In post-Soviet time Russian courts have already developed quite a vast practice of recognition and enforcement of international arbitral awards. One can even already fetch out some trends in such practice. Thorough case study shows that certain distrust to international arbitration and unexpected obstacles to the enforcement of the awards caused by lack of experience in dealing with foreign-related matters, reflected in some early judgments, gradually go.

In Russia the decisions on requests for enforcement of the arbitral awards made in disputes of commercial or other economic nature are vested with the commercial courts (“arbitrazhnyie sudy”). It should be mentioned that the arbitrazh courts have nothing in common with arbitral (non-state) tribunals, whether domestic or international. So the term “arbitrazh” (“arbitral” in the Russian language) as used in the modern Russian law has two meanings: the first stands for arbitral (non-state) tribunals while the second implies the state commercial courts. This is a particular heritage of the Soviet times, caused by historic peculiarities of domestic regulations.

A new noteworthy case is Venture Global Engineering LLC v. Avtotor-Holding Group OJSC heard by the Commercial Court of Kaliningrad region (court of first instance) and Federal Commercial Court of North-Western Circuit (court of cassation) in 2009. The arguments of the parties in this case as well as the courts’ approach in dealing with them are quite typical for the last years’ cases on foreign arbitral awards enforcement; hence worth special attention. The arbitration took place in Stockholm. On 22 December 2008 the ICC International Arbitration Court consisting of a sole arbitrator in case No. 13756/EBS/VRO ordered the Russian OJSC Avtotor-Holding Group to pay debt from the agency agreement in the amount of 1,233,917 USD, penalty at the rate of 8 % annually till the date the award was rendered, 63,000 USD of arbitration costs and 230,444.94 USD of attorney fees in favor of the US Venture Global Engineering LLC. Furthermore, upon the claimant’s request, the arbitrator obliged the defendant to prepare and provide to the claimant a complete and correct detailed list of items acquired from General Motors Corporation and some other information related to the agency agreement.

The debtor failed to fulfill the award voluntarily and the creditor applied at the Commercial Court of Kaliningrad region for its recognition and enforcement. The court granted recognition and enforcement by its ruling of 27 October 2009 in case No. A21-802/2009. The debtor challenged the court’s ruling at the Federal Commercial Court of North-Western Circuit. The range of grounds for refusal to recognize and enforce an award under the New York Convention being quite limited and the qualification of international arbitrators generally being high, yet as a matter of fact the debtors often advance plenty of reasons to oppose the recognition and enforcement. The case in question illustrates it well. The debtor advanced, to name but a few, the following objections:

1) The arbitrator rejected four of the five respondent’s motions to call for crucial evidence and the motion to demand and hear a witness and thus the respondent was unable to present his case;
2) The recognition and enforcement of the award would be contrary to Russian public policy as:

(a) the arbitrator incorrectly decided on the validity of the agency agreement;
(b) the arbitrator set the agent’s fees while neglecting the facts of the case and the evidence presented by the parties;
(c) the penalty in the amount of 8 % awarded under the law of the state of Michigan constituted punitive damages and was inadequate to the consequences of the breach. Such adequacy is an integral part of the Russian public policy.

However, the court of cassation rejected all the objections and upheld the lower court ruling.

The court clearly stated that the said debtor’s arguments amounted to attempts to review the case on the merits. In particular, the court refused to check the validity of the agency agreement and noted that this issue was fully in the competence of the arbitrator as it fell within the scope of the arbitration clause, and that the arbitrator thoroughly examined such validity. Any objections concerning reconsideration of specific facts of the case established by the arbitral tribunal are irrelevant in the case on the recognition and enforcement of the arbitral award.

The court dealt in detail with the public policy argument. It is worth mentioning that invoking Russian public policy by debtors in the proceedings on the enforcement of the awards has been very popular. This is due to the past inclination of the Russian courts to broadly interpret this exception. In this case the court expressly mentioned that an essential difference between a foreign law applied by the arbitrator and Russian law does not itself constitute ground to apply the public policy clause. Otherwise it would be impossible to apply foreign law in Russia at all, which would be contrary to the principles of Russian law. ‘Russian public policy’ is a totally different notion than ‘Russian law’ and embraces “the bases of the morality, core economic and cultural traditions which formed Russian society, main religious postulates and fundamental principles of Russian law”.

The court said that the public policy clause may be applied only in cases where the application of foreign law and/or enforcement of the arbitral award can engender a result inadmissible from the viewpoint of the Russian ‘legal sense’. The court held that there is no reason to believe that enforcement of an award of debt and penalty by a Russian company to a foreign company under agency agreement could engender such a result.

The case reflects positive trends in the practice of enforcement of arbitral awards in Russia. Indeed, there are already many a judgment which confirm that a judicial review on the merits of a case resolved by an arbitrator is inadmissible, including the judgments by the High Commercial Court of the Russian Federation which is the court of the highest instance in the system of Russian commercial courts.

In particular, in a recent case the Federal Commercial Court of Moscow Circuit (ruling of 27 August 2009 КГ-А40/8155-09) held that “an argument that the awarded damages amount does not correspond to the principle of adequacy of civil liability measure to the consequences of the breach falls into the merits of the resolved case and does not pertain to the grounds for refusal of recognition and enforcement of a foreign judgment and a foreign arbitral award”. As it happens, understanding the approach of this court is of great importance: many big Russian companies involved in international business are registered in the Russian capital, and thus in accordance with the Russian procedural rules many cases on the recognition and enforcement of foreign arbitral awards are heard by the Commercial Court of Moscow in the first instance and by the Federal Commercial Court of Moscow Circuit in the cassation instance.

One of the main points illustrated by the above case is that now to oppose a foreign arbitral award recognition and enforcement using the public policy exception the debtor must refer to some grave consequences which such recognition and enforcement would engender in Russia. What such consequences could be is a good subject for a separate discussion.

As I have noted earlier, there is a pitched battle between victims of Pan Am 73 terrorist hijacking over the distribution of treaty funds secured by the United States for American victims in a 2008 diplomatic settlement with Libya. The treaty and Executive Order stipulate that the money shall be distributed solely for the benefit of United States nationals, but foreign nationals are claiming that they are entitled to the overwhelming majority of the funds pursuant to a Joint Prosecution Agreement signed among the passengers of Pan Am 73, most of whom were non-Americans. The American terrorist victims argue that the contract is inapplicable to a diplomatic settlement, and alternatively, that it is void for public policy because the contract cannot contravene the federal policy designed to distribute these funds for American victims, and only American victims. They contend that the JPA places an obstacle in the way of the United States’ efforts to effectuate the comprehensive settlement on behalf of U.S. nationals and undermines the essential purpose of applicable federal law.

Last week, a federal district court judge in Washington, D.C. heard oral arguments on a motion to compel arbitration of this dispute pursuant to an arbitration clause in the Joint Prosecution Agreement. Press reports of the developments are here, here, and here.

One of the most unusual twists in the case is that the implementing statute, the Libyan Claims Resolution Act (“LCRA”), immunizes the assets from “attachment or any other judicial process” before, during, and after the assets are held by the U.S. Department of Treasury for distribution to the American victims. In other words, when Treasury cuts a check to the American victims who succeed before the Foreign Claims Settlement Commission, those assets remain immune from attachment or any judicial process. How then can non-American victims attempt to seize those assets pursuant to a contract claim? The answer should be that they cannot. Consistent with the arbitrability doctrine, a competing federal statute overrides the general requirements of the FAA, precluding arbitration of the contract claims.

