Marc J. Goldstein Arbitrator & Mediator NYC
December 18, 2010

A Sensible Non-Application of Functus Officio to Divergent Partial and Final Awards

The functus officio doctrine returned to center stage this week, with a new decision in a New York Convention case from the U.S. Fourth Circuit Court of Appeals. Here, a partial award determined that a contract had been breached, but the subsequent final award determined that the same contract was unenforceable. In the circumstances, the Court held, the final award was enforceable and confirmation of the partial award could be (and properly was) refused under the Convention by the district court. (AO Techsnabexport v. Globe Nuclear Servs. & Supply, Inc., 2010 U.S. App. LEXIS 25640 (4th Cir. Dec. 15, 2010)).


The arbitral procedure that led to this outcome was a bit out of the ordinary. At issue was a contract involving purchase and sale of uranium. The seller, a Russian company, was the appointee of the Russian Federation to manage its supplies of nuclear material. The buyer, incorporated in Maryland, was a self-styled trader in uranium used in the production of nuclear fuel.


At an early stage, the Tribunal was informed of U.S. criminal indictments related to alleged fraudulent acquisition of a controlling interest in the buyer company by former officials of the Russian Federation, and was told of a parallel criminal investigation in the Russian General Prosecutor’s Office. (The case report does not say, but one assumes, that the Russian sales agent concluded that the buyer was not a secure and trustworthy repository of nuclear materials, and terminated the contract for that reason).


The Tribunal elected to divide the arbitration into three phases: breach of contract liability, damages, and then potentially a third phase addressing the legality of the contract under the applicable Swedish law based on the evidence that might be developed in the Russian criminal investigation. After Phases One and Two, the Tribunal issued a partial award finding breach of contract and awarded nearly $1 billion of damages to the buyer. But in Phase Three the buyer submitted nearly 500 exhibits derived from the Russian criminal investigation, including extensive witness interview transcripts. Based on that evidence, the Tribunal concluded that the contract should be denied enforcement under a provision of the Swedish Contracts Act that in essence permitted rescission based on fraudulent inducement (here, evidently, a scheme to conceal the disreputable character of persons who had secretly conspired to obtain controlling interest in the buyer).


The Fourth Circuit rejected the argument that the Tribunal under the functus officio doctrine lacked power to revisit the conclusion in the partial award that the contract was enforceable. And its rationale for doing so makes good sense: the Tribunal from the outset had made clear that any determinations it might make, prior to any potential consideration of the Russian criminal investigation evidence, were subject to change if that evidence were later presented and it supported (as it did) the conclusion that the contract should be deemed not enforceable. It would not be appropriate in such a case, the Court held, to refuse to confirm the final award under Convention Article V(1)(c) based on the Tribunal having allegedly exceeded its powers.


The Court’s opinion does not permit arbitral procedure-watchers a clear understanding of why the Tribunal elected to proceed as it did. One can imagine the Tribunal had highly imperfect information about the status of the Russian Prosecutor’s work, its timing, its focus, or the merits of the charges under inquiry. One can imagine the Tribunal having been reluctant to stay its proceedings for an indeterminate time. Further, the issuance of the partial award appears to have been quite proper, as at that point it could not be foreseen that the Russian award-loser would be able to present, as it later did, such a compelling case of fraud based on the evidence gathered by the Prosecutor. Thus it appears that well-designed arbitral procedure combined with meticulous application of the Convention and the functus officio doctrine by the U.S. Court yielded a sensible solution to a complex problem increasingly faced by international arbitral tribunals — the arbitral adjudication of issues related to alleged criminality of participants in the arbitration.





Leave a Reply