Fried Frank International Arbitration Newsletter, June 2013

New UNCITRAL Transparency Rules: the End of Confidentiality in Arbitration?

In a controversial move, government delegations at the Working Group II of the United Nations Commission on International Trade Law ("UNCITRAL") agreed during its 58th Session in February 2013 in New York City ("February 2013 Meeting") to adopt new transparency rules that will apply on a default basis to all future arbitration proceedings under bilateral investment treaties ("BITs") that use the UNCITRAL arbitration rules - unless the treaty parties expressly opt out of the new rules.

The new rules will provide for open oral hearings and the publication of key documents, including Notices of Arbitration, pleadings, transcripts, and all decisions and awards issued by the tribunal. However, the arbitrators still retain the discretion to keep some confidential information from public release. These new rules apply only to investor-state arbitrations under the UNCITRAL rules, which are the second most frequently used set of rules for solving investor-state disputes. These rules differ considerably from standard practice in commercial arbitration.

As a result of resistance toward either the automatic inclusion of these new rules or an arbitral tribunal having discretion to apply them, the delegates at the February 2013 Meeting decided that the new wording of Article 1(2) will apply to existing treaties only if the parties to a dispute all consent or where the contracting parties to a treaty have given their blessing to the application of the transparency rules under that treaty regime.

Indeed, explicit consent will be required even where an earlier treaty contains a potentially "dynamic" arbitration offer (e.g., a reference to the UNCITRAL rules as revised or amended from time to time) that provides an arguable basis for arbitrators to find that the transparency rules apply.

The impact of the new rules will depend on the political outcome as states can either make them applicable to existing treaties by way of mutual declarations or conventions, but can also opt out from the rules in their future BITs. Nonetheless, the rules are likely to be used as the United States has already voiced support for their application to existing investment treaties and the European Union trade spokesman declared them a benchmark for all the EU's future BITs. While there may be benefits to transparency in certain contexts - for example, in cases where environmental or human rights issues are in play - in other settings greater transparency may be used as a sword in order to extract a settlement. To enter into force, the rules still need to be approved by the UNCITRAL Commission in July 2013 and then by the UN General Assembly in September 2013.

Looking to the United States to Enforce a Foreign Arbitral Award? Do Not Forget About Personal Jurisdiction

Parties engage in international arbitration proceedings to obtain a final, binding and enforceable arbitral award. A strong enforcement regime, created by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"), ensures that an international arbitration award is readily enforceable in nearly 150 countries that are signatories to the New York Convention. A court in the United States petitioned to confirm a foreign award under the New York Convention "shall" do so "unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the [New York] Convention".1 Seven exclusive nonrecognition grounds are specified in the New York Convention. However, in addition to these grounds, a party opposing enforcement of an award in the United States may also raise a procedural defense that is second nature to all familiar with US litigation - lack of personal jurisdiction.

In a recent decision, the Fifth Circuit Court of Appeals answered the question of first impression in that circuit and held that a lack of personal jurisdiction is a valid defense to the enforcement of a foreign award under the New York Convention. The Fifth Circuit affirmed a Louisiana district court's dismissal of a petition to confirm an award for lack of personal jurisdiction over the defendants, and found that the dismissal was appropriate as a matter of constitutional due process. The Fifth Circuit's decision is in line with decisions from a number of other circuits, and serves as a reminder to parties and practitioners in international arbitration not to lose sight of due process requirements under the United States Constitution.

First Investment Corporation of the Marshall Islands ("First Investment") and two Chinese companies, Fujian Shipbuilding Industry Group Corp. ("FSIGC") and Fujian Mawei Shipbuilding Ltd. ("Mawei"), were parties to a number of shipbuilding contracts. In 2004, First Investment initiated arbitration in London alleging breach of contract by FSIGC and Mawei. Arbitration was conducted under the rules of the London Maritime Arbitration Association and resulted in an award of a approximately US$26 million in damages in favor of First Investment. After the Chinese court refused to enforce the award, First Investment turned to the United States District Court for the Eastern District of Louisiana. The district court dismissed the enforcement petition for lack of personal jurisdiction over the Chinese defendants.2 First Investment appealed, arguing that standard personal jurisdiction criteria do not preclude US courts from enforcing awards under the New York Convention.3 First Investment reasoned that personal jurisdiction may not block the enforcement proceedings, since it is not among the non-recognition grounds listed in the New York Convention.

The Fifth Circuit disagreed. The court noted that personal jurisdiction is "an essential element of the jurisdiction" of a district court - without personal jurisdiction, the court has no power to proceed.4 Thus, even though personal jurisdiction is not mentioned in the New York Convention or the United States Federal Arbitration Act implementing the New York Convention, personal jurisdiction is grounded in constitutional due process concerns, and therefore, takes precedence over the language of the New York Convention and its implementing statute.5

Relying on established US Supreme Court personal jurisdiction precedent, the Fifth Circuit explained that the personal jurisdiction requirement protects an individual's liberty interests.6 It guarantees that a party will not be "haled into court" and subjected to proceedings in a forum with which it has no meaningful contacts, ties, or relations.7

To satisfy the due process requirement, there must be constitutionally sufficient contacts between the defendant and the state where the court is located, and subjecting the non-resident defendant to jurisdiction must be consistent with "traditional notions of fair play and substantial justice".8 A court, in essence, determines whether the exercise of jurisdiction over a defendant would be reasonable, considering a number of factors, including the burden on the defendant, the interests of the forum state and of the plaintiff, the interest in obtaining efficient resolution of controversies, and the interest in "furthering fundamental substantive social justice".9 Hence, the decision whether sufficient minimum contacts exist involves a fact-specific inquiry, and depends on the particular circumstances of each case. The personal jurisdiction requirement may also be satisfied if the defendant consents to jurisdiction or has its principal place of business or residence in the forum. In addition, in the absence of...