UNITED STATES

US Supreme Court Determines that section 1782 does not grant access to US discovery in aid of most international commercial and investor-state arbitration proceedings

R Zachary Torres-Fowler
Troutman Pepper, Philadelphia, Pennsylvania

Albert Bates, Jr
Troutman Pepper, Pittsburgh, Pennsylvania

On 13 June 2022, the United States Supreme Court rendered its highly anticipated decision in ZF Automotive US Inc v Luxshare Ltd.¹ In its decision, the Court established that parties to most international arbitrations seated outside the United States could not avail themselves of broad US-styled discovery pursuant to a peculiar US statute known as 28 USC section 1782.

While the case centred on issues of US law, the Court’s decision carries profound implications for the practice of international arbitration around the world. Given the important role international arbitration plays in the international construction industry, the Supreme Court’s decision in ZF Automotive is of particular note. This article briefly summarises the ruling and its implications.

Background: 28 USC section 1782

According to 28 USC section 1782, the US district courts retain the authority to order any person within the relevant judicial district to provide testimony (ie, depositions) or produce documents for use in a proceeding before a ‘foreign or international tribunal’. In other words, if a party to a proceeding before a ‘foreign or international tribunal’ wished to obtain broad US-styled discovery from a person located in the US, section 1782 provided that party a powerful mechanism to do so, even if broad discovery was not otherwise available under the rules and procedures of the foreign jurisdiction.

The relevant text of the statute is provided below:

‘The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation. The order may be made pursuant to a letter rogatory issued, or request made, by a foreign or international tribunal or upon the application of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court.’²

With the spread of globalisation and increased prominence of international arbitration over the last half-century, section 1782 has increasingly become a discovery tool of interest to practitioners appearing before international arbitral tribunals outside the US. As a result, the US federal courts have wrangled with the question of whether the language of section 1782 includes international arbitral tribunals seated outside the US for several decades.

The history of section 1782, however, dates as far back as 1855 when the US Congress enacted the statute and granted the US courts the authority to permit discovery in the US on the request of a foreign court.³ More than a century later, and after a series of minor revisions, the US Congress adopted a new version of section 1782(a) in 1964 that expanded the scope of the statute to authorise the US district courts to grant discovery in aid of any ‘proceeding in a foreign or international tribunal’ in place of the former text: ‘judicial proceeding pending in any court in a foreign country.’⁴ (emphasis added). According to the legislative history of the 1964 revisions to section 1782, the statute’s ‘twin aims’ were to provide ‘equitable and efficacious procedures for the benefit of tribunals and litigants involved in litigation with international aspects […] [and to] invite foreign countries similarly to adjust their procedures.’⁵

At the time of the passage of the 1964 revisions to section 1782, the legislation garnered relatively little attention and section 1782 remained on the US statute books for several decades without significant interest. In the late 1990s, a pair of US federal circuit courts of appeals concluded that section 1782 did not apply to international commercial arbitrations because privatised international arbitral tribunals did not fall within the meaning of ‘foreign or international tribunal’ as used in the statute.⁶ In 2004, the US Supreme Court entered the fray when it concluded that the Directorate-General for Competition of the Commission of the European Communities was a ‘tribunal’ for purposes of section 1782, but did not reach the question of whether section 1782 encompassed proceedings before international arbitral tribunals.⁷

However, beginning in 2019, a groundswell of cases emerged that placed section 1782 at the forefront in the field of international arbitration. Specifically, in October 2019, the Sixth Circuit court of appeals ruled that the statute did, in fact, encompass international commercial arbitration proceedings.⁸ In 2020, the Fourth Circuit⁹ joined the Sixth Circuit’s reasoning and, the Second Circuit court of appeals concluded that 1782 could apply to certain investor-state arbitration matters.¹⁰

In light of the circuit split, and after a series of fits and starts, the US Supreme Court granted a writ of certiorari to resolve this question once and for all in ZF Automotive US Inc v Luxshare Ltd.

Procedural history

Notwithstanding the title of the case, ZF Automotive consisted of a pair of consolidated cases that both involved arbitration proceedings outside the US in which a party sought discovery in the US pursuant to section 1782.

