Author: Nathan Gayer de Mena**
The recent Second Circuit decision in Beijing Shougang Mining Inv. Co. v. Mongolia[1] provides a relevant backdrop for revisiting the requirement of “clear and unmistakable” delegation in the context of the allocation of proper authority between arbitral tribunals and courts. This blog post argues that the Second Circuit’s holding is consistent with First Options.[2]
I. GATEWAY ISSUES AND DELEGATION: THE LAW AS IT STANDS
Given the increasing complexity of international arbitration, a brief summary is in order. We touch upon three issues: (A) “gateway issues” and arbitrability, (B) the allocation of authority to decide questions of arbitrability between courts and arbitrators, and (C) the notion of delegation. We then proceed to discuss the Mongolia case.
A. What are “Gateway Issues” and What is “Arbitrability”?
“Gateway issues”[3] concern questions of enforceability that “so seriously implicate the consent of parties to arbitrate their disputes that a party contesting the enforceability of an arbitration agreement on those grounds is entitled to a judicial determination of the matter.”[4] These, in turn, have been referred to as issues of “arbitrability.”[5] Thus understood, arbitrability encompasses “dispute[s] about whether the parties are bound by a given arbitration clause” (i.e. formation) and “disagreement[s] about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy” (i.e. scope).[6]
B. Who decides—court or arbitrator—questions of arbitrability?
The leading case on the issue of allocation of authority over questions of arbitrability is First Options of Chicago, Inc. v. Kaplan.[7] For our purposes, that decision provides four takeaways. Firstly, issues of arbitrability are presumptively for the courts to determine.[8] Secondly, parties may, if they so wish, agree to submit arbitrability issues to final resolution by arbitration, “thereby foregoing access to a court on those matters.”[9] Thirdly, the presumption in favor of judicial determination is rebuttable by “clear and unmistakable” evidence of an agreement to arbitrate questions of arbitrability.[10] Lastly, if the parties have submitted questions of arbitrability to arbitration, then the arbitrators’ decision on the matter must be “subject to the same highly deferential standard of judicial review that is applicable under the FAA to the merits of other awards.”[11] In contrast, if the parties did not submit questions of arbitrability to arbitrators, “then the court should decide that question just as it would decide any other question that the parties did not submit to arbitration, namely independently [i.e. de novo].”[12]
C. What is “delegation”?
“Delegation” refers to the ability of the parties to “delegate” “to a tribunal exclusive authority to determine” arbitrability issues.[13] According to First Options, delegations must be supported by “clear and unmistakable” evidence to submit the determination of said issues to an arbitration panel.
II. BEIJING SHOUGANG MINING INV. CO. V. MONGOLIA
The events giving rise to Beijing Shougang concerned an ad hoc arbitration initiated by Beijing Shougang Mining Investment Company, Ltd. and two other Chinese corporations (collectively, the “Chinese corporations”) against Mongolia under the 1991 Mongolia-China BIT.[14] The arbitration revolved around the “alleged expropriation by Mongolia of certain investments made by the Chinese corporations prior to 2006 in an iron-ore mine” located in northern Mongolia.[15] The arbitral tribunal, seated in New York, brought the arbitration to a close by determining that it lacked jurisdiction over the claims.[16]
Shortly thereafter, the Chinese corporations petitioned the District Court for the Southern District of New York to set aside the award and compel a return to arbitration. The district court denied their petition and confirmed the arbitral award.[17] The Chinese corporations appealed to the Second Circuit. They maintained, inter alia, that the parties to the arbitration had “not ‘clearly and unmistakably’ agree[d] to submit issues of ‘arbitrability’ to arbitration and, therefore, that the district court erred by failing to conduct a de novo review of the arbitral tribunal’s decision on arbitrability.”[18]
Rejecting this argument and holding that the Chinese corporations were not entitled to de novo review of the arbitrability of their investment claims, the Second Circuit adopted a two-pronged analysis. Firstly, it concluded that the arbitration agreement—the Mongolia-China BIT—did not contain “a clear statement empowering arbitrators to decide issues of arbitrability.”[19] Secondly, the court held that the parties had nevertheless “clearly and unmistakably” agreed to submit questions of arbitrability to the arbitral tribunal.
