United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
March 23, 2004
FOR THE FIFTH CIRCUIT
____________________ Charles R. Fulbruge III
Clerk
Nos. 02-20042 & 03-20602
____________________
Karaha Bodas Co., L.L.C.,
Plaintiff-Appellee,
V.
Perusahaan Pertambangan Minyak Dan Gas Bumi Negara; Et Al,
Defendants,
Perusahaan Pertambangan Minyak Dan Gas Bumi Negara,
Defendant-Appellant.
Appeal from the United States District Court
for the Southern District of Texas, Houston Division
Before KING, Chief Circuit Judge, DAVIS, Circuit Judge, and
ROSENTHAL,* District Judge.
ROSENTHAL, District Judge:
Thirty years ago, the United States Supreme Court recognized
that “[a] contractual provision specifying in advance the forum in
which disputes shall be litigated and the law to be applied
is . . . an almost indispensable precondition to achievement of the
orderliness and predictability essential to any international
*
District Judge of the Southern District of Texas, sitting by
designation.
business transaction. . . . Such a provision obviates the danger
that a dispute under the agreement might be submitted to a forum
hostile to the interests of one of the parties or unfamiliar with
the problem area involved.”1 When, as here, parties to
international commercial contracts agree to arbitrate future
disputes in a neutral forum, orderliness and predictability also
depend on the procedures for reviewing and enforcing arbitral
awards that may result. This appeal arises from an arbitral award
(the “Award”) made in Geneva, Switzerland, involving contracts
negotiated and allegedly breached in Indonesia. The Award imposed
liability and damages against Perusahaan Pertambangan Minyak Dan
Gas Bumi Negara (“Pertamina”), which is owned by the government of
Indonesia, in favor of Karaha Bodas Company, L.L.C. (“KBC”), a
Cayman Islands company. KBC filed this suit in the federal
district court in Texas to enforce the Award under the United
National Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (the “New York Convention”), and filed enforcement
actions in Hong Kong and Canada as well.2 While those enforcement
proceedings were pending, Pertamina appealed the Award in the Swiss
courts, seeking annulment. When that effort failed, and after the
Texas district court granted summary judgment enforcing the Award,
1
Scherk v. Alberto-Culver Co., 417 U.S. 506, 516 (1974).
2
United Nations Convention on the Recognition and Enforcement of
Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38
(entered into force with respect to the United States, Dec. 29, 1970),
codified at 9 U.S.C. § 201 et seq.
2
Pertamina obtained an order from an Indonesian court annulling the
Award.3
Pertamina appealed to this court. During the appeal,
Pertamina filed in the district court a motion to set aside the
judgment under Federal Rule of Civil Procedure 60(b)(2), based on
newly-discovered evidence Pertamina contended should have been
disclosed during the arbitration, and under Rule 60(b)(5), based on
the Indonesian court’s decision annulling the arbitration Award.
This court remanded to the district court for consideration of
Pertamina’s Rule 60(b) motion.4 On remand, the district court
denied Pertamina’s Rule 60(b) motion. This appeal consolidates
Pertamina’s challenges to the grant of summary judgment and to the
denial of the Rule 60(b) motion.
Pertamina urges this court to reverse the district court’s
decision enforcing the Award on several grounds under the New York
Convention. We conclude that the record forecloses Pertamina’s
arguments that procedural violations and other errors during the
arbitration preclude enforcement. We reject Pertamina’s argument
3
A different panel of this court heard a separate appeal from the
district court’s injunction against Pertamina’s prosecution of the
action in Indonesia, but did not decide the effect of the Indonesian
court’s annulment order on the enforcement proceeding. Karaha Bodas
Co., L.L.C. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 335
F.3d 357, 373-74 (5th Cir. 2003). One of the issues before this panel
is whether the Indonesian court’s order is a defense to the enforcement
of the Award.
4
Karaha Bodas Co., L.L.C. v. Perusahaan Pertambangan Minyak Dan
Gas Bumi Negara, 2003 WL 21027134, at *4-6 (5th Cir. March 5, 2003).
3
that the Indonesian court’s order annulling the Award bars its
enforcement under the New York Convention; this argument is
inconsistent with the arbitration agreements Pertamina signed and
with its earlier position that Switzerland, the neutral forum the
parties selected, had exclusive jurisdiction over an annulment
proceeding. We reject Pertamina’s efforts to delay or avoid
enforcement of the Award as evidencing a disregard for the
international commercial arbitration procedures it agreed to
follow.5 In short, we affirm the district court’s judgment
enforcing the Award, for the reasons set out in detail below.
I. Background
A. Procedural and Factual History
KBC explores and develops geothermal energy sources and builds
electric generating stations using geothermal sources. Pertamina
is an oil, gas, and geothermal energy company owned by the Republic
of Indonesia.6 In November 1994, KBC signed two contracts to
produce electricity from geothermal sources in Indonesia. Under
the Joint Operation Contract (“JOC”), KBC had the right to develop
geothermal energy sources in the Karaha area of Indonesia;
Pertamina was to manage the project and receive the electricity
5
We note that the length of this opinion reflects the number of
arguments Pertamina raises to evade its obligations under the Award more
than the strength of those arguments.
6
PLN, an electric utility owned by the government of Indonesia,
was a party to the arbitration but was dismissed from the district court
action.
4
generated. Under the Energy Sales Contract (“ESC”), PLN agreed to
purchase from Pertamina the energy generated by KBC’s facilities.
Both contracts contained almost identical broad arbitration
clauses, requiring the parties to arbitrate any disputes in Geneva,
Switzerland under the Arbitration Rules of the United Nations
Commission on International Trade Law (“UNCITRAL”).7
7
Article 13.2(a) of the arbitration provision of the JOC
provided:
If the Dispute cannot be settled within thirty
(30) working days by mutual discussions as
contemplated by Article 13.1 hereof, the Dispute
shall finally be settled by an arbitral tribunal
(the “Tribunal”) under the UNCITRAL arbitration
rules . . . . Each Party will appoint an
arbitrator within thirty (30) days after the date
of a request to initiate arbitration, who will
then jointly appoint a third arbitrator within
thirty (30) days of the date of the appointment of
the second arbitrator, to act as Chairman of the
Tribunal. Arbitrators not appointed within the
time limits set forth in the preceding sentence
shall be appointed by the Secretary General of the
International Center for Settlement of Investment
Disputes. Both Parties undertake to implement the
arbitration award. The site of the arbitration
shall be Geneva, Switzerland. The language of the
arbitration shall be English. The Parties
expressly agree to waive [certain Indonesian
procedural laws]. . . .
JOC, Art. 13.2(a),(d). Section 8.2(a) of the ESC’s arbitration
provision similarly read:
If the Dispute cannot be settled within forty-five
calendar (45) days by mutual discussions as
contemplated by Section 8.1 hereof, the Dispute
shall finally be settled by an arbitral tribunal
(the “Tribunal”) under the UNCITRAL arbitration
rules . . . . PLN on one hand, and [KBC] and
PERTAMINA on the other hand, will each appoint one
arbitrator, in each case within thirty (30) days
after the date of a request to initiate
arbitration, who will then jointly appoint a third
arbitrator within thirty (30) days of the date of
5
On September 20, 1997, the government of Indonesia
temporarily suspended the project because of the country’s
financial crisis. The government of Indonesia indefinitely
suspended the project on January 10, 1998. On February 10, 1998,
KBC notified Pertamina and PLN that the government’s indefinite
suspension constituted an event of “force majeure” under the
the appointment of the second arbitrator, to act
as Chairman of the Tribunal. Arbitrators not
appointed within the time limits set forth in the
preceding sentence shall be appointed by the
Secretary General of the International Center for
Settlement of Investment Disputes, upon the
request of any Party. All Parties undertake to
implement the arbitration award. The site of the
arbitration shall be Geneva, Switzerland. The
language of the arbitration shall be English. The
Parties expressly agree to waive the applicability
of [certain Indonesian procedural laws]. . . .
Both contracts contained the following additional arbitration
language:
The award rendered in any arbitration commenced
hereunder shall be final and binding upon the
Parties and judgment thereon may be entered in any
court having jurisdiction for its enforcement.
The Parties hereby renounce their right to appeal
from the decision of the arbitral panel and agree
that in accordance with Section 641 of the
Indonesian Code of Civil Procedure [neither] Party
shall appeal to any court from the decision of the
arbitral panel and accordingly the Parties hereby
waive the applicability of [certain Indonesian
laws]. In addition, the Parties agree that
[neither] Party shall have any right to commence
or maintain any suit or legal proceeding
concerning a [dispute hereunder until the] dispute
has been determined in accordance with the
arbitration procedure provided for herein and then
only to enforce or facilitate the execution of the
award rendered in such arbitration.
JOC, Art. 13.2(d); ESC, § 8.2(d).
6
contracts. KBC initiated arbitration proceedings on April 30,
1998. In its notice of arbitration, KBC appointed Professor Piero
Bernardini, vice-chair of the International Chamber of Commerce’s
(“ICC”) International Court of Arbitration and member of the London
Court of International Arbitration, to serve as an arbitrator.
Pertamina, however, did not designate an arbitrator in the
contractually allotted thirty days. The JOC and ESC both provided
that if a party failed to appoint an arbitrator within thirty days,
the Secretary-General of the International Center for Settlement of
Investment Disputes (“ICSID”) was to make the appointment. After
notifying Pertamina, PLN, and the government of Indonesia, the
ICSID appointed Dr. Ahmed El-Kosheri, another vice-chair of the
ICC, as the second arbitrator. As specified in the JOC and ESC,
the two appointed arbitrators then selected the chairman of the
arbitration panel, Yves Derains, the former Secretary-General of
the ICC.
Pertamina raised threshold challenges to the Tribunal’s
consolidation of the claims KBC raised under the JOC and the ESC
into one arbitration proceeding and to the selection of the panel.
In October 1999, the Tribunal issued a Preliminary Award, rejecting
Pertamina’s threshold challenges and ruling that the government of
Indonesia was not a party to the contracts or to the arbitration
proceeding.
KBC filed its Revised Statement of Claim in November 1999.
Pertamina received a number of extensions before it filed its reply
7
to the Revised Statement of Claim in April 2000. KBC filed a
rebuttal to that reply in May 2000. In response to KBC’s rebuttal,
Pertamina sought additional discovery and a continuance of the
proceedings, claiming that KBC had raised assertions and added
elements to its case-in-chief not contained in the Revised
Statement of Claim.
From the outset, the parties vigorously disputed whether KBC
could have obtained financing to build the project if the
government of Indonesia had not issued the suspension decree.
Pertamina contended that KBC could not have built the project – and
therefore suffered no damages from the government decree suspending
the work – because the precarious situation in Indonesia
effectively made the necessary financing unavailable. Pertamina
asserted that KBC’s rebuttal introduced a new theory as to how
project financing could have been obtained. KBC changed from
focusing on the availability of third-party financing and argued in
the rebuttal that one of its direct investors, FPL Energy (“FPL”),
would have provided project financing if no other source was
available. Shortly before the scheduled hearing, Pertamina sought
discovery of documents relating to FPL’s asserted willingness to
finance the project. In May 2000, the Tribunal denied Pertamina’s
request to obtain this discovery before the hearing and denied the
request for a continuance. The Tribunal stated that it would
decide at the conclusion of the hearing “whether any adjustment to
the proceeding” would be required because of the discovery
8
requested. The hearing on the merits proceeded as scheduled in
June 2000.
The Tribunal received a large record. Both sides submitted
extensive witness statements, expert reports, exhibits, and briefs.
During the hearing, Pertamina and PLN cross-examined KBC’s
witnesses, including two witnesses who testified about KBC’s
ability to finance the project, Robert McGrath, Treasurer of FPL
Group, Inc., and Leslie Gelber, former Vice-President of
Development at FPL Energy. Both witnesses submitted declarations
stating that “FPL Energy was prepared in 1998 to provide bridge
financing or direct capital to continue the Project through the
phases of the Project that were scheduled to be completed during
Indonesia’s period of instability.” At the hearing, counsel for
Pertamina specifically questioned McGrath about the availability of
project financing from FPL. During that questioning, a Tribunal
member asked McGrath whether the investment in the project was
protected by a form of political risk insurance. McGrath
responded, “I am not sure of that. I know there were some
discussions at the time, but I don’t recollect as to whether it was
or wasn’t.” Counsel for Pertamina asked no follow-up questions.
