Yasmine Lahlou Joins California International Arbitration Week Panel on Expedited Arbitration

New York appellate court holds that prior arbitration award precluded claim by party’s affiliate under doctrine of res judicata:

Non-party to arbitration was precluded from bringing breach of contract claim when the same issue was or could have been adjudicated by a related party in a prior arbitration.

Gulf LNG Energy, LLC v. Eni S.p.A., 219 N.Y.S.3d 17 (1st Dep’t Sep. 24, 2024).

The doctrine of res judicata or claim preclusion prevents parties from relitigating claims that were or could have been raised in a prior action. U.S. courts have long applied this doctrine “with equal force” to claims brought in arbitration, thus barring parties from raising the same claim resolved in a prior arbitration in a subsequent court action. Gulf v. Eni S.p.A, is a reminder of two fundamental aspects of res judicata. First, non-parties in privity with the parties to a prior action may find themselves precluded from pursuing related claims that were or could have been litigated in the prior arbitration.  Second, claim preclusion may bar not only claims that were previously decided in a prior action, including a prior arbitration, but also those that were litigated but not ultimately decided.

The dispute in Gulf involved a series of related agreements among several entities for the construction and operation of a facility to handle the importation and regasification of Liquified National Gas (LNG). The main agreement was executed between two subsidiaries of Gulf Port on one side, and Eni USA, the American affiliate of the major Italian energy company, Eni S.p.A., on the other.  There were also separate parental guarantees on each side.  Eni S.p.A. guaranteed the payment obligations of Eni USA, and Gulf Port guaranteed its subsidiaries’ undertaking in the main agreement not to use the planned facility for any activities other than the importation and regasification of LNG. Ultimately these multiple contracts led to two arbitrations and four court cases in Delaware and New York state courts.

Prior to completion of the facility, changes in the U.S. energy market stemming from the shale boom drastically reduced demand for imported LNG. In light of these changed circumstances, Gulf proposed to its customers – including Eni USA – to include additional capabilities in the facility, including gas export (as well as import) and liquefaction (in addition to regasification), however no written agreement was executed. After completion of the facility, Eni USA decided not to ship its liquefied gas to Gulf and instead sold it to other markets.

Eni USA initiated arbitration proceedings against the two Gulf signatories to the main agreement seeking termination of that agreement for frustration-of-purpose. In the alternative, it claimed it could terminate the agreement for breach of contract, based on the Gulf initiative to add liquefaction and export to the facilities original, contractually agreed capabilities. The Gulf signatories disputed both claimed grounds for termination. On June 2018, the arbitral tribunal agreed with Eni USA that the main agreement was terminated because of frustration of purpose, but nonetheless ordered Eni USA to pay Gulf approximately $450 million as equitable compensation. Because it found the contract was terminated, the tribunal did not reach Eni USA’s breach of contract claims. The Delaware Chancery Court confirmed the award and Eni USA paid the outstanding amounts.

Months later, the two Gulf signatories to the main agreement sued Eni S.p.A. under its parental guaranty in a New York court, seeking additional monies allegedly due from Eni USA.  Eni S.p.A. counterclaimed alleging, among other things, that those Gulf entities had breached the main agreement by using the port for activities beyond import and regasification. It also moved, successfully, for summary judgment dismissing the Gulf entities’ claims on the grounds that the main agreement had been terminated and the arbitral award paid in full.

While proceedings continued on its counterclaim, Eni S.p.A. also filed a separate action directly against Gulf Port under its parental guarantee agreement based on the same allegations concerning the improper use of the facility. After the two actions were effectively consolidated by stipulation, Gulf Port and its subsidiaries moved for summary judgment dismissing all of Eni S.p.A.’s claims and counterclaims on the basis, inter alia, that the prior arbitration award made them res judicata. The New York Supreme Court agreed and granted the motion. Eni S.p.A. appealed and the Appellate Division affirmed.

