Some of you know that the editorial staff of Arbitration Commentaries has a soft spot in its heart for stories about changing the place of arbitration. And now, just in time for your beach reading (masked, distanced, and only if your beach is open), comes a new tale – or perhaps one should say a new installment of a melodrama that goes back two decades. It involves a certain Sovereign State in South America that, of late, struck out trying to swing a withdrawal of its own gold from the Bank of England. But the judicial activity that motivates this report comes from that rowdy collection of once-united states that, in Congress assembled, rather openly spurned any further nourishment of the Bank of England, already ~244 years ago. Thus the text for today’s sermon: Northrop Grumman Ship Systems, Inc. v. Ministry of Defense of the Republic of Venezuela, 2020 WL 1584378 (S.D. Miss. Mar. 31, 2020), appeal filed, US Court of Appeals for the Fifth Circuit, No. 20-63047, Apr. 29, 2020, Appellant’s brief filed, June 29, 2020.
Here’s how the story goes:
Back when Hugo Chavez was still a college instructor, Venezuela (“VZ”) had some broken boats. VZ signed up a Northrop Grumman (“NG”) affiliate to fix them. The contract called for arbitration in Caracas and for application of VZ substantive law and the VZ Code of Civil Procedure (of which the VZ Arbitration Act, channeling the UNCITRAL Model Law, was and is a chapter).
When NG first moved to compel arbitration, it resisted Caracas and pitched for Mississippi (evidently the Gulf-shore venue of the boat repair shop). The parties initially struck a deal, to arbitrate in México, but the Mexican arbitration fizzled and the parties made their way back to the federal district court in Mississippi on new cross-motions to compel arbitration. Now it is 2010, and Hugo Chavez is running VZ, and NG tells the court “this isn’t the Caracas we signed up for”, and the district court has to make a decision on cross-motions to compel arbitration, that of NG, still pitching for Mississippi or alternatively anywhere but Caracas, and VZ, still pitching for Caracas because that’s what the contract says.
The district court, citing US case law that permits courts to decline to enforce “forum selection clauses” that are “unreasonable,” grants each party’s motion to compel arbitration but only in part: neither party’s pitch regarding the place of arbitration is accepted, and the Court directs the parties to try to reach an agreement on that point: “The Court concludes that the parties should find a mutually agreeable alternative forum as the location for the arbitration proceedings.” The Court in its Order accepted NG’s factual submissions that there was a big risk of partisan judicial interference with the arbitral process in Caracas, through actions of the Venezuelan State in favor of the VZ-affiliated entity. Whether that 2010 order was correct is Issue #1, and really the only issue, in the current Fifth Circuit appeal. So let’s mark it! And come back to it! (Issue #2 is whether the District Court should have refused to confirm the final award under the Panama Convention, but essentially the asserted Convention ground for non-recognition is that the procedure wasn’t what the parties agreed to because they agreed to arbitrate in Caracas. See Issue #1).
After an abortive try by VZ to appeal that Order – rejected by the 5th Circuit on jurisdiction grounds* — an actual arbitration broke out. NG chose an arbitrator. VZ chose an arbitrator. NG and VZ agreed that the ICC would act (only) as appointing authority, and the ICC appointed a President of the Tribunal. The parties agreed – sort of – that Washington DC would be the place of arbitration – and VZ did not disavow that agreement until the Tribunal was already duly constituted. But now came VZ before the Tribunal to say – as relevant here – this can only be and is a Caracas-seated arbitration because that is what the contract says! And so, in the critical portion of the critical 2014 procedural order of the Arbitral Tribunal that is now ripe for consideration by US Fifth Circuit in the context of an appeal from an order of the district court granting recognition and execution of the Tribunal’s final award, the Tribunal decided:
1) that the venue provision of the contract, selecting Caracas as the place of arbitration, could not be enforced because the unenforceability of that venue provision had been determined by the district court in Mississippi, and was res judicata,
2) that this left unimpaired the parties’ agreement in the contract that any arbitration would be governed by the VZ Code of Civil Procedure,
3) that the Tribunal would apply the VZ Arbitration Act (as part of the VZ Code of Civil Procedure) as the “curial law” of the arbitration – explained very precisely by the Tribunal to mean the law governing the parties’ conduct before the Tribunal, the proceedings before the Tribunal, and the parties’ relationship with the Tribunal — but notably omitting from this descriptive recitation any reference to the judicial competence of the VZ courts in relation to the arbitration or its outcome;
4) whereas the VZ Arbitration Act leaves selection of the place of arbitration to be decided by the Tribunal if that question is not resolved by party agreement, and the parties’ agreement having been invalidated in a judicial proceeding whose outcome binds the parties, it was incumbent upon the Tribunal under the curial law to select a location, and
5) whereas the place of arbitration to be selected could not be in VZ (see #1), and as a matter of fairness ought not to be in the United States save by agreement, the Tribunal designated Rio de Janeiro as the location for the proceedings.