At the end of the hearing, counsel for Pertamina declined to pursue
the previously requested discovery and stated that the record had
been “fully” made.
In the Final Award, the Tribunal found that under the JOC and
the ESC, Pertamina and PLN had accepted the risk of loss arising
9
from a “Government Related Event.” The Tribunal interpreted the
contracts as “putting the consequences of a Governmental decision
which prevents the performance of the contract at Pertamina’s . . .
sole risk.” The Tribunal awarded KBC $111.1 million, the amount
KBC had expended on the project, and $150 million in lost profits.
The Tribunal explained in detail why it rejected the lost profits
amount KBC sought – $512.5 million – and how it arrived at the
amount awarded.
In February 2001, Pertamina appealed the Award to the Supreme
Court of Switzerland. While that appeal was pending, KBC initiated
this suit in the federal district court to enforce the Award.
B. The District Court Decisions
Pertamina challenged enforcement of the Award in the federal
district court on four grounds under Article V of the New York
Convention: (1) the procedure for selecting the arbitrators was
not in accordance with the agreement of the parties; (2) the
Tribunal improperly consolidated the claims into one arbitration;
(3) Pertamina was “unable to present its case” to the Tribunal; and
(4) enforcement of the damages Award would violate the public
policy of the United States. As to the first two grounds,
Pertamina contended that the decision to consolidate the claims
under the two contracts was procedurally improper and that KBC’s
unilateral appointment of an arbitrator violated the ESC
arbitration provision. As to the third ground, Pertamina argued
10
that the Tribunal improperly reversed its finding in the
Preliminary Award that Pertamina did not breach the contracts by
holding Pertamina liable for nonperformance in the Final Award;
that the Tribunal’s denial of Pertamina’s request for discovery of
FPL’s records prevented Pertamina from fully presenting its case;
and that the Tribunal’s denial of a continuance after KBC filed its
rebuttal to the reply to the Revised Statement of Claim prevented
Pertamina from fully preparing to meet KBC’s contentions. As to
the fourth ground, Pertamina argued that the Award violated the
international abuse of rights doctrine and punished Pertamina for
obeying the Indonesian government’s decree. Under Federal Rule of
Civil Procedure 56(f), Pertamina requested a delay in the district
court in responding to KBC’s summary judgment motion to seek
discovery of the same FPL records it had unsuccessfully sought in
the arbitration.
Pertamina continued its appeal seeking annulment of the Award
to the Supreme Court of Switzerland while the enforcement action
was pending in the district court in Texas. The Texas district
court slowed the proceedings in deference to Pertamina’s request
that the Swiss court first be allowed to decide whether to annul
the Award. In April 2001, the Swiss Supreme Court dismissed
Pertamina’s claim because of untimely payment of costs. Pertamina
moved for reconsideration; the Swiss court denied that motion in
August 2001.
11
In December 2001, the district court enforced the Award,
rejecting each of Pertamina’s grounds for refusal. The district
court carefully reviewed the record in examining Pertamina’s
claimed inability to challenge in the arbitration proceeding KBC’s
argument that it could have obtained project financing from its
investor, FPL. The district court denied Pertamina’s Rule 56(f)
request for additional discovery on this issue. Pertamina filed
its notice of appeal from the district court’s summary judgment
enforcing the Award in January 2002.
Having failed in its effort to annul the Award in the Swiss
courts, Pertamina filed suit in Indonesia seeking annulment. In
August 2002, an Indonesian court annulled the Award. KBC continued
with enforcement suits in Hong Kong and Canada. In October 2002,
while this appeal was pending, Pertamina discovered in the Canadian
proceeding that FPL and one other KBC investor, Caithness, had held
a political risk insurance policy covering the KBC project through
Lloyd’s of London. Pertamina also learned that Lloyd’s had paid
$75 million under that insurance policy to FPL and Caithness for
the losses resulting from the Indonesian government’s suspension of
the project.
In December 2002, Pertamina filed a motion in the district
court to vacate the judgment on three grounds: (1) newly-discovered
evidence of the political risk insurance policy, under Rule
60(b)(2); (2) the Indonesian court’s annulment of the underlying
arbitral Award, under Rule 60(b)(5); and (3) satisfaction of
12
judgment to the extent of the $75 million insurance payment.
Pertamina also filed a motion in this court to supplement the
record and briefing. In both motions, Pertamina argued that the
existence of political risk insurance coverage in favor of FPL
undermined KBC’s claims that the contracts allocated political
risks to Pertamina and that FPL would have financed the project in
order to avoid losing its earlier investment. Additionally,
Pertamina argued that the payment of the insurance proceeds
undermined the Tribunal’s determination of damages. Pertamina
urged that KBC’s failure to disclose the insurance during the
arbitration provided a basis for refusing to enforce the Award and
made the district court’s summary judgment improper.
This court denied Pertamina’s motion to supplement the
appellate record under Federal Rule of Appellate Procedure 10(e)
and remanded to the district court for consideration of Pertamina’s
Rule 60(b) motion. On remand, the district court denied the
motion, finding that Pertamina failed to show that KBC had misled
the tribunal or that KBC’s failure to produce the political risk
insurance policy violated the rules governing the arbitration.
The district court also rejected Pertamina’s claim that
Indonesia had primary jurisdiction to decide to annul the Award and
declined to give effect to the Indonesian court’s annulment order
as a defense to enforcement. The district court imposed judicial
estoppel to preclude Pertamina from asserting that Indonesian
procedural law had governed the arbitration and that Indonesian
13
courts had primary jurisdiction to review the Award. Finally, the
district court rejected Pertamina’s argument that the amount of the
Award should be offset by the $75 million insurance payment.8
This appeal followed. Pertamina argues that the Tribunal
improperly consolidated the claims into one arbitration proceeding;
the selection of the arbitrators violated the JOC and ESC; the
Tribunal denied Pertamina a fair opportunity to present its case
because the Tribunal reversed part of its Preliminary Award without
notice, denied Pertamina’s request to postpone the arbitration, and
denied Pertamina’s discovery requests; the Award is contrary to
public policy because it violated the international law abuse of
rights doctrine and because the district court’s decision holds
Pertamina liable for complying with Indonesian law; and the
8
The day after the district court issued its final order denying
Pertamina’s Rule 60(b) motion, KBC submitted a letter to the court
“clarifying” that while FPL was not the insured under the political risk
insurance policy, FPL owned one of the named insureds that benefitted
under the policy. The district court issued a supplemental order
acknowledging KBC’s letter and noting that the fact that FPL was not a
named insured under the insurance policy “was only one of many factors
that the Court considered in denying Pertamina’s Rule 60(b) Motion.
Thus, the fact that an entity owned by FPL, but not FPL itself,
benefit[t]ed under the policy does not change any legal conclusion” in
the court’s decision. On the same day that the district court issued
its supplemental order, and ten days after the court’s denial of
Pertamina’s Rule 60(b) motion, KBC filed a Motion to Amend Findings of
Fact under Federal Rule of Civil Procedure 52(b). In a second
supplemental order, the district court recognized KBC’s motion as a
Motion to Amend or Alter Judgment under Federal Rule of Civil Procedure
59(e) and granted the motion. The court assumed, without deciding, that
FPL benefitted from the risk insurance policy, but held that it did not
affect the basis of the court’s decision. Pertamina argues that the
district court did not have jurisdiction to issue either of these two
supplemental orders. This court agrees that the issue addressed in the
supplemental orders does not affect the outcome of this case.
14
Indonesian court’s annulment of the arbitral Award is a defense to
enforcement under the New York Convention. Each ground is
addressed below.
II. Analysis
A district court’s decision confirming an arbitration award is
reviewed under the same standard as any other district court
decision.9 This court reviews a district court’s grant of summary
judgment de novo.10
A. The New York Convention
The New York Convention provides a carefully structured
framework for the review and enforcement of international arbitral
awards. Only a court in a country with primary jurisdiction over
an arbitral award may annul that award.11 Courts in other countries
have secondary jurisdiction; a court in a country with secondary
jurisdiction is limited to deciding whether the award may be
enforced in that country.12 The Convention "mandates very different
regimes for the review of arbitral awards (1) in the [countries] in
which, or under the law of which, the award was made, and (2) in
9
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 947-948
(1999); Hughes Training, Inc. v. Cook, 254 F.3d 588, 592 (5th Cir.
2001).
10
Eason v. Thaler, 73 F.3d 1322, 1324 (5th Cir. 1996).
11
Karaha Bodas Co., 335 F.3d at 364; see Yusuf Ahmed Alghanim &
Sons, W.L.L. v. Toys “R” Us, Inc., 126 F.3d 15, 23 (2d Cir. 1997).
12
Karaha Bodas Co., 335 F.3d at 364.
15
other [countries] where recognition and enforcement are sought."13
Under the Convention, "the country in which, or under the
[arbitration] law of which, [an] award was made" is said to have
primary jurisdiction over the arbitration award.14 All other
signatory states are secondary jurisdictions, in which parties can
only contest whether that state should enforce the arbitral award.15
It is clear that the district court had secondary jurisdiction and
considered only whether to enforce the Award in the United States.
Article V enumerates specific grounds on which a court with
secondary jurisdiction may refuse enforcement.16 In contrast to the
13
Alghanim, 126 F.3d at 23 (quoted in Karaha Bodas Co., 335 F.3d
at 364).
14
Karaha Bodas Co., 335 F.3d at 364.
15
Id.
16
Article V, Section 201 of the New York Convention provides:
1. Recognition and enforcement of the award may be
refused, at the request of the party against whom
it is invoked, only if that party furnishes to the
competent authority where the recognition and
enforcement is sought, proof that:
(a) The parties to the agreement referred to in
article II were, under the law applicable to them,
under some incapacity, or the said agreement is
not valid under the law to which the parties have
subjected it or, failing any indication thereon,
under the law of the country where the award was
made; or
(b) The party against whom the award is invoked
was not given proper notice of the appointment of
the arbitrator or of the arbitration proceedings
or was otherwise unable to present his case; or
(c) The award deals with a difference not
contemplated by or not falling within the terms of
16
limited authority of secondary-jurisdiction courts to review an
arbitral award, courts of primary jurisdiction, usually the courts
of the country of the arbitral situs, have much broader discretion
to set aside an award. While courts of a primary jurisdiction
country may apply their own domestic law in evaluating a request
to annul or set aside an arbitral award, courts in countries of
the submission to arbitration, or it contains
decisions on matters beyond the scope of the
submission to arbitration, provided that, if the
decisions on matters submitted to arbitration can
be separated from those not so submitted, that
part of the award which contains decisions on
matters submitted to arbitration may be recognized
and enforced; or
(d) The composition of the arbitral authority or
the arbitral procedure was not in accordance with
the agreement of the parties, or, failing such
agreement, was not in accordance with the law of
the country where the arbitration took place; or
(e) The award has not yet become binding on the
parties, or has been set aside or suspended by a
competent authority of the country in which, or
under the law of which, that award was made.
2. Recognition and enforcement of an arbitral
award may also be refused if the competent
authority in the country where recognition and
enforcement is sought finds that:
(a) The subject matter of the difference is not
capable of settlement by arbitration under the law
of that country; or
(b) The recognition or enforcement of the award
would be contrary to the public policy of that country.
9 U.S.C. § 201, Art. V(1)-(2). See generally Alghanim, 126 F.3d at 23;
Susan Choi, Judicial Enforcement of Arbitration Awards Under the ICSID
and New York Conventions, 28 N.Y.U. J. Int’l L. & Pol. 175 (1996).
17
secondary jurisdiction may refuse enforcement only on the grounds
specified in Article V.17
The New York Convention and the implementing legislation,
Chapter 2 of the Federal Arbitration Act (“FAA”), provide that a
secondary jurisdiction court must enforce an arbitration award
unless it finds one of the grounds for refusal or deferral of
recognition or enforcement specified in the Convention.18 The court
may not refuse to enforce an arbitral award solely on the ground
that the arbitrator may have made a mistake of law or fact.19
“Absent extraordinary circumstances, a confirming court is not to
reconsider an arbitrator’s findings.”20 The party defending against
enforcement of the arbitral award bears the burden of proof.21
Defenses to enforcement under the New York Convention are construed
narrowly, “to encourage the recognition and enforcement of
17
Alghanim, 126 F.3d at 23 (cited in Karaha Bodas Co., 335 F.3d
at 368).