In the first case, Luxshare, Ltd, a Hong Kong-based company, initiated an arbitration against the Michigan-based ZF Automotive, Inc, alleging fraud in a sales transaction between the two companies.¹¹ The applicable arbitration agreement between Luxshare and ZF Automotive called for the arbitration to take place in Berlin pursuant to the Arbitration Rules of the German Institution of Arbitration.¹² In connection with the arbitration proceedings, Luxshare filed an application under section 1782 in US federal court that sought information from ZF Automotive and its officers.¹³ ZF Automotive opposed the application on the basis that the arbitral tribunal overseeing the dispute between Luxshare and ZF Automotive was not a ‘foreign or international tribunal.’¹⁴ Following applicable precedent, the lower court granted Luxshare’s application and, on appeal, the Sixth Circuit court of appeals denied ZF Automotive’s effort to challenge the lower court’s decision.¹⁵

In the second case, known as AlixPartners, LLP v Fund for Protection of Investor’s Rights in Foreign States, involved a treaty-based investment arbitration concerning the collapse of a failed Lithuanian bank, AB bankas SNORAS (Snoras).¹⁶ In AlixPartners, a Russian corporation representing the interests of a Russian investor in Snoras (the ‘Fund for Protection of Investors’ Rights in Foreign States’ or the Fund), initiated an ad hoc investment arbitration against Lithuania under the Lithuanian–Russian bilateral investment treaty, claiming that Lithuania expropriated the investor’s interests in Snoras.¹⁷ The Fund subsequently filed a section 1782 application in US federal court seeking information from Simon Freakley, the CEO of the New York based consulting firm AlixPartners LLP and former temporary administrator of Snoras. Similar to ZF Automotive, AlixPartners resisted the Fund’s section 1782 application on the ground that the arbitral tribunal was not a ‘foreign or international tribunal’ within the meaning of the statute.¹⁸ The lower court rejected AlixPartner’s argument and the Second Circuit Court of Appeals affirmed.¹⁹

Supreme Court Decision: ZF Automotive US Inc v Luxshare Ltd

On review of the two consolidated cases, the Court reversed the lower courts’ rulings. The Court held that: (1) the term ‘foreign and international tribunals’ found in section 1782 only referred to ‘governmental or intergovernmental bod[ies]’, not private adjudicative bodies; and (2) the arbitral tribunals in ZF Automotive and AlixPartners did not satisfy this definition.²⁰

In concluding that the term ‘foreign and international tribunals’ excludes private adjudicative bodies, the Court offered three basic rationales.

• First, the Court explained that, based on its review of the text of the statute, the terms ‘foreign tribunal’ and ‘international tribunal’ must refer to government bodies that conferred some form of sovereign authority by one or more nations.²¹

• Second, the Court found that the statutory history of section 1782 supported its interpretation of the language of the statute.²² As the Court explained,

‘[f]rom the start, the statute has been about respecting foreign nations and the governmental and intergovernmental bodies they create.’²³ According to the Court, the phrase ‘foreign or international tribunals’ in the 1964 amendments to section 1782 was intended to broaden ‘the range of governmental and intergovernmental bodies included in section 1782’, but stopped short of also including private arbitration bodies.²⁴

• Third, the Court pointed out that the broadest interpretation of section 1782 created tension with the US Federal Arbitration Act and arguably granted applicants under section 1782 greater access to discovery than even permitted by the FAA.²⁵ For example, ‘the FAA permits only the arbitration panel to request discovery, while district courts can entertain section 1782 requests from foreign or international tribunals or any “interested person.”’²⁶ The Court concluded that this ‘mismatch’ could not support a broad interpretation of section 1782.²⁷

After determining that the phrase ‘foreign or international tribunal’ only referred to adjudicatory bodies conferred with governmental or intergovernmental authority, the Court concluded that neither of the arbitral tribunals at issue in the case fell within the scope of a ‘foreign or international tribunal’.

In the case of the arbitral tribunal in ZF Automotive, the Court easily dispensed with the notion that the international commercial arbitration tribunal could constitute a ‘foreign or international tribunal.’²⁸ According to the Court, the arbitral tribunal was created by agreement of the parties, governed by the rules of a private arbitral organisation, and had no connection with a particular government entity. As a result, this ‘adjudicative body does not qualify as a governmental body.’²⁹

The Court, however, acknowledged that the ad hoc arbitral tribunal in AlixPartners raised a closer question.³⁰ While AlixPartners involved a sovereign government and claims that arose out of an international treaty between Lithuania and Russia, the fundamental question was: ‘Did these two nations intend to confer governmental authority on an ad hoc panel formed pursuant to the treaty?’³¹ The Court concluded that they did not.³² After listing a series of characteristics of the ad hoc tribunal, the Court explained ‘the ad hoc panel at issue in the Fund’s disputes with Lithuania is “materially indistinguishable in form and function” from the [...] panel resolving the dispute between ZF and Luxshare.’³³

Implications

The Court’s decision in ZF Automotive, in large part, maintains the status quo for the field of international arbitration and suggests that the majority of international commercial arbitrations and investor–state arbitrations fall outside the confines of section 1782.