The evidence of a “clear and unmistakable” agreement to arbitrate arbitrability issues was found in two locations. First, the parties agreed to arbitrate arbitrability by “consent[ing] … to the arbitration proceeding in two phases, with a combined jurisdictional and liability phase and, if necessary, a quantum phase.” (viz. in Procedural Order No. 1).[20] Crucially, that agreement had been reached “after it had already become clear that the key jurisdictional issue to be argued during the first phase was the scope of the arbitration clause,” an issue plainly implicating arbitrability.[21] Second, the Chinese corporations’ conduct throughout the arbitration confirmed their intent to arbitrate arbitrability, having argued their case for the panel’s jurisdiction and requested that it remind the parties of the final nature of its award.
III. COMMENTARY
At the outset, it is important to emphasize what propositions Beijing Shougang does not stand for. Beijing Shougang does not violate the principle, underscored by the Supreme Court in First Options, that “merely arguing the arbitrability issue to an arbitrator does not indicate a clear willingness to arbitrate that issue” (emphasis added).[22] In other words, the Second Circuit has not undermined the ability of parties to raise arbitrability issues before arbitration panels without the loss of the right to independent court review. “[M]erely arguing the arbitrability issue” is not, however, an apt description of the Chinese corporations’ actions in this case—rather, they constituted a fully-fledged agreement to delegate questions of arbitrability to the arbitral panel. We consider Procedural Order No. 1 and the Chinese corporations’ subsequent conduct in turn.
It is difficult to view the agreement of the parties in Procedural Order No. 1 as anything other than “clear and unmistakable” evidence of an intention to arbitrate arbitrability. The agreement explicitly envisaged that the tribunal would hear jurisdictional issues, and the Chinese corporations “knew that they were submitting the key issue of arbitrability to resolution by the tribunal.”[23] Surely, a party keen to dispute the authority of the tribunal to decide arbitrability questions would seek to bifurcate the proceedings.
The Chinese corporations’ conduct throughout the remainder of the arbitral process further supports the Second Circuit’s conclusion. Having “initiated the arbitration and argued for the arbitrators’ jurisdiction from their very first submission,”[24] the corporations “explicitly ‘submitted’ their arguments to the arbitrators”[25] in their memorial. Moreover, the corporations requested that the tribunal issue an order specifically “remind[ing] the parties that any award rendered by the tribunal is final and binding.”[26] The fact that the corporations asked the tribunal to remind the parties of the final nature of its findings on jurisdictional issues undermines and contradicts the idea that they had an intent to challenge the tribunal’s power to arbitrate arbitrability.
Lastly, it is also illustrative to recall the extent to which the facts of First Options differ from those of Beijing Shougang. In the former case, the Kaplans participated in the arbitration only by filing a single memo disputing the jurisdiction of the arbitrators, arguing that they never signed the arbitration agreement.[27] By contrast, not only was the validity of the BIT undisputed in this case, but the Chinese corporations “affirmatively presented their desire for the arbitrators to decide arbitrability” over the course of the arbitral process.[28]
To conclude, it is easy in such cases to lose sight of the forest for the trees—ultimately, the Chinese Corporations “never raised any objection to the arbitrators themselves deciding [the] question [of arbitrability].”[29] For seven years, they vigorously argued in favor of the arbitration panel’s jurisdiction to hear the dispute. Having failed to persuade it, the corporations attempted to have their cake and eat it too, “allowing the arbitrability issue to proceed to adjudication by the arbitrators and accepting the result if favorable to [them] or rejecting it if unfavorable and litigating the matter in court.”[30] It is to be hoped that other courts follow in the footsteps of the Second Circuit in Beijing Shougang.
* This blog post draws its inspiration from a recent article by George A. Bermann. See George A. Bermann, After First Options: Delegation Run Amok, 32 Am. Rev. Int’l Arb. 15 (2021). Interested readers are encouraged to consult that article for a more detailed assessment of Supreme Court decisions on delegation of arbitrability. (Ed.: You can access it here).
