The functus officio doctrine returned to center stage this week, with a new decision in a New York Convention case from the U.S. Fourth Circuit Court of Appeals. Here, a partial award determined that a contract had been breached, but the subsequent final award determined that the same contract was unenforceable. In the circumstances, the Court held, the final award was enforceable and confirmation of the partial award could be (and properly was) refused under the Convention by the district court. (AO Techsnabexport v. Globe Nuclear Servs. & Supply, Inc., 2010 U.S. App. LEXIS 25640 (4th Cir. Dec. 15, 2010)).

The arbitral procedure that led to this outcome was a bit out of the ordinary. At issue was a contract involving purchase and sale of uranium. The seller, a Russian company, was the appointee of the Russian Federation to manage its supplies of nuclear material. The buyer, incorporated in Maryland, was a self-styled trader in uranium used in the production of nuclear fuel.

At an early stage, the Tribunal was informed of U.S. criminal indictments related to alleged fraudulent acquisition of a controlling interest in the buyer company by former officials of the Russian Federation, and was told of a parallel criminal investigation in the Russian General Prosecutor’s Office. (The case report does not say, but one assumes, that the Russian sales agent concluded that the buyer was not a secure and trustworthy repository of nuclear materials, and terminated the contract for that reason).

The Tribunal elected to divide the arbitration into three phases: breach of contract liability, damages, and then potentially a third phase addressing the legality of the contract under the applicable Swedish law based on the evidence that might be developed in the Russian criminal investigation. After Phases One and Two, the Tribunal issued a partial award finding breach of contract and awarded nearly $1 billion of damages to the buyer. But in Phase Three the buyer submitted nearly 500 exhibits derived from the Russian criminal investigation, including extensive witness interview transcripts. Based on that evidence, the Tribunal concluded that the contract should be denied enforcement under a provision of the Swedish Contracts Act that in essence permitted rescission based on fraudulent inducement (here, evidently, a scheme to conceal the disreputable character of persons who had secretly conspired to obtain controlling interest in the buyer).

The Fourth Circuit rejected the argument that the Tribunal under the functus officio doctrine lacked power to revisit the conclusion in the partial award that the contract was enforceable. And its rationale for doing so makes good sense: the Tribunal from the outset had made clear that any determinations it might make, prior to any potential consideration of the Russian criminal investigation evidence, were subject to change if that evidence were later presented and it supported (as it did) the conclusion that the contract should be deemed not enforceable. It would not be appropriate in such a case, the Court held, to refuse to confirm the final award under Convention Article V(1)(c) based on the Tribunal having allegedly exceeded its powers.

The Court’s opinion does not permit arbitral procedure-watchers a clear understanding of why the Tribunal elected to proceed as it did. One can imagine the Tribunal had highly imperfect information about the status of the Russian Prosecutor’s work, its timing, its focus, or the merits of the charges under inquiry. One can imagine the Tribunal having been reluctant to stay its proceedings for an indeterminate time. Further, the issuance of the partial award appears to have been quite proper, as at that point it could not be foreseen that the Russian award-loser would be able to present, as it later did, such a compelling case of fraud based on the evidence gathered by the Prosecutor. Thus it appears that well-designed arbitral procedure combined with meticulous application of the Convention and the functus officio doctrine by the U.S. Court yielded a sensible solution to a complex problem increasingly faced by international arbitral tribunals — the arbitral adjudication of issues related to alleged criminality of participants in the arbitration.

The efforts of Chevron Corporation to obtain evidence under 28 U.S.C. § 1782 for use in litigation in Ecuador’s courts  and in a BIT arbitration against the Government of Ecuador has given U.S. District courts in a number of jurisdictions the opportunity to consider the discretionary factors affecting the availability of section 1782 discovery. Such discretionary factors were identified by the U.S. Supreme Court in the Intel case. (Intel Corp. v. Advanced Microdevices, Inc., 542 U.S. 241 (2004)).

Chevron is the defendant in private environmental litigation in Ecuador, and contends that the Government of Ecuador has improperly colluded with the Plaintiffs in that case. That collusion underlies Chevron’s BIT arbitration claims against Ecuador.

