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What Makes An Award An Award?: Thoughts About Enforcement of the Decisions of Experts and Appraisers

A new decision from the US District Court in New York revisits a question that crops up sporadically: Is an agreement for binding expert determination of a discrete non-legal issue an agreement to arbitrate, such that the expert’s determination may be treated as an award? Answering yes, the Court in Seed Holdings Inc. v. Jiffy Intern. AS, 2014 WL 1141717 (S.D.N.Y. Mar. 21, 2014), held that the expert’s decision pursuant to an agreement for binding resolution of a post-closing price adjustment by an independent accountant in a cross-border sale of assets agreement (Canada-US) fell under the New York Convention, with two consequences: (1) the seller’s New York State Court action to vacate the award under the New York Civil Practice Law section on expert determinations (Article 76, as opposed to arbitration which is covered in Article 75) was properly removed to federal court under the removal provision for Convention cases, 9 U.S.C. §205, and (ii) the accountant’s decision was an award confirmable under the Convention and FAA Chapter Two.
In the opinion of this District Court Judge, this outcome was required by decisions of the US Second Circuit Court of Appeals that have treated as a valid agreement to arbitrate any agreement for final and binding resolution of a dispute by a third party, regardless of whether the term arbitration is used, and regardless of whether the agreement requires the third party to apply any particular law or follow any particular rules of procedure. The Court acknowledged a contrary view, referencing the U.S. Eleventh Circuit Court of Appeals, under whose cases the agreement must include some of the attributes of “classic arbitration” in order for the ensuing procedure to be regarded as an arbitration. The District Court in Seed Holdings noted that the “classic arbitration” test readily could have been met in this case, based on the procedures detailed in the parties’ engagement letter with the accountant and the actual procedure that the accountant followed. But the Court was clear in saying it was following the more liberal Second Circuit test: to decide whether there was an “arbitration” agreed upon, the Court looks only to see if the parties provided for binding resolution by a third party.
One might wonder if this was the best solution. The question before the Court was not whether there was subject matter jurisdiction under the Convention to enforce an alleged arbitration agreement. The question was whether there was subject matter jurisdiction to hear and decide (I) the set aside action originated in State court, and (ii) the recognition action originated in the federal court. So one may wonder whether it was appropriate for the Court to make the issue of jurisdiction to confirm or vacate the award turn entirely on whether the arbitration agreement, as opposed to the award, fell under the Convention. In this expert determination context, it seems possible that the agreement could fall under the Convention but the award might not. In this regard, the Second Circuit case most centrally cited in Seed Holdings as the controlling law McDonnell Douglas Fin. Corp. v. Pa. Power & Light Co., 858 F.2d 825, 830 (2d Cir. 1988)) dealt only with the existence of an arbitration agreement not an award. In the McDonnell Douglascase, the Second Circuit reversed the District Court’s denial of a motion to compel arbitration, and held that the agreement of the parties for a tax dispute to be resolved by a mutually agreed independent tax counsel was an enforceable agreement to arbitrate. But no arbitration had yet taken place, and so the Second Circuit in that case did not have to answer the question that seems so central to theSeed Holdingscase: whether the ensuing binding decision is an arbitral award under the FAA.
So one may ask whether there is an unaddressed question here: whether an “arbitral award” under the Convention and FAA Chapter 2 may be any decision resolving the dispute made by the decision-maker designated in a valid arbitration agreement, or whether the term “arbitral award” implies the product of a proceeding that includes some procedural features. Looking only at the text of the New York Convention, there is reason to wonder whether it is sufficient, to constitute an award, that the decision emanates from an authority mutually-designated by the parties in an arbitration agreement to make a binding decision. Article II of the Convention requires the filing with the Court in which recognition is sought of an original or a duly-certified copy of the award. Thus the minimum attribute of an award under the Convention appears to be a written record of the decision.
Further, Article V (1) (b) of the Convention states as one of the permitted grounds for refusal of recognition of an award that the objecting party was not given “notice … of the arbitration proceedings or was otherwise unable to present his case.” Does this not suggest that an award under the Convention, to be considered as such, must be the product of some sort of proceedings in which each of the parties has an opportunity to state sufficiently the basis of its position? And does this not imply that agreement for binding resolution by a third party, but lacking any “proceedings” and lacking any presentations of positions by the parties, if followed to the letter, would produce a decision that might be “arbitral” in the sense that it is derivative of the arbitration agreement, but might not be an “arbitral award” because the term “arbitral” when used as an adjective in the Convention to modify “award” has a different and more procedurally-specific meaning?
The concern here is that the Second Circuit’s test as interpreted by the District Court in Seed Holdingswould potentially mean that the parties’ agreement for final and binding decision by a Tarot-card reader, without any proceedings or submissions of the parties, so long as the decision is committed to writing, is an enforceable arbitral award under the Convention if the other requirements (non-domestic commercial relationship, award made in Territory of a Convention State) are met. This cannot be what our courts intend, and we should not have to await the absurd case to bring out what is truly intended. Some version of the Eleventh Circuit’s “attributes of classic arbitration” formula is probably well-suited to the issue at hand.

