Mike Meier,
Attorney at Law, summary of legal development: District of Columbia Circuit
held that where a Bilateral Investment Treaty (BIT) exists between two
sovereign countries, the BIT and a notice to arbitrate satisfy FSIA’s
jurisdictional requirements
In
1973, Chevron and Ecuador signed an agreement allowing Chevron to develop oil
fields in exchange for below-market oil to the Ecuadorian government to be used
for domestic purposes. This deal was supposed to expire in 1992. However, as
the expiration date approached, Chevron filed several breach of contract suits
against Ecuador. Subsequently in 1995, Chevron and Ecuador signed an agreement
which terminated all obligations between the parties and provided for the
continuation of the pending lawsuits.
In
1993, the United States and Ecuador signed a Bilateral Investment Treaty
(“BIT”), formally known as the Treaty Between the Government of the United
States of America and the Government of the Republic of Ecuador for the
Encouragement and Reciprocal Protection of Investment. The BIT took effect in
1997. Under the BIT, Ecuador offered American investors an avenue to arbitrate
disputes involving investments that existed on or after the treaty’s effective
date.
In
2006, Chevron commenced an international arbitration action claiming that
Ecuador had violated the BIT by failing to timely resolve its lawsuits. Ecuador
objected to the tribunal’s jurisdiction, arguing that it never agreed to
arbitrate with Chevron. Ecuador then contended that Chevron’s investments in
Ecuador had terminated two years prior to the BIT. The tribunal rejected the
jurisdictional challenge and concluded that Chevron’s lawsuits were
“investments” within the meaning of the BIT, and ultimately decided against
Ecuador, awarding Chevron approximately $96 million. Ecuador challenged the
award in the Dutch court system but the challenge was rejected by the District
Court of The Hague, The Hague Court of Appeal and the Dutch Supreme Court.
On
July 27, 2012, Chevron petitioned the District Court to confirm the arbitral
award under the Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (“New York Convention”). Ecuador raised three arguments in
opposition: (1) the District Court lacked subject matter jurisdiction under the
Foreign Sovereign Immunities Act (“FSIA”); (2) confirmation should be denied
under the New York Convention; and (3) that a stay should be granted until the
Dutch Supreme Court could resolve the then-pending appeal of the award.
The
District Court determined that it had subject matter jurisdiction under 28
U.S.C. § 1605(a)(6), which provides that sovereign immunity does not prevent a
suit to confirm an award made pursuant to an arbitration agreement governed by
an international treaty, because the award was made pursuant to the BIT and
governed by the New York Convention. The District Court rejected Ecuador’s
argument that the FSIA required the District Court to undertake a de novo
analysis of whether the dispute was arbitrable under the BIT. The District
Court found that the parties had “clearly and unmistakably agreed” that the
tribunal would resolve such questions. Upon making this determination, the
District Court concluded that it was clearly supported by the text of the BIT.
The District Court then rejected Ecuador’s argument that the order was against
public policy and denied the requested stay. Ecuador subsequently appealed.
The
United States Court of Appeals for the District of Columbia Circuit affirms
District Court’s decision.
The
FSIA typically grants foreign states immunity from the jurisdiction of U.S.
courts. 28 U.S.C. § 1604. By enacting the FSIA, Congress set forth several
exceptions to this jurisdictional restriction. These exceptions provide the
basis for obtaining jurisdiction over a foreign state in federal
court.” Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S.
428, 439 (1989); see also Verlinden B.V. v. Cent. Bank of
Nigeria, 461 U.S. 480, 488-89 (1983).
The
District Court concluded that the jurisdictional requirements of the FSIA were
met because “the Award’s own language indicates it was rendered pursuant to the
BIT” and “the Award is clearly governed by the New York
Convention.” Chevron Corp. v. Republic of Ecuador, 949 F. Supp. 2d 57, 62
(D.D.C. 2013). Ecuador argues that the District Court failed to determine that
an arbitration agreement existed, instead deferring to the judgment of the
arbitrator. Chevron argues that the statute permits jurisdiction provided that
the plaintiff presents a non-frivolous claim that the foreign sovereign has
consented to arbitration.
