Contract for the construction of a plant in Brazil / Lex contractus, Brazilian law / Racketeering Influence and Corrupt Organisation Act (RICO) claim against US contractor / Jurisdiction of the Arbitral Tribunal over RICO claim, yes / RICO claim within the scope of the arbitration clause, yes / Contractual and tort liability envisaged in the contract / Arbitrability of RICO claim, yes / Power of the Arbitral Tribunal to decide upon the alleged unconstitutionality of the RICO statute, no / RICO claim not time-barred / Mandatory application of RICO, no /Conditions for extraterritorial application of a loi de police of a particular state: such state must have a strong and legitimate interest and there must be a connecting factor / Absence of a legitimate interest of the US and of a connecting factor / Treble damages rule of RICO statute does not reflect a principle of international public policy / Contract must be interpreted as intending to exclude claims such as a RICO claim / RICO claim not validly stated.

This dispute concerns claims and a counterclaim in connection with a plant built in Brazil. In 1972, Claimant (Brazilian owner) and Defendant (US manufacturer) entered into a contract concerning design, supply and other services. The parties disagree as to the scope and purpose of the Contract and as to their respective obligations thereunder. A number of defects and problems delayed the completion of the project. Many of these were the subject of a settlement in a Protocol which led to Claimant's acceptance of the plant. However, Claimant asserts that two major plant components were not specifically settled in the Protocol. According to Claimant, there are fundamental design, materials and manufacturing defects in the two components supplied by Defendant. Claimant seeks damages resulting from the alleged defects.

The contract was governed by Brazilian law. The place of arbitration was fixed in Paris.

'Admissibility of the RICO claim

The claim and the defence

In addition to claiming for damages for Defendant's alleged failures, breach of warranty, dolo and fraud, Claimant claims treble damages plus interest and attorneys' fees, relying for that purpose on the United States "Racketeer Influenced and Corrupt Organizations Act", 18 U.S.C. 1961, ("RICO").

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Jurisdiction

At the outset, the Tribunal notes that Defendant has expressly admitted the Tribunal's jurisdiction over Claimant's RICO claim. Both parties thus agree that the Tribunal has jurisdiction over this claim. The Tribunal further notes that the United States District Court for the Southern District of New York, where Claimant previously brought its RICO claim, held that, in view of the arbitration clause in the Contract, this claim should be submitted to arbitration.

Even if the parties agree on this point, the Tribunal must nevertheless satisfy itself that it has jurisdiction over a RICO claim. Looking first to the contract, there are two provisions which lead to the conclusion that the arbitration clause includes the RICO claim.

Article XXXIV dealing with limitation of liability speaks in its first paragraph of Defendant's liability "in contract or in tort or otherwise", thus indicating that delictual claims are in principle covered in the contract in the same way as contractual ones. The second paragraph of this Article contains a similar listing of possible claims bases. Article XII stipulates that the contractual warranties and remedies are in lieu of all other warranties and remedies, including "statutory" ones. A RICO claim, which is a statutory claim and delictual in nature, is thus included in these references. Article XXVIII refers to arbitration of any disputes concerning the Parties' contractual obligations or the interpretation of contract provisions. The arbitration clause includes RICO claims, and their submission to arbitration is therefore foreseen by the contract.

The Tribunal is satisfied that this result is in line with recent developments according to which subject matters that used to be reserved for domestic jurisdiction are now accepted to be submitted to and decided by international arbitral tribunals. This expansion of arbitrable areas has been highlighted, for instance, by the decision of the United States Supreme Court in the Mitsubishi case, where a treble damages claim under the American anti-trust laws was found to be arbitrable; Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614 (1985).

While United States courts have for some time been divided over the arbitrability of RICO treble damages claims, the U.S. Court of Appeals for the Second Circuit confirmed the arbitrability of such RICO claims in a recent decision by which it reinstated the award of a maritime arbitration panel; Kerr-McGee Refining Corp. v. Triumph Tankers, Ltd., 90-7778, 2nd Cir. Having been mandated by the U.S. Court of Appeals for the Fifth Circuit to deal with a RICO claim, an arbitration panel of the Society of Maritime Arbitrators, in a decision of 1990, awarded treble damages under the RICO statute; Trade & Transport, Inc. v. Valero Refining Company, Inc., Decision and Final Award of 23 August 1990, reprinted in 8 Journal of International Arbitration 38 (1991).

