Marc J. Goldstein Arbitrator & Mediator NYC
May 30, 2023

Predicting Rain for Spain

I spent a recent weekend in a former Member State of the European Union. You know, the one that didn’t care for all this EU Primacy stuff, and bailed. I was amidst a sizeable group of QCs turned KCs. And they all asked the same question: “What’s up in Washington?” I started in about Tucker Carlson but was quickly cut short. “No, no, young fellow. We mean all this stuff about Spain and the DC Circuit.

So I gave them the two-minutes-over-cocktails version of “Achmea in the US Courts 2023.” But you all have your own beverages, and more time.  So here is the story.

You remember the Achmea case, and its younger sibling the Komstroy case. Both from the Court of Justice of the European Union (CJEU). The core holding of these cases is that EU Member States may not validly agree to arbitrate disputes to which EU law potentially applies if the arbitral award is not reviewable – at least for EU law issues — within the EU judicial system.  You also remember that Spain has been on the losing side of a number of investment arbitrations against investors domiciled in other EU States – under bilateral investment treaties (BITs) and under the multilateral Energy Charter Treaty (ECT) —  for having pulled the rug out from under solar energy investors by changing its regulatory regime. And in many of those arbitrations, since 2018, Spain made “the Achmea argument” against arbitral jurisdiction before the arbitral tribunals, and lost. Some of these were ICSID Awards, reviewable only in ICSID annulment proceedings. Spain lost those annulment initiatives. Some of these were New York Convention awards under UNCITRAL or Stockholm Rules. Spain raised AchmeaKomstroy in motions to vacate, and mostly lost.

Many of these winning investors have sought to enforce their awards against Spain in the USA. To succeed, of course, they first need for there to be subject matter jurisdiction over Spain. Spain says it enjoys sovereign immunity. The investors say “It’s within the ‘arbitration exception’ of the Foreign Sovereign Immunities Act (FSIA).” (They also argue “waiver” but that’s not our topic del dia). And investors are mainly saying this in the US District Court in Washington (DDC), the default venue for FSIA cases.

The FSIA’s “arbitration exception,” ICYMI, says there is no sovereign immunity if there is an agreement to arbitrate and “the agreement or award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.”

As relevant here, the USA has two such treaties in force: the ICSID Convention and the New York Convention. But, says Spain, the awards are not based on agreements to arbitrate, because the holdings of AchmeaKomstroy were that EU Member States (at ALL relevant times) lacked legal capacity even to offer arbitration to EU-domiciled investors, the texts of the relevant BIT and ECT arbitration clauses notwithstanding.

All this would be less than intriguing if the judges in DDC had a uniform view of the matter. But they do not. Most of the cases say this is a question of arbitrability, not FSIA subject matter jurisdiction. These cases say “arbitrability is part of the ‘merits’ of the investment arbitrations, arbitrability was decided by the tribunals against Spain based on what US arbitration law regards as a valid delegation of arbitrability issues to the Tribunal, and the validity of that delegation makes the ‘merits’ effectively unreviewable in a US District Court.” (quotation created to summarize). The exception is a case decided March 29, 2023 called Blasket Renewable Investments, LLC v. Kingdom of Spain, 2023 WL 2682013 (D.D.C. Mar. 29, 2023), where a DDC judge accepted Spain’s argument that there was no agreement to arbitrate and therefore the investor could not get subject matter jurisdiction over Spain under the FSIA “arbitration exception.” For the DDC judge in Blasket, the lack of legal capacity to arbitrate issue presented by AchmeaKomstroy undermines the existence of an arbitration agreement, this is not a question of arbitrability for purposes of FSIA jurisdiction, and the non-existence of an agreement to arbitrate slams door of the DDC courthouse on the investors (in Blasket, Luxembourg domiciliaries). So the Blasket case and at least one case taking the opposite view (that FSIA subject matter jurisdiction does exist) are on their way to the DC Circuit Court of Appeals. But all of you want the answer now. So here is your Commentator, with his often-reliable crystal ball!

