In September 2014, Gold Reserve won a significant arbitral award ("Award") worth more than US$760 million (and counting, because of post-award interest) against Venezuela for breach of investor-protection standards under the Canada-Venezuela bilateral investment treaty ("Treaty"). In the arbitration, Gold Reserve successfully argued that Venezuela's revocation of certain licenses for gold extraction held by Gold Reserve's subsidiary violated the fair and equitable treatment, full protection and security and expropriation standards of the Treaty. (For further background to the case, see our earlier blog post here.)
Subsequently, two proceedings were filed before the Paris Court of Appeal, being the court at the seat of the arbitration. When Venezuela applied to have the award set aside, Gold Reserve countered that application with a petition to confirm the award. The two procedures differ in scope and length. Although the Paris Court confirmed the award (as previously reported in our blog here), the decision on Venezuela's application to set aside the award remains pending, since the set-aside proceeding entails a more detailed review of the Tribunal's decision-making.
While the set-aside proceeding continues in Paris, Gold Reserve has sought to enforce the award elsewhere, including in Luxembourg and Washington, D.C. The Luxembourg court granted a stay of the enforcement request pending the completion of the Parisian proceedings. However, on November 20, 2015, the U.S. District Court for the District of Columbia granted Gold Reserve's request for enforcement in Washington, D.C. The U.S. District Court, in line with the general pro-enforcement approach of the U.S. courts in their application of the New York Convention, found that Venezuela could neither establish any procedural defects in the arbitration nor prove that enforcement of the Award would violate public policy. Accordingly, Gold Reserve is able to satisfy the Award against Venezuela's assets in Washington, D.C., without waiting for the completion of Venezuela's set-aside proceeding in Paris.
The principal lessons from the U.S. District Court's decision are:
- The Court will give "substantial deference" to the Tribunal's determination on the scope of its jurisdiction.
- Failure to raise an issue squarely and distinctly during the arbitral proceedings may constitute a waiver of the right to raise the same issue before an enforcing court.
- In order to argue successfully that the inequitable allocation of time to the parties led to a due process violation, it is necessary to show exactly what extra time was required for and how the denial of extra time prevented a party from presenting its case.
- The public policy exception to the enforcement of arbitral awards under the New York Convention, as applied by the U.S. courts, is extremely narrow.
- The U.S. courts, and the U.S. District Court for the District of Columbia in particular, have been willing to enforce foreign awards despite parallel proceedings challenging these awards before the courts at the seat of the arbitration.
Each of these points is discussed below.
Venezuela argued that the Award had exceeded the scope of Venezuela's consent to arbitration. Before determining whether the Tribunal had indeed exceeded the scope of its jurisdiction, the Court said that it had to resolve the predicate issue of what degree of deference it owed to the Tribunal's determination of the scope of its jurisdiction. The Court held that it owed "substantial deference" to the Tribunal's own findings concerning its scope to act for two reasons: (i) the ICSID Additional Facility Rules, which applied to this arbitration, clearly states that the Tribunal has the power to rule on its own competence, which the Tribunal here did; and (ii) the U.S. courts follow the policy that where the parties have clearly agreed to arbitrate issues of arbitrability, the New York Convention does not sanction a court's second-guessing of the arbitrator's construction of the parties' agreement.
Here, the Court upheld the Tribunal's decision that it did have scope to act in respect of the dispute: Gold Reserve did qualify as an investor under the Treaty and was the proper recipient of a damages award.
Venezuela also argued that the Tribunal lacked jurisdiction over Gold Reserve because Gold Reserve had not "made" the investment in question—only its subsidiary had. The Tribunal held that Gold Reserve fell within the definition of investor by virtue of owning the subsidiary that had "made" the relevant investments (the subsidiary being the actual entity that owned the relevant concessions). In any case, the Court found that Venezuela had waived its claim as to the proper entity to which an award should be issued under the Treaty. Although Venezuela had obliquely raised this claim in a footnote and at the hearing, Venezuela had failed to spell out this argument squarely and distinctly. As such, Venezuela was held to have waived the right to raise this argument at the enforcement stage. Further, in light of the substantial deference owed to the Tribunal's determination on jurisdiction, it would be inappropriate for the Court to second-guess the Tribunal regarding an argument that was never properly developed before it.
Venezuela also argued that the Tribunal had violated its due process rights by granting the parties inequitable time to present their arguments. Specifically, Venezuela argued that Gold Reserve had been allocated more time to examine the witnesses. While this was, in fact, true, there was a good reason why the Tribunal gave Gold Reserve more time to examine witnesses, namely because Gold Reserve intended to cross-examine Venezuela's witnesses, whereas Venezuela did not intend to cross-examine Gold Reserve's witnesses. As such, the Tribunal found it fair to give Gold Reserve more time to undertake cross-examination. Apart from the time allocated for witness examination, the Tribunal had granted the parties equal time for the opening submissions and closing arguments.
