Let’s have a show of hands. All in favor of the following proposition:

             A U.S. District Court In An Award Enforcement Case Should Decide      If European Union Law Invalidates the Jurisdiction of An Arbitral Tribunal Under the Energy Charter Treaty

Too puzzled to cast a vote?  Then read on.

This question came to my attention when I heard at a recent arbitration conference that at least three, perhaps four, US district court judges (three in Washington, one in New York) have been asked recently to decide this question, and are either puzzling over it now or waiting for completion of the record.  A sensible colleague in the conference audience asked whether US district judges were up to the task, given its foreign law complexities. The panelist-presenter, evidently steeped in those complexities (arising from the interplay of EU law, the Energy Charter Treaty’s dispute settlement provisions, and a certain famous (or infamous) European Court of Justice (ECJ) judgment from 2018 called Achmea), worried aloud that they may not be. The question addressed in this post is whether the US district court in one of those cases – where the record seems to be rather complete and the motion to enforce the award evidently is rather fully submitted – should take up the suggestion of the award-creditor Kingdom of Spain to stay the proceedings, as the New York Convention permits the Court in its discretion to do where the Award has been suspended at least temporarily  by a competent court at the seat of the arbitration (Stockholm) and where an application to set aside the award has been made in that court.

Having spent a fraction of Holiday time binge-reading portions of the record in Novenergia v. Kingdom of Spain (U.S. District Court for the District of Columbia, Docket No. 18 Civ. 1148), I first offer a bit of background. The Energy Charter Treaty (ECT), signed or acceded to by 54 countries and the EU (emphasis supplied without prodding by Novenergia’s counsel), is a source of protection for foreign direct investment in the energy sector and provides for dispute settlement between Contracting States and investors of other Contracting States under one of several options for arbitration: ICSID Rules, ICSID Additional Facility Rules, UNCITRAL Rules ad hoc arbitration, or arbitration under the Rules of the Stockholm Chamber of Commerce. The US and Canada are ECT Observer States, not Contracting States, as are most of the major oil-producing nations in the Middle East.  Starting around 2004, the Kingdom of Spain, an ECT Contracting State, pursued a national commitment to renewable energy via solar power by providing investment incentives in the form of subsidies through the tariffs that solar power electricity producers could charge for feeding voltage into the Spanish grid. But when Spain began to realize that the subsidies were bankrupting the Kingdom, beginning around the start of this decade, the incentive program was significantly revised and constricted, causing grief for investors who had relied on the incentives, and, in short order, a number of ECT arbitrations against Spain by investors from other ECT Contracting States. (Novenergia is Luxembourgeois). Many of those cases were pending (and some still are) when the ECJ, the EU’s highest court, in March 2018 issued its Judgment in the Achmea case (which did not involve the ECT but rather a bilateral investment treaty (BIT) between two EU Member States). For reasons now explained, Achmea (coupled with European Commission guidance on its impact) gave Spain and other EU Contracting States who are Respondents in ECT arbitrations, an idea for a potential jurisdiction defense.

Now a few words about Achmea (Slovak Republic v. Achmea BV, Case No. C-284/16, ECJ Judgment of March 6, 2018, found, e.g., at the ECJ’s website www.curia.europa.eu): Consider Achmea, US readers, to be the Marbury v. Madison of EU investment arbitration. It is emphatically the province of the European Court of Justice, the ECJ, to say what EU law is. Or at least that’s the view of the EU. They call this “The Autonomy of EU Law.” Generally, courts of EU Member States must apply EU law, which is intrinsic to the domestic law in each State. (Note to EU-aspirant States: when the EU sells admissions online, this intrinsicality takes hold when you click “Accept”). Arbitral tribunals under intra-EU BIT’s are creatures of those treaties, not organs of the judicial systems of the State parties to the BITs. The awards of such BIT tribunals are regulated by judicial review in courts at the seats of the arbitrations, which apply the arbitration law and the public policy of the seat State. In a given case under a given BIT this may or may not be a court of the Respondent Contracting State or even another EU Member State. Within the courts of EU Member States, but not elsewhere, and not before BIT arbitral tribunals, there is a procedure to obtain from the ECJ a preliminary ruling on a question of EU law that has arisen in the case. Achmea, a Dutch company and Slovakia chose to arbitrate in Frankfurt, and the German Bundesgerichtof  (that’s a Court) referred to the ECJ the question of whether intra-EU BIT arbitration was in violation of the Treaty on the Functioning of the European Union, given that the arbitral tribunal had neither the right nor the obligation to make such a referral to the ECJ. An arbitral tribunal under an intra-EU BIT doesn’t derive an obligation to apply EU law from the Respondent State’s EU subscription, but only from the BIT, which typically tells arbitrators to apply (inter alia) the BIT, general principles of international law, and law of the State party insofar as necessary. But that sets up intra-EU BIT arbitration as a forum where potentially an “off-shore” version of EU law could evolve, at odds with the official version emanating from the ECJ courthouse in Luxembourg. And in Achmea an aggrieved Slovak Republic  — which got its EU Membership Card roughly a decade after signing the relevant BIT with The Netherlands — argued that this is not good, that The Autonomy of EU Law negates the BIT’s standing offer to arbitrate with an investor of the counterpart Member State because the potential arbitral tribunal envisioned by the BIT is an illegitimate “off-shore” applier of EU law. No lawful offer to arbitrate = no arbitral jurisdiction = proper grounds to annul the award. The ECJ in Achmea agreed on the legal invalidity of the standing offer to arbitrate in an intra-EU BIT, and the German court that had referred the question to the ECJ then proceeded to annul Achmea’s award.

Depending on whether you are a victorious EU investor or a losing EU State in an ECT arbitration, Achmea means either everything, or nothing, in regard to the enforceability of the award. That is to say, if an ECT arbitral tribunal is an illegitimate applier of EU law in the same sense that an intra-EU BIT tribunal (according to the ECJ) is, then ECT arbitration between EU investors and EU Members cannot subsist.  Fascinating. But our question is whether this is a perfectly appropriate issue to be decided in the first instance by a US district court in Washington DC – ahead of the Svea Court of Appeal in Stockholm, already asked by Spain to annul the award, ahead of the ECJ, which could be asked by the Stockholm court to decide in a preliminary ruling whether Achmea extends to a multi-lateral treating that includes non-EU Members like the ECT, and despite a preliminary order of the Stockholm court (issued a mere two days after the filing of Spain’s annulment application) that suspends the award and thus bars its enforcement while all this gets sorted out.

US law guidelines for a district court’s exercise of discretion to stay or not stay the enforcement of a New York Convention award pending an annulment proceeding at the seat of the arbitration comes mainly from a US Second Circuit Court of Appeals case, Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310 (2d Cir. 1998), where the Court identified a number of considerations that district courts should take into account:

• The general objectives of arbitration – the expeditious resolution of disputes and the avoidance of protracted and expensive litigation;
• The status of the foreign proceedings and the estimated time for those proceedings to be resolved;
• Whether the award sought to be enforced will receive greater scrutiny in the foreign proceedings under a less deferential standard of review;
• The characteristics of the foreign proceedings including (i) whether they were brought to enforce the award (which would tend to weigh in favor of a stay) or to set the award aside (which would tend to weigh in favor of enforcement); (ii) whether they were initiated before the underlying enforcement proceeding so as to raise concerns of international comity; (iii) whether they were initiated by the party now seeking to enforce the award in federal court; and (iv) whether they were initiated under circumstances indicating an intent to hinder or delay resolution of the dispute;
• A balance of the possible hardships to each of the parties, keeping in mind that if enforcement is postponed under Article VI of the Convention, the party seeking enforcement may receive “suitable security” and that, under Article V of the Convention, an award should not be enforced if it is set aside or suspended in the originating country; and
• Any other circumstances that could tend to shift the balance in favor of or against adjournment.

The Second Circuit went on to say that this was not “an exhaustive list,” and that “[b]ecause the primary goal of the Convention is to facilitate recognition and enforcement of arbitral awards, the first and second factors on the list should weigh more heavily in the district court’s determination.” Obviously this list of considerations was stated, and weighted, in the context of enforcement of a private commercial arbitration award, an award that resolved breach of contract issues that were unique to the parties’ commercial contract, had no intergovernmental or public policy significance, and carried no risk of deciding issues of public law that were also at the same time presented in a number of other investment arbitrations and in award enforcement or award annulment proceedings before foreign courts. Novenergia v.Spain thus presents a test of the adaptability of the Maiellano Tours formula to a radically different context.

The first Maiellano Tours factor – in a word, expedition – does not appear to favor a merits decision here and now. Rather we should be concerned here that haste may make waste – that if the ECJ formally embraces the EU position that the Achmea outcome extends to intra-EU disputes under the ECT, any judgment given by the US district court may have to be vacated, and any execution obtained against US-based assets of the Spanish State might need to be reversed. (I have no idea what prejudice in terms of effective execution might befall Novenergia from such a delay, but the US district court may hear the parties on that question and require suitable security). One is reminded of what occurred in the Southern District of New York and US Second Circuit Court of Appeals in the Thai-Lao Lignite case, where a stay of enforcement was denied despite anticipated annulment proceedings at the seat in Malaysia, the award was enforced, the award was then annulled in Malaysia, and several years of proceedings ensued here in New York concerning the vacatur, or not, of the initial enforcement judgment. And that happened in a situation where there was initially considerable doubt about the merits of the annulment application at the seat. Here, the parties’ respective Swedish law experts agree that the Award has been suspended under the Swedish Arbitration Act (albeit as a temporary measure and without elaboration of reasons), and the Swedish law expert for Spain, the retired Supreme Court of Sweden justice, states that such a suspension typically occurs only when the issuing court has determined that the annulment application has substantial merit. So, for the US district court in Washington DC to forge ahead now to the merits of controversial questions of EU law and ECT interpretation under international law runs some significant risk of extending rather than streamlining the judicial proceedings.