Serving as an expert consultant on the case on behalf of the American victims, I read this statute as precluding “any judicial process” whatsoever, which includes court proceedings to compel arbitration. Section 4 of the LCRA states that “[n]otwithstanding any other provision of law, any property described [below] … shall be immune from attachment or any other judicial process.” The property is defined as “any property that relates to the [U.S.-Libya] claims agreement” and “for purposes of implementing the claims agreement” is “held by,” “transferred to,” or “transferred from” the Department of Treasury. See 73 Fed. Reg. 50666 (Aug. 27, 2008). Thus, it seems clear that the assets the non-Americans are seeking to attach were immunized by law from “attachment or other judicial process” under the LCRA in order to guarantee that they would reach the intended recipients after they were “transferred from” the Department of Treasury.

During the hearing Judge Bates was very intrigued by the argument, but frankly it was impossible to tell which way he would rule on the arbitrability question. He was particularly interested in hearing that the Department of State was considering filing a Statement of Interest in the case to articulate the federal policy interests that are at stake. The American victims argued that one of the reasons the case should not go to arbitration is that there are clearly established rules requiring federal courts to give deference to such Executive Branch concerns, whereas in arbitration there is no obvious means for the United States to intervene in the arbitration, nor any guarantee that the panel would give the government’s Statement of Interest any weight.

Roger Alford

Earlier I discussed a possible response to a Respondent’s tactical approach to refuse to pay an advance on costs, referring to a previous article I published. This post invited a reaction from readers which I thought worth noting: What do you do when you represent the Respondent who simply cannot afford the fees? I would argue that this is typically not a concern as Respondents may be very happy for the proceedings to simply stop; however, some Respondents, although the financial underdogs, may feel they have both legitimate defenses and even valid counterclaims. Below I discuss a recent case and ask some questions about possible motivations. In this post, I hope to invoke some responses and insights from readers on this issue.

It may be that the current economic crisis is leading to new situations – Claimants avoiding multiple actions by refusing to pay costs themselves and Respondents basically going into bankruptcy trying to both defend themselves and assert valid counterclaims.

On November 19, 2009, the US Fifth Circuit Court of Appeal issued a ruling on a Respondent’s obligation to pay the arbitral costs. In this particular case, Dealer Computer Services Inc. (“DCS”) v. Old Colony Motors, Inc (No. 09-20049), the parties were involved in arbitral proceedings under the auspices of the AAA Commercial Arbitration Rules. As I understand it, they were to the point of the final oral hearing, and, thus, presumably the parties had expended a chunk of the money to cover the AAA fees and associated expenses (“deposit”). However, likely a result of the economic crisis, the Respondent Old Colony Motors ran out of money and was on the verge of bankruptcy. The arbitrators ordered DCS to cover the remaining fees, but it refused to do so, looking instead to the local trial court to force Old Colony Motors to cover its portion of the deposit. On appeal, however, the Fifth Circuit Court of Appeal held that the decision on who paid what with respect to the arbitration rested with the arbitrators.

Although this case may not present anything new, it is interesting that DCS continued to refuse to cover the deposit on Old Colony Motors’ behalf. It argued that it had paid its portion, which sufficiently covered the fees necessary to hear its claims. The problem was that Old Colony Motors had a counterclaim against DCS. In my previous blog post, the situation was considered from the perspective of the Claimant seeking to pursue the agreed upon proceedings when a Respondent, for tactical reasons, refuses to cover its portion of the costs. What about the Respondent’s perspective? What if the Respondent feels that it has valid defenses and strong counterclaim(s) against the Claimant? In other words, it has its own motivation to continue with the proceedings but fees and arbitrator’s expenses prohibit it from doing so? Are there any tactics a Respondent may employ to ensure continuation of the arbitral proceedings?

In DCS v. Old Colony Motors, mentioned above, DCS was in the business of providing computer systems to car dealerships worldwide and part of the sales agreement involved an on-going purchase arrangement of regular system updates. Old Colony Motors was one of its customers, but at some point in the business relationship, DCS claimed that Old Colony Motors had breached their agreement. It is not difficult to imagine that in light of the current economic climate and the sever hit the automobile industry took as a result, that these parties, particularly the small dealership, were in financial distress. It may have been for this reason that Old Colony Motors simply could not pay its portion of the fees.

What I ask readers of this blog is: what are some options for the Respondent? One possibility is to consider asking the arbitral tribunal to issue an interim award which orders the Claimant to pay the entire deposit (of course, some substantive argument is necessary there) and then take this interim award before the court with jurisdiction and seek enforcement. Of course, the problem with this approach, amongst other reasons, is that it costs more money.

My next question is, particularly in light of this economic crisis – is arbitration, especially through a possibly expensive arbitral institute, truly cost effective? In addition, is it difficult to get an unbiased award from arbitrators when it directly involves their fees? What about those Claimants who have several arbitrations going or are at least frequently before the same arbitral institute, and, thus, the arbitral institute receives a lot of business from the party? Normally, with respect to the final question, I wouldn’t assume it matters, but what about when the arbitral institute has a rule which states it will consider lowering fees when a party is experiencing severe hardship? Do they ever do so?

These are certainly issues which may more frequently arise when representing parties during these economically trying times.

Professor Hess is the author of the chapter of the Heidelberg Report on the interplay between arbitration and the Regulation 44/2001 (“the Regulation”). As such, and quite understandably, he actively promotes the suggestion that the arbitration exception should be deleted from the Regulation.

The Heidelberg proposal has been followed by a Green Paper of the European Commission and by a public consultation, which has given rise to numerous reactions from the arbitration community. Many of these reactions expressed a variety of serious concerns on the impact that the extension of the scope of the Regulation to arbitration related court litigation could have. Those concerns relate to possible conflicts between the Regulation and the New York Convention due to the automatic recognition of judgments invalidating arbitration clauses and arbitral awards for reasons inconsistent with the New York Convention, as well as to the recognition of judgments inconsistent with an arbitration awards. They also relate to possible lis pendens situations between proceedings initiated in breach of an arbitral award and proceedings to set the arbitration in motion or to enforce an award. Finally, the suggestion that the lis pendens rule of Article 27 of the Regulation could be set aside in case of a declaratory action before the courts of the country where the arbitration has its seat raises legitimate concerns with respect to the negative effect of the competence-competence principle, as well as to the rush to courts that it might provoke (on these concerns, see the responses to the Commission’s public consultation, and in particular the position taken by the International Bar Association Arbitration Committee, see also our previous post on these issues).

Those concerns, according to Prof. Hess, are misplaced. In an article posted on www.conflictsoflaw.net , which will soon be also published in the 2010-1 issue of the Cahiers de l’arbitrage/The Paris Journal of International arbitration, Prof. Hess submits that they stem from a “misunderstanding” of his intentions (footnote 32). He also promises that “the implications of the proposal will be rather limited” and that “the present state of affairs will largely remain unchanged”. With due respect, this is wishful thinking. The deletion of the arbitration exception, if adopted, will on the contrary have profound and unpredictable consequences on the law of arbitration in EU Member States.

Prof. Hess’ is quite keen to convince the arbitration community that his proposal is arbitration friendly. The Heidelberg proposal would indeed be thought to offer post-West Tankers an alternative to anti-suit injunctions in order to protect arbitration against torpedo actions (“the starting point of the Heidelberg Report was the West Tankers decision of the ECJ”). Yet, it is doubtful that drafters’ primary intention was to remedy West Tankers, for the Heidelberg Report was drafted and published many months before the sinking by the ECJ of pro-arbitration anti-suit injunctions. At any rate, there are good reasons to believe that the medicine would be worst than the illness it is suppose to cure.