Federal district judges in Boston and Baltimore have granted Chevron permission in recent weeks to conduct depositions of damages experts who submitted reports for the Ecuador civil plaintiffs. (Chevron Corp. v. Sheffitz, 2010 U.S. Dist. LEXIS 129540 (D. Mass. Dec. 7, 2010); In re Chevron Corp., 2010 U.S. Dist. LEXIS 124897 (D. Md. Nov. 24 , 2010)).

Each court paused to consider whether the foreign court was receptive to the proposed discovery — and on which side the “receptivity” discretionary factor should impose a burden of persuasion. The Maryland judge was inclined to the view that the Respondent-witness bears the burden to demonstrate that the foreign tribunal is not receptive to the proposed evidence-gathering.  The Massachusetts judge took a more moderate view on this issue, finding that the burden is not clearly imposed on one party or the other. But each judge concluded that even though there was no clear indication that the Ecuador court wished to consider the proposed evidence, the fact that the Ecuador court stated that it was ethically-bound the make the evidence part of the official court file was sufficient to make the “receptivity” factor tip slightly in Chevron’s favor.

The two courts were more nearly consistent in the treatment of the third Intel discretionary factor: whether the proposed discovery would circumvent the procedures of the foreign tribunal. For the Maryland judge, it was sufficient to re-state the settled principle that the proposed evidence need not be discoverable in the foreign proceeding. The Massachusetts judge went a step further, to point out that the issue is properly viewed as one if bad faith, i.e. whether the evidence is sought in defiance of a preference of the foreign tribunal that the evidence not be obtained. 

In both cases, Chevron’s petitions were granted.

Observers of the relationship between the New York Convention and U.S. bankruptcy proceedings will take interest in a recent decision of a federal district court in Pittsburgh, in which the Court rejected the bankruptcy trustee’s attempt to collaterally attack an ICC arbitration award and the judgment entered on that award. G&G Investments, Inc. v. Buschmeier, 2010 U.S. Dist. LEXIS 125902 (W.D. Pa. Nov. 30, 2010).   The bankruptcy debtor in G&G Investments had: contracted to purchase a controlling interest in a German company; attempted to rescind and recover its initial payment; and then lost an ICC arbitration in which it was held fully liable to the German company for the purchase price. Judgment on the award was entered by the federal district court in Pittsburgh several years prior to the bankruptcy filing, in a confirmation proceeding under the New York Convention and Chapter Two of the Federal Arbitration Act in which allegations that the award had been procured by fraud on the tribunal were raised without success. In the bankruptcy case, the controlling shareholder of the German company filed a claim based on the unsatisfied judgment, and the trustee filed an objection to the claim, citing new evidence of fraud based on the report of a German private investigator the trustee had hired to review the documentary record in the arbitration and to interview certain of the witnesses.  The bankruptcy court refused to accept jurisdiction over the trustee’s objection, based on res judicata. That decision was upheld in this appeal to the District Court, which found no excuse for the debtor’s lack of diligence in gathering the evidence of fraud, and no reason to relief the trustee of the res judicata effect of the enforcement proceeding in which  the fraud on the tribunal claim had been raised to no avail.

The decision earlier this week of the UK Supreme Court, that facts disclosed in confidential settlement discussions are admissible to interpret the settlement agreement achieved (Oceanbulk Shipping & Trading SA v. TMT Asia Ltd. & Ors, [2010] UKSC 44 (27 October 2010)), may contribute in a useful way to current discussions about ethical rules of conduct for counsel in international arbitrations.

The decision is useful to the debate over arbitration counsel ethics, because it re-focuses our attention on the reasons for what is known in the UK as the “without prejudice” rule. That rule, as the decision reminds us, is mainly a rule of public policy that encourages settlement of disputes by promoting candor in negotiation. It is secondly a rule of contract law, that an agreement between litigants to hold discussions confidentially is generally as deserving of enforcement as other contracts (though this is closely related to the public policy rationale, which provides the justification for enforcing the contract through an exclusionary rule of evidence rather than merely a claim for damages).

The rule becomes freighted with ethical overtones, because counsel is invariably responsible for the decision to disclose elements of the “without prejudice” discussion in furtherance of a litigation objective, and is usually responsible for the making of the “without prejudice” agreement if not also for the ensuing discussions. When counsel seeks to use information obtained in a “without prejudice” discussion, opposing counsel will issue sanctimonious condemnations of the behavior, often seeking some sanction.

When this happens in an international arbitration what is the arbitrator to do?

