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Case of the Day: Thai-Lao Lignite (Thailand) Co. v. Government of the Lao People’s Democratic Republic

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, hence the case of the day, Thai-Lao Lignite (Thailand) Co. v. Government of the Lao People’s Democratic Republic (S.D.N.Y. 2011).

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 Lignite then sought confirmation of the award in the New York Supreme Court. Laos removed the case to the U.S. District Court. Judge Wood promptly disposed of the threshold issues. She rejected Laos’s contention that the Court lacked personal jurisdiction. Under 28 U.S.C. § 1330(b):

Personal jurisdiction over a foreign state shall exist as to every claim for relief over which the district courts have [subject matter jurisdiction] where service has been made under [28 U.S.C. § 1608].

The court had subject matter jurisdiction since Laos had no immunity under the FSIA. Under 28 U.S.C. § 1605(a)(6)(B), there is no sovereign immunity where the action is brought to confirm an arbitration award governed by the New York Convention.  Laos expressly waived any objections based on service of process. Last, the judge noted that foreign states cannot invoke the Due Process Clause to avoid personal jurisdiction.

Judge Wood also turned away a forum non conveniens argument. (I’ve argued before that forum non conveniens should not be a defense to recognition and enforcement of an arbitral award under the Convention, but the judge was bound by Second Circuit authority that says otherwise). Thailand was a potential alternate forum, but balancing of public and private factors did not tip sufficiently towards Thailand to require the court to override the plaintiff’s choice of forum.

The main issue in the case was arbitrability. Judge Wood gives a thorough analysis, which I am not going to review in detail. The main point of interest, in my mind, is the distinction between the treatment given to a party that did not sign the arbitration agreement, and the party that did sign the agreement but that has some other objection to the arbitrability of the dispute. Sometimes the losing party in an arbitration asserts that it was not a party to the arbitration agreement, or that there was no arbitration agreement at all. But in this case, Laos didn’t dispute that it was party to the arbitration agreement. Its argument was about whether its opponents were parties to the agreement. Because Laos, by agreeing to arbitration under the UNCITRAL Rules, had implicitly authorized the tribunal to decide questions of arbitrability. Under Article 23(1) of the UNCITRAL Rules (as in effect today; the case was decided under the old version of the Rules):

The arbitral tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.

It seems right to me to conclude that where there is no dispute that one party has agreed to arbitrate, the question whether the other party is bound by the arbitration is one that is within the arbitrator’s competence to decide, if the parties have agreed to make it so.