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Nigerian Rhapsody

Friday, April 3rd, 2020

Let’s talk today about enforcement in New York of arbitral awards annulled in Lagos, Nigeria. Big ones. USD $2 Billion, give or take. I know, you think you have heard and read enough about this topic. But really, where are you going to go today? Wash your hands and read on.

The scripture for today’s sermon is a judgment of the US District Court for the Southern District of New York, now in the throes of an appeal before the US Second Circuit Court of Appeals, in Esso Exploration & Production Nigeria Ltd. v. Nigerian National Petroleum Corp., 397 F. Supp.3d 323 (S.D.N.Y. Sept. 4, 2019).

ICYMI, the raw facts are these: In the early 1990s Esso, Texas folk now called ExxonMobil, corporate descendants of John D. Rockefeller’s Standard Oil (S.O., get it?) made an exploration and production deal with Nigeria’s state oil company. Being pragmatic (even if reluctant) Texas oilmen, they agreed to ICC arbitration in Lagos under Nigerian law. Esso spent a small fortune on the drilling, produced a lot of oil, but had the rug pulled out when Nigeria unilaterally changed the contractually-agreed allocations. (“My oil is my oil, your oil is my oil.”). Esso won an ICC arbitration for the aforesaid $2 billion give or take, and then was wiped out by a series of decisions in the Nigerian courts that effectively annulled the award. On the eve of time bar for U.S. enforcement, Esso brought the award (or its dessicated remnants) to the Southern District of New York, and in the above-cited decision, lost. And this was on the basis of the doctrine of “international comity,” as it has been filtered through the prevailing US jurisprudence on enforcement, or not, of New York Convention awards that have been set aside by a competent court at the seat of the arbitration.

I propose to do two, maybe three things, in this rant.  First, I will trace the principle of international comity as a line running through the US annulled award enforcement case law, mainly Second Circuit case law that is stare decisis, more or less, for the pending Esso-Nigeria appeal. Second, I will hark back to the 19th Century notion of international comity in US law, and show that it has had a robust recent history elsewhere in the federal judicial system, notably in the Ninth and Eleventh Circuits, much in contrast to the constricted version that has taken root in the Second Circuit’s annulled arbitration award case law. Third and finally, I will suggest that perhaps this more robust outer-Circuit* version of what international comity means US law, foreign States that systematically nullify arbitration awards against their State instrumentalities of the State would face closer scrutiny in US courts of their alleged manipulations of their own judicial organs.

Onward.

We start, again, with Chromalloy (939 F. Supp. 907 (D.D.C. 1996)), because we must. Chromalloy has fallen out of favor in part for the US District Court’s emphasis on Art. VII of the New York Convention** in its framing of the rationale for enforcing, under the New York Convention and the Federal Arbitration Act, a Convention award against Egypt that a Cairo court had tossed into the Nile.  But about the role of international comity in the annulled award enforcement equation the District Court judge in Washington DC had this to say, mainly quoting a 1984 D.C. Circuit judgment in the Laker Airways case (731 F.2d 909): “‘No nation is under an unremitting obligation to enforce foreign interests which are fundamentally prejudicial to those of the domestic forum… [C]omity never obligates a national forum to ignore ‘the rights of its own citizens or of other persons who are under the protection of its laws.’”  (The italics mean I like it, and as we shall see shortly even the Ninth and Eleventh Circuits evidently like this interests-based articulation of the international comity question).

The next case in the US canon, Baker Marine from the Second Circuit in 1999 (191 F.3d 194), did not develop the comity theme; the panel found it sufficient to reject the appellant’s Chromalloy-inspired reliance on Art. VII of the Convention, and to take note of the fact that this had been a Nigeria-seated arbitration under Nigerian law between Nigerian entities (non-State) on both sides – never mind that, on both sides, the contestants were corporate affiliates of large US energy industry players who evidently had organized affiliates in Nigeria in order to do business there. The Court’s conclusion that appellant “ha[d] shown no adequate reason for refusing to recognize the judgments of the Nigerian court” (here the italics are for clarity only) left quite open the question of what might constitute an “adequate reason,” to call out Nigeria for international lawlessness, especially in a case that might involve (as Baker Marine did not but Esso-Nigeria of course does) the Nigerian State as a party-affiliate.

But the D.C. Circuit was back on the track of State entity defendants in the Termorio case (487 F.3d 928).  In this case, Colombia’s state electric utility acted in breach of a deal to buy power, arbitrated under the ICC arbitration clause in the power purchase contract, lost the case for $60-odd million,  and then insisted in a Colombian court on a defense rejected by the arbitrators: that in Colombia after all you really CAN’T arbitrate at the ICC; you have to do it at the Bogota Chamber of Commerce. Award annulled in Bogota.  Justice in American nevertheless? Negative. Recall this from the D.C. Circuit: “Because there is nothing in the record here indicating that the proceedings before the [Colombian court] were tainted or that the judgment of that court is other than authentic, the District Court was, as it held, obliged to respect it.”  487 F.23d at 930.  And to take matters to even greater depths of divergence from US notions of international comity (look back at that quote from Laker Airways, a few stanzas ago), the Court, seemingly channeling a law clerk’s fascination with the writings of a certain Dutch law professor, stated: “For us to endorse what appellants seek would seriously undermine a principal precept of the New York Convention:  an arbitration award does not exist to be enforced in other Contracting States if it has been lawfully ‘set aside’ by a competent authority in the State in which the award was made. This principle controls the disposition of this case.Id. at 936.  

Mercifully, the Second Circuit has not gone this far, and this notion of a New York Convention near-mandate for recognition of the non-existence of an annulled award has not gained much traction.  But still Termorio helps explain why in the Second Circuit the annulled award enforcement question has become compressed into a “basic notions of morality and justice” pigeonhole: There is an express public policy exception to enforcement in the Convention (Art. V(2)(b)) said the DC Circuit, but not even a glancing reference to public policy in the section about annulled awards. And so, said the Court, even if you could say there is a public policy “gloss” on the annulled awards provision (Art. V(1)(e)) it can’t be any broader than the express public policy ground for non-recognition of an award, and therefore the settled test in that context — basic notions of what is decent and just, etc. — sets the limit of judicial discretion to decide that an foreign award annulment was unlawful and that the award still exists to be recognized and enforced in the USA.  Got it?  Mark this, because when we get back to Esso-Nigeria, we will see that this “basic notions” or “most basic notions” formula is, well, formulaic, and it acts as sort of a strait-jacket inhibiting what ought to be (says your Commentator) a more fulsome international comity analysis.  

