1999 was not so very long ago. And over the last dozen years some areas of the law have necessarily moved rapidly to keep pace with developments in technology and their impact on how business is conducted.  That has not necessarily been the case in every corner of the law of international commercial arbitration.

 Until a few weeks ago, counsel looking for guidance in US law on the “agreement in writing” requirement of the New York Convention could read, unhelpfully, a 1999 decision of the US Second Circuit Court of Appeals in Kahn Lucas Lancaster, Inc. v. Lark International, Ltd., 186 F.3d 210 (2d Cir. 1999). That case dated from an era in which international contracting often involved use of the fax machine – e mail was mostly with us, but transmission of sizeable documents via e mail in digitally compressed scanned electronic files was not.

The Court in Kahn Lucas held that the phrase “signed by the parties or contained in an exchange of letters or telegrams” (Convention Art. II) stated a condition for an enforceable agreement to arbitrate under the Convention, whether the agreement was based on (in the Convention’s words) “an arbitral clause in a contract” or a separate “arbitration agreement.” There was no enforceable agreement to arbitrate, the Kahn Lucas court held, because the arbitration clause in the buyer’s purchase order was not signed by the seller nor was it adopted by the seller in an exchange of letters or telegrams – notwithstanding that the parties did enter into a contract for the sale of goods.

But until this year, there was little guidance to the application of  the “agreement in writing” requirement to the contracting methods characteristic of contemporary international goods and commodities procurement – typically involving innumerable e mail exchanges, PDFs of contracts, e-mailed expressions of assent in lieu of signatures,  e-mailed amendments and counteroffers, and – notably in both cases discussed below – sellers’ “General Terms and Conditions” that, because they contain formal legal detail rather than commercial terms, often receive little or no direct attention in the e mail exchanges. 

Glencore Ltd. v. Degussa Engineered Carbons L.P., 2012 WL 223240 (S.D.N.Y. Jan. 24, 2012)

In Glencore v Degussa, the contract, made by email, was for sale and delivery of feedstock oil at the buyer’s Texas and Louisiana chemical plants. The buyer and its insurer brought suit in a Texas court claiming damages resulting for oil deliveries that did not meet specifications. Seller Glencore (a Swiss company) commenced arbitration on the same claims, against the buyer and insurer, relying on a provision in its “General Terms and Conditions” for AAA arbitration in New York.  Buyer and insurer refused to participate in the arbitration or to withdraw the court action, and Glencore petitioned to compel arbitration.

The question presented was whether the Glencore General Terms and Conditions (“GTCs”), seen by buyer only in late stages of the negotiations and received without comment, nevertheless were part of an “agreement in writing” between the Parties by virtue of the sequence and content of their e mail exchanges. The Court held that this was indeed the case, and granted the motion to compel arbitration.

Glencore had sent its standard sales contract by e mail. It did not include the GTCs but rather only a reference to them. The contract stated that the GTCs would govern, and that if this was contrary to buyer’s understanding then buyer should respond immediately by fax with specific points of disagreement. Buyer did not so, but instead two weeks later after Christmas-New Year holidays replied by e mail asking Glencore for only one change: to state its corporate name accurately. In ensuing e mail exchanges, Buyer asked for and received the GTCs, and did not comment.

Additional contracts were made for feedstock oil supply for ensuing calendar quarters. The contract process followed the same pattern: after delivery of seller’s standard contract, buyer requested minor changes, none of which referenced the GTCs.

The District Court considered that there were two separate analytical steps concerning formation of the arbitration agreement. First, there needs to be contract formation “under ordinary state law contract principles.” (The quotation comes from First Options v Kaplan, a domestic arbitration case, and so in its original context it refers to the applicable law of a state of the United States. But if the parties have different nationalities, this could readily mean the applicable contract law of a foreign State). Second, if there is an arbitration contract, it must in addition satisfy the “agreement in writing” requirement of the New York Convention.

As to the first, “state law,” contract inquiry, the Court found an agreement to arbitrate on two different theories — each under Texas’s version of the Uniform Commercial Code (“UCC”), which it found applicable based on a traditional grouping of contacts choice of law approach. Under the UCC, the buyer had objectively manifested its assent to the seller’s contract including the General Terms. Alternatively, under UCC §2-207(2) which concerns proposed additional terms to an existing contract between merchants, the arbitration clause became part of the contract because it did not “materially alter” the commercial agreement — under a legal standard that treats as a “material alteration” a term that would “impose surprise or hardship” were it included in the contract without having been specifically discussed.

