Republic of Argentina v. AWG Group Ltd
Opinion
Griffith, Circuit Judge
An arbitration panel determined that the Republic of Argentina was liable to AWG Group Ltd. for $20 million. Argentina challenged that decision in district court, arguing that a member of the arbitration panel had, with a connection to two of the parties to the proceeding, shown "evident partiality" under
I
In 1993, Argentina awarded a contract to Aguas Argentinas S.A. (AASA), a consortium of seven companies. Three were Argentine and four were not (AWG Group Ltd. ("AWG"), Sociedad General de Aguas de Barcelona S.A., Vivendi Universal, S.A. ("Vivendi"), and Suez). According to the contract, AASA agreed to invest in and operate Argentina's water services. By its terms, the contract was set to run through 2023 but allowed for earlier termination if either AASA or Argentina failed to live up to its commitments. Argentina also entered bilateral investment treaties with the home countries of the members of AASA promising fair and equitable treatment of their investments in Argentina (the "fair-treatment provisions"). These treaties also established arbitration procedures to resolve disputes that might arise from investments in the signatory countries.
At the turn of this century, Argentina's economy fell into crisis, and its government responded with emergency regulatory measures. One measure unpegged Argentina's currency, the Argentine peso, from the U.S. dollar. Another froze the tariffs AASA could charge customers. Together these measures suppressed the peso's value and prevented AASA from increasing its prices, which led to a significant loss of revenue from its services. AASA had committed to repaying loans that were denominated in dollars and claimed that it could not pay for the quality of service that it had provided when the peso was more valuable unless something changed. Argentina denied AASA's repeated requests to alter the emergency measures or modify its obligations.
In 2003, the non-Argentine members of AASA began arbitration proceedings at the International Centre for Settlement of Investment Disputes (the "Centre") in Washington, D.C. The gravamen of their claim was that Argentina had breached its contract by treating them unfairly. Among its defenses, Argentina maintained that its conduct was compelled by the need to protect its economy and provide safe water. Three years into the arbitration, Argentina terminated the contract on the ground that AASA had failed to keep the nation's water supply free from contaminants. The arbitration lasted twelve years. At its conclusion in April 2015, a unanimous panel rejected Argentina's defense that its conduct was necessary to protect its economy and water supply and concluded that Argentina had breached the contract by treating AASA unfairly. The panel later awarded the claimants the profits they would have realized had Argentina honored the fair-treatment provisions.
In July 2015, Argentina brought suit in district court seeking to vacate the panel's award to AWG on two grounds. First, that the panel member selected by AASA was biased in favor of two of the non-Argentine consortium members. Although Argentina does not allege that the panel member had an outside interest in AWG, its fate in the arbitration was wrapped up with the fate
of its fellow consortium members. Second, that the panel exceeded its authority by failing to credit Argentina's necessity defense and by compensating AASA with hypothetical profits earned after Argentina had lawfully terminated the contract. The district court rejected each of Argentina's arguments and granted AWG's cross-petition to enforce the award.
Republic of Argentina v. AWG Grp. Ltd.
,
II
The law of the United States governing arbitration is codified in the Federal Arbitration Act (the "Act"),
As a general matter, we will enforce an arbitration award unless given a compelling reason to suspect that the award resulted from an unfair process.
See
Hall St. Assocs. v. Mattel, Inc.
,
If we interfere with an arbitration decision, it is only because the proceeding deviated significantly from the Act's standards of fair adjudication.
Oxford Health Plans LLC v. Sutter
,
III
Impartiality of the arbitrators is a cardinal feature of fair adjudication. In
At the outset of the arbitration proceedings, AASA chose as an arbitrator Professor Gabrielle Kaufmann-Kohler, a professor of arbitration at the University of Geneva; Argentina chose Professor Pedro Nikken, the former President of the Inter-American Court of Human Rights; and to chair the panel, the Centre chose and the parties approved Professor Jeswald W. Salacuse, an expert in international law. Three years into the proceedings, in April 2006, international financial-services company UBS AG ("UBS") appointed panel member Kaufmann-Kohler to serve on its board of directors. She was paid for her services in part with UBS stock and in part with a cash salary.