But first a couple of stops on the Second Circuit Expressway.   Most importantly, Pemex (832 F.3d 92 (2d Cir. 2016), which looks a lot like Esso-Nigeria on the surface at least: foreign oil-producing State loses oil-related arbitration to what is effectively a US contractor, and then argues in the State’s courts that the arbitration was non-arbitrable; State Court sides with State Oil, and annuls the award. I will spare you the details of the Mexican legislative and judicial actions that formed the foundation for the Second Circuit’s adjudication. The comparison of those actions to the actions taken by the Nigerian State is the essential rhetorical framing of the Esso-Nigeria case, in the District Court’s decision and in the Second Circuit briefing so far. My job is different: first and foremost, to make you smile if not laugh, and to a lesser extent to advocate for courts to think about annulled award cases in a broader framework of international comity jurisprudence. So mainly I want to show you here (1) how the Second Circuit in Pemex seized the “most basic notions of morality and justice” strait-jacket from Termorio, and (ii) how a court somewhere might make its way from Pemex to a more fulsome comity analysis, taking guidance from Pemex and doing no disservice to it.

I start with the fact that the Pemex case really does frame the basic question as whether comity should be given to the foreign award annulment judgment: “[B]ecause the Southern District’s holding necessarily encompassed its decision to deny comity to a foreign judgment, the standard of review is modified: ‘[w]e review a district court’s decision to extend or deny comity to a foreign proceeding for abuse of discretion.’” (832 F.3d at 100).  Discretion to recognize and enforce an annulled award under the Convention, said the Second Circuit panel, “is constrained by the prudential concern of international comity, which remains vital notwithstanding that it is not expressly codified in the Panama [or New York] Convention. … Although courts in this country have long recognized the principles of international comity and have advocated them in order to promote cooperation and reciprocity with foreign lands, comity remains a rule of practice, convenience, and expediency, rather than law … When construing a statute, the doctrine of international comity is best understood as a guide where the issues to be resolved are entangled in international relations.” (832 F.3d at 106) (Internal citations and quotation marks omitted!) (Italics in lieu of an applause emoji).

From this point on, the Pemex reasoning turned down a narrower path, focused on foreign judgment res judicata principles, and in our reductionist world of bottom lines and catch phrases we end up, maybe for worse not better, with an understanding that Pemex stands for a narrow “public policy exception” to a default rule of non-recognition of annulled awards, an exception confined to judgments that are “repugnant to fundamental notions of what is decent and just.” (Id. at 106-07).  But we can find a foundation for a less cramped comity analysis in the text of Pemex:     

A judgment that tends clearly to undermine the public interest, the public confidence in the administration of the law, or security for individual rights of personal liberty or of private property is against public policy….” (Internal citations and quotation marks omitted). Too bad this is, alas, dictum.

Nearly one year after Pemex, the Second Circuit issued its long-awaited judgment in Thai-Lao Lignite (Thailand) Co., Ltd. v. Government of the Lao People’s Democratic Republic, 864 F.3d 172 (2d Cir. 2017) – long-awaited in part because the panel decided to wait for the Pemex panel to issue its opinion and for Pemex’s application for US Supreme Court review to run its course (certiorari was denied), and then to permit the parties to supplement the briefing in the case to take Pemex into account. Pemex was not fully determinative of the outcome, because the decision turned in part on the fact that the foreign award in Thai-Lao Lignite case had previously been recognized and enforced in a New York federal district court before the issuance of the annulment judgment by the competent court at the arbitral seat in Malaysia. My takeaway from Thai-Lao Lignite, for purposes of this Commentary, is that the panel recognized the separate strands of Pemex that I have identified above – international comity and public policy – and at least initially considered that they might have separate but complementary roles in an annulled awards enforcement setting.  That is my take on the following language from the opinion: “[W]e ruled [in Pemex] that although Article V(1)(e)’s permissive language could be read to suggest that a district court has unfettered discretion as to whether to enforce [an annulled] award, the court’s exercise of that discretion should rather be treated as constrained by the prudential concern of international comity. … Pemex also carved out a public policy exception to the comity principle for occasions when enforcing an arbitral award annulled in the primary jurisdiction is needed to vindicate fundamental notions of what is decent and just in the United States.” 864 F.3d at 176 (boldface supplied for emphasis). From this one might conclude that the Second Circuit here read Pemex as endorsing a fulsome international comity analysis in annulled award enforcement cases, with the public policy “exception” as the exceptional circumstance where deference to the foreign annulment judgment almost inevitably must be rejected. But in the dispositive section of the judgment, the Thai-Lao Lignite Court took a more restrictive view, effectively treating the Pemex version of the public policy exception as exhaustive of the scope of US judicial discretion to enforce an annulled award: “In Pemex, we adopted [our] view of the scope of our courts’ discretion under Article V(1)(e) []: that refusal to recognize a foreign judgment nullifying an award is appropriate only to vindicate fundamental notions of what is decent and just in the United States.Id. at 184 (Internal citations and quotation marks omitted).  