Turning next to the question whether the Convention’s “agreement in writing” requirement was satisfied, the Court first observed that this requirement imposes a more stringent test that the UCC standards of contract formation. To illustrate this point, the Court noted that incorporation of additional terms under UCC 2-207(2) is essentially presumptive absent special circumstances, and that the presumptive inclusion does not satisfy the Convention’s alternative criteria of signature of “an exchange of letters of telegrams.”

Here, the Court held, the “exchange” requirement of the Convention was satisfied because the arbitration clause was incorporated by reference in the contract when it was sent, the buyer replied asking for other changes but not mentioning the GTCs, the buyer further confirmed that the seller’s contract was the agreement by referring to it as such in e mail communications about its parent company’s payment guaranty, and, finally, there was a specific request for delivery of the GTCs and delivery of same followed by no comment and contract discussions for new contracts in subsequent calendar quarters.

Copape Produtos de Petroleo Ltda. v. Glencore Ltd., 2012 WL 398596 (S.D.N.Y. Feb. 8, 2012)

Copape v Glencore involved some different twists in the contract negotiations, and ultimately some differences in the Court’s approach (which notably included no reference to the Glencore-Degussa decision). Here the buyer was a Brazilian company that contracted with Glencore in Brazil through a Glencore affilate in Brazil.  The contract at issue was the fifth between the parties, and in each of the four prior contract negotiations by e mail Glencore had sent it standard contract referencing the Glencore GTCs, without buyer ever requesting a copy. The fifth contract’s negotiation began with an indicative offer by Glencore that referenced its standard contract.  The buyer replied that the contract would be governed only by the Glencore GTCs insofar as buyer specifically approved them. As the exchange of e mails t progressed, Glencore eventually sent the standard contract that referenced its GTCs. But buyer never requested a copy of the GTCs, and in the final exChange of e mails Glencore wrote “Other terms and conditions remain unchanged” and buyer replied “OK.”

After buyer allegedly breached the contract, buyer commenced suit in Brazil. Glencore commenced an ICDR arbitration, buyer moved in federal court in New York to enjoin the arbitration, and Glencore cross-moved to compel arbitration.

In contrast to the two-level approach taken in Glencore-DeGussa, the distrIct court in Glencore-Copape considered that, even though jurisdiction was based on the New York Convention,  the court was presented with only “a single question — whether Copape ever became bound by the arbitration clause…” and that the law governing this question was “the federal law of arbitrability,” law which the court said includes “general principles of contract law including the Uniform Commercial Code.”

This brought into play, as in Glencore-Degussa, Section 2-207(2) of the UCC.

As we have seen, the approach of that Section is to avoid having an acceptance that contains proposed additional terms operate as a counter-offer only. And it further provides for presumptive incorporation of the proposed additional terms unless the party who made the original offer shows that one of three situations exist: the offer strictly prohibited additional terms, or the additional terms make a material alteration, or objection to the added terms is made within a reasonable time.

Thus an arbitration clause could readily become binding under the UCC without either the signature or the “exchange of letters or telegrams” required by the New York Convention. If the clause is contained in a set of proposed additional terms, and no timely objection is made in response, the UCC recognizes the silence as acquiescence, while the Convention evidently does not.

Whereas the court in Glencore-Copape did not discuss the potential divergence between UCC and Convention criteria for a binding agreement to arbitrate, it is helpful to note that the further e mails dispatched by Copape with reference to Glencore’s GTCs would appear to satisfy the “exchange” requirement of the Convention. Critically: (i) Copape raised objections to certain other provisions of the Glencore standard contract but did not object to the provision incorporating by reference the GTCs; (ii) when Glencore e mailed what were intended at the time as final commercial terms, it wrote “other terms and conditions remain unchanged” and asked Copape to “reconfirm by return,” and (iii) Copape replied “OK.”.  And while the court states that this would have been sufficient to find a duty to arbitrate, the court then noted that after further exchanges about business terms and timing, Glencore revised and re-sent the standard contract and Copape confirmed acceptance of it (presumably be e mail).

