US Supreme Court Curtails Discovery in Foreign Arbitrations

On June 13, 2022, the U.S. Supreme Court resolved the long-lasting circuit split and sided with the courts holding that arbitral tribunals deciding private commercial disputes and at least certain ad hoc panels in investor-state treaty arbitrations do not qualify to obtain discovery in the United States, under the broad U.S. discovery rules, for use in such proceedings.

28 U.S.C. §1782 (“Section 1782”), a unique statutory mechanism, allows an interested person to receive judicial assistance in obtaining discovery in the United States for “use in a proceeding in a foreign or international tribunal …”. The provision became particularly attractive for foreign arbitral tribunals and litigants before such tribunals due to tribunals’ lack of sovereign powers to enforce their orders directing to produce evidence.

Although the language of the Statute appears relatively clear on its face, the issue of whether a foreign-seated private arbitral tribunal is covered within the ambit of Section 1782 became a highly contested issue. In recent years, there has been much debate, as well as a split in authority regarding whether the Section 1782 permitted the U.S. courts to authorize discovery for use in private arbitrations overseas.

The decision has significant ramifications as parties to foreign private commercial arbitrations and some investor-state arbitrations will not be able to seek discovery in U.S. courts under Section 1782. This notes provides a brief overview of the U.S. Supreme court’s decision and cites case of Bank Otkritie to illustrate the current approach.

Supreme Court Finds Discovery under Section 1782 is not Available for Private Foreign Arbitration Proceedings

The decision addressed two different appeals that each presented the same question of law. In ZF Automotive US, Inc. v. Luxshare, Ltd., a U.S. company and a Hong Kong company had agreed to resolve disputes in a private commercial arbitration under the Rules of the German Institution of Arbitration e.V. (DIS) in Germany, where the dispute evolved over the sale of two business units to Luxshare for nearly one billion dollars. Afterwards, Luxshare alleged ZF concealed information that resulted in Luxshare overpaying hundreds of millions of dollars. Before initiating arbitration, Luxshare sought Section 1782 discovery from ZF.

In AlixPartners, LLP v. The Fund for Protection of Investors’ Rights in Foreign States, a dispute revolved around a disappointed Russian investor in a Lithuanian bank, AB bankas SNORAS, which the Lithuanian government had subsequently nationalized in the bankruptcy process. The investor purportedly assigned its interest to a Russian Fund that commenced an ad hoc arbitration under the UNCITRAL Rules against the government of Lithuania as provided in the Russia–Lithuania Bilateral Investment Treaty (“BIT”). The Fund then sought Section 1782 discovery from AlixPartners.

Section 1782 enumerates several requirements: the person from whom discovery is sought should reside (or is found) in the district of the district court to which the application is made, applicant intends to use discovery in a foreign proceeding before a foreign or international tribunal, and (3) an application is made by foreign or international tribunal or any interested person .” Once the above statutory requirements are met, a district court may order discovery under Section 1782 in its discretion, taking into consideration the “twin aims” of the statute, namely, “providing efficient means of assistance to participants in international litigation in our federal courts and encouraging foreign countries by example to provide similar means of assistance to our courts”.

Whether the Arbitral Tribunals in Both Cases Qualify as “Governmental or Intergovernmental Bodies”

In a landmark decision, the Supreme Court examined language in Section 1782 that the discovery ordered by the U.S. Court must be “for use in a proceeding in a foreign or international tribunal”. Analyzing the text of the statute, the Court observed that the word “tribunal” does not stand alone but is instead situated within the phrase “foreign or international tribunal”. As such, the Court noted that the words “foreign” or “international” contextually modify the “tribunal” to mean “an adjudicative body that exercises governmental authority”.

More specifically, the Court interpreted “foreign” to mean “belonging to another national or country”, and the test is whether the tribunal “possesses sovereign authority conferred by that nation”. A foreign tribunal, the court found, is “a tribunal imbued with governmental authority by one nation”, while an international tribunal – “a tribunal imbued with governmental authority by multiple nations” to adjudicate disputes. Thus, in order to qualify as a “tribunal” for the purposes of Section 1782, single or multiple nations should imbue such adjudicative body with governmental authority.

Applying this standard, the Supreme Court then determined that neither the DIS tribunal in Luxshare case nor the ad hoc panel in AlixPartners constituted governmental or intergovernmental adjudicative bodies. In particular, the Supreme Court noted that no government has been involved in creating the DIS panel or prescribing its procedures, where, on the contrary, the arbitration was between private parties, agreed to in a private contract, utilized a private dispute resolution organization using its own procedural rules, and the panel was formed by the parties.