Fast forward to 2018. In the intervening years, the Tribunal hears the merits, deliberates, and enters a final award. VZ loses, for about $138 million USD. Ouch. So back we go to Mississippi for award enforcement (or not) – for which the district court retained jurisdiction. The district court’s decision granting recognition and enforcement of that final award is, for our purposes, just a warm-up for the main event in the Fifth Circuit. The only arguable procedural irregularity in the Tribunal’s selection of Rio as the place of arbitration was the Tribunal’s putative lack of authority to make the decision. But that was the issue decided by the district court in its 2010 order, which was final, and the law of the case, for purposes of the district court’s proceedings. This matter was effectively just passing through the district court in 2019-20 on its way to the Fifth Circuit, where the 2010 Order could finally be the subject of an appeal in 2020.
What should the Fifth Circuit sensibly do in its post-arbitration assessment of the 10-year-old district court Order? Ironically, one conceivable outcome would be to hold that the Parties’ respective motions to compel arbitration should have been denied. If the contractual choice of Caracas as the place of arbitration was not severable from, but was integral to, the agreement to arbitrate – and accepting the Court’s 2010 findings that arbitration by these parties of this case could not fairly take place in Caracas — then both motions to compel arbitration arguably ought to have been denied. The unavailability of fair process in Caracas would, on this view, mean that the arbitration agreement, not merely the forum selection clause, was frustrated, commercially impracticable and/or impossible under general contract principles (cf. the New York Convention, Article II (3): “null and void, inoperative or incapable of being performed” – language with no parallel phrasing in the Panama Convention). What then? Would both parties try their luck in Brazil, for recognition of the award and its annulment, respectively?
The 2010 district court Order did not directly address the severability question, and probably should have. But can we not accept that the unstated premise of that Order was that when a business from one State makes a commercial contract with an agency of a foreign State, from the business’s point of view arbitration, not arbitration in the foreign State forum, is the essence of the dispute resolution bargain. The main objective is to resolve disputes outside the foreign State’s courts, with the portability for enforcement offered by the Conventions. The location of the arbitration is a risk accepted as a price for these benefits. Looking at things through the eyes of the Sovereign State party, the view at least presumptively is much the same: it primary objective in agreeing to arbitrate is to eliminate the risk that it could be forced to litigate in a judicial forum of its foreign business partner that it fears may be hostile if not clearly biased, and that it views as unfamiliar and therefore tactically more to the advantage of its opponent. Winning, in the bargain, the right to arbitration on its own territory under its arbitration law and its substantive law, while certainly important advantages, cannot (at least presumptively) be said in the circumstances to be fundamental to the State’s willingness to arbitrate at all. Had there been a negotiating impasse with Northrop Grumman over the place of arbitration, would VZ more likely have accepted the risk of merits litigation in a US court, or the risk that, by leaving the place of arbitration to be agreed later or decided by the Tribunal, the Tribunal might ultimately select a place of arbitration outside of VZ?
