Politics Intrudes on US Arbitration Law?

Dear Readers:

Apologies to those of you who enjoy these posts, for a relatively long hiatus. It has been a busy time these past several months. Today’s post is lengthy, warranting its organization into numbered paragraphs.

1. A 2-1 divided panel decision of the US Court of Appeals for the District of Columbia Circuit on August 9, 2024, in an Investor-State award enforcement case implicating the New York Convention and the “arbitration exception” of the Foreign Sovereign Immunities Act (FSIA), deserves serious attention because of what did not happen. Two judges of the Court rejected the dissenting judge’s contention that the New York Convention does not govern investment arbitration awards against a State when the State’s liability-creating actions under a bilateral investment treaty (BIT) were taken “in a sovereign capacity.” The district court’s enforcement of a $55 million award in favor of a Chinese investor against Nigeria was affirmed, and the applicability of the New York Convention to arbitrations under BITs (but outside of the ICSID Convention framework) between private investors and States that host the investments, remained as it has long been understood. Zhongshan Fucheng Industrial Investment Co. v. Federal Republic of Nigeria, 2024 WL 3733341 (D.C. Cir. Aug. 9, 2024).
2. A political undercurrent to this Commentary is inevitable. First, the dissenting judge joined the DC Circuit in December 2017 directly from service as Deputy White House Counsel to the then-President of the United States, and came to the Court with a corresponding political profile including a publicized affiliation with the Federalist Society (as well as sterling professional credentials). Second, the case involves, directly, an award in favor of a Chinese investor under a China-Nigeria BIT, and, nearly as directly, the relevance of a distinction for purposes of FSIA immunity from suit between the sovereign acts of a sovereign and the private acts of a sovereign. Third, in the background — but how far back may be debated — is the issue of the aforementions ex-President’s official immunity from suit, which was not finally decided by the US Supreme Court in July 2024; it remains for the US District Judge to sort misconduct alleged in the indictments into official (“sovereign”) and non-official (“private”) categories, and for that refined version of presidential immunity to be reviewed in the DC Circuit (absent a Justice Department decision to terminate the prosecution, or a presidential pardon). The reasoning of the dissent in the Zhongshan case – in support of an apparently unprecedented interpretation of the New York Convention – and how the panel majority answered it, invite us to consider how ardent political conservatism in the federal judiciary may be transmitted through legal reasoning to potentially reshape international arbitration law – perhaps in service of laying a jurisprudential foundation for envisioned legal targets of a conservative political agenda.
3.  The underlying facts of the case, briefly, are these. A federated state of Nigeria called Ogun set up a free trade zone in a joint venture with one Chinese investor, and another Chinese investor set up a business there, also under contract with Ogun, investing millions to develop an industrial park with community facilities. Ogun terminated this investor’s contract unilaterally, and Nigerian federal police reinforced the ouster of the Chinese investor by arresting and abusing at least one of its executives. So there was no dispute that, for purposes of the New York Convention, the Investor had a commercial relationship with Ogun state. Nigeria did contend both that Nigeria had no “legal relationship” (in a New York Convention sense) with the Investor, and that even if there was such a relationship it was not “commercial” because the Investor contracted only with Ogun state. (Nigeria when it ratified the Convention in 1959 had adopted the reservation that it would only apply the Convention to commercial disputes). The DC Circuit rejected both arguments, and on these questions the dissent did not quarrel. But there remained one further element necessary to establish that the Convention governed the award: that Nigeria must be a “legal person” under Convention Art. I(1) (which states that the Convention applies to awards “arising out of differences between persons, whether physical or legal”).  Nigeria argued that the alleged violation of its BIT obligation of fair and equitable treatment (among other obligations) was not the action of a “legal person” under the Convention because Nigeria acted – including in the abusive federal police arrest and mistreatment of the Investor’s executive — in a sovereign capacity. On this issue the dissent sided with Nigeria, the majority with the Investor.
4. The dissent begins its “legal person” analysis with a “textualist” exploration into the legal meaning of “person” beginning in the 1950s – the gestation period of the Convention, starting with the ICC’s draft in 1953. The exercise – focused on American legal and general dictionaries, and domestic statutes and case law – seems strikingly misdirected in regard to a multilateral instrument with a multinational drafting history.  Answering the majority’s criticism on this very point, the dissent states that “ordinary English usage is particularly relevant because the Convention was drafted in English and finalized in New York City.” (In precise terms, the U.N. headquarters complex was from the outset an international territory, pursuant to a treaty with the United States. And while the travaux préparatoires of the Convention had English as their official language, the drafting committee members were from Australia, the UK, Belgium, Ecuador, India, Sweden and the USSR). This is unconvincing textualism is seemingly agenda-driven. All the more troubling is that Nigeria conceded its “legal person” status under the Convention for its actions in a private, not sovereign, capacity. The textual exercise did not, and could not, yield held evidence to support a unqualified capacity-of-action distinction.
