ARBITRATION

As matter of first impression, Second Circuit overturns lower court's failure to confirm Swedish arbitral award against sovereign nation (here Russian Federation) where Russian Government, one of sovereign's political organs, was party to arbitration

Compagnie Noga D'Importation et D'Exportation, S.A. ("Noga"�) sought confirmation of a Swedish arbitration award by a New York federal court, naming the "Russian Federation"� as defendant. In 1990, Noga and the former Union of Soviet Socialist Republics (USSR) (the predecessor of the Russian Federation) had entered into $550 million worth of contracts to supply food and consumer goods to foreign trade agencies of the USSR and the Federative Socialist Soviet Republic of Russia (RSFSR) (a constituent republic of the USSR). The anticipated third-party financing for these contracts failed, and Noga agreed to make up part of the shortfall.

In April 1991, Noga lent $422.5 million to the RSFSR in return for the RSFSR's crude oil products. Nine months later, Noga signed onto another $400 million loan agreement with "the Government of the Russian Federation, acting for and on its own behalf"� (the Government) also in return for crude oil.

Both loan agreements provided (1) for arbitration of contract disputes before the Chamber of Commerce of Stockholm, Sweden; (2) for the application of Swiss substantive law to these disputes; (3) for the waiver of immunity with respect to the enforcement of any arbitration award, and (4) for its consent to be sued, inter alia, in New York. [Editors' Note: The USSR collapsed between the 1991 and 1992 loan agreements. In the 1992-1993 period, the Russian Federation assumed the debts and assets of the former USSR and its constituent republics.]

In December 1992, Noga declared the Government to be in default on the loans. Accordingly, it began arbitration proceedings before the Stockholm Chamber of Commerce, naming the "Russian Federation"� as respondent. The Government's attorneys argued that the Russian Federation was not the proper respondent, but nevertheless, for eight years, participated in the arbitration. The tribunal awarded Noga about $50 million in the liability and damages phase of the arbitration, and another $23.3 million in consequential damages.

During 1993 and 1994, Noga assigned portions of the expected arbitration awards to four Swiss banks which had financed Noga's performance of the 1991 and 1992 loan agreements. In 1997, however, Noga filed for protection from creditors in a Swiss court in Geneva. It proposed a composition plan [similar to a Chapter 11 reorganization plan in the U.S.] to pay back its creditors. The Geneva court approved Noga's plan and allowed Noga to discharge its debts by paying 12 percent on the creditors' claims. The assignee banks were to receive their portions from Noga's collection of the arbitration awards.

The Russian Federation opposed the confirmation of the award. It contended that it had neither (1) signed the loan agreements nor (2) taken part in the arbitration proceedings. In its view, the Government of Russia, an organ of the Russian central government, would be the proper party in this case.

The district court denied Noga's motion to confirm and enforce the arbitral award. It relied on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 53) (the Convention), as implemented in the Federal Arbitration Act (FAA) (9 U.S.C. Sections 201-208). The court did not consider the Russian Federation a proper party because it had taken part neither in the underlying arbitration proceedings nor in the loan agreements. Therefore, the court reasoned, it lacked jurisdiction to confirm the award against the Federation.

The U.S. Court of Appeals for the Second Circuit, however, vacates and remands. Essentially, it holds that, for purposes of this proceeding, the Russian Federation and the Government are the same party.

The Court first points out that the Convention and the Act govern the U.S. enforcement of arbitration awards. "... [T]he principal issue in this appeal is whether the Government is an instrumentality established as a juridical entity distinct and independent from the Russian Federation. [Thus] the [decision in] National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611 (1983) (Bancec) [that] public international law and federal common law determine the separate juridical status of a Cuban trade bank is of little help to us here. In any event, because we conclude that the answer to this question is the same regardless which of the bodies of law advocated by the parties is applied here, we need not cut the Gordian choice-of-law knot presented to us by the parties. ..."� [Slip op. 24]

"The Russian [Federation's] Constitution provides for a bicameral federal executive consisting of the President of the Russian Federation, who is described as being "�the head of State,"� Konst. RF art. 80(1), and the Government, which shall exercise "�executive power in the Russian Federation,' id. Art. 110(1). The Government consists of the Chairman of the Government ... and the Deputy Chairman of the Government and the federal ministers ... Id. arts. 83(a), (e), 110(2), 111(1)."�

