Out-Law News 5 min. read
15 Jun 2022, 12:39 pm
The United States Supreme Court’s ruling on which foreign or international tribunals are covered by a law that allows interested parties to petition US courts for evidence, “will have wide-ranging impacts for the conduct of international arbitration”, according to one legal expert.
Michael Cottrell, international arbitration expert at Pinsent Masons, said the court’s unanimous decision that section 1782 of the US Code (s1782) does not cover certain arbitral tribunals “blocks a significant avenue by which parties to commercial and investor-state arbitration proceedings based outside the US had been able to obtain discovery in the US of documents relevant to their dispute.”
Previously, parties had been permitted to seek discovery of documents under s1782, which allows district courts to compel the production of evidence “for use in a proceeding in a foreign or international tribunal”, both prior to and during arbitration proceedings. Certain federal circuit courts had interpreted the term “foreign or international tribunal” as including foreign commercial arbitrations between private entities, as well as investor-state disputes. However, other circuit courts had held that foreign commercial arbitrations were not proceedings before a “foreign or international tribunal”, and so fell outside the scope of s1782.
The Supreme Court’s decision, delivered by Justice Amy Coney Barrett, held that the term “tribunal” has potential governmental or sovereign connotations when modified by the terms “foreign or international”. Justice Barrett said the term is best understood as meaning an adjudicative body that exercises governmental authority, rather than the broader definition of a “tribunal”, which would include an arbitral panel in a private commercial dispute.
The court ruled that, for the purposes of s1782, a foreign tribunal is one that has been imbued with governmental authority by one state, whilst an international tribunal must have been imbued with governmental authority by multiple states. It added that the absence of governmental involvement in tribunals convened to determine commercial disputes means that these tribunals have no such authority. The court also found that, while an investor-state dispute settlement (ISDS) panel might share certain characteristics of other foreign or international panels which would qualify under s1782, this fact did not establish that such panels had governmental authority.
Instead, the court held, to qualify under s1782, there must be evidence that the states which are party to the treaty that establishes a tribunal had intended to endow it with governmental authority.
Cottrell said that the court’s approach was “surprising”, with its rationale for limiting the scope of s1782 to tribunals imbued with governmental authority based on a “strained interpretation of the operative words which appeared to have been designed to achieve the outcome in the decision”. He added: “While the court’s conclusions, insofar as purely private foreign commercial arbitrations are concerned, appear to have been based on its definition of what constitutes a foreign or international tribunal, its conclusions on the nature of ISDS tribunals are inconsistent with its own formulation of the test.”
Ultimately, it is difficult to understand the policy motivation behind this judgment, and it will inevitably leave parties to foreign commercial disputes with limited options when it comes to seeking discovery of documents from persons and entities located in the US.
He said: “In the first instance, the court’s position that there is no evidence in an investment treaty that the state parties intended to imbue an ad hoc tribunal with governmental authority to adjudicate disputes is somewhat dubious.”
“In offering arbitration – usually under the rules of the International Centre for Settlement of Investment Disputes, the United Nations Commission on International Trade Law or the International Chamber of Commerce – as a means for resolving disputes, the states that are party to an investment treaty are expressly agreeing to submit themselves to the jurisdiction of an ad hoc tribunal. Implicit - or explicit, if contained in the applicable rules - is an acknowledgment that such a tribunal will have power to issue interim measures and awards that are binding upon the states, in much the same way as a court or another international tribunal can do,” Cottrell added.
He said: “It is also wrong to say that an arbitral panel in an ISDS case functions ‘independently’ of a state. Instead, it exists as a consequence of the state’s agreement to arbitrate and the state is entitled to be involved in the appointment of at least one of the tribunal members. The state contributes towards the funding of the tribunal by virtue of the advance on costs it is obliged to pay.”
The Supreme Court was ruling on appeals from two cases, the first of which involved Hong Kong-based firm that made allegations of fraudulent sales transactions against a Michigan-based manufacturer that is a subsidiary of a German corporation. Under the terms of the contract signed by both parties, all disputes would be resolved by three arbitrators under the rules of a private dispute resolution organisation based in Berlin.
The second case centred around an insolvent Lithuanian bank that was nationalised by Lithuanian authorities. A Russian corporation, assigned the rights of a Russian investor in the bank, initiated a proceeding against Lithuania under a bilateral investment treaty between the countries, claiming that Lithuania had expropriated investments.
In both cases, parties filed s1782 applications in federal court, seeking the disclosure of information relevant to the disputes that was held by US-based entities. Those disclosure applications were resisted by the US-based entities which argued that the arbitral tribunals were “private adjudicative bodies” rather than “foreign or international tribunals”.
In the Supreme Court’s decision, Justice Barrett wrote that, where permission to invoke s1782 had been granted, it gave wider discovery powers to parties involved in foreign arbitral proceedings than were available to parties in domestic arbitrations under the Federal Arbitration Act (FAA). For instance, s1782 permitted pre-trial discovery, which is not available under the FAA. While the FAA only permits an arbitration panel to request discovery, s1782 applications can be made by the tribunal “or any interested person”, such as a party to the proceedings.
But Cottrell said the fact that s1782 granted more favourable disclosure entitlements in the case of foreign arbitrations than domestic proceedings under the FAA “is not in and of itself grounds for construing the provisions of s1782 restrictively.” He added: “There are other areas of legislation in which foreign entities are entitled to more generous treatment than domestic entities, such as taxation and investment protection.”
“Ultimately, it is difficult to understand the policy motivation behind this judgment, and it will inevitably leave parties to foreign commercial disputes with limited options when it comes to seeking discovery of documents from persons and entities located in the US. This could create difficulties for a party to arbitration where, for example, its opponent’s US-based parent company has relevant evidence which it has refused to provide voluntarily,” Cottrell said.
He added: “This may not, however, be the end of the line for s1782 in support of investor-state disputes. It is possible that the Investment Court System (ICS), which has been proposed as the standing investor-state dispute resolution body under the Canada-EU Comprehensive Economic and Trade Agreement, would satisfy the definition of an international tribunal ’imbued with governmental authority by multiple nations‘ to adjudicate disputes. Therefore, parties to disputes under the ICS and other similar investment courts and arbitration panels established by treaties - such as the EU-Vietnam Investment Protection Agreement - may still be able to invoke s1782 in order to obtain discovery of evidence in the USA.”
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