Although the Glencore-Copape decision, unlike Glencore-DeGussa, fails to take note of the Convention’s “agreement in writing” requirement as a separate and distinct prerequisite to finding an enforceable agreement to arbitrate in a case falling under the New York Convention, Copape does not in the final analysis stretch the limits of “exchange of letters or telegrams” to include the kind of silent acquiescence/contract by estoppel that is permitted by UCC 2-207(2).  This is simply a case of incorporation of the arbitration clause by reference to General Terms and Conditions, with a responsive e mail expressly accepting the contract that references the General Terms, among which is the agreement to arbitrate that the buyer could have, but elected not to, become specifically aware of.

Concluding Remarks

It is evident from the two decisions that the Convention’s requirement that the arbitration agreement be “contained in” a written exchange, as understood in New York federal courts, does not require that arbitration be mentioned in the communications, but only that arbitration be part of the documentation referenced in the communication. What is however troublesome in the Glencore-Copape decision is that it may be read to imply that in a US federal court the “agreement in writing” requirement presents an issue of federal common law of contracts derived from uniform state law, i.e. the UCC. That should not be the case. The Convention’s “agreement in writing” requirement, and the term “contained in an exchange of letters or telegrams,” as treaty language, should have a uniform  whas applied to particular facts, using established principles of treaty interpretation, and taking into consideration decisions of foreign and international tribunals, the opinions of leading commentators, and transnational sources of commercial principles.

An examination of the “agreement in writing” requirement under such transnational principles is beyond the modest scope of the post.  But US courts should not fail to consider them. There is no indication in the New York Convention that Contracting States are meant to reference only their own domestic law of contractual consent when deciding whether an “agreement in writing” to arbitrate exists in proceedings to compel arbitration.

A tale from the Second Circuit: Two reinsurance executives regularly sitting as arbitrators were appointed, respectively, as party-appointed arbitrator and “umpire” (presiding arbitrator) in a reinsurance arbitration. While the case was pending but before the hearing, the same individuals were appointed, again as party-appointed arbitrator and umpire, in a second arbitration that bore certain relationships to the first. There was a similar but not identical issue of contract interpretation. There was a common witness whose testimony was important in each case. And there was a business connection, essentially successorship, between Claimant in Arbitration 1 and Respondent in Arbitration 2. These arbitrators elected not to disclose their appointments in Arbitration 2 to the parties in Arbitration 1.

After the Award in Arbitration 1, the loser learned of Arbitration 2, moved to vacate the award in a New York federal district court based on “evident partiality,” (FAA Section 10(a)(2)), and obtained the vacatur order. But last week, the US Second Circuit Court of Appeals reversed, holding that “evident partiality” depends upon objective evidence of bias, and that there no such evidence on the facts of this case. (Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 2012 WL 335772 (2d Cir. Feb. 3, 2012)).

The Second Circuit declined to adopt any particular criteria by which to evaluate allegations of bias. But the Court did find “useful,” but not “mandatory, exclusive, or dispositive” considerations such as

(1) the extent and character of the personal interest,pecuniary or otherwise, of the arbitrator in the proceedings; (2) the directness of the relationship between the arbitrator and the party he is alleged to favor; (3) the connection of that relationship to the arbitrator; and (4) the proximity in time between the relationship and the arbitration proceeding.”

However the Court did fashion a legal standard of sorts that will probably be cited often, stating: “[A] court must focus on the question of how strongly the relationship tends to indicate the possibility of bias in favor or against one party, and not how closely that relationship appears to relate to the facts of the arbitration.”

The Second Circuit framed the question presented as whether “the failure of two arbitrators to disclose their concurrent service as arbitrators in another, arguably similar, arbitration constitutes ‘evident partiality’ ….”, But the Court devoted relatively sparse attention to the implications of the commonalities between the cases. And one might have hoped for a more searching discussion of the ways in which pre-disposition to particular result, formed in an undisclosed second arbitration, might possibly constitute evidence of bias.