The disparate outcomes in DDC were possible because there is at least an argument – adopted by the DDC judge in Blasket — that the DC Circuit’s prior cases on the FSIA “arbitration exception ” treated as questions of arbitrability (i.e. merits not jurisdiction) issues that are fundamentally different. There was a Chevron v. Ecuador case in 2015. Ecuador argued that it didn’t agree to arbitrate with Chevron because Chevron made its investment before the relevant BIT entered into force. The DC Circuit said this was a question of arbitrability, not whether an arbitration agreement existed, and thus not about FSIA subject matter jurisdiction. Then in 2021 there was the first DC Circuit Judgment in Stileks v. Moldova. That was an ECT case. Moldova argued that Stileks’s claim was not based on an “investment” as the ECT defined “investment.” For the DC Circuit, this was also a question of arbitrability, not an FSIA threshold jurisdiction issue about existence of an arbitration agreement.

You can see why there is at least room for debate about Spain’s Achmea-based “no jurisdiction” plea. Neither Chevron v. Ecuador nor Stileks v. Moldova treated the issue of whether an arbitration agreement failed ever to come into existence because the State making the arbitration offer in a treaty lacked legal capacity to make the offer. Both Chevron and Stileks involved questions of whether the investors were entitled under the terms of the investment treaty to accept the State’s standing offer to arbitrate, an offer that the State conceded was validly made to investors qualified under the treaty to accept the offer.

Spain’s argument gets its energy from the retroactivity dimension of the CJEU’s holdings in Achmea and Komstroy. Those decisions in effect had two dimensions – the fact of the EU law illegality of an intra-EU offer to arbitrate without potential EU judicial review, and the consequence of that illegality. The consequence, per the CJEU, is that even on the date of execution of the ECT by an EU Member State nearly 30 years ago, that Member State lacked legal capacity to offer arbitration to investors of other EU Member States, and the offer of arbitration was, as to them, a nullity “ab initio.”

Does US arbitration law (in the DC Circuit) treat such retrospective de jure lack of capacity to arbitrate (not of capacity to make contracts generally) as (i) a question of arbitrability, capable of being delegated to a Tribunal, or (ii) a question of the existence of any arbitration agreement, that could not have been delegated to a Tribunal because the parties were by definition unable to make a delegation agreement?

Based on the precedents treated in the DDC cases that are on their way to the DC Circuit, the “question of arbitrability” position seems to be the better one. The following discussion is confined to those cases.

The first of three DDC cases cited in Blasket concerned a disputed factual issue of whether the one party ever signed the document containing the arbitration agreement, and if he did, whether he had adequate opportunity to appreciate that the document contained an arbitration agreement. This was plainly an issue of de facto not de jure “existence” of an arbitration agreement. The second DDC case cited in Blasket turned on whether the commercial contract containing an arbitration clause had even been formed under the basic contract formation principles of offer and acceptance in the applicable DC common law. And that DDC judge took particular note of the distinction made in US arbitration law between arbitrability disputes and contract formation disputes: “The Supreme Court has distinguished between challenges to the validity of a contract on grounds related to its formation and challenges to the validity of a contract on the ground that it is void and revocable.” In the third DDC case cited in Blasket, it was held that a factual dispute over whether the signer of the arbitration agreement was intoxicated at the time of signing concerned mental capacity to form a contract, and therefore had to be decided by a court. The judge found persuasive, and adopted, the distinction made between the situation of an arbitration contract signer who lacked mental capacity at the time of signature, which cannot be arbitrated, and the issue of an “ultra vires” signatory, which may be delegated to an arbitrator.

Spain, we will assume, was not intoxicated when it signed the ECT. While the CJEU ruling from an EU law perspective conceives the illegality of intra-EU arbitration agreements as having a retroactive effect equivalent to a lack of mental capacity at the time of signature — i.e. erasing the existence of the standing offer to arbitrate in a BIT or the ECT, and rendering the investor’s Notice of Arbitration ineffective as an acceptance — one wonders whether the CJEU’s perspective counts toward US judicial construction of the FSIA statutory term “agreement to arbitrate.” Uniformity in the application of the FSIA “arbitration exception,” and in turn uniformity in the availability of the “arbitration exception” with respect to all foreign sovereigns – not to mention predictability for investors and their counsel —  should point in the direction of applying US arbitration law to resolve the threshold FSIA subject matter jurisdiction issue. Through that lens, this seems to be plainly an issue of illegality/revocability of the arbitration agreement that stands to be addressed as a merits issue of arbitrability, and not as a barrier to obtaining jurisdiction over Spain in a US district court.

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