Author: ARIA
The Second Circuit’s recent decision in Beijing Shougang Mining Investment Co., Ltd. v. Mongolia has fundamentally undermined the Supreme Court’s landmark decision in First Options of Chicago, Inc. v. Kaplan, guaranteeing parties’ rights to an independent judicial determination of whether they consented to arbitrate.
In First Options,[1] the Supreme Court ruled that parties cannot be deprived of their right to an independent judicial determination of arbitral jurisdiction unless they “clearly and unmistakably” relinquish that right. The district court in that case ruled that when parties challenge arbitral jurisdiction before a tribunal, they waive their right to independent judicial review of the jurisdictional question in a post-award challenge to the resulting award. Affirming the Third Circuit’s reversal of that decision, the Supreme Court held that, due to the fundamental importance of consent to arbitrate, arguing jurisdiction to a tribunal does not and cannot constitute the required “clear and unmistakable” evidence of a delegation. The respondents, the Court said, cannot be required to go to court to seek an anti-arbitration injunction. Rather, they must be allowed to contest arbitral jurisdiction before a tribunal, without detriment to their right to independent post-award review of arbitral jurisdiction.[2]
In its recent decision in Beijing Shougang Mining Investment Co., Ltd. v. Mongolia,[3] the Court of Appeals for the Second Circuit has taken exactly the same position that the Supreme Court flatly rejected in First Options. There, Mongolia challenged arbitral jurisdiction before the tribunal and claimants responded to that challenge. The tribunal ultimately denied jurisdiction and claimants then sought annulment of the award denying jurisdiction. The Second Circuit chose to treat “the parties’ submission of the arbitrability question to the tribunal as clear and unmistakable evidence of a delegation.”[4] The claimants thereby lost the presumptive right to an independent post-award review of arbitrability that the Supreme Court in First Options promised them.
The Second Circuit’s position is clearly contrary to that of the Supreme Court in First Options. If anything, the case for treating a party’s arguing arbitrability before a tribunal as clear and unmistakable evidence of a delegation is even weaker in Beijing Shougang than in First Options. This is because the claimants in Beijing Shougang did not raise the jurisdictional question before the tribunal; Mongolia did.[5] All the claimants did was respond.
What, one may ask, did the Second Circuit think the claimants should have done when Mongolia objected to arbitral jurisdiction? Did the court expect them not to reply? Certainly not. The claimants in Beijing Shougang acted as claimants always do, whether in commercial or investment arbitration. They filed their claim and, when the respondent challenged jurisdiction before the tribunal, they responded. Replying to a respondent’s jurisdictional challenge before a tribunal is a “step that any party pursuing a claim in arbitration has no choice but to make.”[6]
In short, while purporting to apply First Options, the Court of Appeals not only contradicted that decision, but essentially dismantled it.[7] Met with a challenge to arbitral jurisdiction, claimants always respond to the challenge. Similarly, when, as in First Options, a respondent contests jurisdiction, it always raises the matter before the tribunal. If not, it will have waived its jurisdictional objection. If acting in this entirely rational and standard manner constitutes “clear and unmistakable” evidence of a delegation, then clear and unmistakable evidence will always be found whenever a jurisdictional issue is raised before a tribunal.
The upshot of the ruling in Beijing Shougang is that virtually every court going forward will find that a party has relinquished its presumptive First Options right to a court’s independent assessment of arbitral jurisdiction if it is challenged. That fundamental consent-based right will for all practical purposes have ceased to exist.[8]
For further details, please review Professor Bermann’s latest article entitled “After First Options: Delegation Run Amok” along with the Postscript discussing the Beijing Shougang case here.
Download the pdf of this summary here.
[1] First Options of Chi., Inc. v. Kaplan, 514 U.S. 938 (1995).
[2] See id. at 946-47.
[3] Beijing Shougang Mining Inv. Co., Ltd. v. Mongolia, No. 19-4191, 2021 U.S. App. LEXIS 25812 (2d Cir. Aug. 26, 2021).
[4] George A. Bermann, After First Options: Delegation Run Amok, 32 Am. Rev. Int’l Arb. 15, 35 (2021).
[5] Beijing Shougang, 2021 U.S. App. LEXIS 25812, at *12-13.
[6] Bermann, supra note 4, at 40.
[7] Id. at 39-40.
[8] Id. at 40.