The Appellate Division held first that the Supreme Court did not err in ruling that the arbitration award precluded Eni S.p.A.’s claims, because it was in privity with Eni USA, a party to the arbitration, and the Gulf signatories and Gulf Port were also privies. Not only did the parent companies on both sides hold 100% ownership of their subsidiaries, they also worked with those subsidiaries to pursue the same business objectives. Most importantly, the contracts executed by both parent companies were ancillary to and intertwined with the main agreement between their respective subsidiaries. Thus, the fact that neither parent company was actually a party to the prior arbitration did not bar preclusion.

Nor did the fact that the arbitral tribunal had not reached the issue of Gulf’s alleged breach of the main agreement help Eni S.p.A avoid preclusion.  It was sufficient under New York law, the court held, that that claim had been litigated. i.e., the parties to the arbitration had fully briefed, argued and submitted Eni S.p.A.’s  issues to the arbitral tribunal.  To allow re-litigation of claims fully presented in a prior proceeding, but whose resolution had proved to be unnecessary there, would “engender endless litigation, wreaking havoc” on businesses and courts.

Lastly, the court addressed whether the lower court erred in finding an identity of claims, since the claims in the arbitration were brought under the main agreement and the litigation focused on the parental guarantees. The court held that res judicata issues should be assessed under a “transactional analysis,” that looked beyond the single agreement at issue in the arbitration to determine whether the current claim and the former claim were part of the same transaction or connected transactions. Because Eni S.p.A.’s claims related to the performance of the same obligation adjudicated in the arbitration – the limitation on the use of the facility to import and regasification – the prior arbitration award precluded Eni S.p.A.’s claims.

Read the court’s full decision here.

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Fifth Circuit holds that arbitrators interpret their own authority to modify awards under ICC Rules:

Arbitrators did not exceed their authority by modifying final award where they determined that ICC rules authorized them to do so.

RSM Prod. Corp. v. Gaz du Cameroun, S.A., 117 F.4th 707 (5th Cir. 2024).

Under the common law doctrine of functus officio – Latin for having performed one’s office – once an arbitrator renders a final decision on the merits, with certain limited exceptions for ministerial and computational corrections, he or she may not revisit and modify the award. However, functus officio is a common law default rule, which the parties are free to contract around. One way they may do so is by adopting institutional rules that permit arbitrators to modify their awards.

However, a party may still challenge a modified award on the grounds that the arbitrators exceeded their authority by modifying or amending an award in contravention of the applicable institutional rules. That was the circumstance in RSM. And, as the Court of Appeals for the Fifth Circuit’s decision demonstrates, such challenges raise a more fundamental question – who, as between the arbitrators and the court, interprets the scope of the arbitrators’ power to modify an award under the institutional rules. In RSM, the Fifth Circuit determined that the interpretation of the scope of the arbitrators’ authority under the International Chamber of Commerce Rules (ICC Rules) adopted by the parties was itself a matter committed to arbitration, and thus deference was due to the arbitrators’ determination that the rules permitted modification of a prior award.

Article 36 of the ICC Rules authorized arbitral tribunals to modify an award to “correct a clerical, computational or typographical error.” As we previously reported, the trial court had ruled the arbitrators in RSM exceeded their authority under Article 36 when they revised their initial award to remove certain categories of damages.  (https://www.chaffetzlindsey.com/report/arbitration-in-the-courts-december-2023vol-12/.)

On appeal, the Fifth Circuit reversed.  The arbitration clause by which the parties had incorporated the ICC rules also provided that the arbitrators would resolve “[a]ny and all claims, demands, causes of action, disputes, controversies and other matters in question arising out of or relating to” their agreements.  Therefore, the court held, it was for the arbitrators, not the district court, to interpret the scope of the arbitrators’ authority to modify an award under Article 36 of the ICC Rules.

In the court’s words, “the Tribunal not only had the contractual authority to correct computational errors, but it also had the authority to determine what constituted a computational error in the first instance.” The relevant question was simply “whether the Tribunal even arguably construed the parties’ agreements when it issued the Addendum Award.” Finding it had, the Fifth Circuit held the Addendum would be enforced whether their interpretation was correct.  In so holding, the court noted, “the potential for . . . mistakes is the price of agreeing to arbitration. . .. The arbitrator’s construction holds, however good, bad, or ugly.”

