The tribunal was at pains to emphasize the interim award was final and binding under Article 32 of the UNCITRAL Rules, which means that Chevron could pursue recognition and enforcement of the award in jurisdictions around the world. It could do so offensively by seeking declaratory relief in Ecuador (or elsewhere), or defensively in response to an attempt by the Ecuador plaintiffs to seek enforcement of the Ecuador judgment. Of course, the Interim Award is only binding on Ecuador and Chevron, so it is not clear what a domestic court outside Ecuador would do with an award imposing injunctive relief on Ecuador.

Meanwhile, on Thursday the Second Circuit issued its long-awaited opinion in Chevron v. Naranjo. The Second Circuit’s crucial holding was that New York’s Uniform Foreign Money-Judgments Recognition Act precludes declaratory injunctive relief by a foreign judgment debtor. “There is … no legal basis for the injunction that Chevron seeks, and, on these facts, there will be no such basis until judgment-creditors affirmatively seek to enforce their judgment in a court governed by New York or similar law.”

The Second Circuit had little sympathy for Chevron’s attempt to pursue an antienforcement injunction, particularly given the comity concerns at stake.

“[W]hen a court in one country attempts to preclude the courts of every other nation from ever considering the effect of that foreign judgment, the comity concerns become far greater. In such an instance, the court risks disrespecting the legal system not only of the country in which the judgment was issued, but also those of other countries, who are inherently assumed insufficiently trustworthy to recognize what is asserted to be the extreme incapacity of the legal system from which it emanates. The court presuming to issue such an injunction sets itself up as the definitive international arbiter of the fairness and integrity of the world’s legal systems.”

But at the same time, the Second Circuit emphasized that it expressed “no views on the merits of the parties’ various charges and counter-charges regarding the Ecuadorian legal system and their adversaries’ conduct of this litigation, which may be addressed as relevant in other litigation before the district court or elsewhere.” It also avoided any decision with respect to the underlying RICO claims that Chevron has filed against the Ecuador plaintiffs and their lawyers, focusing simply on the improper procedural device that Chevron sought to employ to enjoin enforcement of the Lago Agrio judgment abroad.

Where does the case go from here? In Ecuador, Chevron has appealed to Ecuador’s highest court to review the case. No word yet as to whether Chevron will seek to have the arbitral tribunal’s Interim Award recognized and enforced in Ecuador. The arbitral tribunal is scheduled to hold hearings on February 11-12 to determine what steps Ecuador is taking to prevent enforcement of the Lago Agrio judgment.

As for the Ecuador plaintiffs’ efforts to enforce the judgment, there is no indication that Chevron will post an appeal bond, which means that the Ecuador plaintiffs are free to pursue enforcement anywhere in the world where Chevron has assets.

It appears that the Ecuador plaintiffs will not seek to have the judgment enforced within the United States. Ecuador Plaintiffs’ lawyer James Tyrrell stated yesterday that “The Ecuadorean plaintiffs are not coming to New York to enforce this judgment.” Given the locus of Chevron’s assets, it is not obvious why the plaintiffs have adopted this strategy, unless they have reason to believe that there is a high probability that the judgment would not be enforced.

There is, of course, the option of pursuing enforcement abroad. If the Invictus Memo is reliable, the Ecuador plaintiffs have identified twenty-seven nations where Chevron has substantial activities, including countries that are friendly with Ecuador, such as Colombia and Venezuela. That memo candidly states the ultimate end game strategy for the Ecuador plaintiffs:

“After approximately seventeen total years of litigation in the United States and Ecuador, the case against Chevron now enters its most critical, multi-faceted, and labor intensive…. With the ultimate goal of effecting and swift and favorable settlement, the strategy of the Plaintiffs’ Team will incorporate the following components: … managing the public relations impact of Chevron’s manipulation of the Cabrera narrative … [and] identifying jurisdictions globally that are most hospitable to an enforcement action.”

Stok and Associates (“Stok”) is a small Florida law firm that holds its bank accounts with Citibank. In November 2008, Stok deposited a substantial client cashier’s check into its Trust Account with Citibank. Although Citibank granted Stok immediate credit and availability of funds (enabling Stok to wire most of the funds to its client’s foreign bank account), Citibank subsequently revoked its acceptance of the check on the basis that the check was counterfeit. Citibank charged back the funds in question from the Trust Account. Stok demanded return of the removed funds but Citibank did not accede.

The contract governing the relationship between Stok and Citibank included an arbitration provision that provided, in relevant part: “[E]ither Citibank or [Stok] may elect to require any dispute between [them] concerning the aforementioned accounts or any other Bank deposit account or line of credit be resolved by binding arbitration.” However, Stok preferred to litigate and filed suit against Citibank in Florida state court in December 2008. In January 2009, Citibank filed its Answer, which raised one affirmative defense, but made no reference to the arbitration provision.

On February 23, 2009, Citibank sent Stok a letter electing arbitration. Stok rejected Citibank’s election, so Citibank filed a motion to compel arbitration the following day, initially in state court. When it became apparent that under Florida state law, Citibank had waived its right to arbitrate by filing its Answer without expressly reserving the right to elect arbitration, Citibank withdrew its motion to compel. Instead, Citibank filed a petition to compel arbitration in the U.S. District Court for the Southern District of Florida. In May 2010, the district court denied Citibank’s petition, holding that Citibank had waived its right to arbitrate. As part of this determination, the district court found that Stok had suffered prejudice due to Citibank’s delay in demanding arbitration.

Citibank appealed to the U.S. Court of Appeals for the Eleventh Circuit. In July 2010, the Eleventh Circuit allowed the appeal. The Eleventh Circuit applied the two-part test set down in Ivax Corp. v. B. Braun of America, Inc., 286 F.3d 1309 (11th Cir. 2002): “First, we decide if, ‘under the totality of the circumstances,’ the party ‘has acted inconsistently with the arbitration right,’ and, second, we look to see whether, by doing so, that party ‘has in some way prejudiced the other party.’” Id. at 1315–16 (quoting S&H Contractors, Inc. v. A.J. Taft Coal Co., 906 F.2d 1507, 1514 (11th Cir. 1990)).

With respect to the first element, the Eleventh Circuit assumed, without deciding, that Citibank’s participation in state court litigation was sufficiently substantial to show that it did not intend to avail itself of the arbitration provision. However, the Eleventh Circuit concluded that Stok did not satisfy the second element of the two-part waiver test set out in Ivax – namely the requirement to show prejudice sufficient to warrant waiver. In reaching this conclusion, the Eleventh Circuit stated that the prejudice element of the waiver test is examined by taking into account the expense incurred by the party alleging prejudice from participating in the litigation process, the use of pre-trial discovery procedures by a party seeking arbitration, and the length of delay in demanding arbitration. Applying these factors, the Eleventh Circuit held that Stok had failed to satisfy its burden on the basis that: (1) courts have declined to find waiver in cases with similar or more extensive litigation activity prior to the motion to compel arbitration; (2) Stok had failed to provide evidence of either the amount of money it spent or the number of hours it dedicated to pursuing litigation-specific activities; and (3) Citibank’s delay in invoking its right to arbitrate was brief and “when little meaningful litigation has taken place, this Court has declined to find waiver from even longer delays.” (Both the district court and the Eleventh Circuit agreed that the period relevant to the prejudice analysis was the time that had elapsed between Citibank’s filing its Answer in state court and sending a letter to Stok demanding arbitration – a period of 24 days).

