Is arbitration quicker and cheaper than litigation? The reality is, unfortunately, that there is often little difference. What is more, in the wake of two recent US court cases, there is a risk that international arbitrations with a
US connection will ever more closely resemble litigation in terms of speed and cost.
English litigators can obtain discovery in the US against parties to English litigation and against non-parties. The US courts have the power to order such discovery under the rules of section 1782 of Title 28 of the US Code. Historically, these rules were not available as a means of obtaining discovery for international arbitrations. However, that could all change as a result of recent decisions in the US courts.
Section 1782 gives a US federal court the discretionary power to grant discovery, provided three criteria are satisfied:
(a) the respondent ‘resides or is found’ in the US;
(b) the application is made by a foreign or international tribunal or by ‘any interested person’; and
(c) discovery is ‘for use in a proceeding in a foreign or international tribunal’.
In deciding whether to order discovery under section 1782, the US courts will take into account factors such as whether the request is ‘unduly intrusive or burdensome’ and whether the respondent is a party or non-party to the foreign proceeding.
Application to arbitration
The key issue is whether section 1782’s criterion of ‘foreign or international tribunal’ is met in an international arbitration. In contrast to litigation, which is a function of the state, arbitration is traditionally viewed as a private and commercial process. This meant it did not satisfy this condition.
The application of section 1782 began to widen with the 2004 case of Intel Corp v Advanced Micro Devices. In this case, the US Supreme Court ruled that the Directorate-General for Competition of the European Commission was a tribunal within the meaning of section 1782. Although there were indications in the judgment that section 1782 might also be applied to foreign arbitral proceedings, the point was not decided.
The case of Re Oxus Gold [October 2006 and April 2007] helped clarify the point. The applicant in this case started an arbitration against the Kyrgyz Republic under a bilateral investment treaty. In an application before the New Jersey District Court, Oxus Gold sought to obtain documents and testimony from a US resident, Mr B, who was not a party to the dispute.
The New Jersey court deemed Mr B’s evidence relevant to the dispute and determined that the arbitral panel was a ‘tribunal’ for the purposes of section 1782. The court granted Oxus Gold’s motion. However, as the panel in question was created under a treaty between two sovereign states, the court answered the point simply by distinguishing it from the type of panel found in a private international commercial arbitration.
In Roz Trading [December 2006], the US court rejected the notion that only governmental bodies qualify as tribunals under section 1782. The court held that a private tribunal, in this case an arbitral tribunal in a commercial arbitration in Vienna, was indeed a ‘foreign or international tribunal’ within the meaning of section 1782. It therefore ordered the respondent parent company, based in Georgia, US, to produce the requested documents.
Implications
US discovery is extremely wide-ranging; in fact, it is the antithesis of the type of disclosure traditionally available in international arbitration. On its own, it is said that discovery is responsible for much of the delay and expense of litigation that US litigants complain so bitterly about. The big question now is whether the wider application of section 1782 will open the floodgates and lead to international arbitrations with a US connection being drowned in documents.
An optimistic view is that this will not happen. Arbitrators will undoubtedly look for ways to retain control over the discovery process and discourage parties from seeking discovery through the US courts. However, this needs active management — for example, arbitrators making orders for disclosure against parties where appropriate and indicating where they deem discovery against non-parties in the US is not justified. It is to be hoped, therefore, that arbitrators will set clear limits as to the extent of the discovery that should be sought in a case.
Parties will need to be careful to appoint arbitrators with the experience and tenacity to keep the parties in check when it comes to disclosure. It is then to be hoped that the US courts, when exercising their discretion over whether to issue 1782 discovery orders, will take account of the arbitrators’ views.
Currently, it is very much a case of watching how this manifests itself in practice and how the US courts exercise their powers with regards to foreign arbitrations. It is the hope of many, we suspect, that this development does not further chip away at the benefits of arbitration over litigation in terms of its speed and cost.
Adrian Lifely is a partner and Simon Maughan an associate at Osborne Clarke.
