Court: Court of Appeals for the D.C. Circuit; March 19, 2018; Federal Appellate Court
Colleen Kollar-Kotelly, United States District Judge, reviews a petition from Pao Tatneft seeking recognition and enforcement of a Merits Award from an arbitration against Ukraine, conducted under the 1958 New York Convention and related legal frameworks. The arbitration, OAO Tatneft v. Ukraine, was held by the Permanent Court of Arbitration in Paris, leading to a ruling on July 29, 2014, which ordered Ukraine to pay Tatneft $112 million in damages plus interest. This award was upheld by the Paris Court of Appeal after Ukraine's attempt to overturn it. On March 30, 2017, Tatneft filed a petition to confirm the arbitral award, which Ukraine opposes. Ukraine subsequently sought a stay of proceedings pending a foreign set-aside action, as well as motions to dismiss the petition and for jurisdictional discovery. The Court determined that these motions are interrelated and decided to deny Ukraine's motions while holding Tatneft's petition in abeyance until further briefing is submitted.
The factual background includes the formation of CJSC Ukrtatnafta, a joint stock company established in 1995 by Tatarstan and Ukraine, with Tatneft as a major shareholder. Initial agreements involved capital contributions in oil-related assets, later modified to include cash and other assets. The shareholding structure evolved to include Seagroup International and AmRuz Trading, forming a bloc that controlled 56% of Ukrtatnafta. In 2007, the Privat Group acquired a 1% interest and subsequently invalidated prior shareholder resolutions, restricting the Tatarstan Shareholders from managing or owning shares in Ukrtatnafta. Following this, on December 11, 2007, Tatneft initiated a dispute with Ukraine, alleging violations of the Russia-Ukraine Bilateral Investment Treaty regarding the protection of Russian investors.
On September 28, 2010, the arbitral tribunal confirmed its jurisdiction over Tatneft's claims. A merits hearing took place from March 18 to March 27, 2013, during which fact and expert witnesses provided testimony. On July 29, 2014, a Merits Award was issued, determining that Ukraine's actions led to a complete deprivation of Tatneft's shareholder rights in Ukrtatnafta and that Ukraine violated the Russia-Ukraine BIT by failing to provide fair and equitable treatment. Ukraine was ordered to pay Tatneft US$ 112 million in compensation, plus interest at the U.S. dollar LIBOR rate plus 3%, compounded quarterly.
Following the arbitration, Ukraine sought to annul both the Merits Award and the Jurisdiction Decision before the Paris Court of Appeal, which rejected Ukraine's request on November 29, 2016, affirming both decisions and ordering Ukraine to cover fees and costs for Tatneft. Ukraine appealed this decision to the French Court of Cassation on March 21, 2017. On December 29, 2016, Tatneft demanded payment of the Merits Award, warning of enforcement actions if unpaid by February 15, 2017. Tatneft subsequently filed a Petition to Confirm Arbitral Award on March 30, 2017, seeking recognition of the award in U.S. court.
Ukraine requested a stay of the Petition pending the outcome of its appeal in France and filed an opposition to the Petition, raising concerns about the arbitrator's impartiality and arguing that enforcing the award would violate U.S. public policy. Ukraine also claimed that the U.S. court lacked subject matter jurisdiction due to foreign sovereign immunity and argued for dismissal based on forum non conveniens. It contended that the arbitration exception in the Foreign Sovereign Immunities Act (FSIA) did not apply, as Tatneft was not a 'private party' and the award was not based on an arbitration agreement. Ukraine sought jurisdictional discovery should the court deny its motion to dismiss, while Tatneft opposed all of Ukraine's motions.
The legal context includes the FSIA, which governs jurisdiction over foreign states in U.S. courts, and the New York Convention, which pertains to the enforcement of foreign arbitration awards. The FSIA is the exclusive basis for such jurisdiction, with foreign states enjoying sovereign immunity unless exceptions apply.