Stok petitioned for certiorari, noting a circuit split regarding whether prejudice on the part of a resisting party is necessary for an opposing party’s right to compel arbitration to be deemed waived. Stok noted that the majority of circuits (namely the First, Second, Third, Fourth, Fifth, Sixth, Eighth, and Eleventh Circuits) permit parties to compel arbitration unless the parties seeking to oppose arbitration are able to demonstrate that they have suffered substantial prejudice due to the adverse party’s delay in seeking arbitration. In contrast, the Seventh, Tenth, and D.C. Circuits have held that once a party participates in litigation, it is precluded from demanding arbitration, even if the adverse party has suffered no prejudice. Even within the majority, courts had required different degrees of prejudice necessary to find a waiver of the right to compel arbitration. Stok argued that “the notion that contracting parties should be able to rely on predictability and uniformity in achieving their bargained for expectations is completely lost in the context of the divergent waiver analyses among the Circuits.”

Citibank, in its Brief in Opposition, denied that any “true” circuit split exists. It argued that even in the three circuits classified by Stok as forming the minority, prejudice is at a minimum a “relevant factor” in the applicable waiver analysis. Citibank argued “without naming prejudice as an element, [these three circuits] in varying degrees, do hold it to be a significant part of the waiver decision. This is a semantic, not a substantive difference.” However, Citibank’s position was untenable. It is simply not plausible to say there is no distinction of real import between an absolute requirement for some level of prejudice to exist before waiver will be found, and no requirement for prejudice before waiver will be found. That the minority circuits identified by Stok might take prejudice into account if it exists does not detract from the fact that they are still open to finding waiver where no prejudice exists – circumstances that would absolutely preclude a finding of waiver in the majority circuits. Indeed, as Stok rightly pointed out in its Reply Brief, the Seventh Circuit (whose Judge Richard Posner has been one of the chief proponents of the view that prejudice is not needed for a finding of waiver) expressly acknowledges that it is in the minority on this issue.

In granting certiorari, the Supreme Court evidently agreed with Stok’s analysis. Now that the case has been dismissed, it seems likely that the Supreme Court will grant certiorari the next time it finds itself presented with an appropriate opportunity to address this issue. Where, however, the Court will (or should) end up on this issue is open to debate.

Although Stok & Associates, P.A., v. Citibank, N.A settled before the parties had the opportunity to fully brief the substantive question at issue, Stok addressed the merits briefly in its Petition, advocating a complete abandonment of the requirement for prejudice. Pointing to the Supreme Court’s holding that the purpose of the FAA was “to reverse the longstanding judicial hostility to arbitration agreements and to place [arbitration agreements] upon the same footing as other contracts,” Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 80 (2000) (emphasis added), Stok argued that a requirement to establish prejudice before waiver will be found goes beyond this, amounting to “a contractual term … inserted by the judiciary into every arbitration provision.” Stok asserted that a bright-line rule (eradicating the prejudice inquiry entirely) is the only way to resolve the issue: “creating a simple standard for waiver of an arbitral forum whenever one participates in litigation without reservation, will [enable] the monumental waste of scarce judicial and party resources [to] subside – the very goal the FAA was supposed to realize.”

While bright-line rules (and the perceived certainty that they bring) can have a certain initial appeal, the flip-side of that certainty is a lack of flexibility. The rule that Stok advanced in its Petition (that waiver of the right to arbitrate occurs whenever one participates in litigation without reservation) goes beyond merely rejecting a requirement for prejudice before waiver will be found. Rather, it also seeks to modify the first part of the two part test for waiver applicable in the Eleventh Circuit – the requirement that the party acted inconsistently with the arbitration right “under the totality of the circumstances.” As formulated, Stok’s proposed rule would shut the door to the possibility that parties who participate without reservation in proceedings brought against them – even in the most preliminary of ways –might still exercise their contractual right to arbitration. This is out of step with the pro-arbitration scheme of the FAA and U.S. federal jurisprudence more generally.

Tellingly, Stok’s argument goes beyond the position taken even in the minority circuits. The Seventh Circuit in Cabinetree of Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir. 1995), one of the cases on which Stok relied in its petition for certiorari, held that an election to proceed with litigation is only a presumptive waiver of the right to arbitrate. Id. at 389. This is a rebuttable presumption. As the Seventh Circuit held, it is easy to imagine situations where participation in court proceedings does not signify an intention to proceed in litigation to the exclusion of arbitration: “[t]here might be doubts about arbitrability, and fear that should the doubts be resolved adversely the statute of limitations might have run. Some issues might be arbitrable, and others not. The shape of the case might so alter as a result of unexpected developments during discovery or otherwise that it might become obvious that the party should be relieved from its waiver and arbitration allowed to proceed.” Id. at 390. In such circumstances, the Seventh Circuit permits a finding of no waiver. This essentially serves the same function that is served by the prejudice element of the two-part test followed by the majority of circuits — both provide the courts with a route to avoiding an unfair denial of a party’s right to arbitrate.

There is no need (or justification) for the Supreme Court to go as far as Stok advocated. The question presented in Stok related solely to whether a showing of prejudice is required before an opposing party’s contractual right to arbitrate will be deemed waived. Even if the Supreme Court ultimately chooses to reject the requirement of prejudice, the federal courts should still be able to ensure that parties’ rights to arbitrate are not unduly fettered, through a careful consideration and application of first part of the test for waiver, with its requirement to take into account the “the totality of the circumstances.”

By Gary Born & Anna Holloway

In 2000, UEG Araucária, a Brazilian energy company, entered into a series of agreements with several Bechtel entities for the engineering and construction of a $210 million power plant in Araucária, Brazil. Three of the contracts contained identical arbitration and choice of law clauses. The arbitration clause provided that “[a]ny dispute, controversy, or claim arising out of or relating to the Contract, or the breach, termination or validity thereof . . . shall be finally settled by arbitration” under the ICC rules, “except as these rules may be modified herein.” Each of the contracts also had multiple New York choice-of-law clauses, one of which provided that “[t]he law governing the procedure and administration of any arbitration instituted pursuant to [the arbitration clause] is the law of the State of New York.”

In January 2008, the power plant’s steam-turbine generator failed. That September, UEG Araucária submitted a Request for Arbitration to the ICC, claiming breach of contract, negligence, and fraud by Bechtel.

Bechtel responded by filing an action in the New York state court seeking to stay the arbitration and dismiss the claims, claiming that UEG Araucária’s claims were time-barred under New York and Brazilian law. Notwithstanding the arbitration agreement between the parties, as a basis for the state court’s jurisdiction, Bechtel cited section 7502(b) of the New York Civil Practice Law and Rules, which states:

“If, at the time that a demand for arbitration was made or notice of intention to arbitrate was served, the claim sought to be arbitrated would have been barred by limitation of time had it been asserted in a court of the state, a party may assert the limitation as a bar to the arbitration on an application to the court.”

UEG Araucária removed the action to federal district court and filed a counter-application to compel arbitration of the timeliness question. The district court denied UEG Araucária’s motion to compel, finding that the contracts between UEG Araucária and Bechtel evidenced “the parties’ clear intent to select New York law for arbitration procedure . . . including the rule limiting the power of arbitrators to hear preliminary questions of timeliness.” The district court found the claims were indeed time-barred and granted Bechtel’s request for a permanent stay of the arbitration.

UEG Araucária appealed the ruling to the Second Circuit, which reversed the district court’s decision while acknowledging that “the question is a close one.” The court said its task was “to divine whether the parties intended at the time of contracting to have issues of timeliness determined by the arbitrator.” Its analysis would also be informed by the requirement under the Federal Arbitration Act to “construe the parties’ intentions ‘generously’ in favor of arbitrability.”