In conclusion, the Tribunal determines that it has jurisdiction over Claimant's RICO claim.

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Considerations of the Tribunal

Unconstitutionality

As an initial matter, the Tribunal will not decide on Defendant's contention of the alleged unconstitutionality of the RICO statute and the amendments intended to be made to it. As to the unconstitutionality of a national statute, an international arbitral Tribunal might first doubt whether it is empowered to decide upon it, notwithstanding the jurisdiction it has to decide upon the application of the statute. Indeed, to decide that a statute enacted in a sovereign state is unconstitutional, and to refuse to apply it for that reason, would mean that a Tribunal rejects the validity and the effects of an element of the law of that state, which is still in force inside the territory of such state, and has not been declared unconstitutional by its competent courts. In the view of this Tribunal, it is highly probable that it does not possess and cannot exercise such an extraordinary power, in any case where the statute in question does not infringe upon transnational public policy, as indeed the RICO statute does not.

The Tribunal notes that the RICO statute has not been declared unconstitutional by the Supreme court of the United States, and is still in force in the United States and applied by its courts. Accordingly, its application cannot be rejected because of its being unconstitutional, but only if the Tribunal were to determine that the conditions of its application were not fulfilled, with regard to its own provisions or to principles and/or rules of international law.

RICO claim not time-barred

To support its assertion that "Claimant's RICO claims are untimely under the US law", Defendant relies on the testimony of Professor M…, who refers to the Mulley-Duff case (483 United States 143 (1987)), in which the United States Supreme Court held that "the statute of limitation for civil RICO is the four-year period found in the . . . Clayton Act".

. . .

While the duration of the period within which a RICO claim must be filed seems by now firmly established under the jurisprudence of the US Supreme Court, the case law seems contradictory and somewhat confusing as to the date from which the limitation runs. What is clear, however, is that there are numerous cases where it was decided that the starting point is, as Professor B… puts it, the day where the plaintiff knows or should reasonably have known of his injury. Defendant does not content this position and the Tribunal notes that such a starting point is the more logical one, for the injured party obviously cannot file a claim before knowing the injury suffered.

It must be recalled that Claimant accepted the plant in November 1984, whereas it filed its complaint in the Federal District Court less than four years later. Moreover, according to Professor B…, it is Claimant's position that it did not learn and could not have learned of Defendant's alleged fraudulent activity until March 1985. Under these circumstances, the least that can be said is that Defendant, which had, in this respect, the onus probandi, did not prove the expiry of the limitation period before Claimant's first complaint-it being noted in addition, in passing, that, as everybody agrees, there is no limitation provision in the RICO statute itself.

Consequently, the Tribunal rejects the contention that Claimant's RICO claim was time-barred, and that it is not admissible for that reason.

No mandatory application of RICO

Claimant asserts that the RICO statute must be applied to this case because it is mandatory in nature (and its conditions are fulfilled). Claimant submits that the RICO statute is closely linked to the contract which gave rise to the "pattern of racketeering activity" and that it should consequently be applied to determine the legal consequences of this activity, notwithstanding the fact that Claimant is not a United States company and has its seat and center of business outside the United States, and that the parties chose the law of country X to govern the validity, construction and performance of the contract.

In Defendant's opinion, the mere fact that RICO is mandatory does not require the Tribunal to apply it here. Even if RICO were mandatory under United States law, since it is different from the law chosen by the parties and since the forum is an arbitration, its application in this case could only be considered if the United States had a strong and legitimate interest in such application, which, Defendant submits, it has not. Defendant asserts that, at least as far as treble damages are concerned, the RICO statute is not meant to protect fundamental public policies of the United States, but its purpose in this respect is rather to protect the interests of the private party affected by a racketeering activity. Defendant further asserts that the effects of the alleged racketeering activity did not occur within the territory of the United States; and, in any event, that the United States has no legitimate interest to "impose" the RICO statute on other countries.