Foreign sovereign immunity is absolute unless an exception applies, which the district court must verify at the outset of any case involving a foreign state. The Foreign Sovereign Immunities Act (FSIA) allows for an exception when confirming arbitration awards, specifically if the foreign state has entered into an arbitration agreement with a private party that may be governed by an applicable treaty, such as the New York Convention. This 1958 treaty, incorporated into U.S. law through the Federal Arbitration Act (FAA), mandates recognition and enforcement of international arbitral awards.
Under Section 202 of the FAA, arbitration agreements and awards related to commercial relationships are subject to the New York Convention, granting U.S. district courts original jurisdiction over such matters regardless of the amount in controversy. The New York Convention is recognized as fitting within the arbitration exception of FSIA, specifically Section 1605(a)(6). Federal courts have limited discretion to refuse confirming an arbitration award; they must confirm the award unless specific grounds for denial, as outlined in the Convention, are established.
These grounds for refusing confirmation include incapacity of the parties, lack of proper notice, issues outside the arbitration agreement's scope, improper composition of the arbitral tribunal, the award not being binding, or violations of local law or public policy. In this case, Ukraine contests the confirmation of the Merits Award on Article V grounds, citing a lack of impartiality in the arbitral tribunal and asserting that enforcement would contravene U.S. public policy. Ukraine's arguments concerning sovereign immunity and forum non conveniens, however, are outside the scope of Article V and were raised in its Motion to Dismiss rather than in its response to the Petition. The court will first address these jurisdictional and procedural arguments before considering the merits of Ukraine's Article V claims.
Ukraine's motion to dismiss is predicated on an alleged lack of subject matter jurisdiction regarding the enforcement of an arbitral award against a foreign sovereign. For a U.S. court to exercise jurisdiction in such cases, it must first establish a valid basis for enforcing a foreign arbitral award and confirm that the foreign sovereign does not possess sovereign immunity against the enforcement action. If the court finds a lack of subject matter jurisdiction, it is mandated to dismiss the case.
The court evaluates two critical factors related to Diag Human: the foreign arbitration exception to sovereign immunity and the New York Convention, which governs the confirmation of arbitral awards. Under the Foreign Sovereign Immunities Act (FSIA), foreign states are generally immune from U.S. jurisdiction unless a specific exception applies. Tatneft argues that an exception exists for confirming arbitration awards made under an arbitration agreement governed by an international treaty, specifically the Russia-Ukraine Bilateral Investment Treaty (BIT) and the New York Convention.
Tatneft contends that the Merits Award fits this exception, as it was issued under the BIT, which includes provisions for arbitration. Article 9 of the Russia-Ukraine BIT stipulates that disputes should first be attempted to be resolved through negotiation and, if unresolved after six months, referred to an ad hoc arbitration tribunal per UNICITRAL rules. The Merits Award is also governed by the New York Convention since the arbitration occurred in Paris, a Convention-signatory country.
In contrast, Ukraine asserts that the arbitration exception does not apply for three reasons: 1) Tatneft is a state-controlled entity, not a 'private party' as defined under the FSIA; 2) the Merits Award, based on a 'fair and equitable treatment' provision, was not made pursuant to any arbitration agreement because this provision is excluded from the BIT; and 3) the Merits Award primarily compensated damages related to shares of Swiss and American companies, for which Tatneft allegedly lacked standing to claim on behalf of AmRuz and Seagroup.
The arbitral tribunal bifurcated the proceedings to address Ukraine's objections regarding jurisdiction and admissibility before proceeding with the merits of the case. From February 20 to December 14, 2009, extensive written submissions focused exclusively on these preliminary issues, culminating in a three-day hearing in The Hague. The tribunal issued an 87-page Jurisdiction Decision affirming its authority to hear the dispute and the admissibility of Tatneft's claims under the Russia-Ukraine Bilateral Investment Treaty (BIT) and international law.
The tribunal's decision was influenced by Ukraine's request for a preliminary ruling on jurisdiction, as outlined in its Statement of Defense. The tribunal thoroughly examined and rejected multiple jurisdictional objections from Ukraine, including claims that the BIT does not cover disputes involving Ukrtatnafta, that Tatneft lacks investor status due to control by the Government of Tatarstan, that Tatneft's involvement in Ukrtatnafta does not constitute an investment, and that such participation violates Ukrainian law.