The appellate court acknowledged an apparent tension between the arbitration clause and the choice-of-law clauses in the contracts between the parties. The arbitration provision “tends to support the view that any disagreements about the contract—which would include disputes about whether a relevant statute of limitations bars arbitration, as well as disputes about who should decide the statute of limitations issues—shall be decided by arbitration.” However, the choice-of-law provisions “cut the other way, suggesting that, because, under New York law, a party can assert a statute of limitations in court as a bar to arbitration, . . . a party is permitted to have a court decide timeliness issues.”

The panel concluded that “the contracts in this case are at least ambiguous as to whether Bechtel and UEGA agreed to permit recourse to C.P.L.R. 7502(b).” As opposed to the broad arbitration clause, the choice-of-law provisions “make no mention of timeliness disputes or of any right of the parties to resort to the courts in any circumstances.” Moreover, as the U.S. Supreme Court recognized in Mastrobuono v. Shearson Lehman Hutton, Inc., “general choice-of-law clauses . . . may be read to address only ‘substantive rights and obligations, and not the State’s allocation of power between alternative tribunals.’” The court concluded that the contracts between UEG Araucária and Bechtel evidenced “no clear statement that a statute of limitations defense should be withheld from the arbitrator.” Lacking such clear intent, the panel resolved the ambiguity in favor of arbitration, and held that the arbitrator, not the district court, should decide the timeliness issue.

The Bechtel decision illustrates how laws like New York’s C.P.L.R. 7502(b), which carve out a particular role for courts in otherwise arbitrable disputes, are of very limited use given the capabilities of arbitrators and the expansive pro-arbitration reach of the FAA. In purporting to provide for an initial judicial role in arbitrable disputes, New York’s § 7502(b) is reminiscent of a former provision in the English Arbitration Act that allowed a claimant that had entered into an arbitration agreement to nonetheless obtain summary judgment in court before the matter was referred to arbitration. That provision, which created an unnecessary judicial barrier to resolution of claims through arbitration, was sensibly deleted in the 1996 revision of the Act. Likewise, it is unclear why a law like § 7502(b) should carve out the particular question of timeliness for a court to review, when a claim as a whole is subject to arbitration. Arbitrators are no less capable of addressing whether a claim is time-barred than they are of resolving any other legal issue.

Moreover, under the FAA as interpreted by the Second Circuit, the applicability of § 7502(b) is so narrow as to render it virtually meaningless. If any choice-of-law provision would seem to allow for application of § 7502(b), the one between Bechtel and UEG Araucária would be it: the agreements provided that New York law would govern not only the parties’ substantive legal rights, but also “the procedure and administration of any arbitration” between the parties. But the court still found that because there was no clear statement that a court should be able to resolve the timeliness issue in particular, the issue was for only the arbitrator to decide.

The Bechtel panel’s reasoning thus raises the question of what, exactly, is left for laws like § 7502(b) to do if even choice-of-law provisions that apply to the arbitral process itself do not allow for resort to them. According to the Second Circuit, for § 7502(b) to apply, the contracts would have had to provide expressly that a court could resolve a limitations question. However, if a contract had such an explicit provision, then § 7502(b) likely would not be necessary at all. After all, even if § 7502(b) did not exist, parties could still draft contractual language that generally provides for arbitration of disputes, but expressly allows a court to resolve any timeliness questions. If parties to an otherwise broad arbitration agreement really want to allow a court to resolve limitations questions, nothing is stopping them from writing that into the agreement without reference to § 7502(b). Thus, laws like § 7502(b) add little; Bechtel’s narrow construal of when § 7502(b) applies effectively limits its application to instances where its existence is unnecessary. This is probably just as well, as any broader application of such a provision might well run afoul of the FAA (although New York state courts have held in the past that § 7502(b) is not facially preempted by the FAA).

More broadly, the Bechtel decision implicates the question whether certain aspects of an arbitration agreement can broaden the judicial role in a dispute. The Second Circuit’s assessment of whether § 7502(b) applied in the dispute between UEG Araucária and Bechtel is something of a mirror image to the question before the U.S. Supreme Court in its 2008 decision in Hall Street Associates, L.L.C. v. Mattel, Inc. In Hall Street, the Court addressed whether parties can agree to expand the scope of post-award judicial review beyond that expressly permitted by the FAA (the answer was no); Bechtel addressed whether a court may adjudicate certain aspects of a claim before the arbitration commences if the governing law of the arbitration agreement provides for it. In both instances, the courts limited the scope of the judicial role considerably, although not to the same degree. Unlike in Hall Street, the Bechtel panel found that parties could, theoretically, agree to have a court adjudicate part of a claim before it is referred to arbitration. This is because federal law does not restrict pre-award adjudications by courts where the underlying arbitral agreements allow for it – unlike the way the FAA, under Hall Street, does confine the bases on which courts may review final arbitral awards, even if the governing arbitration expressly purports to expand such grounds.

Bechtel illustrates that, although the scope of pre-award adjudication is not nonexistent, it is very narrow and requires clear intent by the parties. As Bechtel confirmed, a law like § 7502(b) is only applicable where it is expressly invoked in an agreement; it otherwise is not enforceable as a default rule under a particular governing law. Parties that do want to allow for the possibility of judicial involvement in certain aspects of disputes otherwise subject to arbitration would be well advised to make their particular intentions extremely clear in their agreements.

Finally, the Bechtel panel’s rejection of the application of § 7502(b) could also cause certain observers to sigh with relief. Because of New York’s economic importance and its well developed commercial law, a New York choice-of-law clause is a very common feature of international commercial agreements. When parties draft agreements that contain both New York choice-of-law clauses and arbitration clauses, it is unlikely that they are cognizant of § 7502(b) in particular. It is even less likely that many of them expect and want to supplant the arbitrator’s jurisdiction if timeliness issues ever come up in a dispute between the parties. A contrary ruling in Bechtel might have caused corporate contract drafters to think twice before reflexively choosing New York’s as the governing law of the contract. Thus, the Bechtel panel, in rendering a particular provision of New York law virtually nugatory, might ironically have been doing a favor to New York law more generally.

By Gary Born and Adam Raviv

The case arose out of a contract between the petitioner, a Japanese-based company, and the respondent, an Indian-based company, pursuant to which the petitioner agreed to provide Chinese-produced telecommunications equipment to the respondent in India. The respondent was to make payments for the equipment to an escrow account at an Indian-based commercial bank from which the petitioner would withdraw the funds. The contract was governed by English law and provided that any disputes arising from or relating to the contract were to be resolved by arbitration in Singapore. In early 2008, the petitioner delivered equipment pursuant to the contract and issued invoices and bills of exchange to the respondent in the amount of approximately $47.5 million. The respondent accepted the delivery of the equipment without complaint but only paid the petitioner approximately $5.6 million of the total amount due, citing cash-flow problems.

Anticipating a favorable arbitral award, the petitioner sought an ex parte order attaching a debt owed to the respondent by a New York-domiciled customer in the amount of $18,480 under New York’s Civil Practice Law and Rules § 7502(c). Section 7502(c) provides for the pre-award attachment of assets located in New York in connection with an arbitration regardless of where it is seated:

“[New York courts] may entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitration that is pending or that is to be commenced inside or outside this state, whether or not it is subject to the United Nations convention on the recognition and enforcement of foreign arbitral awards, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.”