US (Non-) Enforcement of Annulled Foreign Awards: Shall We Welcome A Dash of French Eccentricity?

It seems that we never tire of thinking, and writing, about “Chromalloy“. That famous 1996 case from a federal district court in Washington D.C. (939 F. Supp. 907) has given its name, at least for the US arbitration community, to a body of case law and legal theory concerning the circumstances in which a court in one country might recognize and enforce, under the New York Convention and its own arbitration law, a foreign arbitration award that has been set aside by a competent court at the seat of the arbitration or (more rarely) by the competent court of a State that did not host the arbitration but whose arbitration law was made applicable by agreement of the parties. The French, who in the 1990s as now sought to protect their nation’s position as net exporter of cutting edge arbitration theory, had their own Chromalloy case, gave it an attractive additional partner called Hilmarton, wrote furiously for years about the notion of an autonomous arbitral legal order, and bottled that cogitation into a recent 1er Cru (Cour de Cassation 2007) called Putrabali.

While the courts and scholars of many countries have weighed in, the field remains dominated by a France v. US dialectic.  Greatly simplified, French law and theory treats the award as a-national (or “de-localized”), so that the setting aside of the Award in Seat State A under State A arbitration law has little relevance when confirmation of the Award is sought in Non-Seat State B. US law (it may be a stretch to suggest the US has any “theory”) recognizes a rather organic relationship between a foreign arbitral award and the lex arbitri under which it was made, claims that the existence of this relationship is derived from  the text of the New York Convention Article V(1)(e), and applies a strong presumption in favor of the binding effect of the Seat State court’s decision to vacate an award based on principles of “comity between nations.”  Comity is a rather cherished concept in American jurisprudence, functioning perhaps as a jurisprudential antidote to our nation’s ambivalent legacy of foreign military intervention (but see France, 1944).

Until now, the American approach has faced little competition from the French on the US home field.  We have a common law, precedent-based fortress, built up since Chromalloy in a handful of familiar (and sometimes criticized) decisions that will not be reviewed in extenso here. I refer to Baker Marine in the Second Circuit (191 F.3d 194); Termo Rio in the D.C. Circuit (487 F.3d 928); and PEMEX in the Southern District of New York (2013 WL 4517225) where, exceptionally. a Mexican award was recognized despite vacatur in the Mexican courts.

Now there a new decision, and it falls in the familiar comity pattern: Thai-Lao Lignite (Thailand) Co. v. Government of the Lao People’s Democratic Republic, 2014 WL 476239 (S.D.N.Y. Feb. 6, 2014). In this latest decision, the Court has vacated its own 2011 judgment granting recognition to an award made in Malaysia, on the ground that subsequent to entry of that judgment the competent Malaysian court vacated the award and that the Malaysian court judgment commands the respect of the US courts in the absence of extraordinary circumstances that would render non-recognition of the award a violation of fundamental US public policy. Says this Court at a critical juncture in the opinion: “The Court will not disregard comity considerations and refuse to recognize the Malaysian courts’ judgments unless Petitioners can demonstrate that the process before the Malaysian courts ‘violated basic notions of justice.’”