The second Maiellano Tours factor, status of the foreign proceedings, is really a refinement of the first “expedition” factor, asking how much delay is expected if completion, or at least material progress, is awaited in the foreign proceedings.  Here Novenergia’s expert states that the Stockholm annulment case could perhaps be finished by Summer 2019, but that it might take longer if counsel ask for more time or if the Stockholm court decides to seek a preliminary ruling from the ECJ on the Achmea/ECT issue. That expert also posits that the Achmea issue is of such importance that one can predict rather confidently that the Stockholm court (Svea Court of Appeal) will exercise its discretion to certify the case for appeal to the Supreme Court of Sweden, and that if this were to occur the end date for the entire Swedish annulment process could extend to 2022. Spain’s expert, a recently-retired Justice of the Supreme Court of Sweden, does not disagree.  Your Commentator’s view is that the time involved for the Swedish annulment process does not support denial of the stay. One element of this assessment is that the minimum time for an initial decision, more or less six months (and growing nearer while the matter is sub judice), is not so long. Another element is that the stay may be reconsidered, perhaps after the first Swedish decision, or even earlier, if and when there is a preliminary ruling from the ECJ on whether the Achmea ruling extends to intra-EU arbitrations under the ECT. If there is a clarifying ECJ ruling, adherence to that ruling by the Swedish courts may be foreseeable, so the time for the further proceedings in Sweden to be completed may then be not particularly relevant to the analysis. A relatively short (up to six months) wait-and-see period when there is great volatility on this issue in a number of European courts and in ECT arbitral tribunals has considerable merit.

The third Maiellano Tours factor is “whether the award sought to be enforced will receive greater scrutiny [in the foreign court] under a less deferential standard of review.” Here the first question may be what is the scope of review in the US Court of the arbitral tribunal’s rejection of Spain’s Achmea-based objection to jurisdiction? Without digressing into a lengthy discussion of this controversial corner of US arbitration law, let’s assume for argument’s sake that the US Court would not view the parties’ agreement to Stockholm Rules arbitration in Stockholm in the framework of Swedish arbitration law as a clear and unmistakable delegation of all power to decide arbitral jurisdiction issues to the arbitrators.  Let’s further assume that in Sweden an arbitrator’s arbitrability decision is judicially reviewed more or less de novo when this is  requested (IBA Arbitration Guide for Sweden, updated Jan. 2018, at p. 8, prepared by Robin Oldestam of Mannheimer Swartling). So differential deference to the tribunal’s Achmea arbitrability ruling may not be present. But what about the status of EU law as an intrinsic element of Swedish substantive law? If the ECJ declares that the Achmea rationale extends to the ECT, isn’t Sweden bound to apply the ECJ ruling whereas the US Court is not? This would seem to be effectively a wider scope of review in Sweden, a factor that favors a stay under the Maiellano Tours factors, on the basis that the risk of inconsistent outcomes is reduced by waiting.

I will not dwell here on the fifth Maiellano Tours factor “balance of hardships”, save to note: (1) that alleged economic hardship of a Claimant like Novenergia may be partially relieved by a requirement of suitable security, and would not be relieved by permitting enforcement if Spain could prevail upon a court to require Claimants to create reserves sufficient to satisfy its claims for recoupment if the Achmea issue were to be ultimately resolved in its favor; and (2) it seems an unnecessary hardship for Spain to be required to litigate the Achmea issue before multiple enforcing courts unconnected to the EU when an EU Member State court such as the Svea Court of Appeal might grant Spain’s request that a preliminary ruling be sought from the EU concerning the application (or not) of the Achmea rationale to the Energy Charter Treaty.

The sixth (and last enumerated) Maiellano Tours factor is the “catch-all”: “[A]ny other circumstances that could tend to shift the balance in favor of or against adjournment.” One such circumstance is that Novenergia v Kingdom of Spain is only one of many intra-EU arbitrations under the Energy Charter Treaty. Conferees at the December 2018 conference that I attended were told that there are at least four award enforcement cases in US district courts at this time in which an investor from one EU Member State has won an award against another EU Member State for violations of the ECT. How many other similar ECT arbitrations are in progress I do not know, but indications are that there may be a considerable number. A Norton Rose Fulbright report in October 2018 states that Spain had been named as the Respondent in more than 40 cases, that Italy faces ten cases, that the most frequently occurring nationality of ECT Claimants is German, and that 66 ECT cases are pending. It stands to reason that many of these cases involve the Achmea issue, and that definitive guidance from the ECJ will be obtained, if not in the Novenergia case in the Swedish annulment case, then in another annulment case where an ECJ Preliminary Ruling is similarly sought. I suggest it is reasonable for a US district judge to tread cautiously because the stakes are far greater than the award in favor of Novenergia or the timing of its collection. Essentially the further utility of the ECT arbitral dispute resolution process within the EU is at stake. A merits decision on the issue by a US court in one case is not likely to resolve the matter and there is at least some risk that the US court, presumably having no prior training or experience in the relevant EU law, would issue a decision which, even if soundly reasoned, fails to be influential among the Justices of the ECJ when a Preliminary Ruling is predictably sought by a court of an EU Member State.

And also in the “other circumstances” category: What should be the influence on the US district judge of the fact that arbitral tribunals composed of renowned experts in public international law, including the Tribunal in Novenergia, have sided with Claimants in rejecting the position that Achmea’s reasoning should apply to intra-EU arbitrations under the ECT?  It would seem that there may be strong reasons for the US judge to resist (for now) the temptation to follow the lead of the investment arbitration “in crowd.” What of the fact that because the US is not a Member State of the ECT, the ECT is not American law, and US courts have neither any developed ECT jurisprudence nor do they have any direct forum interest in construing its dispute settlement provisions? What of the fact that the US is also not a Member State of the Vienna Convention on the Law of Treaties (“VCLT,” although the US is a non-ratifying signatory) — while Sweden is — and that it is through the VCLT’s principles of interpretation that the proposed construction of the ECT in light of EU law is to be made? What of the fact that the Svea Court of Appeal or the Supreme Court of Sweden might view an EC position (and/or ECJ Ruling) against intra-EU arbitration under the ECT as fostering a mandatory rule of Swedish substantive law, having the status of fundamental public policy, and thus requiring annulment of an Intra-EU ECT award rendered in Sweden — even if that conclusion would not be reached when analyzing the legal validity of Spain’s offer to arbitrate under the ECT solely on the basis of Swedish arbitration law? Doesn’t the suspension of the Novenergia award by the Svea Court of Appeal sufficiently hint at this possibility that there would need to be very compelling reasons favoring immediate US enforcement, even at the risk of later vacatur of the enforcement judgment, in order for a US court to deny a stay?

In summary, it would appear that there are substantial reasons for the US court to refrain at least temporarily from deciding the merits of the Novenergia v. Kingdom of Spain enforcement case to await developments in the annulment proceeding in Sweden.

In celebration of the recent publication (November 30, 2018) of important sections of the American Law Institute’s Restatement (Second) of the U.S. Law of International Commercial and Investment Arbitration (in an as yet not formally ALI-approved Council Draft), concerning the topic of the issue preclusive (collateral estoppel) effect of international arbitration awards in later US litigation, today’s post will report upon findings of a brief excursion into recent US federal case law to see what the courts have actually been doing in this area.

As a foundation for the reader’s appreciation of this report, it seems to suitable to set forth here at the outset: first, the Restatement’s “black letter” in regard to this dimension of   issue preclusion, and second, the Restatement’s summary of the criteria applied by US courts to determine the issue-preclusive effect of prior adjudications (whether judgments or awards). Thus, the Restatement in Section 4-37 (as proposed for ALI Council approval) states:

Issue Preclusive Effect of Arbitral Award

            A court declines to permit reexamination of the merits of a specific issue of fact or law previously adjudicated in an international arbitral award to the extent that the party seeking preclusive effect establishes that:

     (a) the prior award is entitled to recognition under this Chapter;

     (b) the award satisfies the requirements for issue preclusion prescribed for an arbitral award by the law of the forum in which such recognition is sought; and

    (c) barring reexamination of the issue is consistent with the arbitration agreement and the reasonable expectations of the parties.

And in Section d (ii) of the Reporters’ Notes to this section the US forum requirements for issue preclusion are summarized as follows: “Although jurisdictions that embrace issue preclusion vary in their articulation of the governing standards, those jurisdictions that allow it commonly require that four central requirements be satisfied: (1) the parties must have been given a full and fair opportunity to litigate the relevant issues; (2) the issue on which preclusion is sought must actually have been decided in the previous adjudication; (3) resolution of the issue must be necessary to the previous adjudication; and (4) the party against whom preclusion is sought must be a party or in privity with a party to the previous adjudication.”