In its decision, the appellate court began by recounting the statutory history of § 7502(c). The court explained that the New York Court of Appeals (the highest court in the New York judicial system) concluded in a much-criticized 1982 decision – Cooper v. Ateliers de la Motobecane, 57 N.Y.2d 408 (1982) – that New York courts had no authority to order the attachment of property in connection with an arbitration. The Court of Appeals had held in Cooper that New York statutory law in effect at the time permitted a court to issue an order of attachment only in an action for damages, not in a connection with an arbitration. Moreover, the Court of Appeals had held that, even if an attachment order could be issued, such an order would be inconsistent with the New York Convention because the Convention precludes courts from doing anything other than ordering an arbitration to proceed. The latter holding had placed New York in a distinct minority among courts internationally, as well as in the United States. (For further background, see Gary Born, International Commercial Arbitration 2030-2042 (2009).)

In response to the Cooper decision, the New York legislature added § 7502(c) in 1985. However, the provision as enacted at that time permitted New York courts to issue orders of attachment or preliminary injunctions only in connection with arbitrations seated in New York that were not subject to the New York Convention. It was not until 2005 that the New York legislature amended § 7502(c) to add the current language to the statute, extending its application to arbitrations seated outside of New York and to arbitrations under the New York Convention. This amendment foreshadowed UNCITRAL’s addition of Article 17J to the UNCITRAL Model Law the following year. Article 17J expressly provides that courts located outside the arbitral seat can issue interim measures in aid of international arbitrations.

After discussing the statutory history, the appellate court analyzed whether the $18,840 debt could properly be attached in the absence of personal jurisdiction over the respondent. (The court lacked personal jurisdiction because the respondent had no offices, employees, or bank accounts in New York, had only occasionally solicited business in New York, and had not undertaken any business activities in connection with the contract at issue in New York.) The court determined that the attachment was proper.

In reaching this conclusion, the court distinguished Shaffer v. Heitner, 433 U.S. 186 (1977), a leading U.S. Supreme Court decision that had held that a state court could not exercise personal jurisdiction over a party merely because the party owned property in the state. The appellate court reasoned that the Supreme Court had noted in dicta in Shaffer that this principle did not preclude an action to attach property in a forum as security for a judgment being sought in another forum, even where the property owner had no other contacts with the forum in which the property was located to give rise to personal jurisdiction. The appellate court concluded that this “security” exception applied in the arbitration context under § 7502(c) because the petitioner was not seeking to rely on the property to confer personal jurisdiction but rather was “merely seek[ing] to have the property attached for future execution in the event a recovery is ordered by the out-of-state forum.”

The appellate court further noted that two safeguards built into § 7502(c) – a requirement that the petitioner must show that any arbitral award made would be ineffectual without the attachment and a provision that the attachment order expires if the petitioner fails to initiate an arbitration within 30 days of the attachment being granted – addressed any concerns regarding fairness. Oddly, the Sojitz court did not address its prior interpretation of the New York Convention in Cooper – holding that the Convention precluded grants of provisional relief in aid of an international arbitration. That holding was a matter of U.S. federal law (because U.S. treaties have the status of federal law) and, as a consequence, not subject to being “overruled” by state law – including state legislation such as the amendment to § 7502(c). The Sojitz court presumably, and correctly, reconsidered and reversed its prior interpretation of the New York Convention in Cooper, but its opinion does not explain this reasoning. Assuming that this logic is followed in the future, the Sojitz decision provides a useful tool for parties to international arbitration whose counter-parties have assets located in New York and comes as a welcome development in the field of international arbitration.

By Gary B. Born & Thomas R. Snider

The case concerned the enforceability of arbitration clauses inserted in consumer contracts. The issue, which has been highly controversial throughout North America in recent years, was first tackled by the Supreme Court four years ago, in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34. The decision in that case was firmly pro-arbitration, the Court refusing to find arbitration clauses inserted in consumer contracts—even when coupled with class action waivers—to be per se unenforceable. In Seidel, the main issue was whether section 172 of British Columbia’s Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2, upon which the plaintiff primarily based her action, rendered her claim inarbitrable. Five features of that section, which has been described as a “public interest remedy,” are particularly noteworthy: i) first, it derogates from the general requirements regarding standing by allowing any person—irrespective of whether he or she has been affected by a given consumer transaction—to seek a declaration that an act or practice relating to that transaction contravenes the statute, and/or an interim or permanent injunction restraining the defendant from contravening the statute; ii) second, it identifies the British Columbia Supreme Court (a court of first instance) as the forum before which an action thereunder may be brought; iii) third, it allows that court to grant remedies benefiting all persons affected by the impugned act or practice, and to order the defendant to advertise to the public the particulars of the judgment made; iv) fourth, it makes no mention of arbitration; v) and finally, the rights, benefits and protections granted by that section—like those granted by all other sections of that statute—are unwaivable. The plaintiff also asserted alternative claims seeking compensation for the prejudice she had personally suffered as a result of the defendant’s actions.

In a split decision, a narrow majority of the full Supreme Court (5-4) ruled that, despite the absence of express language to that effect, claims made under section 172 were inarbitrable. To justify its decision, the majority first pointed to the text of section 172 and held that the reference to the British Columbia Supreme Court was indicative of the legislature’s intention to confer a right to proceed before that court. The majority also found that, because section 172 treats the plaintiff as a public interest plaintiff, its policy objectives could not be effectively served by “low profile, private and confidential arbitrations where consumers of a particular product may have little opportunity to connect with other consumers who may share their experience and complaints and seek vindication through a well-publicized court action.” Finally, the majority was of the view that an arbitral tribunal was unable to grant some of the remedies provided for in section 172; in particular, it insisted on the facts that “arbitrators, who derive their jurisdiction by virtue of the parties’ contract, cannot order relief that would bind third parties, [and] that only superior courts have the authority to grant declarations and injunctions enforceable against the whole world.” As for the plaintiff’s alternative private interest claims—which were based on a different section of the statute as well as on the common law—, they were referred to arbitration; the Court’s decision thus confirms that consumer claims are generally arbitrable at common law.

To appreciate the significance of the Court’s ruling on section 172, it is important to first recall its 2003 decision in Desputeaux v. Éditions Chouette (1987) Inc., 2003 SCC 17, which also concerned the arbitrability of statutory rights. The issue there was whether a section of the federal Copyright Act, R.S.C. 1985, c. C-42 granting concurrent jurisdiction to federal and provincial courts over claims based on that statute ought to be interpreted as rendering such claims inarbitrable. The Quebec Court of Appeal had ruled that it did, in a ruling that essentially stood for the proposition that statutory claims are inarbitrable unless the relevant jurisdictional provisions expressly provide otherwise. In an unambiguously pro-arbitration—and unanimous—decision, the Supreme Court reversed the presumption and held that statutory claims were arbitrable unless the relevant provisions expressly stated otherwise. Furthermore, the Court was explicit as to the philosophical underpinnings of its decision, as it openly embraced “the trend in the case law [...], which has been, for several decades, to accept and even encourage the use of civil and commercial arbitration, particularly in modern western legal systems, both common law and civil law” [emphasis added]. Two years later, in GreCon Dimter inc. v. J.R. Normand inc., 2005 SCC 46, the Court reiterated its commitment to the promotion of arbitration by reminding lower courts that arbitration clauses had to be encouraged and their enforcement facilitated.

However, none of these considerations mattered to the majority in Seidel. Its opinion is clearly inconsistent with the presumption adopted in Desputeaux, as it stands for the proposition that a limit to the arbitrability of statutory claims can be implied in the structure or purpose of a legislative provision. And the significance of the majority’s reasoning on this point cannot be minimized on the ground that it may have been caused by an oversight on its part. Indeed, as the dissenting judges emphasized—in a compelling and thoroughly-reasoned opinion—the inconsistency between the majority’s approach and Desputeaux, the majority was surely very much aware of what was at stake. Therefore, it is hard to resist the conclusion that the presumption adopted in Desputeaux has effectively been abandoned in Seidel.