The Court held that although Venezuela was technically correct that the parties were not afforded equal time, Venezuela also had to show exactly what it needed more time for, and how the denial of extra time prevented it from presenting its case. Venezuela could not show how the unequal timing affected its ability to present its case.
Narrow public policy exception
The Court stated that the public policy exception to the confirmation of an arbitration award was extremely narrow as there was a presumption favoring upholding international arbitration awards under the New York Convention. Denial of enforcement under the public policy ground would be proper only when confirmation would "violate the forum state's most basic notions of morality and justice."
Applying this narrow approach, the Tribunal rejected both of Venezuela's public policy arguments. Venezuela's first argument was that, if the Tribunal had an awarded damages to Gold Reserve's Venezuelan subsidiary (rather than Gold Reserve itself, which was a Canadian company), then the Venezuelan tax authorities would have had an interest in the arbitral award. The Court rejected this argument as a reason for refusing enforcement since the Tribunal had awarded damages to Gold Reserve net of tax. Venezuela's second argument was that the Tribunal had awarded punitive damages against a foreign state (namely Venezuela) in contravention of international law. The Court, having carefully examined the Award, said that the Tribunal had not awarded damages on a punitive basis and indeed had expressly disavowed any perception that it was acting on the basis of equitable considerations. The Court found that the Tribunal's reference to the seriousness and egregiousness of Venezuela's breaches was in order to assess the total losses incurred by Gold Reserve, and not for the purpose of awarding damages on a punitive basis.
Willingness to grant a stay
The U.S. District Court refused to grant a stay pending Venezuela's set-aside application before the Court of Appeal in Paris—a decision that is in line with several recent decisions of the U.S. District Court for the District of Columbia. In particular, the U.S. District Court for the District of Columbia has been willing to permit enforcement where there is evidence showing that the foreign proceedings would take a significant amount of time to resolve (relative to the length of arbitration/litigation proceedings to date).
In this case, the Court applied the principles set out in the Second Circuit's decision in Europcar Italia, S.p.A v. Maiellano Tours, Inc., 156 F.3d 310 (2d Cir. 1998). It refused Venezuela's request for a stay on the basis of two principal factors. First, the objective of arbitration is to ensure the immediate satisfaction of arbitral awards. Gold Reserve had filed its request for arbitration in 2009—over six years ago—thus, the objective of expeditious resolution of disputes militated in favor of refusing a stay. Second, the estimated time for the resolution of the French proceedings also favored Gold Reserve. While the case before the Paris Court of Appeal was currently pending, it did not appear that it would be resolved soon; indeed, oral argument had been postponed until February 2016. After considering other factors such as concerns about international comity and the balance of hardships to the parties (which the Court found, in totality, marginally favored Gold Reserve), the Court denied Venezuela's petition for a stay of the U.S. enforcement proceedings.
The District Court has permitted enforcement despite parallel foreign proceedings in two other recent (2011 and 2013) cases. In Chevron Corp. v. Republic of Ecuador, 949 F.Supp.2d 57 (D.D.C. 2013), the Court granted Chevron's petition to enforce an award (against Ecuador) that was being challenged at the seat of the arbitration (i.e. The Netherlands). It noted that although the Dutch proceedings were ongoing, the District Court of The Hague had issued its decision denying Ecuador's petition to set aside the award more than a year previously, and the appeal would not likely be resolved until late 2013 or 2014 (the U.S. District Court's decision was issued in June 2013).
In another example, in Continental Transfert Technique Limited v. Federal Government of Nigeria, 697 F.Supp.2d 46 (D.D.C. 2011), the Court declined to adjourn enforcement proceedings despite pending proceedings to challenge the award in Nigeria. The Court observed significant delays in the Nigerian legal process: the judge assigned to the case had retired and no other judge presided over Nigeria's attempt to set aside the award. The Court described the case in Nigeria as having "stalled, a state of affairs that suggests a resolution of the Nigerian proceedings may be long in coming." Thus, the Court held that adjourning the U.S. proceedings pending the outcome of the Nigerian proceedings would contravene the strong U.S. federal policy in favor of arbitration and the expeditious resolution of disputes.
A version of this article was first published on Practical Law.
For further information, please contact Larry Shore, Partner, Elizabeth Chan, Visiting Attorney, or your usual Herbert Smith Freehills contact.