Having furnished this foundation, I now report on my recent excursion:

1. Whereas there is judicial discretion to give or withhold issue-preclusive effect to a prior arbitral award, the arbitration community has an understandable unease, a valid concern about awards being relegated to second-class status in relation to the judgments of courts. But major elements in the discretion equation are within the arbitrators’ substantial control: Can the Court can determine with confidence, from the Award and/or other submitted portions of the arbitral record, that the precise issue on which preclusive effect is sought was actually and necessarily decided in the arbitration? When a well-reasoned and precisely-crafted international arbitration award is involved, that concern should be satisfied most of the time — both as to the issues actually decided, and the procedures followed in the arbitration. As an illustration, in a recent case a federal district court in Texas gave preclusive effect to a factual finding made in a foreign arbitration that plaintiff suffered no economic harm by virtue of the merger of Respondent’s predecessor into the Respondent. And the Court was fully satisfied that the issue-precluded litigation plaintiff had received due process in the arbitration. The result was a summary judgment for defendant on the basis that damages could not be established on any of its litigation claims. (OJSC Ukrnafta v. Carpatsky Petroleum Corp., 2018 WL 5921228 (S.D. Tex. Nov. 13, 2018)). It is notable that in the same case, however, the court declined to find plaintiff’s claims to be time-barred, where the arbitral tribunal’s determination that plaintiff was a put on notice of its claims many years earlier was an alternative finding to the tribunal’s decision that no notice was even required under the contract. Thus the question of the timing of notification had not been necessarily decided in the arbitration.

2. Arbitral unease about US judicial discretion in regard to issue preclusion is most acute when it comes to the procedural differences between litigation and arbitration. There may be a visceral fear that US judges will systematically reject issue preclusion on the basis that a proceeding with more searching pre-hearing discovery, broader scope for oral witness examination, more fulsome opportunity to obtain the evidence of non-parties, might lead to a different outcome on an issue in the courtroom. My brief tour of case law for this post did not reveal a pattern in which such considerations resulted in denying preclusive effect to international awards. But many other considerations might come into play. For example, a federal judge in Los Angeles ruled in 2016 in a patent licensing case that an arbitral determination of the reasonable royalty rate against the same licensor would not be given preclusive effect for what were characterized as “equitable” reasons — notably, that in the case before the court the jury was charged with determining a broad range of fair contractual terms and not merely the royalty rate that the arbitral tribunal had addressed. (TCL Communications Technology Holdings Ltd. v. Ericsson, 2016 WL 6662725 (C.D. Cal. May 26, 2016)).

3. An arbitral tribunal might still be sitting, or a second arbitral tribunal in a related matter might be sitting, after confirmation of Award #1 by a US court. In that scenario, who decides issue preclusion? It it a matter for the Court, in “defense” of its judgment, or for the still-sitting tribunal? It seems that the issue-preclusive effect of Confirmed Award #1 in pending Arbitration #2 is likely to be seen by US courts as a matter for Tribunal #2. It was so held by the US Second Circuit Court of Appeals in Citigroup v Abu Dhabi Investment Authority, 776 F.3d 126 (2d Cir. 2015), where the Court held that an anti-arbitration injunction against Arbitration #2 would not be issued to “protect” the judgment confirming Award #1. In essence, the Court reasoned that federal courts’ interest in protecting their judgments from collateral attack did not justify taking an arbitrable dispute (over issue prelusion) away from the arbitrators, where the court’s judgment did not ensue from a plenary proceeding in the court but only from a motion to recognize and enforce the award under the New York Convention. But query whether the same outcome would follow if a party were seeking a stay of litigation on the merits, and not merely, as in Citigroup, an injunction against Arbitration #2. The case discussed below is indicative, in a positive way.

4. A recent case was resolved in favor of a discretionary stay of the merits litigation based on the potential issue-preclusive effect of a related pending international investor-State arbitration. In this case, plaintiffs who had invested in a mining concession in the African nation of Guinea brought (1) an ICSID arbitration against Guinea for breach of the mining concession and violations of international law, and (2) a US litigation against George Soros and Soros-affiliated non-profit entities who, the plaintiffs alleged, had under the pretext of helping Guinea to revoke the corruption-tainted mining contracts engaged by a prior regime, had tortiously interfered with plaintiffs’ rights. The District Court granted the Soros defendants’ motion for a stay, finding that the issues to be decided in the ICSID arbitration — mainly whether the mining concession was valid or instead was void based on corruption in its procurement — would “likely provide significant insight into, if not actually resolve, the claims asserted in this action.” (BSG Resources (Guinea) Ltd. v. Soros, 2017 WL 5897450 (S.D.N.Y. Nov. 29, 2017)).

5. The litigant to be precluded may not have been a party to, but only a participant in, the related earlier arbitration. In such a case, before finding a “full and fair opportunity to litigate” before the arbitral tribunal, there must be an especially careful assessment of the status and motives that the putative precluded party had when it participated in the arbitration. Suppose the later-litigating party was a voluntary non-party witness in the arbitration, and knew it was a potentially liable party that might have to resolve disputes with a party to the arbitration in court later on, and its exposure would depend largely on the arbitration outcome? That was the situation in SMS Demag Inc. v. ABB Transmissone & Distrobuzone, S.p.A., 2008 WL 906530 (W.D. Pa. Mar. 31, 2008), where the manufacturer of defective industrial machinery testified as a non-party in arbitration between the owner of the factory and the contractor-developer who had separately procured the machinery. Its witness role at the arbitration was held insufficient to satisfy the “full and fair opportunity to litigate” requirement, despite the clear incentive to limit its potential exposure. (Frequently but not uniformly, the application issue-preclusion law of the forum will require that the party sought to be precluded shall have been either a party or in privity with the party in the earlier proceeding. But that standard was not applicable in the SMS case, and so the examination of motives and incentives was necessarily more wide-ranging).

Distilling lessons about issue preclusion in the US courts for arbitrators and the parties appearing before them, we may take away the following points:

1. Issue preclusion as a potential basis to resolve an issue before the Court generally has the same jurisprudential status in relation to a prior arbitration as it does in relation to prior litigation. (This much can be said to be “black letter law”  enshrined for instance in the ALI’s Restatement (Second) of Judgments: “[A] valid and final award by arbitration has the same effects under the rules of res judicata, subject to the same exceptions and qualifications, as a judgment of a court”, sec. 84(1), with the clarification offered in ensuing text that “res judicata” here is used in a broad sense to include issue preclusion. The differences are mainly in the details, that is, how the arbitration process and arbitral award factor into the legal formula for deciding issue preclusion.
2. Whether or not the award has been enforced under the New York Convention appears not to factor into the courts’ assessments (although the pendency of an annulment proceeding would evidently raise doubt that the award is final). This is as it should be, because the transformation of the award into a court judgment contributes nothing on the question of what issues where actually and necessarily resolved, or whether the party to be precluded had a full and fair opportunity to litigate the issue. On the other hand, it seems at least implicit in the case law that a foreign or international arbitration award should be entitled to recognition, whether or not it has actually been recognized, as a predicate for giving issue-preclusive effect to findings of fact or law made by the Tribunal in an award. The new Restatement Council Draft provides in the “black letter” that “[a] court declines to permit reexamination on the merits of a specific issue of fact or law previously adjudicated in an international arbitral award to the extent that the party seeking preclusive effect demonstrates that: (a) the prior award is entitled to recognition under this Chapter….” In the Reporter’s Notes, no case law is cited illustrating an affirmative judicial finding of the award’s entitlement to recognition; it seems to be rather an analytical point, as stated by the Reporters, that “[a]n award that is not entitled to recognition cannot be granted issue preclusive effect. Thus, as an initial matter, issue preclusion is only possible in relation to an award that satisfies the requirements for recognition under this Chapter.” Closer examination of the record in cases discussed above might reveal that indeed the Claimant did provide sufficient factual basis to demonstrate that the award was entitled to recognition, and that no question in this regard was raised by the party against whom issue preclusion was sought.
3. Arbitrators generally know from the context of the case whether other proceedings are probable in which a party to the arbitration may seek issue preclusive effect against another and/or be confronted with an issue preclusion contention. The most obvious situation is where the parties have agreed to arbitrate certain types of claims and to litigate others, both types of claims arise from the same business dispute, and the arbitration occurs first. When this happens, arbitrators will wish to be especially mindful to state succinctly the issues actually presented and actually decided, and to recite the procedural history in a fashion that anticipates any possible claim that a party was not afforded fair opportunity to address an issue. (Here I do not mean to understate the technical-legal significance of a court judgment in the US law of issue preclusion, but only to emphasize that the possible frailties of arbitration from an issue preclusion perspective are not cured merely by a confirmation judgment).
4. Arbitration’s epic and incremental struggle for legitimacy in the US courts, over a period of several decades, should always be borne in mind. Richard Hulbert when he wrote nearly 30 years ago on this subject (Vol. 7 No. 1 Berkeley J. Int’l Law at p. 159) sought to enlighten US jurists about the due process procedural quality of prototypical international arbitrations – then far less well understood than they are today. But judicial misconceptions of arbitration persist, especially away from the major centers of judicial activity related to international arbitration. When writing with potential issue-preclusive impact, arbitrators do well to remember that the main exposure to arbitration of  many US judges relates to domestic awards written with little if any reference to evidence, case law, reasoning, or the arbitral process. Arbitration seems to be perennially on trial in the US courts despite its advances.