18
9 U.S.C. § 207.
19
Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310,
315 (2d Cir. 1998); Nat’l Wrecking Co. v. Int’l Bhd. of Teamsters, 990
F.2d 957, 960 (7th Cir. 1993).
20
Europcar Italia, 156 F.3d at 315.
21
Imperial Ethiopian Gov’t v. Baruch-Foster Corp., 535 F.2d 334,
336 (5th Cir. 1976); see Czarina, L.L.C. v. W.F. Poe Syndicate, 2004 WL
205611, at *6 n.3 (11th Cir. Feb. 4, 2004).
18
commercial arbitration agreements in international
contracts . . . .”22
B. The Choice-of-Law Issues
In the JOC and ESC, the parties stipulated that “the site of
the arbitration shall be Geneva.” The Tribunal concluded that
under the arbitration agreements, Swiss procedural law applied as
the law of the arbitral forum.23 From 1998 to April 2002, Pertamina
consistently and repeatedly took the position before the Tribunal,
the Swiss courts, and the United States district court, that Swiss
procedural law applied to the arbitration.24 In April 2002, after
22
Imperial Ethiopian Gov’t, 535 F.2d at 335; Parsons & Whittemore
Overseas Co., Inc. v. Societe Generale de L’Industrie du Papier, 508
F.2d 969, 974, 976 (2d Cir. 1974).
23
The Tribunal specifically cited Swiss procedural law in its
Preliminary Award. The Tribunal first cited Swiss law regarding the
intentions of parties to a contract to help guide its determination
whether the government of Indonesia was a party to the JOC and ESC. The
Tribunal cited the Swiss concept of “connexity” in concluding that KBC
could consolidate its claims under the contracts into a single
arbitration proceeding. Finally, the Tribunal referred to Swiss common
law suggesting that arbitrators are not agents in determining that the
selection of Tribunal arbitrators was appropriate under the agreements.
The Final Award stated that it was “[m]ade in Geneva.”
24
See, e.g., Prelim. Award, § B(1) (“The Respondents support this
conclusion by making reference to Swiss law as the JOC and the ESC
provide for UNCITRAL Arbitration in Geneva between the parties which are
neither Swiss nor Swiss resident. As a result, and under both
contracts, the arbitration proceedings are governed by Chapter 12 of the
Swiss Private International Law Statutes. Under Swiss law, [Respondent
contends] the Arbitral Tribunal is lacking jurisdiction because KBC
failed to comply with the contractual prerequisites to arbitration.”);
id. at § C(1) (“The Respondents also state that, under the arbitration
agreements and Swiss law, the arbitrators have no power to consolidate
. . . .”); id. at § C(3) (citing a Swiss federal tribunal case in
support of its decision that a consolidated arbitration was
appropriate); id. at § D(1) (Respondents contend that “[s]uch solution
is not acceptable under the applicable Swiss law”).
The district court found that Pertamina “specifically, repeatedly
19
the Swiss court had rejected Pertamina’s annulment proceeding and
the district court had held the Award enforceable in the United
States, Pertamina moved in the district court for a stay of the
Award pending the outcome of the annulment proceeding Pertamina had
filed in Indonesia. For the first time, Pertamina raised in the
district court the argument that Indonesian, not Swiss, procedural
law had applied to the arbitration. Pertamina took this position
in the district court as part of its argument that Indonesia had
primary jurisdiction over the Award and therefore had the authority
to set it aside rather than merely decline to enforce it.
Article V(1)(e) of the Convention provides that a court of
secondary jurisdiction may refuse to enforce an arbitral award if
it “has been set aside or suspended by a competent authority of the
country in which, or under the law of which, that award was made.”25
Courts have held that the language, “‘the competent authority of
the country . . . under the law of which, that award was made’
refers exclusively to procedural and not substantive law, and more
and unequivocally” argued that Swiss arbitration law applied in the
arbitration. Pertamina opened its motion to stay the district court
proceedings pending appeal to the Swiss judiciary by stating: “The
arbitration award . . . was conducted subject to the arbitration laws
of Switzerland, and the Swiss court is empowered to vacate an award
rendered in Switzerland. . . . KBC is asking this Court to act
prematurely to confirm an award that might be overturned in the country
whose law governed the arbitration.” Pertamina added that “it is
fundamental that the courts of the originating nation are in the best
position to pass on issues under their own law. . . . Here, Pertamina’s
appeal encompasses questions of Swiss law.” Pertamina made similar
arguments under Swiss procedural law in its responses to KBC’s motion
for summary judgment.
25
9 U.S.C. § 201, Art. V(1)(e).
20
precisely, to the regimen or scheme of arbitral procedural law
under which the arbitration was conducted, and not the substantive
law . . . applied in the case.”26 In this appeal, Pertamina and the
Republic of Indonesia (the “Republic”), as amicus, argue that the
Tribunal and the district court erred in finding that Swiss
procedural law, rather than Indonesian procedural law, applied.
Pertamina and the Republic argue that in the arbitration
agreements, the parties chose Indonesian procedural, as well as
substantive, law to govern the arbitration. Pertamina and the
Republic assert that, as a result: (1) the arbitration must be
examined for compliance with Indonesian procedural law; and (2) the
Indonesian court had primary jurisdiction to annul the Award,
providing a defense to enforcement in the United States. KBC
responds that the Tribunal properly interpreted the parties’
contracts in deciding that Swiss procedural law applied and the
district court properly applied the New York Convention in
affirming that decision. This court agrees with KBC.
Under the New York Convention, the rulings of the Tribunal
interpreting the parties’ contract are entitled to deference.27
26
Int’l Standard Elec. Corp. v. Bridas Sociedad Anonima
Petrolera, Indus. y Comercial, 745 F. Supp. 172, 178 (S.D.N.Y. 1990);
see Alghanim, 126 F.3d at 21; M & C Corp. v. Erwin Behr GmbH & Co., KG,
87 F.3d 844, 848 (6th Cir. 1996).
27
Europcar Italia, 156 F.3d at 315; Nat’l Wrecking Co., 990 F.2d
at 960; see James Ford Inc. v. Ford Dealer Computer Serv. Inc., 56 Fed.
Appx. 324, 325 (9th Cir. 2003) (giving broad deference to an
arbitrator’s choice-of-law decision).
21
Unless the Tribunal manifestly disregarded the parties’ agreement
or the law, there is no basis to set aside the determination that
Swiss procedural law applied.28 The parties’ arbitration agreements
specified that the site of the arbitration was Geneva, Switzerland
and that the arbitration would proceed under the UNCITRAL rules.
Those rules specify that the “arbitral tribunal shall apply the law
designated by the parties as applicable to the substance of the
dispute.”29 It is undisputed that the parties specified that
Indonesian substantive law would apply.30 It is also undisputed
that the contracts specified the site of the arbitration as
Switzerland. The contracts did not otherwise expressly identify
the procedural law that would apply to the arbitration. The
parties did refer to certain Indonesian Civil Procedure Rules in
the contracts.31 Pertamina and the Republic argue that these
28
Europcar Italia, 156 F.3d at 315; Nat’l Wrecking Co., 990 F.2d
at 960.
29
UNCITRAL Arbitration Rules, G.A. Res. 31/98, U.N. GAOR Comm’n
Int’l Trade L., at Art. 33(1) (1976),
http://www.uncitral.org/english/texts/arbitration/arb-rules.htm.
30
Article 20 of the JOC and Section 12.1 of the ESC each
provided: “This Contract shall be governed by the laws and regulations
of [the] Republic of Indonesia.”
31
Pertamina and the Republic rely on the following contractual
provisions for their position:
The parties expressly agree to waive the
applicability of (a) Article 650.2 of the
Indonesian Code of Civil Procedure so that the
appointment of the arbitrators shall not terminate
as of the sixth (6th) Month after the date(s) of
their appointments and (b) the second sentence of
Article 620.1 of the Indonesian Code of Civil
22
references evidence an intent that while Switzerland would be the
place of the arbitration, Indonesian procedural law would apply as
the lex arbitri.
Under the New York Convention, an agreement specifying the
place of the arbitration creates a presumption that the procedural
law of that place applies to the arbitration.32 Authorities on
Procedure so that the arbitration need not be
completed within the specific time.
JOC at Art. 13.2(a); ESC at § 8.2(a).
In accordance with Section 631 of the Indonesian
Code of Civil Procedure, the Parties agree that
the Tribunal need not be bound by strict rules of
law where they consider the application thereof to
particular matters to be inconsistent with the
spirit of this Contract and the underlying intent
of the Parties, and as to such matters their
conclusion shall reflect their judgment of the
correct interpretation of all relevant terms
hereof and the correct and just enforcement of
this Contract in accordance with such terms.
JOC at Art. 13.2(b); ESC at § 8.2(b).
The parties hereby renounce their right to appeal
from the decision of the arbitral panel and agree
that in accordance with Section 641 of the
Indonesian Code of Civil Procedure neither Party
shall appeal to any court . . . and accordingly
the Parties hereby waive the applicability of
Articles 15 and 108 of the Law No. 1 of 1950 and
any other provision of Indonesian law and
regulations that would otherwise give the right to
appeal the decisions of the arbitral panel.
JOC at Art. 13.2(d); ESC at § 8.2(d).
32
Albert Jan van den Berg, “The Application of the New York
Convention by the Courts,” ICCA Congress Series No. 9 25, 26 (Kluwer
1999); Sir Michael J. Mustill & Stewart C. Boyd, The Law and Practice
of Commercial Arbitration in England 64 (Butterworths 2d ed. 1989);
Alain Hirsch, The Place of the Arbitration and the Lex Arbitri, 34 Arb.
J. 43, 46 (1979); Alan Scott Rau, The New York Convention in American
Courts, 7 Am. Rev. Int’l Arb. 213, 224 (1996). In their reports filed
23
international arbitration describe an agreement providing that one
country will be the site of the arbitration but the proceedings
will be held under the arbitration law of another country by terms
such as “exceptional”; “almost unknown”;33 a “purely academic
invention”;34 “almost never used in practice”;35 a possibility “more
theoretical than real”; and a “once-in-a-blue-moon set of
circumstances.”36 Commentators note that such an agreement would
be complex, inconvenient, and inconsistent with the selection of a
neutral forum as the arbitral forum.37
in the district court, recognized authorities on international
arbitration retained by both Pertamina and KBC, including Albert Jan van
den Berg, Sudargo Guatama, Alan Scott Rau, and Eric A. Schwartz, agreed
that under the Convention, arbitration clauses designating the site of
the arbitration presumptively designate that site as the source of the
applicable procedural law.
33
Mustill and Boyd, Commercial Arbitration at 64.
34
Van den Berg, The Application of the New York Convention at 26.
35
Id.
36
Martin Hunter, Case and Comment: International Arbitration,
[1988] Lloyd’s Mar. & Comm. L. Q. 23, 26.
37
See, e.g., Gary B. Born, International Commercial Arbitration:
Commentary and Materials 761 (2d ed. 2001). Few reported cases involve
arbitration clauses that separate the law of the forum state and the lex
arbitri. In two such English cases, Naviera Amazonica Peruana S.A. v.
Compania Internacional de Seguros del Peru, [1988] 1 Lloyd’s L. Rep. 116
(C.A. 1987), and Union of India v. McDonnell Douglas Corp., [1993] 2
Lloyd’s Rep. 48 (Q.B. 1992), the courts applied the presumption that the
procedural law of the place specified as the forum for the arbitration
would govern. Naviera Amazonica Peruana, [1988] 1 Lloyd’s L. Rep. at
119; Union of India, [1993] 2 Lloyd’s Rep. at 50. The Hong Kong court
also relied upon this presumption in determining that Swiss procedural
law governed the arbitration proceeding at issue in this case. Hong
Kong decision at 7-8.