At the time of Kaufmann-Kohler's appointment, UBS managed trillions of dollars in investments, including over $2 billion in Suez and Vivendi. Most of those investments were made for the clients of UBS, who relied on the company to manage their funds. Only a sliver of the Suez and Vivendi shares were purchased as investments for UBS. Owning shares in Suez and Vivendi made UBS a passive shareholder without a management role or entitlement to the firms' profits.
When she accepted the position on the board of directors, Kaufmann-Kohler did not know of UBS's investments in Suez and Vivendi. UBS ran a check for any conflicts of interest she might have had with the company, and as part of that process Kaufmann-Kohler reported her activity as an arbitrator, including the arbitration involving Argentina, Suez, and Vivendi. The only conflict UBS identified was Kaufmann-Kohler's upcoming participation in the jury for the America's Cup race in which UBS had sponsored a yacht. UBS did not alert her to any connection the company had with Suez or Vivendi. In fact, Kaufmann-Kohler first learned of UBS's investments in them in November 2007, when Argentina sought her recusal from the panel because of her relationship with UBS. 1 The other members of the panel rejected Argentina's challenge, concluding that UBS's interests in Suez and Vivendi were too trivial to cause a reasonable person to doubt Kaufmann-Kohler's fairness. Even so, Kaufmann-Kohler resigned from the board on April 15, 2009, more than a year before the panel reached its decision finding Argentina liable to AASA.
We must decide whether Kaufmann-Kohler's brief service on the board obliged her to disclose to the arbitration parties her connections to Suez and Vivendi. The Act's "evident partiality" standard imposes duties on arbitrators with significant interests in the parties, a standard the Supreme Court examined in
Commonwealth Coatings Corp. v. Continental Casualty Co.
,
The Court agreed that disclosure was necessary, but the Justices could not agree on a single rationale. In his plurality opinion, Justice Black proposed adopting the same standard for avoiding partiality for arbitrators that governed judges.
Id
. at 148,
In his concurrence, Justice White advanced a rule that relieves arbitrators from a duty to disclose trivial interests: "[A]rbitrators are not automatically disqualified by a business relationship with the parties before them if both parties are informed of the relationship in advance, or if they are unaware of the facts but the relationship is trivial."
Id
. at 150,
We applied Justice White's rule in
Al-Harbi
to uphold an award despite the arbitrator's undisclosed relationship with a party to the arbitration.
Before considering whether evident partiality could apply when the arbitrator did not know he had an interest in the party, we first asked whether his interest was significant.
See
id
. at 683. There is no duty to disclose a trivial interest under
Commonwealth Coatings
even if the arbitrator has full knowledge of his connection to the party.
Id
. We found that the challenger hadn't "establish[ed] specific facts that indicate[d] improper motives on the part of [the] arbitrator."
Id
. (quoting
Peoples Sec. Life Ins. Co. v. Monumental Life Ins. Co.
,
We emphasized in
Al-Harbi
that a challenger to an arbitrator's partiality has a steep slope to climb.
Id
. (upholding the award in "light of [the] onerous standard for vacatur"). A challenger can satisfy its heavy burden of proof only by presenting "specific facts that indicate improper motives on the part of an arbitrator."
Id
. (quoting
Peoples Sec.
,
Argentina contends that a reasonable person would think the huge sum of money UBS invested in Suez and Vivendi biased Kaufmann-Kohler in their favor because of her position on the UBS board. This appearance of bias would, in Argentina's view, trigger a duty for Kaufmann-Kohler to disclose the investments UBS made in the parties before she joined its board of directors. AWG responds that Kaufmann-Kohler did not need to discover and disclose the investments because her connection with Suez and Vivendi was remote-so remote, in fact, that she hadn't even known about the investments.
Before this, Argentina had raised two other challenges to the panel, neither of which is part of this litigation. In August 2006, the panel rejected Argentina's challenge to its jurisdiction on various grounds. In October 2007, the panel rejected a challenge to Kaufmann-Kohler's impartiality stemming from her role as arbitrator in a previous dispute involving Argentina.
We use Justice White's approach because his rule is narrower than Justice Black's.
