional measures context to evaluate critically the applicant’s merits case. But the Tribunal may reflect its unexpressed concerns in other ways, such as by affording only the most minimal relief to the applicant based on principles of necessity, urgency and proportionality.

Illuminating Lamps Plus

Sunday, May 5th, 2019

Even a casual follower of the US Supreme Court’s arbitration jurisprudence needed neither a crystal ball nor an HID light bulb to foresee that the employer would defeat the employees in the Lamps Plus case. (Lamps Plus, Inc. v. Varela, No. 17-988 (April 24, 2019)). The real question is and always has been what pathway to pursue a class arbitration would remain open in light of the majority’s reasoning, in the equally predictable 5-4 outcome with the Court’s conservative bloc fully subscribed to Chief Justice Roberts’s opinion. The path taken, it appears, has less to do with class arbitration than with how US judges applying state contract law may determine any issue of consent in the realm of arbitration governed by the Federal Arbitration Act.

And no matter how many other bloggers and online newsletters have told you, in the past week or so, that the Court held that explicit language in an arbitration agreement now is necessary for class arbitration to be sustained, I am here to say that this is not what the Court held, and that advocates for class arbitration and judges seeking to parse Lamps Plus carefully should re-read the majority opinion after reading this Commentary. The bottom line: Lamps Plus, like its forerunners in Supreme Court class arbitration jurisprudence, is an FAA pre-emption case, and it holds that state law contract rules that resolve ambiguity about consent (to class arbitration, for sure, but logically regarding any element of the agerement to arbitrate) on a basis other than the intent of the parties — are pre-empted by the FAA. In particular, the rule of construing ambiguous language against the contract drafter (“contra proferentum”) is FAA pre-empted, at least where, as in the law of California, it is deemed a rule of public policy and not a rule for determining the intent of the parties. That holding – if you accept this as the holding, as you perhaps will not — leaves to another day whether state law rules of contract interpretation that are expressly stated in state law to be tools for the ascertainment of the intent of the parties may be applied to an ambiguous arbitration agreement to determine an issue of consent such as whether an employer agreed to class arbitration.

We recognize Lamps Plus as an FAA pre-emption case in the class arbitration tradition of Concepcion v. AT&T Mobility, Inc. (with gracious support from Stolt-Nielsen v. AnimalFeeds Int’l Corp., which was not a pre-emption case) from the Court’s review of its foundational jurisprudence. Whereas many arbitration law experts have an abiding level of discomfort with those foundations, I will subject them to some brief renewed criticism here. But of course this is the Law of the Land on class arbitration, not likely to change any time soon:

1. The Lamps Plus majority reminds us that arbitration is a matter of “consent not coercion.” Indeed. Of course, coercion lies at the very core of the class arbitration branch of arbitration jurisprudence. It was long ago resolved in US arbitration case law that the adhesive nature of an arbitration agreement between employees and employers, or between consumers and providers of essential goods or services, does not negate the consent of the economically weaker party. And so the contests between “consent” and “coercion” staged in the Supreme Court arena have often focused on whether besieged billion-dollar corporations are being dragged against their will into arbitrations involving a higher risk of loss than they bargained for when they (more or less) initially coerced the employee or consumer to resolve disputes in arbitration.

2. In the mise-en-scène of Lamps Plus, we are guided back to the supposed fundamental objectives of the 1925 Federal Arbitration Act as articulated by the US Supreme Court in 2010-11. Foremost is a supposed “tradition[] [of] individualized arbitration.” Another is the supposed enshrinement in the FAA itself of “informality” in arbitral procedure as a key protected value. Perhaps the most controversial element of the Stolt-Nielsen and Concepcion decisions, when they were new, was that they appeared to reverse-engineer into a 1925 statute purported “fundamental” FAA values that, conveniently, could be seen as contradicted by attributes of contemporary class arbitration (e.g., the AAA Rules version of class certification). The supposed “fundamentality” in the FAA of an individual model of arbitration, and the primacy of “informality” under the FAA, originally were among the dicta, railing against class arbitration, needlessly tacked on at the end of Justice Alito’s opinion for the majority in Stolt-Nielsen (2010). But those dicta became the foundation in Concepcion (2011), for saying that a state law rule treating an arbitration clause in an adhesion contract as unconscionable if it did not permit class arbitration was pre-empted by the FAA. Such a rule, the Concepcion majority told us, is a roadblock to the accomplishment of the FAA’s core objectives. Of course, for the dissenters, and for those in the arbitration community who recognize reverse engineering when they see it, the Stolt-Nielsen dicta were regrettable, and the Concepcion rationale was a contrivance. On this view, the core purpose of the FAA was simply to overcome judicial hostility in the courts of many states to the enforcement of pre-dispute arbitration clauses, which had too often been denied enforcement as unlawful ousters of state court jurisdiction.

3. Of course, a closer look at actual experience in class arbitration might well reveal that it is no more complex, inefficient, or formalistic that many other complex commercial arbitrations. But no matter. Stolt-Nielsen and Concepcion have given today’s Supreme Court majority a fixed notion of class arbitration that is not open to factual challenge case-by-case. And this year, in Lamps Plus and its forerunner the Epic Systems case (where by the same 5-4 vote it was held that the right of collective action under the National Labor Relations Act does not include a right to arbitrate on a class basis) the Court’s conservative majority has given us a new moniker for the reverse-engineered core FAA values: “central benefits.” Thus, we are told by Chief Justice Roberts’s opinion that “[n]either silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself.

4. But perhaps the “central benefit” of arbitration that ultimately motivates the decision in Lamps Plus is nothing more controversial than arbitration’s consensual nature. Whether you accept that view depends on what phrase in Lamps Plus you accept as defining the issue in the case. In the first paragraph of Part III A of Chief Justice Robert’s opinion, we read: “At issue in this case is the interaction between a state contract principle for addressing ambiguity and a ‘rule[] of fundamental importance’ under the FAA, namely, that arbitration ‘is a matter of consent, not coercion.’ [citation to Stolt-Nielsen omitted here].” (slip op. at 6-7). Two full paragraphs about the importance consent in arbitration generally follow, before any mention of class arbitration.

If Lamps Plus mainly concerns state law methods for deciding arbitral consent when ambiguity about consent exists, and is not mainly about any particular contractual content needed for consent to class arbitration, then Lamps Plus is scarcely a funeral rite for class arbitration. Now, surely naysayers to my thesis will point to the Court’s statement of the issue in the preamble of Section III: “We therefore face the question whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration….[citation to Stolt-Nielsen again omitted here]. We hold that it cannot…. The statute requires more than ambiguity to ensure that the parties actually agreed to arbitration on a classwide basis.” (slip op. at 6). Naysayers, you have a point. But there is nothing in this phrase that specifically forecloses the possibility that “more than ambiguity” can mean not only additional clarifying text in the arbitration agreement, but also a resolution of the ambiguity by application of a state law interpretive rule that aims to find the intent of the parties.

Indeed, the Court does not the state that every arbitration agreement that is ambiguous about class arbitration must be construed to prohibit class arbitration. And whereas the Ninth Circuit did not purport to hold that ambiguity itself “provide[s] a sufficient basis” to find that class arbitration is permitted, the Court had no reason to reach that far. It had only to deal with the Ninth Circuit’s reliance on contra proferentum to resolve the ambiguity, and that is what the Court did. Had the majority in Lamps Plus intended to bar class arbitration under all arbitration agreements that are ambiguous about class arbitration, Chief Justice Roberts’s opinion could have ended with one additional sentence at the conclusion of Section III A, which I create here: “The parties’ mutual intent to have class arbitration must be stated in clear and unmistakable terms.” But in fact Section III A concludes only with the statement that “[n]either silence nor ambiguity provides a sufficient basis for concluding that parties to an arbitration agreement agreed to undermine the central benefits of arbitration itself.” So then what is a “sufficient [contractual] basis” for class arbitration?