So now you know why the issue framed for decision by the Appellant Esso in Esso-Nigeria is whether the Nigerian judicial annulment of Esso’s $2 Billion award offends “fundamental notions of what is decent and just in the United States.”  But perhaps you wonder, as I do, why the Second Circuit and the DC Circuit have so consciously turned their backs on the possibility of a fulsome application of the US doctrine of international comity – indeed have not in the annulled award cases even recognized that there is such a more fulsome comity test available (as described in one contemporary version below). Instead the annulled award cases from New York and Washington pay lip service to comity doctrine and segué to a restrictive, deferential test of essential public policy. The reason for this appears to be the perception that the New York Convention assigns special status to the competent court at the seat of the arbitration, recognizing that court’s power to nullify the outcome of the arbitration on any basis short of transparently arbitrary confiscation from the winner. But isn’t it more reasonable to assume – there being no decisive travaux préparatoires on this point cited in the case law or known to this Commentator – that the drafters (huddled in First Avenue taverns during the 1958 Yankees-Braves World Series) had in mind that Contracting States would have arbitration laws that more or less congregate around an international norm, with the occasional benign local quirk like requiring wing arbitrators to be accomplished mogul skiers or permitting vacatur for “manifest disregard of the law”?  Isn’t that the strand of arbitration theory that inspired the evolution of the UNCITRAL Model Law (in the same First Avenue taverns)? And isn’t such a normative limitation on the power of a Convention Contracting State to slaughter its own awards to be fairly implied from that State’s acceptance of an international legal obligation to recognize and enforce foreign awards?

OK you say, show me this so-called fulsome international comity test. I will, and don’t lose patience just because it comes from California. Your pomegranates come from California.  

If you were a Second Circuit judge just poking around for the intellectual fun of it, and feeling un-cabined by the precedents of Baker Marine and Pemex and Thai-Lao Lignite, at least in the privacy of your own chambers and thoughts, you would discover that US comity jurisprudence comes in a variety of shapes and sizes, depending on the purpose for which a comity argument is raised. And to narrow the field a bit, you would discover a sub-category of comity doctrine that is referred to, thematically, as “Adjudicatory Comity.” (E.g., Mujica v. AirScan, Inc., 771 F.3d 580 (9th Cir. 2014)). That label seems to apply to a number of adjudicatory situations, ranging from one where there is already a final judgment on the same or nearly the same claim from a foreign court, to a parallel proceedings scenario, to something akin to a forum non conveniens motion on a claim not brought but that could be brought in some form in a foreign court. In the Mujica case just cited, the underlying claims were those of victims of a bombing attack by the Colombian military against rebel insurgents in Colombia in 1998. And while claims arising from those events were pending in Colombia’s courts, the claims in the US courts were under our Alien Tort Statute against US corporations allegedly complicit in the bombing, and those precise claims could not be litigated in Colombia. In all events this was referred to as a “prospective” Adjudicatory Comity situation – looking to whether a foreign court would be treated as the exclusive forum for a merits adjudication to be obtained.

So let’s first have a look at the comity principles identified in that setting. And then let’s consider to what extent it might be appropriate to invoke those principles in what is clearly a “retrospective” context – the potential recognition and enforcement in the US of an already-annulled foreign arbitration award, most especially one annulled by the State court of a losing State party.
The Ninth Circuit in Mujica adopted in broad outlines a three-part standard (at least) that had been stated by the Eleventh Circuit, inviting courts to “evaluate several factors, including [1] the strength of the United States’ interest in using a foreign (or domestic) forum, [2] the strength of the foreign governments’ interests, and [3] the adequacy of the alternative forum.” (quoting from Ungaro-Benages v. Dresdner Bank AG, 379 F.3d 1227, 1238 (11th Cir. 2004)).  Expanding on the US interests factor, the Ninth Circuit elaborated five factors: “(1) the location of the conduct in question, (2) the nationality of the parties, (3) the character of the conduct in question, (4) the foreign policy interests of the United States, and (5) any public policy interests.” (771 F.3d at 604). After a more detailed exposition of the considerations in applying each of these five factors, the Ninth Circuit observed that “[t]he proper analysis of foreign interests essentially mirrors the consideration of U.S. interests.” (Id. at 607). And in the third branch of the exposition of its Adjudicatory Comity analysis, the Court looked at how to assess the adequacy or inadequacy of the foreign forum. Here the Court stated: “[C]ourts consider decisions rendered by the alternative forum and ask ‘(1) whether the judgment was rendered via fraud; (2) whether the judgment was rendered by a competent court utilizing proceedings consistent with civilized jurisprudence; and (3) whether the foreign judgment is prejudicial [and] … repugnant to fundamental principles of what is decent and just.” (Id. at 608, quoting from Belize Telecom, Ltd. v. Gov’t of Belize, 528 F.3d 1298, 1307 (11th Cir. 2008)).

Aha” you say – “finally something that looks familiar.” And indeed it is notable, and important to this discussion, that — courtesy of the Termorio and Pemex and Thai-Lao Lignite — the entire analysis in the Second Circuit of whether to grant or refuse enforcement of an annulled foreign award has been telescoped into what the Ninth and Eleventh Circuits treat as merely one factor in the third branch (“adequacy of the foreign forum”) of a fulsome examination of Adjudicatory Comity. But consider the shortcomings of this telescoping in a case like Esso-Nigeria. Arguably it results in little or no examination of the state of diplomatic relations between the United States and Nigeria. Arguably it results in marginal consideration of available evidence concerning judicial independence in Nigeria broadly speaking, as opposed to what can be brought to bear in the record concerning the specific judicial proceedings in which the annulment occurred. Arguably the narrow focus on what is “fundamentally decent and just” results in no examination beyond the case-specific evidence of Nigeria’s faithfulness or faithlessness as a Contracting State of the New York Convention, or Nigeria’s conduct in regard other bilateral or multilateral treaties to which the US and Nigeria are parties (and note here that two key features of the older notion of comity drawn from 19th Century and earlier jurisprudence: reciprocity between nations, and the essentially permissive and prudential character of comity. See Hilton v. Guyot, 159 U.S. 113 (1895)). Arguably the Second Circuit’s narrow “fundamental notions” approach also results in insufficient attention to the duration and size of the financial commitment made by the US party to the arbitration, not to mention the actual circumstances of the US party’s acceptance of Nigeria as the arbitral seat and its acceptance of Nigerian law as the governing law. Arguably it results in insufficient attention to the position of the US party in the US and global economy and the economic and security interests of the US and our allies and strategic partners that might be implicated. 