Thank you readers for your indulgence in reaching the end of this and prior posts. Wishing you all Happy Holidays.

At a recent gathering of arbitration lawyers that I attended, the leader of a seminar concerning the arbitration rights and duties of non-signatories asked if anyone in the audience disagreed with the proposition that under US arbitration law it is for the courts not arbitrators to decide whether and when a non-signatory may or must arbitrate. Not being totally at ease with the stated categorical proposition, I ventured the comment that the delegation of arbitrability issues to arbitrators pursuant to the “First Options” case law may operate as an exception to that rule, and potentially a rather broad exception at that. Not having explored the question very recently, and being unsure if I had embarrassed myself (yet again) with an inaccurate remark, I decided to explore. The results are interesting, lend comfort to my fragile ego, and indicate that the US law version of compétence-compétence (especially “negative compétence-compétence,” i.e., the law of judicial restraint on judicially deciding arbitrability), at least in regard to “who may or must arbitrate” arbitrability questions, has been undergoing some subtle but important changes.

As a quick refresher on the relevant US law, here first is a simplistic and hopefully not very controversial foundation for what follows: The received learning from the First Options case (First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)) is that the question of whether the parties to an arbitration agreement agreed to arbitrate a particular matter is presumptively a question for determination by a court, and that presumption is overcome in favor of arbitral determination of “arbitrability” only if there is clear and unmistakable evidence that the parties intended to delegate the arbitrability issue to the arbitrators. In the decade after First Options, several US federal appellate courts accepted the position that where the agreement to arbitrate provides for arbitration under arbitral procedural rules that empower arbitrators to rule upon objections to their jurisdiction, that rules adoption operates as a delegation of arbitrability issues to the arbitrators and furnishes the requisite clear and unmistakable evidence needed to overcome the presumption in favor of judicial determinations of arbitrability issues. That position is accepted with near uniformity in the US federal courts. But a competing strain of judicial authority, equally well-entrenched, holds that whether any arbitration agreement ever came into existence cannot be regarded as a question of arbitrability subject to consensual delegation to the arbitrators, because the existence of a valid delegation of arbitrability issues to the arbitrators presumes a valid arbitration agreement in the first instance, and if a party disputes whether it ever entered into a valid arbitration agreement, that issue needs to be resolved judicially before the delegation clause, or any other aspect of the arbitration agreement, can spring into operation. Case law evolved in two strands for courts to address the threshold question of whether an existing arbitration clause in a written agreement could be enforced by, or against, a person or entity who did not sign it (or at least did not sign on his, her, or its own behalf).  One branch of that case law, culminating in a decision of the US Supreme Court in Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009), established that in a domestic case it is ordinary the applicable state law of contracts that applies to determine if a non-signatory may be permitted or required to enforce an agreement to arbitrate. The other body of case law has particularized to the arbitration context the various state contract law grounds for contract enforcement by or against non-signatories – assignment, assumption, agency, alter ego, estoppel, etc.

At the intersection of these streams of arbitrability law is a question that has not received particularly careful attention from the courts: what happens when a court permits or requires a non-signatory to arbitrate under an arbitration agreement that validly delegates arbitrability to the arbitrators? Does the judicial determination that the non-signatory may or must arbitrate resolve the non-signatory arbitrability issue entirely, despite the delegation, or does the court’s decision trigger application of the delegation clause to the non-signatory such that arbitrability of the underlying dispute by or against the non-signatory is ultimately to be determined by the arbitrators?

The question has considerable practical significance for arbitrators. Suppose a non-signatory prevails in a motion to compel arbitration, the Court holding (as in Contec and Gerszberg cases discussed below), that the non-signatory has a “sufficient relationship” with a signatory to be permitted to arbitrate. When the non-signatory commences an arbitration, or seeks to be joined as a party, the signatory may object to jurisdiction, and the non-signatory may retort “Issue Preclusion!” “Collateral Estoppel!”  What is an arbitrator to do?

The arbitrator might legitimately consider that the signatory has a contractual right to an arbitral ruling on the question of jurisdiction over the non-signatory’s merits claims or defenses, and that the non-signatory, having established that it may enforce the arbitration agreement, should not be allowed to enforce it selectively by bypassing the contract’s delegation of arbitrability questions to the arbitrator. But if the arbitrator desires an arbitral reprise of the court’s arbitrability decision on this basis, how does the arbitrator make a principled distinction between what she is to decide and what the Court has already decided? I suggest the correct answer might be this: that where the arbitration agreement contains the requisite clear and unmistakable delegation of arbitrability issues to the arbitrator, the judicial motion to compel arbitration that resolves the rights or obligations of a non-signatory should be construed and treated as a motion to compel arbitration of that arbitrability issue only. As such, there is no collateral estoppel, because the issue before the arbitrator now, after the court grants the motion to compel arbitration, is not the arbitrability of arbitrability (the right or duty of the non-signatory to arbitrate arbitrability), but rather the arbitrability of the merits between the signatory and a non-signatory, the latter being an issue that was not decided and was not properly decidable by the court.

For a persuasive judicial illustration of this position, l recommend Gerszberg v. Li & Fung (Trading) Ltd., 215 F.Supp.3d 282 (S.D.N.Y. 2016). In Gerszberg, a non-signatory, claiming status as third-party beneficiary of a litigation settlement agreement that provided for arbitration to resolve claims of non-compliance, commenced such an arbitration. The signatory Respondent applied to the Court to enjoin the arbitration, and advanced the position that it was for the Court not the Arbitral Tribunal to resolve the “arbitrability” issue of Claimant’s alleged third-party beneficiary status.

The Court in Gerszberg did not resolve the third-party beneficiary status issue in this particular decision — this was an interim order providing a procedural framework to develop the evidentiary record. But the district court judge did state with precision the issue that was to be resolved by the Court rather than the Tribunal: not the arbitrability issue per se, but only “who decides the issue of arbitrability.” Said the Court: “[T]o determine who decides the issue of arbitrability, a court must first determine whether the parties have sufficient relationship to each other and to the rights created under the [arbitration] agreement. … In other words, the question of relational sufficiency is for the Court, not the arbitrator, to resolve.”

Reiterating the point a few paragraphs later, the Court stated: “This case… presents the question of when an entity that claims to be a third-party beneficiary has a sufficient relationship to the parties and the rights created under the agreement containing the arbitration clause such that the issue of arbitrability must be decided by an arbitrator.” The Court called its eventual decision on relational sufficiency “a threshold determination,” and “a gating determination.” Thus the governing principle was stated to be that “a putative third-Party beneficiary cannot automatically force a signatory to arbitrate the question of arbitrability, without first making a showing to a court of relational sufficiency.”

Readers seeking jurisprudential roots of this “relational sufficiency” principle are encouraged to read Contec Corp. v. Remote Solution Co., 398 F.3d 205 (2d Cir. 2005) and Ross v. American Express, 547 F.3d 137 (2d Cir. 2008). In Contec, a signatory to AAA Commercial Rules arbitration clause in an international contract was held to be required to arbitrate arbitrability with a non-signatory corporate successor to the other signatory.  The existence of such an obligation, the Contec Court stated, depends upon “whether the parties [and especially the non-signatory] have a sufficient relationship to each other and to the rights created under the agreement.” Thus “relational sufficiency” became the test — at least in the Second Circuit which accounts for a considerable percentage of the judicial output relating to international arbitration, but as noted below the Fifth Circuit, home to the US energy industry, has followed suit. This test was satisfied in Contec because “there was an undisputed relationship between each corporate form of Contec [non-signatory] and Remote Solution [signatory],” and “the parties apparently continued to conduct themselves as subject to the 1999 Agreement regardless of change in corporate form.” Ross v. American Express, a domestic antitrust class action case, reaffirms the Contec relational sufficiency test but held that it was not satisfied on the facts: American Express, other than being an alleged antitrust co-conspirator with the credit card companies that had signed arbitration agreements with their customers, had no relevant relationship with those signatories that would entitle Amex to invoke those arbitration agreements against the plaintiffs.

Other recent cases have reached similar outcomes but with less analytical precision. Consider the US Fifth Circuit Court of Appeals decision in Brittania-U Ltd. v. Chevron USA, 866 F.3d 709 (5^th Cir. 2017). Claimant’s grievance was that Chevron, in an auction of Nigerian oil exploration leases, defrauded Claimant with a big assist from a Chevron employee and a Chevron banker. Claimant and Chevron had an arbitration agreement for UNCITRAL Rules arbitration in London, embedded in a confidentiality agreement that was not signed by the putative collaborators. When Claimant sued all three in a Texas court, Defendants removed to a US District Court under the New York Convention/FAA Chapter 2 and jointly moved to compel arbitration. The District Court granted the motion and the 5th Circuit affirmed.