With respect to the above issues, the Tribunal notes that there is no need for it, in order to arrive at its decision on the RICO claim in this case, to determine the purpose of RICO and the scope of its application generally . . . There is no doubt that the prime purpose of the RICO statute is to protect the United States economy and society against the negative effects of organized "racketeering activities", and that this reflects a fundamental public policy of the United States which is protected by the statute's mandatory application. The specific question before the Tribunal in this case is, however, more limited. In order to determine whether Claimant's RICO claim is admissible, the Tribunal must decide whether the application of the RICO statute is mandated in a case before an international arbitral Tribunal where a non-U.S. party seeks treble damages from a U.S. party pursuant to that statute. The Tribunal notes that the contractual relations between the parties are, pursuant to a contractual choice of law clause, governed by the claiming party's domestic law.

In their examination of this question, both parties have discussed what they describe as the "mandatory laws method", according to which it should be decided whether a particular national law or rule must be applied to the legal relationship between two private parties, notwithstanding the private contractual relationship or other arrangements such parties may otherwise have between themselves. Whereas the doctrine on this method was initially concerned almost exclusively with the application of the mandatory provisions of the lex fori, foreign mandatory rules were later placed on an equal footing, for instance in a number of multilateral conventions, for cases where the relevant situation had a close or significant connection with the state having enacted such a rule. Finally, scholars and commentators have more recently discussed the application in international arbitration of mandatory laws and rules. They are, like the few published arbitral awards dealing with this issue, divided on whether an international arbitral Tribunal should be allowed at all to apply a mandatory law in derogation of the law otherwise chosen by the parties.

This Tribunal accepts the premise that there may be situations in which an international arbitral tribunal should admit the application of mandatory rules different from the law that the parties have chose to govern their claims or relationships. The Tribunal emphasizes, however, that such an application outside the lex contractus is subject to particularly stringent conditions: the Tribunal must be satisfied that the mandatory rules different from the law that the parties have chosen to govern their claims or relationship must clearly be a loi de police. It is true that in arbitration, in general, the will and autonomy of the parties are particularly relevant not only with respect to applicable law and contractual issues, but also as far as the selection of the forum as such and its procedure are concerned. This priority of the will of the parties must, however, be construed to be subordinate to the mandatory application of a loi de police. In the case of the mandatory law of a particular state, the thrust of the conditions for its extraterritorial application is that such state must have a strong and legitimate interest to justify the application of such a law in international arbitration. Furthermore, if the respective law contains both public and civil (private) law rules, and if the extraterritorial application of only the latter rules is at stake, it must be shown that such state has a strong and legitimate interest in justifying the application of these civil (private) law rules in international arbitration.

Considering the above, and assuming that the treble damages provisions of the RICO statute are, according to United States law, mandatory in character, the Tribunal finds that there is in the present case no sufficiently strong and legitimate interest of the United States so as to mandate the application of such provisions. The criteria that lead to this conclusion mainly relate to two aspects: the type of interest and the connecting factor.

Claimant has summarized its position as to what interest is at issue here, as follows:

Fraud by a United States corporation engaged in international trade tarnishes the reputation of all, puts honest corporations at a disadvantage, and affects even the domestic competitive climate by making success turn on misrepresentation and deceit rather than on the superior quality and price of the product offered.

In essence, the interest put forward here is no longer concerned with the United States market, or even with the United States economic or social organization in general. If, however, the interest is concerned rather with the international marketplace as a whole and with the rules according to which the participants in international commerce "play", then in order to consider the application of RICO as mandatory also in international arbitration, one would first have to assume that the United States has some sort of police authority for international trade outside the territory of the United States, and secondly that this mandates not only the application of the public law rules of the RICO statute, but also the mandatory extraterritorial application of the civil (private) law rules of RICO in international arbitrations outside the United States . . .

Furthermore, even if a particular state does claim the mandatory extraterritorial application of its laws, that-by itself-is not sufficient to lead to the mandatory application of such laws in international arbitration. Otherwise, those states that make extensive use of such claims and thereby show less recognition of the sovereignty of other states embedded in the principle of territoriality could attain a privileged position in relation to other states. As an obvious example of this abstract consideration, without implying that it is comparable to the issue of this case, one may refer to the most recent majority decision of the United States Supreme Court accepting the jurisdiction of the United States courts over a Mexican citizen accused of drug-related criminal acts, who was abducted at the initiative of United States government authorities on Mexican territory and brought to the United States. ( United States v. Alvarez-Machain, 112 S. Ct. 2188 ).