As in prior US cases in the Chromalloy line, there is no acknowledgment or consideration of the French point of view in the Thai-Lao Lignite decision. But we Americans are not isolated in our resistance. The French view is seen as eccentric in some lofty European quarters as well (read e.g. Professor van den Berg , 2010 J. Int’l Arb. 179). And critics of the délocalisation theory point out that it is not applied in France as an interpretation of Article V(1)(e) of the Convention, but as a sort of second-level dictum behind the French statute on enforcement of foreign awards. That statute is more recognition-friendly than the New York Convention’s Article V, as it does not include annulment in the country of origin as a potential ground for non-recognition, and this brand of recognition-friendliness has its own port in the New York Convention — Art. VII. But the oracles of the eccentric French theory are as lofty as its critics, and the theory resonates here in New York, the island of pragmatism, where we endorse the idea that New York should be chosen as the seat of arbitration for such non-organic reasons as our fine restaurants, good transit hubs, and spanking new conference facilities.  So the condemnation of French theory as eccentric should not prevent the planting of some French seeds in the Federal Arbitration Act /New York Convention garden, to see what ideas might blossom in the Second Circuit Springtime if the Thai-Lao Lignite case returns to an appellate court which on last encounter with the same case upheld the order granting recognition to the Award.

The Second Circuit’s controlling precedent, Baker Marine, is non-specific about the “adequate reasons for refusing” to respect the annulment order that might perhaps be offered, and that might in some other case make the issue of whether to recognize an annulled award a closer call. The Court simply said there was no violation of US public policy by respecting the Nigerian court annulment, and distinguished Chromalloy (US Chromalloy, that is) mainly on the basis that the applicant was not a US citizen and had not initially sought confirmation in the US. The facts orienting the arbitration to Nigeria in Baker Marine lent themselves to conventional inside-the-box comity-of-nations thinking: the underlying contract was made in Nigeria by Nigerian affiliates of US companies, concerned extraction of natural resources in and of Nigeria, was governed by the contract law of Nigeria, and the arbitration agreement even included a phrase embracing Nigerian arbitration procedure to fill gaps not covered by the UNCITRAL Rules. The Second Circuit did not have to consider in Baker Marine how the New York Convention discretion to enforce an annulled award might be affected when the only connection of the arbitration to the seat of the arbitration is the designation of the seat in the parties’ arbitration agreement (or indeed a designation of the seat by an administering institution in the absence of a contractual express choice). But that question may be prominent in Thai-Lao Lignite if an appeal ensues.

In Thai-Lao Lignite the parties and transactions and history of proceedings scarcely invite a “comity”-based judicial deference to a Malaysian court’s merits-based review of three American arbitrators’ decisions applying New York law.  The parties were not Malaysian, but Thai and Laotian. The objective of the underlying contracts was to mine coal in Laos and put it to use in Laotian plants to generate electric power for sale into Thailand. And the provisions of Malaysian arbitration law on which annulment was based were essentially in parallel to the provisions of the New York Convention and the UNCITRAL Model Law that permit an award to be refused recognition or annulled in the country of origin if the Award contains decisions on matters that exceed the scope of the submission to arbitration. Where the answers to those scope-of-submission questions given by American arbitrators selected by the parties depended on their application of the New York contract law selected by the parties, first to decide the relationships among the contract containing the arbitration clause and prior contracts that did not provide for arbitration, and then to decide the relationship of certain non-signatories to the arbitration agreement, one might seriously question what is the source of any sovereign interest of Malaysia, that should command deference from the courts of United States, in having its judiciary be the pre-emptive forum to decide — with global res judicata effect — whether the arbitrators stayed within their jurisdiction.

Perhaps it is reading too much into the New York Convention for American courts to say that the comity principles they apply in this context are based on the Convention. We read in the US case law that the Convention establishes “very different regimes” for judicial review in the country of origin and in a non-originating State where recognition of a foreign award is sought. That statement is half-wrong. The Convention establishes no regime for judicial review in the courts of the seat of arbitration when the application to the court is not to confirm the award but to annul it. What the Convention does do is acknowledge that Member States might have separate annulment regimes (or, like Belgium, might not), and that the courts of a Member State when asked to recognize a foreign award (i) may elect (or not) to respect the outcome of the annulment process in the country of origin (Art. V(1)(e)), or (ii) may recognize an annulled award if domestic law specifically permits recognition despite the annulment (Art. VII).

