D.C. Circuit Defers to Arbitrators’ Decision on Arbitrability for FSIA Purposes

On August 4, 2015, the D.C. Circuit issued a decision in Chevron Corp. v. Republic of Ecuador, 795 F.3d 200 (D.C. Cir. 2015), affirming the district court’s deference to the arbitrators’ decision on arbitrability for purposes of finding subject matter jurisdiction under the Foreign Sovereign Immunities Act (“FSIA”) to confirm an international arbitral award against Ecuador. The D.C. Circuit also upheld the district court’s rejection of a challenge to the award’s confirmation under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”).

For two decades, Chevron Corporation (“Chevron”) and the Republic of Ecuador battled in a series of lawsuits related to an investment and development agreement for oil fields in Ecuador. The dispute began in the Ecuadorian courts and eventually proceeded to an international arbitration tribunal in The Hague that found in favor of Chevron. After every level of the Dutch judiciary affirmed the arbitral award, Chevron successfully confirmed the award in the U.S. District Court for the District of Columbia. Ecuador appealed the confirmation decision to the D.C. Circuit Court of Appeals (“D.C. Circuit”).

The D.C. Circuit addressed two primary questions: (1) whether the district court lacked subject matter jurisdiction to confirm the award under the FSIA, and (2) whether confirmation should be denied under the New York Convention. Holding in favor of Chevron on both questions, the D.C. Circuit affirmed the confirmation of the award.

First, Ecuador claimed that the FSIA precluded the district court from exercising jurisdiction to review and confirm an award entered against Ecuador as a sovereign state. Although the FSIA generally grants foreign states immunity from the jurisdiction of courts in the United States, the district court had determined that it had subject matter jurisdiction under the FSIA’s “arbitration exception,” 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. The district court found the exception applicable here because the award was made pursuant to a bilateral investment treaty (“BIT”) between the United States and Ecuador and was governed by the New York Convention. On appeal, Ecuador argued that the FSIA required the district court to make a de novo determination that an arbitration agreement existed between the parties that encompassed Chevron’s claims, rather than deferring to the arbitrator’s judgment on that issue.

The D.C. Circuit noted that Ecuador conflated the jurisdictional standard under the FSIA with the standard of review under the New York Convention. Chevron satisfied its prima facie burden of production to prove that the FSIA’s arbitration exception applied: Chevron showed that the parties had an arbitration agreement by producing the BIT and notice of arbitration. The burden then shifted to Ecuador to try to rebut the presumption that these items constituted an agreement to arbitrate.

Relying on the U.S. Supreme Court’s decision in BG Group, PLC v. Republic of Argentina 134 S. Ct. 1198 (2014), the D.C. Circuit rejected Ecuador’s argument that a de novo determination of arbitrability was required for FSIA purposes. Noting that the BIT “includes a standing offer to all potential U.S. investors to arbitrate investment disputes, which Chevron accepted in the manner required by the treaty,” the D.C. Circuit found the requirements of the FSIA arbitration exception were satisfied and jurisdiction existed over Ecuador in the confirmation action.

Even if a de novo determination of arbitrability were required, though, the D.C. Circuit explained that its conclusion on jurisdiction would be the same, because Ecuador could not demonstrate by a preponderance of the evidence that Chevron had an “investment” within the meaning of the BIT. Chevron’s initial investment pre-dated the effective date of the BIT at issue, but Chevron had commenced arbitration on the basis that Ecuador had violated the BIT by failing to resolve its lawsuits concerning the investments in a timely manner. The tribunal had ruled that the lawsuits constituted “investments” within the meaning of the BIT. On appeal, Ecuador argued that the lawsuits would have had to be associated with an investment existing during the effective period of the BIT to qualify as an investment under the BIT. The D.C. Circuit disagreed, finding that the language of the BIT suggests that an investment continues to exist until it has been fully wound up and all claims have been settled, and thus Chevron’s lawsuits were continuations of its initial investment. Moreover, the lawsuits were in existence when the BIT entered into force, and thus satisfied the temporal limitation in the BIT.

As to Ecuador’s second ground for appeal, the D.C. Circuit swiftly rejected the arguments that the award was unenforceable under the New York Convention, on largely the same grounds as the district court. Ecuador argued that confirmation should be denied under Article V(1)(c), allowing refusal of an award if it “deals with a difference not contemplated by or not falling within the terms of the submission to arbitration,” and Article V(2)(b), allowing refusal if “the recognition or enforcement of the award would be contrary to the public policy” of the enforcement country. The D.C. Circuit did not credit Ecuador’s reliance on Article V(1)(c), finding that the district court did not need to reach this question because the BIT, by incorporating the UNCITRAL Arbitration Rules, provided that the arbitration tribunal would decide issues of arbitrability. Under Article V(2)(b), Ecuador argued that it never agreed to arbitrate with Chevron and the Tribunal usurped the jurisdictional authority of the Ecuador courts, such that confirmation would be against public policy in favor of forum selection clauses and respect for foreign sovereignty. The D.C. Circuit rejected this argument, noting that Chevron’s breach of contract claims were brought in Ecuadorian courts, while the arbitration proceeding alleged that Ecuador had unduly delayed resolution of those lawsuits in violation of the BIT. Ecuador had agreed in the BIT to arbitrate this latter type of action. Moreover, confirmation was fully consistent with the U.S. public policy in favor of arbitral dispute resolution.

The D.C. Circuit therefore affirmed the district court’s confirmation of the arbitral award entered in Chevron’s favor.

A version of this post originally appeared in the November 2015 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.