The US case law concerning the severability of particular aspects of the agreement to arbitrate, such as the provider institution or the identity of the arbitrator, is mainly in a domestic context and therefore largely fails to capture the considerations that factor into the arbitration v. litigation choice in international business deals generally, and acutely in deals that involve foreign State-affiliated entities. Thus in a domestic context where the parties chose an arbitration provider as the “forum” and the provider no longer exists when a dispute arises, the courts say that they will look to the language of the arbitration agreement for objective indications whether the parties wanted to arbitrate or only wanted to arbitrate if they could do so in that forum. Such case law and such standards are unhelpful to decide cases like Northrop Grumman v. Venezuela. Let’s watch to see if the Fifth Circuit takes this occasion to develop some significant law on this point.
Venezuela in its brief to the Fifth Circuit, says in its lead-off argument that the 2010 district court Order wrongly applied a “[FAA] Chapter 1 standard” to the parties’ respective motions to compel arbitration, each of which arose under Chapter 3 and the Panama Convention. What this argument means is less than clear, but let’s try to unpack it in objective Convention/FAA terms. Article 1 of the Panama Convention states: “An agreement in which the parties undertake to submit to arbitral decision any differences that may arise or have arisen between them with respect to a commercial transaction shall be valid.” Segué to FAA Chapter 3, and we see that Section 303 tells courts they may compel arbitration at any place provided for in the agreement, and if no place is provided for then direct that arbitration shall be held “in accordance with Article 3 of the [Panama] Convention.” The referenced Article 3 says that in the absence of an express agreement the arbitration shall be conducted under the procedural rules of the Inter-American Commercial Arbitration Commission (“Yak-Yak” to IACAC buffs).
Let’s agree that the 2010 district court Order did not describe this statutory and treaty framework. But it did apply traditional contract principles to determine – in relevant part, as to the choice of Caracas as the Seat – the contents and validity of the parties’ agreement: commercial impracticability, impossibility, and (at least by implication) frustration. What’s wrong with that? Nothing in the Panama Convention or FAA Chapter 3 limits the district court in its methods to find out what the parties’ agreement really is. Besides (you were about to say, if I didn’t) FAA Chapter 1 applies under Chapter 3, where there is no conflict, and FAA Section 2 (in Chapter 1) says arbitration agreements are valid and enforceable save upon such grounds as exist for the revocation of any contract. How about revocation for commercial impracticality, impossibility, or frustration? Where is the conflict between Chapter 1, Section 2 and Chapter 3 /Panama Convention? Maybe the district court in 2010 didn’t exactly check all these analytical boxes the way readers of Arbitration Commentaries would have, but still, it’s looking pretty affirmable. And nothing the district court did was contrary to compelling arbitration in accordance with the Panama Convention – directing the parties to try to agree on a place of arbitration was surely within what the district court could do under FAA Section 303(b) [An express agreement of the parties on a place of arbitration is surely “in accordance with Article 3 of the [Panama] Convention.” The parties eventually reported to the district court that they had agreed to Washington DC as the place of arbitration. When Venezuela later disavowed that agreement, the matter was already before the Tribunal, and both parties then submitted the question of place of arbitration to the Tribunal, as provided for in the governing Venezuela Arbitration Act.
The brief for Venezuela goes on to argue that the 2010 district court Order failed to analyze whether the choice of Caracas as the place of arbitration was severable from rather than integral to the agreement to arbitrate. That’s a fair and accurate critique – but what’s a Fifth Circuit to do now, after nearly a decade of arbitration that culminated in a final award? Isn’t this an occasion to invoke the principle, almost as hoary as your Commentator, that district court judgments can be affirmed on any ground (not waived) that the record will support? As discussed above, it is indeed time for US courts to develop some principles, attuned to international business transactions, to assess whether a choice of the seat of arbitration is integral to, or ancillary to, the agreement to arbitrate. But if the adopted guiding principle is, as it ought to be, that the parties presumptively chose international arbitration primarily (i) to avoid the risk of being forced to litigate in a hostile foreign judicial forum, and (ii) to secure the award enforcement advantages of the New York and Panama Conventions, then it should ordinarily be an uphill battle to show that the choice of one party’s home State as the place of arbitration was such an integral part of the agreement to arbitrate that the entire agreement must fall if the agreement on the seat is no longer valid.