Read the court’s full decision here.

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D.C. Court holds that limitations period for recognition and enforcement of ICSID awards is governed by forum state’s statute of limitations for enforcing state court money judgments:

Because Section 1650a requires that ICSID awards be accorded the same full faith and credit as state court money judgments, state law rather than the FAA governs the time to petition for enforcement.

Webuild S.p.A. v. Argentine Republic, No. CV 21-2464 (D.D.C. Nov. 19, 2024).

The recognition and enforcement of commercial arbitration awards are generally governed by the Federal Arbitration Act, with Chapter 1 governing domestic awards and Chapters 2 and 3 governing international awards falling under the New York and Panama Conventions, respectively. Under Section 207 of the FAA, parties have three years to seek confirmation of international awards falling under the Conventions. However, the recognition and enforcement of awards in investor-state disputes governed by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”) fall outside the FAA. The ICSID Convention is adopted into federal law by another statute, 22 U.S.C. §1650a (the “Investment Disputes Act”). Section 1650a is silent on the time for seeking recognition and enforcement of investor-state awards. But it does require that ICSID awards “shall be given the same full faith and credit as if the award were a final judgment of a court of general jurisdiction of one of the several States.”

In Webuild v. Argentina, the district court for the District of Columbia held that, because ICSID awards are on equal footing with state court judgments, the enforcing court must apply the forum state’s limitations periods for enforcing a state court judgment, rather than the three-year limitations period for enforcing international awards under Chapter 2 of the FAA.

Webuild involved a petition to enforce an ICSID award against Argentina under the Argentina-Italy BIT. The claim arose out of a concession for the provision of sewage services in the Province of Buenos Aires. Starting in 2001, Argentina took several unilateral measures that hindered the value of the investment (including unpegging the contract from the U.S. dollar, freezing tariffs, preventing the investor from billing work charges and suspending its right to interrupt services for customers who did not pay their bills), and ultimately terminated the concession in 2006. Webuild started proceedings under the ICSID Convention, resulting in a 2011 award ordering Argentina to pay $21.3 million (in U.S. currency) plus interest. In January 2014, an ad hoc committee – the body authorized under the ICSID Convention to address annulment petitions – rejected Argentina’s plea to annul the award.

Webuild petitioned the D.C. district court to enforce the award in September 2021. Argentina moved to dismiss the petition as time-barred, arguing that FAA §207’s three-year limitation period applied so that the petition, filed ten years after issuance of the award, was untimely.

The district court denied Argentina’s motion, holding that the petition was timely filed. Because the Investment Disputes Act, 22 U.S.C. §1650a, does not contain its own statute of limitations, the court found it needed to “borrow the most suitable statute or other rule of timeliness from some other sources.” In such cases, when Congress fails to provide an express limitations period, there is a strong presumption that the limitation period is to be drawn from “the state statute most closely analogous to the federal Act in need.” This presumption can be overcome in favor of a federal law that “clearly provides a closer analogy” if the federal policies at stake and the practicalities of litigation make it more appropriate.

The district court held the appropriate limitation period was the twelve years provided in D.C. Code §15-101 for the enforcement of civil money judgments. According to the court, D.C. Code §15-101 was appropriate because Section 1650a requires courts to treat an ICSID award “as if [it] were a final judgement of a court of general jurisdiction of one of several States.” Accordingly, a law governing the enforcement of money judgments from D.C. courts was “a sensible choice.”

In reaching its holding, the court rejected Argentina’s argument that the FAA was more closely analogous to Section 1650a. Central to the court’s reason was its view that the ICSID Convention and Section 1650a compel courts to enforce ICSID awards as if they were state court judgments, not mere arbitration awards. While the FAA provides grounds to refuse recognition of an award, Section 1650a precludes such merits-based challenges to ICSID awards, leaving the courts with a largely “perfunctory” role when it comes to enforcement.

The decision in Webuild followed the D.C. district court’s similar decision in a prior case from last August, Titan Consortium 1, LLC v. Argentine Republic, No. 21-cv-2250 (D.D.C. Aug. 19, 2024), which also involved the enforcement of an ICSID award against Argentina. As in Webuild, the court held that the D.C. Code §15-101, rather than the FAA, was the “best option” from which to borrow a statute of limitation for the Investment Disputes Act and held the enforcement petition filed four years after issuance of the award was timely filed.