Belize Bank Ltd. v. Gov't of Belize
,
Neither Argentina nor AWG disputes that Kaufmann-Kohler had some degree of interest in Suez and Vivendi, but it falls to Argentina to show that the degree was significant.
See
id
. Under
Commonwealth Coatings
, Argentina must first show that "the arbitrator ha[d] a substantial interest" in UBS.
AWG responds that, although her supervisory position with UBS might have given
her a substantial interest in the firm, Kaufmann-Kohler's position was so far removed from investment decisions that it could not have given her a substantial interest in the parties. But AWG skips a step. The second part of the
Commonwealth Coatings
framework asks whether UBS, not Kaufmann-Kohler, "ha[d] done more than trivial business with" Suez or Vivendi.
Id
. at 152,
Both Argentina and AWG agree there is more to an interest than just its commercial value. A majority of the Court in
Commonwealth Coatings
suggested that frequent deals with a party may make an arbitrator's interest significant although only small sums are exchanged.
See
id
. at 146,
Argentina seems to agree that the relationship UBS had with Suez and Vivendi was limited to purchasing and selling shares in the parties. UBS had no management responsibilities nor any guarantee of directly sharing in their profits. At the same time, Argentina does not explain why this kind of relationship is comparable to recurrent client relationships, which arbitrators might have wanted to retain. While Suez and Vivendi might have been interested in retaining UBS as an investor because the company owned more than 2% of their shares, Argentina does not explain how the importance of the parties' interest in UBS affects the interest UBS had in the parties. Commonwealth Coatings requires us to gauge the interest of Kaufmann-Kohler's firm in the parties, not their interest in her firm. We see no hint from Argentina that UBS cared about staying in the good graces of Suez and Vivendi.
Argentina proposes that the relationship UBS had with the parties was significant simply because it was ongoing while the arbitration was pending. Yet even assuming that a fresh relationship with a party is more important than one that has gone stale, Argentina does not satisfy its heavy burden to explain why this makes the interest of a passive investor, which is far more detached than the company-client relationships it cited as examples, a substantial one. We have been given no reason to think that the Act proscribes the relationships UBS had with Suez and Vivendi simply because they coincided with the arbitration.
That leaves Argentina to rely on the sheer number of dollars UBS had wrapped up in the parties as evidence of significance. We agree that the more than $2 billion UBS had invested in Suez and Vivendi added up, to state the obvious, to a significant sum. However, Argentina forgets to put that number in context. UBS is in the business of managing money by purchasing and selling shares in corporations. The $2 billion that UBS invested in Suez and Vivendi made up less than 0.06% of the $3.6 trillion UBS had in invested assets. That percentage is too small to suggest much significance, and Argentina does not provide additional context to persuade us otherwise.
We have no problem agreeing with Argentina that UBS was interested in the success of companies in which it had invested $2 billion, no matter what percentage of its portfolio that amount made up. However, Argentina fails to put forth any specific facts beyond the dollars invested to show why that interest was more than trivial to such a mammoth investment firm. Speculation that UBS's investment of 0.06% of its assets, most of which was credited to its clients and not its own bottom line, created a substantial interest in Suez and Vivendi is simply not enough to satisfy the Act's high standard of proof.
Argentina does not give us reason to find that the passive investments UBS made in Suez and Vivendi created evident partiality in Kaufmann-Kohler. If the interest presented here could disqualify an arbitrator who did not disclose it, parties would hesitate to select arbitrators associated with financial companies that invest broadly. The risk would be too high that "evident partiality" challenges, like Argentina's, could uproot results of decade-long arbitrations without any evidence of bias beyond a diversified portfolio.
See
Epic Sys.
,
Because UBS's interests in Suez and Vivendi were trivial, and therefore Kaufmann-Kohler's interests in these parties were insignificant, they could not have created evident partiality, and there is no basis for vacating the panel's award under § 10(a)(2).
