In Citigroup, Inc. v Abu Dhabi Investment Authority 13 Civ. 6073 (PKC), the United States District Court for the Southern District of New York (SDNY) recently issued a judgment compelling Citigroup to arbitrate for a second time its dispute with Abu Dhabi Investment Authority (“ADIA”), upholding the principle that arbitrators, not the courts, have the jurisdiction to decide the preclusive effect of a previous arbitration award.
In late 2007, ADIA, a sovereign wealth fund, invested US$7.5 billion in Citigroup. The Investment Agreement provided a mechanism that would convert ADIA’s investment into Citigroup common stock at a certain price and increase the number of shares that ADIA received to compensate for any dilution from other Citigroup stock issues. Importantly, the Investment Agreement also included a wide ranging arbitration clause referring “any dispute that arises out of or relates to the Transaction Documents” to international arbitration in New York under the rules of the International Centre for Dispute Resolution (the international division of the American Arbitration Association).
The First and Second Arbitrations
In late 2009, ADIA initiated arbitral proceedings against Citigroup alleging that Citigroup had diluted the value of its investment by issuing preference shares to other investors. It asserted wide ranging claims of fraud, misrepresentation, breach of fiduciary duty, breach of contract and breach of the implied covenant of good faith and fair dealing, seeking to rescind the Investment Agreement or US$4 billion in damages (the “First Arbitration”). The three-member arbitration panel rejected ADIA’s claims in their entirety after a 16 day hearing, with 24 witnesses and approximately 6,000 exhibits. Citigroup obtained recognition of the first arbitral award in the SDNY in March 2013. ADIA’s appeal of the confirmation judgment is pending appeal in the Second Circuit.
In mid-2013, ADIA filed a second Notice of Arbitration against Citigroup (the “Second Arbitration”), repeating many claims that it raised in the First Arbitration.
Citigroup applied to the SDNY claiming that (1) the Second Arbitration was foreclosed by the SDNY’s confirmation judgment of the First Arbitration; and (2) ADIA should be enjoined from pursuing the Second Arbitration. ADIA moved to dismiss Citigroup’s application and to compel Citigroup to arbitrate.
Arbitrators, not courts, are competent to determine the res judicata effect of the First Arbitration award – the Belco Rule
District Judge Castel reiterated the robust pro-arbitration federal policy embodied by the Federal Arbitration Act and long recognised by US courts – In re. Am. Express Fin. Advisors Sec. Litig., 672 F. 3d 113, 127-28 (2d Cir. 2011). In keeping with this principle, he noted the Belco Rule from National Union Fire Insurance Company of Pittsburgh, Pa. v. Belco Petroleum Corp., 88 F.3d 129, 131 (2d Cir. 1996) which provides that “the preclusive effect of a prior, related arbitration between the parties must be determined by the arbitrator in the current arbitration, rather than by the court” and that it “is as much related to the merits as such affirmative defences as a time limit in the arbitration agreement or laches, which are assigned to an arbitrator under a broad arbitration clause.” [internal quotations omitted]. The Judge therefore dismissed Citigroup’s claim that the Second Arbitration was foreclosed.
An injunction staying the Second Arbitration would swallow the Belco Rule
Citigroup submitted that the SDNY had a residual authority under the All Writs Act to “issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” 28 U.S.C § 1651(a) and that an injunction against the Second Arbitration was necessary to ensure the integrity of the SDNY Court’s jurisdiction in relation to the judgment confirming the First Arbitration. Whilst the District Judge acknowledged that there were circumstances in which the All Writs Act “might” provide the authority to enjoin arbitration to prevent re-litigation, these cases were in extreme circumstances in which multiple inconsistent judgments were severely threatened, whereas the current case implicated “only garden-variety res judicata concerns” and “if accepted, would apply to virtually any instance where a second arbitration is purportedly precluded by a federal court judgment confirming the first arbitration award. [Citigroup’s] proposed approach would swallow the Belco rule”.
Second Arbitration compelled
Consistent with his earlier reasoning, District Judge Castel granted ADIA’s motion to compel the Second Arbitration.
This decision provides a good example of an inevitable consequence of the USA’s pro-arbitration policy that many parties will not have considered: while a US court will, save for limited circumstances, recognise the finality of an arbitration award, its powers to prevent re-arbitration of a dispute in the face of an existing conclusive arbitral award is limited by its very deference to the arbitration agreement itself.
For more information, please contact Laurence Shore, Partner, Amal Bouchenaki, Of Counsel, or Robert Rothkopf, Associate, or your usual Herbert Smith Freehills contact.