24
In the JOC and ESC, the parties expressly agreed that
Switzerland would be the site for the arbitration. This agreement
presumptively selected Swiss procedural law to apply to the
arbitration. There is no express agreement in the JOC or ESC that
Indonesia would be the country “under the law of which” the
arbitration was to be conducted and the Award was to be made.38 The
Tribunal recognized the parties’ selection of Switzerland by
issuing the Award as “[m]ade in Geneva.” In selecting Switzerland
as the site of the arbitration, the parties were not choosing a
physical place for the arbitration to occur, but rather the place
where the award would be “made.” Under Article 16(1) of the
UNCITRAL rules, the “place” designated for an arbitration is the
legal rather than physical location of the forum.39 The arbitration
proceeding in this case physically occurred in Paris, but the Award
was “made in” Geneva, the place of the arbitration in the legal
sense and the presumptive source of the applicable procedural law.40
The references in the contracts to certain Indonesian civil
procedure rules do not rebut the strong presumption that Swiss
38
9 U.S.C. § 201, Art. V(1)(e).
39
See Jacomijn J. van Hof, Commentary on the UNCITRAL Arbitral
Rules: The Application by the Iran-U.S. Claims Tribunal 109-10 (Kluwer
1991); see also UNCITRAL Arbitration Rules at Art. 16(1). Rules 16(2)
and (3) expressly permit proceedings to be conducted at a location
different from the designated “place” of the arbitration. UNCITRAL
Arbitration Rules at Art. 16 (2)-(3). Rule 16(4) provides that “[t]he
award shall be made at the place of arbitration.” Id. at Art. 16(4).
40
Van Hof, Commentary on the UNCITRAL Arbitral Rules at 109-110.
25
procedural law applied to the arbitration.41 These references fall
far short of an express designation of Indonesian procedural law
necessary to rebut the strong presumption that designating the
place of the arbitration also designates the law under which the
award is made.
Pertamina and the Republic have belatedly asserted that the
district court should have conducted a choice-of-law analysis to
determine the law that would apply to the interpretation of the
parties’ contracts, rather than analyze the contracts under the New
York Convention. Pertamina and the Republic assert that the result
of such an analysis would have been to identify Indonesian law as
the decisional law under which to interpret the contracts. This
argument is inconsistent with the position Pertamina – and its
experts on interpreting international commercial arbitration
agreements – took earlier in this case, that the district court
should review the Tribunal’s interpretation of the contracts under
the New York Convention. A court conducts the multifactor choice-
of-law analysis Pertamina now advocates in the absence of an
41
Robert N. Hornick, one of the authorities on international
arbitration and Indonesian law who submitted an affidavit and report in
the district court, provided an explanation for the references to the
Indonesian laws in the arbitration clauses unrelated to any intent to
designate Indonesia as the country under the law of which the Award
would be made. Hornick explained that each article of Indonesian law
cited in the contracts imposes a requirement inconsistent with the
contemplated arbitration. (Hornick Decl. ¶¶ 28-32). These articles
could have been invoked to oppose later enforcement of the Award in
Indonesia unless waived. By waiving in advance provisions that could
later be invoked to block enforcement of the Award in an Indonesian
court, the parties facilitated future enforcement efforts in Indonesia.
(Id.).
26
effective choice of law by the parties to an arbitration
agreement.42 In the JOC and ESC, the parties presumptively chose
Swiss procedural law as the lex arbitri when they designated
Switzerland as the site of the arbitration, and that presumption is
unrebutted.43
As the district court, another panel of this court, and the
Hong Kong Court of First Instance have all recognized, Pertamina’s
previous arguments that Swiss arbitral law applied strongly
evidence the parties’ contractual intent.44 Pertamina represented
to the Tribunal that Swiss procedural law applied.45 As but one
example, Pertamina cited Swiss procedural law in arguing that the
42
REST. (2D) CONFL. §§ 187, 188, & 218 (1971).
43
Certain sections and comments of the Restatement also support
a determination that Swiss law applied to the arbitration agreement.
See, e.g. id. at § 188 (incorporating R EST. (2D) CONFL. § 6, which
requires consideration of the relevant policies of the forum); id. at
§ 218 cmt. b (suggesting that the arbitration forum may have the most
significant relationship to the arbitration and that a contractual
provision requiring arbitration to occur in a certain forum may evidence
an intention by the parties that the local law of this forum should
govern).
44
Karaha Bodas Co., 335 F.3d at 371; Hong Kong decision at 12.
45
See, e.g., Prelim. Award, § B(1) (“The Respondents support this
conclusion by making reference to Swiss law as the JOC and the ESC
provide for UNCITRAL Arbitration in Geneva between the parties which are
neither Swiss nor Swiss resident. As a result, and under both
contracts, the arbitration proceedings are governed by Chapter 12 of the
Swiss Private International Law Statutes. Under Swiss law, [Respondent
contends] the Arbitral Tribunal is lacking jurisdiction because KBC
failed to comply with the contractual prerequisites to arbitration.”);
id. at § C(1) (“The Respondents also state that, under the arbitration
agreements and Swiss law, the arbitrators have no power to consolidate
. . . .”); id. at § C(3) (citing a Swiss federal tribunal case in
support of its decision that a consolidated arbitration was
appropriate); id. at § D(1) (Respondents contend that “[s]uch solution
is not acceptable under the applicable Swiss law”).
27
Tribunal could not consolidate the claims under the JOC and ESC
into one proceeding. Pertamina at no point argued to the Tribunal
that Indonesian procedural law applied. Pertamina initially sought
to set aside the Award in a Swiss court.46 Pertamina asked the
Texas district court to stay its enforcement proceeding until
Pertamina’s appeal in Switzerland was resolved. In making this
argument, Pertamina stated that “[t]he arbitration . . . was
conducted according to the laws of Switzerland, and the Swiss court
is empowered to vacate an award rendered in Switzerland . . . .
KBC is asking this Court to act prematurely to confirm an award
that might be overturned in the country whose law governed the
arbitration.”47
The Tribunal’s decision that Swiss arbitral law applied does
not make the Award unenforceable.48 The combination of the parties’
selection of Switzerland as the site of the arbitration; the
46
In the district court, Pertamina presented an affidavit and
report from an expert on international commercial arbitration that
weakly attempted to explain the appeal to the Swiss court as a mistake.
The theory that Pertamina’s lawyers erred and applied to the wrong court
for annulment – and then moved for reconsideration when that court
dismissed the appeal – is utterly without support in the record.
47
See Major League Baseball Players Ass’n v. Garvey, 532 U.S.
504, 509 (2001) (citations omitted) (“[I]f an ‘arbitrator is even
arguably construing or applying [a] contract and acting within the scope
of his authority,’ the fact that ‘a court is convinced he committed
serious error does not suffice to overturn his decision.’”).
48
Europcar Italia, 156 F.3d at 315; Nat’l Wrecking Co., 990 F.2d
at 960; see Garvey, 532 U.S. at 509 (“Courts are not authorized to
review [an] arbitrator’s decision on the merits despite allegations that
the decision rests on factual errors or misinterprets the parties’
agreement.”).
28
failure clearly or expressly to choose Indonesian arbitral law in
their agreements, as required to select arbitral law other than
that of the place of the arbitration; and the clear evidence
provided by the parties’ own conduct that they intended Swiss law
to apply to the arbitration, amply supports the district court’s
determination that the Tribunal properly applied Swiss procedural
law.
The district court also found that under the doctrine of
judicial estoppel, Pertamina’s prior conduct precluded it from
arguing against the application of Swiss procedural law. The
doctrine prevents a party from asserting a position in a legal
proceeding that is contrary to a position previously taken in the
same or earlier proceedings.49 “The policies underlying the
doctrine include preventing internal inconsistency, precluding
litigants from ‘playing fast and loose’ with the courts, and
prohibiting parties from deliberately changing positions according
to the exigencies of the moment.”50 Fifth Circuit courts have
identified two limitations on judicial estoppel: (1) the position
of the party to be estopped must be clearly inconsistent with its
49
Hall v. GE Plastic Pac. PTE Ltd., 327 F.3d 391, 396 (5th Cir.
2003); see In re Coastal Plains, Inc., 179 F.3d 197, 205 (5th Cir. 1999)
(quoting Brandon v. Interfirst Corp., 858 F.2d 266, 268 (5th Cir. 1988))
(describing judicial estoppel as “a common law doctrine by which a party
who has assumed one position in his pleadings may be estopped from
assuming an inconsistent position”); see also Ahrens v. Perot Sys.
Corp., 205 F.3d 831, 833 (5th Cir. 2000); Ergo Sci., Inc. v. Martin, 73
F.3d 595, 598-600 (5th Cir. 1996).
50
United States v. McCaskey, 9 F.3d 368, 378 (5th Cir. 1993).
29
prior position; and (2) the court must have accepted that prior
position.51 Judicial acceptance requires that the court adopted the
position previously urged by a party, whether as a preliminary
matter or as part of a final disposition.52
The district court did not abuse its discretion in imposing
judicial estoppel to preclude Pertamina from arguing against the
application of Swiss procedural law. Pertamina repeatedly
represented to the Tribunal and to the district court that Swiss
procedural law controlled the arbitration.53 Both the Tribunal and
the district court relied on these representations in their
decisionmaking. In the Award, the Tribunal accepted Pertamina’s
argument that Swiss procedural law applied. The district court
adopted Pertamina’s position that Swiss law applied in delaying the
enforcement proceedings pending the Swiss court’s resolution of the
appeal.54 Pertamina’s argument that Indonesian procedural law
governed the arbitration is clearly inconsistent with its prior
position that Swiss procedural law controlled.55 Pertamina
belatedly suggests that its positions are not inconsistent because
51
Hall, 327 F.3d at 396; Ahrens, 205 F.3d at 833; Coastal Plains,
179 F.3d at 206.
52
Coastal Plains, 179 F.3d at 206.
53
See note 24.
54
See Coastal Plains, 179 F.3d at 206 (noting that the acceptance
prong of judicial estoppel can be satisfied by a court’s acceptance of
a party’s position “as a preliminary matter”).
55
See Hall, 327 F.3d at 396; Ahrens, 205 F.3d at 833; Coastal
Plains, 179 F.3d at 206.
30
the New York Convention permits multiple primary jurisdictions. As
addressed more fully below, this record makes it clear that only
the Swiss courts had primary jurisdiction over this Award.
Judicial estoppel provides an additional ground for concluding that
Swiss procedural law applied to the arbitration proceeding.56
C. The Procedural Challenges to the Arbitral Award
1. Consolidation of the Claims under the JOC and ESC into
One Arbitration Proceeding
Under Article V(1)(d) of the New York Convention, a court may
refuse to enforce an arbitration award if “[t]he composition of the
arbitral authority or the arbitral procedure was not in accordance
with the agreement of the parties, or, failing such agreement, was
not in accordance with the law of the country where the arbitration
took place.”57 Pertamina argues that because the JOC and ESC were
separate contracts with separate arbitration clauses, and because
neither contract expressly allowed the consolidation of claims, the
Tribunal improperly consolidated the claims into one arbitration
proceeding. Pertamina also contends on appeal that because
Indonesian rather than Swiss procedural law governed the
56
See Hall, 327 F.3d at 396; Coastal Plains, 179 F.3d at 206;
Ahrens, 205 F.3d at 833. The High Court of Hong Kong Court estopped
Pertamina from asserting application of Indonesian procedural law for
the same reasons. Hong Kong decision at 9-12. The High Court also
emphasized the dilatoriness of Pertamina’s argument: “Pertamina’s
position on the [applicable procedural law] only changed 30 months after
the preliminary award was published, 15 months after the Final award
(December 2000) and seven months after the Swiss Court dismissed the
petition for revision (August 2001).” Id. at 11.
57
9 U.S.C. § 201, Art. V(1)(d).
31
arbitration, the Tribunal’s reliance on Swiss procedural law to
consolidate the claims was erroneous.