The Second Circuit may be invited in Thai-Lao Lignite to think more systematically about the connections linking (i) the discretion under Art. V(1)(e) to disrespect the foreign annulment, (ii) the contractual basis of all American arbitration law, and (iii) the nature of the particular contractual choice made by the parties in regard to the seat of arbitration in a particular case. “Comity” may on close examination be revealed to be an unsuitable paradigm. International arbitrations and the resulting awards may be neither organically national nor invariably international (de-localized). Rather, characterization of the award in relation to the seat, with consequences for the scope of discretion to enforce an annulled award, might be seen as fact-dependent and in play on a case-by-case basis.

French eccentricity has always been welcomed in Manhattan, up to a certain point.

New York Confronts Archaic Obstacle to Award Enforcement Against Assets Held in Bank Branches Abroad

There may shortly be a dramatic change in the powers of an unpaid Award Creditor to use New York’s courts to seize Award Debtor assets held in foreign bank accounts. If the change occurs, Award Creditors will be able to require foreign banks that have a New York branch to deliver to the creditor in New York assets held in foreign branches to satisfy a judgment enforcing an international arbitration award. The implications for international arbitrations seated in New York, and for New York’s attractiveness as an arbitral seat, are considerable.

The stage has been set for this potential change by a decision two weeks ago from the US Second Circuit Court of Appeals, in which the Second Circuit has asked New York State’s highest court, the New York Court of Appeals, to decide an unresolved question of New York law. The “certified question” is whether New York’s so-called “Separate Entity Rule” has been, or should be, abolished, such that an order to turn over assets to satisfy a judgment, when served on the New York branch of a foreign or global bank, would require the bank to turn over the judgment debtor’s assets held in all the bank’s branches wherever located. (Tire Engineering & Distribution, L.L.C. v. Bank of China Ltd. (and two consolidated cases raising the same issue), 2014 WL 114285 (2d Cir. Jan. 14, 2014)).

Consider the current plight of the Award Creditor, victorious against a non-US party in an arbitration with a New York seat. A judgment from a federal district court in New York giving recognition to the Award under the New York Convention is readily obtainable, and on a very short timetable if there are good reasons for expedition such as demonstrable risk of asset dissipation or concealment by the Award Debtor. That process also enables the Award Creditor to enlist the district court’s support in fixing a short timetable for the Award Debtor to present, in the same proceeding, any cross-motion to set aside the award — rather than the longer timetable otherwise afforded to the Award Debtor by Chapter Two of the FAA. But proceedings to recognize the Award in the USA are unhelpful if there are no assets here and the Award Debtor is not physically present, unless the US court has an enforcement “long-arm” based on the presence here of a bank whose foreign branches hold Award Debtor assets.  Such “long-arm” enforcement power, if it exists, potentially eliminates the need for the Award to be recognized and enforced in multiple jurisdictions where the Award Debtor may keep assets.

The New York Court of Appeals has addressed some related issues in the last few years, but the decisions offer little predictive value. In the Koehler case in 2009, the Court held that a foreign bank that was jurisdictionally present in New York could be required by a turnover order to deliver in New York stock certificates held for the Judgment creditor at the bank’s headquarters office in Bermuda.  (Koehler v. Bank of Bermuda Ltd., 12 N.Y.2d 533 (2009)). After Koehler, many litigants have argued, and a few trial level courts have held, that the “separate entity” rule was overruled by implication in that case. But the assets in Koehler were not held by a foreign branch of the bank, and so the “separate entity” issue was not presented. In the Commonwealth of Northern Mariana Islands v. Canadian Imperial Bank of Commercce case last year (21 N.Y.2d 55), the Court held that assets in possession of a foreign subsidiary of a Canadian bank jurisdictionally present in New York did not have to be delivered in satisfaction of a turnover order, because the turnover provision of New York’s Civil Practice Law & Rules requires turned over of assets in “possession or custody” of the garnishee but does not extend to assets in the “control” of a garnishee by reason of a parent-subsidiary relationship. Commonwealth also fails to answer the question now certified to the Court by the Second Circuit, which presents the situation of a bank with New York and foreign branches that are in the same corporate entity, i.e. they are not legally separate under applicable laws, and are to be regarded as separate only if the legal fiction of separateness based on the “Separate Entity Rule” is recognized by New York’s highest court.