We need to read Section III B of the majority opinion for our answer. Chief Justice Roberts gives us an entire Section III B, devoted to the Ninth Circuit’s use of the contra proferentum principle to resolve the ambiguity against the employer. That rule under California law — and generally, under common law contract doctrine — the Court finds, is a “rule of last resort” to determine on the basis of public policy how to construe a contract when the intent of the parties can’t be ascertained. And since contra proferentum is inherently not about the intent of the parties (at least under California law), the majority reasons, its application by the Ninth Circuit to decide a question of consent to class arbitration is pre-empted by the FAA. The remainder of Section III B purports to show that the use of contra proferentum by the Ninth Circuit was akin the California state courts’ application of their “Discover Bank” unconscionability rule in Concepcion: it is a rule of public policy divorced from ascertainment of the actual intent of the parties, and thus is pre-empted by the FAA when applied to resolve a disputed issue of consent. And as Lamps Plus points out, this is the same flaw the Stolt-Nielsen Court’s majority attributed to the arbitral tribunal that had originally ruled in favor of class arbitration: the adoption of a policy-based view of the benefits of class arbitration to justify holding that class arbitration would be permitted where the arbitration agreement was (by stipulation) silent.

Thus the majority opinion in Lamps Plus concludes: “Courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a classwide basis. The doctrine of contra proferentum cannot substitute for the requisite affirmative contractual basis for concluding that the parties agreed to class arbitration.

And so, dear readers, I submit to you that Lamps Plus is an FAA-preemption case, pre-empting state law contract rules that determine consent issues without finding the intent of the parties, and is not nearly a burial chant intoned over the grave of class arbitration. Lamps Plus does not hold that an agreement for class arbitration must always be stated unambiguously to be capable of enforcement. By necessary implication, however, Lamps Plus does require at least that state contract law rules for resolving ambiguity on the question of consent to class arbitration must be rules recognized in applicable state law of contracts as designed to determine the intent of the parties.

Judges in the lower federal courts with a conservative outlook may well be inclined toward the broader reading. Some judges might be inclined to lift out of context only the first sentence of the two-sentence conclusion to Section III B: “Courts may not infer from an ambiguous agreement that parties have consented to arbitrate in a class wide basis.” And they will say the Court meant this to mean the agreement for class arbitration must be unambiguous. But that is a mis-reading, a shorthand/soundbite approach to what is evidently a nuanced majority opinion. There is ample room to persuade many lower federal court judges that when ambiguity about class arbitration is resolved by using state law contract interpretation rules that are by definition designed to determine rather than bypass the intent of the parties, such rules are not FAA-preempted and may result in an ambiguous agreement being construed to permit class arbitration upon the consent of the parties (properly determined under state contract law).

Naysayers, stay with me for another paragraph. Let’s revisit the introductory strains of Part III of Chief Justice Roberts’s opinion (slip op at p. 6): “We therefore face the question whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration. . . . We hold that it cannot . . . The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.” What (we may ask) is “more than ambiguity”? Only clarity, that is, non-ambiguity? What about ambiguity satisfactorily resolved? If class arbitration must be consented to only clearly and unmistakably, well, why not just say so? (Don’t you assume that Justices Roberts and Kavanaugh debated this on the squash court? Were some members of the Fab Five not willing to jump off the cliff?) These imponderables, I submit, permit the holding of Lamps Plus to be understood more narrowly: It pertains not merely to the content of the agreement, but also to the judicial method for resolving ambiguity. Contra proferentum doesn’t make the cut, because it is a public policy doctrine — to the majority’s displeasure, it is especially relevant to contracts of adhesion (slip op. at 3) — and is divorced from intent of the parties. But what about other state contract law principles to resolve ambiguity? “More than ambiguity” can mean, consistent with Lamps Plus, ambiguity resolved by contract interpretation that determines the mutual intent of the parties. That proposed interpretation of Lamps Plus aligns the holding, which concerns judicial interpretation of the arbitration clause, with Oxford Health, Inc. v. Sutter, which concerned arbitral interpretation of the arbitration clause. Maybe on the squash court Justice Kavanaugh suggested that if “non-ambiguity” meaning “clarity” were made the test, then Oxford Health (Kagan, J. for a unanimous Court!) would no longer be good law.


An epilogue is in order, and it is important. A footnote in the majority opinion reminds us that the Supreme Court has not decided if the question whether an ambiguous arbitration clause allows class arbitration is a “question of arbitrability” that a court rather than the arbitrators should decide unless it is clearly delegated to the arbitrators. In Lamps Plus the question did not arise because the parties agreed to have it decided in the federal district court where the employee had purported to file the class action. But based on the outcome in Lamps Plus, perhaps we should expect to see more proponents of class arbitration opting to file arbitrations in the first instance and hoping to get the benefit of the deferential rule of Oxford Health in regard to judicial review of an arbitrator’s clause construction award regarding class arbitration. (According to the class arbitration docket on the American Arbitration Association website, only about 35 new class arbitrations were filed from January 1, 2018 to date). It will also be interesting to watch for the possible emergence of a more arbitration-savvy plaintiffs’ class action bar. Such counsel will perhaps be less inclined to attempt, as did the employee’s counsel in Lamps Plus, to skirt the arbitration clause entirely by initiating a class action in a federal district court. That approach seems least likely to result in a class proceeding and most likely to result in a judicial rather than arbitral decision on the class arbitration question. The Supreme Court appears to be in no particular hurry to place on its agenda this important unresolved question of allocation of power between arbitrators and courts. Despite a split in the Circuits, the Supreme Court has denied certiorari already twice since March 1, 2019 in cases that have presented this issue.

TAR: How Shall We Treat This Sticky Subject?

Tuesday, March 5th, 2019

In your Tribunals’ initial case management conferences last month, what discussion took place regarding to the use of Technology Assisted Review (“TAR”) for e-disclosure? Are many of you now scrambling to your web browsers to confirm exactly what is TAR? Is your approach to e-disclosure frozen in time circa 2010 (or perhaps 1995) — even as TAR’s acceptance among judges and magistrates is expanding?  Should questions about the use of TAR in arbitral e-disclosure be left entirely to party agreement? Or is such preliminary delegation  simply a convenient way for arbitrators to steer clear of unfamiliar and challenging terrain?

This post will not educate you about how TAR works or even the details of what TAR is. I am as much of a neophyte about the particulars as many of you may be.

But this much is evidently beyond reasonable dispute: TAR is potentially far more effective and efficient than keyword searching for identifying of relevant and material data in a large universe of data. An arbitral tribunal that claims to be seriously dedicated to an efficient process arguably should steer the parties, at the earliest stages, toward an agreement concerning the use (or not) of TAR for the gathering of data sought by the adverse party.

Here is a modest compilation of evidence supporting the proposition just stated:

  • TAR for Smart People, a 200-page textbook published by the e-discovery consulting firm OpenText (successor by merger as of January 31, 2019 to Catalyst Repository Systems), has recently been issued in its third edition, with a foreword by a just-retired U.S. Magistrate Judge who was a pioneer in the judicial endorsement of  TAR. I have a free download. You may obtain it the same way.
  • There is now a reasonably evolved body of TAR jurisprudence in the US federal courts. This case law arguably should be a foundation for a best-practices approach to e-disclosure among international commercial arbitrators. Some of the accepted principles: (1) TAR is cheaper, more efficient and superior to keyword searching,  (2) TAR will not be imposed upon a party as a method for gathering responsive documents, (3) a party’s decision to use TAR to comply with the adverse party’s requests for production ordinarily should be seen as a reasonable method to achieve compliance, and (4) whereas TAR’s efficacy depends on the sample set of relevant, responsive documents used for the predictive coding, the parties’ early meet-and-confer efforts should focus on compiling a sample set that satisfies the requesting party.
  • In the UK, a Practice Direction issued in August 2018 by the Civil Procedure Rule Committee for the courts of England and Wales makes discussion of the potential use of TAR mandatory in parties’ early conferences concerning disclosure protocol. The Practice Direction requires that the parties justify any decision not to use TAR where disclosure will involve 50,000 documents or more. This Practice Direction is now incorporated a two-year pilot program operative in the Business and Property Courts.