Additionally, various admissibility objections were considered, including Tatneft's standing to represent AmRuz and Seagroup, its claim for unpaid oil deliveries, and its ability to assert violations of rights under the BIT. The tribunal found in favor of Tatneft, concluding that despite government involvement, business operations predominated, allowing Tatneft to claim as a private investor. It determined that the fair and equitable treatment clause was incorporated through a most-favored-nation clause, which Ukraine failed to uphold.
Ukraine's Motion to Dismiss requests the Court to reconsider jurisdiction and admissibility objections regarding the applicability of the arbitration exception to Ukraine's foreign sovereign immunity. The case parallels Chevron Corp., where Ecuador contended that the arbitration exception required a de novo evaluation of whether breach of contract claims fell under the BIT's arbitration agreement.
The D.C. Circuit rejected Ecuador's argument, clarifying that it conflated the jurisdictional standard of the Foreign Sovereign Immunities Act (FSIA) with the review standard under the New York Convention. The District Court's task was to assess whether Ecuador had effectively rebutted the presumption that the Bilateral Investment Treaty (BIT) and Chevron's notice of arbitration formed a valid arbitration agreement. Judge James E. Boasberg criticized Ecuador’s request for an independent de novo review of arbitrability under the FSIA, characterizing it as an attempt to re-litigate the merits of its dispute with Chevron. The court emphasized that the FSIA is a jurisdictional statute concerning the court's authority, not the parties' rights, and noted that Section 1605(a) pertains only to which tribunal may enforce an arbitral award, not the underlying contractual rights. Therefore, the FSIA's arbitration exception was deemed applicable, granting the court subject-matter jurisdiction to enforce the award, and Ukraine's motion to dismiss was denied.
In an alternative argument, Tatneft contended that jurisdiction exists under 28 U.S.C. § 1605(a)(1) due to Ukraine's implied waiver of sovereign immunity. Ukraine argued that Tatneft had waived this argument by not including it in the original Petition. Although Tatneft did not explicitly mention Section 1605(a)(1), it asserted that the supporting facts were referenced in its Petition. Tatneft maintained that procedural rules prohibiting amendments through opposition briefs do not apply in this context. The court found that Ukraine had sufficient opportunity to address this argument in its reply, thus allowing consideration of the implied waiver theory. While the FSIA does not define "implied waiver," this Circuit interprets it narrowly, requiring clear intent from the foreign state to waive its immunity. It has recognized implied waiver in three specific scenarios: agreement to arbitration abroad, agreement to a governing law, or failure to assert sovereign immunity in responsive pleadings, and courts have been cautious in expanding these scenarios.
In cases where a foreign state has consented to arbitrate disputes without designating a specific jurisdiction, courts have recognized an implicit waiver of immunity under § 1605(a)(1). However, most courts do not interpret a contract clause mandating arbitration outside the U.S. as an implicit waiver of immunity to lawsuits in American courts. In this instance, Ukraine’s agreement to arbitrate in France, a signatory to the New York Convention, implies an expectation of enforcement actions in other signatory states. Thus, following the precedent in Creighton, the court concludes that there is an implied waiver under § 1605(a)(1), resulting in the denial of Ukraine's motion to dismiss for lack of jurisdiction.
Additionally, Ukraine's motion to dismiss based on forum non conveniens is addressed. The court must determine whether an adequate alternative forum exists and if the balance of private and public interests favors dismissal. There is a strong presumption favoring the plaintiff's chosen forum, placing the burden on the defendant to demonstrate the existence of an adequate alternative forum with jurisdiction. An alternative forum is typically deemed adequate if it can provide service of process and allow litigation of the dispute's subject matter. If the alternative forum's remedy is significantly inadequate, dismissal may not serve the interests of justice.
Tatneft contends that Ukraine fails to meet the forum non conveniens threshold because the D.C. Circuit has previously indicated that no alternative forum can attach a foreign state's commercial property located in the U.S. Ukraine argues that Tatneft misinterprets the D.C. Circuit's reasoning, emphasizing that Tatneft has not identified any specific Ukrainian commercial property in the U.S. for attachment, rendering Ukraine's assets in the U.S. speculative.