While essentially accepting the Distirct Court’s view of the relatedness of the two arbitrations, the Court observed that “the fact that one arbitration resembles another in some respects does not suggest to us that an arbitrator presiding in both is somehow therefore likely to be biased in favor of or against a party. And in support of this position the Court cites “Cf.” (i.e. by analogy) a remark of US Supreme Court Justice Anthony Kennedy to the effect that “the fact that the same judge presides over related cases ordinarily does not suggest that judge is biased.”

But the Court did not address or even acknowledge the imperfections in extending that analogy to commercial arbitration.

Suppose US District Judge X was presiding over multiple related but unconsolidated cases involving the same Ponzi scheme, and in each case was hearing claims of different investors, against the same investment manager, concerning that investment manager’s due diligence in regard to the same investment vehicle. Most observers would presumably agree there is no issue of judicial bias and no issue of procedural unfairness. The fact that the judge will, in each case before her, be influenced by evidence and legal argument in each of the cases is a known and assumed systemic risk of litigation. But that risk is offset by the public nature of federal court litigation, including full electronic access to the dockets in each case. Competent counsel may monitor the progress of each case and, indeed, by judicial process may obtain the evidence in the related cases, and have adequate opportunity to credit or discredit that evidence.

The privacy of related commercial arbitrations results in an entirely different dynamic. If not made aware of a pending related proceeding before the same arbitral tribunal, or one or more arbitrators in common to the two separate tribunals, a party is in no position even to assess the risk of that the arbitrators will develop a pre-disposition in the course of Arbitration 2 on issues central to resolution of Arbitration 1. 

Does this mean that the Second Circuit came to the wrong conclusion in Scandinavian Re? Not necessarily, especially under existing American law.

The American law concept of “evident partiality” is mainly albeit not exclusively focused on the relationships, personal and economic, between the arbitrator and the parties or their counsel. The Federal Arbitration Act does not distinguish, as international arbitration rules do, between “independence” and “impartiality.” Lack of impartiality, as it is widely understood under international arbitration rules, and in international arbitral practice, would include, for example, an arbitrator forming a judgment on crucial issues based upon her own fact investigation or her own legal research – especially if the results of such investigation or research are not disclosed to the parties during the proceedings so that they have an adequate opportunity for comments.

The arbitrator who fails to disclose her appointment in related Arbitration 2 to the parties in Arbitration 1 does not reveal any bias by the omission, but she does fail to alert the parties to the risk that an issue will be pre-judged by her and that she will seek to influence her fellow arbitrators in Arbitration 1 based on what she heard and read in Arbitration 2. Assuming Arbitration 2 is a private proceeding, the parties in Arbitration 1 proceed in ignorance of the fact that probative evidence and/or relevant legal argument is being presented to a member of the tribunal (or in the Scandinavian Re case, two members) in another case.  If the arbitrator, acting in an unbiased fashion in Arbitration 2, is persuaded by the evidence, legal argument, or witness credibility of a party positionally aligned with a party in Arbitration 1, the arbitrator has an undisclosed pre-disposition.  The election not to disclose the pre-disposition, prior to the award in Arbitration 1, implies that the arbitrator intends to deprive the party in Arbitration 1 who is disadvantaged by the pre-disposition of the ability to effectively persuade that arbitrator and the other members of the tribunal to adopt the opposite view. The arbitrator who in this fashion covertly subverts the what may be called the transparency of the arbitral decision process —  i.e. the  shared but often unstated assumptions that the tribunal will render its decision based on the record developed by the parties — may, on this view, be found to have been “evidently partial” if the undisclosed pre-disposition relates to a material matter.

Last year Chevron, as judgment debtor for a $17.2 billion environmental damages judgment issued by an Ecuador court, convinced a US district judge in New York to issue a global anti-enforcement injunction preventing the Ecuadorean parties from seeking enforcement of that judgment anywhere.  Late last year the US Second Circuit Court of Appeals issued an order vacating that injunction, but its written opinion, explaining why the injunction was improper, was not issued until now.

As you will see

http://www.ca2.uscourts.gov/decisions/isysquery/83c7e33b-75ca-4735-acec-95593be09f03/2/doc/11-1150_op.pdf

, the Court states that New York’s statute providing for recognition of foreign country money judgments cannot be invoked affirmatively by the judgment debtor to prevent the foreign judgment creditor from seeking enforcement of the judgment, whether in New York or elsewhere.  The Court’s position is that, under New York’s statute, the judgment debtor may only raise issues of unfairness, lack of due process, fraud, corruption, etc., in regard to the judgment-issuing court, as a defense to enforcement in New York – if and when the judgment creditor seeks enforcement of the judgment in New York.