As an initial matter, a quest for the applicable law may be fruitless. The relevant rules are likely to be part of the law of evidence or civil procedure in the respective jurisdictions of the disputants. These rules do not apply unless the parties have agreed to them specifically. Arbitration rules of procedure do not ordinarily regulate the matter.  Complicating matters, it is debatable whether the without prejudice rule is a rule of international public policy that warrants vigilant protection from the international arbitrator. The public policy element of the rule is essentially a domestic objective to reduce the burdens that private disputes place on public courts. So if the parties have no agreement on confidentiality, the arbitrator is hard pressed to regulate.

But a without prejudice agreement between the parties, directly or through counsel, providing for the confidentiality of a settlement discussion or any other discussion among the parties or counsel, is properly to be viewed by the arbitrator as a rule of procedure governing the arbitration that she is bound to enforce. Further, when viewed as a rule of procedure, and not merely as a contract, it is quite arguable that the arbitrator has less discretion than a judge might have to give effect to many of the numerous exceptions to the UK version of the without  prejudice rule identified by the UK Supreme Court. Except for non-enforcement that might be said to result from international public policy (e.g. to permit disclosure of actual or threatened criminal conduct), the arbitrator may find little room to interpret the rule adopted by the parties to permit, for example, the disclosure permitted in the UK decision of facts pertinent to interpretation of a settlement agreement.  

Still, there exists the sense at least among common law lawyers that there is something quasi-ethical about respecting an agreement made on the confidentiality of communications between the disputants during the course of the arbitration.

If the arbitrator can establish that there is a shared expectation in this regard, the inclusion of a without prejudice rule in the initial procedural order may save controversy later on. As the debate over codifying ethical rules for arbitration counsel advances, we may expect to see this course being adopted by tribunals more frequently.

Just when you thought the day would never return when a U.S. court would actually show deference to a foreign arbitral tribunal on an issue of that tribunal’s jurisdiction, along comes a new decision of the U.S. Third Circuit Court of Appeals in Philadelphia, holding that an appeal before it on such a jurisdiction issue was moot – moot – because the ICC arbitral tribunal in Paris had ruled upon the issue in a partial award during the pendency of the appeal.  (Invista S.A.R.L. v. Rhodia SA, 2010 U.S. App. LEXIS 21950 (3d Cir. Oct, 25, 2010)).

The Invista case had its origins in a joint venture in the 1970s between affiliates of the chemical giants DuPont and Rhone-Poulenc, for the manufacture of an intermediate chemical essential to the production of nylon.  DuPont licensed the technology for the manufacturing process to the joint venture. The joint venture agreement strictly prohibited disclosure of the technology or related proprietary information for a period of 15 years, and it provided for disputes to be resolved by ICC arbitration in Paris.

By 2007, when the arbitration began, the DuPont and Rhone Poulenc interests in the joint venture had been transferred to entities in the Invista and Rhodia groups, respectively.  Each group had an interest in exploiting the licensed technology to build and operate a chemical plant in Asia, and the Invista side claimed the Rhodia side could not do so without disclosing the licensed technology in violation of the non-disclosure provisions of the joint venture agreement.

The crux of the arbitrability problem was that the entities, on both sides, that sought to exploit the technology in Asia were not the direct successors to the joint venture signatories  Rhodia commenced the ICC arbitration, naming as Claimants both the successor entity to the Rhone Poulenc signatory, and its non-signatory parent Rhodia SA. Invista commenced litigation in the U.S., naming Rhodia SA as defendant and contending it was not obligated to arbitrate with Rhodia SA .  Consistent with that position, the Invista parties in the arbitration sought dismissal of Rhodia SA as a claimant party.

The U.S. litigation made its way from a Texas state court, to a Texas federal court, to a New York federal court, to the Delaware Chancery Court, and at last to the federal district court in Delaware upon removal (as a case falling under the New York Convention) under Section 205 of the Federal Arbitration Act. (Readers seeking a more detailed account of this meandering itinerary will study the case.) In Delaware, the federal judge concluded that Rhodia SA, movant on the motion to compel arbitration, was not a significant participant with its affiliate in the running of the joint venture, and therefore as a non-signatory could not invoke the arbitration agreement against Invista under estoppel, assumption, or agency principles.