As you read the District Court judgment in Esso-Nigeria and the Appellant’s Brief in the Second Circuit, take note of the extensive record that was made in the District Court concerning many of the factors identified in the preceding paragraph – but especially judicial independence in Nigeria — and observe how little bearing that evidence had on the District Court’s analysis.  That analysis not only focused on the Pemex “public policy exception” formula, but effectively proceeded to narrow that test even further by comparing one-by-one the egregiousness or not of Nigeria’s actions toward Esso to the steps taken by Mexico/Pemex against the US affiliated Pemex contractor.  Appellant in Esso-Nigeria essentially accepts the existing framework of Second Circuit law, and seeks reversal within it. But there are clear overtones in its brief appealing to a broader perspective on comity of the type described as Adjudicatory Comity in the Ninth Circuit.  We should expect to see the Esso-Nigeria case, in its appellate outcome, as provoking more discussion about a shift in that direction in the US jurisprudence concerning recognition of annulled foreign awards.

*Manhattanites thinks of Brooklyn, Queens and the Bronx as “Outer Boroughs.” Manhattan international arbitration lawyers can be charged with thinking of places like the Ninth and Eleventh Circuits as “Outer Circuits,” mainly because they are less often called upon, as compared to the Second and DC Circuits, to adjudicate important issues of US international arbitration law.

* In pertinent part Art. VII says that the Convention does not “deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or treaties of the country where such award is sought to be relied upon.” The position of the Court in Chromalloy was this meant that if an award would not be subject to vacatur under FAA Section 10, the domestic FAA, then it should be enforced despite the foreign seat court annulment.  That view has not gained traction in case law and has been criticized in literature.

Monstrous

Saturday, November 9th, 2019

If you are learning here for the first time that a divided panel of the US Ninth Circuit Court of Appeals vacated an arbitration award, on the Federal Arbitration Act ground of “evident partiality,” rendered in a JAMS arbitration by a retired California trial judge who had served as a JAMS arbitrator in over 1500 cases since 2000 (Monster Energy Co. v. City Beverages, LLC, 2019 WL 5382062 (9th Cir. Oct. 22, 2019)), perhaps you have been diverted to a lengthy hearing or a languorous holiday. Before I elaborate, to explain why the Ninth Circuit took umbrage at the arbitrator’s non-disclosure of his status as an “owner-shareholder” of JAMS,  in the aggravating circumstance that the winning party was a regular JAMS “customer” by virtue of a JAMS arbitration clause in its standard form Contract, let me just say: Welcome Back!

Monster makes energy drinks (including brands an arbitrator could love: Full Throttle, Relentless, Reign, Predator). It contracts with beverage distributors, in this case one formally called City Beverage LLC, in Washington State. Its standard distributor contract calls for JAMS Arbitration in Orange County, California (home to Mickey and Minnie Mouse, baseball’s Angels and hockey’s Ducks, a healthy stretch of the San Diego Freeway, and an airport named John Wayne). Monster’s largest single shareholder, holding almost 17 percent, is Coca-Cola (a fact not mentioned in the Ninth Circuit opinion, but consider it!) Monster terminated its Washington State distributor, a JAMS arbitration ensued, JAMS sent the parties a list of seven candidates, and the retired judge, introduced above, emerged as the parties’ mutual choice. The arbitrator then made disclosures: notably, that he had “an economic interest” in the “overall financial success” of JAMS, and that he had JAMS-arbitrated one Monster case that Monster lost.

But Monster proceeded to win this case, and its spurned Washington distributor, looking for vacatur grounds, dug deeper into the arbitrator’s economic interest in JAMS.  It learned of the arbitrator’s status as an “owner-shareholder” of JAMS “through public sources,” and found data on a JAMS web page revealing that JAMS had registered 97 cases by or against Monster in the preceding five years.  The District Court found a waiver of the bias objection by the distributor and confirmed the award, but the Ninth Circuit disagreed on waiver because “[City Beverage] did not have constructive notice of the Arbitrator’s ownership interest in JAMS – the key fact that triggered the specter of partiality.” The Ninth Circuit then proceeded to decide the “evident partiality” issue, effectively as a first-instance tribunal, rather than remand to the District Court to determine that question. In the view of the Ninth Circuit two-judge panel majority (“Monster Majority”) – one judge on the panel dissented – the fact that the arbitrator had a right to some portion of the profits earned by JAMS made his undisclosed ownership interest in JAMS “sufficiently substantial” to warrant a finding of “evident partiality” when coupled with JAMS’s “non-trivial” business dealings with Monster in the form of 97 registered arbitrations in five years.  The Monster Majority does not discuss why it has no need for additional fact-finding, and holds: “Placing the onus on arbitrators to disclose their ownership interests in their arbitration organizations, and their organizations’ nontrivial business dealings with parties to the arbitration, is consistent with both the principles of [the leading US Supreme Court case on “evident partiality”] Commonwealth Coatings [393 U.S. 145 (1968)] and our court’s precedents.” 

The evidence of “substantial” business relationship that satisfied the Monster Majority might strike many experienced observers as insufficient and incomplete. I have no specific knowledge of the terms of any owner-shareholders’ relationships with JAMS, but one could easily imagine the details to be of a nature that raises no justifiable doubts about the independence of a JAMS arbitrator. The owner-shareholder, let us suppose, turns over 25% of gross arbitrator fees on a case to JAMS and takes home 75%. JAMS (per its website) charges modest filing fees and collects administrative fees calculated as a 12% mark-up against all Professional Fees (mainly arbitrator fees, but JAMS might also appoint a mediator, conciliator, etc. ). Let’s assume JAMS also derives revenues from hearing room rentals. JAMS then bears operating costs for its office space, overheads, executive management and staff, etc., and perhaps has a profit at the end of the year (or perhaps not).

