Foreign Sovereign Arbitrability Defense Faces Demise on Appeal

The US Court of Appeals for the District of Columbia Circuit is poised to solidify rulings that effectively bar foreign sovereigns from challenging arbitrability determinations of tribunals where the parties have agreed the tribunal shall determine its own jurisdiction. It’s a welcome development for parties seeking to confirm an arbitral award against a foreign sovereign in the US.

The Foreign Sovereign Immunities Act provides an exception to sovereign immunity to allow a party to confirm an arbitral award against a foreign sovereign in the US. US courts have long held that they won’t independently review an arbitral tribunal’s arbitrability determination—that is, whether a dispute is subject to arbitration—where the party seeking enforcement can show that the parties clearly agreed to arbitrate that question.

But until recently, US courts hadn’t afforded much deference to a panel’s arbitrability ruling in investor-state arbitrations, generally allowing foreign sovereigns to obtain de novo review.

Following its landmark decision in the 2021 case of Stileks v. Republic of Moldova, the D.C. Circuit has the opportunity to firmly end the arbitrability defense for these foreign sovereigns in US confirmation proceedings.

In Stileks, the parties had agreed to adopt the 1976 United Nations Commission trade rules, which say the arbitral tribunal has the power to decide arbitrability. The D.C. Circuit acknowledged the “background understanding” that courts, not arbitrators, decide questions of arbitrability unless the parties have agreed otherwise. It then firmly declared for the first time that courts should respect the parties’ delegation of authority and review an arbitrability determination with “more than mere deference.”

Non-state actors hoped the D.C. Circuit’s Stileks decision would effectively end the arbitrability defense for foreign sovereigns. And although foreign sovereigns have continued to raise the arbitrability defense, the US District Court for the District of Columbia applied Stileks in three out of four instances in 2023, confirming the parties’ delegation of arbitrability to the arbitral tribunal. Each of these cases is on appeal, giving the D.C. Circuit the opportunity to reaffirm its earlier holding.

The Hulley case involved the same 1976 rules as in Stileks. The court declined the sovereign’s invitation to “second guess the tribunal’s determination” of arbitrability, noting that in addition to adoption of the rules, the sovereign had issued a letter to the tribunal stating that it accepted the jurisdiction of the tribunal to determine its own jurisdiction. The district court found that these facts “effectively” precluded the sovereign’s arbitrability challenge.

The cases of NextEra and 9REN applied Stileks in a similar manner. They concerned an argument by Spain that it lacked legal authority to arbitrate under the Energy Charter Treaty because of its conflicting obligations under EU treaties.

The district court rejected Spain’s arbitrability challenge, citing rules from the International Center for Settlement of Investment Disputes that “do not provide for judicial review of an ICSID tribunal award’s merits, including the question of arbitrability.” The court held that the arbitral decisions couldn’t be challenged on arbitrability because Spain’s challenges went to the merits of the awards.

The one outlier—Blasket, which declined to follow Stileks—rejected the reasoning in NextEra and 9REN, despite addressing virtually the same facts and arguments. As in NextEra and 9REN, Spain argued that it lacked legal authority to arbitrate under the Energy Charter Treaty because of the EU treaties.

In this instance, the court held that Stileks didn’t apply because the challenge in Stileks wasn’t predicated on the argument that the “parties were incapable of entering into an agreement to arbitrate anything at all.” The court declined to defer to the tribunal and considered the merits of Spain’s challenge.

Hulley reconciled the apparent split by noting that NextEra and 9REN rejected Blasket’s reasoning. In any case, NextEra, 9REN, and Blasket have temporarily created an intra-district conflict with respect to Energy Charter Treaty disputes involving an EU jurisdiction.

In each of these pending appeals, the D.C. Circuit can reaffirm its holding in Stileks, shutting the door on foreign sovereigns’ re-do attempts on arbitrability in the context of the Foreign Sovereign Immunities Act’s arbitration exception to sovereign immunity.

The cases are Hulley Enterprises Ltd. v. Russian Federation, D.D.C., No. 14-1996, decided 11/17/23; Nextera Energy Global Holdings B.V. v. Kingdom of Spain, D.D.C., No. 19-cv-01618, decided 2/15/23, 9REN Holding S.À.R.L. v. Kingdom of Spain, D.D.C., No. 19-cv-01871, decided 2/15/23; and Blasket Renewable Investments, LLC v. Kingdom of Spain, D.D.C., No. 21-3249, decided 3/29/23.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Thomas Welling is partner and Benjamin Paull is an associate in Venable’s commercial litigation practice in the firm’s New York office.

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