“There
are two types of jurisdictional authorizations: (1) ‘jurisdiction that depends
on particular factual propositions’ and (2) ‘jurisdiction that depends on the
plaintiff’s asserting a particular type of claim.’Agudas Chasidei Chabad of
U.S. v. Russian Fed’n, 528 F.3d 934, 940 (D.C. Cir. 2008). Ecuador argues
that the § 1605(a)(6) exception requires the District Court to make three
findings: (1) a foreign state has agreed to arbitrate; (2) there is an award
based on that agreement; and (3) the award is governed by a treaty signed by
the United States calling for the recognition and enforcement of arbitral
awards.’ Chevron argues that the exception allows jurisdiction any time a plaintiff
asserts a non-frivolous claim involving an arbitration award. . Appellee’s Br.
at 30-31.”
As
the plaintiff, Chevron bears the burden of supporting its claim that the FSIA
exception applies. The court concludes that Chevron has met its burden of
production by producing the BIT, Chevron’s notice of arbitration against
Ecuador, and the tribunal’s arbitration decision. Ecuador does not dispute the
existence of the BIT, but challenges the District Court’s conclusion that the
BIT (or the combination of the BIT and Chevron’s notice of arbitration) is an
arbitration agreement between Ecuador and Chevron.
Ecuador
argues that the FSIA required the District Court to make a de novo
determination of whether Ecuador’s offer to arbitrate in the BIT encompassed Chevron’s
breach of contract claims. According to Ecuador, if Chevron’s claims are not
covered by the BIT, then Ecuador never agreed to arbitrate with Chevron, and
the District Court consequently lacked jurisdiction. According to Ecuador, the
arbitrability question is a jurisdictional question that must be addressed by
the District Court.
“[…]
For FSIA purposes, Chevron made a prima facie showing that there was an
arbitration agreement by producing the BIT and the notice of arbitration. Once
Chevron made this showing, the burden shifted to Ecuador to demonstrate by a
preponderance of the evidence that the BIT and the notice to arbitrate did not
constitute a valid arbitration agreement between the
parties. Chabad, 528 F.3d at 940. The jurisdictional task before the
District Court was to determine whether Ecuador had sufficiently rebutted the
presumption that the BIT and Chevron’s notice of arbitration constituted an
agreement to arbitrate.”
“The
Supreme Court’s recent decision in BG Group, PLC v. Republic of Argentina,
134 S.Ct. 1198 (2014), is instructive on this point. In BG
Group, Argentina’s primary argument was similar to Ecuador’s in the
present case. By its terms, the Bilateral Investment Treaty between the United
Kingdom and Argentina required an investor to litigate its claims in the local
court system before submitting the claims to arbitration. 134 S. Ct. at
1204. The arbitration panel concluded that Argentina had waived the local
litigation requirement and found in BG Group’s favor on the merits. Id. at
1204-05. When BG Group sought to confirm the award in the District Court for
the District of Columbia, the District Court deferred to the arbitrators’
determination regarding the local litigation requirement. Republic of
Argentina v. BG Group PLC, 715 F. Supp. 2d 108, 121-22 (D.D.C. 2010). This
Court reversed, holding that “[b]ecause the Treaty provides that a precondition
to arbitration of an investor’s claim is an initial resort to a contracting
party’s court… the question of arbitrability is an independent question of law
for the court to decide.’ Republic of Argentina v. BG Group PLC, 665
F.3d 1363, 1371 (D.C. Cir. 2012).”
“The
Supreme Court reversed. The Court “treat[ed] the document . . . as if it were
an ordinary contract between private parties”—Argentina and BG Group—and
concluded that the parties had intended to allow the arbitrator to determine
whether the local litigation requirement had been satisfied. BG Group, 134 S.