For many international arbitration practitioners, the Court’s decision is likely to come as some relief. Indeed, had the Court reached the opposite conclusion in ZF Automotive, many practitioners feared that section 1782 could upset the carefully designed document exchange practices commonly used in international arbitration proceedings around the world. Moreover, parties – particularly those in the US – who opted into international arbitration precisely to avoid the expansive discovery practices in the US no longer faced the risk of being subjected to extensive discovery disputes in the US courts.

To others, however, the Court’s decision was a missed opportunity. Indeed, many practitioners in the US have argued for decades that the text of section 1782 was clear and that there should be no real dispute that the statute was intended to include international commercial arbitration and investor state arbitration. To these practitioners, section 1782 was a critical tool that would enable parties to uncover key evidence and enable foreign arbitral tribunals to render more informed determinations in their proceedings.

Notably, the Court did not close the door on all future disputes concerning section 1782 and left open the possibility that an international arbitral tribunal could, under the right circumstances, constitute a ‘foreign or international tribunal’.³⁴ According to the Court, ‘[g]overnmental and inter-governmental bodies may take many forms, and we do not attempt to prescribe how they should be structured […] [t]he relevant question is whether the nations intended that the ad hoc panel exercise governmental authority.’³⁵

As a result, we expect that US courts will continue to grapple with the question of when an arbitral tribunal is imbued with specific government authority, particularly in the field of investment arbitration where some institutions, such as ICSID, carry unique quasi-governmental characteristics. As a result, it would be wrong to conclude that ZF Automotive is the last we will hear of section 1782 and practitioners in the field of international arbitration and even international construction disputes should continue to keep their ears to the ground.

Notes

¹ ZF Automotive US Inc v Luxshare Ltd, 21-401, 2022 WL 2111355 (US 13 June 2022).

² 28 USC s 1782(a).

³ 33 Cong Ch 140; 10 Stat. 630 (2 Mar 1855); see also New York City Bar, International Commercial Disputes Committee, 28 USC s 1782 as a Means of Obtaining Discovery in Aid of International Commercial Arbitration – Applicability and Best Practices, 2-3 (29 Feb 2008).

⁴ New York City Bar, International Commercial Disputes Committee, 28 USC s 1782 as a Means of Obtaining Discovery in Aid of International Commercial Arbitration – Applicability and Best Practices, 2-10 (29 Feb 2008).

⁵ S Rep No 88-1580 (1964), reprinted in 1964 USCCAN 3782, 3793.

⁶ NBC v Bear Stearns & Co, 165 F.3d 184 (2d Cir 1999) (holding that private international arbitration falls outside Section 1782’s coverage); Republic of Kazakhstan v Biedermann Int’l, 168 F3d 880 (5th Cir 1999) (same).

⁷ Intel Corp v Advanced Micro Devices, Inc, 542 US 241, 248 (2004).

⁸ Abdul Latif Jameel Transp. Co Ltd v FedEx Corp, 939 F3d 710 (6th Cir 2019).

⁹ Servotronics, Inc v Boeing Co, 954 F3d 209 (4th Cir 2020); but see Servotronics, Inc v Rolls-Royce PLC, 975 F3d 689, 694 (7th Cir 2020)

¹⁰ Fund for Protection of Investor Rights in Foreign States v AlixPartners, LLP, 5 F4th 216 (2d Cir 2021).

¹¹ See generally LuxShare, LTD v ZF Automotive US, Inc, 547 FSupp3d 682 (E D Mich 2021); LuxShare, LTD v ZF Automotive US, Inc, 555 FSupp 3d 510 (6th Cir 2021).

¹² See generally LuxShare, LTD v ZF Automotive US, Inc, 547 F Supp3d 682 (E D Mich 2021).

¹³ Ibid.

¹⁴ Ibid.

¹⁵ LuxShare, LTD v ZF Automotive US, Inc, 555 F Supp 3d 510 (6th Cir 2021).