Claimant argued that even if adoption of the UNCITRAL Rules was a valid delegation of arbitrability issues to arbitrators by the signatories, still Claimant was entitled to have the court decide whether Claimant had to arbitrate the merits with the non-signatories, this being portrayed by Claimant as an issue of contract formation (i.e. the threshold question of whether any arbitration agreement existed with the non-signatories). The Fifth Circuit cited Contec in support of its holding that Claimant was required to arbitrate arbitrability with the non-signatories, but did not (at least expressly) perform the type of relational sufficiency analysis that the district court judge in Gerszberg had (rightly) read Contec to mandate. But putting aside these nuances, the outcome is what should impress us: compétence-compétence carried the day in the home courts of the US global energy industry with regard to an UNCITRAL international arbitration agreement drafted by one of its biggest players. And let us remind ourselves that this is the virulent American strain of compétence-compétence: this London-seated Tribunal’s award on jurisdiction over the claims against the non-signatories would be judicially revisitable in a US court only based on the New York Convention defenses to recognition and enforcement. [The Convention on its face appears not to offer a defense to enforcement in favor of a non-signatory, or in favor of a signatory against whom a non-signatory seeks to enforce an Award. Article V(1)(a) provides a defense to enforcement, based on the alleged invalidity of the arbitration agreement, to the “parties to the agreement referred to in Article II,” that is, the parties to the written agreement to arbitrate. But I have not examined for this Commentary whether under US or other national law Article V(1)(a) of the Convention has indeed been construed to offer no recourse against a Tribunal award on jurisdiction in regard to non-signatories. But of course a London-made award would be subject to judicial set aside in a UK court where, as will be recalled from the famous Dallah case of 2010, a Tribunal’s decision on arbitrability by a signatory against a non-signatory is subjected to de novo review.]

In another recent US Fifth Circuit Court of Appeals case, this one a domestic FAA case, the Court affirmed the ruling of a US District Court in Mississippi that when a non-signatory — here, an upstream assignee of residential mortgages in a securitization scheme — seeks to enforce against a signatory an arbitration agreement containing a valid delegation of arbitrability to the arbitrators (as the clause in this case did, by selecting the JAMS Comprehensive Rules then in force), the court’s role is only to evaluate contract formation under applicable state contract law, leaving all remaining arbitrability issues to the arbitrators.  (Green Tree Servicing, L.L.C. v. House, 890 F.3d 493 (5th Cir. 2018)). In the District Court opinion, the Court had quoted at length from another Fifth Circuit case (Kubala v. Supreme Prod. Servs., Inc., 830 F.3d 199, 201 (5th Cir. 2016)): “[I]f the party seeking arbitration points to a purported delegation clause, the court’s analysis is limited. It performs the first step — an analysis of contract formation — as it always does. But the only question, after finding that there is in fact a valid agreement, is whether the purported delegation clause is in fact a delegation clause — that is, if it evinces an intent to have the arbitrator decide whether a given claim must be arbitrated.  If there is a delegation clause, the motion to compel arbitration should be granted in almost all cases.”  While admitting as I must to a degree of confirmation bias – having adopted a thesis and set out to find cases that support it —  I see the Fifth Circuit approach of the Kubala and Green Tree cases as fitting nicely with my suggestion above that, for the arbitrator, the judicial motion to compel arbitration by or against a non-signatory, where a valid delegation clause appears in the arbitration agreement, is properly viewed by the arbitrator as granting the motion to compel arbitration only to the extent of compelling arbitration of arbitrability, leaving the arbitrability issues ultimately to be determined by the arbitrator and refuting the contention of the prevailing party in the judicial motion to compel arbitration that the adverse party is collaterally estopped from further contesting arbitrability before the Tribunal.

It is arguably a rather thin distinction to say that, where the arbitration clause delegates arbitrability to the arbitrators, a Court asked whether a non-signatory may or must arbitrate does not decide the non-signatory’s right or obligation to arbitrate the merits, but decides only the arbitrability of arbitrability. In practical terms, many litigants can be expected to accept a Court’s relational sufficiency “threshold” determination as decisive, discounting heavily the prospects of a different assessment by the Tribunal as to the arbitrability of the merits, and simply proceed to arbitrate the merits. But the (seemingly recalcitrant) party that does still insist on an arbitral determination of whether it may or must arbitrate the merits with a non-signatory is evidently entitled to that, and is not barred by issue preclusion principles – because the Court has decided only the arbitrability of arbitrability – and whether the facts, the language of the Agreement, and the governing law mandate a different outcome as to arbitrability of the merits is an issue Arbitral Tribunals cannot necessarily avoid.

Circling back to where this Commentary began – with my having questioned that seemingly evident proposition that it is for the courts to decide (if asked) whether non-signatories may or must arbitrate – I find that the case law on delegation clauses in the non-signatory context supports my reticence. The conclusion one may draw is that we should not over-simplify our understanding of the allocation of power under US law concerning the arbitration rights and obligations of non-signatories. It cannot be said without qualification that this question is reserved to the court if a party desires that a court resolve it. Nor can it be said categorically that an arbitrability delegation in the agreement is irrelevant because a non-signatory cannot be deemed to have delegated anything and a signatory can only be deemed to have delegated arbitrability issues as between signatories. It seems more accurate to understand that US arbitration law results in a power-sharing arrangement when, as will usually be the case, the arbitration clause makes what our law considers to be a clear and unmistakable delegation of arbitrability decision power to arbitrators. Courts (if asked) make a threshold determination of relational sufficiency — which in the details looks like a full-on determination of the non-signatory’s right or obligation to arbitrate. But if the threshold test is met, the non-signatory is to be treated as a party for purposes of arbitrability and the determination of whether the signatory may or must arbitrate the merits with a non-signatory is committed to arbitral determination, and if the arbitration is domestic or is an international case seated in the US, that determination is subject only to the same limited and deferential post-award judicial review in a US court as any other matter within the scope of the agreement to arbitrate.

Today’s post concerns waiver of the right to arbitrate by an ambivalent plaintiff in a US District Court, and under what conditions it might be appropriate for a US District Court, applying the New York Convention and FAA Section 206 (governing motions to compel arbitration under arbitration agreements covered by the Convention), to decide that such a waiver by virtue of the litigation conduct of the plaintiff renders an arbitration agreement “null and void” (or “inoperative”) under Article II (3) of the Convention*. Every sermon needs its text, and today our text is a recent case from Silicon Valley: Hebei Hengbo New Materials Technology Ltd. v. Apple, Inc., 2018 WL 4635635 (N.D. Cal. Sept. 26, 2018) (hereinafter, “Hengbo v. Apple”). But before we go to the West Coast, I share a brief personal and historical note.

In 1999, my American client had an expropriation claim, against an imploding Central European State in the throes of a civil war, and the claim fell within the framework of an ICC arbitration clause in the client’s asset purchase contract with a State-owned seller. The client for reasons mainly political wanted to commence a lawsuit against the State in the U.S. District Court in Washington D.C. without losing the possibility of reverting to an arbitral forum. We drafted a “without prejudice” reservation footnote, filed the Complaint with the footnote included, issued a press release, struggled to make sufficient service of process under the FSIA (as NATO’s munitions rained down upon the State’s capital) … and proceeded rather swiftly to withdraw the lawsuit and file the ICC arbitration. No waiver issue arose, although obviously one could have arisen if we had remained in court for a longer period.

The Chinese manufacturing company plaintiff in Hengbo v. Apple — a producer of glass destined for the screen of your iPad — was not so lucky. Hengbo filed its lawsuit in the federal court in San Jose in January 2018 without mentioning the arbitration clause (but annexing the contract containing it), seeking inter alia rescission of the aforesaid contract. On a stipulated date in April, Apple moved to dismiss for failure to state claim (FYI foreign readers: a merits-based motion). Four days later the parties filed a joint case management statement, required by the Court’s rules of practice, in which they reported, in pertinent part, that both parties were contemplating but had not yet decided whether to move to compel arbitration, and in which Hengbo expressly reserved the right to move to compel arbitration. The Court then fixed a deadline for Hengbo to declare its intent to move to compel arbitration. Hengbo complied by filing a notice of intent by the deadline. The Court fixed a deadline for Hengbo to file its motion to compel arbitration. Hengbo complied by filing its motion to compel arbitration by the deadline so fixed. On parallel track, the parties briefed Apple’s motion to dismiss, and Hengbo voluntarily dismissed one of its causes of action after considering Apple’s motion.

The District Court, taking the fully-briefed motions on submission without oral argument, denied the arbitration motion on the basis that Hengbo had waived the right to arbitrate, and granted in part Apple’s motion to dismiss.

Putting aside any lamentations about the possible responsibility of counsel, the judge, and the court’s case management process, for the parallel tracking of arbitrability and merits motions, let us focus on the most striking element of the decision for the US jurisprudence of international arbitration: the New York Convention was nearly ignored; only waiver cases in the context of domestic FAA arbitration were cited; and mention of the Convention was confined to a footnote stating that the parties disputed its applicability (Hengbo yes, Apple no) and that there was no need for the Court to resolve that dispute because it had no bearing on the outcome. That is a curious position, indeed, as the arbitration clause in this commercial contract provided for arbitration under the ICC Rules in San Francisco between Chinese and US companies. If that looks to you like a potential  “nondomestic” Convention arbitration under FAA Chapter Two, I agree. It seems the Court gave no attention to the possibly distinct attributes of litigation conduct waiver under the Convention and FAA Chapter Two because Hengbo in its submissions appeared to concede that “waiver” is a ground recognized by US courts for finding an arbitration agreement to be “null and void” under Convention Article II (3). And there are cases that say this in some fashion. But the case law, the Convention, and the scholarship of Article II (3), deserve a closer look.

