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February 17, 2012

Perils of a two-track justice system

During last week's events on the Chevron v. Ecuador investor-state case, someone asked an interesting question: say the Ecuadoran domestic ruling for the plaintiffs (who allege harm from environmental contamination by Texaco, now Chevron) stands. Say their legal team moves to attempt to enforce that ruling in other courts (say courts in Venezuela, where Chevron has some assets). How would a U.S. court treat the Ecuadoran or Venezuelan ruling?

This question actually perfectly illustrates the offensiveness of the two-track justice system that the investor-state system represents: the Ecuadoran plaintiffs would actually receive more favorable treatment of their enforcement actions if their original case had been an investor-state arbitration rather than a national court case. (Not that they would have standing in any case. I'm just sayin'.)

The U.S. (along with Ecuador and Venezuela) is party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). An investor-state arbitral award anywhere in the world can be enforced in the U.S. with respect to assets of the respondent located in the U.S., which is considered a “secondary jurisdiction” under U.S. court interpretations of the Convention.

In 1985, the U.S. Supreme Court put its stamp of approval on the enforcement of arbitral awards. This appeared to be motivated in part by a desire to avoid losing some of this “business” to France and the UK. (For a fascinating history of this, see this book by Yves Dezalay and Bryant Garth.) As the court wrote in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.: “[C]oncerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes require that we enforce ... agreement[s]” to submit disputes to binding international arbitration.

However, most foreign court rulings (like the Ecuadoran ruling) will have difficulty being enforced in the U.S. The U.S. (along with almost every other country in the world) is not party to the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters, which would have set up an international framework for this.

As a consequence, legal scholar Brian Richard Paige writes, each U.S. state has different practices regarding recognition of foreign judgments. Moreover, the U.S. Supreme Court in Hilton v. Guyot, 159 U.S. 113 (1895), ruled that the U.S. would only enforce foreign rulings if the foreign government granted reciprocity, i.e. enforced U.S. rulings. Since most foreign governments hate U.S.-style class action cases, U.S. courts have been wary to recognize foreign judgments. As the Hilton case stated:

“When an action is brought in a court of this country, by a citizen of a foreign country against one of our own citizens, to recover a sum of money adjudged by a court of that country to be due from the defendant to the plaintiff, and the foreign judgment appears to have been rendered by a competent court, having jurisdiction of the cause and of the parties, and upon due allegations and proof, and opportunity to defend against them, and its proceedings are according to the course of a civilized jurisprudence, and are stated in a clear and formal record, the judgment is prima facie evidence, at least, of the truth of the matter adjudged; and it should be held conclusive upon the merits tried in the foreign court, unless some special ground is shown for impeaching the judgment, as by showing that it was affected by fraud or prejudice, or that by the principles of international law, and by the comity of our own country, it should not be given full credit and effect.”

However, as Paige writes, the Hilton Court refused to domesticate the French judgment on the ground that there was no showing that French courts would grant reciprocal treatment to judgments of the United States. As such, “the comity of our nation” did not require the Court “to give conclusive effect to the judgments of the courts of France.”

This stuff gets very complicated. Take a recent case in U.S. federal courts, KBC v. Pertamina. KBC was a Cayman company that had a contractual relationship with Pertamina, an Indonesia state owned enterprise. They agreed to arbitrate if they ran into problems, on Indonesian territory under UNCITRAL rules. On December 18, 2000, the arbitral panel issued a final decision awarding KBC more than $261 million in damages, lost profits, and costs of arbitration.

Pertamina asked for Swiss courts to overturn the award, which they did not do.

KBC, for its part, asked a Texas federal court to enforce the judgment. Pertamina appealed, but refused to post a bond. KBC then took it to New York court. Both courts upheld the arbitral award, on the basis of comity and the 1985 Mitsubishi precedent.

But then Pertamina launched a case in Cayman courts, arguing that the whole dispute was fraudulent. KBC then asked U.S. courts to enjoin the Cayman action, which they did, this time without referencing comity, but instead the need to uphold the New York Convention.

The case shows that an arbitral award in favor of Chevron is going to be given much more weight in U.S. courts than an Ecuadoran (or Venezuelan) court ruling in favor of the Ecuadoran plaintiffs.

I’m sure there’s a lot more legal complexity than what I’m capturing here in this quick review, but the comity doctrine seems to be among the most elastic on the books.

Moreover, the recent ruling in Donziger v. Chevron in the NY courts shows that U.S. judges were pretty unwilling to treat their Ecuadoran counterparts as equal. In a March 2011 ruling, Judge Lewis Kaplan wrote "that Ecuador has not provided impartial tribunals or procedures compatible with due process of law." While this was vacated in September, it definitely gives a flavor of what might go down.

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