Several months after the Delaware District Court’s decision, in 2009, the ICC Tribunal in a partial award held that it lacked jurisdiction over Rhodia SA for substantially the same reasons given by the federal judge for denying Rhodia SA’s motion to compel, i.e. “documents produced on the record do not show that Rhodia SA was directly involved in the performance of the Joint Venture Agreement.” (Partial Award as quoted in the Third Circuit’s opinion).

The Third Circuit, on Rhodia SA’s appeal from the District Court’s denial of its motion to compel arbitration, held that the appeal was moot because the very arbitral tribunal to which Rhodia sought to have the claims referred had decided, in the meantime, that it lacked jurisdiction to hear those claims.

While the result here might be hailed, somewhat reflexively, as a vindication of the competence vested in the arbitral tribunal to determine its own jurisdiction, one may wonder as a matter of American arbitration law whether it is convincing for the Third Circuit to justify a finding of mootness solely on the basis of the Tribunal’s partial award.  The award had not been brought to the United States for confirmation (or to the court of any other nation, so far as appears in the opinion). Nor was this a case where it could be said that the parties to the arbitration had clearly and unmistakably agreed to submit the issue of arbitral jurisdiction to the arbitrators. The Invista parties in the arbitration moved to dismiss Rhodia SA as a party, but they had little choice but to do so, Rhodia SA having intervened as a party claimant without any agreement from the Invista side. Further, it is unclear that Rhodia SA could not have had access to any ICC arbitral forum if the Third Circuit had proceeded to determine that it was eligible to enforce the arbitration clause in the joint venture agreement. Certainly the existing tribunal could not vacate or modify its own award. But what if Rhodia then filed a separate arbitration and sought appointment of a different tribunal? Would the ICC Court not feel constrained to avoid choosing between the existing partial award on jurisdiction and the contrary judgment of a U. S. Court of Appeals? Would not the ICC Court in all likelihood would launch the case based on a prima facie assessment under Article 6(2) that an arbitration agreement might exist, and leave to the new tribunal the challenge of reconciling the partial award and the U.S. judgment?    

This is not to suggest that the Third Circuit outcome is wrong, but only that mootness was perhaps not the most persuasive basis for the decision.  Some form of estoppel would seem to be more convincing. Rhodia SA had intervened in the ICC arbitration with full knowledge of the tribunal’s powers to decide upon its own jurisdiction, and presumably with full knowledge that Invista would raise that issue before the tribunal. Rhodia could have treated Invista’s motion in the tribunal to dismiss Rhodia from the case as a refusal to proceed to arbitration, and on that basis might have purported to withdraw without prejudice from the arbitration while insisting that it was entitled to a final judicial determination of arbitrability from the Third Circuit. The heart of the matter seems to be Rhodia’s unqualified willingness to litigate arbitrability in the arbitral tribunal, which made its appeal to the Third Circuit a proverbial second (or third, counting the District Court in Delaware) bite at the apple.

One important question the Third Circuit did fail to address was whether Invista’s Delaware litigation involved any of the same issues already raised in the ICC arbitration between proper parties to that arbitration.  FAA Section 3 provides for a stay of proceedings if the lawsuit is brought “upon any issue referable to arbitration under an agreement in writing for such arbitration.”  It was not necessary to a Section 3 stay for the Court to find that Rhodia SA had the right to participate in the arbitration. The Third Circuit barely brushes up against this issue, merely noting that Invista in its Complaint alleged that the issues and claims presented in the litigation were distinct from those presented in the arbitration. The issue is not analyzed further. Examination of the appellate briefs to see if the issue was raised is beyond the scope of this writer’s present ambition. And so this criticism of the Third Circuit’s decision is made subject to that large qualification.

Under compétence-compétence, American style, nothing may be arbitrated if there never was a contract. We were reminded of this last week, when a federal judge in Manhattan (i) denied a motion to compel arbitration, and (ii) refused to stay its own proceedings pending the decision of an ICC arbitral tribunal in London on the contested issue of the existence of a contract containing an agreement to arbitrate.

(Dedon Gmbh v. Janus Et Cie, 2010 U.S. Dist. LEXIS 112131 (S.D.N.Y. Oct. 19, 2010).