5. A further problem with this textual approach, as the majority states, is stare decisis. In DC Circuit cases such as Tatneft v. Ukraine, and Olin v. Libya, and Stileks v Moldova, and Chevron v. Ecuador, and even in the U.S. Supreme Court in BG Group v. Argentina, it has been accepted that an Award involving a Host State’s breach of international law obligations toward an investor under a BIT falls under the Convention and forms a basis for subject matter jurisdiction under the FSIA’s arbitration exception. In Stileks, for example, the Respondent Republic of Moldova had lost an Energy Charter Treaty arbitration on the basis of acts that were unambiguously sovereign – the Claimant had failed to obtain relief in Moldovan courts in “decade-long proceedings [that] were unsuccessful, due in significant part to the Moldovan government’s actions.” But Moldova among its many arguments against FSIA jurisdiction under the arbitration exception did not contend that it was not a “legal person” under the Convention, and neither the district court nor the DC Circuit had raised this potential barrier to subject matter jurisdiction sua sponte. The dissent in Zhongshan makes a valiant effort to rebut the stare decisis point. But the dissent’s argument devolves, in essence, to a position that nothing less than an express holding on an expressly litigated issue qualifies as settled jurisprudence. The discussion of Tatneft is illustrative. The dissenter correctly observes that the DC Circuit in Tatneft found FSIA non-immunity of Ukraine based on the waiver exception, not the arbitration exception – a waiver based on Ukraine having become a Contracting State of the New York Convention. But if Ukraine was not a “legal person” under the New York Convention, in regard to its arbitration with Tatneft, its signature on the New York Convention could scarcely operate as a waiver of sovereign immunity for Tatneft’s US award- enforcement case. Not so fast, says the dissent (in substance), because Ukraine did not advance a Convention non-personhood argument, and the Court opted not to raise it sua sponte. This is a highly technical limitation on stare decisis, in regard to a potential defect in FSIA subject matter jurisdiction in the “home court” for FSIA case law. Although it is not stated directly by the majority, the underpinning for its established jurisprudence position seems to be that when the DC CIrcuit repeatedly declines to raise sua sponte a potential defect in FSIA subject matter jurisdiction, that pattern of inaction stands as solid evidence that the argument animating the potential defect has no traction.
6. The panel majority furnishes its answer to the “legal person” question in roughly five dimensions (text, precedent, drafting history, treaty practice, U.S. Executive Branch construction), and the dissent counters on each. That makes this sprawling tome of a decision not comprehensively treatable in a medium like this Blog. Having treated text and precedent above,  I now take drafting history as the last dimension on which to take the measure of the dissent’s mission. Comparison of the majority and dissent in the treatment of drafting history is a useful way to measure objectivity: drafting history rarely yields a definite and direct answer, so the jurist’s use of such evidence can be revealing of an underlying agenda.
7. In simplified terms, the majority and dissent were in a debate over portions of the travaux that declared that the Convention “does not deal with arbitration between States.” That was not conclusive however, because it is necessary to understand why the Convention does not expressly state whether it covers, or does not cover, State-to-State arbitrations.  If the reason is that States are categorically not “legal persons” under the Convention, then an Investor v State arbitration could be no more within the Convention than a State v. State case. Even the dissent is not prepared to go this far. But if the drafting group said the Convention “does not deal with” State v State mainly because the Convention is concerned with awards arising from commercial disputes, then the character of State’s actions as “sovereign” or “private” – the distinction at the core of the dissent’s “not a person” position – does not answer the question of whether the State’s acts impacted a commercial relationship.
8. Underlying this debate over the original Convention meaning of “legal person,” of course, is the fact that BITs as we know them today existed nearly not at all when the Convention was working its way through the United Nations in the 1950s. The prevailing norm for investment encouragement and protection was the “Friendship, Commerce & Navigation” (FCN) treaty – a centerpiece of U.S. post-war treaty-making from the late 1940s to the 1960s — which were purely public law instruments because they created no provisions for direct enforcement of duties owed — for the benefit of citizens of the States — between States under International law. (The 1954 FCN between the U.S. and Israel, for example, articulated many of the international law obligations now commonly adjudicated in Investor-State arbitration, but provided for dispute resolution before the International Court of Justice, i.e., State v. State). Before reaching its treatment of the travaux, the majority situates the China-Nigeria BIT (and BITs in the precedents cited) textually in the private law camp by virtue of (i) the declared objective to encourage foreign investment by private investors,  (ii) the BIT’s separate dispute resolution frameworks for State-State and Investor-State arbitration, and (iii) the standing offer of the State to arbitrate with Investor over alleged violations of the investment protection obligations undertaken in the BIT. The ensuing dialogue between the majority and the dissent over the meaning to be derived from the sidelining of State v State arbitration in the Convention’s drafting history really concerns whether (and if so when) the Host State as a violator of privately- arbitrable BIT obligations avoids the grasp of the New York Convention because the privity of treaty contract in the BIT is, as it was in FCNs, State to State.