The Tribunal carefully analyzed the parties’ contracts in
concluding that a consolidated arbitration of KBC’s claims against
Pertamina and PLN under the JOC and ESC was appropriate. In
factual findings set out in the Preliminary Award, the Tribunal set
out the basis for concluding that the two contracts were integrated
such that “the parties did not contemplate the performance of two
independent contracts but the performance of a single project
consisting of two closely related parties.”58 The Tribunal
continued:
In such circumstances, the conclusion of this
Arbitral Tribunal is that KBC’s single action
should be admitted, provided it is
appropriate. The Arbitral Tribunal has not
the slightest doubt in this respect. Due to
the integration of the two contracts and the
fact that the Presidential Decrees, the
consequences of which are at the origin of the
dispute, affected both of them, the initiation
of two separate arbitrations would be
artificial and would generate the risk of
contradictory decisions. Moreover, it would
increase the costs of all the parties
involved, an element of special weight in the
light of difficulties faced by the Indonesian
economy, to which counsel for [Pertamina]
58
Article 15.3 of the ESC provided that “the terms of [the ESC]
and the Joint Operation Contract constitute the entire agreement between
the parties hereto.” Article 1.2 of the JOC stated that “[e]ach such
Energy Sales Contract shall be an integral part of this contract, and
to the extent the provisions of the Energy Sales Contract obligate the
parties hereto, shall be deemed incorporated into this contract for all
purposes.” Pertamina and KBC entered into the JOC and ESC on the same
day. The JOC and the ESC contained virtually identical arbitration
provisions.
32
legitimately drew the Arbitral Tribunal’s
attention.
The record provides ample support for the Tribunal’s findings and
conclusion that the two contracts were integrated such that the
parties contemplated a single arbitration.
The Tribunal cited the Swiss law concept of “connexity” in
analyzing the legal relations among KBC and Pertamina under the JOC
and KBC, Pertamina, and PLN under the ESC as one of the factors
justifying the consolidation of claims under the two contracts into
one arbitration proceeding. The Tribunal concluded that the
relationship of the JOC and ESC exceeded the standard of
“connexity” under Swiss law. “The use of the word ‘connexity’ to
describe the relationship between the JOC and the ESC would be an
understatement. In reality, the two contracts are integrated.”
Courts and arbitration tribunals have recognized that claims
arising under integrated contracts may be consolidated into single
arbitrations.59 The Tribunal cited one other factor that supported
59
See, e.g., Conn. Gen. Life Ins. Co. v. SunLife Assur. Co. of
Canada, 210 F.3d 771, 774 (7th Cir. 2000); Maxum Found., Inc. v. Salus
Corp., 817 F.2d 1086, 1087-88 (4th Cir. 1987). Pertamina cites cases
decided under the FAA and the law of different American jurisdictions
for the proposition that courts do not have the authority to order
arbitrations without the parties’ approval. See, e.g., Dean Witter
Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985) (“The preeminent
concern of Congress in passing the [FAA] was to enforce private
agreements into which parties had entered, and that concern requires
that we rigorously enforce agreements to arbitrate, even if the result
is ‘piecemeal’ litigation . . . .”); Gov’t of the United Kingdom and N.
Ireland v. Boeing Co., 998 F.2d 68, 74 (2d Cir. 1993); Protective Life
Ins. Co. v. Lincoln Nat. Life Ins. Corp., 873 F.2d 281, 282 (11th Cir.
1989). These cases do not involve contracts so closely related as to
manifest the parties’ agreement to be joined in arbitration proceedings
involving parties and claims under those integrated contracts.
33
consolidation: “appropriateness.” The parties agreed to the
application of the UNCITRAL Rules, which permit a tribunal to
conduct an arbitration “in such manner as it considers
appropriate.”60 Pertamina does not dispute the application of the
UNCITRAL Rules to the arbitration proceeding.
Courts are reluctant to set aside arbitral awards under the
New York Convention based on procedural violations, reflected in
cases holding that the Convention embodies a proenforcement bias.61
The Tribunal emphasized in its Preliminary Award that although the
claims would be consolidated, “the position of each party has to be
considered independently when discussing the substance of the case,
on the basis of their respective legal and contractual situations.”
The record reflects that the Tribunal kept this promise. There is
no prejudice arising from the consolidation that would justify a
refusal to enforce the Award.
2. The Composition of The Tribunal
Under Article V(1)(d), a court may refuse enforcement of an
arbitral award if the composition of the tribunal is not in
60
UNCITRAL Arbitration Rules at Art. 15(1).
61
See, e.g., China Minmetals Materials Imp. and Exp. Co., Ltd. v.
Chi Mei Corp., 334 F.3d 274, 282-83 (3d Cir. 2003); Glencore Grain
Rotterdam B.V. v. Shivnath Rai Harnarain Co., 284 F.3d 1114, 1120 (9th
Cir. 2000); Alghanim, 126 F.3d at 20; Parsons & Whittemore Overseas, 508
F.2d at 973; Compagnie des Bauxites de Guinee v. Hammermills, Inc., 1992
WL 122712, at *5 (D.D.C. May 29, 1992); Am. Constr. Mach. & Equip. Corp.
Ltd. v. Mechanised Constr. of Pakistan, Ltd., 659 F. Supp. 426, 428
(S.D.N.Y. 1987).
34
accordance with the parties’ agreement.62 The JOC provided for the
appointment of arbitrators, as follows:
Each Party [KBC and Pertamina] will appoint an
arbitrator within thirty (30) days after the
date of a request to initiate arbitration, who
will then jointly appoint a third arbitrator
within thirty (30) days of the date of the
appointment of the second arbitrator, to act
as Chairman of the Tribunal. Arbitrators not
appointed within the time limits set forth in
the preceding sentence shall be appointed by
the Secretary General of the International
Center for Settlement of Investment Disputes.
The ESC procedure for arbitrators’ appointment was slightly
different:
PLN on one hand, and [KBC] and PERTAMINA, on
the other hand, will each appoint one
arbitrator, in each case within thirty (30)
days after the date of a request to initiate
arbitration, who will then jointly appoint a
third arbitrator within thirty (30) days of
the date of the appointment of the second
arbitrator, to act as Chairman of the
Tribunal. Arbitrators not appointed within
the time limits set forth in the preceding
sentence shall be appointed by the Secretary
General of the International Center for
Settlement of Investment Disputes, upon the
request of any Party.
Each contract required the appointment of arbitrators within thirty
days of the notice of arbitration and provided for appointment by
the ICSID in the event that a party did not do so.
In its notice of arbitration sent to Pertamina, KBC appointed
Professor Piero Bernardini to serve as an arbitrator. Pertamina
did not designate an arbitrator within thirty days, nor did it
62
9 U.S.C. § 201, Art. V(1)(d).
35
object to KBC’s selection at that time. By letter dated June 2,
1998, KBC notified the ICSID of Pertamina’s inaction and requested
the appointment of a second arbitrator under the default
appointment provisions of the contracts. Pertamina did not respond
to this letter. The ICSID questioned KBC about the consolidation
of claims under the JOC and the ESC and KBC’s unilateral
appointment of an arbitrator. KBC responded by letter dated June
22, 1998. The ICSID confirmed receipt of KBC’s letters and in a
June 29, 1998 letter to all parties, recapped the prior
correspondence, noted Pertamina’s failure to respond, and expressed
its intent to grant KBC’s request to appoint the second arbitrator.
The ICSID Secretary-General identified Dr. Ahmed El-Kosheri as its
candidate and asked for any objections by July 13, 1998. The ICSID
sent all the preceding correspondence to PLN by courier and to
Pertamina by fax and courier. Despite the Secretary-General’s
invitation to do so, neither Pertamina nor PLN lodged objections or
responses to the proposed appointment. On July 13, 1998, having
received no communications from Pertamina, the ICSID notified
Pertamina and PLN of its intent to appoint Dr. El-Kosheri and made
the appointment on July 15, 1998. Under the JOC and ESC, Professor
Bernardini and Dr. El-Kosheri then selected the chairman of the
arbitration panel, Yves Derains.
In its Preliminary Award, the Tribunal rejected Pertamina’s
argument that KBC’s selection of an arbitrator violated the ESC’s
requirement that KBC and Pertamina jointly make the nomination.
36
The Tribunal found that the parties intended to limit that
requirement to disputes in which PLN was opposed to KBC and
Pertamina. Because the ESC did not expressly address the method
for appointing arbitrators when KBC and Pertamina opposed each
other, the Tribunal found that UNCITRAL Arbitration Rules for
appointment applied. The Tribunal ruled that the appointment
procedures used did not violate these rules or create an inequality
of treatment. The Tribunal emphasized Pertamina’s failure to
nominate an arbitrator or object to those nominated. The district
court agreed with the Tribunal’s reasoning and added that Pertamina
had failed to demonstrate any prejudice from the appointment
proceedings.
On appeal, Pertamina reasserts its argument that KBC’s
unilateral selection of an arbitrator violated the ESC’s
requirement that “PLN on the one hand and [KBC] and Pertamina, on
the other hand, will each appoint one arbitrator.” Pertamina
contends that its interests would always be aligned with KBC under
the ESC, which required PLN to purchase from Pertamina the
electricity that KBC provided, and that this explains the
contractual requirement that KBC and Pertamina agree on an
arbitrator in a dispute arising under that contract. In response,
KBC argues that the Tribunal correctly found that a dispute between
KBC and Pertamina was possible under the ESC, but in the event of
such a dispute, the ESC did not provide a procedure for choosing an
arbitrator. KBC asserts that the Tribunal correctly found that the
37
general UNCITRAL rules for selecting an arbitrator would apply,
under which KBC, Pertamina, and PLN would each appoint an
arbitrator. In addition, KBC argues that the district court
correctly found that Pertamina had failed to object to KBC’s
selection of Professor Bernardini as an arbitrator and failed to
nominate an arbitrator despite the ICSID’s requests. Finally, KBC
argues that Pertamina cannot show prejudice that would make the
Award unenforceable.
The ESC arbitration clause refers to “any dispute or
difference of any kind whatsoever” arising among “the Parties.”
Section 2 of the ESC defines “parties” to include PLN, Pertamina,
and KBC. By its terms, the arbitration clause covers a dispute
between KBC and Pertamina arising under the ESC, as well as a
dispute in which the interests of KBC and Pertamina are aligned.
If the ESC required KBC and Pertamina jointly to select an
arbitrator for disputes in which KBC and Pertamina were opposed, as
Pertamina contends, Pertamina could effectively block arbitration
under the ESC simply by refusing to agree with KBC to the selection
of an arbitrator. Such an interpretation would make the ESC
arbitration clause illusory. In addition, Pertamina had numerous
opportunities early in the proceedings to object to KBC’s selection
of Professor Bernardini as an arbitrator and to nominate its own
arbitrator. Pertamina did not challenge the composition of the
arbitral panel until after the entire panel had been selected and
seated. Pertamina’s failure timely to object to Professor
38
Bernardini’s selection and to nominate its own arbitrator was, as
the district court noted, a strategic decision that Pertamina
should not now be able to assert as a defense to enforcing the
Award.63
Pertamina has failed to meet its burden of showing that the
Tribunal was improperly constituted. The Tribunal reasonably
interpreted the ESC’s arbitration provisions and reasonably applied
the UNCITRAL arbitration rules. Despite numerous opportunities,
Pertamina failed to challenge the Tribunal’s composition until
after the arbitrators were selected. The procedural infirmities
Pertamina alleges do not provide grounds for denying enforcement of
the Award.
D. The Due Process Challenges to the Arbitral Award
Under Article V(1)(b), enforcement of a foreign arbitral award
may be denied if the party challenging the award was “not given
proper notice of the appointment of the arbitrator or of the
arbitration proceedings or was otherwise unable to present [its]
case.”64 Article V(1)(b) “essentially sanctions the application of
the forum state’s standards of due process,” in this case, United
63
Pertamina apparently argued to the Tribunal that it did not
name an arbitrator because it was contesting the legitimacy of the
arbitration and further contended that it did not receive certain
correspondence from ICSID regarding KBC’s request that the ICSID appoint
a second arbitrator. Pertamina, however, did not make these arguments
before the district court.