What will be the next chapter in the Chevron-Lago Agrio saga is unclear.  This opinion reports that on January 3, 2012, the intermediate appellate court in Ecuador rejected Chevron’s appeal of the judgment, that as a consequence the judgment is now enforceable, but that if Chevron elects to appeal to Ecuador’s highest court, that court could possibly grant a stay of enforcement, subject to the posting of a bond by Chevron.

Chevron presumably is considering whether a hospitable forum other than the US exists in which Chevron could obtain personal jurisdiction over some of the judgment creditor parties, and persuade the court to consider the enforceability of the judgment – and hence address the merits of Chevron’s attacks on the integrity of the Ecuador trial court proceedings – before any of the judgment creditors have initiated an enforcement case in that forum.  The findings of fact made by the US District Court concerning the unfairness of the Ecuador court proceedings have presumably lost any potential collateral estoppel effect in view of the entire vacatur of the district court’s judgment. Those findings were made in regard to the probablility-of-success branch of the US courts’ traditional preliminary injunction formula. But the Second Circuit has ruled that the district court had no legal basis to engage in such analysis, as injunctive relief was not in any case available under the foreign money judgments recognition statute of New York.  

Chevron presumably is also considering the relationship between potential enforcement proceedings and its pending BIT arbitration against Ecuador, in which Chevron claims that the judicial proceedings leading to the judgment violated (inter alia) its right to fair and equitable treatment. Chevron could take the position, in any court where recognition and enforcement is sought, that proceedings should be stayed for a period of time to permit the BIT arbitration to be concluded, and that the BIT arbitration is the most appropriate forum for an adjudication of the fairness of the Ecuadorean judicial process.

In that event, one would suppose Chevron would invite the court seised of the enforcement case to draw an analogy to Article V(1)(e) of the New York Convention, which permits a court to stay recognition and enforcement proceedings in regard to a foreign arbitration award if there are pending proceedings to set aside the award in a court at the seat of arbitration (or in the State whose arbitration procedural law governed).  The analogy is imperfect of course, as the Lago Agrio judgment creditors presumably would not be collaterally estopped by any conclusions drawn against Ecuador in the BIT case.   But if Chevron prevails in the BIT case, then under what US lawyers would regard as subrogation principles, Ecuador would in effect be the judgment debtor of the Lago Agrio plaintiffs.

Faithful readers of Arbitration Commentaries will be familiar with several principles that are repeated in the cases discussed in this space.   One, mentioned in last week’s post concerning the DC Circuit’s vacatur of a investment arbitration award, is that US courts generally find “clear and unmistakable evidence” of an agreement to arbitrate “arbitrability” issues when the parties select rules, like the UNCITRAL Rules, that confer power on arbitrators to decide objections to their jurisdiction.  Another principle, mentioned for example in a post in November 2011 concerning a Second Circuit decision involving American Express, is that the Federal Arbitration Act does not provide judicial power to enjoin a pending or contemplated arbitration.

So, you might suppose, this writer would rail against a new federal district court decision from Oakland, California, in which the Court (i) held that there was not sufficient evidence of an agreement to arbitrate arbitrability even though the parties had adopted the UNCITRAL Rules for use in an ICDR-administered arbitration, and (ii) that it would enjoin the foreign arbitration claimant from proceeding with its ICDR arbitration on claims the Court had determined to be non-arbitrable. (Oracle America, Inc. v. Myriad Group AG, 2012 WL 14364 (N.D. Cal. Jan. 17, 2012)).  

But I believe this decision is entirely correct. The case is worthy of discussion here to highlight the special circumstances that justify the result, and to show that this decision is entirely consistent with US arbitration law as we have come to understand it.

This was a dispute between Oracle, as successor to Sun Microsystems, and one of Sun’s software licensees in Europe.  The agreement between licensor Sun and licensee Myriad provided for ICDR-administered arbitration under the UNCITRAL Rules for all disputes arising under the agreement, except that “any dispute” concerning the parties’ intellectual property rights, or compliance with the separate license of a “technology compatibility kit,” could be brought before a competent court, whose jurisdiction in that event would be exclusive.

