You may learn very little you did not already know, about federal arbitrability law or investor-State arbitration, from the Second Circuit’s decision in Republic of Ecuador v. Chevron Corp., 2011 U.S. App. LEXIS 5351 (2d Cir. Mar. 17, 2011)). But the decision so elegantly combines fundamental principles from these separate domains of arbitration jurisprudence that it serves to enrich our appreciation of some basic precepts.
In case you have not subscribed to Arbitration Commentaries or the OGEMID discussion forum before today (for shame), here is a primer on Chevron/Texaco’s travails In Ecuador: Citizen groups from Ecuador sued Chevron in New York federal court for environmental harm from oil drilling and toxic waste disposal. Chevron obtained forum non conveniens dismissal, promising to litigate in Ecuador courts. The Government of Ecuador, allegedly, interfered in the litigation in Ecuador to prejudice Chevron’s defense.
Chevron then started an arbitration against Ecuador under the UNCITRAL Rules as permitted in the bilateral investment treaty (BIT) between Ecuador and the United States. A judgment against Chevron has been entered in the Ecuador litigation, the enforcement of which Chevron resists in the US proceedings.
The Ecuador litigation plaintiffs and Ecuador applied separately to the US District Court in New York to enjoin Chevron from pursuing the BIT action. The District Court denied both motions, and in this Second Circuit decision those denials of a stay are affirmed. This commentary concerns the Second Circuit’s position on the Ecuador Government’s attempt to halt the BIT arbitration.
Ecuador argued that by starting the BIT arbitration, Chevron violated the promise it had made to the District Court, to litigate the merits in Ecuador’s courts, as the basis for forum non conveniens dismissal in the original US case. This promise operated as a waiver and estoppel barring the BIT case, said Ecuador.
But Chevron maintained, and the Second Circuit agreed, that: (1) in the BIT, Ecuador offered to arbitrate under the UNCITRAL Rules, (2) those Rules vest power in the Arbitral Tribunal to resolve objections to the Tribunal’s jurisdiction, including objections to the validity of the arbitration agreement, (3) in BIT cases, the bilateral agreement to arbitrate between investor and State arises when the investor accepts the State’s arbitration offer by filing its case, (4) given this contractual basis for investment arbitration, conduct that allegedly operated as a waiver of, or estoppel against, Chevron’s right to file its BIT case concerned the validity of the arbitration agreement, and (5) both sides having agreed to arbitrate under the UNCITRAL Rules, they had “clearly and unmistakably” agreed to arbitrate arbitrability. As between Ecuador and Chevron, therefore, the issues of waiver and estoppel were for the Tribunal to decide.
In one sense, the latest Chevron-Ecuador decision is simply on old twist on a familiar theme. The arbitration-dodger brings collateral litigation, on the merits or over arbitrability, in the teeth of a broad and prima facie valid arbitration agreement that incorporates rules conferring jurisdictional competence on the arbitrators. The Second Circuit decision reminds us that (1) US case law assigning arbitrability decisions to arbitrators in such circumstances applies in cases arising under the New York Convention and FAA Chapter 2, and including investor-State cases, (2) the fact that conduct affecting the validity of the arbitration agreement occurred in a litigation context (i.e. Chevron’s promises to the US court to litigate in Ecuador courts) creates no special circumstance making the court in which that conduct occurred primarily responsible for deciding arbitrability.
Whether such cases must be addressed, one-by-one, burdening judges and stalling arbitrations, is a question judicial rule-makers in the US may wish to address seriously and soon. Imagine a path-breaking Local Practice Rule in an arbitrability-preoccupied venue like the Southern District of New York:
“When in the course of a pending arbitration the court is to asked to decide whether the court or the arbitral tribunal should determine in the first instance an objection to the arbitral tribunal’s jurisdiction:
(1) The application shall be brought on by Order to Show Cause on not more than five days notice unless the Court shall otherwise direct;
(2) The application shall include the full text of the alleged agreement to arbitrate, and of any rule or provision of law to which reference is made in such agreement concerning the powers of the arbitral tribunal to resolve objections to the tribunal’s jurisdiction; and
(3) The Court shall rule on the application with due regard for the efficiency of the arbitral process; and
(4) The Court shall award attorneys’ fees and costs to the prevailing party, unless that party shows good cause why no such award should be made.”