The shift in the Court’s view of arbitration’s place and importance in the Canadian legal system is also apparent from the majority’s analysis of the compatibility of arbitration with the structure and purpose of section 172, which is neither thorough nor convincing. As the reference in section 172 to the British Columbia Supreme Court can be read as a mere allocation of jurisdiction rationae materiae, it is by no means clear that it evidences the legislature’s intention to grant an unwaivable right to proceed in court. Furthermore, the public interest aspect of section 172 and the statute’s policy of ensuring that unacceptable corporate conduct can be publicly denounced would not be defeated by resorting to arbitration, as an award finding that breaches of the statute have occurred would necessarily fall within the public domain upon the commencement of recognition and enforcement proceedings. And, contrary to what the majority believed, section 172 does not contemplate remedies that would be enforceable against the entire world, and that would thus be outside an arbitral tribunal’s jurisdiction: the section only contemplates that certain remedies could benefit—rather than be binding on—other persons than the claimant. The cursory reasoning offered by the majority suggests that it did not view declaring certain claims to be inarbitrable as a particularly serious matter. This is a far cry from recent decisions by some Canadian appellate courts standing from the proposition that the right to resort to arbitration is a fundamental right.

Finally, and perhaps most significantly, the majority overtly rejected the idea—earlier embraced in both Desputeaux and GreCon—that courts should somehow be encouraging arbitration. While responding to the dissenting judges’ pointed criticism to the effect that its opinion exhibited “an undercurrent of hostility towards arbitration” and represented “an inexplicable throwback to a time when courts monopolized decision making and arbitrators were treated as second-class adjudicators,” the majority’s response was not to challenge the dissenting judges’ assertions, but merely to state that “the Court’s job is neither to promote nor detract form private and confidential arbitration.” Not only will this statement surely be routinely invoked against parties defending a pro-arbitration position in those hard cases where the applicable statute provides no obvious answer, it also suggests—more strongly than any other aspect of the majority’s opinion—that the Court’s decision may very well have been animated by a desire to mark the beginning of a new era in the relationship between Canadian courts and the arbitral process.

Building on the American Law Institute’s draft Restatement of the U.S. Law on International Commercial Arbitration, Gary Born, Jan Paulsson, J. William Rowley, QC, Linda Silberman, and Judge Diane P. Wood will discuss controversial themes that have emerged in the course of the drafting process. These include: (1) How National Is International Arbitration?; and (2) The Limits of Party Autonomy.

Although the themes for the conference may have an abstract tone, they encompass a host of issues relevant to anyone practicing in the field. Take the first theme, which one could easily reframe as “How International Is National Arbitration?”

Assuming that one drafts a national Restatement on an international topic, should the process aim to record the existing specificities of national practice, or to facilitate their subordination to international norms? To the extent that one aims to bridge gaps between national and international norms, should one focus on elimination of the most unusual local practices, which the draft Restatement does by rejecting (1) the application of forum non conveniens to enforcement proceedings, and (2) the use of “manifest disregard of the law” as a judicially created ground for vacating awards under § 10 of the Federal Arbitration Act (FAA)? See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 5-21(a) (Council Draft No. 2, 2010) (“An action to enforce a Convention award is not subject to . . . dismissal on forum non conveniens grounds.”); RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-11E, ALTERNATIVE C (Preliminary Draft No. 4, 2010) (“A court may not vacate a U.S. Convention award for manifest disregard of the law.”).

Alternatively, instead of just pruning the outliers, should one aim for virtual congruence between national and international standards? If so, should the Restatement promote greater harmony between those formally distinct sources of law, or should it abolish the formal distinctions through direct incorporation of international norms into domestic law?

As a concrete example of the questions just posed, one may cite the draft Restatement’s treatment of the grounds for vacatur of New York Convention awards rendered in the United States (U.S. Convention awards). In its current form, the draft Restatement proposes (but will have to choose between) two alternatives: (1) vacatur in accordance with the grounds set forth in § 10 of the FAA (which generally governs the vacatur of domestic awards), or (2) vacatur in accordance with the grounds for refusal to enforce awards under Article V of the New York Convention. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7, ALTERNATIVES A & B (Preliminary Draft No. 4, 2010).

In one sense, the choice of vacatur grounds for U.S. Convention awards is not simple. As a purely textual matter, one can defend either of the alternatives mentioned above. For example, § 10 of the FAA might be the appropriate vehicle because (1) the Convention does not regulate the standards for vacatur of awards at the place of arbitration, but contemplates that the curial courts will continue to apply national standards in vacating awards (Article V(1)(e)); (2) in implementing the Convention by statute (9 U.S.C. § 208), Congress provided for the continued application of the FAA’s domestic provisions to the extent that they do not conflict with the Convention or any part of its implementing legislation; and (3) in implementing the Convention by statute (9 U.S.C. § 207), Congress also required confirmation of awards unless a court finds any of the grounds for refusal “specified” in the Convention. Because those grounds include vacatur by a court applying national standards at the place of arbitration (Art. V(1)(e)), recourse to § 10 of the FAA does not conflict with the Convention or its implementing legislation. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note b (Preliminary Draft No. 4, 2010). On the other hand, one could take the position that the same provisions permit vacatur only for the grounds “specified” in the New York Convention itself because the application of any other standard would “conflict” with § 207, which requires U.S. courts to confirm awards absent one of grounds “specified” in the Convention. Id.

Although selection of the proper grounds for vacatur may not be easy as a textual matter, the stakes are surprisingly low because the draft Restatement considers § 10 of the FAA to be “largely congruent” with Article V of the New York Convention. RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note a (Preliminary Draft No. 4, 2010). As a result, selection of either source “presumably would not have any importance as a matter of substance.” Id. Both approaches should, thus, generally yield the same outcomes on petitions to vacate Convention awards.

If both options remain defensible and produce identical outcomes, why agonize over the method that the Restatement adopts for striking a balance between national and international norms? See id. (“An initial question is whether a choice among the alternatives even matters.”). As in so many cases, the question is not “what” one chooses, but “how” one chooses—an issue that may have cascading effects for the entire Restatement.

If the Restatement were to let courts decide through the accumulation of judicial precedent, it would favor the application of § 10 of the FAA by a three-to-one margin among United States Courts of Appeal. RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note c (Preliminary Draft No. 4, 2010). However, the reporters have rejected this approach on the grounds that the Restatement is not a popularity contest.

If the Restatement were to let its advisors and members of its consultative group decide through the accumulation of comments, it would overwhelmingly favor the application of Article V grounds. However, one wonders if that represents a different kind of popularity contest involving practitioners driven to promote New York as a venue for international arbitration, and academics eager to bring the FAA into line with the UNCITRAL Model Law, which offers a “pleasing symmetry” between (1) the grounds for refusing enforcement, and (2) the grounds for vacating awards. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note d (Preliminary Draft No. 4, 2010) (examining the policy considerations, and emphasizing that the unification of grounds for non-enforcement and for vacatur may “enhance the attractiveness of the U.S. as an arbitral forum”). See also United Nations Commission on International Trade Law Model Law on International Commercial Arbitration, arts. 34, 36, 40 U.N. GAOR Supp. (No. 17) at 89, U.N. Doc. A/40/17 (1985) (adopting the substance of New York Convention Article V as the grounds both for refusing enforcement and for setting aside awards); NIGEL BLACKABY ET AL., REDFERN AND HUNTER ON INTERNATIONAL ARBITRATION 595 (5th ed. 2009) (emphasizing the “pleasing symmetry” between the grounds for non-enforcement and for setting awards aside under the UNCITRAL Model Law).