For nearly 40 years, federal courts have repeated one another in agreeing that the “null and void” exception and the exceptions in Article II(3) generally should be “narrowly construed,” and that Article II(3)’s exception clause supports refusal to compel arbitration “only (1) when it  [the arbitration agreement] is subject to internationally recognized defenses such as duress, mistake, fraud, or waiver… or (2) when it contravenes fundamental policies of the forum state.” (emphasis supplied). When the US Fourth Circuit Court of Appeals concluded in 1981 “that Article II (3) contemplates the possibility of waiver of the arbitration agreement by the one or both of the parties,” (I.T.A.D. Assocs. v. Podar Bros., 636 F.2d 75), the Convention as American law was still pre-adolescent, there was no US case law on the point that the Court could cite, and there was no drafting history or secondary literature about Article II that the Court did cite. Still, it is instructive that the Fourth Circuit in Podar: (1) reversed the District Court order denying the motion to compel arbitration and remanded with directions to grant the motion, (2) held that Article II (3) should be applied through “adoption of standards which can be uniformly applied on an international scale,” (emphasis supplied), and (3) held that Section 206 of the FAA does not confer discretion on the District Courts to determine whether conduct amounting to waiver bars enforcement of the arbitration agreement. (For a sampling of judicial “likes” for Podar, see, e.g., Sedco, 767 F.2d 1140 (5^th Cir. 1985) (“liking” the no discretion holding); Riley, 969 F.2d 953 (10^th Cir. 1992) (“liking” the narrowly construed holding indirectly via Rhone Mediterranee, 712 F.2d 50 (3d Cir. 1983) which broadly embraced Podar; Bautista, 396 F.3d 1289 (11^th Cir. 2005) and Lindo, 652 F.3d 1257 (11^th Cir. 2011), each taking the “internationally recognized defenses” notion to another level, i.e. “standard breach-of-contract defenses [that] can be applied neutrally on an international scale”).

I have searched (curiously not thoroughly) for other US federal case authority addressing the status of litigation conduct waiver as a basis for judicial refusal to enforce the arbitration agreement under the Convention and FAA Section 206, and found rather little. Apple, in the Hengbo case, seems to have fared no better : in support of the proposition  that litigation conduct waiver analysis in an FAA Chapter 2/Section 206 case is identical to what it would be under FAA Chapter 1/Section 3, Apple cited just one case, from a US District Court in Nevada. (Fomostar, LLC v. Florentius, 2012 WL 2885119 at *9 (D. Nev. July 13, 2012)) (not reviewed in the 9^th Circuit). In the Fomostar case there is no analysis of the question and no indication that the parties even joined issue on whether the traditional analysis of  waiver by litigation conduct in the context of domestic arbitration  is proper under the Convention.

The District Judge in Hengbo accepted the position that the analysis is the same as under FAA Section 3, but evidently did so not on the strength of the cited District of Nevada case but because Hengbo more or less conceded the point. Apple might have also cited Khan v Parsons Global, 480 F.Supp.2d 327 (D.D.C. 2007), where the Court applied a traditional litigation conduct waiver analysis in a Convention arbitration agreement enforcement context — and found no waiver — and made such analysis without directly addressing whether litigation conduct waiver as a defense to enforcement is consistent with Convention Article II. Perhaps Apple identified and shied away from Khan because the case nevertheless raises the troublesome question raised in this post. The District Court in Khan held that “unconscionability” should not be recognized as a ground for finding an arbitration agreement “null and void” under Article II (3) because unconscionability is not a hard and fast rule capable of being applied uniformly in a non-discretionary way on an international scale. Said the Court in Khan:

[T]he federal case law is clear that, while public policy and discretion of the courts may be a predominant characteristic of domestic arbitration, international arbitration requires certainty to ensure unified standards by which agreements to arbitrate are observed ….

By its very nature, the defense of unconscionability seeks to promote those very tenets that are contrary to a finding of certainty, namely: policy, fairness, and appeals to a court’s discretion outside of the letter of the law. Therefore, in light of this foundation, this Court finds that unconscionability is not — and indeed cannot be — a recognized defense to the enforceability of arbitration agreements under the N.Y. Convention

If unconscionability can never be within the Article II(3) exceptions clause, for the reasons stated in Khan, should we perhaps conclude that waiver is only sometimes within the Article II(3) exceptions clause, and that it depends on what evidence the court must evaluate to determine if there has been a waiver?

Of course, contemporary judicial analysis of this question should be informed by the scholarship that now exists concerning the appropriate meaning of the Article II(3) exceptions clause – there being effectively no drafting history of the clause. (I do here in a limited way, so as not to exhaust your attention, or my resources). Scholars of international arbitration benefit from bringing to bear on the question the developed judicial practice in the courts of many Convention States.

The ICCA Guide to the New York Convention (2011) tells us that Article II (3) is intended to establish the “presumptive validity” of the arbitration agreement, and that the “unless” clause concerns situations where the validity presumption is rebutted. The ICCA Guide notes that the Convention takes no position on the time for asking a court in a pending dispute to refer to the dispute to arbitration, that this question is left to national arbitration or procedural law, and that “[i]f a party fails to raise the request in a timely manner, it may be considered that it has waived the right to arbitrate and that the arbitration agreement becomes inoperative.” Here already is an indication that US courts have gone astray in treating litigation conduct waiver under “null and void,” and this is reinforced by the ICCA Guide’s further comment that “null and void” “can be interpreted as referring to cases in which the arbitration agreement is affected by some invalidity from the outset.” According to the ICCA Guide, “[a]n inoperative Agreement for purposes of Article II(3) is an arbitration agreement that was at one time valid but that has ceased to have effect” and that this category “typically includes cases of waiver, revocation, repudiation, or termination of the arbitration agreement. Similarly, the arbitration agreement should be deemed inoperative if the same dispute between the same parties has already been decided before a court or arbitral tribunal.”

Interesting. If the guidance stopped before the last sentence concerning res judicata, one might think “inoperative” does not include the non-applicability/suspension of the arbitration agreement only with regard to a particular dispute. Evidently scholars think it does, or can, apply with regard to a particular dispute, but that the main purpose of the “inoperative” phrase is to deny enforcement of arbitration agreements that the parties have consigned to the dust bin.

But perhaps the res judicata illustration in the ICCA Guide does not justify the conclusion that litigation conduct waiver is always a proper question for a US court to decide under Article II(3) and FAA Section 206. To take the ICCA Guide’s res judicata example one step further, it’s notable that the current (non-final) draft of portions of the Restatement of the US Law of International Commercial and Investment Arbitration concerning res judicata in an arbitration agreement enforcement setting take a hybrid position on this point: if it’s not seriously disputable that the same dispute (or issue) was decided between the same parties in a prior arbitral award, a US Court should deny a motion to compel arbitration, but if the res judicata (or issue-preclusive) effect of the prior adjudication is contestable and involves serious factual issues, the motion to compel arbitration should be granted and the preclusion issue should be decided by the Tribunal. Further, the Restatement drafters view the issue of waiver as a “non-gateway” issue, like Statute of Limitations, that ordinarily should be resolved by arbitrators. (Restatement Section 2-12 and comments to same, in Preliminary Draft No. 11, August 20, 2018, not yet presented for approval by ALI).

Should we perhaps conclude, similarly, that the waiver of an arbitration agreement with regard to a specific dispute should need to be clear and unambiguous for that waiver to fall within Article II(3), and that a fact-intensive, discretion-laden assessment of waiver by litigation conduct should also be seen as outside Article II (3) and more suitable for arbitral determination as a contract-based defense, under the law the arbitrators find to be applicable to the enforceability of the arbitration agreement? That approach would conform to Professor van den Berg’s less-generous-than-the ICCA Guide view of “inoperative”: that it “can be said to cover those cases where the arbitration agreement has ceased to have effect, such as revocation by the parties.” (A.J. van den Berg, The New York Convention of 1958: An Overview).

Coming back to the US case law, the consistent theme since 1981 in the appellate decisions that support treating “waiver” as a Convention matter under Article II (3) and FAA Section 206 is that the Article II (3) exceptions should be capable of application on an international scale — which would seem to mean that they can be expected to be treated in a uniform way by the courts of most important Contracting States — and that they should not involve the exercise of discretion.

If that is the standard, then perhaps only an objectively determinable waiver should render the arbitration agreement unenforceable under the Convention. Example: In the first pleading, the Plaintiff acknowledges the existence and validity of the arbitration agreement, and declares that it elects not to seek its enforcement. Such a basis for waiver may be expected to yield the same outcome in most Contracting States, and finding waiver involves no exercise of judicial discretion. At the opposite extreme, suppose the initial pleading contains a reservation by plaintiff of the right to shift gears and proceed to arbitrate, or is silent about arbitration; the plaintiff participates in case management activities in compliance with the court’s rules of practice (necessarily entailing discussion but not action on such matters as trial and summary judgment and discovery); plaintiff does not object to defendant making a merits-based motion to dismiss or to the full briefing of this motion before the arbitration issue is resolved; plaintiff indeed participates in that motion to dismiss activity, but at the same time plaintiff complies with directions from the Court concerning the time to give notice of intention to move to compel arbitration; and plaintiff files that motion by the deadline set by the Court.

