Case of the Day: Thai-Lao Lignite Co. v. Laos

The case of the day is Thai-Lao Lignite Co. v. Government of the Lao People’s Democratic Republic (S.D.N.Y. 2014). I’ve covered the case several times before. Here is my brief description from my first post on the case:

Lignite is a low-quality coal used for generating electricity. The Hongsa region of Laos, near the Thai border, has it, and in the early 1990s, Thailand needed to import electricity. And so a joint venture was born. Thai-Lao Lignite, a Thai company, entered into a Project Development Agreement with the Lao government giving it exclusive exploration and mining rights in the region. The idea was that Thai-Lao Lignite would build a Lignite-fired power plant on the Lao side of the border, and Laos would sell the electricity to Thailand. The PDA called for Thai-Lao Lignite to organize another entity, Thai-Lao Power Co., under Lao law, and to assign its rights and obligations under the PDA to the Lao company. Thai-Lao Lignite never made the assignment, and the Lao government dealt with Thai-Lao Lignite as though it were a proper party to the PDA. The PDA had an arbitration agreement calling for arbitration in Malaysia at the Kuala Lumpur Regional Centre for Arbitration under the UNCITRAL Rules. The substantive law governing the contract was the law of New York. A dispute developed …

Thai-Lao Lignite demanded arbitration. The parties agreed that the ICC would replace the Kuala Lumpur Regional Center as the appointing authority. The tribunal issued an award in favor of Thai-Lao Lignite in 2009.

Thai-Lao sought and received confirmation of the award in 2011. The judge rejected Laos’s argument that the dispute was not arbitrable. The Second Circuit later summarily affirmed. Laos unsuccessfully sought a rehearing en banc, and, represented by Professor George Berman, it unsuccessfully petitioned the Supreme Court for review. So things were looking pretty good for Thai-Lao.

Unfortunately for the company, however, in 2012 the Malaysian High Court vacated the award on the grounds that the dispute was not arbitrable. And so Laos returned to New York and sought to set aside the order confirming the award under FRCP 60(b)(5), which provides for relief from a judgment if “the judgment has been satisfied, released, or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable,” and under Article V(1)(e) of the New York Convention, which provides:

Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that … 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.

The main issue in the case was the scope of the US court’s discretion to enforce an arbitral award made in another New York Convention state when the courts of that state had vacated the award. I’ll give a little detail about the doctrine, but first, just as a way of thinking about the issue, it’s my sense that how we think about the right outcome here depends on how we think about the relationship of an arbitration to the state in which the arbitration has it seat, or maybe, if we want to be fancy about it, how we think about “delocalization” of international commercial arbitration. If you take the traditional view that the arbitration is a creature of the law of the state in which the arbitration has its seat, then the tendency will be to want to defer to the Malaysian court. If you take the view that the arbitration is not just a creature of Malaysian law and that national courts’ role is to support, not to control, an essentially transnational procedure, then you won’t necessarily want to give controlling weight to the Malaysian court’s view.

Let’s turn to the doctrine. It’s clear that, in general, a US court should not recognize an arbitral award when the courts of the state where the award was made have vacated the award. TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928, 935 (D.C. Cir. 2007). But there are rare exceptions. Indeed, I covered one of them, COMMISA v. PEMEX, in September 2013. There, it was Mexico’s courts that annulled the awards, acting in a way that the US court found was transparently calculated to benefit a Mexican state-owned enterprise and that the US court found to violate basic norms of justice. In another well-known example, In re Chromalloy Aeroservices, 939 F. Supp. 907 (D.D.C. 1996), there was a similar theme of self-dealing: an Egyptian court set aside an award in a dispute between Egypt itself and a private company, again on grounds the US court found highly dubious.

These sorts of consideration were, according to the US court, absent here. Maybe the Malaysian court got the decision right and maybe it got it wrong, but there didn’t seem to be any transparent self-dealing, or any respect in which the Malaysian decision, right or wrong, violated the most basic norms of justice.

Thai-Lao sought to point to past instances of bad behavior by Laos in the litigation, but as the judge pointed out, the bad behavior in question occurred in the earlier US proceedings, and for present purposes what matters (and what could be potentially relevant) is conduct in the Malaysian proceedings.

Perhaps Thai-Lao’s strongest point was a point also found in Chromalloy: the losing party—in both cases, a foreign sovereign—had promised not to appeal from the award. But Laos’s promise was only a promise “to the extent permitted by law,” and the only evidence the parties adduced was an expert opinion to the effect that Malaysian law did not permit waiver of the right to seek vacatur of an arbitral award.

There is an issue of preclusion here: since the US court had ruled first on arbitrability, should the Malaysian court have accorded the US judgment some kind of preclusive effect? As an initial matter, it seems clear that the Malaysian court was not required to give it preclusive effect, though if the Malaysian court felt the issues had been fully and fairly litigated in New York, it would seem permissible and reasonable for the Malysian court to refuse to allow the parties to re-litigate the issue. But the issues litigated in New York and in Malaysia were not really identical: Malaysian law provides for de novo review of the arbitrator’s decision as to arbitrability, while US law, as both the district court judge and the Second Circuit concluded, provided only for a deferential review.

Thai-Lao has appealed, so we have not seen the last of this case.

About Ted Folkman

Ted Folkman is a shareholder with Murphy & King, a Boston law firm, where he has a complex business litigation practice. He is the author of International Judicial Assistance (MCLE 2d ed. 2016), a nuts-and-bolts guide to international judicial assistance issues, and of the chapter on service of process in the ABA's forthcoming treatise on International Aspects of US Litigation, and he is the publisher of Letters Blogatory, the Web's first blog devoted to international judicial assistance, which the ABA recognized as one of the best 100 legal blogs in 2012, 2014, and 2015.

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