It will take some time for the major provider organizations in international arbitration to come to terms with TAR in their rules, protocols, and guidelines. In the meantime, we as arbitrators have much soul-searching to do, case by case.  I raise some of the questions here.

What is the practical usefulness of traditional written requests for production and written objections thereto, each drafted according to litigation models dating from the pre-digital era? Are arbitrators and counsel unhelpfully channeling their litigator instincts,  carrying on an obsolete custom? If the objective is to provide helpful guidance to the search for documents that the requesting party considers relevant, shouldn’t the guidance conform to the search method?

Let’s suppose a Tribunal takes these questions seriously. And let’s further suppose, to reduce complications in the discussion, that: (1) both parties prefer that document disclosure be obtained before the initial round of written merits submissions, and (2) each side is represented by a multinational law firm based in the US or UK that is known to have (or may reasonably be assumed to have) a well-developed capability for the use of TAR .

Instead of fixing a timetable for court-style requests for production, written responses and objections, perhaps Redfern Schedules, and resolution of ensuing disputes, would you prefer instead that your TAR-sensitive Tribunal (1) require the parties to have their e-disclosure attorneys-in-charge attend the case management conference, and (2) inform the parties that document search method including TAR will be discussed at the conference?

Suppose at this conference both sides indicate a preference to use TAR, reserving the right to assert that perceived shortcomings in the TAR-based production might justify curative application of other methods. If so, isn’t the next question how should each side convey its wishes to the other? If the technology-assisted phase of TAR begins with a very human, attorney-driven, more-or-less “manual” selection of a sample set, then what requesting document will the attorney-samplers use as their reference point to compile the sample set?

Perhaps some e-disclosure attorneys will tell your Tribunal that they prefer old-fashioned court-style requests for production. Or perhaps they will shrug and say they usually do not have a choice, because most of their work is in relation to court litigation, or subpoenas from administrative bodies and grand juries. But perhaps a few of them would say that they would like a document that is like a Proffer, a declaration of what the requesting party expects to prove or disprove on the basis of the responsive documents. Let’s call this, potentially, the TAR Search Template.  It would be required to contain narrative explanations of the relevant and material issues of fact or law to be established by the search, the persons from whom such documents are to be sought (by name or functional profile), and the relevant time frames. (And Template drafters would be reminded to prepare them in compliance with applicable protocols like the ICDR Guidelines and Art. 3.3 of the IBA Evidence Rules).

A provision in Procedural Order No. 1 then might look like this: “TAR Search Templates (the “Templates”) shall be exchanged and delivered to the Tribunal in 30 days, and on [Day 30+7] the Tribunal will hold a telephone conference if necessary to resolve objections to the Templates, the parties having the ability in the +7 period to submit proposed changes and/or to negotiate adjustments to the Templates.”

Ensuing provisions of this TAR-driven PO #1 might require exchange/submission of the sample set, an interval to review/revise the Templates in light of the presence or absence of responsive documents in the sample set, commencement and completion dates for the TAR process, possibly an interim reporting or production requirement so permit TAR’s efficacy to be assessed, and a timetable to request any supplemental search measures (such as keyword searching) after delivery of the documents generated by the TAR process.


I do not know the right answers, but I hope this post poses many of the right questions. I do not think that international arbitrators may continue to be technology trogolodytes who permit the e-disclosure process to be only as efficient as the parties, left mainly to their own initiatives, may or may not succeed in making it. Yet I do not wish to be understood as advocating, at the opposite extreme, for imposition of TAR-based disclosure methods by arbitral fiat.  The effective arbitrator sensibly balances arbitral encouragement and party autonomy.  But this balancing act can’t be done without a fluency in the subject matter. I perceive that there is a fluency problem today. Many of the arbitrators in greatest demand completed their advocacy careers before TAR gained a significant foothold in advocacy practice. Others have had or continue to have only a glancing exposure — optional disengagement from process-oriented details being a privilege of stature.

Here is a vote for universal fluency. Let’s all read some of the leading TAR decisions of US federal judges. And download your copy of TAR for Smart People today. (I have no connection to the publisher or the authors, and derive no remuneration from advocating that you read it).

Suspended in Sweden: The Achmea Controversy Visits Washington

Tuesday, January 15th, 2019

Let’s have a show of hands. All in favor of the following proposition:

             A U.S. District Court In An Award Enforcement Case Should Decide      If European Union Law Invalidates the Jurisdiction of An Arbitral Tribunal Under the Energy Charter Treaty

Too puzzled to cast a vote?  Then read on.

This question came to my attention when I heard at a recent arbitration conference that at least three, perhaps four, US district court judges (three in Washington, one in New York) have been asked recently to decide this question, and are either puzzling over it now or waiting for completion of the record.  A sensible colleague in the conference audience asked whether US district judges were up to the task, given its foreign law complexities. The panelist-presenter, evidently steeped in those complexities (arising from the interplay of EU law, the Energy Charter Treaty’s dispute settlement provisions, and a certain famous (or infamous) European Court of Justice (ECJ) judgment from 2018 called Achmea), worried aloud that they may not be. The question addressed in this post is whether the US district court in one of those cases – where the record seems to be rather complete and the motion to enforce the award evidently is rather fully submitted – should take up the suggestion of the award-creditor Kingdom of Spain to stay the proceedings, as the New York Convention permits the Court in its discretion to do where the Award has been suspended at least temporarily  by a competent court at the seat of the arbitration (Stockholm) and where an application to set aside the award has been made in that court.

Having spent a fraction of Holiday time binge-reading portions of the record in Novenergia v. Kingdom of Spain (U.S. District Court for the District of Columbia, Docket No. 18 Civ. 1148), I first offer a bit of background. The Energy Charter Treaty (ECT), signed or acceded to by 54 countries and the EU (emphasis supplied without prodding by Novenergia’s counsel), is a source of protection for foreign direct investment in the energy sector and provides for dispute settlement between Contracting States and investors of other Contracting States under one of several options for arbitration: ICSID Rules, ICSID Additional Facility Rules, UNCITRAL Rules ad hoc arbitration, or arbitration under the Rules of the Stockholm Chamber of Commerce. The US and Canada are ECT Observer States, not Contracting States, as are most of the major oil-producing nations in the Middle East.  Starting around 2004, the Kingdom of Spain, an ECT Contracting State, pursued a national commitment to renewable energy via solar power by providing investment incentives in the form of subsidies through the tariffs that solar power electricity producers could charge for feeding voltage into the Spanish grid. But when Spain began to realize that the subsidies were bankrupting the Kingdom, beginning around the start of this decade, the incentive program was significantly revised and constricted, causing grief for investors who had relied on the incentives, and, in short order, a number of ECT arbitrations against Spain by investors from other ECT Contracting States. (Novenergia is Luxembourgeois). Many of those cases were pending (and some still are) when the ECJ, the EU’s highest court, in March 2018 issued its Judgment in the Achmea case (which did not involve the ECT but rather a bilateral investment treaty (BIT) between two EU Member States). For reasons now explained, Achmea (coupled with European Commission guidance on its impact) gave Spain and other EU Contracting States who are Respondents in ECT arbitrations, an idea for a potential jurisdiction defense.