A granular examination of these facts, as to any particular owner-shareholder JAMS arbitrator, would reveal what portion of his JAMS earnings are derived from her own cases, and what portion from the profit-participation. Suppose that such a granular examination would show that the arbitrator in this case derived 98 percent of JAMS earnings from his own fees and 2 percent from the profit-participation, and in dollar terms the profit share amounted to less than $5000 per annum? Perhaps the JAMS executive and shareholder readers out there will privately chuckle at these numbers. But my point is this: The Monster Majority does not make a convincing case that any ownership interest in an arbitration services organization like JAMS is per se “substantial.” That is a question of fact, and why it was not sent back to the District Court for fact-finding is not adequately explained by the Monster Majority.    I have the same reaction in regard to the JAMS caseload of Monster arbitrations.  Most of us know nothing about them, what revenues JAMS derived from Monster’s payments, whether most of the cases were one- or three-arbitrator cases, whether many of them were settled early, who were the adverse parties, and, most importantly, what portion of JAMS’s gross revenues annually are derived from Monster’s payments to JAMS. The JAMS website states that JAMS administers 15,000 arbitrations, mediations, etc. annually.  Monster’s 97 registered cases over five years would be just short of 20 per year, or .00007 of the global JAMS annual caseload by volume.  Is it appropriate for a federal appellate court sitting as a first instance finder of facts to conclude without further development of the record that this is a “non-trivial” level of business between Monster and JAMS, for purposes of assessing the reasonable perception of bias of an owner-shareholder JAMS arbitrator? (n.b. The Ninth Circuit doesn’t mention the 15,000 cases per year figure found on the JAMS website).

It seems that a host of material issues about the arbitrator’s financial interest in Monster’s contributions toward the arbitrator’s earnings at JAMS were unexamined. The reason for this, evidently, was that JAMS actively resisted the losing party’s requests for information and its subpoena, and opposed the motion to compel subpoena compliance before the District Court. The District Court never ruled on the motion to compel, and found it to be moot after denying the motion to vacate and granting Monster’s motion to confirm the award. For the Monster Majority, this appears to have been the basis of an implicit adverse inference against JAMS and its owner-shareholder arbitrator: “JAMS repeatedly stymied [City Beverage’s] efforts to obtain details about JAMS’s ownership structure and the Arbitrator’s interest post-arbitration.” And more explicitly, the Majority professed no interest in learning more about the arbitrator’s economic benefit from JAMS’s Monster cases or JAMS’s overall profits. The Court held that the mere fact that the arbitrator has a right to a portion of profits from all JAMS cases made his interest in JAMS a “substantial interest in a firm” that did business with a party, under the formula stared by Justice White’s influential concurrence in Commonwealth Coatings (“substantial interest in a firm which has done more than trivial business with a party”). And for the Ninth Circuit majority, the registration of 97 Monster cases at JAMS over five years was “hardly trivial, regardless of the exact profit-share the Arbitrator obtained.

Perhaps the main reason many of us are so uncomfortable with the Monster Majority’s analysis is that JAMS , as an arbitration institution, does not sell legal services to clients in the same sense that a law firm or other services firm does. JAMS is not a fiduciary for its users, as a law firm is for its clients. JAMS does not strive to achieve outcomes satisfactory for its clients in economic terms, as other services and products vendors do. And what about the fact that the choice of JAMS to administer arbitration under its Rules is a mutual choice by the parties, and that there are no overtones of unequal bargaining power in this business-to-business setting? These differences seem to require that the Commonwealth Coatings formula  be adapted, not applied literally.

One senses that the Monster Majority conceived of Monster having chosen JAMS for its arbitrations as it might have chosen an aluminum supplier for its beverage cans. The Majority refers to JAMS having administered 97 cases “for Monster.” The majority refers to the arbitration clause in Monster’s form contract as “designating JAMS Orange County as its arbitrator.” The majority answers what seems the key question of how an arbitrator’s relationship with JAMS resembles or differs from an arbitrator’s relationship with another entity having business dealings with a party by simply brushing that question aside: “[N]or do we see any reason to insulate arbitration services from the principles that the Court articulated in Commonwealth Coatings.

Our distress is aggravated by the fact that the Monster Majority construes the mandate of Commonwealth Coatings in a fashion that most federal appellate courts have not. The Majority quotes Justice Black’s opinion for the Court in Commonwealth Coatings as a holding that “evident partiality” is to be found, and an award vacated, when the arbitrator fails to “‘disclose to the parties any dealings that might create an impression of possible bias.’” But that suggestion of a broad subjective standard was tempered in Justice Black’s opinion by his quotation of (1) the then-extant version of the AAA Commercial Rule on disclosure, which called for disclosure of “any circumstances likely to create a presumption of bias,” and (2) the 33d Canon of Judicial Ethics calling upon judges “to avoid such action as may reasonably tend to awaken [] suspicion” of bias.  Justice Black then concluded the opinion by stating that “evident partiality” in the FAA refers to circumstances whereby the arbitrator “might reasonably be thought biased against one litigant and favorable to another.” Further, the Monster Majority in its quoting of Justice White’s concurrence paraphrasing the Court’s holding — “‘that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed’” — ignores that the challenged arbitrator in that case was in business for himself as an engineering consultant and that the undisclosed fact was that the Respondent in the case was his client from time to time. Prior to Monster, the Ninth Circuit had been aligned with other Circuits in reading Commonwealth Coatings to require “facts showing a reasonable impression of partiality.” (New Regency Prods. v. Nippon Herald Films, Inc., 501 F.3d 1101, 1195 (2007)).

The Monster Majority purports to be adhering to its New Regency precedent. But an objective test here requires more information about the arbitrator’s ownership interest in JAMS and what 97 filed Monster Arbitrations meant in regard to (1) JAMS profits distributable to its owner-arbitrators, and (2) the propensity of JAMS arbitrators in those cases to render awards in favor of Monster.

The Ninth Circuit panel has granted Monster’s application to extend the time for filing of a petition for rehearing en banc ( i.e. by the full complement ofNinth Circuit judges) until December 5, 2019. The arbitration community will be keen to see what happens in the next chapter, whether at the Ninth Circuit or in an petition for certiorari that would invite the US Supreme Court to revisit its 50 year-old Commonwealth Coatings precedent and potentially adapt it to the cotemporary business context of commercial arbitration.