** Nathan Gayer de Mena is a Student Editor at ARIA and a Double Degree Programme Candidate, LSE (LL.B. ’22) & Columbia Law School (J.D. ’23).
[1] Beijing Shougang Mining Inv. Co. v. Mongolia, No. 19-4191, 2021 U.S. App. LEXIS 25812 (2d Cir. Aug. 26, 2021).
[2] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995).
[3] “Gateway questions” are called thus because their resolution determines “whether the underlying controversy will proceed to arbitration on the merits.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002).
[4] Bermann, supra note 1, at 15. See also Lamps Plus, Inc. v. Varela, 587 U.S. ___ (2019), 139 S. Ct. 1407, 1415, 1419.
[5] The term “arbitrability” is used elsewhere to describe the “absence of legislative prohibitions against arbitrating particular claims.” Gary B. Born, International Commercial Arbitration 1224 n. 466 (3rd ed., 2020).
[6] Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83–84 (2002). See also Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S.Ct. 524, 527-28 (2019) (“arbitrability question … [includes] whether [parties’] arbitration agreement applies to the particular dispute”).
[7] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995).
[8] Id. at 945.
[9] Id. at 943; Bermann, supra note 1, at 16.
[10] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). In other words, as the Court later stated, “[t]he question whether the parties have submitted a particular dispute to arbitration, i.e., the ‘question of arbitrability’ is ‘an issue for judicial determination [u]nless the parties clearly and unmistakably provide otherwise.’” Howsam, 537 U.S. at 83.
[11] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995); Born, supra note 6, at 1225.
[12] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943 (1995).
[13] Bermann, supra note 1, at 17.
[14] See Agreement Between the Government of the People’s Republic of China and the Government of the Mongolian People’s Republic Concerning the Encouragement and Reciprocal Protection of Investments, Aug. 26, 1991.
[15] Beijing Shougang Mining Inv. Co. v. Mongolia, No. 19-4191, 2021 U.S. App. LEXIS 25812, at *3-4 (2d Cir. Aug. 26, 2021).
[16] Id. at *4.
[17] Beijing Shougang Mining Inv. Co., Ltd. v. Mongolia, 415 F. Supp. 3d 363, 2019 U.S. Dist. LEXIS 206072, (S.D.N.Y., Nov. 19, 2019).
[18] Beijing Shougang Mining Inv. Co. v. Mongolia, No. 19-4191, 2021 U.S. App. LEXIS 25812, at *4 (2d Cir. Aug. 26, 2021).
[19] Id. at *21.
[20] Id. at *5.
[21] Id. at *5-6. Concretely, the issues concerned “the appropriate reading of the language “dispute[s] involving the amount of compensation for expropriation,” [contained in Art. 8(3) of the BIT] and in particular, whether that clause provides arbitral jurisdiction over only disputes about the amount of compensation rather than whether compensation is owed.” Id. at *21-22.
[22] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 946 (1995).
[23] Beijing Shougang Mining Inv. Co. v. Mongolia, No. 19-4191, 2021 U.S. App. LEXIS 25812, at *24 (2d Cir. Aug. 26, 2021).
[24] Beijing Shougang Mining Inv. Co., Ltd. v. Mongolia, 415 F. Supp. 3d 363, 2019 U.S. Dist. LEXIS 206072, at *8 (S.D.N.Y., Nov. 19, 2019).
[25] Id. at *5.
[26] Beijing Shougang Mining Inv. Co. v. Mongolia, No. 19-4191, 2021 U.S. App. LEXIS 25812, at *31-2 (2d Cir. Aug. 26, 2021).
[27] First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 941 (1995).
[28] Beijing Shougang Mining Inv. Co., Ltd. v. Mongolia, 415 F. Supp. 3d 363, 2019 U.S. Dist. LEXIS 206072, at *14 (S.D.N.Y., Nov. 19, 2019).
[29] Id. at *4-5.
[30] In re Arbitration between Halcot Navigation Ltd. Partnership and Stolt-Nielsen Transp. Group, 491 F. Supp. 2d 413, 419 (S.D.N.Y. 2007).