That is the Hengbo v Apple situation in a nutshell. The District Court’s finding of litigation conduct waiver on such facts is plainly an exercise of discretion. And it may be doubted that the situation is likely to be uniformly treated by the courts of other Contracting States: not only do they have different laws and procedures that might prevent such a confluence of circumstances from arising, but those courts might have a quite different view of the same facts as a matter of discretion. They might for instance consider that the costs associated with the litigation before the plaintiff made up its mind to arbitrate are better addressed by a costs order. Indeed some foreign courts (and even some of you readers, in the US and elsewhere) might see the US approach as manifested in the Hengbo v. Apple case as evidence of a lingering hostility to arbitration: according to this exercise of judicial discretion, the right to arbitrate seems to lack robustness, appears to be entangled with notions of respect for the judicial process and the local court’s own rules of practice, and with judicial hostility toward forum shopping. These are attitudes that arguably impel judges, more than arbitrators who are as not as invested in compliance with the court’s rules and customs, to view the right to arbitrate as capable of being forfeited by any meaningful hesitation to invoke it in the course of a litigation.

If, as the analysis here suggests,  Article II (3) does not provide a platform for the type of discretionary determination of a “waffling waiver” that was made in Hengbo v Apple, then what about FAA Section 3, as applied under FAA Chapter Two via Section 208**? Section 3 provides for a stay of judicial proceedings pending arbitration of an arbitrable dispute, and conditions the availability of such relief on the movant being “not in default in proceeding with the arbitration.” But if the Convention and FAA Chapter Two do not allow a litigation conduct waiver analysis by the Court where the assessment would involve discretion, then a discretionary analysis under Section 3 is in conflict with the Convention and Chapter 2 and has no place in an proceeding to enforce an arbitration agreement under Section 206.

Whether US courts will eventually adopt this line of analysis is anyone’s guess. The judicial prerogative to assess arbitration waiver by litigation conduct is so deeply ingrained in American jurisprudence that it seems difficult to foster momentum against it in the District Courts without clear direction from appellate courts.  But perhaps we will see these serious questions confronted more systematically by judges in future cases, with outcomes that reflect less reflexive assumptions about the symmetry of practice with regard to domestic and international arbitration agreements.

*Article II (3) states:  “The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”

** Section 208 provides that FAA Chapter 1 will apply in actions and proceedings under Chapter Two “to the extent that chapter is not in conflict with this chapter or the Convention as ratified by the United States.”

The New York Convention mandates that an “agreement in writing,” as defined in Article II (2), shall be recognized by Contracting States, and that the court of a Contracting State shall refer the parties to arbitration when there is an action before the Court as to which such an agreement has been made. (Article II, subsections (1) and (3)). But if a US District Court has subject matter jurisdiction based on FAA Chapter Two (implementing the Convention), is an “agreement in writing” as defined in Article II the only form of arbitration agreement the Court may enforce?  A decision at the end of August of the US Eleventh Circuit Court Appeals answers “yes,” apparently at odds with what was decided, or assumed, in the decisions of other federal appeals courts over the last 20 years. (Outokumpu Stainless USA v. Converteam SAS, 2018 WL 4122807 (11th Cir. Aug. 30, 2018).

This may seem like a rather technical point, but imagine this: You chair a Miami-seated Tribunal in an ICC Rules construction case commenced against an “owner” (who signed an arbitration agreement with the general contractor) by a non-signatory subcontractor that claims it is entitled to arbitrate based on theories of estoppel and third-party beneficiary. Respondent moves to dismiss, both sides agree that the issue is properly for the Tribunal in the first instance, and Respondent urges that under the Outokumpu case an international dispute cannot be arbitrated unless there is an agreement in writing, as defined in Article II, between the parties to the arbitration. Your Tribunal rejects this argument and applies what it considers to be the correct position under US arbitration law, permitting non-signatories to enforce agreements to arbitrate against signatories based on estoppel, agency, third-party beneficiary status, alter ego, assignment and successorship, etc. But if the Respondent moves to vacate your Interim Award on Jurisdiction in the Federal District Court in Miami, will the Tribunal he found to have manifestly disregarded this new controlling law as pronounced in the Outokumpu case?

So … let’s consider what happened in Outokumpu. A German steelmaker contracted through its US subsidiary with a US general contractor (GC) to have steel mills built in Alabama, and the contract (with an ICC arbitration clause that called for a Dusseldorf-seated arbitration under German law) defined the GC broadly to include all subcontractors the GC might engage. The GC then engaged a subcontractor in France (GE Energy) to build motors, the motors failed, and the steelmaker brought suit against GE Energy in a court of the State of Alabama. GE Energy removed the action to the federal district court based on the New York Convention*, and moved to compel arbitration. Its motion was granted in the District Court.**

For the unanimous Eleventh Circuit panel, the legal analysis “start[ed] and end[ed]” with Convention Article II: without a signature on the arbitration agreement by the party seeking to compel arbitration, no order to compel arbitration is available under FAA Chapter 2 (Section 206). GE Energy could not compel arbitration based on estoppel or third-party beneficiary, the Court held, because “the Convention, as codified in Chapter 2 of the FAA, only allows the enforcement of agreements in writing signed by the parties and Congress has specified that the Convention trumps Chapter 1 of the FAA where the two are in conflict. … Although parties can compel arbitration through estoppel under Chapter 1… estoppel is only available under Chapter 1 because Chapter 1 does not expressly restrict arbitration to the specific parties to the agreement….But the Convention imposes precisely such a restriction.”

The decision cites no case law precedent for this position, and does not discuss any authorities taking a different view.

As a matter of textual analysis, the Article II (1) of the Convention reads as a mandate for Contracting State enforcement of an arbitration agreement in a particular form — but not as a prohibition of the enforcement of an agreement having another form. “Each Contracting State shall recognize an agreement in writing ….” The United States in the implementing legislation might have opted to enforce only such agreements where international commerce was concerned, but the text of FAA Chapter Two gives no indication that this was done. Subject-matter jurisdiction was defined by reference to the commercial nature of the arbitration agreement and its internationality, not its form (Section 202), and no reference to a form requirement is made in the section authorizing a court to compel arbitration (Section 206). It appears that neither the Convention nor Chapter Two prohibits enforcement of an arbitration agreement that lacks the signature of the one of the parties. And the position that FAA Chapter 2 is exclusively concerned with giving effect to the Convention’s mandates, no less and no more, is answered by Section 208 declaring that Chapter 1 “applies to actions and proceedings brought under this chapter to the extent that Chapter is not in conflict with this chapter or the Convention….”

Whereas over many decades case law under Chapter 1 has established the enforceability of arbitration agreements by or against non-signatories under certain conditions, what is the conflict with the Convention or Chapter Two that prevents such enforceability when subject-matter jurisdiction is based on Chapter Two? I see none. And the Eleventh Circuit panel in Outokumpu finds such a conflict only by construing Article II (1) of the Convention, against its plain meaning, as an exhaustive description of the arbitration agreements a US court is allowed to enforce when its jurisdiction is based on the Convention and Chapter Two.

Other US appellate case law, none of it cited in Outokumpu, supports the position taken here. In the Second Circuit’s Smith/Enron Cogeneration decision of 1999 (198 F.3d 88), the grant of a petition to compel arbitration under Chapter Two Section 206 was affirmed where arbitration was sought by non-signatory assignees of the written agreement to arbitrate and the signatory was estopped based on its conduct. In the Fifth Circuit’s Bridas/Turkmenistan decision of 2003 (345 F.3d 347), where jurisdiction to enforce the award was (necessarily but not expressly) based on the Convention and Chapter Two, the Court reviewed de novo the Tribunal’s determination that non-signatory Government of Turkmenistan was a proper party to the arbitration, and stated that “federal courts have held that so long as there is some written agreement to arbitrate, a third party may be bound to submit to arbitration.” In the First Circuit’s InterGen case from 2003 (344 F.3d 134), the Court held that in a case before the Court based on the Convention and FAA Chapter Two, it would decide whether the written agreement was binding on a nonsignatory by applying federal common law principles of estoppel, agency, third-party beneficiary, and alter ego. (And see also the First Circuit’s Sourcing Unlimited case from 2008, 526 F.3d 38). In the Fourth Circuit’s International Paper decision from 2000 (206 F.3d 411) the Court expressly rejected the proposition, adopted by the Eleventh Circuit in Outokumpu, that Convention Article II(1) precludes enforcement by or against nonsignatories (206 F.3d at 418 n. 7). In the Fifth Circuit’s Steamship Mutual case of 2010 (601 F.3d 329), the Court expressly held that in a case under the Convention, just as in a case under Chapter 1, the district courts should “rel[y] on the same common law contract and agency principles to determine whether  nonsignatories must arbitrate.” (Id. at 334).