Arbitral Method on Corruption: Another Installment

Wednesday, August 28th, 2019

There are a variety of ways you might attempt to learn more than you already know about how international arbitrators handle allegations of corruption that are presented as claims or defenses in a pending case. You might sign up for a conference and, at some expense, hear condensed remarks by very knowledgeable individuals who have participated in such cases as counsel or arbitrators (e.g. a one-hour session at the ICC event in New York on October 4, from 2:30 to 3:30 p.m.). You might download the GAR “tool kit” on corruption. (I will). You might download a recently published arbitral decision on the subject, like the 420-page ruling of the Tribunal in the Tethyan Copper v. Pakistan arbitration (ICSID Case No. ARB/12/1, Decision on Respondent’s Application to Dismiss the Claims, dated Nov. 10, 2017, now also located in the electronic docket of the US District Court for the District of Columbia in connection with Claimant’s petition to enforce the Final Award, Case 1:19-cv-02424-TNM, Document 1-1, filed Aug. 8, 2019, hereinafter the “Tethyan /Pakistan Corruption Ruling”). But I understand, you already vowed to read the Mueller Report on vacation, and you’re only up to page 125. OK. So perhaps you will read this Commentary – an incomplete and non-authoritative treatment of the subject, but it is FREE and right there on your mobile device for an easy beach read! 

Seriously, readers, your Commentator who never sleeps (but often swims) took up the cudgels of the Tethyan/Pakistan Corruption Ruling, read much but not nearly all of it, and attempted to glean some useful points for your summer holiday consumption.

Let’s begin with what you really want to know, if you do not know already. Pakistan lost. Its corruption defense — that Claimant bribed and unlawfully induced State officials to make key decisions to advance its mining venture – failed. Pakistan also lost on the merits. In the Final Award dated July 12, 2019, Pakistan was found to have expropriated Claimant’s investment and to have denied Claimant fair and equitable treatment, under the applicable standards of the Australia-Pakistan BIT. Damages $4.087 billion, plus interest up to the date of the Award of $1.753 billion. This result motivated a Pakistani international arbitrator to comment on OGEMID that Pakistan is being victimized in international arbitral tribunals as a consequence of “intervention” by the Supreme Court of Pakistan to ferret out corruption. Said this commentator on OGEMID: “The present government is fighting a war against corruption and fragile institutions in Pakistan. The judicial activism and failure of relevant institutions to act is costing Pakistan billions of dollars before international tribunals.” It’s not clear whether this commentator is laying the blame on Pakistani institutions, or ICSID, or the Tribunal, or perhaps all of them. But the undercurrent seems to be that there was a legitimacy, at least in the origins, of Pakistan’s anti-corruption efforts, and that what began as a laudable initiative ends up as another good deed punished.

If you propose to stop reading the Commentary after this sentence, take away one key point (and LONG sentence): Pakistan first raised its motion to dismiss on the basis of corruption three plus years into the case, after the post-hearing briefing, after the Tribunal had been at work for months on an interim ruling on liability, and Pakistan did so on the basis of the work of a suddenly-convened State-appointed “Group of Experts” who in a matter of 8-12 weeks in the Summer of 2015 compiled a dossier of written admissions from various current and former government officials, none of whom had ever been, or have ever been as far as the Tribunal was informed, criminally prosecuted for the bribery and undue influence offenses to which they purported to admit.

For the rest of you, who wish to read on, here are my observations:

1. Tribunal’s Treatment of Claimant’s Contention That Pakistan Waived, By Conduct, Its Jurisdiction Objection: You might suppose that when a State asks dismissal of an ICSID case for lack of jurisdiction — based on corruption vitiating the domestic lawfulness of the investment – and does so after the merits hearing and the post-hearing briefs, that a defense of waiver of the jurisdictional objection might gain traction. But read those ICSID Arbitration Rules with care! Rule 41(1) lets the dilatory objector State off the hook if “the facts on which the objection is based are unknown to the party” at the normal deadline: the time of its last pleading. Besides that, Rule 26 allows the Tribunal to let a dilatory party off the hook “in special circumstances.”  So suppose the State says that “yes we had general knowledge of questionable payments but lacked the necessary specifics of the payors and payees and the influence resulting from the payments until a special commission of inquiry had completed its work”? If you are an ICSID Tribunal whose decisions finding a Host State liable might be attacked (as this Tribunal’s evidently have been) as having frustrated the State’s diligent efforts to ferret out official corruption, you might decide it’s better to deal with the corruption evidence on its merits than to steer off on the procedural exit ramp. (“Any possible delay in obtaining knowledge of the relevant facts can, and will, be taken into account in the Tribunal’s evaluation of the evidence.” Tethyan/Pakistan Corruption Ruling Para. 232). Waiver defense to the State’s Jurisdiction Objection?: unsuccessful.

2. What is the Standard of Proof?: On this question some of the world’s most eminent jurists and arbitrators appear to be at a loss for effective words, and they settle upon formulae that seem to mean “evidence that convinces us – and we will let you know by the end of this several hundred page decision if we are convinced.” The problem with achieving a more specific and enduring formula is bound up with the arbitrator’s duty of independence and impartiality, and the appearance thereof while acting in the very transparent environment of Investor-State arbitration. Here is why I believe this to be so. The State (Pakistan, for instance) argues that corruption is very difficult to prove because direct evidence is almost always lacking — people involved like State officials just always seem to forget to take selfies on their i-phones when pocketing or passing the bribes. Besides, says the State, corruption is nasty and internationally bad, it undermines the rule of law, its extinction is a goal of international public policy. So cut us some slack on the standard of proof so we don’t fail to prove it, says the State, stick with preponderance of the evidence. The Investor, on the other hand, tells the Tribunal that this is very very serious business, a level of gravity somewhere up the scale from garden-variety fraud, that not only threatens a forfeiture of Claimant’s entire investment if it precludes recovery against the State but has big collateral damage potential because some high level supposed perpetrators might have to do serious time. Therefore says the Claimant, the standard should be, more or less, really really clear and really really convincing. (Obviously there is more elegance in the submissions of Claimant’s counsel, and I couldn’t possibly measure up). Now let’s get inside your arbitrator mind for a moment. If you accept preponderance of the evidence, you establish a big margin for error that might allow a State to gin up and succeed with a bogus corruption defense, and effectuate what amounts to an expropriation of Claimant’s investment at the mere cost of counsel fees and a share of arbitrator fees. And to avoid this outcome you might have to apply preponderance in a fashion that gives the impression that you actually applied a more demanding standard. At the other extreme, adoption of the very stringent standard advocated by Claimant makes it appear that the standard rather than the evidence will be decisive, that the Tribunal, even before systematically assessing the evidence, has at least a skepticism about it — and in the eyes of some critics of the ISDS system that kind of arbitral skepticism reflects an implicit anti-State pro-Investor bias. These are reasons — not stated in the Tethyan/Pakistan Corruption Ruling but I would imagine discussed in a deliberation context by the arbitrators – to elide adoption of the Claimant’s position. And so the formula that emerges in the Pakistan case – with some parallels to prior cases like Niko Resources v. Bangladesh is that the Tribunal will require the evidence to be “compelling” and “persuasive” – which is only to say, effectively, that the Tribunal will look at all the evidence with an open mind as to its weight and authenticity and let you know at the end of the decision whether it is convinced. In summary, perhaps there is not, and in the framework of ICSID arbitrations cannot be, a fully satisfactory answer to the question of what is or should be the standard of proof.