Prof. Hess’s confidence that his proposal is innocuous seems to be based on the assumption that “the New York Convention provides for a uniform law”, and that there is thus “a general assumption that the courts of its contracting parties will apply its provisions equally”. As all courts of the Union should be trusted in an equal manner, “there is no reason to oblige the courts of a contracting party in a regional framework to verify the validity of the agreement individually”. In other words, mutual trust between Members States would command to give the same deference to all courts decisions in the Union, which may be fine in Aldous Huxley’s best of all worlds, but is probably far from the reality of the Union. Prof. Hess himself recognises, by the way, that the distrust towards State intervention in arbitration proceedings has been caused by “the limited degree of uniformity created by the New York Convention which does not entirely eliminate differences between the national jurisdictions”, which acknowledgement is rather difficult to conciliate with the assumption that the New York Convention “provides for a uniform law”.

Be as it may, there should be no serious argument that there is indeed no “general assumption” that courts in Member States apply the New York Convention “equally”. It is indeed not the case. Quite to the contrary, there are considerable differences in the way different jurisdictions apply the New York Convention. This is, first, because the generality of the terms of the New York Convention permit courts to disregard its spirit while formally complying with its literal terms (for example by applying a wide interpretation of the concept of public policy). And, second, because the New York Convention is not a convention of uniform law (like, for example, the Vienna CISG). Its scope is not to replace the national laws on arbitration, but to provide for a minimal threshold for the enforcement of arbitration agreements and foreign arbitral awards. As such, the Convention permits Member States to apply more favourable rules. In short, the Convention’s application and interpretation falls back on national arbitration law (on the nature of the New York Convention and the more-favourable rule see A. Mourre, A propos des articles V et VII de la Convention de New York et de la reconnaissance des sentences annulées dans leur pays d’origine: où va-t’on après les arrêts Termo Rio et Putrabali ? rev. arb. vol. 2008, Iss. 2 pp. 263-298 ). On the contrary, international works such as the successful UNCITRAL Model Law are model uniform instruments with a defined aim to harmonize national arbitration legislations.

It is in any case rather doubtful that, as submitted by Prof. Hess, “the prevalence of the New York Convention would be ensured by Article 71 JR, guaranteeing the New York Convention’s priority as a so-called ‘special convention’”. If it were so, French courts would retain the possibility of enforcing in France, based on article VII of the New York Convention, an award annulled in another Member State, which is the exact contrary of what the Heidelberg report intends to achieve. Article 71 refers to special conventions relating to court jurisdiction and enforcement of judgments in special matters, which arguably does not encompass the New York Convention.

It would therefore be necessary, for the sake of clarity, to add to Article 71 an additional provision stating that: “Nothing in the present Regulation will affect the proper operation of the New York Convention”.

One of the difficulties with the Heidelberg proposals is that it ignores the variety of cultures and legal realities that characterize arbitration. The Heidelberg Report is indeed impregnated by the idea that, if there is a dispute on the validity or enforceability of the arbitration agreement, it is for the courts to decide such dispute upfront. However, such a perspective, which is present in the laws of the United Kingdom and Germany, is totally absent in the French and Swiss perspectives (and Switzerland is now about to adopt the negative effect of Kompetenz-Kompetenz regardless of the seat of the arbitration – see Georg von Segesser/Dorothee Schramm latest post for an update on the legislative works being done in this respect). The way Prof. Hess approaches the problem is telling: the Heidelberg proposal does “not intend to increase satellite or parallel litigation in cases where the arbitration clause is undisputed” [emphasis added]. And he further considers that, would the Heidelberg proposals be adopted, “when the arbitration agreement is undisputed, parties may immediately initiate arbitration proceedings without any recourse to State courts” [emphasis added]. Considering that the parties may start their arbitration if they agree that there is a valid arbitration agreement is hardly an innovative proposition. But the reverse of the medal is interesting: if there is no agreement, courts should step in before the arbitration is started. Of course, from that perspective, the suggested declaratory action fits nicely in the picture.

Prof. Hess concedes that “even if the clause is disputed, Member States shall be free to provide a system of negative competence-competence where the arbitral tribunal decides on the validity of the clause”. This is acknowledged: the Regulation as amended would not invalidate Article 1458 of the French Code of Civil Proceedings. Whilst this might provide some comfort, Prof. Hess is however totally silent on the operation of article 27 of the Regulation in case of a conflict between an action in the merits in breach of the arbitration agreement and an action to put the arbitration in motion before the juge d’appui at the seat of the arbitration (e.g. the French juge d’appui. The question is of course relevant in case of an ad hoc arbitration where the parties did not select an appointing authority).

The easy answer could of course be that the decision of the juge d’appui according to which the arbitration shall proceed is a court decision and is thus able to set aside the lis pendens principle according to the proposed new article 27A. Is that so sure?

The proposed new article 27A is clear: it says that the lis pendens principle will be set aside “if a court of a Member State that is designated as the place of the arbitration in the arbitration agreement is seized for declaratory relief in respect to the existence, the validity, and/or scope of that arbitration agreement”. First, arbitration agreements which do not provide for the seat of the arbitration would be left unprotected. But more importantly, declaratory relief is what it is (unless the Commission intends to change the concept): a declaration, in the present case a declaration that the arbitration agreement is valid or enforceable. A French juge d’appui however takes no such decision. When seized of an action to put the arbitration in motion (and the same applies if the court is seized on the merits), a French court will limit itself to ascertain that the arbitration agreement is not manifestly null and void or inoperable. And this is a very demanding standard for parties who submit that there is such a manifest nullity or inoperability: according to French case law, it can only be so if the alleged nullity or inoperability is evident and does not need any complex analysis of the facts (see recently Cass. 1st Civ. 7 June 2006, Jules Verne c/ Sté ABS, rev. arb. Vol. 2006 Iss. 4, pp. 945 – 953 , note E. Gaillard, JDI Vol. 2006 Iss. 3 pp. 1384, note A. Mourre). Courts have been as far as deciding that the juge d’appui can only declare the arbitration agreement manifestly void or inoperable if there is no possible contrary solution (on this issue, see O. Cachart, Le contrôle de la nullité ou de l’inapplicabilité manifeste de la clause compromissoire, rev. arb. Vol. 2006 Iss. 4, pp. 893 – 908). Otherwise, it is for the arbitral tribunal to decide. There is, in other words, no declaration from the French juge d’appui as to the validity or applicability of the arbitration agreement.

In sum, the proposed new article 27A will not prevent a party having first started merit proceedings in breach of the arbitration agreement, and submitting before the court seized in the merits that the arbitration agreement is manifestly void or inoperative, from relying on the lis pendens rule to impose a stay to the French juge d’appui having to decide that the arbitration agreement is not void or inoperative.

In order for the Heidelberg proposal not to hamper the operation of the negative effect of competenz-competenz, the new Article 27A would have to be drafted as follows:

“A court of a Member State shall stay the proceedings once the defendant contests the jurisdiction of the court with respect to the existence and scope of the arbitration agreement (i) if a court of a Member State that is designated as the place of the arbitration is seized for declaratory relief in respect to the existence, the validity, and/or scope of that arbitration agreement, or (ii) if a judge at the seat of the arbitration has been seized to put the arbitration in motion or has been seized of a difficulty relating to the constitution of the arbitral tribunal, or (iii) if an arbitral tribunal, sitting in or outside the European Union, has been seized of said question” (accordingly, see the IBA position paper, § 25-28).