The case under discussion presages, and might eventually involve, an issue of interpretation of Article (V)(1)(e). You remember Article (V)(1)(e), which says recognition and enforcement may be refused if the award has been annulled “by a competent authority of the country in which, or under the law of which, that award was made.” Must a court of “secondary jurisdiction,” invited to refuse recognition and enforcement under Article (V)(1)(e), accept that there is potentially concurrent jurisdiction to annul an award in the courts of two foreign States, the State where the award was made and another State under whose arbitration law the award was made? This question has not been answered by a US court to this writer’s knowledge.
Mainstream international arbitration scholarship instructs us that “an award is ‘made’ at the place at which the arbitration is held, i.e., at the arbitral seat.” (credit F.A. Mann, quoted by other Mainstreamers…). Professor van den Berg tells us that “or under the law of which the award was made…” in Article V(1)(e) (of each Convention) refers to a situation where “on the basis of an agreement of the parties the award is governed by an arbitration law which is different from the arbitration law of country in which the award was made.” That seems to imply that the parties may agree to derogate from the normal “primary jurisdiction”-conferring consequence of naming a place of arbitration, and that the result of such an agreement remains that there is only one State whose courts are to be seen as competent to annul the award. And this view would be consistent with the legacy notion of a single “country of origin” – a notion inherited from the bad old days of double exequatur before 1958.
But the closest common analogy to the situation in Northrop Grumman v. Venezuela is not the side-deal-in-derogation example given by Prof. van den Berg, but one perhaps at least as common: where the parties have chosen procedural law that does not make a default designation of the place of arbitration, and the parties have made no separate agreement about the place of arbitration. If your arbitration agreement in an international case provides that the Ontario International Arbitration Act (adopting the Model Law) shall apply, but names no place of arbitration, then the place of arbitration “shall be determined by the Tribunal” (Model Law Art. 20) if the parties can’t agree. If the Tribunal picks Rio, well, maybe by the time you lose the arbitration and move for an annulment, there will be flights to Brazil, live Samba in the clubs until the wee hours, a Brazilian President recovered from the Virus, and a vaccine.
It seems right to view the Northrop Grumman case just as you would if the parties had agreed initially on the Venezuelan Arbitration Act as the lex arbitri (the “curial law”) but without naming a place of arbitration. Whereas the parties’ initial selection of Caracas was invalidated in an Order that the Arbitral Tribunal treated as res judicata, and which in Mississippi is the law of the case, any potential annulment judgment from a Venezuelan court, made on the footing that the place of arbitration had to remain and did remain in Caracas, would invite a US court to rule – à la Pemex — that this is a rare instance when a foreign award annulment judgment should not be respected. If the Respondent returns to the district court in Jackson MI, maybe next year, brandishing an annulment judgment from a court in Caracas, not one in Rio, remember what you read here! 🔮
A final word about your Commentator’s soft spot for Seat stories. In 2000 as an advocate I had occasion to submit to the ICC Court that Belgrade 2001 was not the same place, in Seat terms, as the Belgrade 1990 that our client had signed up for – certainly not for an ICC arbitration against a Balkanized fragment (Serbia) of a failed State (Yugoslavia). The ICC Court delegated the Tribunal to do the fact-finding. Post-hearing, and while the Tribunal was deliberating over the status of Belgrade, the facts on the ground changed materially: the Serbian autocrat Milosevic was ousted and there was a “normalization” of Belgrade at least in respects deemed by the Tribunal to be germane to its status as a juridical Seat. Belgrade still lacked good fondue venues, so the hearings remained in Geneva.
One member of the Northrop Grumman arbitral tribunal had close exposure to that episode. If my storytelling here is unfaithful to reality, I expect to hear about it and to pass along any needed corrections!
*Just a question for hard-core FAA buffs to mull, over Zoom cocktails, about the Fifth Circuit’s 2011 dismissal of the initial appeal: Was the 2011 appeal properly seen by the 5th Circuit as arising from orders granting motions to compel arbitration, and therefore not jurisdictionally sound, under the FAA, until the arbitration is over? Or was it an appeal from an order denying enforcement of a “forum selection clause” – an ancillary agreement about the place of arbitration — that might have been appealable as an interlocutory order as a matter of discretion, or even as a mandatory injunction against a Caracas-seated arbitration?