Now a few words about Achmea (Slovak Republic v. Achmea BV, Case No. C-284/16, ECJ Judgment of March 6, 2018, found, e.g., at the ECJ’s website Consider Achmea, US readers, to be the Marbury v. Madison of EU investment arbitration. It is emphatically the province of the European Court of Justice, the ECJ, to say what EU law is. Or at least that’s the view of the EU. They call this “The Autonomy of EU Law.” Generally, courts of EU Member States must apply EU law, which is intrinsic to the domestic law in each State. (Note to EU-aspirant States: when the EU sells admissions online, this intrinsicality takes hold when you click “Accept”). Arbitral tribunals under intra-EU BIT’s are creatures of those treaties, not organs of the judicial systems of the State parties to the BITs. The awards of such BIT tribunals are regulated by judicial review in courts at the seats of the arbitrations, which apply the arbitration law and the public policy of the seat State. In a given case under a given BIT this may or may not be a court of the Respondent Contracting State or even another EU Member State. Within the courts of EU Member States, but not elsewhere, and not before BIT arbitral tribunals, there is a procedure to obtain from the ECJ a preliminary ruling on a question of EU law that has arisen in the case. Achmea, a Dutch company and Slovakia chose to arbitrate in Frankfurt, and the German Bundesgerichtof  (that’s a Court) referred to the ECJ the question of whether intra-EU BIT arbitration was in violation of the Treaty on the Functioning of the European Union, given that the arbitral tribunal had neither the right nor the obligation to make such a referral to the ECJ. An arbitral tribunal under an intra-EU BIT doesn’t derive an obligation to apply EU law from the Respondent State’s EU subscription, but only from the BIT, which typically tells arbitrators to apply (inter alia) the BIT, general principles of international law, and law of the State party insofar as necessary. But that sets up intra-EU BIT arbitration as a forum where potentially an “off-shore” version of EU law could evolve, at odds with the official version emanating from the ECJ courthouse in Luxembourg. And in Achmea an aggrieved Slovak Republic  — which got its EU Membership Card roughly a decade after signing the relevant BIT with The Netherlands — argued that this is not good, that The Autonomy of EU Law negates the BIT’s standing offer to arbitrate with an investor of the counterpart Member State because the potential arbitral tribunal envisioned by the BIT is an illegitimate “off-shore” applier of EU law. No lawful offer to arbitrate = no arbitral jurisdiction = proper grounds to annul the award. The ECJ in Achmea agreed on the legal invalidity of the standing offer to arbitrate in an intra-EU BIT, and the German court that had referred the question to the ECJ then proceeded to annul Achmea’s award.

Depending on whether you are a victorious EU investor or a losing EU State in an ECT arbitration, Achmea means either everything, or nothing, in regard to the enforceability of the award. That is to say, if an ECT arbitral tribunal is an illegitimate applier of EU law in the same sense that an intra-EU BIT tribunal (according to the ECJ) is, then ECT arbitration between EU investors and EU Members cannot subsist.  Fascinating. But our question is whether this is a perfectly appropriate issue to be decided in the first instance by a US district court in Washington DC – ahead of the Svea Court of Appeal in Stockholm, already asked by Spain to annul the award, ahead of the ECJ, which could be asked by the Stockholm court to decide in a preliminary ruling whether Achmea extends to a multi-lateral treating that includes non-EU Members like the ECT, and despite a preliminary order of the Stockholm court (issued a mere two days after the filing of Spain’s annulment application) that suspends the award and thus bars its enforcement while all this gets sorted out.

US law guidelines for a district court’s exercise of discretion to stay or not stay the enforcement of a New York Convention award pending an annulment proceeding at the seat of the arbitration comes mainly from a US Second Circuit Court of Appeals case, Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310 (2d Cir. 1998), where the Court identified a number of considerations that district courts should take into account:

  • The general objectives of arbitration – the expeditious resolution of disputes and the avoidance of protracted and expensive litigation;
  • The status of the foreign proceedings and the estimated time for those proceedings to be resolved;
  • Whether the award sought to be enforced will receive greater scrutiny in the foreign proceedings under a less deferential standard of review;
  • The characteristics of the foreign proceedings including (i) whether they were brought to enforce the award (which would tend to weigh in favor of a stay) or to set the award aside (which would tend to weigh in favor of enforcement); (ii) whether they were initiated before the underlying enforcement proceeding so as to raise concerns of international comity; (iii) whether they were initiated by the party now seeking to enforce the award in federal court; and (iv) whether they were initiated under circumstances indicating an intent to hinder or delay resolution of the dispute;
  • A balance of the possible hardships to each of the parties, keeping in mind that if enforcement is postponed under Article VI of the Convention, the party seeking enforcement may receive “suitable security” and that, under Article V of the Convention, an award should not be enforced if it is set aside or suspended in the originating country; and
  • Any other circumstances that could tend to shift the balance in favor of or against adjournment.

The Second Circuit went on to say that this was not “an exhaustive list,” and that “[b]ecause the primary goal of the Convention is to facilitate recognition and enforcement of arbitral awards, the first and second factors on the list should weigh more heavily in the district court’s determination.” Obviously this list of considerations was stated, and weighted, in the context of enforcement of a private commercial arbitration award, an award that resolved breach of contract issues that were unique to the parties’ commercial contract, had no intergovernmental or public policy significance, and carried no risk of deciding issues of public law that were also at the same time presented in a number of other investment arbitrations and in award enforcement or award annulment proceedings before foreign courts. Novenergia v.Spain thus presents a test of the adaptability of the Maiellano Tours formula to a radically different context.

The first Maiellano Tours factor – in a word, expedition – does not appear to favor a merits decision here and now. Rather we should be concerned here that haste may make waste – that if the ECJ formally embraces the EU position that the Achmea outcome extends to intra-EU disputes under the ECT, any judgment given by the US district court may have to be vacated, and any execution obtained against US-based assets of the Spanish State might need to be reversed. (I have no idea what prejudice in terms of effective execution might befall Novenergia from such a delay, but the US district court may hear the parties on that question and require suitable security). One is reminded of what occurred in the Southern District of New York and US Second Circuit Court of Appeals in the Thai-Lao Lignite case, where a stay of enforcement was denied despite anticipated annulment proceedings at the seat in Malaysia, the award was enforced, the award was then annulled in Malaysia, and several years of proceedings ensued here in New York concerning the vacatur, or not, of the initial enforcement judgment. And that happened in a situation where there was initially considerable doubt about the merits of the annulment application at the seat. Here, the parties’ respective Swedish law experts agree that the Award has been suspended under the Swedish Arbitration Act (albeit as a temporary measure and without elaboration of reasons), and the Swedish law expert for Spain, the retired Supreme Court of Sweden justice, states that such a suspension typically occurs only when the issuing court has determined that the annulment application has substantial merit. So, for the US district court in Washington DC to forge ahead now to the merits of controversial questions of EU law and ECT interpretation under international law runs some significant risk of extending rather than streamlining the judicial proceedings.

The second Maiellano Tours factor, status of the foreign proceedings, is really a refinement of the first “expedition” factor, asking how much delay is expected if completion, or at least material progress, is awaited in the foreign proceedings.  Here Novenergia’s expert states that the Stockholm annulment case could perhaps be finished by Summer 2019, but that it might take longer if counsel ask for more time or if the Stockholm court decides to seek a preliminary ruling from the ECJ on the Achmea/ECT issue. That expert also posits that the Achmea issue is of such importance that one can predict rather confidently that the Stockholm court (Svea Court of Appeal) will exercise its discretion to certify the case for appeal to the Supreme Court of Sweden, and that if this were to occur the end date for the entire Swedish annulment process could extend to 2022. Spain’s expert, a recently-retired Justice of the Supreme Court of Sweden, does not disagree.  Your Commentator’s view is that the time involved for the Swedish annulment process does not support denial of the stay. One element of this assessment is that the minimum time for an initial decision, more or less six months (and growing nearer while the matter is sub judice), is not so long. Another element is that the stay may be reconsidered, perhaps after the first Swedish decision, or even earlier, if and when there is a preliminary ruling from the ECJ on whether the Achmea ruling extends to intra-EU arbitrations under the ECT. If there is a clarifying ECJ ruling, adherence to that ruling by the Swedish courts may be foreseeable, so the time for the further proceedings in Sweden to be completed may then be not particularly relevant to the analysis. A relatively short (up to six months) wait-and-see period when there is great volatility on this issue in a number of European courts and in ECT arbitral tribunals has considerable merit.