The issue that then arises is of course that many jurisdictions, like France, take quite a liberal approach as to the applicability of the arbitration agreement to non signatories, with the consequence that the above proposition would lead to generalise in the European Union the French arbitration friendly conception that arbitral tribunals have a priority in assessing their own jurisdiction, including with respect to non signatories. Are Prof. Hess and the Commission ready to endorse that principle? That would certainly be a considerable step forward for the laws on arbitration in Europe.

Another aspect of the lis pendens conundrum regards the enforcement of awards. Presumably, Prof. Hess’ proposed Article 27A would prevent any lis pendens situation between an action in the merits in breach of the arbitration agreement and an enforcement action at the seat of the arbitration. As a matter of fact, in case of a dispute on the award’s validity at the seat of the arbitration where a party would base its argument on the invalidity of the arbitration agreement, the court would be required to decide whether said agreement is indeed valid or enforceable, and its decision would be taken as equivalent to the declaration required by the proposed article 27A. But what if enforcement is sought in another country? The proposed Article 27A would then not protect the award and the Regulation’s automatic stay provision would then have the effect of preventing a party from enforcing the award.

It would therefore be necessary to include in the Regulation a new Article 27B as follows: “Article 27 shall not apply to the court of a Member State requested to enforce an arbitration award” (accordingly, the IBA position paper, § 40).

Finally Article 34 of the Regulation would need to be amended so to avoid the automatic recognition of judgments having disregarded a valid arbitration award or annulled an arbitral award on the basis of local standards. A new article 34A would therefore need to be included, as follows:

“A judgement shall also not be recognised:

a) if it has been rendered in disregard of an arbitration agreement that is valid under the law of the country of recognition;
b) as regards judgments rendered on the validity of an award, if (i) it has not been rendered by the courts of the country where the arbitration has its seat, or (ii) in case of annulment of the award, if it was not made on one of the grounds set out in Article V (1) (a) to (d) of the New York Convention” (accordingly, see the IBA position paper, § 40).

Encore un effort, Messieurs les réformateurs….

Procedural Order No. 3 (Confidentiality Order) dated 27 January 2010 in Giovanna a Beccara and others v. The Argentine Republic (the “Order”) addresses the competing considerations of confidentiality, transparency, public information, equality of the Parties’ rights, and orderly conduct of the proceedings in investment treaty arbitration.  Although the Tribunal’s Order provides a nuanced approach to confidentiality issues in investment treaty arbitration, the Tribunal appears to accept that the risk of incorrect public impressions arising from the disclosure of party submissions is sufficient to impose restrictions on publication.  In contrast, I would argue that in situations where there are no express confidentiality obligations in an investment treaty arbitration, the party making a request for confidentiality should have to substantiate on a balance of probabilities that, if confidentiality is not maintained, there is a real risk of aggravation of the dispute or that the disclosure will compromise the integrity of the arbitration proceedings.

Summary

Beccara involves a claim by Italian bondholders against Argentina under the Argentina-Italy BIT.  Early in the proceedings the parties took opposing positions on confidentiality.  Although they agreed that the final award would be made public (para. 75), prior to the hearing on jurisdiction differences arose with respect to three issues related to confidentiality.  First, the parties could not agree on the terms governing Argentina’s access to the Claimants’ database containing information on the over 180,000 claimant bondholders.  The Claimants argued that Argentina could only have access to the database if Argentina agreed to maintain individual claimant information confidential and signed a confidentiality agreement.  Second, the Claimants objected to Argentina’s submission of 21 expert opinions and transcripts from other treaty arbitrations.  The Claimants argued that the submission of these materials ignored confidentiality duties in the other treaty arbitrations and would be contrary to the principle of equality of the Parties since the Claimants did not have access to the entire record of the other proceedings and Argentina might use the materials from other arbitrations selectively and out of context.  Third, in light of the Parties’ inability to agree on confidentiality issues, the Claimants requested an order for confidentiality aimed at protecting the entire record of the proceedings.

Although neither party contested the Tribunal’s power to issue a confidentiality order, the tribunal noted that a confidentiality order could be based on either the power to recommend Provisional Measures (Art. 47, ICSID Convention and Rule 39(1), ICSID Arbitration Rules) or the power to make orders required for the conduct of the proceedings (Rule 19, ICSID Arbitration Rules).  The Order notes that although Tribunal members (Pierre Tercier, Georges Abi-Saab and Albert Jan Van den Berg) held somewhat different views on the use of orders and provisional measures with regard to confidentiality issues in international investment arbitration, this difference was of “mainly technical nature and does not carry any substantial practical relevance for the present case” (para. 64).  The Tribunal expressly based the Order on its power to determine the conduct of proceedings under Rule 19, ICSID Arbitration Rules.

The Tribunal began its consideration of the issue by agreeing with the statement by the Tribunal in Biwater Gauff (Tanzania) Limited v. United Republic of Tanzania that:

In the absence of any agreement between the parties on this issue, there is no provision imposing a general duty of confidentiality in ICSID arbitration, whether in the ICSID Convention, any of the applicable Rules or otherwise. Equally, however, there is no provision imposing a general rule of transparency or non-confidentiality in any of these sources.  (para. 121 of Procedural Order No. 3 of 29 September 2006)

After discussing various authorities, the Beccara Tribunal outlined the following general approach:

72.            In the light of the above considerations, whilst the Tribunal shares the view that transparency in investment arbitration shall be encouraged as a means to promote good governance of States, the development of a well grounded and coherent body of case law in international investment law and therewith legal certainty and confidence in the system of investment arbitration, it also believes that transparency considerations shall not justify actions that exacerbate the dispute or otherwise compromise the integrity of the arbitration proceedings. Further, transparency considerations may not prevail over the protection of information which is privileged and/or otherwise protected from disclosure under a Party’s domestic law.

73.  In conclusion, the Tribunal deems that the ICSID Convention and Arbitration Rules do not comprehensively cover the question of the confidentiality/transparency of the proceedings. Thus, in accordance with Article 44 of the ICSID Convention and Rule 19 of the ICSID Arbitration Rules, unless there exist an agreement of the Parties on the issue of confidentiality/transparency, the Tribunal shall decide on the matter on a case by case basis and, instead of tending towards imposing a general rule in favour or against confidentiality, try to achieve a solution that balances the general interest for transparency with specific interests for confidentiality of certain information and/or documents.

With respect to the record of the proceedings, the Claimants had requested that the entire proceedings be covered by a general duty of confidentiality allowing only the disclosure by the Parties of “general updates on the status of the case” (para. 77).  For its part, Argentina submitted that there is no general rule of confidentiality governing ICSID arbitration proceedings.  The Tribunal viewed Argentina’s conduct in submitting expert opinions and transcripts from other proceedings as suggesting that the “Respondent does not consider any such documents to be subject to any restriction, unless they relate to sealed proceedings” (para. 78).

The Tribunal disagreed with the positions of both Parties, stating that although there is no general duty of confidentiality, parties do not have a “carte blanche” to disclose information or documents issued or produced in the proceedings (para. 79).  Rather, a more contextual approach is required:

80.  Depending on the information and documents at stake, different considerations of confidentiality, transparency, public information, equality of the Parties’ rights, orderly conduct of the proceedings and other procedural rights and principles may apply, requiring a differentiated treatment.