"The Russian Constitution also enumerates the responsibilities of the Government, which include, among other things: (i) submitting a federal budget to the State Duma; (ii) "�ensuring the implementation ... of a uniform financial, credit, and monetary policy'; and (iii) "�exercising any other powers vested in [the Government] by the Constitution of the Russian Federation, [Russian] federal laws, and decrees of the President of the Russian Federation.' Id. Art. 114(a), (b), (g). ..."�

"Plainly, ... that entity is not a sovereign, corporation, or instrumentality separate from the Russian Federation. Rather, the Government is a political organ of the Russian Federation, analogous to the cabinet of the American president. Most significantly, ... the Government "�is not a juridical person and enjoys no autonomous legal capacity.' ..."�

"Indeed, given the ... Bancec decision, had either the Government or the Russian Federation wanted to shield the latter entity from being the subject of these confirmation proceedings, either could have designated a publicly-owned state corporation or instrumentality as the entity to contract with Noga. At bottom, the Government was performing a quintessential "�governmental' function: financing the purchase of massive quantities of basic necessities and infrastructure improvements to provide for the Russian people and paying for those necessities and improvements with the country's natural resources."�

"Finally, the Russian Federation has not satisfied its burden of proving that the Government is a separate juridical entity that can sue and be sued in Russian courts for obligations that are analogous to the ones set forth in the Loan Agreements or, indeed, for any legal obligations."�

"For example, the Russian Federation could have presented docket entries or court filings from Russian courts indicating that the Government had sued or been sued in this capacity. No such evidence was presented to the District Court, however. Accordingly, we find that, under Russian law, the Government and the Russian Federation should be treated as the same party for the purpose of this confirmation proceeding."� [Slip op. 25-27]

The Court then turns to U.S. federal common law. The issue of whether a federal court will confirm a foreign arbitral award against a sovereign nation, where one of the sovereign's political organs was a party to the arbitration, is one of first impression. Prior to this, federal courts had only considered confirmation of arbitral awards against foreign sovereigns where the foreign sovereign [had] acted through a corporation. Usually, the legal theories behind it are that the corporation was the alter ego or agent of the foreign sovereign, or that the corporate veil should be pierced.

In other contexts, the federal courts have held that the fact of an internal separation of some sort between the sovereign and one or more of its organs was of no legal significance. "The most developed area of federal common law concerning this issue relates to whether, in the context of the [Foreign Sovereign Immunities Act of 1976, as amended, 28 U.S.C. Sections 1602 ff) (FSIA)], a ministry or other political subdivision of a foreign sovereign should be treated either as the foreign state itself or a political subdivision of it (in which case it would be immune from suit), or as an "�agency or instrumentality' of the foreign state in which case it would be subject to suit under 28 U.S.C. Section 1605(a)(3)."�

" ... Significantly, in the case at bar, it is clear ... that the Government owns no assets that could be attached to satisfy a judgment confirming the ... Award and, moreover, that all such assets are owned by the Russian Federation."�

"Finally, we note that an issue similar to the one before us has arisen in the federal common law of bankruptcy and set off. Specifically, when monies are owed to an individual by one federal agency and that individual owes a debt to another federal agency, the two federal agencies may set off the debts owned by one of them against the claims of the other. In other words, the agencies are treated as constituent parts of a unitary entity. ..."� [Slip op. 31-37]

Neither does international law support the defendant's distinction between a sovereign and its governmental organs. It attributes the act of a State organ to the State regardless of the State organ's functions.

For example, in the arbitration over Libya's nationalization of its oil industry, the arbitrator overruled Libya's objection that the contracts at issue had been entered into by the Libyan Minister of Petroleum and that Libya (as a State) was not a party to it. See Texaco Overseas Petroleum Co. v. Government of the Libyan Arab Republic, 53 I.L.R. 393 (1975).

Citation: Compagnie Noga D’Importation et D’Exportation S.A. v. The Russian Federation, Nos 02-9237(L) & 02-9272(CON), 2004 WL 504604 (2d Cir. March 16).

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