64
9 U.S.C. § 201, Art. V(1)(b).
39
States standards of due process.65 A fundamentally fair hearing
requires that a party to a foreign arbitration be able to present
its case.66 A fundamentally fair hearing is one that “meets ‘the
minimal requirements of fairness’ – adequate notice, a hearing on
the evidence, and an impartial decision by the arbitrator.”67 The
parties must have an opportunity to be heard “at a meaningful time
and in a meaningful manner.”68 “The right to due process does not
include the complete set of procedural rights guaranteed by the
Federal Rules of Civil Procedure.”69
1. The Claim that the Final Award “Reversed” the Preliminary
Award
Pertamina first contends that the Tribunal reversed the
Preliminary Award in the Final Award without notice, denying
Pertamina the opportunity to be “meaningfully heard.” Pertamina
emphasizes the Tribunal’s ruling that “a governmental decision
which prevents KBC [from] perform[ing] its obligations is not
deemed to be a breach of contract by Pertamina or PLN but a Force
65
Iran Aircraft Indus. v. Avco Corp., 980 F.2d 141, 145 (2d Cir.
1992) (quoting Parsons & Whittemore Overseas, 508 F.2d at 975).
66
Slaney v. Int’l Amateur Athletic Fed’n, 244 F.3d 580, 592 (7th
Cir. 2001); Generica, Ltd. v. Pharm. Basics, Inc., 125 F.3d 1123, 1130
(7th Cir. 1997).
67
Slaney, 244 F.3d at 592 (quoting Sunshine Mining Co. v. United
Steelworkers, 823 F.2d 1289, 1295 (9th Cir. 1987)); Generica, 125 F.3d
at 1130 (quoting same).
68
Iran Aircraft Indus., 980 F.2d at 146 (citations omitted).
69
Matter of Arbitration Between Trans Chem. Ltd. and China Nat.
Mach. Imp. & Exp. Corp., 978 F. Supp. 266, 310 (S.D. Tex. 1997), aff’d,
161 F.3d 314 (5th Cir. 1998).
40
Majeure event excusing KBC’s nonperformance.”
The Tribunal stated in the Preliminary Award that the force
majeure clause in the JOC and ESC made a “government-related event”
an event of force majeure only with respect to KBC. The Tribunal
stated that Pertamina and PLN were so closely related to the
Indonesian government that a decision by the Indonesian government
was not a force majeure event as to them. In its briefing before
the Tribunal made its Final Award, KBC argued that under the
contract language and given the close relationship between
Pertamina and the Indonesian government, Pertamina bore the risk of
loss from a force majeure event under the JOC and ESC. Pertamina
responded that in the Preliminary Award, the Tribunal had ruled
that acts of force majeure by the Indonesian government are not
breaches of the JOC and ESC and that to award KBC damages would be
incompatible with that ruling. In the Final Award, the Tribunal
found that the Indonesian government’s actions were an event of
force majeure that excused KBC’s failure to perform under the JOC
and ESC. The Tribunal stated that this finding did not contradict
its ruling in the Preliminary Award that the Indonesian government
was not a party to the JOC or ESC, because that ruling “was not
meant to express any view as to the consequences to
Pertamina . . . of a Governmental decision which prevents the
performance of the Contracts.”
The record shows that Pertamina knew it could be found liable
for nonperformance after the Preliminary Award had issued. After
41
the Preliminary Award issued, KBC argued to the Tribunal that
Pertamina bore the risk of nonperformance under the JOC and ESC in
the event of force majeure. KBC’s argument clearly assumed that
the Preliminary Award allowed the Tribunal to find that the
contracts placed the risk of, and liability for, such
nonperformance on Pertamina. In response to that argument,
Pertamina had, and took, the opportunity fully to present its
arguments against KBC’s theory of liability.
The Final Award shows that the Tribunal considered and
rejected Pertamina’s argument in making its liability decision.
The Tribunal concluded that the JOC and ESC allocated the risk of
government interference with the project solely to Pertamina and
PLN. In this enforcement proceeding, Pertamina is essentially
repeating the arguments it made to the Tribunal. The fact that
those arguments were presented to and considered by the Tribunal is
inconsistent with Pertamina’s claim that it had no notice of the
need to make the argument to that Tribunal or the opportunity to do
so. Pertamina did not suffer the fundamental unfairness it claims,
so as to support a refusal to enforce the Award.70
2. The Tribunal’s Denial of a Continuance and Request for
Additional Discovery
To challenge KBC’s contention that FPL was willing to finance
the project, Pertamina sought in the arbitration proceeding a
70
See Europcar Italia, 156 F.3d at 315 (“Absent extraordinary
circumstances, a confirming court is not to reconsider the arbitrator’s
findings.”).
42
continuance and discovery of the following documents from KBC, FPL,
and Caithness regarding the financing of the KBC project:
(1) All documents relating to efforts to
obtain financing for the Karaha-Bodas
project during the period September 1997
through June 1998.
(2) All documents showing any consideration
of providing direct financing (whether
through bridge financing, a loan
guarantee, or direct equity investment)
for the Karaha-Bodas project during the
period September 1997 through June 1998.
(3) All documents relating to FPL’s, its
subsidiaries’, or its predecessors’
consideration of whether to invest in the
Karaha-Bodas project.
(4) All documents relating to FPL’s, its
subsidiaries’, or its predecessors’
decision to invest in the Karaha-Bodas
project, stated variously to have
occurred in mid-1996 or mid-1997.
(5) All documents sent by KBC to FPL, its
subsidiaries, or its predecessors
following the investment identified in
¶ 4 and concerning geothermal exploration
and development in the Karaha-Bodas
concession area (whether such exploration
occurred before or after the investment).
(6) All documents relating to evaluation by
each, any and all of KBC, FPL (or
subsidiaries or predecessors), and
Caithness whether to proceed with the
Karaha-Bodas project during the period
September 1997 through June 1998.
The Tribunal denied Pertamina’s request.
After Pertamina discovered that FPL and certain other
investors in KBC owned a political risk insurance policy
underwritten by Lloyd’s of London, which had paid $75 million after
43
the project suspension, Pertamina sought reconsideration of the
district court’s summary judgment enforcing the Award under Rule
60(b). The district court found that Pertamina’s inability to
introduce evidence of the insurance policy at the arbitration did
not prevent the presentation of its case to the Tribunal. The
district court also held that KBC’s failure to bring the insurance
policy to the Tribunal’s attention did not make enforcing the Award
a violation of public policy. We agree.
“An ‘arbitrator is not bound to hear all of the evidence
tendered by the parties . . . . [He] must give each of the parties
to the dispute an adequate opportunity to present its evidence and
arguments.’”71 It is appropriate to vacate an arbitral award if the
exclusion of relevant evidence deprives a party of a fair hearing.72
“Every failure of an arbitrator to receive relevant evidence does
not constitute misconduct requiring vacatur of an arbitrator’s
award. A federal court may vacate an arbitrator’s award only if
the arbitrator’s refusal to hear pertinent and material evidence
prejudices the rights of the parties to the arbitration
proceedings.”73
71
Generica, 125 F.3d at 1130 (quoting Hoteles Condado Beach, La
Concha and Convention Ctr. v. Union de Tronquistas Local 901, 763 F.2d
34, 39 (1st Cir. 1985)); see Slaney, 244 F.3d at 592 (cautioning that
“parties that have chosen to remedy their disputes through arbitration
rather than litigation should not expect the same procedures they would
find in the judicial arena”).
72
Generica, 125 F.3d at 1130; Slaney, 244 F.3d at 592.
73
Hoteles Condado Beach, 763 F.2d at 40 (internal citations
omitted).
44
Although the Tribunal denied Pertamina the specific discovery
it sought on the issue of FPL financing, Pertamina was able to
cross-examine the KBC witnesses who testified that FPL was willing
to provide financing for the project, Leslie Gelber and Robert
McGrath. Before those witnesses testified, Pertamina had already
presented substantial evidence in its response to KBC’s Statement
of Claim as to why KBC would not have been able to secure financing
for the project, emphasizing the depressed state of the Indonesian
economy and its unattractiveness to investors. Pertamina argued to
the Tribunal that KBC had presented no documentary evidence of
FPL’s willingness to finance the project and asserted that FPL
would have required such a high rate of interest because of the
risk involved as to make the KBC venture unprofitable.
The Tribunal found that “the issue remained open in 1998 of
the terms and conditions upon which financing could have been
obtained for the Project development.” The Tribunal noted that
“the worsening of the economic and political situation in Indonesia
at the time has to be taken into account as regards both the
conditions at which financing could have been obtained and possible
delays in arranging the same.” The Tribunal, however, noted that
the parties contemplated the possibility of a delay in arranging
financing, because the ESC provided that the contract could be
suspended for up to two years if KBC was unable to arrange
financing for the project. The Tribunal also noted KBC’s efforts
to reinstate the project after the initial government suspension
45
order, finding that KBC was ready and willing to secure financing
for the project. The Tribunal found the testimony of KBC’s
witnesses on financing credible, stating that it had “no
reason . . . to cast doubts about KBC’s readiness, directly and/or
through its shareholders, to make provision thereof.” In
determining the lost profits, the Tribunal considered all the risks
of the project, including the potential difficulties in arranging
financing that Pertamina cited, and “significantly reduc[ed]” the
amount of lost profits claimed by KBC.
In Generica, Ltd. v. Pharmaceutical Basics, Inc.,74 the party
opposing enforcement of an international arbitration award argued
that the tribunal curtailed cross-examination of a witness, in
violation of the party’s due process right to present its case.75
The tribunal, recognizing that it had curtailed the cross-
examination, placed diminished reliance on the witness’s
testimony.76 The court found that by limiting the reliance on the
witness’s testimony, the arbitrators eliminated the possibility of
prejudice to the party claiming a due process violation.77 The
court confirmed the award.78 As in Generica, the Tribunal appears
to have given all the evidence as to damages, including the
74
125 F.3d 1123 (7th Cir. 1997).
75
Id. at 1129-31.
76
Id. at 1131.
77
Id.
78
Id.
46
availability of financing, appropriate weight in determining
liability and damages.
In Tempo Shain Corp. v. Bertek, Inc.,79 the arbitral panel did
not allow a potential witness to testify on the basis that the
witness’s testimony was cumulative.80 The court vacated the
arbitral award.81 The record showed that the witness would have
testified to facts that only he could have known, making his
testimony essential.82 Similarly, in Hoteles Condado Beach, La
Concha and Convention Center v. Union de Tronquistas Local 901,83
the court vacated an award because the arbitral panel refused to
give any weight to the only evidence available to the losing
party.84 In the present case, by contrast, the Tribunal’s language
in the Final Award and the record show that the testimony about
FPL’s willingness to provide financing was only one factor relevant
to damages. KBC raised the possibility of FPL’s direct financing
only in response to Pertamina’s affirmative defense that KBC could
not have financed the project. Pertamina did not seek discovery on
KBC’s efforts to finance the project in the arbitration proceeding
until after KBC filed its rebuttal to the response to the Statement
79
120 F.3d 16 (2d Cir. 1997).
80
Id. at 20.
81
Id. at 21.
82
Id. at 20.
83
763 F.2d 34 (1st Cir. 1985).
84
Id. at 40.
47
of Claim, despite the fact that Pertamina raised the issue as an
affirmative defense.
The record shows that the Tribunal’s refusal to grant a
continuance and additional prehearing discovery did not “so affect
the rights of [Pertamina] that it may be said that [it] was
deprived of a fair hearing.”85 Pertamina was able to present
comprehensive evidence of investment conditions in Indonesia and
expert opinions on the availability of financing, as well as cross-
examine Gelber and McGrath on FPL’s asserted willingness and
ability to provide financing.86
Pertamina contends that the late revelation of the political
risk insurance policy refutes KBC’s contention in the arbitration
that FPL was willing to finance KBC to protect the $40 million it
had previously invested in KBC. The existence of the political
insurance policy was not “central or decisive” to Pertamina’s
case.87 In order to show damages, KBC had to show that if the
project had not been suspended, KBC could have proceeded to perform
85
Newark Stereotypers’ Union No. 18 v. Newark Morning Ledger Co.,
397 F.2d 594, 599 (3d Cir. 1968).
86
Pertamina acknowledges that it specifically examined Gelber and
McGrath about the existence of documents regarding FPL’s willingness to
finance the project. Pertamina states that the Tribunal had to instruct
McGrath to answer the question directly, demonstrating that McGrath was
an “evasive” witness. The Tribunal observed McGrath testify and was
able to make the credibility judgment that he either lacked knowledge
of such documents or was unwilling to discuss them. Cf. United States
v. Garza, 118 F.3d 278, 283 (5th Cir. 1997) (noting that a district
court is in the best position to judge the credibility of witnesses and
refusing to “second-guess” the lower court’s judgment on the issue).