3. What Can We Learn About Arbitral Method in Evaluation of the Evidence?

Let’s take this in two parts (a. and b.) : Issue identification, and decision method.

a. Evidence evaluation issues that arise (examples):

1) status and potential influence of the putative bribe takers;

2) causation, in the sense that influence was exercised based on inducement;

3) causation, in the sense that the person allegedly influenced would have made a different decision;

4) whether allegedly influenced persons actually supported the action sought by the Investor, casting doubt on motivation to bribe;

5) whether the official act allegedly produced by the bribe was discretionary or was something already required to be done, by law or by contract.

b. Techniques for resolution in evidence evaluation (examples):

1) The party with burden of proof of a fact cannot satisfy the burden merely by pointing to the absence of evidence of the non-existence of that fact (compare: affirmative evidence that a discussion was held at a meeting about the amount of the bribe vs. evidence lacking clear indication that amount of the bribe was not discussed); 

2) The party with burden of proof on the issue of whether an of corruption occurred fails to sustain the burden if it fails to establish any specific impact that the allegedly bribed official had on the State’s favorable decision in regard to the investment. (Tethyan/Pakistan Corruption Ruling Para. 824);

3) The Tribunal’s insistence on persuasive evidence of corruption may entail, for example, insistence on clear identification of the persons who made the payments, and convincing evidence that the bribe recipient would not have supported the official action desired by the investor had the bribe not been tendered. (Id., Para. 840);

4)  The Tribunal will be keen to resolve credibility issues, presented by virtue of conflicting retrospective accounts given by witnesses, by using objective tools, and thus will look to contemporaneous evidence (travel and meeting itineraries, e mails written by the witnesses, etc.) that corroborates or conflicts with the retrospective account given by a witness. (Id., Paras. 856, 859).

4. What Does A Tribunal Do With Its Natural Skepticism About a Late Submission of a Corruption Defense?: A Tribunal will be strongly influenced by circumstances concerning the presentation of the claim of corruption that affect the overall credibility of the presentation. In the Tethyan/Pakistan case, the dominant circumstance was that Pakistan had convened a “Group of Experts” at the end of the merits phase of the case, and in the space of a several weeks this Group had compiled a remarkable dossier of incriminating written confessions from current and former government officials, concerning events as much as 15 years earlier. Without the saying so, readers and observers with even a passing exposure to the tensions surrounding Investor-State arbitration (like this Commentator, in his bleacher seat with a hot dog and a beer) will have a keen sense that the Tribunal felt obliged to subordinate this consideration to a painstaking objective review of the evidence presented by both sides, thereby perhaps more effectively subduing the predictable criticism of the outcome by pro-State ISDS critics, and reducing the prospects of success for an ICSID Annulment attack. Thus it is only at page 417 of a 420-page Decision that the Tethyan/Pakistan Tribunal “take[s] note of the context in which the testimony provided by the Respondent’s witnesses arose and was produced in this arbitration” (Para. 1491) and finds it to be “remarkable that as far as the Tribunal has been informed, [Pakistan] has to date not initiated a prosecution against any of these individuals” (Para. 1493).  One could imagine that in a United States court, a foreign State over which the Court had jurisdiction would not receive such tolerant and thorough treatment, and that a delay-based objection of waiver, acquiescence, laches, etc. might be heard and granted as a basis for dismissal at the pleading stage or after minimal discovery about the origins and motivations of the State’s corruption inquiry. The transparency of ICSID arbitration and the ongoing controversy about its fairness and efficacy appears to lead to more tolerance of what might elsewhere be seen and dealt with as unacceptable scorched earth tactics.   

Who Decides Who Decides? – The Turf War Continues

Wednesday, August 28th, 2019

When you see me in the street, you can tell that I’m a pro-arbitration kind of guy. I wear my FAA hoodie, usually with the hood down, the better for you to admire my snowy white hair and furrowed, gravitas-laden brow. So when a US Court of Appeals takes a swing at arbitration, my instinct is to swing back. Fifth Circuit, take this 🤜. (As a response to the decision here discussed, Archer & White Sales, Inc. v. Henry Schein, Inc., 2019 WL 3812352 (5th Cir. Aug. 14, 2019)).

Actually, the Fifth Circuit got punched already this year for being anti-arbitration, by a heavyweight champ called the Supreme Court of the United States. In Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019), the Supreme Court in a unanimous decision abrogated the Fifth Circuit’s rule that if a motion to compel arbitration is “wholly groundless,” the district court when presented with a motion to compel arbitration may decide arbitrability itself, and deny the motion, even though there is an otherwise valid and legally sufficient contractual delegation of arbitrability issues to the arbitrator. In essence, the Court held that the “wholly groundless” exception was wholly groundless, and inconsistent with the Federal Arbitration Act, because its underlying premise was that arbitrators (a very mercenary bunch) cannot be trusted to resist arbitrating disputes that clearly were agreed to be litigated.