Acting upon the carve-out of judicial jurisdiction for IP disputes, Oracle brought a trademark and copyright infringement action in the federal court, and added pendent claims for breach of contract. Myriad responded by filing an ICDR arbitration embracing all of Oracle’s claims in the federal court action.

The Court, rejecting the position that the arbitrability issues were for the arbitrators to decide, held that the explicit contractual exclusion of IP claims from the arbitration clause prevented the adoption of the UNCITRAL Rules from being “clear and unmistakable evidence” that the parties intended the arbitrators to decide arbitrability issues.  Whereas the parties had provided for the filing of certain claims in court, the Court reasoned, they should be presumed have to have intended that the Court resolve any challenge to its own jurisdiction unless the parties expressly assigned such issues to arbitrators.   This is a point not very prominent in the jurisprudence of “clear and unmistakable evidence, but the point has been made in several cases, in different ways.  Some of the cases say that adoption of UNCITRAL or similar rules, providing arbitral power to decide jurisdiction issues, are “clear and unmistakable evidence” absent other contradictory factors. Other cases have said, more directly, that at least where there is a broad arbitration clause assigning “all disputes” to arbitration, reference to such arbitration rules provides the needed “clear and unmistakable evidence.”  In line with those cases, here we had what was not an unqualifiedly broad arbitration clause, but instead a clause that had a very broad carve-out of non-arbitrable IP disputes over which judicial jurisdiction, when invoked, would be exclusive.

On the question of enjoining the arbitration claimant Myriad from proceeding before the ICDR on the IP claims (the contract claims, the Court agreed, were arbitrable), neither party appears to have raised the question of the source of the Court’s power to enjoin Myriad. The Court, in granting the injunction as requested by Oracle, addressed the issue according to 9^th Circuit law on foreign antisuit injunctions, without finding that it made any difference that the proceeding affected by the injunction was an arbitration.  That this approach is essentially correct follows logically from the correctness or the Court’s position on who decides arbitrability. Once the Court had properly asserted jurisdiction over certain of the claims, by having had its subject matter jurisdiction properly invoked and then by denying the motion to compel arbitration as to the IP claims, the Court had inherent power to issue an antisuit injunction to protect its prospective judgment on the merits against collateral attack in any other forum.  Thus, in contrast to the situation where a motion to enjoin arbitration is the only relief sought and the FAA is invoked for that purpose, and in contrast to cases where relief to stay an arbitration is sought by a respondent, by cross-motion, in an FAA Section 4 petition to compel arbitration, here the Court was seized of the merits of the non-arbitrable claims.

I have written in other commentaries that this is precisely the route that should be taken to enjoining an improper arbitration if such relief is desired — and that the ability of the party objecting to arbitration to obtain injunctive relief by invoking the Court’s jurisdiction to hear the merits obviates the need to find an implied injunctive remedy under the FAA. Earlier case law had suggested that the power to enjoin an improper arbitration is a “necessary correlative” (or words to that effect) of the power under the FAA to compel an improper arbitration. But the available of an injunction under the Court’s inherent powers, once its jurisdiction over the merits is invoked, proves there is no such necessity. That is precisely what occurred here, and the FAA properly did not factor in the equation of whether the Court could or should grant the injunction.

An interesting question raised by the foregoing: What should the arbitral tribunal do if the Claimant, in defiance of the injunction, insists on proceeding with what the Court has ruled to be non-arbitrable claims? I would venture this answer: that whereas the injunction runs against the party and not against the ICDR or the tribunal, a motion in the arbitration to stay proceedings on the non-arbitrable claims should not be granted.  Such a stay would also be at odds with the parties’ agreement that the arbitrators have power to determine objections to their own jurisdiction.  But it seems fair to say that there may be cases – and the Oracle case is one of them – where the arbitrators’ power to decide jurisdiction issues is concurrent with the power of a competent court. Nothing in the UNCITRAL Rule conferring competence over jurisdiction issues on arbitrators requires that the arbitrators decide such questions de novo if the tribunal finds that the issues have been addressed in another forum that also had jurisdiction to decide. The situation invites resolution of the jurisdiction objection, in an interim award, on the basis of collateral estoppel.  

