KARAHA BODAS CO., L.L.C. v. PERUSAHAAN PERTAMBANGAN MINYAK DAN GAS BUMI NEGARA; ET AL
Nos. 02-20042 & 03-20602
United States Court of Appeals, Fifth Circuit
March 23, 2004
Charles R. Fulbruge III, Clerk
Before KING, Chief Circuit Judge, DAVIS, Circuit Judge, and ROSENTHAL,* District Judge.
ROSENTHAL, District Judge:
Pertamina appealed to this court. During the appeal, Pertamina filed in the district court a motion to set aside the judgment under
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 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 generated. Under the Energy Sales Contract (“ESC“), PLN agreed to purchase from Pertamina the energy generated by KBC‘s facilities. Both contraсts 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
KBC filed its Revised Statement of Claim in November 1999. Pertamina received a number of extensions before it filed its reply 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 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 deсlarations 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 from a “Government Related
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 in Texas 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) enforcemеnt 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 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
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. 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. Thе district court denied Pertamina‘s
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
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
This court denied Pertamina‘s motion to supplement the appellate record under
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 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
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 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 limited authority of secondary-jurisdiction
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 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
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
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
Under the New York Convention, the rulings of the Tribunal interpreting the parties’ contract are entitled to deference.27
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
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 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 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
The references in the contracts to certain Indonesian civil procedure rules do not rebut the strong presumption that Swiss procedural law applied to the arbitration.41 These references fall far short of an express designation of Indonesian procedural lаw 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 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
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 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
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 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
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] 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
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 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 aрpointed 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 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. Despitе 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. 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 рrocedure for choosing an arbitrator. KBC asserts that the Tribunal correctly found that the general UNCITRAL
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 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 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
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
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 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
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 continuance and discovery of the following documents from KBC, FPL, and Caithness regarding the financing of the KBC project:
- All documents relating to efforts to obtain financing for the Karaha-Bodas project during the period September 1997 through June 1998.
- 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.
- All documents relating to FPL‘s, its subsidiaries‘, or its predecessors’ consideration of whether to invest in the Karaha-Bodas project.
- 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.
- 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).
- 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 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
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 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., 125 F.3d 1123 (7th Cir. 1997),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
In Tempo Shain Corp. v. Bertek, Inc., 120 F.3d 16 (2d Cir. 1997),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, 763 F.2d 34 (1st Cir. 1985),83 the сourt 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 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,
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 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. 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 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 prejudiсe 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
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 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 projеct.
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
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
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 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
In Biotronik Mess-Und Therapiegeraete GmbH & Co. v. Medford Medical Instrument Co., 415 F. Supp. 133 (D.N.J. 1976),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 оpposing 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., 292 F. Supp. 549 (S.D.N.Y. 1968),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 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
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 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 cоuntries 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
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
Pertamina‘s own conduct during and after the arbitration evidences its intent to have Swiss procedural law apply and to have 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 Pеrtamina‘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.
Notes
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 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 secоnd 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]. . . .
Both contracts contained the following additional arbitration language: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 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]. . . .
JOC, Art. 13.2(d); ESC, § 8.2(d).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 Indоnesian 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 procedural 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.
- Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, оnly if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
- 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
- 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
- The award deals with a difference not contemplated by or not falling within the terms 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
- 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
- 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.
- 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:
- The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or
- The recognition or enforcement of the award would be contrary to the public policy of that country.
JOC at Art. 13.2(a); ESC at § 8.2(a).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 Procedure so that the arbitration need not be completed within the specific time.
JOC at Art. 13.2(b); ESC at § 8.2(b).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 acсordance with such terms.
JOC at Art. 13.2(d); ESC at § 8.2(d).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.
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).[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 thаt 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.
Id.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.