The Fifth Circuit had wanted to apply its “wholly groundless” exception because the arbitration clause, in a business-to-business pharmaceutical distribution contract, provided for AAA Commercial Rules arbitration of all disputes except (as relevant here) “an action seeking injunctive relief …” Whereas the Plaintiff’s antitrust complaint sought money damages and injunctive relief, the Fifth Circuit thought the “wholly groundless” exception applied. And while the Supreme Court did away with that exception, it left the Fifth Circuit an opening: the case was remanded for the Fifth Circuit to decide whether the arbitration clause satisfies the “clear and unmistakable evidence” test for delegation of arbitrability to arbitrators.

The Fifth Circuit’s reasoning on this question, in its decision earlier this month —  the entire sum of its analysis of the arbitration clause — is this: “Given that carve-out, we cannot say that the Dealer Agreement evinces a ‘clear and unmistakable’ intent to delegate arbitrability.” Why is it, dear judges, that you cannot say?  Is it because the carve-out is so specific to the question of who (court or arbitrator) decides arbitrability, in an action seeking injunctive relief, that there is real doubt about whether the parties intended the AAA Commercial Rule empowering arbitrators to rule on their own jurisdiction to be applicable to such an action? Evidently this is not what the Fifth Circuit panel thought, or the decision would have said so. Or is the Fifth Circuit panel unable to say there is an unmistakable delegation of arbitrability to the arbitrators because it simply makes no sense to delegate anything to the arbitrators where the carve-out appears to be clear on its face? But is this not precisely the position rejected by the Supreme Court in its decision abrogating the “wholly groundless” exception?  

Whereas the Fifth Circuit panel was unable to say there remains a clear and unmistakable intent to arbitrate arbitrability by virtue of the AAA Rules, permit me to say why that is so despite the carve-out.* Subject to the carve-out for “actions seeking injunctive relief,” the parties agreed to arbitrate “all disputes” arising out of the Dealer Agreement under the AAA Commercial Arbitration Rules. Many types of disputes concerning injunctive relief could arise, not all of them fitting neatly within “actions seeking injunctive relief”:

1) a motion to compel arbitration of the arbitrability of claims, filed in court, seeking both damages and injunctive relief;

2) a claim for damages and injunctive relief as remedies for the same alleged wrong

3) a claim for injunctive relief only;

4) a claim for an equitable remedy that is not, strictly speaking, an injunction, such as a constructive trust or the appointment of a receiver.

5) a claim seeking damages and reserving the right to amend to tack on a request for injunctive relief.

Which of these is “an action seeking injunctive relief”? #3 clearly is. #2 is ambiguous: maybe the parties meant the carve-out to apply just where an injunction is the only remedy sought. # 4 is ambiguous, because “injunction” might have intended literally or it might have been a code word for equitable remedies, #5 is even more ambiguous, because it is not “seeking” but “might eventually seek” an injunction. Example #1 is the dispute before the Fifth Circuit on remand in Schein. It seeks an adjudication about the allocation of power between courts and arbitrators to decide an arbitrability issue. The final determination of the motion grants no injunctive relief (except, in a sense obviously not intended by the parties, to enjoin either litigation or arbitration of the arbitrability issue), so it is painfully difficult to see how this motion to compel arbitration is an “action seeking injunctive relief.” It is procedural motion under FAA Section 3 within such an action, and the stay or dismissal of the action pending arbitration would adjudicate the action without adjudicating its arbitrability. Somebody, a court or an arbitrator, must construe the carve-out to decide whether the dispute sought to be arbitrated is “an action seeking injunctive relief.” The carve-out creates that question without answering it, and if the carve-out permits the Fifth Circuit to decide, without reasoning, that the delegation of arbitrability to the arbitrator is not “clear and unmistakable,” then the Fifth Circuit has simply resurrected its “wholly groundless” exception in a thin disguise.

When the Schein case returns to the US Supreme Court, which seems more than just possible, there would be a couple of factors in play. First, the Justices will be aware that the Supreme Court has never decided whether to adopt the position that when an arbitration clause provides for arbitration under Rules that allow arbitrators to rule on objections to their jurisdiction, that rules-adoption is clear and unmistakable evidence of an agreement to arbitrate arbitrability. But whereas every federal court of appeals to have considered whether to adopt this principle has in fact done so, the Supreme Court is not likely to grant certiorari to decide a question that was not even raised in the Schein case at the District Court or Fifth Circuit level.  More likely, the Supreme Court will think the issue is what constitutes sufficient evidence of a contrary intention of the parties, concerning delegation of arbitrability, to put a cloud over the clarity otherwise resulting from the rules-adoption? And how about this for a solution: Whereas what makes the rules-adoption “clear and unmistakable evidence” is not the adoption of arbitration rules generally but rather the adoption of the specific rule empowering arbitrators in regard to objections to their jurisdiction, the cloud on clarity must come from some evidence in the contract not merely of an intention to litigate some claim, but some specific evidence in the contract of an intention to litigate rather than arbitrate arbitrability. That approach makes sense because the agreement to arbitrate under AAA Commercial Rules, as in Schein, is an agreement to arbitrate arbitrability, and the “actions seeking injunctive relief” carve-out in the arbitration clause doesn’t cast doubt on the existence or validity of that agreement, but only on the scope of arbitrable arbitrability issues. The Supreme Court has told us repeatedly for decades, going back to the Steelworkers Trilogy cases, that any doubts concerning the scope of arbitrable issues under a valid arbitration agreement are to be resolved in favor of arbitration. It seems entirely possible that this fundamental principle of US arbitration law will be sufficient for the Supreme Court to overturn the Fifth Circuit’s decision on remand in Schein.

* [Hard core gluttons for punishment may note that the Fifth Circuit’s reliance on what it saw as a parallel “carve-out” case that the Second Circuit decided in favor of judicial determination of arbitrability, NASDAQ OMX Grp., Inc. v. UBS Securities, LLC, 770 F.3d 1010 (2d Cir. 2014). But the arbitration clause in NASDAQ OMX was not an “all disputes” type of clause, it had much more sweeping exception clauses effectively making arbitration of disputes the exception rather than the rule, and making it a plausible construction that the AAA Commercial Rules only applied in an arbitration once exceptions to arbitration, if raised, had been determined in a judicial forum. Thus there was doubt about whether the parties had actually intended that the AAA Rule on arbitral determination of arbitrability would ever come into play].

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 italaw.com 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.

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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.