The third Maiellano Tours factor is “whether the award sought to be enforced will receive greater scrutiny [in the foreign court] under a less deferential standard of review.” Here the first question may be what is the scope of review in the US Court of the arbitral tribunal’s rejection of Spain’s Achmea-based objection to jurisdiction? Without digressing into a lengthy discussion of this controversial corner of US arbitration law, let’s assume for argument’s sake that the US Court would not view the parties’ agreement to Stockholm Rules arbitration in Stockholm in the framework of Swedish arbitration law as a clear and unmistakable delegation of all power to decide arbitral jurisdiction issues to the arbitrators.  Let’s further assume that in Sweden an arbitrator’s arbitrability decision is judicially reviewed more or less de novo when this is  requested (IBA Arbitration Guide for Sweden, updated Jan. 2018, at p. 8, prepared by Robin Oldestam of Mannheimer Swartling). So differential deference to the tribunal’s Achmea arbitrability ruling may not be present. But what about the status of EU law as an intrinsic element of Swedish substantive law? If the ECJ declares that the Achmea rationale extends to the ECT, isn’t Sweden bound to apply the ECJ ruling whereas the US Court is not? This would seem to be effectively a wider scope of review in Sweden, a factor that favors a stay under the Maiellano Tours factors, on the basis that the risk of inconsistent outcomes is reduced by waiting.

I will not dwell here on the fifth Maiellano Tours factor “balance of hardships”, save to note: (1) that alleged economic hardship of a Claimant like Novenergia may be partially relieved by a requirement of suitable security, and would not be relieved by permitting enforcement if Spain could prevail upon a court to require Claimants to create reserves sufficient to satisfy its claims for recoupment if the Achmea issue were to be ultimately resolved in its favor; and (2) it seems an unnecessary hardship for Spain to be required to litigate the Achmea issue before multiple enforcing courts unconnected to the EU when an EU Member State court such as the Svea Court of Appeal might grant Spain’s request that a preliminary ruling be sought from the EU concerning the application (or not) of the Achmea rationale to the Energy Charter Treaty.

The sixth (and last enumerated) Maiellano Tours factor is the “catch-all”: “[A]ny other circumstances that could tend to shift the balance in favor of or against adjournment.” One such circumstance is that Novenergia v Kingdom of Spain is only one of many intra-EU arbitrations under the Energy Charter Treaty. Conferees at the December 2018 conference that I attended were told that there are at least four award enforcement cases in US district courts at this time in which an investor from one EU Member State has won an award against another EU Member State for violations of the ECT. How many other similar ECT arbitrations are in progress I do not know, but indications are that there may be a considerable number. A Norton Rose Fulbright report in October 2018 states that Spain had been named as the Respondent in more than 40 cases, that Italy faces ten cases, that the most frequently occurring nationality of ECT Claimants is German, and that 66 ECT cases are pending. It stands to reason that many of these cases involve the Achmea issue, and that definitive guidance from the ECJ will be obtained, if not in the Novenergia case in the Swedish annulment case, then in another annulment case where an ECJ Preliminary Ruling is similarly sought. I suggest it is reasonable for a US district judge to tread cautiously because the stakes are far greater than the award in favor of Novenergia or the timing of its collection. Essentially the further utility of the ECT arbitral dispute resolution process within the EU is at stake. A merits decision on the issue by a US court in one case is not likely to resolve the matter and there is at least some risk that the US court, presumably having no prior training or experience in the relevant EU law, would issue a decision which, even if soundly reasoned, fails to be influential among the Justices of the ECJ when a Preliminary Ruling is predictably sought by a court of an EU Member State.

And also in the “other circumstances” category: What should be the influence on the US district judge of the fact that arbitral tribunals composed of renowned experts in public international law, including the Tribunal in Novenergia, have sided with Claimants in rejecting the position that Achmea’s reasoning should apply to intra-EU arbitrations under the ECT?  It would seem that there may be strong reasons for the US judge to resist (for now) the temptation to follow the lead of the investment arbitration “in crowd.” What of the fact that because the US is not a Member State of the ECT, the ECT is not American law, and US courts have neither any developed ECT jurisprudence nor do they have any direct forum interest in construing its dispute settlement provisions? What of the fact that the US is also not a Member State of the Vienna Convention on the Law of Treaties (“VCLT,” although the US is a non-ratifying signatory) — while Sweden is — and that it is through the VCLT’s principles of interpretation that the proposed construction of the ECT in light of EU law is to be made? What of the fact that the Svea Court of Appeal or the Supreme Court of Sweden might view an EC position (and/or ECJ Ruling) against intra-EU arbitration under the ECT as fostering a mandatory rule of Swedish substantive law, having the status of fundamental public policy, and thus requiring annulment of an Intra-EU ECT award rendered in Sweden — even if that conclusion would not be reached when analyzing the legal validity of Spain’s offer to arbitrate under the ECT solely on the basis of Swedish arbitration law? Doesn’t the suspension of the Novenergia award by the Svea Court of Appeal sufficiently hint at this possibility that there would need to be very compelling reasons favoring immediate US enforcement, even at the risk of later vacatur of the enforcement judgment, in order for a US court to deny a stay?

In summary, it would appear that there are substantial reasons for the US court to refrain at least temporarily from deciding the merits of the Novenergia v. Kingdom of Spain enforcement case to await developments in the annulment proceeding in Sweden.

Issue Preclusion in the Holiday Season

Tuesday, December 11th, 2018

In celebration of the recent publication (November 30, 2018) of important sections of the American Law Institute’s Restatement (Second) of the U.S. Law of International Commercial and Investment Arbitration (in an as yet not formally ALI-approved Council Draft), concerning the topic of the issue preclusive (collateral estoppel) effect of international arbitration awards in later US litigation, today’s post will report upon findings of a brief excursion into recent US federal case law to see what the courts have actually been doing in this area.

As a foundation for the reader’s appreciation of this report, it seems to suitable to set forth here at the outset: first, the Restatement’s “black letter” in regard to this dimension of   issue preclusion, and second, the Restatement’s summary of the criteria applied by US courts to determine the issue-preclusive effect of prior adjudications (whether judgments or awards). Thus, the Restatement in Section 4-37 (as proposed for ALI Council approval) states:

Issue Preclusive Effect of Arbitral Award

            A court declines to permit reexamination of the merits of a specific issue of fact or law previously adjudicated in an international arbitral award to the extent that the party seeking preclusive effect establishes that:

     (a) the prior award is entitled to recognition under this Chapter;

     (b) the award satisfies the requirements for issue preclusion prescribed for an arbitral award by the law of the forum in which such recognition is sought; and

    (c) barring reexamination of the issue is consistent with the arbitration agreement and the reasonable expectations of the parties.

And in Section d (ii) of the Reporters’ Notes to this section the US forum requirements for issue preclusion are summarized as follows: “Although jurisdictions that embrace issue preclusion vary in their articulation of the governing standards, those jurisdictions that allow it commonly require that four central requirements be satisfied: (1) the parties must have been given a full and fair opportunity to litigate the relevant issues; (2) the issue on which preclusion is sought must actually have been decided in the previous adjudication; (3) resolution of the issue must be necessary to the previous adjudication; and (4) the party against whom preclusion is sought must be a party or in privity with a party to the previous adjudication.”