Is there a possibility for reconsideration by the Panel or en banc in the Eleventh Circuit? Whereas none of the above-mentioned cases is cited in the Court’s opinion, there is reason to think the Outokumpu case was not adequately briefed and argued. (This comment is made without having taken initiative to read those briefs). There are serious practical consequences to such a flat proscriptive rule against enforcement in FAA Chapter Two Cases by or against nonsignatories. For example, would it not harm the core objectives of the Convention and Chapter Two if arbitration could be avoided by a signatory by bringing a lawsuit against collateral nonsignatories like officers or employees or agents of the signatory party? That gambit, often attempted, has been repeatedly foiled by courts judiciously invoking applicable common law principles to require arbitration with nonsignatories in suitable circumstances.

The Outokumpu case is one to be watched, and worried over, as applicable time limits for reconsideration or certiorari approach.

*US proceduralists may wonder why this was an appealable order before the arbitration took place, as the FAA generally does not permit this. The opinion does not explain. But let’s assume there was appellate jurisdiction, perhaps based on a certified question from the district court concerning whether the arbitrability issue was sufficiently “related to” the arbitration agreement between the signatories to have permitted removal of the case from the Alabama court. The removability issue, resolved in favor of the removal in this decision, is not the subject of this post.

**US proceduralists will also note that removal was based, alternatively, on diversity of citizenship, with GE Energy arguing that Outokumpu had fraudulently joined US insurance carriers as defendants in the Alabama state court action, to defeat diversity-based removal to the federal court. But GE Energy did not press the matter of diversity of citizenship, nor did it advance the argument that if there was diversity, it could move to compel arbitration under FAA Chapter 1 and invoke US law as to non-signatory arbitrability without regard to the Convention’s “agreement in writing” provision.

Imagine with me, readers:

A sovereign foreign State — India, for the sake of discussion — attracts the interest of a US enterprise to conduct a search for offshore hydrocarbon deposits and, if any are located, to determine their commercial viability. The State cedes aspects of its sovereignty contractually, in a number of ways. First, it gives the exploration outfit rights of occupancy for exploration purposes on a defined block of the State’s offshore waters. Second, it extends the period of the concessionaire’s right to be physically present on the block for an agreed period after hydrocarbon discovery in order to determine commercial viability — two years for oil, five years for natural gas. Third, it agrees to submit disputes under the contract to international arbitration before a three-member Tribunal having its seat in Malaysia. Other voluntary incursions upon the State’s sovereignty— the exploration firm’s right to profit-share, for example — are presumably explicit or implicit in the contract. Among those that are implicit in the arbitration agreement, in tandem with India’s accession to the New York Convention, are the ceding of control of the arbitration process and the legal validity of the Award to the arbitrators and to the courts and arbitration laws of Malaysia, and the acceptance of the enforceability of the Award in the courts of those New York Convention Contracting States in which India is not immune from a suit brought for that enforcement purpose – – in the United States for example.

Readers who have already read Hardy Exploration & Production (India), Inc. v. Government of India, 2018 WL 2758220 (D.D.C. June 7, 2018), know how this not very unusual contractual compromise between State sovereignty and natural resource extraction plays out. Hydrocarbons are found. The State claims it is oil, which if true triggers merely a two-year commercial assessment term. The concessionaire believes its discovery to be natural gas, triggering a five-year period for assessment. The State, after two years, revokes the concessionaire’s right to operate on the block. Effectively, there is a physical as well as commercial ouster. The concessionaire files an arbitration, and wins a Final Award – from three retired Justices of the Supreme Court of India – that includes most notably a decree of specific performance ordering India to allow the concessionaire back on the block for the five-year assessment term associated with a natural gas discovery. But when enforcement of the Award is sought in the United States under the New York Convention, a federal district judge holds that enforcement should be refused because it would violate the US public policy of showing respect for a foreign State’s sovereignty in regard to the State’s control over its own “territorial integrity.” (In the same decision, the court also refuses on the basis of the public policy exception in Convention Article V(2)(b) to enforce an award of interest.  Discussion of that portion of the Award is reserved for another day and another post).

Given the rather richly-developed jurisprudence of the New York Convention’s public policy exception in US courts, we would reasonably expect such an exceptional refusal of enforcement to be grounded in that case law. But such is not the case. Instead the main premise of the Court’s decision is the principle of foreign sovereign immunity as embodied in the Foreign Sovereign Immunity Act, in sections of the FSIA other than the “arbitration exception.”

While the decision acknowledges the FSIA’s exception for enforcement of foreign arbitral awards, the court asserts that whereas that FSIA arbitration exception does not address in specific terms the recognition and enforcement of an arbitral award of specific performance against a State, the arbitration exception is not the sole or even the decisive articulation of the US public policy that is germane to the case. The decision purports to find its rationale for denying confirmation of the Award’s specific performance decree in two sources: (1) judicial decisions expressing reluctance to grant extraterritorial injunctions in plenary actions in US courts, and (2) the FSIA’s limitation of attachments against the assets of a foreign State to the State’s property located in the United States and used for the State’s commercial activity. Said the Court: “[T]he spirit of the United States policy preference against specific performance is clear from the exclusion from the statutory text [of the FSIA] of any mention of specific performance or extraterritorial enforcement, apart from the terrorism and expropriation exceptions.”

But the district court does not explain why this supposed “policy preference” rises to the level of a “most basic notion[] of morality and justice” — the enduring phrase coined 44 years ago by the Second Circuit to capture the notion that refusal of award enforcement under the Convention’s public policy exception should be justified only when the enforcement would offend a universal and fundamental legal or societal norm. (Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie du Papier, 508 F.2d 969, 974 (2d Cir. 1974)). And the fact, noted prominently in the decision, that certain US federal statutes as construed by the courts generally prohibit a contract claim for injunctive relief or specific performance against the US government, does not convincingly advance the position that enforcement of a foreign arbitral award of specific performance against a foreign State violates a bedrock US legal norm. The foreign State’s consent by contract to broad remedial powers of the Arbitral Tribunal, coupled with its accession to the New York Convention, would seem to be a crucial distinction. That the US has not consented to be a defendant in contract litigation seeking specific performance or an injunction would not appear to furnish evidence of a fundamental US legal norm opposed to enforcing an arbitral specific performance award, when that award is the outcome of a legal process (including the enforcement process) to which a foreign State has expressly and voluntarily submitted.

The district court in Hardy Exploration was legitimately concerned about the international unseemliness of a US court policing the compliance of a non-hostile foreign State with a US judgment for specific performance for commercial activity in its offshore waters. But this pragmatic comity concern could be assessed if necessary in regard to enforcement of the judgment, as when the court might be asked to impose a civil contempt sanction for India’s potential non-compliance.

An arguably aberrant decision such as this one may also be seen as a by-product of the common law development of American jurisprudence concerning the New York Convention. We have an elegant catch-phrase handed down through the ages from the Parsons-Whittemore case — “our most basic notions of morality and justice.” We have a series of procedural guidelines for decisions about the Convention’s Article V exceptions: that they are to be construed narrowly, that the Respondent bears a heavy burden, that the pro-arbitration policies of the Convention and the Federal Arbitration Act are entitled to considerable weight. And with regard to the public policy exception specifically courts are instructed that the public policy serving as a basis for refusal of enforcement should be “explicit,” also “well defined and dominant,” and based on “laws and legal precedents.” But synthesis conceptually of the large body of case law dealing with the “public policy exception” appears to be a task US judges have been reluctant to undertake.

Obviously such a synthesis, systematically done, is too ambitious a task for the format of these Commentaries and your patience as readers. But upon a review of the leading appellate decisions and a representative sampling of district court cases, the following observations are offered.  First, the offended public policy must be more dominant, more enduring, more fundamental to the American conception of the rule of law than the public policy favoring international arbitration. Second, the offended public policy should be, or be closely akin to, a foundational principle of the American legal order such as individual liberty, private property, or non-discriminatory application of well-defined rules of law (what might also be considered principles of “natural justice” that are widely adopted in developed nations). Third, perhaps best understood as a corollary of the preceding, federal legislative policies concerned with the regulation of commerce or with diplomatic relations ordinarily, and save in those rare cases where the first two criteria stated above are clearly met, are not matters of “public policy” under Article V(2)(b), even if they are commonly understood as matters of public policy in political discourse.

Under these standards, there is a serious question as to whether the Hardy Exploration case has been correctly decided in the district court on the basis that enforcement (in the Convention sense of converting a foreign arbitral award to a domestic judgment) of an arbitral award of specific performance granting what amounts to a limited commercial easement in the territory of a foreign State is an unacceptable intrusion by the United States upon the sovereignty of that State. The State created the easement in a commercial contract and submitted disputes about the scope and duration of the easement to international arbitration. Specific performance here evidently entails no intrusion on the political and diplomatic autonomy of the foreign State: the Award does not exclude India from the concessionaire’s offshore exploration block for purposes relating to India’s national defense or security, or for any other national purpose that is not in conflict with the concessionaire’s ability to evaluate the commercial viability of the hydrocarbon reserves lying beneath the waters.

A Notice of Appeal has been filed. The case deserves to be watched closely for an important ruling on the New York Convention’s public policy exception from the US Court of Appeals for the District of Columbia Circuit.