The Separate Entity Rule is an anachronism, on a practical level, having its origins long before the Internet Age in a concern about the burden that would be imposed if far-flung branches had to communicate with one another about account balances. A broader comity concern is also associated with the Rule, as it operates to force the Judgment Creditor to proceed in the courts of, and subject to the banking laws and debtor-creditor laws of, the jurisdiction where the assets are located. Comity is likely to be much debated before the Court of Appeals. The banking industry will argue that forced compliance with US turnover orders will subject the banks to criminal violations of banking laws in many jurisdictions. Creditor interests will argue that such concerns are overstated and, indeed, that bank secrecy laws and related restrictions sometimes exist to foster the growth of the banking industry in emerging global financial centers, and that the laws serve the interest of the banks and their customers more than the interests of the enacting States.

The Separate Entity Rule has never received the imprimatur of New York’s highest court, a fact that should make it easier for the Court to reject it. Such rejections seems reasonably likely, and also likely to be coupled with a reminder that comity is a discretionary doctrine and that courts may on case-by-case basis excuse compliance with a turnover order if considerations of comity counsel in favor of requiring the judgment creditor to apply for relief in the jurisdiction where the assets are held.  That would send the Tire Engineering case back to the Second Circuit, and perhaps in turn back to the District Court for a first instance consideration of comity in each of the consolidated cases.

But rejection of the Separate Entity Rule would be a major step in modernizing judgment enforcement law in New York, making New York a more appealing host venue for international arbitrations.

Judicial Discretion to Allow Proceedings on Related Non-Arbitrable Claims

Today we will applaud a new decision of the US Seventh Circuit Court of Appeals that sustains a district court judge’s refusal to stay all discovery in a litigation mainly involving arbitrable issues in a pending foreign arbitration. (GEA Group AG v. Flex-N-Gate Corp., 2014 WL 97289 (7th Cir. Jan. 10, 2014)).  Such applause may strike readers as anomalous, if not heretical. But this is a special case, and the treatment of the issues by the eminent jurist Richard A. Posner deserves our close attention.

Matters begin simply enough. A US company gets cold feet on the eve of a deal closing, fails to buy the subsidiary of a German company after a long negotiation, and the German company files a breach of contract arbitration in Germany in 2004 under the “DIS” German arbitration rules as provided in the arbitration clause. Nearly five years into the arbitration, in 2009, the Claimant, no longer willing to tolerate known asset-stripping of the Respondent US Company by its non-signatory non-party alter ego CEO and controlling shareholder, replicates the arbitration claim with a federal court lawsuit that makes no mention of the pending arbitration, and includes the CEO as a defendant, alleging fraud by him both in connection with the failed transaction and in transferring assets in derogation of the rights of Claimant/Plaintiff as a prospective award/judgment creditor . (The opinion sheds no light on why the CEO was not joined as a party to the arbitration. One might surmise that German arbitration law as compared to US law is less accommodating to alter ego arguments for jurisdiction over non-signatories).

By the time this case reached appellate decision in January 2014, the arbitration in Germany remained unresolved ten years after it began — a $290 million award in favor of the German company having been vacated in the German courts (for reasons not disclosed in this opinion) and a new arbitration making the same claims having been commenced (again without naming the CEO as a Respondent) in 2012. In the meantime, the US litigation had made two prior visit to the Seventh Circuit, in each case based on the question of what is the proper scope of an FAA Section 3 stay of litigation pending arbitration where the Plaintiff is the arbitration Claimant, seeks a stay of a litigation it commenced, and argues that the stay should be total such that it would prevent the non-arbitrating alter ego CEO defendant from conducting discovery in support of his litigation defenses and counterclaims.

The Seventh Circuit here rejects the notion that it is an absolute responsibility of US courts under the FAA, in a case that presents related arbitrable and non-arbitrable claims, to stay the case entirely and until the arbitration is entirely completed, in order to prevent inconsistent decisions or use of in the arbitration of evidence derived from discovery. And the Court’s premises for this position are sound: (1) the risk of inconsistent decisions was remote as the US case was not nearing either trial or any motion for summary judgment, (ii) the non-arbitrating CEO had the right to defend himself and to pursue his counterclaims, especially since the German arbitration Claimant had commenced the lawsuit, and (iii) the arbitral tribunal in Germany retained full control over the admissibility in the arbitration of evidence derived from discovery in the US litigation.