Having furnished this foundation, I now report on my recent excursion:

  1. Whereas there is judicial discretion to give or withhold issue-preclusive effect to a prior arbitral award, the arbitration community has an understandable unease, a valid concern about awards being relegated to second-class status in relation to the judgments of courts. But major elements in the discretion equation are within the arbitrators’ substantial control: Can the Court can determine with confidence, from the Award and/or other submitted portions of the arbitral record, that the precise issue on which preclusive effect is sought was actually and necessarily decided in the arbitration? When a well-reasoned and precisely-crafted international arbitration award is involved, that concern should be satisfied most of the time — both as to the issues actually decided, and the procedures followed in the arbitration. As an illustration, in a recent case a federal district court in Texas gave preclusive effect to a factual finding made in a foreign arbitration that plaintiff suffered no economic harm by virtue of the merger of Respondent’s predecessor into the Respondent. And the Court was fully satisfied that the issue-precluded litigation plaintiff had received due process in the arbitration. The result was a summary judgment for defendant on the basis that damages could not be established on any of its litigation claims. (OJSC Ukrnafta v. Carpatsky Petroleum Corp., 2018 WL 5921228 (S.D. Tex. Nov. 13, 2018)). It is notable that in the same case, however, the court declined to find plaintiff’s claims to be time-barred, where the arbitral tribunal’s determination that plaintiff was a put on notice of its claims many years earlier was an alternative finding to the tribunal’s decision that no notice was even required under the contract. Thus the question of the timing of notification had not been necessarily decided in the arbitration.


  1. Arbitral unease about US judicial discretion in regard to issue preclusion is most acute when it comes to the procedural differences between litigation and arbitration. There may be a visceral fear that US judges will systematically reject issue preclusion on the basis that a proceeding with more searching pre-hearing discovery, broader scope for oral witness examination, more fulsome opportunity to obtain the evidence of non-parties, might lead to a different outcome on an issue in the courtroom. My brief tour of case law for this post did not reveal a pattern in which such considerations resulted in denying preclusive effect to international awards. But many other considerations might come into play. For example, a federal judge in Los Angeles ruled in 2016 in a patent licensing case that an arbitral determination of the reasonable royalty rate against the same licensor would not be given preclusive effect for what were characterized as “equitable” reasons — notably, that in the case before the court the jury was charged with determining a broad range of fair contractual terms and not merely the royalty rate that the arbitral tribunal had addressed. (TCL Communications Technology Holdings Ltd. v. Ericsson, 2016 WL 6662725 (C.D. Cal. May 26, 2016)).


  1. An arbitral tribunal might still be sitting, or a second arbitral tribunal in a related matter might be sitting, after confirmation of Award #1 by a US court. In that scenario, who decides issue preclusion? It it a matter for the Court, in “defense” of its judgment, or for the still-sitting tribunal? It seems that the issue-preclusive effect of Confirmed Award #1 in pending Arbitration #2 is likely to be seen by US courts as a matter for Tribunal #2. It was so held by the US Second Circuit Court of Appeals in Citigroup v Abu Dhabi Investment Authority, 776 F.3d 126 (2d Cir. 2015), where the Court held that an anti-arbitration injunction against Arbitration #2 would not be issued to “protect” the judgment confirming Award #1. In essence, the Court reasoned that federal courts’ interest in protecting their judgments from collateral attack did not justify taking an arbitrable dispute (over issue prelusion) away from the arbitrators, where the court’s judgment did not ensue from a plenary proceeding in the court but only from a motion to recognize and enforce the award under the New York Convention. But query whether the same outcome would follow if a party were seeking a stay of litigation on the merits, and not merely, as in Citigroup, an injunction against Arbitration #2. The case discussed below is indicative, in a positive way.


  1. A recent case was resolved in favor of a discretionary stay of the merits litigation based on the potential issue-preclusive effect of a related pending international investor-State arbitration. In this case, plaintiffs who had invested in a mining concession in the African nation of Guinea brought (1) an ICSID arbitration against Guinea for breach of the mining concession and violations of international law, and (2) a US litigation against George Soros and Soros-affiliated non-profit entities who, the plaintiffs alleged, had under the pretext of helping Guinea to revoke the corruption-tainted mining contracts engaged by a prior regime, had tortiously interfered with plaintiffs’ rights. The District Court granted the Soros defendants’ motion for a stay, finding that the issues to be decided in the ICSID arbitration — mainly whether the mining concession was valid or instead was void based on corruption in its procurement — would “likely provide significant insight into, if not actually resolve, the claims asserted in this action.” (BSG Resources (Guinea) Ltd. v. Soros, 2017 WL 5897450 (S.D.N.Y. Nov. 29, 2017)).


  1. The litigant to be precluded may not have been a party to, but only a participant in, the related earlier arbitration. In such a case, before finding a “full and fair opportunity to litigate” before the arbitral tribunal, there must be an especially careful assessment of the status and motives that the putative precluded party had when it participated in the arbitration. Suppose the later-litigating party was a voluntary non-party witness in the arbitration, and knew it was a potentially liable party that might have to resolve disputes with a party to the arbitration in court later on, and its exposure would depend largely on the arbitration outcome? That was the situation in SMS Demag Inc. v. ABB Transmissone & Distrobuzone, S.p.A., 2008 WL 906530 (W.D. Pa. Mar. 31, 2008), where the manufacturer of defective industrial machinery testified as a non-party in arbitration between the owner of the factory and the contractor-developer who had separately procured the machinery. Its witness role at the arbitration was held insufficient to satisfy the “full and fair opportunity to litigate” requirement, despite the clear incentive to limit its potential exposure. (Frequently but not uniformly, the application issue-preclusion law of the forum will require that the party sought to be precluded shall have been either a party or in privity with the party in the earlier proceeding. But that standard was not applicable in the SMS case, and so the examination of motives and incentives was necessarily more wide-ranging).


Distilling lessons about issue preclusion in the US courts for arbitrators and the parties appearing before them, we may take away the following points:


  1. Issue preclusion as a potential basis to resolve an issue before the Court generally has the same jurisprudential status in relation to a prior arbitration as it does in relation to prior litigation. (This much can be said to be “black letter law”  enshrined for instance in the ALI’s Restatement (Second) of Judgments: “[A] valid and final award by arbitration has the same effects under the rules of res judicata, subject to the same exceptions and qualifications, as a judgment of a court”, sec. 84(1), with the clarification offered in ensuing text that “res judicata” here is used in a broad sense to include issue preclusion. The differences are mainly in the details, that is, how the arbitration process and arbitral award factor into the legal formula for deciding issue preclusion.
  2. Whether or not the award has been enforced under the New York Convention appears not to factor into the courts’ assessments (although the pendency of an annulment proceeding would evidently raise doubt that the award is final). This is as it should be, because the transformation of the award into a court judgment contributes nothing on the question of what issues where actually and necessarily resolved, or whether the party to be precluded had a full and fair opportunity to litigate the issue. On the other hand, it seems at least implicit in the case law that a foreign or international arbitration award should be entitled to recognition, whether or not it has actually been recognized, as a predicate for giving issue-preclusive effect to findings of fact or law made by the Tribunal in an award. The new Restatement Council Draft provides in the “black letter” that “[a] court declines to permit reexamination on the merits of a specific issue of fact or law previously adjudicated in an international arbitral award to the extent that the party seeking preclusive effect demonstrates that: (a) the prior award is entitled to recognition under this Chapter….” In the Reporter’s Notes, no case law is cited illustrating an affirmative judicial finding of the award’s entitlement to recognition; it seems to be rather an analytical point, as stated by the Reporters, that “[a]n award that is not entitled to recognition cannot be granted issue preclusive effect. Thus, as an initial matter, issue preclusion is only possible in relation to an award that satisfies the requirements for recognition under this Chapter.” Closer examination of the record in cases discussed above might reveal that indeed the Claimant did provide sufficient factual basis to demonstrate that the award was entitled to recognition, and that no question in this regard was raised by the party against whom issue preclusion was sought.
  3. Arbitrators generally know from the context of the case whether other proceedings are probable in which a party to the arbitration may seek issue preclusive effect against another and/or be confronted with an issue preclusion contention. The most obvious situation is where the parties have agreed to arbitrate certain types of claims and to litigate others, both types of claims arise from the same business dispute, and the arbitration occurs first. When this happens, arbitrators will wish to be especially mindful to state succinctly the issues actually presented and actually decided, and to recite the procedural history in a fashion that anticipates any possible claim that a party was not afforded fair opportunity to address an issue. (Here I do not mean to understate the technical-legal significance of a court judgment in the US law of issue preclusion, but only to emphasize that the possible frailties of arbitration from an issue preclusion perspective are not cured merely by a confirmation judgment).
  4. Arbitration’s epic and incremental struggle for legitimacy in the US courts, over a period of several decades, should always be borne in mind. Richard Hulbert when he wrote nearly 30 years ago on this subject (Vol. 7 No. 1 Berkeley J. Int’l Law at p. 159) sought to enlighten US jurists about the due process procedural quality of prototypical international arbitrations – then far less well understood than they are today. But judicial misconceptions of arbitration persist, especially away from the major centers of judicial activity related to international arbitration. When writing with potential issue-preclusive impact, arbitrators do well to remember that the main exposure to arbitration of  many US judges relates to domestic awards written with little if any reference to evidence, case law, reasoning, or the arbitral process. Arbitration seems to be perennially on trial in the US courts despite its advances.

