A Question of Sovereignty, Development, andNatural Resources: A New Standard forBinding Third Party NonsignatoryGovernments to Arbitration

Table of ContentsI. Introduction 1410II. International Commercial Arbitration in U.S. Courts 1413A. The Federal Arbitration Act and the New York Convention 1415B. The TPN Problem as Applied in U.S. Courts 1418III. Bridas and ChevronTexaco 1422A. Bridas and Turkmenistan 1423B. ChevronTexaco and Ecuador 1426IV. Current Shortfalls and the Need for a New Standard 1432A. The New Standard 1433B. Bridas and ChevronTexaco Under the New Standard ......... 1435C. Why the Status Quo Frustrates Justice: A Series of Shortfalls 14371. Federal Common Law 14372. The Law Otherwise Applicable: Foreign Law 14403. Internationally Neutral Standards 1441D. Capacity and Authority as a Check on the New Standard 1442V. Conclusion 1445I. IntroductionThe issue of compelling a third party nonsignatory (TPN) government or government entity to arbitration has recently arisen in two cases before U.S. courts. National sovereignty, natural resources, and international comity were at stake in both cases, but the U.S. Supreme Court has yet to address the issue.1 A U.S. court binding a foreign government to an arbitration agreement or award necessarily strikes at the sovereignty of that state.2 When a state explicitly consents to be bound, compulsion or enforcement is merited under international treaties3 and broader principles, such as the International Law Commission's Draft Articles on the Responsibility of States.4 In cases of explicit consent, a violation of sovereignty is more or less moot. On the other hand, when a state is merely a TPN to an arbitration agreement,5 the U.S. court ordering compulsion or enforcement undercuts a foreign nation's sovereign status.6 Some fact scenarios may justify undercutting sovereignty, but the U.S. courts faced with this issue in two recent cases failed to emphasize the question of sovereignty when deciding whether to compel a TPN government to arbitration.7 With the oil and gas resources of two developing nations central in both disputes, the development consequences of these cases cannot be ignored.8 Bridas v. Government of Turkmenistan9 and Republic of Ecuador v. ChevronTexaco Corp. 10 arise out of similar factual arrangements and implicate a TPN government faced with arbitration. In both cases, the courts had to decide whetiier the government could be a party to the arbitration agreement that it did not sign. Despite the similarities between Bridas and ChevronTexaco, the Fifth Circuit and the Southern District of New York reached divergent results.11 In Bridas, the Fifth Circuit applied federal common law to decide whetiier the government of Turkmenistan was bound to an arbitration agreement entered into by a state-owned entity and a foreign corporation.12 Through federal common law, the court found Turkmenistan bound to the arbitration agreement based on a theory of U.S. corporate law.13 In contrast to this approach, in ChevronTexaco the Southern District of New York deferred to Ecuadorian law on the compulsion question.14 The court used Ecuadorian law to analyze federal common law's third-party liability theories and held that Ecuadorian law could not compel arbitration against the TPN government. …