Although it is obviously in the international interest to suppress the trade in drugs, this does not have a consequence that every method used by a national state in this context automatically has to be enforced internationally. The many statements made after the above decision of the United States Supreme Court by other states and legal scholars show that this particular method is widely rejected by the international community.

What becomes clear in the context of this example is that, for extraterritorial claims, one has to distinguish between the aim and the method of the national law rules at stake. For the present case, this means that even if the United States RICO statute were to be interpreted by United States courts as claiming mandatory extraterritorial application also for its treble damages rule, the acceptable interest of stopping activities such as those covered by RICO also outside the United States is not, by itself, sufficient to lead to mandatory extraterritorial application in international arbitration. Not only this aim, but also the method applied would have to meet the particularly stringent conditions mentioned above for the exceptional mandatory extraterritorial application of a national law rule.

The method at issue here, i.e. whether one private party can claim from another private party treble damages, is a specific feature of United States law. The fact that other national laws or international treaties do not use such method seems to indicate that the states of the international community, although sharing the aim behind it, have not considered the United States interest that may claim extraterritorial application of this method as a mandatory interest in their own jurisdiction.

In view of this situation, the Tribunal cannot find that this is an interest that should be protected in an international arbitration which rests on the agreement of private parties, concerns the tripling of damages allegedly suffered in a private business relationship and is otherwise governed, pursuant to the choice of the parties, by a law of another country. While certain of Defendant's actions invoked by Claimant in support of its RICO claim are said to have taken place in the United States, the bulk of the alleged fraud occurred outside the United States. The center of the relations between the parties was in Brazil, and the effects of the alleged RICO activity by Defendant occurred there. These circumstances do not warrant the mandatory application of the treble damages provisions of the United States RICO statute in this case of international arbitration.

This result is confirmed by the second criterion, i.e. the connecting factor. While the United States is certainly free to mandate application of its law to its nationals and to others within its jurisdiction, the Tribunal cannot find that such a mandatory application is in this case warranted with regard to a foreign national outside the United States' jurisdiction. The fact that the foreign national itself "seeks" the protection of RICO cannot affect the above finding, since it seeks a "mandatory" protection that would be contrary to the choice of law it agreed to with the other party.

The conclusion might be different if the national mandatory law had to be considered as reflecting a principle of international public policy. However, such a qualification cannot be made for the treble damages rule of the RICO statute, whose application is at stake here. In fact, as mentioned above, this rule is specific to the United States and is not found either in other major national legal systems or in international conventions. While it is, of course, in the interest of the international community and international commerce to prevent, also at the international level, practices such as those at which RICO aims, it cannot be judged that the specific legal consequences of a treble damages claim of an "injured" party, which is the only issue at stake in this arbitration, are a common feature of many national laws or of international law.

The Tribunal, therefore, concludes that the application of RICO is not mandatory in the present case.

No application of RICO on the basis of the contract

Even if, as found above, the application of RICO is not mandatory in the present case, at least in theory that would not exclude that the treble damages provision of RICO is applicable due to a choice expressed by the parties in the contract. For the sake of completeness, and as the parties have addressed that issue in detail, the Tribunal therefore hereafter will examine that issue as well. However, as will be seen, the Tribunal finds that RICO is also not applicable on this basis of the contract.

Defendant contends that the choice of law clause in the contract bars the application of the RICO statute in this proceeding and precludes . . .'s RICO claim. The relevant Article XXV of the contract provides:

The validity, construction, and performance of this contract shall be governed by, and interpreted in accordance with, the laws of Brazil.

Claimant contends that the contract's choice of law clause does not cover the facts alleged to support the RICO claim, nor the RICO statute itself, so that the RICO statute can be applied in spite of this clause.