9. Confronting the same relatively indefinite indications in the travaux, the majority and the dissent diverge initially, and perhaps most importantly, on the relationship of the drafting history to the text – “legal person” — which is shaped in turn by their divergent views of what the text implies on a standalone examination. For the majority, the starting point is that there is no textual indication that “legal person” requires a case-by-case inquiry in its application to State actors, and this, combined with Nigeria’s admission (and other contextual and historical evidence) that States are Convention “legal persons” at least sometimes, meant that drafting history would have to have clarity to overcome a presumption that no such distinctions were intended. Quoting the US Supreme Court: “[C]herry-picked generalizations from the negotiation and drafting history … cannot be used to create a rule that finds no support in the treaty’s text.” The dissent starts from a different premise: the “text and context strongly suggest … that the Convention does not extend to disputes arising from sovereign acts governed by public law.” From this starting point, the dissent seeks from the travaux not clarity but only corroboration. Indeed, the dissent’s point of departure is well-captured in the phrase deployed to sum up the Investor’s argument: “hid[ing] elephants in mouseholes.”  That is to say, the dissent starts from the position that “legal person” is a treaty “mousehole” too cramped to accommodate the “elephant” of Investor-State arbitration over sovereign acts affecting BIT obligations that the Investor enforces through arbitration as an intended beneficiary and arbitration offer recipient.
10. The main (but not only) piece of drafting history debated between the dissent and the majority was a section of a Committee report concerning a change in the name of the draft Convention. The drafters said they changed “International Arbitral Awards” to “Foreign Arbitral Awards” because the former connotes State-to-State arbitration, which the Convention “does not deal with,” whereas the Convention does concern awards made in the territory of a country other than the one where recognition is sought. For the dissent, this was proof positive that States are not Convention legal persons, because personhood could not conceivably depend on who is the adversary: effectively “once a non-person, always a non-person.” But that seems an argument that proves too much, especially since Nigeria and the dissent both accepted that Nigeria was a Convention Art. I(1) legal person at least in some circumstances. The majority on the other hand viewed this passage as “indeterminate” because the language could be seen either as an express exclusion of State v. State arbitration or only as an explanation for aligning the Convention’s title with its main focus. One might go further, and worry that the dissent’s take on this nugget of drafting history is a troubling example of confirmation bias in treaty interpretation.
11. It is telling – as a measure of agenda-driven legal reasoning – that the dissent holds tenaciously to the view that this Chinese investor’s claims against Nigeria were “public law” claims, and therefore just as excluded from Convention coverage as State v. State claims arguably were. But in doing so the dissent slides past, without comment, the majority’s fundamental distinction: the China-Nigeria BIT in its Art. 9 concerning Investor-State arbitration, called upon any arbitral tribunal to “adjudicate in accordance with the law of the Contracting Party to the dispute… as well as the generally recognized principles of international law.”  I note this not as the predominant element in the majority’s reasoning – it is one of many – but only because it is the one that most poignantly indicates that the dissent was unmoved even at a point where its “public law” reasoning had essentially run out of runway. Much if not all of the travaux evidence of Convention meaning, invoked by the dissent on the “legal person” issue, would appear to support the majority position that the Convention covers the Chinese investor’s BIT arbitration award against Nigeria, and the dissent appears to manage this contradiction by being unyielding in the position that the BIT claims were “public law” claims.
12. There are reasons here to be worried about the fragility of arbitration jurisprudence and the risk of its subservience in the hands of (sometimes) agenda-driven jurists to considerations that may have little to do with arbitration or the New York Convention. That the dissent took such pains to extract from available sources a distinction between sovereign acts and the private acts of a sovereign, on a question of immunity from suit, in service of excusing Nigeria from enforcement of an award in favor of a Chinese investor under a BIT in which it consented to arbitrate, and under the New York Convention of which it was one of the original ratifiers in 1959, suggests that a different agenda, more political and more domestic, may have been in play in the writing of the dissent.