The Supreme Court acknowledged that the investment arbitration presented a “harder question”: a Sovereign State has been involved on one side, and one finds the option to arbitrate in an international bilateral investment treaty rather than in a private contract. However, the Court ultimately held that such a tribunal would also not be a governmental body within the meaning of Section 1782. The Court concluded that the panel’s authority derived from the parties’ consent and not from any government authority: the BIT at issue provided the parties with a choice of submitting the dispute to a court, a pre-existing arbitral body or an ad hoc panel. Further, the BIT did not provide the arbitral panel with any governmental authority, it rather acted independently and is not affiliated with any country or governmental entity.

The Court explained that “a body does not possess governmental authority just because nations agree in a treaty to submit to arbitration before it”.

Further, the Supreme  Court distinguished state-against-state proceedings under the same BIT where both states designate the International Court of Justice (“ICJ”) as an appointing authority. According to the Court, a tribunal appointed in an ICJ matter would possess the required governmental authority.

Bank Otkritie: Section 1782 in Aid of Foreign Proceedings – No More?

Shortly after the Supreme Court rendered the decision, the U.S. District Court for the Southern District of New York had to address a case, in which a petitioner sought discovery under Section 1782  regarding two foreign proceedings: commercial arbitration and a parallel litigation. We cite this case to illustrate how Section 1782 operates post the Supreme Court’s decision.

The underlying dispute in this case related to a fraudulent scheme consisting of a series of complex transactions – the termination of certain loan and pledge agreements worth around $500 million and entered into among the Russian Bank Otkritie and a number of companies incorporated in Cyprus and BVI that owned valuable real state in Russia.

In the case at hand, the Bank made an ex parte motion seeking to subpoena banking records from three other bank entities – Citibank, N.A., Deutsche Bank Trust Company Americas, and Deutsche Bank Securities, Inc. As the decision reveals, the Bank indented to use the records as evidence to demonstrate shielding of assets in order to evade liability arising from two foreign proceedings: an arbitration proceeding before the London Court of International Arbitration, and a parallel proceeding before the High Court of Justice in London.

The court granted the application for an order pursuant to Section 1782, authorizing Bank Otkritie to issue and serve subpoenas on respondents for the production of the requested banking documents. The decision is of particular interest because Bank Otkritie also argued that the “anticipated judgment recognition and enforcement proceedings” in relation to the LCIA award “also qualify as adjudicative foreign proceedings” under Section 1782. However, the Court of Appeals has clarified that “international arbitral panels created exclusively by private parties are not foreign or international tribunals within the meaning of Section 1782”. The Court noted that the bank has not presented any evidence to show that LCIA is a “state-sponsored” tribunal and not a tribunal that is “created exclusively by private parties”. Nevertheless, this issue does not defeat the bank’s application, because the other proceeding, the one before the High Court, qualifies as a “foreign or international tribunal …”.

Concluding Remarks: a Door is Still Ajar?

The Supreme Court’s decision has brought much-needed clarity and arguably precludes evidentiary forum shopping. The parties are still, however, likely to test the boundaries of the decision as it leaves open the question of which type of arbitral tribunal may constitute a “governmental or intergovernmental adjudicative body” and still remain ripe for discovery pursuant to Section 1782. In particular, the decision did not explicitly address whether arbitrations arising under the ICSID Convention, a multilateral treaty that creates a permanent institution for the resolution of investor-state disputes – the International Centre for Settlement of Investment Disputes, qualify for Section 1782 purposes.

About the Author:

Rinat Gareev is a US-qualified attorney (admitted in New York), holds civil and common law degrees. In his current role of a Legal Consultant at a New York based law firm, Rinat represents domestic and international entities on a variety of general corporate matters and cross-border transactions, as well as assisting clients in navigating complex compliance issues. Prior to returning to legal consulting, Rinat has gained experience by working and training in leading arbitral institutions in Malaysia, South Korea, Russia, international organizations (UNCITRAL) and law firms. Through Rinat's professional and educational experience, he has developed expertise in trade law, aviation law, arbitration and cross-border dispute resolution. He has published several papers in international and local journals on issues relating to cross-border dispute resolution and also provides expert opinions on various domestic and international law-related issues. Rinat is HKIAC-accredited tribunal secretary.

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