Case of the Day: Republic of Iraq v. ABB AG

Motions to compel arbitration in international cases are, strictly speaking, outside of the scope of Letters Blogatory’s coverage, since if we’re going to cover them, we might as well cover forum non conveniens, and then other issues would seem logical to cover, and so on. But since it’s a slow news day and since the case has general interest, our case of the day is Republic of Iraq v. ABB AG (S.D.N.Y. 2011), an action by Iraq seeking damages arising from alleged corruption in the UN Oil-For-Food program, which the UN established in the 1990s to allow Iraq to sell oil in order to purchase humanitarian goods. The allegation in the case was that BNP Paribas had a contract with the United Nations under which it would operate the escrow account for the program’s funds.

Iraq sued BNP Paribas and others in 2008. Nearly two years later, it gave BNP a notice of arbitration pursuant to BNP’s contract with the UN, which provided:

Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination, or invalidity thereof, unless settled amicably … within sixty days after receipt by one Party [a defined term, which refers only to the UN or BNP] of the other Party’s request for such amicable settlement, shall be referred by either Party to arbitration …

Iraq then moved to compel arbitration, and BNP moved to enjoin arbitration.

The threshold question was whether the question of arbitrability was for the court or for the arbitral tribunal. Under Second Circuit precedent, the question of arbitrability is presumptively one for the court, even in cases under the New York Convention, and the presumption can be overcome only by clear and unmistakable evidence from the arbitration agreement itself. The judge found no such evidence, “for the simple reason that there [was] no contract between” Iraq and BNP. Nor did the arbitration agreement clearly and unmistakably manifest an intention to make claims of third parties arbitrable. “To the contrary, it provide[d] that disputes ‘shall be referred by either Party to arbitration.’” The court distinguished Contec Corp. v. Remote Solution Co., 398 F.3d 205 (2d Cir. 2005), the one Second Circuit case in which the court compelled arbitration on the motion of a non-party to the arbitration agreement. There, the non-party was the corporate successor to the signatory. They had the same ownership and the same business relationship with the other party to the arbitration agreement. There was no such successor or alter ego relationship between the UN and Iraq here.

Turning to the merits, the court found that Iraq’s claims were not arbitrable. Under New York law, which the parties agreed applied, third parties are entitled to assert only those rights under the contract that the parties intended they should have the right to assert. Judge Stein, citing New York cases denying third-party beneficiaries the right to enforce arbitration clauses in the absence of evidence that the parties had intended to allow them to do so, found no evidence of such intent in the agreement. Indeed, the agreement, which referred to arbitration at the instance of one of the Parties –a defined term–and which permitted resort to arbitration only after an attempt by the Parties to settle their dispute amicably, was to the contrary.

The court therefore denied Iraq’s motion to arbitrate and granted BNP’s motion to enjoin the arbitration. It did not rule on BNP’s argument that Iraq had waived the arbitration agreement by filing a lawsuit and litigating for two years, although that argument has obvious appeal. It also did not discuss the propriety of the injunction against Iraq, although off the cuff, I suppose that by bringing its motion, Iraq subjected itself to the court’s personal jurisdiction and also waived any sovereign immunity objection to an injunction so intimately related to its own motion, see 28 U.S.C. § 1607.

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