Applying this approach, the Tribunal ordered that:

(i) Subject to further specific restrictions on disclosure of specific documents and information as set out herein, the parties may engage in general discussion about the case in public, provided that any such public discussion is restricted to what is necessary, and is not used as an instrument to antagonize the Parties, exacerbate their differences, unduly pressure one of them, or render the resolution of the dispute potentially more difficult, or circumvent the terms of this Procedural Order No. 3.

(ii) No confidentiality restriction shall apply to the publication of the award and its content.

(iii) In the absence of any specific contrary ground, no confidentiality restriction shall be imposed on orders or directions of the Tribunal, including this Procedural Order No. 3.

(iv) Minutes and records of hearings of the present proceedings shall be restricted unless the Parties otherwise agree, or the Tribunal otherwise directs.

(v) Pleadings, written memorials and other written submissions of the Parties (including correspondence between the Parties and the Tribunal on substantive issues), as well as witness and experts statements attached thereto shall be restricted unless the Parties otherwise agree, or the Tribunal otherwise directs.

(vi) Documents and exhibits submitted with pleadings, written memorials and/or other written submissions of the Parties shall be subject to the restrictions contemplated in §§ 109-110 above unless the Parties otherwise agree, or the Tribunal otherwise directs.

(vii)Correspondence between the Parties and the Tribunal which does relate to the mere conduct of the case shall be restricted.

In addition, the Tribunal ordered that Argentina be given access to the information in the Claimants’ database subject to certain terms and conditions aimed at protecting personal data.  Further, the tribunal ordered that the expert reports and transcripts from other treaty arbitration not be admitted as evidence.

Comment

Although the Order raises a series of important issues (such as the application of home state privacy laws to protect confidential Claimant information (paras. 121-133); the use of materials from other international arbitrations (paras. 136-152); and, as highlighted by Tribunal, the power and authority of the Tribunal to order the continuation of confidentiality restrictions beyond the conclusion of the proceedings (para. 120), my comment focuses on the restriction on disclosure of pleadings, written memorials and other written submissions of the Parties.

The Tribunal’s reasons for restricting disclosure of pleadings is as follows:

101.   Pleadings and written memorials are likely to contain references to and details of documents produced pursuant to a disclosure exercise, and their uneven publication or distribution carry the risk of giving a misleading impression about these proceedings.

102.  Indeed, based on their function and aim, pleadings and memorials of a Party often present a one-sided story of the dispute. Their publication therefore carries the inherent risk to give an incorrect impression about the proceedings. This would not only thwart public information purposes, but would further antagonise the Parties and aggravate their differences. In the present proceedings, this risk is further accentuated by the fierce tone of some of the Parties’ submissions.

103.  Under these circumstances, the Tribunal concludes that – at this stage of the proceedings – the need to preserve a constructive atmosphere allowing the proper unfolding of the arbitration requires restricting publication of the Parties’ pleadings, written memorials and other written submissions, including correspondence between the Parties and the Tribunal on substantive issues (see further below § 114-116).

104.  The same restriction applies to witness and expert statements attached to pleadings and written memorials, the publication of which would carry the same risk of giving a misleading impression about the proceedings.

In general, I agree with the Tribunal’s differentiated treatment approach set out in para. 80 above.  There are legitimate reasons why disclosure of certain materials maybe inappropriate—for instance, restrictions to protect confidential information or for the protection of the interests of third parties, such as witnesses, who may be exposed to harassment or intimidation.  But, with the greatest respect to the Tribunal, the view that publication of the pleadings carries a risk of incorrect impressions and thus of antagonizing and aggravating the Parties’ differences is not a particularly good reason to justify restricting a party from disclosing its own pleadings (subject to redaction for any confidential information).  Restricting sovereign states from disclosing their legal pleadings in an arbitration governed by public international law on the basis of unsubstantiated risks is not likely to enhance public confidence in the investment treaty arbitration.

The Tribunal rightly states: “that transparency considerations shall not justify actions that exacerbate the dispute or otherwise compromise the integrity of the arbitration proceedings.” (para. 72).  Yet, the only evidence cited in the Order of risks to the integrity of the arbitration proceedings is the “fierce tone” of some of the Parties’ submissions (para. 102) and allegedly erroneous information regarding the status of the arbitration proceeding in an Italian newspaper (para. 35).  This is a very scant record on which to justify the differentiated treatment approach espoused by the Tribunal in para. 80.   It is not a very balanced “solution that balances the general interest for transparency with specific interests for confidentiality of certain information and/or documents” (para. 73).

References to the risk of aggravation from disclosure are not to my mind particularly compelling in light of the experience of the NAFTA Parties, where disclosure of pleadings is the norm.  There appears to be little or no evidence that disclosure has had any negative impact on Chapter Eleven arbitrations.

In situations where there are no express confidentiality obligations, I would argue that the party making a request for disclosure restrictions should have to substantiate on a balance of probabilities that there is a real risk of aggravation of the dispute, that the disclosure will compromise the integrity of the arbitration proceedings or there is a likelihood of harm to a third party.  To my mind, the risk of misinformation is not a sufficient basis to impose restrictions to which the parties have not agreed.

Although I disagree with the Tribunal’s application of its contextual differentiated treatment approach, I would emphasize that the Tribunal’s Order addresses confidentiality comprehensively and systematically, distinguishing between different types of materials.  The Order addresses confidentiality issues in a nuanced manner and recognizes that the Parties retain the right to engage in general discussion about the case in public.  No confidentiality restrictions are imposed on Tribunal orders, directions or the award.  Further, restrictions are subject to party agreement, or as the Tribunal otherwise directs. Therefore, either party is at liberty to request that particular documents be exempted from the general restrictions.

Finally, in Beccara, even though Argentina submitted that there is no general rule of confidentiality governing ICSID arbitration proceedings, it should be noted that Argentina has not made its pleadings or expert opinions in its legion of investment treaty arbitrations publicly available.  Argentina, thus, is not the aggrieved poster child for transparency in investment treaty arbitration.  If it wants the advantage of submitting materials from other investment treaty arbitrations in its ongoing arbitrations, perhaps it should make them all public.

I recently gave a talk at a Sydney Law School conference about the unexplored relationship between bilateral investment treaties and freedom of expression.

In a longer paper on BITs and human rights published last year I’d highlighted some potential tensions, including the need for states to balance the rights of citizens to speak and protest – including in opposition to certain controversial foreign investment projects – and the protections owed to foreign investors, including full protection and security.

I’ve also highlighted in an earlier blog posting, the further tension between freedom of expression and arbitral confidentiality. And that’s a topic which I’ll revert to later this spring in some conference presentations which are in the works.

But, for this post, I wanted to highlight the potential for BITs to advance freedom of expression in certain contexts.

In a recent commentary for the Vale-Columbia Center, I hinted at this potential, but I wanted to elaborate a bit more on my thinking here and to do something which space did not permit in that earlier commentary: begin to think aloud about the limits of BIT protections for political expression of aliens. (And I want to tip my cap to Mark Kantor, with whom I’ve bounced around some earlier ideas – although not the ones discussed here – following the intellectual match-making efforts of Karl Sauvant at Columbia).

***

Hardly a week goes by without reports of governments somewhere shutting down media outlets, trying to censor their reports, or having a hand in – or turning a blind eye to – attacks on journalists.