¹⁶ In re Fund for Protection of Investor Rights in Foreign States, 19 Misc 401 (AT), 2020 WL 3833457 (S D N Y 8 Jul 2020).

¹⁷ Ibid.

¹⁸ Ibid.

¹⁹ In re Fund for Protection of Investor Rights in Foreign States, 19 Misc 401 (AT), 2020 WL 3833457 (S D N Y 8 Jul 2020); Fund for Protection of Investor Rights in Foreign States v AlixPartners, LLP, 5 F 4th 216 (2d Cir 2021).

²⁰ ZF Automotive US Inc v Luxshare Ltd, 21-401, 2022 WL 2111355, at *10 (US 13 June 2022).

²¹ ZF Automotive US Inc v Luxshare Ltd, 21-401, 2022 WL 2111355, at *5-7 (US 13 June 2022).

²² ZF Automotive US Inc v Luxshare Ltd, 21-401, 2022 WL 2111355, at *7-8 (US 13 June 2022).

²³ ZF Automotive US Inc v Luxshare Ltd, 21-401, 2022 WL 2111355, at *7 (US 13 June 2022).

²⁴ Ibid.

²⁵ Ibid.

²⁶ Ibid.

²⁷ Ibid.

²⁸ ZF Automotive US Inc v Luxshare Ltd, 21-401, 2022 WL 2111355, at *8 (US 13 June 2022).

²⁹ Ibid.

³⁰ Ibid.

³¹ Ibid.

³² ZF Automotive US Inc v Luxshare Ltd, 21-401, 2022 WL 2111355, at *9 (US 13 June 2022).

³³ Ibid.

³⁴ ZF Automotive US Inc v Luxshare Ltd, 21-401, 2022 WL 2111355, at *10 (US 13 June 2022).

³⁵ Ibid.

R Zachary Torres-Fowler is a partner at Troutman Pepper in Philadelphia and can be contacted at zach.torres-fowler@troutman.com. Albert Bates, Jr, is a partner at Troutman Pepper in Pittsburgh and can be contacted at albert.bates@troutman.com.

---

PANAMA

Update on Panama’s PPP regime

Luis H Moreno IV
Panama City

It has been almost three years since Panama adopted its first public–private partnership (PPP) regime through Law 93 of 2019 (the Law). It regulates the institutional framework and processes for the development of investment projects under the PPP category, and seeks to promote the development of infrastructure and public services, contribute to economic growth, job creation, competitiveness, and improve the living conditions.

Since the enactment of the Law in 2019, additional complementary regulations listed in this article have been issued. The first two PPP projects – before similar contracts were executed with a general concessions law, but not with a PPP law – are advancing through the prefeasibility and feasibility stages, and into prequalification phase.

The governing body of the PPPs in Panama is called the Ente Rector (the ‘governing body’). It comprises the ministers of the Presidency, economy and finance, public works, commerce and industry, and foreign affairs. It also includes the Comptroller General of the Republic, who does not have right to vote.

Through Resolution No ER-02-01-2021 of 28 October 2021, the official website of the governing body was created at https://enterector.gob.pa. Through this website, interested parties have full access to relevant information about Panama’s PPP projects, including: relevant laws, resolutions, decrees, and guidelines, bidding documents/RFPs, FAQs, step-by-step explanation of the process, among other key information regarding the regime and projects.

Moreover, Resolution No ER-01-R1-2021 of 28 October 2021, approves the Rules of Internal Procedure of the Governing Body Reglamento Interno de Funcionamiento del Ente Rector. These rules include essential regulatory aspects of the operation of the governing body, such as its scope of application, general principles, attributions, announcements, quorum and decision-making process, technical and operational support responsibilities, duties of its members, exclusions, formalities. The adoption of this resolution was probably the single most important step for the implementation of PPP projects in Panama, as the governing body is the leading authority in PPP projects, being responsible for defining the priority areas for the projects and the analysis criteria on the identification, selection, and prioritisation of projects, as well for the approval of projects, tender documents, and PPP contracts, among others.

As mentioned in previous articles, the Law is designed to contain four main stages for the implementation of a PPP project:

Stage 1 – prefeasibility

• Public Contracting Entity (EPC) submits the Initial Technical Report (ITI) to the PPP Secretariat (SNAPP), complying with eligibility criteria established in the Law.

• SNAPP analyses the ITI and the Ministry of Economy and Finance (MEF) verifies if the project complies with fiscal/budgetary capabilities.