The Tribunal will therefore examine this issue now on the basis of the contract. The Tribunal will first analyze the wording of the contract's choice of law clause in order to determine what the parties intended to cover in it. The clause itself lists three issues which are to be governed by and interpreted in accordance with the laws of Brazil: the validity, the construction and the performance of the Contract.

The validity of the Contract is not at issue in the RICO claim . . .

Neither is there any question of construction or interpretation of the contract-except for the choice of law clause itself-at issue in the RICO claim. The substantive provisions of the contract do not deal with the alleged "pattern of racketeering activity", which was, of course, not envisaged by the parties at the time of the conclusion of the contract.

What remains is the third issue, which is covered by the choice of law clause, i.e. the performance of the contract . . .

According to Claimant, the first question to be posed in this context is whether a RICO claim is to be considered as contractual in nature and therefore covered by the choice of law clause, with the result that this clause would exclude such a claim; or whether a RICO claim "is not based on private law rules governing commercial relations, but derives from U.S. public law", with the result that a contractual choice of law clause could not bar such a claim.

Claimant asserts that the latter proposition is the correct one. This would lead to the conclusion that the law chosen by the parties is not applicable to the RICO claim, even if one considered that the facts alleged in support of that claim are linked to the performance of the contract which is covered by the contractual choice of law clause.

According to Defendant, the issue is not whether the RICO claim is contractual in nature, but rather whether the facts alleged by Claimant and the legal question presented to the Tribunal in connection with the RICO claim are contractual in nature. Defendant argues that the fraudulent activities alleged by Claimant concern the performance of the contract. "The facts alleged consist, in essence, of the conduct of the contracting party at the time of the execution of the contract and during its performance, and the subject of the claim is, apart from the invalidation of some of the contract's clauses, the payment of the damages caused by that conduct."

Claimant's claim is essentially a claim for damages, whether simple compensatory damages or treble damages. Such damages are the consequences of alleged wrongdoings in connection with the performance of the contract. The racketeering activities alleged by Claimant are aggravating factors which only serve to increase the measure of damages.

The Tribunal need not determine what the status of a RICO claim such as the one brought by Claimant would be under United States law. Suffice it to confirm that the characterization of such a RICO claim as delictual under United States law would not alter the result for a claim brought before an international arbitral Tribunal which, in the event that the parties have provided that the dispute is to be decided under a particular national law, must apply this law also to issues of a delictual nature. This is any case in which an "extra-contractual" issue presents a link itself with respect to the contract's performance, where it can be said that the scope of application of the law governing the contract is extended because it is the law most closely connected with the extra-contractual issue.

Even though it is highly unlikely that any one of the parties gave any consideration to the applicability of RICO at the time of the conclusion of the contract, based on the above, the Tribunal finds that the contract and the intentions of the parties must be interpreted as intending to exclude claims such as a RICO claim.

A last argument put forward by Claimant in connection with the choice of law questions is that parties cannot in advance waive the right to present a RICO claim. This would govern not only explicit waivers, but also implied waivers resulting from the combination of an arbitration clause and a choice of law clause. Such a rule presupposes, however, that RICO is applicable in the first place. Since the Tribunal has found that the contract is intended to exclude a RICO claim in this case, the issue of its waivability is not relevant.

In addition to the choice of law clause, the contract contains two other provisions which support the conclusion that a RICO claim is not admissible in this case. Both relate to the contract's explicit exclusion of all but contractual claims for the parties.

. . .

The Tribunal therefore concludes that the contract and the will of the parties must be interpreted as intending to exclude claims such as a RICO claim.

Finally, there is an additional reason that supports why Claimant should not be permitted to bring a claim outside the law chosen in the contract. As can be seen from Article XXXII of the contract, it was Claimant that insisted on the choice of Brazilian law to govern its relationship with Defendant. In light of this, it would seem that Claimant would be estopped from subsequently invoking a law whose application it had originally requested, and contracted to exclude.

Even if one still may have doubts whether any one of the above considerations is sufficient by itself, at least in view of all the above factual and legal circumstances when taken together, and considering the parties' intention, to exclude claims such as RICO expressed in the contractual choice of law and exclusion clauses, the Tribunal determines that Claimant's claim for treble damages pursuant to the United States RICO statute is also not admissible on the basis of the contract.