87
Cf. Hoteles Condado Beach, 763 F.2d at 40 (denial of party’s
only evidence was ground for vacating award).
48
by obtaining financing. The record amply supports KBC’s position
that KBC and FPL had already invested substantial money before the
Indonesian government issued its suspension order. The existence
of the political risk insurance policy is not inconsistent with the
testimony of Gelber and McGrath that FPL intended to finance the
project and would have done so but for the suspension decreed by
the government of Indonesia. The existence of political risk
insurance for the project is not inconsistent with FPL’s
willingness to invest had the project not been suspended, that is,
if the risk insured against had not occurred. The Tribunal’s
damages analysis and the lost profits award depended on the
assumption that the project continued, that is, that the suspension
had not taken place.
Pertamina’s argument that KBC’s political risk insurance
policy undermines the Tribunal’s finding that the JOC and ESC
placed the risk of a government-related event on Pertamina is also
unavailing. The Tribunal determined that the JOC and ESC placed
the risk of nonperformance due to a government-related event on
Pertamina based on a well-reasoned, detailed analysis of the
contract terms.88 The existence of a political risk policy does not
88
See, e.g., Talman Home Fed. Sav. & Loan Ass’n of Ill. v. Am.
Bankers Ins., 924 F.2d 1347, 1351 (5th Cir. 1991) (quoting Republic
Nat’l Bank of Dallas v. Nat’l Bankers Life Ins. Co., 427 S.W.2d 76, 79
(Tex. App. – Dallas 1968, writ ref’d)) (“The cardinal rule of
construction as applied to all contracts is to ascertain the intention
of the parties as expressed in the language used in the instrument
itself. It is the intention and purpose of contracting parties, as
disclosed within the four corners on the instrument which should
control.”).
49
undermine this result. Moreover, the political risk policy
contained a subrogation provision that required KBC to reimburse
the insurer if KBC recovered its losses from another source.89 The
existence of the political risk policy is not inconsistent with the
contractual allocation of risk.
The Tribunal asked McGrath whether FPL had purchased “OPIC
insurance,” a form of political risk insurance. McGrath responded
that he did not know the answer to the question. Pertamina’s
counsel did not follow up on the Tribunal’s questioning. At the
conclusion of the hearing, the Tribunal chair asked the parties
whether the discovery requests were “maintained, all of them, part
of them, because we would like to know on what we have to decide.”
The response from counsel for Pertamina was as follows:
[T]he purpose of discovery is to prepare for
the hearing, it is not to supplement the
record after the hearing. So I think the
discovery requests are moot, and if discovery
is now permitted, then you have to re-open the
proceedings and so on. So I treated,
notwithstanding the fact that it was
theoretically open, I treated this request as
effectively being denied, and we went forward.
89
This subrogation provision undermines Pertamina’s additional
argument that, in the alternative, it is entitled to a $75 million
offset from the political risk insurance payout. Pertamina argues that
enforcement of the judgment, in combination with the insurance proceeds,
will permit KBC double recovery in violation of the single-satisfaction
rule. See Tompkins v. Cyr, 202 F.3d 770, 785 (5th Cir. 2000). The
subrogation provision of the political risk insurance policy, however,
requires that to the extent the insured obtains any recovery from a
judgment against Pertamina, the insured is obligated to repay the
insurer. In addition, payment by a collateral source does not typically
diminish a judgment debt. See Global Petrotech, Inc. v. Engelhard
Corp., 58 F.3d 198, 202 (5th Cir. 1995). There will be no double
recovery, and Pertamina is not entitled to a credit.
50
Our request went to the purported financial
ability, the purported financing that would
have been made available and other things, and
I think the record on that has been fully
made. I am prepared to rest on that record,
and so I think the discovery requests should
no longer be in the picture.
The parties submitted extensive posttrial briefs. In the Final
Award, issued in December 2000, the Tribunal stated that all
parties had “waived their respective requests for discovery” at the
conclusion of the hearing.
Pertamina asserts that it did not waive its requests for
discovery because the Tribunal denied the request before the
hearing, when the discovery could have been of use. Pertamina
ignores the fact that in international commercial arbitration, it
is not uncommon to ask for additional discovery or information
after a hearing, to request additional sessions of a hearing to
submit more evidence, or to file posthearing submissions.90 Rather
than renew its requests for discovery into FPL’s willingness to
finance the project or to assert a request for discovery into FPL’s
political risk insurance, Pertamina’s counsel expressly stated that
90
See, e.g., UNCITRAL Arbitration Rules at Art. 15(2), 29(2)
(stating that a party may request at any stage of the proceeding a
hearing for presentation of evidence and that a tribunal may reopen
hearings at any time upon request of a party); Jay E. Grenig,
Alternative Dispute Resolution with Forms, § 5.76 (2d ed. 1997)
(including in a description of the customary order of arbitration
proceedings the “submission of post-hearing briefs”). See also Lincoln
Nat’l Life Ins. Co. v. Payne, 286 F.Supp.2d 1023, 1026 (S.D. Ia. 2003);
Techcapital Corp. v. Amoco Corp., 2001 WL 267010, at * 2 (S.D.N.Y. March
19, 2001); Mays v. Lanier Worldwide, Inc., 115 F.Supp.2d 1330, 1342
(M.D. Ala. 2000); I. Appel Corp. v. Katz, 1999 WL 287370, at * 3 n.2
(S.D.N.Y. May 6, 1999); United Foods, Inc. v. W. Conference of Teamsters
Pension Trust Fund, 816 F. Supp. 602, 607 (N.D. Ca. 1993).
51
the record had been “fully made” and that he was “prepared to rest
on the record.” The record supports the Tribunal’s conclusion that
the discovery requests made before the hearing had been waived.
Pertamina did not ask for discovery into political risk insurance
until it filed its Rule 60(b) motion in the district court.
The Tribunal’s denial of a continuance and additional
discovery did not prevent Pertamina from presenting its case, so as
to deprive it of a fair hearing. Pertamina presented ample
evidence in support of its position that KBC would be unable to
find financing. The Tribunal considered Pertamina’s evidence and
gave it considerable weight, awarding KBC damages substantially
lower than the amount it sought.91 Pertamina has failed to show the
prejudice required to decline enforcement of the Award on this
ground.
3. The District Court’s Denial of Pertamina’s Rule 56(f)
Discovery Request
In the district court, after KBC moved for summary judgment on
its application to enforce the Award, Pertamina moved for a
continuance under Rule 56(f) and sought the same discovery on
FPL’s willingness and ability to provide project financing that it
had sought in the arbitration. The district court denied the Rule
56(f) motion.
91
KBC sought $512.5 million in lost profits. The Tribunal
awarded KBC $150 million in lost profits. The Tribunal also awarded KBC
$111.1 million in lost expenditures.
52
The denial of a Rule 56(f) discovery request is reviewed for
abuse of discretion.92 The district court may not simply rely on
vague assertions that additional discovery will produce needed, but
unspecified, facts.93 “If it appears that further discovery will
not produce evidence creating a genuine issue of material fact, the
district court may, in the exercise of its discretion, grant
summary judgment.”94 As one court has explained:
In judging discovery requests in this context
[of an arbitration award confirmation
proceeding], the court must weigh the asserted
need for hitherto undisclosed information and
assess the impact of granting such discovery
on the arbitral process. The inquiry is an
entirely practical one, and is necessarily
keyed to the specific issues raised by the
party challenging the award and the degree to
which those issues implicated factual
questions that cannot be reliably resolved
without some further disclosure.95
The record shows that in the arbitration, Pertamina was able
to present substantial evidence regarding the Indonesian economy,
the problems in securing financing for projects in Indonesia, and
the projected electrical generating capacity of the project. The
Tribunal took Pertamina’s arguments into account in awarding
92
Resolution Trust Corp. v. Sharif-Munir-Davidson Dev. Corp., 992
F.2d 1398, 1401 (5th Cir. 1993).
93
Int’l Shortstop v. Rally’s, Inc., 939 F.2d 1257, 1267 (5th Cir.
1991).
94
Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1442 (5th Cir.
1993).
95
Lummus Global Amazonas S.A. v. Aguaytia Energy del Peru S.R.
Ltda., 256 F.Supp.2d 594, 626 (S.D. Tex. 2002) (citations omitted).
53
significantly less in lost profits than KBC had sought. The
Tribunal did not solely rely on FPL’s willingness to finance the
project in determining that KBC was ready to “directly, and/or
through its shareholders,” finance the project. The Tribunal also
looked to KBC’s efforts to convince the Indonesian government to
restart the project in making this finding. The record supports
the district court’s denial of a continuance to permit further
discovery on KBC’s ability to finance the project.
The district court also noted Pertamina’s counsel’s statement
at the conclusion of the arbitration hearing that “the record on
[the financing issue] ha[d] been fully made.” Pertamina has failed
to show that the discovery it sought in the district court would
have created disputed fact issues material to determining whether
Pertamina received a fundamentally fair hearing before the
Tribunal.96 Because the issue of financing could be reliably
resolved without the requested discovery, the district court did
not abuse its discretion in denying Pertamina’s Rule 56(f) motion.97
96
See Krim, 989 F.2d at 1442.
97
See Lummus Global Amazonas, 256 F.Supp.2d at 626; Resolution
Trust Corp., 992 F.2d at 1401. For the same reasons, the district court
did not err by refusing to permit additional discovery or host an
evidentiary hearing before ruling on Pertamina’s Rule 60(b) motion. See
Provident Life and Accident Ins. Co. v. Goel, 274 F.3d 984, 999 (5th
Cir. 2001) (noting that the only issues on an appeal of a Rule 60(b)
motion are the propriety of the denial of relief and whether the
district court abused its discretion in denying relief).
54
E. The Public Policy Challenge to the Arbitral Award
Pertamina asserts that the Award violated public policy
because it violated the international law doctrine of abuse of
rights. Pertamina contends that the Award imposes punishment for
obeying a government decree. Pertamina also asserts that KBC’s
failure to disclose the political risk insurance policy during the
arbitration makes enforcement of the Award a violation of public
policy.
Under Article V(2)(b) of the New York Convention, a court may
refuse to recognize or enforce an arbitral award if it “would be
contrary to the public policy of that country.”98 The public policy
defense is to be “construed narrowly to be applied only where
enforcement would violate the forum state’s most basic notions of
morality and justice.”99 “The general pro-enforcement bias
informing the convention . . . points to a narrow reading of the
public policy defense.”100 Erroneous legal reasoning or
misapplication of law is generally not a violation of public policy
within the meaning of the New York Convention.101
98
9 U.S.C. § 201, Art. V(2)(b).
99
M & C Corp., 87 F.3d at 851 n.2 (quoting Fotochrome, Inc. v.
Copal Co., Ltd., 517 F.2d 512, 516 (2d Cir. 1975)); see Parsons &
Whittemore Overseas, 508 F.2d at 974; Slaney, 244 F.3d at 593.
100
Parsons & Whittemore Overseas, 508 F.2d at 973.
101
Coutinho Caro & Co. U.S.A., Inc. v. Marcus Trading, Inc., 2000
WL 435566, at *12 (D. Conn. March 14, 2000).
55
An action violates the abuse of rights doctrine if one of the
following three factors is present: (1) the predominant motive for
the action is to cause harm; (2) the action is totally unreasonable
given the lack of any legitimate interest in the exercise of the
right and its exercise harms another; and (3) the right is
exercised for a purpose other than that for which it exists.102 The
abuse of rights doctrine is not established in American law103 and
KBC’s actions do not meet the factors required to trigger its
application. The evidence in the record is that KBC pursued the
arbitration to recover its costs, expenses, and lost profits from
the nonperformance of the JOC and ESC.104 The record does not
support Pertamina’s argument that enforcing the Award penalizes
obedience to a governmental decree. The Tribunal explained in the
Final Award that the JOC and ESC shifted the risk of loss resulting
from a government-ordered suspension onto Pertamina and PLN.