• SNAPP shares the ITI and PPP project request with the governing body.

• The governing body issues its approval (with or without recommendations), or objection to the PPP project request received together with the EPC report.

Stage 2 – feasibility

• EPC prepares and files the Definitive Technical Report (ITD) as well as a draft of the tender documents and PPP contract, to the SNAPP.

• SNAPP analyses ITD and MEF verifies if project complies with fiscal/budgetary capabilities.

• SNAPP shares the ITD to the governing body, which will then issue its approval or non-approval of the project.

• EPC carries out the bidder’s prequalification process, with prior authorisation from the governing body.

Stage 3 – bidding process

• EPC carries out preparatory activities for the tender process.

• EPC begins the promotion and publicity of the PPP project, with the support of the SNAPP.

• If adjustments are required to the tender documents and contract model, SNAPP and MEF prepare and submit them to the governing body.

• The tender process takes place, proposals are received, analysed and the PPP contract is formally awarded.

Stage 4 – execution

• Signed PPP contracts are submitted to the office of the General Comptroller for its endorsement.

• PPP project execution phase commences under the supervision of the EPC.

Resolution No ER-04-M1-2021 of 23 December 2021, approved the Procedural Guideline for the Stage 3 bidding process of the PPP Institutional Framework. This guideline was drafted by the SNAPP in collaboration with the General Direction of Public Contracting of Panama, as a useful instrument for EPCs in the implementation of their PPP projects.

Although the Law and its regulation sets the rules for the tender process, the Procedural Guideline involves the practical details of the tender process and its implementation, including the tender documents content, its approval and required modifications, consultation period, public homologation meeting, announcement of the tender process, formalities, rejection and acceptance of bid proposals, composition, attributions and responsibilities of evaluation commissions, terms and deadlines within the tender process, available claims within the tender process, among others.

Who bears the risks in PPP projects? This is a fundamental question in any PPP contract, as the core of this development modality is to procure the efficient assignment of risks, allocating them to the party which is better suited to bear them.

Resolution No ER-02-L1-2022, of 31 March 2022, approves the Guideline for Risk Evaluation, Allocation, and Assessment. In a highly technical and detailed manner, it provides the elements to be considered in the preparation of a risk matrix and the identification, allocation, mitigation, and qualitative and quantitative assessment of the most common risks in PPP project, including (amongst others), design, construction, property expropriation and liberation, social, geological and geotechnical, environmental, archaeological, licences and permits, additional investments, financial closing, interest rates, currency exchange, regulatory changes, inflation, force majeure, early termination of PPP contract, accidents and third party liability, cost overruns, revenue, political and non-payment risks.

Resolution No ER-03-L2-2022, of 31 March 2022, approves the Guideline for the Preparation of the Value-For-Money Analysis, including both qualitative and quantitative approaches. This resolution is of particular interest for financial institutions and advisors which focus on the economics of PPP projects, as it establishes criteria for determining the need for public funding and how to calculate it, efficient management of terms and costs, budgetary allocation, bankability, risk transfer levels, base cost calculation, social opportunity cost, risk analysis, project revenue calculation, management costs  and other important indicators.

Applying the PPP Law

Two important projects have been prioritised: (1) rehabilitation, improvement, and performance standards maintenance of the Pan-American Highway (east side); and (2) the Construction of the Fourth Transmission Line (500KV).

The first project is led by the Ministry of Public Works of Panama. Its prequalification tender document was published on 26 May 2022, and proposals are expected to be received on 19 September 2022.

In order for the prequalification phase to begin, the Ente Rector issued Resolution No ER-05-P1-2021 of 23 December 2021, approving the ITI corresponding to Stage 1 of the project, and Resolution No ER-04-P1-2022, authorising the prequalification tender document.

The second project is led by the Empresa de Transmición Eléctrica, S A (ETESA), which is an entirely government-owned electricity transmission company with exclusive rights on the transmission of electricity in Panama.

The ETESA’s current transmission system consists of three trunk transmission lines, and the above project seeks to increase ETESA’s transmission capacity with a fourth. It is expected that the prequalification tender documents for this project will be released in the second half of 2022, as the ITI corresponding to Stage 1 of the project has already been approved through Resolution No ER-01-P2-2022 of 31 March 2022.

Luis H Moreno IV is a Partner at Alfaro, Ferrer & Ramirez in Panama City, Panama. He can be contacted at lhmoreno@afra.com.