RICO claim not validly stated

The Tribunal will now deal with an additional reason for which it finds that Claimant's RICO claim is not admissible. Defendant contends that "Claimant has not presented a prima facie valid RICO claim". Consequently, submits Defendant, Claimant's claim should be dismissed as non-admissible, there being no need to enter into the discussion of Claimant's allegations on the merits. What is thus asserted by Defendant is that Claimant did not even allege-let alone prove-the necessary elements of the activities defined by the RICO statute which are to be met, in civil matters, for the treble damages provision to apply.

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The Tribunal will not discuss at this stage whether Claimant's allegations are proven, which would be a discussion on the merits; it will merely discuss whether or not Claimant alleged all the categories of facts constituting a RICO activity that would entitle it to treble damages. Limited in this way, such a discussion does concern the admissibility of the claim, for the latter could in no case prevail if the required factual elements are not even alleged, which means that one does not have to enter into a discussion on the merits in order to dismiss it.

The relevant provisions of RICO, Section 1962, are worded as follows:

(a) It shall be unlawful for any person who has received any income derived, directly or indirectly, from a pattern of racketeering activity to use or invest, directly or indirectly, any part of such income, or the proceeds of such income, in acquisition of any interest in, or the establishment or operation of any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce . . . (RICO Section 1962 (a)).

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(c) It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity . . . (RICO Section 1962 (c))

The Tribunal derives the elements needed for a RICO claim to be validly stated from the text of the statute itself. In the Tribunal's view, on that basis, there are two main elements of a valid RICO claim under Section 1962 (a) and (c), namely, a "pattern of racketeering activity", and the investment in or conducting of an enterprise.

As to the "pattern of racketeering activity", this element is in fact subdivided: there must be, on the one hand, a racketeering activity, and, on the other hand, such activity must have been exercised in the framework of a "pattern" . . .

The Tribunal has already determined that in this case Defendant did not commit fraud, i.e. intentional and wilful inducement or failure to perform. Consequently, its relevant activities cannot be defined as racketeering, since they are not fraudulent towards Claimant, and could not be so characterized even if the parallel activities towards other companies were considered fraudulent, a matter over which this Tribunal has obviously no jurisdiction. Indeed, "racketeering activities" and "pattern of" are two distinct elements, and both of them have to be established in order for the RICO statute to be applicable.

As a result, the determination by the Tribunal of the absence of any fraud in itself excludes a subsequent admission of the RICO claim on the merits; consequently, such a claim is not admissible . . .

As to the investment in or conduct of an enterprise, the income (or a part of it) derived from a pattern of racketeering activities, or its proceeds, should be used or invested, in acquisition of any interest in, or the establishment or operation of, any enterprise which is engaged in, or the activities of which affect, interstate or foreign commerce.

The Tribunal notes that Section 1962 (a) does not require expressly that the "enterprise" in which the proceeds are invested be distinct from the person (legal or natural) who earned the income through a pattern of racketeering activity; nor does the provision literally require that there be a causal link between the investment in an "enterprise" and the injury suffered by the Claimant. It might be that such features follow from the lawmaker's purpose, but they are in any event not clearly expressed in the provision itself. To the contrary, it is reasonable to construe Section 1962 (c) as implying a distinction between the person who committed the racketeering activity and the enterprise which that person is "conducting", since, ex hypothesis, the person was already "conducting" its own enterprise when it developed said activity.

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To conclude on this second element (investing in or conducting an enterprise), the Tribunal determines that Claimant's allegations are sufficient under Section 1962(a), but not under Section 1962(c). Such a conclusion limits the admissibility of Claimant's RICO claim to the facts falling under Section 1962(a). Indeed, there is an allegation of a "pattern of racketeering activities", and of investment of its proceeds in an enterprise. The allegation of conducting an enterprise is too hypothetical and speculative to be taken into account. However, in any event, taking into account the absence of any fraud committed by Defendant-as the Tribunal has previously determined-Claimant did not state a valid RICO claim, and consequently the same is not admissible.

For the reasons elaborated above, the Tribunal determines that Claimant's RICO claim is not admissible.'