The D.C. Circuit addressed the Respondent's claim that the district court should dismiss the case due to the absence of attachable assets in the U.S. The court affirmed that even without current assets, a judgment could facilitate future attachment of property. The Respondent's speculation about the Petitioner's motives related to Ukrainian property was deemed irrelevant to the forum's convenience. The court highlighted that since no alternative forum exists for the Petitioner to reach the Respondent's potential U.S. assets, the district court's refusal to dismiss based on forum non conveniens was upheld.
Tatneft contended that Ukraine was not an adequate alternative forum, citing concerns over the impartiality of Ukrainian courts, which allegedly acted wrongfully in relation to its interests. The court compared this case to prior rulings where defendants faced inadequate forums due to government control over judicial outcomes. However, it noted that previous cases rejected mere generalizations about judicial inadequacies. The court concluded that Tatneft's specific claims about the Ukrainian judicial system, particularly regarding its prior experiences and the nature of the underlying claims, provide a stronger basis for asserting that it would struggle to achieve justice in Ukraine compared to vague allegations about the judicial system's inadequacies.
The Court ruled that it need not consider the balancing factors of the forum non conveniens test, as Tatneft has raised credible concerns about its ability to obtain justice in Ukraine, thus establishing that Ukraine cannot demonstrate the existence of an alternative forum. Consequently, Ukraine's motion to dismiss on forum non conveniens grounds is denied.
Regarding jurisdictional discovery, Ukraine seeks permission to investigate whether Tatneft qualifies as a "private party" under the FSIA arbitration exception, which would affect the jurisdiction of U.S. courts. While the district court has broad discretion in jurisdictional discovery, a plaintiff must demonstrate a good faith belief that such discovery would establish personal jurisdiction over the defendant and provide a detailed plan of the desired discovery. Tatneft contends that Ukraine has not shown how additional facts would alter jurisdictional analysis, arguing that its request should be denied. The Court, having already decided to defer to the arbitral tribunal's jurisdiction determination upheld by the Paris Court of Appeal, finds Ukraine's request for jurisdictional discovery moot.
The Court has ruled that Section 1605(a)(1) of the Foreign Sovereign Immunities Act (FSIA) provides an alternative basis for denying Ukraine immunity, applicable beyond just enforcing arbitral awards involving private parties. Ukraine's request for jurisdictional discovery is denied, as it fails to demonstrate that further discovery would alter the Court's jurisdiction analysis under 28 U.S.C. 1605(a)(6) or 1605(a)(1).
Regarding Tatneft’s arbitration case, Tatneft filed a Notice of Arbitration on May 21, 2008, leading to a Jurisdiction Award on September 28, 2010, and a subsequent Merits Award on July 29, 2014, which held Ukraine liable for $112 million in damages for violating the "fair and equitable treatment" standard. Ukraine sought to annul these awards before the Paris Court of Appeal, which upheld both awards on November 29, 2016. Ukraine then initiated cassation proceedings against this decision on March 21, 2017.
Tatneft has moved to dismiss Ukraine's cassation case on the basis that Ukraine has not complied with the payment of the Merits Award and associated fees. Ukraine's Motion to Stay is predicated on the ongoing cassation proceedings, arguing that enforcing the Merits Award could lead to multiple litigations and inconsistent outcomes, creating potential financial hardship if the award were later overturned. Ukraine anticipates the French Cassation Court will decide by June 2018. Tatneft opposes this stay, asserting that the Merits Award has already been validated by the Paris Court of Appeal, and the mere possibility of a future overturn does not warrant delaying proceedings. The Court's authority to stay proceedings is supported by precedent, emphasizing efficient case management.
