United States: Year In Review – Significant Arbitration Developments

First Tuesday Update is our monthly take on current issues in commercial disputes, international arbitration, and judgment enforcement. On this first Tuesday of 2023, we review our 2022 updates. Three main themes emerged last year: first were court decisions about enforcement of arbitral awards; second was the Supreme Court's decision regarding § 1782 discovery; and third was the continued pattern of requiring strict compliance when serving foreign sovereigns. We review each of these key developments in turn and look forward to continuing our updates on the first Tuesday of every month in 2023.

Enforcing Arbitral Awards: What Role Do Domestic Standards, Forum Non Conveniens, and the Primary vs. Secondary Jurisdictions Play in Awards

This year we covered three developments regarding enforcement of arbitral awards. First, the Eleventh Circuit will review en banc whether an international arbitration award could be vacated under Chapter 1 of the Federal Arbitration Act (FAA) (dealing with domestic arbitral awards) if the award was rendered in the United States. Second, the Second Circuit will consider whether forum non conveniens has any role to play in proceedings to recognize an arbitral award. Third, the Second Circuit issued a decision regarded the powers of the primary versus secondary jurisdictions under the New York Convention.

In Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., the Eleventh Circuit granted en banc review to reconsider its precedent barring courts from vacating international arbitral awards rendered in the United States under the FAA's broader domestic standards of Chapter 1. Federal courts generally agree that for an arbitration award made outside of the United States, the grounds for non-recognition are exclusive as specified in international arbitration conventions (found in Chapter 2 of the FAA, dealing with "international awards."). Most circuits have also held that awards made in the United States under local law but subject to an international arbitration convention could also be vacated under Chapter 1 of the FAA.

The Eleventh Circuit is the only federal court that has refused to consider Chapter 1 grounds and specifically requires a party to raise one of the seven grounds enumerated in Article V of the New York Convention, as incorporated by Chapter 2 of the FAA, to vacate a non-domestic award made in the United States. Deference to the New York Convention currently makes the Eleventh Circuit's pro-arbitration approach an attractive forum for international arbitration. But this deferential position may soon change and we expect an en banc decision in 2023. You can review our full update on the topic here.

We recently reported on a case pending before the United States Court of Appeals for the Second Circuit involving the New York Convention and the doctrine of forum non conveniens, which allows a court to dismiss a case if it finds another forum is more appropriate. In Olin Holdings Limited v. Libya, Case No. 22-825, the State of Libya is appealing an order from the Southern District of New York (SDNY) confirming a foreign arbitral award in favor of Olin, a Cyprus-based company. Libya is appealing on the basis that it contends it did not waive sovereign immunity and did not consent to arbitrate. Libya is also contending the district court erred in denying its forum non conveniens motion. This case could potentially represent an examination of forum non conveniens as it relates to the recognition of foreign arbitral awards, which the Second Circuit has not reconsidered in 25 years. We expect there will be an update in 2023.

In another Second Circuit decision, the court affirmed in part and remanded in part an SDNY decision that declined to enforce a $1.8 billion (plus interest) international arbitral award. In this decision, the court considered "primary" and "secondary" jurisdiction under the New York Convention. Under the New York Convention, a country that enters an arbitral award is considered to have "primary jurisdiction" over the award. Id. Courts in the "primary jurisdiction" have discretion to enforce or set aside the award. NY Convention art. V., 1(e) (the award may be "set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made"). All other signatory states, referred to as "secondary jurisdictions" are permitted to decide whether to enforce the award. Id. at 6; NY Convention art. V., (2)(b) ("recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that ... the recognition or enforcement of the award would be contrary to the public policy of that country"). The arbitral award at issue was previously set aside in part by a Nigerian court. Relying on the New York Convention, the district court concluded that the Nigerian court's ruling was not contrary to principles of justice and therefore the Nigerian court's ruling was entitled to comity in the US. The Second Circuit's decision signals a move to affording more deference to foreign courts' decisions to set aside arbitral awards. Indeed, the court emphasized its preference to follow a foreign court's decision to enforce or set aside a judgment unless the decision is contrary to US public policy. You can review our full update on the topic here.

The Supreme Court Narrowed the Scope of § 1782 Discovery

In ZF Automotive US v. Luxshare, Ltd. and Alixpartners v. Fund for Protection of Investor Rights in Foreign States, the Supreme Court held that 28 U.S.C. § 1782 does not apply to international arbitration tribunals. This decision resolved a circuit split over whether 28 U.S.C. § 1782 discovery could be used in international arbitration. You can review our full update on the topic here.

This decision put a conclusive end to § 1782 discovery in international commercial arbitration. Taking a very restrictive approach, the Supreme Court held that the phrase "foreign or international tribunals" covers only "governmental or intergovernmental adjudicative bod[ies]...imbued with governmental authority," and exclude contract-based tribunals governing private disputes. It further held that "foreign tribunal" and "international tribunal" complement one another; the former is a tribunal imbued with governmental authority by one nation, and the latter is a tribunal imbued with governmental authority by multiple nations. Section 1782 discovery had been a powerful tool for private, commercial, cross-border disputes.

Applying the same narrow definition, the Supreme Court held that a tribunal in an ad hoc investor-state arbitration governed by the UNCITRAL Rules under the Lithuania-Russia Bilateral Investment Treaty, also did not qualify as a "foreign or international tribunal" under 28 U.S.C. § 1782. The Supreme Court held that "the [Lithuania-Russia] treaty does not itself create the panel; instead, it simply references the set of rules that govern the panel's formation and procedure if an investor chooses that forum." In addition, the ad hoc panel "functions independently" of, and is not affiliated with, either Lithuania or Russia.

The court failed, however, to address whether 28 U.S.C. § 1782 may apply in arbitration proceedings instituted under the International Centre for Settlement of Investment Disputes (ICSID) convention and whether such tribunals "exercise governmental authority." Indeed, the court acknowledged the possibility that other arbitral panels constituted in investor-state cases involving international investment agreements could qualify as a governmental or intergovernmental body under Section 1782 if they are "clothed ... with governmental authority" by the sovereigns that provide for their creation. This is an issue we suspect will continue to be litigated.

Service Matters

In 2022, the Supreme Court denied certiorari in an important service of process case under the Foreign Sovereign Immunities Act, in Saint-Gobain Performance Plastics Eur. v. Bolivarian Republic of Venezuela, 23 F.4th 1036 (D.C. Cir. 2022). The question there was can service be accomplished if the plaintiff does everything it is supposed to do but the foreign sovereign's central authority does not effectuate service. The DC Circuit held that such circumstances do not effectuate service. Without Supreme Court review, the DC Circuit's insistence on strict compliance continues. You can review our full update on the topic here.

Also, in the SDNY, in Republic of Guatemala v. IC Power Asia Dev. Ltd., 1:22-CV-00394 (CM), 2022 WL 3139949 (S.D.N.Y. Aug. 5, 2022), the court denied Guatemala's (motion for entry of an approximately $1.8 million default judgment against an Israeli company with respect to enforcement of an arbitral award, due to improper service of process. Notwithstanding the fact that the court found it had subject matter jurisdiction and personal jurisdiction, the court found "no reason" to excuse Guatemala's deficient service. Courts are more and more requiring technical formalities be strictly complied with before finding service complete, particularly where a default judgment is sought. You can review our full update on the topic here.

We expect these trends to continue in 2023. As always, we have extensive experience in these issues. Feel free to contact us if we can be of any assistance. Happy New Year!

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