Thank you readers for your indulgence in reaching the end of this and prior posts. Wishing you all Happy Holidays.

When Is Arbitral Jurisdiction Over Non-Signatories Delegated To the Tribunal?

Tuesday, October 30th, 2018

At a recent gathering of arbitration lawyers that I attended, the leader of a seminar concerning the arbitration rights and duties of non-signatories asked if anyone in the audience disagreed with the proposition that under US arbitration law it is for the courts not arbitrators to decide whether and when a non-signatory may or must arbitrate. Not being totally at ease with the stated categorical proposition, I ventured the comment that the delegation of arbitrability issues to arbitrators pursuant to the “First Options” case law may operate as an exception to that rule, and potentially a rather broad exception at that. Not having explored the question very recently, and being unsure if I had embarrassed myself (yet again) with an inaccurate remark, I decided to explore. The results are interesting, lend comfort to my fragile ego, and indicate that the US law version of compétence-compétence (especially “negative compétence-compétence,” i.e., the law of judicial restraint on judicially deciding arbitrability), at least in regard to “who may or must arbitrate” arbitrability questions, has been undergoing some subtle but important changes.

As a quick refresher on the relevant US law, here first is a simplistic and hopefully not very controversial foundation for what follows: The received learning from the First Options case (First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)) is that the question of whether the parties to an arbitration agreement agreed to arbitrate a particular matter is presumptively a question for determination by a court, and that presumption is overcome in favor of arbitral determination of “arbitrability” only if there is clear and unmistakable evidence that the parties intended to delegate the arbitrability issue to the arbitrators. In the decade after First Options, several US federal appellate courts accepted the position that where the agreement to arbitrate provides for arbitration under arbitral procedural rules that empower arbitrators to rule upon objections to their jurisdiction, that rules adoption operates as a delegation of arbitrability issues to the arbitrators and furnishes the requisite clear and unmistakable evidence needed to overcome the presumption in favor of judicial determinations of arbitrability issues. That position is accepted with near uniformity in the US federal courts. But a competing strain of judicial authority, equally well-entrenched, holds that whether any arbitration agreement ever came into existence cannot be regarded as a question of arbitrability subject to consensual delegation to the arbitrators, because the existence of a valid delegation of arbitrability issues to the arbitrators presumes a valid arbitration agreement in the first instance, and if a party disputes whether it ever entered into a valid arbitration agreement, that issue needs to be resolved judicially before the delegation clause, or any other aspect of the arbitration agreement, can spring into operation. Case law evolved in two strands for courts to address the threshold question of whether an existing arbitration clause in a written agreement could be enforced by, or against, a person or entity who did not sign it (or at least did not sign on his, her, or its own behalf).  One branch of that case law, culminating in a decision of the US Supreme Court in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009), established that in a domestic case it is ordinary the applicable state law of contracts that applies to determine if a non-signatory may be permitted or required to enforce an agreement to arbitrate. The other body of case law has particularized to the arbitration context the various state contract law grounds for contract enforcement by or against non-signatories – assignment, assumption, agency, alter ego, estoppel, etc.

At the intersection of these streams of arbitrability law is a question that has not received particularly careful attention from the courts: what happens when a court permits or requires a non-signatory to arbitrate under an arbitration agreement that validly delegates arbitrability to the arbitrators? Does the judicial determination that the non-signatory may or must arbitrate resolve the non-signatory arbitrability issue entirely, despite the delegation, or does the court’s decision trigger application of the delegation clause to the non-signatory such that arbitrability of the underlying dispute by or against the non-signatory is ultimately to be determined by the arbitrators?

The question has considerable practical significance for arbitrators. Suppose a non-signatory prevails in a motion to compel arbitration, the Court holding (as in Contec and Gerszberg cases discussed below), that the non-signatory has a “sufficient relationship” with a signatory to be permitted to arbitrate. When the non-signatory commences an arbitration, or seeks to be joined as a party, the signatory may object to jurisdiction, and the non-signatory may retort “Issue Preclusion!” “Collateral Estoppel!”  What is an arbitrator to do?

The arbitrator might legitimately consider that the signatory has a contractual right to an arbitral ruling on the question of jurisdiction over the non-signatory’s merits claims or defenses, and that the non-signatory, having established that it may enforce the arbitration agreement, should not be allowed to enforce it selectively by bypassing the contract’s delegation of arbitrability questions to the arbitrator. But if the arbitrator desires an arbitral reprise of the court’s arbitrability decision on this basis, how does the arbitrator make a principled distinction between what she is to decide and what the Court has already decided? I suggest the correct answer might be this: that where the arbitration agreement contains the requisite clear and unmistakable delegation of arbitrability issues to the arbitrator, the judicial motion to compel arbitration that resolves the rights or obligations of a non-signatory should be construed and treated as a motion to compel arbitration of that arbitrability issue only. As such, there is no collateral estoppel, because the issue before the arbitrator now, after the court grants the motion to compel arbitration, is not the arbitrability of arbitrability (the right or duty of the non-signatory to arbitrate arbitrability), but rather the arbitrability of the merits between the signatory and a non-signatory, the latter being an issue that was not decided and was not properly decidable by the court.

For a persuasive judicial illustration of this position, l recommend Gerszberg v. Li & Fung (Trading) Ltd., 215 F.Supp.3d 282 (S.D.N.Y. 2016). In Gerszberg, a non-signatory, claiming status as third-party beneficiary of a litigation settlement agreement that provided for arbitration to resolve claims of non-compliance, commenced such an arbitration. The signatory Respondent applied to the Court to enjoin the arbitration, and advanced the position that it was for the Court not the Arbitral Tribunal to resolve the “arbitrability” issue of Claimant’s alleged third-party beneficiary status.

The Court in Gerszberg did not resolve the third-party beneficiary status issue in this particular decision — this was an interim order providing a procedural framework to develop the evidentiary record. But the district court judge did state with precision the issue that was to be resolved by the Court rather than the Tribunal: not the arbitrability issue per se, but only “who decides the issue of arbitrability.” Said the Court: “[T]o determine who decides the issue of arbitrability, a court must first determine whether the parties have sufficient relationship to each other and to the rights created under the [arbitration] agreement. … In other words, the question of relational sufficiency is for the Court, not the arbitrator, to resolve.

Reiterating the point a few paragraphs later, the Court stated: “This case… presents the question of when an entity that claims to be a third-party beneficiary has a sufficient relationship to the parties and the rights created under the agreement containing the arbitration clause such that the issue of arbitrability must be decided by an arbitrator.” The Court called its eventual decision on relational sufficiency “a threshold determination,” and “a gating determination.” Thus the governing principle was stated to be that “a putative third-Party beneficiary cannot automatically force a signatory to arbitrate the question of arbitrability, without first making a showing to a court of relational sufficiency.

