Choice of Law

• Author: International Law Group

The Uzan family controls several Turkish telecommunications companies, including Telsim and Rumeli Telefon (TRT). In 1998, Motorola lent TRT $360 million to buy cellular infrastructure and equipment from Motorola, and $200 million for TRT to acquire a 25- year nationwide cellular license in Turkey. The collateral was 51 percent of TRT's outstanding shares.

Motorola eventually raised the loans to about $2 billion, and the collateral to 66 percent of TRT's shares. The Motorola loan documents specified that Swiss law applied and that parties would arbitrate any disputes before a three-person panel in Switzerland according to the International Arbitration Rules of the Zurich Chamber of Commerce.

In addition, Nokia lent TRT about $800 million secured with 7.5 percent of TRT's outstanding shares. The choice-of-law and arbitration clauses of the Nokia loan documents closely tracked the Motorola clauses.

TRT, however, repaid a total of only about $205 million of the total loans of $2.8 billion. Motorola and Nokia (plaintiffs) filed suit in a New York district court against several Uzan family members and associates, as well as against several of their companies (defendants). The complaint charged violations of RICO, Illinois state law, the U.S. Computer Fraud and Abuse Act, and the Electronic Communications Privacy Act. It did not, however, include as defendants the signatories of the loan agreements.

The district court found that the defendants had defrauded Motorola and Nokia by making false statements and by diluting the value of the collateral. The total award was about $4 billion in compensatory and punitive damages. The defendants duly noted an appeal. The U.S. Court of Appeals for the Second Circuit affirms in part, vacates in part, and remands in part.

One of defendants' arguments concerns the choice of law. Below, they had unsuccessfully moved the district court to compel arbitration under 9 U.S.C. Section 206, part 2 of the Federal Arbitration Act (FAA), which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards [June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3] (New York Convention). Section 206 provides that a court "may direct [that] arbitration be held in accordance with the agreement at any place provided for ..."

The Second Circuit then explains its analysis. "We have applied a choice-of-law clause to determine which laws govern the validity of an agreement to arbitrate. ... More generally, a...