We’ve seen a very public struggle between Google and China over censorship and cyber-security. Recently, we’ve seen Venezuela shut down a number of opposition television stations. And, last year, we saw Turkey slap a multi-Billion Dollar tax on a local broadcasting empire.

When confronted with censorship or harassment, media actors often turn to human rights law or constitutional protections for freedom of expression and the press.

However, when we are talking about foreign-owned media or reporters operating in other territories, bilateral investment treaties may offer some notable protections.

Indeed, we’ve seen a number of BIT claims where foreigners have brought claims against governments for alleged harms inflicted on media enterprises.

In fact, one of the most famous set of BIT claims are the CME and Lauder claims against the Czech Republic … which arose out of a struggle for control of a major TV broadcaster. Yet, while the CME/Lauder cases involved media companies, they did not deal with state censorship or mistreatment due to the broadcaster’s editorial views or engagement in political expression.

But, there are other BIT arbitrations where states were alleged to have punished media companies for their views.

Most famously, there is the Pey Casado v. Chile case, which dealt with the expropriation of a left-leaning newspaper during the 1973 Pinochet coup. However, the expropriation claim was time-barred in that case, so arbitrators spent more of their time looking at whether Chile had denied justice to the claimants during their decades-long quest for compensation.

Apart from the Pey case, alleged harassment for political reasons was at the center of the Tokios Tokeles v. Ukraine arbitration.

Readers of this blog will know that the Tokios case is usually cited as a “treaty-shopping” case. However, the Tokios claim arose out of allegations that the authorities were harassing a publisher because of his printing of political materials, including a laudatory book about an opposition politician, Yulia Tymenskenko.

Although arbitrators ultimately ruled that Ukraine did not breach its treaty obligations, they had some interesting things to say about BITs and political expression.

In the Tokios Tokeles v. Ukraine case, an ICSID tribunal warned that a state would breach its obligation to provide fair and equitable treatment if the state targeted and harassed a foreign-owned publisher “for its impertinence in printing materials opposed to the” governing regime.

So, on the face of it, punishment of media actors for political reasons might breach BIT protections. And such treaty claims are straightforward in the sense that they don’t rely on any importation of human rights law or non-BIT legal obligations which a state may have to provide for freedom of expression.

Arbitrators might simply rule that harassment or hindering of foreign-owned media outlets because of what they publish or broadcast is unfair, inequitable, or arbitrary.

But, there is a complicating factor that may come into play.

If you dig into the history of the international law for the protection of aliens, you find that publicists have long differed as to whether aliens enjoy the same rights as locals when it comes to freedom of expression, freedom of assembly or freedom of the press. And even when aliens are assumed to enjoy some speech rights, this did not necessarily entitle them to engage to the same extent as locals in overtly “political” activities, including attacking the government or its institutions via the media.

Yet, the Tokios Tokeles tribunal skirted over the question of any limits on the rights of aliens to participate in the political life of a host country; perhaps the tribunal did so because Ukraine did not raise these points in argument, or maybe arbitrators ignored this issue because no treaty breach was upheld in the Tokios case and the above-quoted holding of the tribunal about protecting political “impertinence” was a throw-away line.

But, whatever the reasons for this issue not being discussed in the Tokios case, there is certainly an argument that states, at least as a matter of international law, enjoy more latitude in limiting the expression (and political engagement) of aliens on their territory.

Indeed, in deference to this long-standing position under international law, Article 16 of the European Convention on Human Rights makes explicit that the right of aliens to Freedom of Expression may be more limited than that of nationals of a particular state.

So, while I hope that BITs may advance freedom of expression, I also suspect that we will see some debate as to whether a vague BIT obligation to provide fair and equitable treatment – without any express according of freedom of expression rights to foreigners – is really meant to oblige states to permit aliens to engage fully in the political conversation and debate of their host country.

(Come to think of it, there might even be an argument that the procedurally clever decision of the Ukrainian publisher to use an off-shore entity to sue Ukraine in the Tokios Tokeles case ought to have weakened the substantive protections owed as a matter of international law, thanks to the transformation of a national into an alien.)

While BIT provisions are famously silent as to their protection of expressive activities, arbitrators might look to the broader circumstances which gave rise to a given foreign investment and any legitimate expectations which may have arose.

Where a foreign investor had a particular investment in a media outlet approved and licensed by the local authorities, it might be argued that there is a tacit (or even explicit) understanding that the foreign-owned outlet will be playing a role in the political sphere and public debate.

(Conversely, one thinks of the situation of Google in China, where it is reported that the US company agreed to very-detailed license terms, which may well have confirmed that draconian censorship is what one should legitimately expect in China).

However, given the more basic ambiguity as to the extent to which BIT protections should safeguard the expressive rights of aliens, it might be useful for investment treaties to hearken back to the days of older Treaties of Amity or Treaties of Friendship, Commerce, and Navigation (FCN), some of which set out express protections for news reporters operating on foreign soil (as well as exceptions which clarified the limits of such protections).

While BITs have clear potential to advance freedom of expression, most contemporary investment treaties are frustratingly silent as to whether aliens are to be granted full license to engage in a host country’s political conversation.

Luke Eric Peterson
Investment Arbitration Reporter
http://www.iareporter.com

It is not easy to get a grip on the vast amount of case-law being churned out by investment treaty arbitration panels. However, if law students wanted examples of the ultimate slap-dash arguments being put together by claimant lawyers, then go no further than to sample some of arguments launched in this case. It is important enough to warrant a timely re-appraisal. In the case of FW Oil Interests, a distinguished tribunal (comprised of Sir Franklin Berman and Lord Mustill), subtly warn of lazy broad arguments where the credibility of Government officials is questioned with foundationless allegations of corruption. (The tribunal in the recent EDF case (ICSID Case No. ARB/05/13) tried to cut down the law of corruption to at least relate ‘fault’ to evidential basis). If one were to approach litigation in the English Bar in similar vein, serious disciplinary action would no doubt ensue. The worrying aspect is that in not exercising their discretion appropriately in tailoring claims lawyers are undermining the long-term viability of the system and weakening its credibility. This approach is partial result of the endemic conflict in the system between a correct approach founded in public international law and, the more popular of, reducing the sovereign state to a mere private entity in commercial arbitration governed by private law.

The claim itself was based on losses that the supposed investor had suffered through pre-contractual expenditure, prior to acquiring a bid and forming a contract. The tribunal rejected the claim on the basis that such pre-contractual expenditure could not amount to an ‘investment’ for the purposes of the ICSID Convention or the USA- Trinidad & Tobago Bilateral Investment Treaty. A different position had been reached by a tribunal in the Mihaly v. Sri Lanka (ICSID Case No. ARB/00/2, 15/03/02). The tribunal did not seek to explain in detail why the present case was justifiably different from Mihaly (FWO at para 126). The tribunal made it clear that a state changing its position on the offer of a successful tender with reason did not amount to a lack of good faith (FWO at para 179). It did not, however, sadly give any qualification as to what justifiable ‘reasons’ might be, and implicitly left a broad right to states to withdraw with no compensation for the investor. It is not clear on the facts how in this case such a decision by the partially state controlled bodies was not arbitrary. Not having put the Mihaly distinction to bed, the case still leaves open the question: Under what circumstances is pre-contractual expenditure a justifiable ‘investment’ for the purposes of the ICSID Convention and a similarly worded investment treaty to the US-Trinidad & Tobago BIT?