Read the court’s full decision here.

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California federal court compels arbitration of dispute under side agreement related to reinsurance contract:

Arbitration clause in reinsurance treaty was broad enough to require arbitration of claims concerning related memorandum of understanding executed 15 years later.

Truck Insurance Exchange v. Certain Underwriters of Lloyd’s London et al., No. 2:24CV08157 (C.D. Cal. Nov. 15, 2024).

Although arbitration is a matter of contract, Truck Insurance is a reminder that an agreement to arbitrate may, by its terms, extend to disputes under later executed agreements that are interrelated with the contract containing an arbitration clause. In Truck, the United States District Court for the Central District of California held that an arbitration clause in a reinsurance treaty applied to a separate Memorandum of Understanding executed more than 15 years after the original agreement.

The underlying dispute involved a 1968 reinsurance treaty between Truck Insurance Exchange (“Truck”) and various reinsurers (“the Reinsurers”) covering a series of comprehensive liability policies issued to Kaiser Cement & Gypsum Company (“Kaiser”). In the early 1980s, Truck began reporting various claims arising out of Kaiser’s asbestos liabilities. A dispute arose between Truck and the Reinsurers over whether and to what extent those claims were covered under the reinsurance treaty and the parties executed a Memorandum of Understanding (MOU) in 1984 memorializing how they would handle such claims. In relevant part, §3 of the MOU provided that “[b]oth [Truck] and [the Reinsurers] fully reserve all their rights as to all issues of coverage herein and agree that no activity by either party nor the Understanding set forth herein shall ever be argued or deemed to constitute a waiver of the contractual rights of the parties or their rights under the law in the event of future applicable legislation, case law decision or participation by [Truck] in the Asbestos Claims Facility.”

After the MOU, Truck did not bill the Reinsurers for asbestos losses under the Kaiser policies, until 2023, when Truck informed the Reinsurers that it would resume billing for these claims. In response, the Reinsurers commenced arbitration under the arbitration clause in the reinsurance treaty seeking a declaration that these losses were not covered. Truck, in turn, filed a civil complaint in the California Superior Court claiming breach of the reinsurance treaty and seeking a declaratory judgment that the reinsurers were obligated to pay the new claims. Truck later amended the complaint to include additional reinsurers and remove the breach of contract claim, thus proceeding only on its claim for declaratory judgment under the MOU. The Reinsurers removed the case to federal court under FAA §205, and then moved to compel arbitration and dismiss or stay the complaint pending the arbitration.

The central issue was whether Truck’s claim fell within the scope of the arbitration agreement in the reinsurance treaty. Truck did not dispute that the case would be subject to arbitration if it related to the reinsurance treaty, but argued that its claim for declaratory judgment was based solely on the MOU. Truck argued it would only ask the court to examine the last sentence of §3 of the MOU – providing the MOU should not constitute a waiver of the parties’ contractual rights under future applicable legislation and caselaw – and declare whether the MOU allowed Truck to bill the Reinsurers in accordance with California case law. According to Truck, the arbitration clause in the reinsurance treaty was inapplicable because the MOU was a separate agreement, which did not contain its own arbitration provision.

The court rejected this argument and granted the Reinsurers’ motion to compel, holding, “where two contracts are merely interrelated contracts in an ongoing series of transactions, an arbitration provision in one contract could apply to subsequent contracts.” In this case, the MOU and the reinsurance treaty were part of the same transaction, as the MOU concerned the interpretation of the reinsurance agreement. The MOU did not by itself provide any rights or obligations in relation to the payment of asbestos claims. This meant that any billings Truck wished the court to address were made solely under the reinsurance treaty. Truck’s claims thus fell within the scope of the reinsurance treaty’s arbitration clause, which required the arbitration of “any dispute… between [the parties] with reference to the interpretation of this Contract or the rights with respect to any transaction involved.”

Read the court’s full decision here.