Ct. at 1206 (majority op.). In doing so, the Court implicitly rejected Argentina’s
contention that its offer to arbitrate only applied to investors who complied
with the local litigation requirement.[…]”
“For
purposes of the BIT, ‘investment’ means every kind of investment in the
territory of one Party owned or controlled directly or indirectly by nationals
or companies of the other Party . . . and includes . . . a claim to money or a
claim to performance having economic value, and associated with an investment.’
BIT Article I.1(a)(iii), J.A. 294. Ecuador argues that the final phrase — ‘and
associated with an investment’ — means that a lawsuit must be associated with
an investment that existed within the effective period of the BIT in order to
qualify as an investment under the BIT. This is a misreading of the treaty
terms for two reasons.”
“First,
Article I.3 provides that any alteration of the form in which assets are
invested shall not affect their character as investment. In conjunction with
the BIT’s non-exhaustive definition of ‘investment,’ Article I.3 suggests that
an investment continues to exist until it has been fully wound up and all
claims have been settled. Chevron’s lawsuits were therefore continuations of
its initial investment in Ecuador and protected by the BIT.”
“Second,
Article XII limits the application of the BIT ‘to investments existing at the
time of entry into force as well as to investments made or acquired
thereafter.’ J.A. 300. The investments referred to by this article are
investments as defined in Article I, and include ‘a claim to money or a claim to
performance having economic value, and associated with an investment.’ J.A.
294. Ecuador argues that the Article XII temporal limitation applies both to
the claim and to the investment with which that claim is associated. We
disagree. I our view, Article XII applies only to ‘investments’ as defined by
Article I, and not to the use of the term ‘investments’ within the
definitional paragraph. A lawsuit that existed at the time of entry into force
of the BIT is consequently an ‘investment’ for BIT purposes so long as that
lawsuit is associated with an investment as generally defined: ‘An expenditure
to acquire property or assets in order to produce revenue; the asset so
acquired.’ BLACK’S LAW DICTIONARY (6th ed. 1990). Chevron’s breach of contract
lawsuits indisputably were associated with its pre-BIT investment activities,
and the lawsuits indisputably existed when the BIT entered into force. The
lawsuits were therefore “investments” within the meaning of the treaty.”
The
court concludes that the District Court correctly determined that the BIT and
Chevron’s notice to arbitrate satisfied the jurisdictional requirements of the
FSIA, and states that “even if the FSIA required the de novo review
of arbitrability suggested by Ecuador, the District Court would still have
properly exercised jurisdiction because Ecuador failed to demonstrate by a
preponderance of the evidence that Chevron’s lawsuits were not protected by the
BIT.”
“As
recognized by the court below, ‘the [New York Convention] affords the district
court little discretion in refusing or deferring enforcement of foreign
arbitral awards.’ Belize 668 F.3d 724, 727 (D.C. Cir. 2012). […] Ecuador
asserts two grounds on which confirmation of the award should be denied:
Articles V(1)(c) and V(2)(b) of the New York Convention. Article V(1)(c)
provides that an award may be refused if it ‘deals with a difference not
contemplated by or not falling within the terms of the submission to
arbitration,’ and V(2)(b) allows refusal if ‘the recognition or enforcement of the
award would be contrary to the public policy’ of the country in which
enforcement is sought.”
“Ecuador’s
reliance on Article V(1)(c) is misplaced. The District Court did not need to
reach the question of whether Chevron’s lawsuits fell within the terms of
submission to arbitration because the BIT allows the arbitration tribunal to
make that determination. […] ‘Where ordinary contracts are at issue, it is up
to the parties to determine whether a particular matter is primarily for
arbitrators or for courts to decide. If the contract is silent on the matter .
. . courts presume that the parties intend courts, not arbitrators, to decide .
. . disputes about `arbitrability.’ BG Group, 134 S. Ct. at
1206 (internal citations omitted). The BIT is not silent on who decides
arbitrability. Article VI of the BIT provides that the investor company may
submit a matter to arbitration ‘in accordance with the Arbitration Rules of the
United Nations Commission on International Trade Law (UNCITRAL).’ BIT Art.