The answer to this question depends on one’s views of the purpose of ICSID and investment treaties. Staying true to their aims of providing capital for sustainable economic development (the aims of the World Bank’s ICSID project), judicial constructions of ‘investment’ have to mirror this. Thus unnecessary loss of capital through pre-contractual expenditure should generally be wastage as far as Contracting Parties are concerned. Taking the facts as the FWO tribunal has narrated them, there was no clear basis why the state controlled entities withdrew the tender after it had been acquired by the claimant causing it loss. The oil fields that the investor sought to exploit were left unused up to the date of the decision. As far as the overarching policy of ICSID is concerned this is waste. Where the tribunal got lost is drawing parallels between how rights are created as a matter of domestic law, with the mutually exclusive conceptualization of public international treaty obligations. To put it simply, it does not follow that a lack of a cause of action for pre-contractual expenditure in domestic law leads to no rights of action on the same facts in treaty law. It is simply irrelevant whether one or more jurisdictions do or do not recognize pre-contractual liability to liability in public international law. One way to look at it might be to say that the aims of the treaties consumes all such distinctions.

To protect capital expenditure and the aims of investment treaties and ICSID an approach closer to the overall goals of the system is need of judicial elucidation. One approach may be to couple protection in this issue with the existing doctrine of legitimate expectations. Thus the definition of investment may include: ‘Where an investor as made legitimate expenditure in the pursuit of real expectation of contract’. This would remove mere expenditure where the award of contract is speculative from protection. The tribunal rightly intimated this as the commercial risk of contractual relations (FWO at para 141). However risk cannot be so broad as to include all expenditure in all circumstances of pre-contractual relations. Otherwise it would undermine the purpose of the investment treaty to encourage cross-border commercial venture. There will be a point were state behaviour reduces commercial risk by increasing likelihood of the contract being awarded. It needs to then be determined whether excess expenditure in this regard, beyond a mere speculative input of capital, justifies protection as an ‘investment’. There are many cases less clear than direct inducement as in Mihaly, where this will be so. The remarkable aspect of FWO is that the tender for contract had been awarded, and only the formality of formation was left. Adequate focus on the expenditure in this period or the likelihood of being awarded the tender (which must in my view give rise to a treaty right) was not carried out by the tribunal. The latter is no doubt still speculative. There may be a case for different approaches to the pre-contractual expenditure issue between cases of tendering process and the investor as a sole negotiator for the contract. The latter may justify a greater degree of protection where the state’s conduct is tantamount to inducement. However judicial tests need to be carefully construed to meet these exigencies, to ensure appropriate investor protection. My example based on expectations is merely suggestive, however it is clear that a better balance than in FWO needs to be struck between risk and protection. At the moment the approach in Mihaly is far closer to overall aims of the investment treaty system.

In a decision dated 10 February 2010 (4A_612/2009), the Swiss Federal Tribunal rejected a petition to set aside a November 2009 CAS Award against German speed-skater Claudia Pechstein. The Federal Tribunal took some unusual procedural steps – including foregoing the usual exchange of written pleadings – to speed up the proceedings and to decide the case before the 2010 Winter Olympic Games in Vancouver.

Blood samples taken from Claudia Pechstein at the International Skating Union (ISU) World Speedskating Championships in Hamar, Norway, in February 2009, showed elevated reticulocytes values. On 1 July 2009, the ISU Disciplinary Commission declared Claudia Pechstein responsible for an anti-doping violation under the ISU Anti-Doping Regulations by using a prohibited method of blood doping. Pechstein and the German Speedskating Association appealed that decision to the Court of Arbitration for Sport (CAS) in Lausanne, Switzerland.

An arbitral panel at the CAS, in a decision dated 25 November 2009, rejected the appeals and confirmed the sanction imposed by the ISU Disciplinary Commission. The CAS panel determined that Pechstein’s abnormal blood readings and the unusual variations in the reticulocytes values recorded several weeks before, at, and a few weeks after the Hamar event, could not be reasonably explained by the various justifications submitted by Pechstein nor by a congenital medical condition. Rather, the CAS panel found that “they must … derive from the Athlete’s illicit manipulation of her own blood, which remains the only reasonable alternative source of such abnormal values.”

A copy of the full CAS award is available here:

<a href="http://www.tascas.org/d2wfiles/document/3802/5048/0/FINAL%20AWARD%20PECHSTEIN.pdf“>

Pechstein filed a petition to set aside the Award before the Swiss Federal Tribunal, urging a fast resolution in light of the upcoming Winter Olympic Games.

In its 10 February 2010 decision, the Federal Tribunal rejected Pechstein’s petition. While the judgment (4A_612/2009) is not yet published, the Federal Tribunal issued a press release outlining its decision (available here: http://www.bger.ch/mm_4a_612_2009_d.pdf).

Procedurally, in order to be able to render a decision prior to the start of the Olympic Games, the Federal Tribunal treated the case with priority and waived the exchange of written pleadings.

On the merits, the Federal Tribunal reaffirmed that Art. 190(2) of the Swiss International Private Law Act contains the exclusive list of grounds for appeal of international arbitral awards. Pechstein had invoked procedural violations, had submitted new medical expert reports, and had argued her elevated blood readings at Hamar were the result of manipulation. The Federal Tribunal rejected all of these arguments. In particular, and in line with long-standing jurisprudence, the Federal Tribunal held that it had no power to review the factual findings made in the CAS Award, nor to assess new evidence. The Federal Tribunal can only review an international arbitral award on the merits for a violation of the Swiss Ordre Public.

This decision is noteworthy for the procedural “fast track” that the Swiss Federal Tribunal was willing to adopt in order to render a decision only a little over two months from the date of the CAS Award and before the matter would have become moot with the start of the Winter Olympics on 12 February 2010. It is unusual to waive the exchange of written pleadings in setting-aside proceedings before the Federal Tribunal. The decision reaffirms the Federal Tribunal’s willingness to decide appeals against international arbitral awards quickly and to show flexibility in responding to the needs of Parties.

Georg von Segesser / James Menz

On January 15, 2010, the United States Supreme Court granted a writ of certiorari in Rent-A-Center West, Inc. v. Jackson, Case No. 09-497, agreeing to revisit the oft-litigated issue of whether the court or arbitrator should determine arbitrability under the Federal Arbitration Act (“FAA”). The Court’s prior jurisprudence has established the general rule, as a matter of federal substantive arbitration law, that challenges to a contract’s validity as a whole should be heard by the arbitrator, while those specific to the arbitration provision should be heard by the court. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445 (2006). The variation now before the high court concerns the extent to which the parties can contract around that rule. The question presented to the Court is whether a court is required in all cases to hear claims that an arbitration agreement subject to the FAA is unconscionable, even when the parties have clearly and unmistakably assigned the decision to the arbitrator.

Background and Holdings Below:

Antonio Jackson filed a lawsuit in the federal district court in Nevada against his employer, Rent-A-Center, alleging race discrimination and retaliation. Rent-A-Center moved to compel arbitration, relying on a standalone arbitration agreement Jackson signed as a condition of his employment (the “Agreement”). The Agreement provided, inter alia, that “[t]he Arbitrator, and not any federal, state or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including, but not limited to any claim that all or any part of this Agreement is void or voidable.” Rent-A-Center argued that, in light of this provision, the threshold question of whether the arbitration agreement was valid and enforceable was for an arbitrator, not the court, to decide. Jackson argued in response that the Agreement was substantively and procedurally unconscionable. The district court granted the motion to compel arbitration, reasoning that the parties “clearly and unmistakably” provided the Arbitrator exclusive authority to decide the enforceability of the arbitration agreement.