If the Restatement were to follow the intent of Congress, the question becomes whether to focus on (1) what Congress would do if presented with the options today, or (2) what Congress probably had in mind when adopting the Convention’s implementing legislation in 1970. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note d (Preliminary Draft No. 4, 2010) (“The issue . . . is what Congress intended in enacting Section 207.”).

If approached as a forward-looking judgment about policy, it makes sense to limit the grounds for vacatur of U.S. Convention awards to the grounds actually specified in Article V of the Convention. As explained above, that would not change the substantive outcome of actions to vacate awards, but it would send a clear signal that United States adheres to universally accepted standards for vacating awards, thereby increasing New York’s appeal as a venue for international arbitration. Id.

If approached as a backwards-looking inquiry into the likely intent of Congress during 1970, the picture changes dramatically. As a matter of historical record, the United States did not sign the New York Convention in 1958 because the U.S. delegation concluded that “certain provisions were in conflict with some of our domestic laws.” H.R. Rep. 91-1181, at 1, reprinted in 1970 U.S.C.C.A.N. 3601, 3601-02. See also Certain Underwriters at Lloyd’s London v. Argonaut Ins. Co., 500 F.3d 571, 576 (7th Cir. 2007).

In addition, some contemporaneous observers expressed concerns about the use of multilateral treaties to regulate a topic for which the 50 states had at least a degree of concurrent jurisdiction. See Martin Domke, The United Nations Conference on International Commercial Arbitration, 53 AM. J. INT’L L. 414, 417 & n.27, 419 & n.41 (1959).

Still concerned about unintended changes to U.S. law in 1970, the State Department proposed to implement the New York Convention not by general amendments to the FAA’s existing provisions, but through a separate chapter that would “deal exclusively with recognition and enforcement of awards falling under the Convention.” H.R. Rep. 91-1181, at 2, reprinted in 1970 U.S.C.C.A.N. 3601, 3603 (emphasis added). In doing so, the State Department assured Congress that “[t]his approach would leave unchanged the largely settled interpretation of the Federal Arbitration Act.” Id. (emphasis added).

Given the history of concern about unintended changes to domestic law, one might regard it as perilous to assume that the Convention’s implementing legislation reflects enthusiasm for abolishing the use of national standards for vacatur of U.S. Convention awards. To the contrary, the historical context arguably reflects a sense of caution aimed at preservation of a national character for arbitration.

Perhaps the same sense of caution should militate against the consideration of foreign standards as a dimension of public policy for purposes of refusal to enforce awards under Article V(2)(b) of the Convention. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 5-14 cmt. e (Council Draft No. 2, 2010) (indicating that “a court may take into account public policies recognized at the arbitral seat or in other jurisdictions having a connection to the dispute”). But that remains a topic for discussion on March 23.

For more information about the conference, please visit the ITA’s website (http://www.cailaw.org/ita/ASIL_11.html).

If time permits, I may do another list for 2011. But, first I thought I’d take a look back at last year’s list and offer a brief update on those cases. Rather, than do all of the heavy-lifting here, I’ll direct readers of this blog to relevant reporting in my Investment Arbitration Reporter newsletter (not to be confused with Kluwer’s ITA newsletter) where appropriate. (You won’t need a subscription to view the articles that are referenced below, as we’ll make them publicly available.)

Without further ado, here’s a run-down of the ten cases from last year.

Suez, Vivendi, Anglian Water, et al. v. Argentina

In August, decisions on liability were finally rendered, holding Argentina liable for breaching investment protections owed to a Who’s Who of foreign investors in that country’s water and sewage sector. However, for those interested in the running debate about the coherence or fragmentation of public international law, the decisions may be something of a disappointment. While the arbitrators found breaches of Argentina’s bilateral investment treaty obligations, they gave short shrift to Argentina’s invocation of international human rights law obligations in its defence of these claims. Check out our reporting for a fuller run-down of what happened.

Fraport v. Philippines

Next on last year’s list was Fraport’s bid to annul an ICSID jurisdictional decision which had grounded the company’s bid for compensation over an expropriated airport terminal. In 2007, a divided tribunal ruled that the company’s claim should fail due to the fact that the claimant had quietly circumvented local laws designed to limit foreign control of the terminal project.

Well, tell your friends that you read it on the internet: Fraport got an early Christmas present on December 23rd when an ICSID annulment committee annulled the 2007 ruling. The annulment paves the way for a new arbitration, and one imagines that this will land on ICSID’s doorstep early in the new year. Keep an eye on the IAReporter newsletter for the fuller story on this one.

Brandes Investment Partners v. Venezuela

Last year, we noted that a decision should be forthcoming by a panel of arbitrators in a telecoms nationalization claim whose viability hinges on the ambiguous-looking arbitration clause in a domestic investment protection statute. Yeah, that’s a mouthful. But you’ve got time to digest it because, as of this writing, a decision in the Brandes case is still awaited.

Mind you, a different ICSID panel weighed in earlier this year with a notably restrictive interpretation of the same statute at issue in the Brandes case. Our report on that dimension of the Mobil v. Venezuela case is here. Now it remains to be seen what the Brandes tribunal makes of the ruling in the Mobil case.

El Paso v. Argentina

Nothing new to report here. El Paso turned to arbitration against Argentina back in 2003, alleging that the country’s handling of an earlier financial crisis triggered breaches of protections owed to El Paso. Arbitrators are still dotting their ‘I’’s and crossing their ‘t’’s on this long-anticipated decision. El Paso must be thoroughly demoralized given that the most likely outcomes are A) a dismissal of its case or B) a “victory” followed by a protracted annulment process.

AES v. Hungary

There is rather more to report in relation to another claim highlighted in last year’s list. AES was one of three foreign power producers to sue Hungary for allegedly failing to respect the terms of long-term power purchase agreements. However, in September, arbitrators handed down a verdict in favour of Hungary, finding no breaches of the country’s obligations under the Energy Charter Treaty. A fuller accounting of the case can be read here.

Foresti and others v. South Africa

A group of foreign miners drew international headlines when they alleged that South Africa’s Black Economic Empowerment program – and the country’s new BEE-inspired mining regime – had breached protections owed under South Africa’s bilateral investment treaties.

As was noted last December, the politically contentious dispute seemed to be fizzling out after the claimants signaled that they were prepared to lay down their arms. However, the claimants and South Africa could not agree on the peace terms, so it fell to arbitrators to hold a hearing and issue an award which drew a line under the case. Read all about it here.

RosInvestCo v. Russian Federation

On December 19, 2010, we reported that an arbitral award in one of three pending Yukos-related arbitrations against Russia had been quietly rendered back in September. The ruling had remained under lock and key until the Russian Federation moved earlier this month to set aside the award. Here’s our quick run-down of what happened, but keep an eye on our newsletter for a full accounting of the award’s holdings.

Chemtura v. Canada

Canada walked away victorious after arbitrators ruled in August of 2010 that a U.S. chemical company had failed to make out any of its claims under the North American Free Trade Agreement (NAFTA). The case had been watched nervously by public health advocates as Chemtura was attempting to second-guess Canada’s phase-out of the controversial agro-chemical, lindane. But, in the end, Canadians were left only with a hefty legal bill – not an arbitral edict requiring them to put a teapoon of lindane on their morning oatmeal. See this report for the crux of the tribunal’s ruling.