A district court has the inherent power to stay proceedings to maintain orderly justice processes. Under the New York Convention, courts may exercise discretion to stay cases if there are ongoing parallel proceedings in the originating country that could impact an award's validity. Factors considered for a stay include: (1) the objectives of arbitration, (2) status and estimated resolution time of foreign proceedings, (3) the level of scrutiny the award may face in foreign proceedings, (4) characteristics of those proceedings (such as their timing and intent), (5) potential hardships for parties, and (6) any other relevant circumstances. In this instance, a parallel case in the French Court of Cassation has been dismissed without prejudice, with Ukraine acknowledging the case is inactive unless it proves execution of a prior decision within two years. Ukraine has not paid 200,000 Euros in legal costs to Tatneft as mandated by the Paris Court of Appeal, but asserts it is challenging the Radiation Order from the French Court, which does not directly contest the Merits Award but targets a procedural decree. If successful, this challenge could reinstate the cassation proceeding.
A stay of the recognition and enforcement proceeding is denied because Ukraine's request is based on an inactive French setting aside proceeding, which does not constitute a parallel proceeding. Ukraine's intention to challenge the decision to deactivate this proceeding does not impact the upheld Merits Award by the Paris Court of Appeals, nor does it provide a pressing need for a stay. The Court emphasizes that it would be an abuse of discretion to impose an indefinite stay without necessity, especially given that Ukraine has already appealed the Merits Award, which has been confirmed.
Regarding the confirmation of arbitration awards, U.S. courts have limited discretion to refuse confirmation under the Federal Arbitration Act (FAA), mandating confirmation unless specific grounds for refusal detailed in the New York Convention are met. These grounds include incapacity of parties, invalidity of the agreement, lack of notice in arbitration proceedings, or non-compliance with the arbitration agreement. Additionally, enforcement may be refused if the subject matter is not arbitrable or if it contradicts public policy in the enforcement jurisdiction. Courts may only deny enforcement based on the explicit grounds in Article V of the Convention, reinforcing the limited scope for challenging foreign arbitral awards.
The New York Convention allows courts to deny confirmation of an arbitral award only under specific circumstances, making confirmation proceedings generally summary in nature. The party opposing confirmation bears the burden of proof, which is a high standard. Ukraine has raised two defenses under Article V of the Convention against enforcing the Merits Award: (1) the arbitral tribunal's composition did not comply with the parties' agreement, and (2) enforcement would violate U.S. public policy. The Court has reviewed various documents related to Tatneft's Petition to Confirm the Arbitral Award and Ukraine's opposition. It has decided that Tatneft must respond to Ukraine's opposition by April 19, 2018, before the Court rules on the Petition. Consequently, the Court denied Ukraine's motions to dismiss, for jurisdictional discovery, and to stay proceedings. The Petition is held in abeyance pending Tatneft's reply. The Court also considered multiple motions and notices filed by both parties regarding the case. Ukraine contends that Tatneft is a state-controlled company, originally transformed by the Republic of Tatarstan into a shareholding entity in 1994, with shares held by NJSC Naftogaz after 2004.
The Merits Award is filed in four parts on the Court docket due to its length. The Court will address Ukraine's jurisdictional objection before any motion to stay is ruled upon. The motion to stay will be evaluated after the motion to dismiss and the request for jurisdictional discovery. Ukraine is recognized as a foreign state under 28 U.S.C. Section 1603(a). Tatneft asserts that jurisdiction exists under Section 1605(a)(1) due to Ukraine's waiver of sovereign immunity by signing the New York Convention, though this argument was not included in Tatneft's initial Petition. Tatneft distinguishes between "admissibility" and "jurisdictional" objections, noting that admissibility pertains to whether a claim should be heard, while jurisdictional relates to the tribunal's authority to decide the claim. Admissibility objections are considered merits issues for the arbitral tribunal. The parties agreed to an extended briefing schedule regarding the motion to dismiss. The Russia-Ukraine Bilateral Investment Treaty (BIT) allows disputes to be resolved by various forums, including competent courts or arbitration tribunals in the territory of investment, the Arbitration Institute of the Stockholm Chamber of Commerce, or an ad hoc tribunal following UNCITRAL rules. Ukraine highlights two additional parallel proceedings in Moscow and London but primarily focuses on the parallel proceeding in France, where the Award was rendered. Ukraine discusses the concept of "radiation" under French law, allowing temporary case removal from the docket under specific circumstances. Ukraine contests Tatneft's characterization of a prior ruling as a "dismissal without prejudice," asserting it is more accurately described as a "stay."