In a commentary appearing in this space a few months ago, after the Ontario Court of Appeal’s decision in Government of Mexico v. Cargill, I suggested that American courts might decide the scope of judicial review of an investment treaty tribunal’s determination of its own jurisdiction by concluding that the parties’ agreement to resolve disputes by arbitration under the UNCITRAL Rules constitutes “clear and unmistakable evidence” of the treaty parties’ intent to have arbitrators decide jurisdiction issues with the same latitude that they decide the merits. 

In a decision yesterday, the federal court of appeals in Washington D.C. appeared to endorse that position, and yet the Court vacated an award issued in favor of an investor from the UK against the Republic of Argentina, on the ground that the arbitral tribunal exceeded its powers in hearing the case before the claimant investor had complied with a provision of the UK-Argentina bilateral investment treaty requiring, before arbitration, litigation for 18 months in an Argentine court.  (Republic of Argentina v. BG Group PLC,  2012 WL 119558 (D.C. Cir. Jan. 17, 2011)).

The DC Circuit accepts, with citation to the Second Circuit’s decision the Republic of  Ecuador v. Chevron Corp., 638 F.3d 384, 394 (2d Cir. 2011), that as a general matter a BIT’s incorporation of a provision for arbitration of disputes under the UNCITRAL Rules – which empower arbitrators to rule on objections to its jurisdiction – constitutes “clear and unmistakable evidence” that the parties intended for the arbitrators to decide questions of arbitrability.  The Court agrees that, in such case, the arbitrators’ arbitrability decision is subject to judicial review as an award to only the limited extent permitted by the Federal Arbitration Act.

But in this Court’s view the fulfillment of the BIT’s condition precedent to arbitration – that the investor should first file litigation in Argentina’s court system and refrain from commencing arbitration for 18 months thereafter – was not within the arbitral tribunal’s jurisdiction-deciding powers because the investor, having not complied with the litigation pre-condition, had no right to invoke the arbitral tribunal’s jurisdiction.   

Do any readers share my view that there is a certain circularity in this reasoning?  “Jurisdiction” is power to adjudicate.  The Republic of Argentina moved to vacate the award on the grounds that the arbitral tribunal adjudicated despite lacking power to adjudicate. How, then, could the Tribunal’s decision to the contrary have been anything other than a ruling on an objection to jurisdiction? And if it was a ruling on an objection to jurisdiction, then under the Court’s own statement of the law, the tribunal’s decision on jurisdiction was entitled to be reviewed as an award under the Federal Arbitration Act.  Moreover, wasn’t the arguably premature invocation of arbitral jurisdiction a glaringly foreseeable type of dispute for the treaty parties, given the treaty’s Argentine litigation provision – making the absence of a carve-out from the arbitral tribunal’s jurisdiction-deciding powers more revealing, in terms of the treaty parties’ intent, than the absence from the treaty of a definite allocation of power over that issue to the courts or the arbitral tribunal?

For today I leave readers with the foregoing questions, and also with the additional commentary that I posted today on the OGEMID website:

Comment Posted by Marc Goldstein:

“U.S. courts do not get many chances to decide if principles developed in a commercial (and usually domestic) arbitration context make sense as applied to investment treaty arbitration. Most of the investment treaty cases go through the ICSID system and don’t reach our courts. This does not excuse what the D.C. Circuit has decided in BG Group, but in substantial measure explains it.

The First Options decision was the governing law here by default because US courts have not thought through distinctive compétence-compétence principles applicable to BIT arbitrations.  Because  First Options arose from a private domestic commercial arbitration, state common law contract law principles applied to determine if the parties had agreed to arbitrate arbitrability, and intent of the parties was the litmus test provided by that common law.  The presumption in favor of judicial determination of the “who decides arbitrability” question was explained by Justice Breyer on the grounds that the question “is rather arcane” — one on which a private contracting party in the U.S. “might not focus” when signing a commercial contract containing an arbitration clause. An unstated premise, but I submit an equally important one, was that private commercial entities and persons in a US domestic context generally assume the availability and adequacy of their own domestic courts to resolve disputes.