VI(3)(a)(iii), J.A. 298. Under these rules, which the BIT incorporates by
reference, ‘[t]he arbitral tribunal shall have the power to rule on objections
that it has no jurisdiction, including any objections with respect to the
existence or validity of the arbitration clause,’ and ‘shall have the power to
determine the existence or the validity of the contract of which an arbitration
clause forms a part.’ UNCITRAL Arbitration Rules, G.A. Res. 31/91 art. 21 (Dec.
15, 1976). Ecuador therefore consented to allow the arbitral tribunal to decide
issues of arbitrability—including whether Chevron had ‘investments’ within the
meaning of the treaty. See also Oracle America, Inc. v. Myriad Group A.G.,
724 F.3d 1069, 1077 (9th Cir. 2013)(‘Incorporation of the UNCITRAL arbitration
rules . . . constitutes clear and unmistakable evidence that the parties agreed
to arbitrate arbitrability.’); Schneider v. Kingdom of Thailand, 688 F.3d
68, 72 (2d Cir. 2012) (‘[A] bilateral investment treaty’s incorporation of
the … UNCITRAL rules [is] clear and unmistakable evidence that the parties
intended questions of arbitrability to be decided by the arbitral panel in the
first instance.’) (internal quotation marks omitted). There was no need for the
District Court to independently determine that Chevron’s suits satisfied the
BIT’s parameters once it had concluded that the parties had delegated this task
to the arbitrator.”
The
court further determines that Ecuador’s Article V (2)(b) arguments are
similarly rooted in the “erroneous premise” that the BIT is
inapplicable. Ecuador identified two aspects of American public policy
that are inconsistent with confirmation of the award. First, Ecuador argues
that “the Award is repugnant to the policy that forum-selection clauses in
agreements between sophisticated parties will be upheld” because Chevron and
Ecuador had contractually agreed that Chevron’s claims would be litigated in
Ecuadorian courts. Appellant’s Br. at 57-58. Second, Ecuador argues that
confirmation is inconsistent with respect for foreign sovereignty, claiming
that “the Tribunal effectively usurped the jurisdictional authority of the
Ecuadorian judiciary, the only adjudicative body authorized to hale the
Republic into court to respond to Chevron’s lawsuits.”
“The
primary flaw with the first argument is that it misconstrues the nature of
Chevron’s action. Chevron’s breach of contract claims were brought in
Ecuadorian courts, as required by the initial investment agreement and ratified
by the 1995 settlement agreement. Chevron’s arbitration action alleged that
Ecuador had unduly delayed resolution of those claims in violation of the BIT.
J.A. 813-14. The issue initially before the arbitration panel was not whether
Ecuador had breached its contract with Chevron, but instead whether Ecuador had
breached the BIT by failing to resolve the contract suits in a timely fashion.
In signing the BIT, Ecuador agreed to arbitration of precisely this type of
action. See Art. II(7), J.A. 297 (‘Each Party shall provide effective
means of asserting claims and enforcing rights with respect to investment,
investment agreements, and investment authorizations.’).”
“Contrary
to Ecuador’s protestations, enforcement of the arbitral award is fully
consistent with the public policy of the United States, most notably the ‘emphatic
federal policy in favor of arbitral dispute resolution,’ Mitsubishi Motors
Corp. v. Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985). By signing the BIT,
Ecuador agreed to allow independent and neutral arbitrators to determine
whether an investor company could take advantage of the substantive and
procedural protections in the BIT. Chevron followed the proper procedure to
request arbitration under the BIT, and the arbitrator determined that it had
jurisdiction. Four courts have also considered and rejected Ecuador’s argument
that Chevron did not have the right to avail itself of the BIT’s arbitration
clause. Ecuador has given us no reason to conclude that these many authorities
ruled in error.”
The
Court affirms the District Court’s confirmation of Chevron’s arbitral award.
Citation: Chevron Corp. v.
Ecuador, 795 F.3d 200 (D.C. Cir. 2015).
