US Supreme Court ends discovery by US courts in aid of foreign arbitration proceedings
Published on 8th Aug 2022
An arbitral tribunal is not a 'foreign or international tribunal' under Section 1782 of Title 28 of the United States Code
The US Supreme Court has held that 28 USC Section 1782 cannot be used in aid of arbitration proceedings seated outside the US: although Section 1782 permits a US District Court to order discovery “for use in a proceeding in a foreign or international tribunal,” an arbitral tribunal is not a “foreign or international tribunal”.
Companies and individuals in the US sometimes have information, such as documents or witness testimony, that could be useful as evidence to a party to legal proceedings outside the US. Section 1782 is a federal law that allows parties to proceedings in “a foreign or international tribunal” outside of the US to apply to the US District Court in the district where the person from whom discovery is sought to obtain this information. US District Courts can order individuals and corporations residing in their district to provide witness testimony, and produce documents, which, if obtained, can then be used as evidence in foreign legal proceedings.
Whether arbitral tribunals qualified as "foreign or international tribunals" under Section 1782 had been a contentious issue decided differently by various federal Courts of Appeal. The US Supreme Court has now conclusively put an end to discovery for international arbitration, holding that an arbitral tribunal is not a “foreign or international tribunal” under Section 1782.
Prior to the US Supreme Court’s decision, parties to arbitration proceedings conducted outside of the US had increasingly attempted to use Section 1782 as a tool to obtain information from third parties based in the US, such as the parent companies and subsidiaries of the opposing side in the arbitration. This information would otherwise be much more difficult, or even impossible, to obtain due to the limited powers of arbitrators in typical arbitration proceedings to compel the production of documents and testimony.
In ZF Automotive US, Inc. v. Luxshare, Ltd., the US Supreme Court heard two cases, which were later consolidated, on the applicability of Section 1782 to arbitration, ZF Automotive US, Inc., et al. v. Luxshare, Ltd., and AlixPartners, LLP, et al. v. Fund for Protection of Investors’ Rights in Foreign States.
The first case involved Hong Kong electronics company Luxshare alleging fraud in a sales transaction by ZF Automotive, a Michigan-based subsidiary of the German automotive parts manufacturer ZF Friedrichshafen. The contract provided for a DIS arbitration seated in Munich, Germany. As ZF Automotive was based in the US, Luxshare filed an application under Section 1782 in the US District Court for the Eastern District of Michigan, seeking information from ZF Automotive. The District Court granted the request, and the US Court of Appeals for the Sixth Circuit denied ZF Automotive’s request for a stay.
The second case concerned a claim brought in ad hoc arbitration proceedings under the Russia-Lithuania Bilateral Investment Treaty, where a Russian entity, the Fund for Protection of Investors’ Rights in Foreign States, claimed that Lithuania had expropriated its investment in SNORAS, a now defunct Lithuanian bank. The Russian fund filed a Section 1782 application in the District Court for the Southern District of New York seeking information from AlixPartners, the US-based temporary administrator of SNORAS. The District Court held that that the ad hoc arbitration panel was a “foreign or international tribunal” under Section 1782 and the US Court of Appeals for the Second Circuit affirmed.
The US Supreme Court adopted a narrow approach and unanimously held that Section 1782 applies only to governmental or inter-governmental adjudicatory bodies, basing its reasoning on an analysis of the definition and meaning of the words “foreign or international tribunal” considering the statute’s legislative history. The US Supreme Court concluded that these words must be understood in light of the legislative history of Section 1782, whose “animating purpose” was comity between nations — that is, promoting respect for foreign governments and encouraging reciprocal assistance.
The Supreme Court held that neither arbitral tribunal was a governmental or intergovernmental body: in the ZF Automotive case, as no government was involved in the creation of the arbitral tribunal or the creation of its procedures, and in the case of Lithuania and Russian fund, because despite the fact that a sovereign nation was on one side of the dispute, and although the option to arbitration was contained in an international treaty rather than a private contract, the tribunal was not a “pre-existing governmental body” and Russia and Lithuania did not have the intent to clothe the ad hoc arbitral tribunal with governmental authority.
The US Supreme Court therefore held that the purpose of this section would not be served if US District Courts extended assistance to private bodies adjudicating private disputes abroad, such as arbitral tribunals. The court also noted that extending Section 1782 to private bodies would also be in significant tension with the Federal Arbitration Act, which governs domestic arbitration in the US, because Section 1782 permits much broader discovery than the Federal Arbitration Act allows.
Impact of decision
Evidence plays a critical role in the outcome of arbitration proceedings. Parties sometimes find it challenging to gather all the evidence required to meet their case, especially if documents and witnesses are situated abroad, and especially if these documents and witnesses belong to third parties. When arbitration proceedings are seated in one jurisdiction, but potential evidence is located in another, parties seldom have another option than to seek the assistance of the courts in the other jurisdiction to obtain documents and testimony that may then be used as evidence in the arbitration proceedings.
Section 1782 had previously been seen by non-US parties as a tool to seek discovery from opponents based in the US, especially those with US parent companies or subsidiaries. Parties to arbitration proceedings can no longer expect US courts to grant discovery in international commercial arbitration proceedings or ad hoc proceedings under investment treaties. This can be seen as a boon to US parties involved in arbitrations with non-US parties, which now have a stronger incentive to continue using arbitration as dispute resolution mechanism.
If discovery is critical to potential disputes with US parties, parties who do not want to put their disputes before state courts solely to ensure access to Section 1782 should contemplate providing for broad discovery in their dispute resolution clauses.
Discovery under Section 1782 will still be available to arbitration-related litigation, such as enforcement and set-aside proceedings, as well as interim applications such as applications for freezing orders. Any evidence obtained through these routes could still potentially be used in a subsequent arbitration.
Osborne Clarke comment
The possibility remains that future decisions may find that International Centre for Settlement of Investment Disputes (ICSID) tribunals are “international tribunals” within the meaning of Section 1782 as the ICSID Convention is a multilateral international treaty to which many governments are a party. The investment treaty arbitration at issue in the US Supreme Court’s decision was ad hoc. The same might be true for the European Union’s proposed Multilateral Investment Court, which is intended to be a permanent institution.
Even in the absence of a mechanism to compel the production of potential evidence in the US, the parties may still be inclined to comply with an arbitral tribunal’s orders for document production and discovery against the parties to the arbitration to avoid a tribunal drawing adverse inferences or making adverse costs awards. In this scenario, however, parties would still require the assistance of courts in obtaining evidence from third parties, or in situations where threats of adverse inferences and adverse costs awards fall on deaf ears.