The BG Group decision is disconcerting because most of these premises of First Options do not apply in the BIT context.  Interpretation of the BIT is governed by international law including the VCLT, not domestic contract law, and the intent of the parties is relevant only insofar as international law makes it so.  Then there is the problem that one of the parties to the dispute is not a party to the treaty. Further, the “who decides arbitrability” issue is not “arcane” in the context of a modern-era BIT negotiation between developed nations such as Argentina and the UK. Given the 18-months-in-court requirement in this BIT, and the presumed advantage to the State of resolving foreign investor disputes in the State’s court system, it seems fair to assume that treaty negotiators thought quite a bit about the prospect that investors would seek to curtail or avoid entirely the 18-months-in-court requirement, and foresaw that Argentina would find itself in the position of arguing lack of exhaustion as an obstacle to arbitral decision on the merits.   Did the Argentine Republic foresee that it would be arguing this to an Argentine judge, from whom the UK investor would seek a pre-arbitral declaration of the investor’s right to proceed with arbitration? Obviously not.

If these assumptions about the behavior and mindset of the States in the BIT negotiations are valid, then a BIT arbitration clause that provides for arbitration under rules that empower arbitrators to decide issues of their own jurisdiction should create a presumption under US arbitration law that the parties intended the arbitrators to decide “arbitrability” issues, including the fulfillment or validity of conditions precedent to arbitration, unless it can be said with positive assurance that the parties intended to exclude such issues from the scope of arbitrable issues.

So the BG Group case is a desirable candidate for the granting of a writ of certiorari by the US Supreme Court. Perhaps the arbitration community will pull together as amici curiae in support of the petition for writ if one is filed. And it will no doubt already have occurred to BG Group’s counsel that the winning counsel for the Respondent in the First Options case is now the Chief Justice of the United States.”

The US Court of Appeals in Washington, DC holds that the New York Convention supplies the exclusive grounds for a federal district court to adjourn an award confirmation proceeding, and that such grounds do not include a pending proceeding to nullify the award against a foreign State, in its courts, when that State was not the place of arbitration. Not new news you say — quite rightly.

But yesterday’s decision by the DC Circuit (Belize Social Development Ltd. v. Government of Belize, 2012 WL 104462 (D.C. Cir. Jan. 13, 2012), is significant for at least two reasons.

First, the federal appellate system functioned effectively to correct an egregious error by the federal district court in a Convention award enforcement case. The district court had entered a stay of the enforcement case based on the proceedings pending in the Belize court, a stay intended to last for the duration of the Belize proceedings. Such a stay order is not ordinarily appealable, but the DC Circuit agreed (with appellant) that the Writ of Mandamus should be invoked to permit interlocutory review of a district court order that the district court was clearly without power to enter.

Second, the Court’s opinion bears no trace of consideration of the sovereignty of Belize, or reference to “comity,” as a possible basis to hesitate in applying the New York Convention. Rather, even though faced with judicial proceedings brought by a sovereign State under its own substantive law in its own courts, in which the Belize court had granted an anti-enforcement injunction, and despite Belize have legislated criminal sanctions of increased severity to back this injunction, the DC Circuit focused on the “international commitments”  of the United States that result from the New York Convention’s adoption and implementation through Chapter Two of the Federal Arbitration Act.

Indeed, the Court — perhaps aware of the Second Circuit’s recent dismissal of a Convention award enforcement case against an agency of Peru, under the doctrine of forum non conveniens — took pains to invoke the principle that it is “the virtually unflagging obligation” of the federal courts “to exercise the jurisdiction given them.” That principle, as applied to the jurisdiction conferred by FAA Chapters Two and Three to enforce the New York and Panama Conventions, counsels against invocation of a discretionary doctrine like forum non conveniens (the issue before the Second Circuit in Figuereido) as much as it weighs against (as the DC Circuit held) a stay of enforcement proceedings based on the “inherent power” of the district court to regulate proceedings. 

Readers of the DC Circuit’s opinion will also be heartened by the Court’s citation of the Restatement of International Arbitration Law, in its most recent draft, in support of the proposition that only a vacatur proceeding in a court at the seat of the arbitration or under the arbitration law that governed the arbitration will support an adjournment of a confirmation case. While that proposition was well-established in case law before the Restatement, the Restatement appears to serve as a de facto codification that enables courts to apply arbitration law with a confidence and decisiveness not generally seen in prior years.