As a matter of comity, the Supreme Court limits discovery in international arbitration

By unanimous decision to ZF Automotive US, Inc. v. Luxshare, LTD., 142 S. Ct 2078 (2022) (ZF Automotive), the Supreme Court resolved a long circuit split over whether an IAC is a “foreign or international court” under 28 USC § 1782(a). in ZF AutoThe Court held that the two arbitral tribunals before the consolidated case, the Commercial Arbitration and the Ad Hoc Investment Arbitration, were not “foreign or international courts” and therefore could not invoke Article 1782 to compel testimony and documents.

The Supreme Court has held that a “foreign or international court” is one that exercises governmental authority, and that neither private commercial arbitral tribunals nor ad hoc arbitral tribunals established under international treaties, even sovereign parties, qualify under 1782 article. The court ruled that parties to special tribunal arbitrations cannot use section 1782 to seek assistance from district courts to obtain testimony or produce documents in the United States for use in foreign arbitration proceedings.

This provision is significant because for many years some panels have applied Article 1782 to allow parties to broadly find their case in private international arbitration. According to the court decision, the possibility of discovery is drastically limited in the arbitration process. However, Article 1782 remains an appropriate remedy for international non-arbitration proceedings, including cross-border insolvency proceedings.

Circumstances and motives of the Supreme Court

The case was brought to court on the basis of two consolidated cases, ZF Automotive US, Inc. v. Luxshare, Ltd. (Luxshare) and AlixPartners, LLP v. Fund for the Protection of the Rights of Foreign Investors (Alex Partners). dispute within luxury This was due to an acquisition that went bad. ZF Automotive US, Inc. It is a subsidiary of a German company in the United States that manufactures auto parts. ZF Automotive has sold two business units to Hong Kong-based Luxshare Ltd for nearly $1 billion. After the deal was completed, Luxshare allegedly discovered that ZF Automotive had fraudulently withheld important information about the business units it acquired, resulting in hundreds of millions of dollars in overpayments. The sale agreement for the business units provided that all disputes would be resolved under the arbitration rules of eV German Arbitration Institute (DIS), a private arbitration organization based in Berlin.

In anticipation of DIS arbitration against ZF Automotive, Luxshare filed a warrant On the one hand Section 1782 request in the U.S. District Court for the Eastern District of Michigan to produce information from ZF Automotive and two of its top executives. 28 USC § 1782(a) provides in relevant part: “A local court of the county in which a person resides or is located may compel that person to give testimony or a statement or to produce a document or other thing for use in the proceeding. foreign or international court. ZF Automotive moved to quash the subpoenas, arguing that the DIS is not a “foreign or international court” under section 1782. But that argument was effectively blocked by the Sixth (and Fourth) Circuit. Accordingly, the district court was left with no alternative because it was bound by precedent in its district and denied ZF Automotive’s motion to vacate the injunction. As expected, the Sixth Circuit declined to stay.

dispute within AlixPartners. It arose out of a dispute between a Lithuanian and a Russian investor in the failed Lithuanian bank AB bankas SNORAS (Snoras). After learning that “Snoras” cannot fulfill its obligations, the Central Bank of Lithuania nationalized “Snoras” and appointed the general director of the US consulting company “AlixPartners, LLP” Simon Freakley as a temporary administrator. After Freakley published a report on Snoro’s financial situation, the Lithuanian authorities declared the failed bank bankrupt and started bankruptcy proceedings. The Russian company, a member of the Russian investor waiver, the Fund for the Protection of the Rights of Investors in Foreign Countries (hereinafter – the Fund) stated that during the process, Lithuania confiscated Snoro’s investments.

The fund started proceedings against Lithuania under the bilateral investment agreement between Lithuania and Russia. The agreement stipulates that if the parties cannot resolve the dispute through negotiations within six months, the investor can refer the dispute to one of the four forums. The forum chosen by the Fund was ad hoc arbitration under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules.

In anticipation of ad hoc arbitration, the Foundation in 1782 The U.S. District Court for the Southern District of New York filed a request for information from Freakley and AlixPartners regarding Freakley’s role as Snor’s interim administrator. AlixPartners moved to quash the subpoenas, arguing that the Special Arbitration Committee is not a “foreign or international court” under Article 1782, but rather a special tribunal. Unlike the Sixth Circuit, the Second Circuit’s precedent did not treat the Special Arbitration Committee as a “foreign or international tribunal under § 1782. However, due to the unique nature of the dispute involving a sovereign ad hoc panel, the Second Circuit used a multifactorial test and ultimately concluded that the panel was indeed a “foreign or international tribunal” under § 1782. The Supreme Court agreed to hear both luxury And Alex’s partners questions together.

The Supreme Court first considered whether the phrase “foreign court or international tribunal” in Article 1782 included only private judicial bodies or governmental or intergovernmental bodies. In its decision, the Court held that a “foreign court” is one exercising a governmental power conferred on it by one state, while an “international court” is one exercising governmental powers conferred by two or more states with a special judicial authority. Article 1782 does not specify institutions. The court concluded that:

  • A “court” in Article 1782 need not be a formal “court,” and the broad meaning of the word “court” does not per se exclude private judicial institutions. However, the word appended to the phrase “foreign or international” is best understood as a judicial authority exercising governmental power.
  • The purpose of Section 1782 is comity: allowing federal courts to assist foreign and international governmental entities increases deference to foreign governments and promotes mutual assistance.
  • Expanding section 1782 to include private institutions would also create significant tension with the Federal Arbitration Act, which governs domestic arbitration, because section 1782 allows for much broader discovery than the FAA allows.

Apply this logic to the DIS jury luxury, the Court found that there was no governmental interference in the formation of the body or the determination of its procedures, and therefore Article 1782 did not apply. . custom panel AlixPartners. Asked a more difficult question. The difficulty arose from the fact that the sovereign was on one side of the dispute and that the possibility of arbitration was provided for in an international treaty rather than a private treaty. However, the Court concluded that the Special Court of Arbitration was not a pre-existing institution, but was established to resolve investor-state disputes. Moreover, nothing in the treaty reflected an intention for the ad hoc committee to exercise governmental powers. Thus, the ad hoc team of the fund’s dispute with Lithuania “did not fundamentally differ in form and functions” from the DIS team, as it was also a special judicial institution.

Excerpt from the Supreme Court decision

The phrase “foreign court or international court” has been the subject of much debate over the years since the 1964 In the amendments to Article 1782, the word “judiciary” was substituted for the word “court”. The Supreme Court’s decision finally settled a major circuit split over whether to include the Special Arbitration Commission as an “arbitral tribunal” within the meaning of Article 1782. The Supreme Court decided that the answer to this question is no.

Not surprisingly, Article 1782 has been applied in many other venues outside of international arbitration, including foreign bankruptcy proceedings. We see About Lancaster Factoring Co., 90 F.3d 38 (2d Cir. 1996). So, to Drawbridge Special Opportunity Fund LP v Barnet (Barnet), 737 F.3d 238 (2d Cir. 2013), the Second Circuit stated that foreign liquidators should consider using this section to help determine who is involved in foreign bankruptcy cases. In fact, the Supreme Court noted ZF Auto Resolution that “the purpose of section 1782 is comity: allowing federal courts to assist foreign and international governmental entities increases deference to foreign governments and promotes mutual assistance.” Courtesy is one of the main principles of cross-border bankruptcy proceedings, especially in the United States. Although some may expect that the use of § 1782 may henceforth be limited to arbitration proceedings, it will be used in other forums as appropriate.

Leave a Comment

Your email address will not be published.