Chevron v. Ecuador (Round One)

While a bruising multi-front legal fight over liability for Amazonian oil pollution gathered pace last year, arbitrators also weighed in with a ruling on a less-publicized under-card battle between the two combatants: Chevron corporation and the Republic of Ecuador.

In what could be a hefty victory for Chevron, arbitrators ruled that Ecuador was liable for delaying the judicial resolution of a series of contract disputes. As we made clear in an analysis of the arbitral ruling, the tribunal appeared to break new ground in ruling that an international tribunal can step into the shoes of domestic courts that are failing to deliver justice in a timely fashion.

Libananco v. Turkey


Various claimants came out of the woodwork to sue Turkey following that country’s winding up of the Uzan family business empire. Libananco, a Cyprus-based entity, has long maintained that it has the most credible claims. The off-shore company insists that it held stakes in two valuable electricity concessions prior to their being taken over by the government. With all of the other known arbitration claims brought by shell-companies now having been dispatched on jurisdictional grounds, a ruling in the Libananco case is the only thing left to be written.

However, if Libananco should prevail, it will have to contend with a recent ruling by a New York judge that any ICSID arbitration winnings must accrue to the benefit of those who suffered a Billion Dollar fraud at the hands of the Uzans. See our story here.

Luke Eric Peterson
Editor
http://www.InvestmentArbitrationReporter.com

The questions presented before the court were:
“(1)(a) Whether review of an arbitration award for “manifest disregard of the law” or “complete irrationality” remains available after Hall Street Associates L.L.C. v. Mattel, Inc., 552 US 576 (2008), a question that this Court again expressly reserved in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. __, 130 S. Ct. 1758 (2010), and on which there is a clear Circuit conflict; and

(b) If such review is available, may a reviewing court determine whether an award is irrational under the totality of the circumstances (as the district court did here and as the Second Circuit permits), or are awards impregnable unless it is “clear from the record that the arbitrators recognized the applicable law and then ignored it” (as the Ninth Circuit below held).

(2) Whether the Federal Arbitration Act (“FAA”) requires vacatur of an arbitral award issued by arbitrators who failed to disclose material facts bearing on their integrity and their relationships with each other, in violation of the applicable rules governing arbitrations, or (as the Ninth Circuit held) are arbitrators required to disclose only their relationships with the parties and counsel, with the burden to investigate and unearth other material facts falling on the parties”(petition for certiorari as posted on SCOTUSblog, a blog contributed to closely following US Supreme Court decisions).

Manifest disregard is a subject of lengthy academic articles. It has already been frequently discussed on this blog and even some recently last week when discussing the Stolt Nielsen case. However, it remains unclear whether it remains as an option to essentially review the merits of the arbitral award in court. Despite split circuit treatment and a subsequent ambiguous decision in Hall Street Associates LLC v. Mattell, Inc., in which the Supreme Court held that grounds for vacatur are strictly found within the Arbitration Act, the Supreme Court decided against provided further light and clarification on this oft debate topic. Apparently, the Supreme Court, by denying cert, feels that its decision on Hall Street was not vague, but sufficient to settle the long-standing debate.

In Stolt-Nielsen, charterers were arbitrating against shipping companies, alleging violations of antitrust law. The issue was whether the arbitration could proceed as a class arbitration. All of the arbitration agreements in the international maritime contracts between the various parties were silent on this question. Before the hearing, the parties entered into a Supplemental Agreement to be bound by Rules 3 through 7 of the American Arbitration Association’s Supplementary Rules for Class Arbitrations. Rule 3 contains a requirement that as a threshold matter, the arbitrators must decide whether, under the arbitration agreement, the arbitration can proceed as a class arbitration. After a hearing solely on this issue, the tribunal ruled that the arbitration agreements permitted class arbitration, even though the agreements were silent on this point. Upon rendering its decision, the tribunal stayed the arbitration to permit Stolt-Nielsen to challenge the award.

The Supreme Court’s Stolt-Nielsen decision must be viewed not only in response to the two lower court decisions handed down after the award issued, but also with reference to the Court’s earlier decision in Hall Street Associates v. Mattel, Inc., 552 U.S. 576 (2008). In Hall Street, the Court had held that a party agreement that provided for a review of an arbitration award by a court for errors of fact or law was not enforceable. The exclusive grounds for vacating an award were the narrow grounds explicitly set forth in the Federal Arbitration Act (“FAA”), and parties could not add or change grounds by agreement. FAA grounds do not include a basis for setting aside an award on the merits. Moreover, the Court in Hall Street had also appeared to find that the judge-created doctrine of “manifest disregard of the law” was not a separate and independent ground for vacating an award, although it was perhaps a gloss on grounds contained in the statute.

When Stolt-Nielsen’s challenge to the tribunal’s award reached the federal district court, the Hall Street case had not yet been decided. The district court determined that because the evidence before the tribunal had shown that in maritime arbitrations peculiar to the shipping industry, there had never been class arbitrations, such custom and usage was “tantamount to an established rule of maritime law,” 435 F. Supp. 2d at 385. The judge then vacated the award on the ground that the tribunal had manifestly disregarded the law.

The Hall Street decision had come down by the time the case was appealed to the Second Circuit. The appellate court reversed the district court decision. The Second Circuit believed that the manifest disregard standard had survived Hall Street as a gloss on other sections of the FAA. Nonetheless, it held that the standard was quite narrow, and that the tribunal had not manifestly disregarded the law. Moreover, the Second Circuit ruled that under the FAA, the tribunal had not exceeded its powers — one of the express statutory grounds for vacatur – because it had decided the exact question that the parties had presented to it for decision.

The conservative majority of Supreme Court, which was hostile to class arbitrations, was faced with a difficulty. On what grounds could it reverse the Second Circuit and cause the award to be vacated? Because the Court had held in Hall Street that the narrow grounds for vacatur set forth in the FAA were exclusive, it was not obvious how it could set aside the award, particularly without the help of the manifest disregard doctrine. On what other theory could the majority vacate the tribunal’s decision that class arbitration was permitted when the arbitration agreement was silent on that subject?

The Supreme Court began its reasoning by noting that the decision of the arbitral tribunal could not be vacated for legal error. It stated that petitioners must clear a high hurdle because showing error, even serious error, is simply not enough to obtain vacatur. Nonetheless, Court proceeded to vacate the award. To do this, it drew upon a standard from labor arbitration rather than from commercial arbitration. Citing a labor arbitration case, the Court said, “[i]t is only when [an] arbitrator strays from interpretation and application of the agreement and effectively ‘dispense[s] his own brand of industrial justice’ that his decision may be unenforceable.” 130 S. Ct. at 1767, citing Major League Baseball Players Assn. v. Garvey, 532 U.S. 504, 509 (2001) (per curiam). The labor arbitration standard has been considered a more flexible standard because labor arbitration awards are vacated more frequently in the U.S. than commercial arbitration awards.

Having relied upon a labor arbitration standard – one that does not appear to be very different from a finding that the arbitrator improperly applied the law — the Court then attempted to connect the cited labor case to commercial arbitration. It found that the labor arbitration standard was essentially the same as the ground for vacatur found in FAA §10 (a)(4) — that the arbitrators exceeded their powers — because, according to the Court, “the task of the arbitrator is to interpret and enforce a contract, not to make public policy.” 130 S. Ct. at 1767. The Court’s interpretation is unusual and without precedent. Section 10(a)(4) has never previously been interpreted as meaning that if arbitrators consider public policy, they have exceeded their powers. Rather, the provision has always been understood to mean that arbitrators exceeded their powers if they reached a decision beyond the scope of the parties’ arbitration agreement. In Stolt-Nielsen, however, the tribunal did not appear to exceed its powers because it decided exactly the question that the parties presented to it for decision. Yet, in holding that the tribunal exceeded its powers by focusing on policy instead of on interpretation of the contract (a view challenged by the dissent), the Court suggests a new way to vacate on the ground of arbitrators’ exceeding their powers, if a court believes their decision to be wrong on the merits.