A panel of the Ninth Circuit Court of Appeals reversed the district court in part. Jackson v. Rent-A-Center, 581 F.3d 912, 920 (9th Cir. 2009). The two-judge majority held that where “an arbitration agreement delegates the question of the arbitration agreement’s validity to the arbitrator, a dispute as to whether the agreement to arbitrate arbitrability is itself enforceable is nonetheless for the court to decide as a threshold matter.” Id. at 919. In the majority’s view, the parties’ agreement to arbitrate arbitrability –like all arbitration agreements– was not enforceable per se but rather was subject to ordinary state-law principles governing contracts. Thus, the majority concluded that the fact that the parties signed the Agreement was not dispositive in the face of Jackson’s contention that he could not meaningfully assent.

The dissenting judge disagreed, stating that the question of the arbitration agreement’s validity should have gone to the arbitrator. The dissenter relied on the Supreme Court’s prior holding that “although the general rule gives the threshold question of arbitrability to courts, parties may provide for the arbitrator to decide the question instead if they do so ‘clearly and unmistakably.’” Id. at 921 (quoting AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 649 (1986)). The dissenting judge pointed out that even the majority conceded that the Agreement was neither silent nor ambiguous as to who should determine arbitrability.

Application to Arbitration Agreements under the New York Convention (Chapter 2 of the FAA):

Although Rent-A-Center arises in the domestic arbitration context, the Supreme Court’s forthcoming decision may impact international arbitration cases. There is a split of authority in the federal appellate courts as to whether a state-law challenge of unconscionability is a ground for non-enforcement of an arbitration agreement under the New York Convention. The Eleventh Circuit Court of Appeals has held that the defense of unequal bargaining power does not fit within the narrow scope of Article II(3) of the New York Convention, which limits the potential defenses to arbitration agreements that are “null and void, inoperative or incapable of being performed.” See Bautista v. Star Cruises, 396 F.3d 1289, 1302 (11th Cir. 2005) (holding that unconscionability was not within the limited scope of the “null and void” clause of the Convention, which encompassed “only those situations –such as fraud, mistake, duress, and waiver– that can be applied neutrally on an international scale”). The First Circuit Court of Appeals, however, has entertained the defense of unconscionability against an arbitration agreement governed by the New York Convention, reasoning that unconscionability is a “standard contractual challenge” to an arbitration agreement that is consistent with the Convention’s “null and void” clause. DiMercurio v. Sphere Drake Ins., Plc, 202 F.3d 71, 79-81 (1st Cir. 2000); see also Rogers v. Royal Caribbean Cruise Line, 547 F.3d 1148, 1158 (9th Cir. 2008) (assuming without deciding that unconscionability renders an agreement “null and void” under the Convention).

Moreover, the Court’s opinion in Rent-A-Center may shed light as to the extent to which parties can assign other jurisdictional issues (sometimes referred to as “gateway issues”) to an arbitrator by express agreement. Parties to international arbitrations commonly agree to rules that expressly empower the arbitrator to determine challenges to the existence, scope or validity of the arbitration agreement. See e.g., ICC Arbitration Rules, Art. 6(2); ICDR Arbitration Rules, Art. 15(1); LCIA Arbitration Rules, Art. 23.1. The federal courts have generally respected the incorporation of institutional rules as a method of assigning arbitrability decisions to the arbitrator. See Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005) (“when . . . parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator”); Terminex Int’l Co., v. Palmer Ranch Ltd., 432 F.3d 1327, 1333-34 (11th Cir. 2005) (same) (AAA Arbitration Rules); Apollo Computer, Inc. v. Berg, 886 F.2d 469, 473 (1st Cir. 1989) (same) (ICC Arbitration Rules); but see Microchip Tech. Ins. v. U.S. Philips Corp., 367 F.3d 1350, 1358 (Fed. Cir. 2004) (holding that whether the parties agreed to arbitrate was to be decided by the court but failing to analyze effect of parties’ incorporation of the ICC Rules in arbitration agreement). However, at least one federal circuit court has attempted to carve out an exception to this rule for cases where a party alleges the arbitral forum itself is illusory. See Awuah v. Coverall North America, Inc., 554 F.3d 7, 13 (1st Cir. 2009) (holding that party was entitled to court’s review of whether arbitration agreement was an illusory remedy, notwithstanding incorporation of AAA’s rules empowering arbitrator with jurisdictional determinations). The validity and boundaries of such an exception are still uncertain. See Jackson, 581 F.3d at 921 n.4 (Hall, C.J., dissenting) (disagreeing with the majority’s expansive interpretation of the holding in Awuah). Accordingly, the Supreme Court’s forthcoming opinion in Rent-A-Center could provide necessary guidance to lower courts in this developing area of the law.

Oral argument in Rent-A-Center is scheduled for April 26, 2010.

Raoul G. Cantero III
Erika M. Serran
White & Case

It is interesting to consider how to handle the situation when a party refuses to pay its portion of the advance on costs. I have previously published an article on this matter and, looking to the ICC Rules, would recommend an alternative route to the traditionally referenced ones. I will consider the options that exist when the Respondent fails to pay its portion and what theories, if any, apply. The two most common theories are what I refer to as the Contract Theory Approach and the Interim Measure Approach. I do not intend to discuss in length these respective approaches – looking to articles published by leading arbitral scholars adequately covers this area. Instead, I want to suggest an alternative approach when the ICC Arbitration Rules are in play, which I covered in an article published a few years back. In all the floating commentaries I have seen, I have not noticed any mention of an alternative approach such as this one.

I will first give a quick description of what I mean by the Contract Theory Approach and the Interim Measure Approach. Under the Contract Theory Approach, proponents argue a binding agreement arose between both the parties when they chose in their arbitration agreement to submit their dispute to arbitration. When the Respondent fails to pay its portion of the advance on costs, it has effectively breached the arbitration agreement. In contrast, under the Interim Measure Approach, the paying party requests that the arbitral tribunal issue a provisional measure requesting the non-paying party to cover their portion of the advance on costs or refund the paying party. This last approach can be difficult because it is often challenging to get the provisional measure claim in front of the arbitral tribunal before the entire arbitral claim is dismissed for lack of paying the entire advance on costs; otherwise, the Claimant is forced to pay the entire advance on costs itself.

I suggest considering an alternative route, which I name the Provisional Amount Approach. This approach is designed to operate under the ICC Arbitration Rules, specifically the ICC Arbitration Rules Article 30(1) which states, “After receipt of the Request, the Secretary General may request the claimant to pay a provisional advance in an amount intended to cover the costs of arbitration until the Terms of Reference have been drawn up.”

Looking to Article 30(1), the Claimant may request that the Secretary General determine a provisional amount which Claimant can pay in lieu of the entire advance on costs, to get the case through the Terms of Reference stage. This ensures the formation of the arbitral tribunal. At this point, the Claimant may then request a provisional measure to force the Respondent to pay its portion of the advance on costs under the ICC Arbitration Rules Article 23(1).

This alternative route is an interesting route to consider as it accomplishes four objectives: The Claimant has managed to (1) pay less than the entire advance on costs, (2) work around any procedural issues, (3) get the merits before the arbitral tribunal, and (4) reserve the argument for the final award in case the provisional measure request fails. Moreover, the Claimant may invoke some sympathy from the arbitral tribunal who will no doubt realize the strategic games the Respondent is trying to play!