Readers seeking jurisprudential roots of this “relational sufficiency” principle are encouraged to read Contec Corp. v. Remote Solution Co., 398 F.3d 205 (2d Cir. 2005) and Ross v. American Express, 547 F.3d 137 (2d Cir. 2008). In Contec, a signatory to AAA Commercial Rules arbitration clause in an international contract was held to be required to arbitrate arbitrability with a non-signatory corporate successor to the other signatory.  The existence of such an obligation, the Contec Court stated, depends upon “whether the parties [and especially the non-signatory] have a sufficient relationship to each other and to the rights created under the agreement.” Thus “relational sufficiency” became the test — at least in the Second Circuit which accounts for a considerable percentage of the judicial output relating to international arbitration, but as noted below the Fifth Circuit, home to the US energy industry, has followed suit. This test was satisfied in Contec because “there was an undisputed relationship between each corporate form of Contec [non-signatory] and Remote Solution [signatory],” and “the parties apparently continued to conduct themselves as subject to the 1999 Agreement regardless of change in corporate form.Ross v. American Express, a domestic antitrust class action case, reaffirms the Contec relational sufficiency test but held that it was not satisfied on the facts: American Express, other than being an alleged antitrust co-conspirator with the credit card companies that had signed arbitration agreements with their customers, had no relevant relationship with those signatories that would entitle Amex to invoke those arbitration agreements against the plaintiffs.

Other recent cases have reached similar outcomes but with less analytical precision. Consider the US Fifth Circuit Court of Appeals decision in Brittania-U Ltd. v. Chevron USA, 866 F.3d 709 (5th Cir. 2017). Claimant’s grievance was that Chevron, in an auction of Nigerian oil exploration leases, defrauded Claimant with a big assist from a Chevron employee and a Chevron banker. Claimant and Chevron had an arbitration agreement for UNCITRAL Rules arbitration in London, embedded in a confidentiality agreement that was not signed by the putative collaborators. When Claimant sued all three in a Texas court, Defendants removed to a US District Court under the New York Convention/FAA Chapter 2 and jointly moved to compel arbitration. The District Court granted the motion and the 5th Circuit affirmed.

Claimant argued that even if adoption of the UNCITRAL Rules was a valid delegation of arbitrability issues to arbitrators by the signatories, still Claimant was entitled to have the court decide whether Claimant had to arbitrate the merits with the non-signatories, this being portrayed by Claimant as an issue of contract formation (i.e. the threshold question of whether any arbitration agreement existed with the non-signatories). The Fifth Circuit cited Contec in support of its holding that Claimant was required to arbitrate arbitrability with the non-signatories, but did not (at least expressly) perform the type of relational sufficiency analysis that the district court judge in Gerszberg had (rightly) read Contec to mandate. But putting aside these nuances, the outcome is what should impress us: compétence-compétence carried the day in the home courts of the US global energy industry with regard to an UNCITRAL international arbitration agreement drafted by one of its biggest players. And let us remind ourselves that this is the virulent American strain of compétence-compétence: this London-seated Tribunal’s award on jurisdiction over the claims against the non-signatories would be judicially revisitable in a US court only based on the New York Convention defenses to recognition and enforcement. [The Convention on its face appears not to offer a defense to enforcement in favor of a non-signatory, or in favor of a signatory against whom a non-signatory seeks to enforce an Award. Article V(1)(a) provides a defense to enforcement, based on the alleged invalidity of the arbitration agreement, to the “parties to the agreement referred to in Article II,” that is, the parties to the written agreement to arbitrate. But I have not examined for this Commentary whether under US or other national law Article V(1)(a) of the Convention has indeed been construed to offer no recourse against a Tribunal award on jurisdiction in regard to non-signatories. But of course a London-made award would be subject to judicial set aside in a UK court where, as will be recalled from the famous Dallah case of 2010, a Tribunal’s decision on arbitrability by a signatory against a non-signatory is subjected to de novo review.]

In another recent US Fifth Circuit Court of Appeals case, this one a domestic FAA case, the Court affirmed the ruling of a US District Court in Mississippi that when a non-signatory — here, an upstream assignee of residential mortgages in a securitization scheme — seeks to enforce against a signatory an arbitration agreement containing a valid delegation of arbitrability to the arbitrators (as the clause in this case did, by selecting the JAMS Comprehensive Rules then in force), the court’s role is only to evaluate contract formation under applicable state contract law, leaving all remaining arbitrability issues to the arbitrators.  (Green Tree Servicing, L.L.C. v. House, 890 F.3d 493 (5th Cir. 2018)). In the District Court opinion, the Court had quoted at length from another Fifth Circuit case (Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 201 (5th Cir. 2016)): “[I]f the party seeking arbitration points to a purported delegation clause, the court’s analysis is limited. It performs the first step — an analysis of contract formation — as it always does. But the only question, after finding that there is in fact a valid agreement, is whether the purported delegation clause is in fact a delegation clause — that is, if it evinces an intent to have the arbitrator decide whether a given claim must be arbitrated.  If there is a delegation clause, the motion to compel arbitration should be granted in almost all cases.”  While admitting as I must to a degree of confirmation bias – having adopted a thesis and set out to find cases that support it —  I see the Fifth Circuit approach of the Kubala and Green Tree cases as fitting nicely with my suggestion above that, for the arbitrator, the judicial motion to compel arbitration by or against a non-signatory, where a valid delegation clause appears in the arbitration agreement, is properly viewed by the arbitrator as granting the motion to compel arbitration only to the extent of compelling arbitration of arbitrability, leaving the arbitrability issues ultimately to be determined by the arbitrator and refuting the contention of the prevailing party in the judicial motion to compel arbitration that the adverse party is collaterally estopped from further contesting arbitrability before the Tribunal.

It is arguably a rather thin distinction to say that, where the arbitration clause delegates arbitrability to the arbitrators, a Court asked whether a non-signatory may or must arbitrate does not decide the non-signatory’s right or obligation to arbitrate the merits, but decides only the arbitrability of arbitrability. In practical terms, many litigants can be expected to accept a Court’s relational sufficiency “threshold” determination as decisive, discounting heavily the prospects of a different assessment by the Tribunal as to the arbitrability of the merits, and simply proceed to arbitrate the merits. But the (seemingly recalcitrant) party that does still insist on an arbitral determination of whether it may or must arbitrate the merits with a non-signatory is evidently entitled to that, and is not barred by issue preclusion principles – because the Court has decided only the arbitrability of arbitrability – and whether the facts, the language of the Agreement, and the governing law mandate a different outcome as to arbitrability of the merits is an issue Arbitral Tribunals cannot necessarily avoid.

Circling back to where this Commentary began – with my having questioned that seemingly evident proposition that it is for the courts to decide (if asked) whether non-signatories may or must arbitrate – I find that the case law on delegation clauses in the non-signatory context supports my reticence. The conclusion one may draw is that we should not over-simplify our understanding of the allocation of power under US law concerning the arbitration rights and obligations of non-signatories. It cannot be said without qualification that this question is reserved to the court if a party desires that a court resolve it. Nor can it be said categorically that an arbitrability delegation in the agreement is irrelevant because a non-signatory cannot be deemed to have delegated anything and a signatory can only be deemed to have delegated arbitrability issues as between signatories. It seems more accurate to understand that US arbitration law results in a power-sharing arrangement when, as will usually be the case, the arbitration clause makes what our law considers to be a clear and unmistakable delegation of arbitrability decision power to arbitrators. Courts (if asked) make a threshold determination of relational sufficiency — which in the details looks like a full-on determination of the non-signatory’s right or obligation to arbitrate. But if the threshold test is met, the non-signatory is to be treated as a party for purposes of arbitrability and the determination of whether the signatory may or must arbitrate the merits with a non-signatory is committed to arbitral determination, and if the arbitration is domestic or is an international case seated in the US, that determination is subject only to the same limited and deferential post-award judicial review in a US court as any other matter within the scope of the agreement to arbitrate.