In Dedon, the parties either did or did not enter into an exclusive distribution agreement. If they did, it unquestionably provided for arbitration of disputes — including disputes over the existence of the agreement — before an ICC arbitral tribunal in London. But it was common ground that the purported agreement had never been signed; the disputed issue was whether it had been adopted by performance.

The aggrieved terminated U.S. distributor, Janus, filed the ICC case, and Dedon responded by asking the ICC Court for a determination prima facie under ICC Rule 6(2) that an agreement to arbitrate did not exist (while expressly reserving the right to obtain a judicial determination of that issue) . The ICC Court instead found prima facie that an agreement to arbitrate might exist, and launched the case.

The U.S. court concluded that the text of Article II(3) of the New York Convention and U.S. Supreme Court precedent compel the federal judge to resolve the question of arbitrability presented when one party moves to compel arbitration and the other opposes that motion by contesting whether any contract between the parties ever came into being.

On the question of whether to stay proceedings and await the arbitral tribunal’s arbitrability ruling, the court concluded — with evident reluctance and hesitation — that awaiting the ICC tribunal’s ruling on that issue would only complicate matters, because the Court’s duty to decide the arbitrability issue de novo might then collide with its obligation under the New York Convention to recognize the award and any decision of a competent English court that might uphold that award. The court further justified its election not to defer to the arbitral tribunal on the ground that the plaintiff distributor in the New York action had sought urgent injunctive relief.

Should we regard this decision as a proper exercise of judicial control over the fundamental contractual basis for arbitration? Or was it a premature “intervention” in an ongoing ICC case?

As an initial matter, the notion that this was an “intervention” or “interference” by the judiciary in the arbitral process should be resisted. Within a three-week time frame, one party commenced proceedings ar the ICC, and the other filed the New York lawsuit. In the lawsuit, the ICC-filing party moved to compel arbitration. The New York Convention required the court to decide if the parties had made an arbitration agreement. Otherwise the motion to compel could not be addressed. The Court was not “interfering” or “intervening,” it was addressing a motion presented by the party seeking to pursue the ICC case.

Further, as no arbitral tribunal had yet been formed, in practical terms an arbitral decision on the arbitrability issue was several months off into the future. From a “comity” perspective, the intrusion into the province of an international tribunal was far less than if the tribunal had been seized of the case, and had already held a hearing on the jurisdiction question.

The fact that the ICC Rules make arbitrators competent to rule on their own jurisdiction should be of no consequence to a court asked to consider the arbitrability issue, when the arbitrability issue is whether the parties ever made a contract.  If they did not, no arbitral tribunal could legitimately claim power to apply the ICC Rules to a dispute. If the arbitral tribunal is the first to adjudicate this arbitrability issue, everything it decides, and all proceedings before that tribunal, have only provisional legitimacy until there is a judicial affirmation of the correctness of the arbitral decision on jurisdiction.

A stay of proceedings would be justified if the matter were ripe for arbitral decision, prompt judicial review of that decision could be had in the courts at the seat of arbitration, and the applicant for judicial relief on the merits would not suffer serious prejudice if required to await those rulings.

It remains to be seen how the ICC Tribunal will respond if the New York court rules that no contract ever existed. The Court’s denial of the motion to compel arbitration would be only an interlocutory order with no necessary binding effect on the arbitral tribunal. Of course the tribunal might elect to adhere to the New York court’s decision under collateral estoppel principles. Or the New York court might possibly accept an invitation to enter an anti-arbitration injunction — an order in personam against the party, directing the party not to pursue the arbitration, that could made into a judgment and enforced by a court at the seat of the arbitration.

Notably absent from the Court’s analysis is any discussion of whether an accelerated judicial determination of the arbitrability issue could be obtained from an English court. Indeed there is a provision  for such relief in Article 32 of the English Arbitration Act of 1996. It provides that the court may “determine any question as to the substantive jurisdiction of the tribunal.”  But it goes on to state that an application shall not be considered unless it is made with the agreement of all parties to the proceedings, or it is made with permission of the tribunal and the court is satisfied that judicial determination will likely produce substantial cost savings and there is otherwise “good reason why the matter should be decided by the court.” This may be the best solution for the New York court — which is scheduled to hold a conference October 27 to set procedure for a trial of the arbitrability issue. Should the court succeed in securing the mutual consent of the parties to submit the issue to an English court on an expedited basis, considerable savings in costs and avoidance of potentially inconsistent outcomes could be achieved.