When faced with an international business dispute, most lawyers are inclined, instinctively, to resort to the procedures of their own legal system. This is natural and understandable, especially if a lawyer is familiar only with the courts and procedures of that jurisdiction. But this can be a fatal mistake when an international arbitration arises, as the case below illustrates.
Our client contracted with a US-based contractor for certain construction works. Their contract provided for ICC arbitration in Paris. Thereafter, our client terminated the contract because the contractor’s work was defective. While the contract (and its arbitration clause) was between only our client and the contractor, our client had noticed that the contractor's parent had become increasingly involved in the contract's performance.
Accordingly, our client wanted to find a way to bring the US parent company into the arbitration it intended to bring against the contractor. To do so, we needed to argue that the US parent company was bound by the contract’s arbitration clause. One of our legal arguments was that the contractor’s corporate veil should be pierced because of the parent's disregard for the contractor's corporate form.
Consequently, when our client began an ICC arbitration, it named the contractor and the contractor’s US parent company as respondents. However, while information about disregard of the corporate form was known by the contractor and its parent, the limited discovery generally available in an ICC arbitration did not seem likely to lead to disclosure of this information.
Arbitration Standards of Discovery
The 1999 IBA Rules on the Taking of Evidence on International Arbitration— which the tribunal chose to apply in this case—provide for more limited discovery than in common law jurisdictions, but for more expansive discovery than in the civil law world.1 It would have been particularly difficult to demonstrate to the arbitrators’ satisfaction that the case was an appropriate one in which to pierce the corporate veil—a notoriously difficult standard under practically all systems of law.
Extensive US discovery
But then the contractor’s parent applied to a US District Court to enjoin the Parisbased ICC arbitration, arguing that it was not bound by the arbitration clause. Part of the District Court’s inquiry into whether to grant the parent company's motion for a preliminary injunction included an inquiry into its probable success on the merits, which in turn involved an inquiry into whether the corporate veil would likely be pierced.
Therefore, our client became entitled to discovery under the US Federal Rules of Civil Procedure on whether the corporate veil of the contractor could be pierced and the parent company brought into the ICC arbitration in Paris. This enabled our client to conduct far more extensive discovery than would normally have been available in an ICC arbitration and to obtain substantial evidence that the parent had wholly disregarded the contractor’s corporate form, justifying the piercing of its corporate veil. This information would almost certainly never have become available to our client under the more limited document disclosure provided for by the IBA Rules.
While the US District Court dismissed the parent company’s case for lack of jurisdiction over our client, we were able to use the information that we had acquired in the ongoing arbitration. Based on this information, the ICC arbitral tribunal decided, unanimously, to pierce the corporate veil and hold the parent company bound by the arbitration clause in the contract, leading the parent company to settle the case.
While the parent company and its USbased lawyers resorted to US courts presumably because this is what they were most familiar with, had they been more familiar with international arbitration and foreign rules of civil procedure, they would almost certainly not have begun a US court action that exposed their client to US discovery. Consequently, when involved in an international arbitration, it is vital that a party’s lawyers have a good command of international arbitration practice.
A longer version of this article was written by Christopher R. Seppälä and Elizabeth Oger-Gross, “How Resort to US Courts—with US Discovery—Can Backfire on a US Party to an International Arbitration,” in International Disputes Quarterly (Summer 2010), at http://www.whitecase.com/idq/summer-2010-3/.