See
Al-Harbi
,
IV
Argentina next argues the panel exceeded its authority by rejecting the country's necessity defense without explanation and by basing the award on events that Argentina prevented by canceling the contract. The Act authorizes vacatur of an award if "the arbitrators exceeded their powers" under the arbitration agreement. § 10(a)(4). The bar is high: courts may disturb an award only if the challenger can show that it was inconsistent with the panel's own understanding of the award that was authorized by the agreement.
See
Stolt-Nielsen
,
Argentina contends that the panel failed to fully consider its necessity defense. Necessity is a well-known principle of international law that, as presented by Article 25 of the International Law Commission Articles on Responsibility of States for Intentionally Wrongful Acts, would excuse Argentina from liability if its breach of the fair-treatment provisions was the "only means for the State to safeguard an essential interest against a grave and imminent peril" that Argentina had not itself caused. 4 During the arbitration proceeding, Argentina alleged that the unforeseen economic crisis had limited its ability to accommodate AASA's requests while preserving safe water services for the country's residents and resuscitating its economy. The panel rejected Argentina's assertions with brief conclusions, left unsupported by particular evidence, about the panel's understanding of the government's role in the crisis and the actions it might have taken to comply with the fair-treatment provisions. Argentina interprets the cursory dismissal as suggesting that the panel based its decision on its own policy preferences instead of the criteria to which the parties had agreed. Otherwise, Argentina reasons, the panel would have addressed with care each of Argentina's arguments that it breached the fair-treatment provisions out of necessity.
We have never required of an arbitration award the sort of extended explanation Argentina urges. In fact, we have determined that a panel's decision may be upheld even if it offered no explanation at all because the alternative, requiring a particular level of detail for every response to each party's theories, would "unjustifiably undermine the speed and thrift sought" from arbitration proceedings.
Sargent v. Paine Webber Jackson & Curtis, Inc.
,
An unexplained decision might show that a panel exceeded its powers if there is good reason to suspect that the decision relied on factors prohibited by the arbitration agreement. See id . But Argentina did not point to anything in the record suggesting that the panel rejected the defense to suit its own preferences instead of the criteria set out in the agreement. Without such a showing, we have no reason to suspect that the panel strayed from the arbitration agreement. And without more, we will not disturb the panel's decision.
Argentina also argues the panel exceeded its powers when it calculated the damages Argentina owed AASA by estimating the profits each member of the consortium would have received had Argentina complied with the fair-treatment provisions. The final award included estimated profits from 2002, the time at which Argentina began treating AASA unfairly, until 2023, the default expiration date of the contract. The panel reasoned that in a world in which Argentina treated AASA fairly and equitably, Argentina would have granted the consortium some relief from the country's emergency economic policies and preserved, not canceled, the contract.
According to AWG, it was reasonable for the panel to assume that the contract would have lasted past 2002 had there been no breach, and so it was appropriate for the panel's award to include estimated profits from the years 2006 through 2023. Argentina takes issue with the panel's assumption that the contract would have continued past 2006, the time at which Argentina actually terminated the contract. But the government fails to show how the arbitration agreement prohibits making that assumption. Argentina also fails to prove that the panel exceeded its powers by basing AWG's compensation on payments that were not discounted to account for the risk of lawful termination. Even had the panel erroneously overestimated the probability that Argentina would have granted relief to AASA and ignored the risk of contract termination, we would still uphold the panel's decision as the result of its good-faith understanding of the type of compensation permitted by the arbitration agreement.
See
Oxford Health Plans
,
V
Argentina also asks us to vacate the award under the New York Convention for the same reasons it asked us to vacate the award under the Act. For the same reasons we could not vacate the award under the Act, we cannot vacate it under the New York Convention.
See
VI
We conclude that Argentina has not satisfied the Act's or the New York Convention's elements required to vacate the award. We affirm the district court's judgment.
So ordered.
Although Kaufmann-Kohler also owned stock in UBS through her compensation package, we do not need to decide whether her status as a shareholder gave her a substantial interest in UBS, given that her position as a director did so.
AWG does not dispute that the defense in Article 25 would apply to Argentina if satisfied. See AWG Br. 54.
Reference
- Full Case Name
- REPUBLIC OF ARGENTINA, Appellant v. AWG GROUP LTD., Appellee
- Cited By
- 11 cases
- Status
- Published