Despite reaching the same result as the district court, which had found the award to be in manifest disregard of the law, the Supreme Court continued to vacillate about the validity of the manifest disregard doctrine. The majority asserted that the Court was not deciding whether the doctrine had survived its decision in Hall Street, either as an independent ground or as a judicial gloss on the enumerated statutory grounds. However, the Court nonetheless stated that if the standard for manifest disregard was that the arbitrators knew the relevant legal principle and yet willfully flouted the law, then that standard had been satisfied in Stolt-Nielsen. Thus, the Court apparently believed that the tribunal deliberately flouted the law in answering affirmatively rather than negatively the parties’ question about whether class arbitration was permitted. As a consequence, even though the Court claimed not to decide if manifest disregard had survived Hall Street, the case result suggests that the Court may have actually broadened the applicability of the doctrine. In finding that both the manifest disregard standard and the labor arbitration standard for vacating awards were satisfied in Stolt-Nielsen, and that the labor arbitration standard equated to arbitrators’ exceeding their powers, the Court conflated three standards, and created thereby a broader standard for reviewing and vacating awards than has typically been applied in commercial arbitration cases.

Stolt-Nielsen raises the concern that U.S. judges can now more easily vacate awards on grounds beyond those found in the FAA, such as when an arbitrator “strays from interpretation… and dispenses his own brand of industrial justice,” 130 S.Ct. at 1767. Thus, judges can interfere more easily with the parties’ expectations of finality. Regardless of whether one believes the arbitral tribunal’s decision was right or wrong, it is quite troubling to find in Stolt-Nielsen a new pathway for U.S. courts to vacate an arbitration award on the merits when it thinks the arbitrators got it wrong.

Among the lessons learned from these three claims are that good investment treaty protection really is important to foreign investors; where investment protection is in place, it can be shown to be doing its job; and where it is not in place the investor can be in a difficult position if problems arise with the host state.

The outcomes of the first two claims also appear to provide compelling evidence to refute assertions recently that investment treaty arbitration as currently constituted is not a fair, independent, and balanced method for the resolution of investment disputes.

AbitibiBowater v. Canada

Canada and AbitibiBowater recently settled an expropriation claim brought under Chapter 11 of the NAFTA for Cdn $130 million. The settlement shows that the investment treaty protection system under the NAFTA worked. While there has been some public and political questioning in Canada of the settlement and its amount, Canada had the courage to settle the claim on a basis acceptable to both sides without requiring the investor to go through all the hoops of a full arbitration process. Sometimes it is easier for governments to avoid the potential political heat from a settlement and instead let the system run its course, knowing that it may be easier to distance themselves from the decision of three arbitrators than a decision made to settle. Here, that did not happen.

The settlement also highlights a particular challenge of investment treaties in federal states like Canada. In this case, the actions leading to the claim were actions of one of Canada’s provinces, Newfoundland and Labrador. However, it was the federal state, Canada, against which the claim was properly brought and which was required to defend and settle the claim. This shows vividly how a state can end up on the hook for the actions of one of its constituent territories, provinces or states – or municipalities – and may be left financially naked, having to pay for actions that it did not take and had no constitutional authority to prevent.

There is no arrangement yet between Canada’s federal government and its provincial and territorial governments over the financial responsibility within Canada for investment treaty obligations. The federal government is responsible under Canada’s international treaties for its own actions and arguably those of its provinces and territories. There are other pending claims against Canada relating to actions by levels of government within the country other than the federal government. While the Canadian Prime Minister is reported as stating after the AbitibiBowater settlement that “I have indicated that in future, should provincial actions cause significant legal obligations for the government of Canada, the government of Canada will create a mechanism so that it can reclaim monies lost through international trade processes” (The Globe and Mail, August 27, 2010, page B3), what that mechanism would be, or whether it could be imposed unilaterally, he did not say.

With other claims pending, a resolution may not be able to wait. Indeed, a lead editorial in one of Canada’s principal mainstream newspapers called for a solution now: “the federal government should not simply wait for the next problem of this kind to come up. It should diplomatically, but firmly, make clear to the provinces that it is thinking about specific options. The taxpayers of Canada need some concrete assurance that they will not have to pick up another such tab” (The Globe and Mail, August 30, 2010, page A12).

Of course, the potential liability of a province or territory to pay raises questions of its direct and indirect roles in the defense of the claim, if any, and its responsibilities to cooperate and assist in the defence.

It appears that these issues will need to be dealt with in Canada sooner rather than later – one way or another – if not for other reasons, for political reasons.

It does not appear that either of Canada’s NAFTA partners, the United States and Mexico, both of which are federal states, has developed a comprehensive solution to this issue.

Chemtura v. Canada

At about the same time as the AbitibiBowater settlement, Canada defeated Chemtura’s claim against it, which was based on a Canadian decision to phase out use of a fungicide (lindane) because of health concerns. The arbitral tribunal (Prof. Gabrielle Kaufmann-Kohler, Hon. Charles N. Brower, and Prof. James R. Crawford) held that the measures taken by Canada “did not amount to a substantial deprivation” of Chemtura’s investment (para. 265) and in any event “the measures . . . constituted a valid exercise of [Canada’s] police powers . . . and as a result, does not constitute an expropriation” (para. 266). The tribunal further held that the measures were within the regulatory body’s mandate and were taken “in a non-discriminatory manner, motivated by the increasing awareness of the dangers presented by lindane for human health and the environment” (para. 266). Chemtura was ordered to pay Canada almost Cdn $3 million to cover one-half of its fees and costs in connection with the arbitration (para. 273). The result shows that – contrary to the concerns raised by critics of investment protection – a state can successfully defend investor claims based on health and environment protection regulatory actions of the state. (See http://ita.law.uvic.ca/documents/ChemturaAward_000.pdf)

Here, like in the AbitibiBowater case, the system appears to have worked.

First Quantum Minerals v. Democratic Republic of Congo

First Quantum Minerals is a different story.

First Quantum, a Canadian mining company, has made claims about the actions of the government of the Democratic Republic of the Congo (DRC) in relation to a project it has in the DRC. Canada does not have a bilateral investment treaty with the DRC. However, the DRC is a member of ICSID and provides for ICSID arbitration through its Mining Code.

If Canada were a member of ICSID, First Quantum would have investment treaty protection through ICSID available to it. However, Canada has not yet ratified the ICSID Convention, which it signed almost four years ago.

Instead, First Quantum has had to resort to trying to get its own state, Canada, to assert its case for it on the international stage, as well as, according to media reports, possibly bringing an arbitration under ICSID’s Additional Facility (which of course would yield an award that would not have the same standing as an ICSID award).

Until Canada ratifies ICSID (the subject of our Kluwer Arbitration Blog on 24 August 2010), Canadian investors like First Quantum investing abroad cannot get disputes resolved by way of an ICSID award. The same is the case for foreign investors coming into Canada – a claim against Canada cannot be resolved by way of an ICSID award either.

Here, some fixing is needed.

Andrew McDougall (amcdougall@perlaw.ca) and Barry Leon (bleon@perlaw.ca) are Partners in the International Arbitration Group with Perley-Robertson, Hill & McDougall LLP (www.perlaw.ca).