Pertamina is challenging the substance of the Tribunal’s
interpretation of the JOC and ESC. An arbitration tribunal’s
contract interpretation does not violate public policy unless it
“violates the most basic notions of morality and justice.”105 The
102
Joseph M. Perillo, Abuse of Rights: A Pervasive Legal Concept,
27 Pac. L. J. 37, 47 (Fall 1995).
103
The abuse of rights doctrine is not even fully established in
Louisiana, the American jurisdiction that has invoked it. See Lloyd v.
Georgia Gulf Corp., 961 F.2d 1190, 1193 n.4 (5th Cir. 1992).
104
See Perillo, 27 Pac. L. J. at 47.
105
Slaney, 244 F.3d at 593.
56
Tribunal’s interpretation of the JOC and ESC does not approach this
steep threshold.
KBC’s failure to disclose the political risk insurance policy
does not provide a basis for refusing to enforce the Award.
Enforcement of an arbitration award may be refused if the
prevailing party furnished perjured evidence to the tribunal or if
the award was procured by fraud.106 Courts apply a three-prong test
to determine whether an arbitration award is so affected by fraud:
(1) the movant must establish the fraud by clear and convincing
evidence; (2) the fraud must not have been discoverable upon the
exercise of due diligence before or during the arbitration; and (3)
the person challenging the award must show that the fraud
materially related to an issue in the arbitration.107 It is not
necessary to establish that the result of the arbitration would
have been different if the fraud had not occurred.108 Courts,
however, have held that an arbitration award is not fraudulently
obtained when the protesting party had an opportunity to rebut his
opponent’s claims at the hearing.109
106
Karppinen v. Karl Kiefer Mach. Co., 187 F.2d 32, 34 (2d Cir.
1951).
107
Bonar v. Dean Witter Reynolds, Inc., 835 F.2d 1378, 1383 (11th
Cir. 1988).
108
Id.
109
See Biotronik Mess-Und Therapiegeraete GmbH & Co. v. Medford
Med. Instrument Co., 415 F. Supp. 133, 137-38 (D.N.J. 1976).
57
In Biotronik Mess-Und Therapiegeraete GmbH & Co. v. Medford
Medical Instrument Co.,110 the party opposing enforcement of the
award argued that the prevailing party knowingly withheld evidence
of an agreement that undermined its case.111 The court stated that
while the party opposing enforcement urged fraud, the real
complaint was that the party prevailing in the arbitration should
have presented evidence favorable to its opponent’s case.112 The
court rejected this argument, stating that “a party cannot complain
about the nonproduction of evidence when it failed to offer such
evidence itself.”113 In Catz American Co. v. Pearl Grange Fruit
Exchange Inc.,114 the party opposing enforcement did not ask the
arbitrators to bring certain witnesses before the panel, although
the prevailing party offered to make the witnesses available.115
The panel never called for the witnesses’ testimony.116 The party
opposing enforcement of the award argued that the prevailing party
should nonetheless have produced the witnesses.117 The court
rejected this argument, stating that “[a]rbitrators must be given
110
415 F. Supp. 133 (D.N.J. 1976).
111
Id. at 137.
112
Id. at 138.
113
Id.
114
292 F. Supp. 549 (S.D.N.Y. 1968).
115
Id. at 553.
116
Id.
117
Id.
58
discretion to determine whether additional evidence is necessary or
would simply prolong the proceedings.”118 Because the witnesses
were not solely within the prevailing party’s control and there was
other evidence in the record supporting the other party’s position,
the court rejected the challenge to the award.119
Pertamina argues that KBC’s failure to reveal its political
risk insurance policy amounts to misconduct warranting a refusal to
enforce the Award. There is no evidence in the record that KBC
deliberately misled the Tribunal. When the question of political
risk insurance arose and was not clearly resolved, Pertamina had
the opportunity to ask additional questions, which it chose not to
pursue. The Tribunal gave Pertamina an opportunity to pursue
discovery requests, which it declined. KBC’s failure to produce
evidence of political risk insurance, given Pertamina’s decisions
not to pursue the subject, does not violate public policy. The
district court did not err in refusing to deny enforcement of the
Award on the basis of a public policy violation or in refusing to
grant a new trial on the basis of Rule 60(b).120
F. The Effect of the Indonesian Court’s Annulment of the
Arbitral Award
118
Id.
119
Id.
120
Cf. Biotronik, 415 F. Supp. at 138; Catz American, 292 F. Supp.
at 553; see Goel, 274 F.3d at 999 (noting that the only issues on an
appeal of a Rule 60(b) motion are the propriety of the denial of relief
and whether the district court abused its discretion in denying relief).
59
Pertamina filed an annulment action in the Central District
Court of Jakarta, Indonesia in March 2002. That court annulled the
Award on August 27, 2002. Pertamina now contends that the
Indonesian court’s annulment is a defense to enforcement under the
New York Convention. KBC responds that Indonesia cannot be a
proper forum for annulment because Switzerland is the country of
primary jurisdiction.
Pertamina argues that the New York Convention permits more
than one country to have primary jurisdiction over an arbitration
award. Pertamina contends that the Convention’s language
permitting annulment by a court in “the country in which, or under
the law of which, that award was made” allows for two potential
primary jurisdiction countries – the country who hosted the
arbitration proceeding, and the country whose arbitral procedural
law governed that proceeding.121 Using this reasoning, Pertamina
suggests that both Switzerland (the host country) and Indonesia
(the country of governing law) have primary jurisdiction over the
arbitration in this case.
Pertamina correctly observes that the Convention provides two
tests for determining which country has primary jurisdiction over
an arbitration award: a country in which an award is made, and a
121
The language, “‘the competent authority of the country . . .
under the law of which, that award was made’ refers exclusively to
procedural and not substantive law, and more precisely, to the regimen
or scheme of arbitral procedural law under which the arbitration was
conducted, and not the substantive law . . . applied in the case.”
Int’l Standard Elec. Corp., 745 F. Supp. at 178; see Alghanim, 126 F.3d
at 21; M & C Corp., 87 F.3d at 848.
60
country under the law of which an award is made.122 The New York
Convention suggests the potential for more than one country of
primary jurisdiction. Courts and scholars have noted as much.123
Pertamina cites one such scholar as support for its position:
[A]mbiguity is derived from the fact that the
formula does not indicate whether the party
seeking the annulment of the award must choose
between the court at the seat of the
arbitration and the one located in the country
under the law of which the award is made – if
the two are distinct – or whether it may seek
annulment jointly or alternatively before both
courts. . . . Article V(1)(e) of the New York
Convention could [ ] be construed as referring
to the courts of only one country while giving
the party seeking the annulment the
possibility to choose between the two
countries should the two be distinct.124
Although an arbitration agreement may make more than one country
eligible for primary jurisdiction under the New York Convention,
the predominant view is that the Convention permits only one in any
given case.125 “[M]any commentators and foreign courts have
concluded that an action to set aside an award can be brought only
122
9 U.S.C. § 201, Art. V(1)(e).
123
See, e.g., Int’l Standard Electric Corp., 745 F. Supp. at 177
(quoting Albert Jan van den Berg, The New York Arbitration Convention
of 1958 350 (Kluwer 1981)); Paul Sanders, The New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards, 6 Netherlands
Int’l L. Rev. 43, 56 (1956).
124
Hamid G. Gharavi, The International Effectiveness of the
Annulment of An Arbitral Award (2002).
125
“The reality, however, seems to be that the Article V(1)(e)
formula enables enforcement courts to refuse enforcement of an award
annulled by the competent court of the country in which the award was
made even if (i) the award was rendered pursuant to the laws of a third
State and (ii) annulment proceedings were pending before the court of
the country under the law of which the award was made.” Id.
61
under the domestic law of the arbitral forum.”126 Pertamina’s
expert on international arbitration filed a report in the district
court, stating that “there can be only one country in which the
courts have jurisdiction over an annulment.”127 In its motion to
the district court to set aside judgment under Rule 60(b),
Pertamina conceded that “[a] primary jurisdiction has exclusive
authority to nullify an award on the basis of its own arbitration
law.” Such “exclusive” primary jurisdiction in the courts of a
single country is consistent with the New York Convention’s
purpose; facilitates the “orderliness and predictability” necessary
126
Alghanim, 126 F.3d at 22 (citing commentary that the country
of origin of the award is the only country with primary jurisdiction).
127
Supplemental Expert Report of Albert Jan van den Berg, p. 20.
Others agree. Professor Paul Sanders concludes that regardless of any
ambiguity, Article V(1)(e) grants primary jurisdiction to the courts of
only a single country:
[T]he suspension must have been ordered by or the
application for suspension must have been made to
a “competent authority of the country in which, or
under the law of which, that award was made.”
Here only one competent authority is meant; either
the Court of the country where the award was made,
or the Court of the country under the law of which
the award was made. These last words were added
on a Russian proposal to cover the case that an
award has been made f.i. in Germany under French
procedural law. In that case the suspension . .
. according to the Convention should have to be
demanded in France and not in Germany.
Sanders, New York Convention at 56. In his expert report for KBC,
Professor Allen Scott Rau emphasized that “there is only one national
court system that has jurisdiction to consider an application for
annulment of an award.” Scholar Jan Paulsson submits “the fact is that
setting aside awards under the New York Convention can take place only
in the country in which the award was made.” The Role of Swedish Courts
in Transnational Commercial Arbitration, 21 Va. J. Int’l L. 211, 242
(1981).
62
to international commercial agreements; and implements the parties’
choice of a neutral forum.128
In this case, both of the New York Convention criteria for the
country with primary jurisdiction point to Switzerland – and only
to Switzerland.129 The Award was made in Switzerland and was made
under Swiss procedural law. The parties’ arbitration agreement
designated Switzerland as the site for the arbitration. This
designation presumptively designated Swiss procedural law as the
lex arbitri, in the absence of any express statement making another
country’s procedural law applicable.
Pertamina’s own conduct during and after the arbitration
evidences its intent to have Swiss procedural law apply and to have
128
For example, “having a double test, i.e. that of the place of
arbitration and that of the law governing the arbitration, can give rise
to discrepancies.” Andreas Bucher and Pierre-Yves Tschanz,
International Arbitration in Switzerland 164 (1988). As one source has
explained:
For instance, the Federal Republic of Germany does
not define German awards as awards made in Germany
but as awards governed by German law wherever they
are made. As a result, an award purporting to be
made in Switzerland under German arbitration law
is considered as a Swiss award in Switzerland and
as a German award in Germany, with the result that
such award could be challenged in both countries.
In the reverse situation of an award made in
Germany purportedly under Swiss arbitration law,
such award is considered as Swiss in Germany and
as German in Switzerland (since the place of
arbitration is in Germany). As a result, such an
award cannot be challenged in either country, but
can only be recognized (or denied recognition)
under the New York Convention.
Id.
129
See Alghanim, 126 F.3d at 21; M & C Corp., 87 F.3d at 848.
63
Switzerland be the country of primary jurisdiction over the Award.
During the arbitration, Pertamina asserted that Swiss procedural
law applied. When it lost the arbitration, Pertamina asked the
Swiss court to set aside the Award, acknowledging that the Swiss
courts had primary jurisdiction. While that appeal was pending,
Pertamina urged the district court in the enforcement proceeding
that the Swiss court had exclusive primary jurisdiction – until the
Swiss courts rejected Pertamina’s appeal.130
Under the New York Convention, the parties’ arbitration
agreement, and this record, Switzerland had primary jurisdiction
over the Award.131 Because Indonesia did not have primary
jurisdiction to set aside the Award, this court affirms the
district court’s conclusion that the Indonesian court’s annulment
ruling is not a defense to enforcement under the New York
Convention.
III. Conclusion
Pertamina’s challenges to the district court’s decision
affirming the Award are without merit. The summary judgment
enforcing the Award is AFFIRMED.
130
The district court found that Pertamina “specifically,
repeatedly and unequivocally” argued that Swiss arbitration law applied
in the arbitration. See note 24.
131
The Hong Kong court enforced the Award after the Indonesian
court issued its annulment ruling, stating that “the fact that the court
in Indonesia has now annulled the award under its own law is also a
matter which has no effect on this court’s task.” Hong Kong decision
at 12.
64
Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara
Court: Court of Appeals for the Fifth Circuit
Date filed: 2004-03-23
Citations: 364 F.3d 274
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