There is a Section 1782 subtext to the decision, and indeed Section 1782 commands brief mention, with the Court pointing out that either party to the German arbitration might have sought evidence located in the United States, and possibly obtained it. Without taking a position on whether Section 1782 applies to foreign commercial arbitral tribunals, the Seventh Circuit here points out that the disclosure itself is not objectionable because the arbitral tribunal still retains control over use of the evidence in the arbitration.

Readers of the decision will find some digression into issues about whether the German Claimant/Plaintiff had any sound rationale for bringing the US case when it did. The Court points out that the one clearly justifiable basis for US proceedings, to enjoin assets stripping by the alter ego CEO, was effectively waived by Claimant/Plaintiff since it sought of stay of all proceedings in the action it commenced.

But for us this case should mainly be about the potential discretionary limitations the district courts might impose on a stay of US litigation related to foreign arbitration. Whereas FAA Chapter Two has no specific provision concerning a stay of litigation involving arbitrable issues, FAA Section 3 applies and its relevant language “upon any issue referable to arbitration” is malleable and judges therefore retain considerable discretion to stay the entire case or only the claims and counterclaims that involve precisely the parties to and the claims asserted in the arbitration. To the extent the action is not brought upon an “issue referable to arbitration” — here, the CEO’s potential liability, and the CEO’s personal counterclaims against the Claimant/Plaintiff — a court might in some situations prudently stay everything, and in other situations might justifiably allow the non-arbitrable claim to move ahead even if this might generate evidence usable in the arbitration. Here it was the party who invoked arbitration in the first place that also invoked litigation, and the party asking to move ahead with the litigation could sensibly point to the long duration of the German arbitration and related German judicial proceedings and say that he should not be required to wait ad infinitum for an adjudication of his individual rights and duties.

Congratulations On Your New Appointment. Or Was It Only A Nomination?

Under the arbitration rules of many arbitral institutions around the world, a nominated arbitrator-candidate only becomes an appointed arbitrator when the administering institution, acting through the administrative body identified in its Rules, notifies the candidate that he or she has been appointed (or as the terminology appears in some rules, “confirmed”).  A quick review indicates that this is the case under the arbitration rules of the ICC, LCIA, CPR, SIAC, Kuala Lumpur Centre and Vienna Centre, and under the Swiss Rules. The arbitrators must await a formal notification of appointment from the institution that follows after the nominated arbitrator candidate has submitted his or her statements of availability, independence/impartiality, and willingness to serve.

It may come as something of a surprise to many arbitration lawyers and arbitrators that the same is not true in international cases administered by the American Arbitration Association  (AAA) International Centre for Dispute Resolution (ICDR) under the Commercial Rules or the International Rules of the American Arbitration Association, either as a matter of the rules’ text or as a matter of administrative practice. The reason this may come as a surprise is that many of us, whether functioning as counsel or arbitrator, simply assume that the Tribunal cannot function until, at the earliest, the expiration of any time period fixed by the AAA for parties to comment on the disclosures, if any have been made, of each of the arbitrators.  As arbitrators in AAA-administered cases, we therefore refrain from beginning to organize the case until that time has expired — and some arbitrators will even refrain from having initial discussions with their co-arbitrators, let alone the parties. And as counsel in such cases, we ordinarily refrain from contacting the Tribunal-in-formation until this period for comments has expired or all parties have indicated that they have no such comments.

The practice of the ICDR in case of receipt of completed appointment documentation that includes disclosures is to immediately transmit that documentation to counsel/the parties, with a cover letter giving notice to the parties that the arbitrator has been appointed, and fixing a period of time (generally two weeks) for any party to submit comments (or a challenge) based on the disclosures.  Despite the statement in such letter that the arbitrator “has been appointed,” the ensuing invitation for comment upon the disclosures by a deadline two weeks later may well cause the letter to be interpreted, by the parties and the arbitrators, as meaning that the appointment is conditional on expiration of the comment period without comments, or upon the rejection of any timely challenge.

In certain cases the clarification of this ambiguity, one way or the other, could have significant consequences. One issue that could arise in such a situation is how the Tribunal or a reviewing court might apply a provision in the arbitration agreement that requires the Tribunal to issue a Final Award within a rather short period from the date the third arbitrator is selected, say 45 days. Unless both parties consent to the timetable of proceedings, can the Tribunal be comfortable that proceedings may be scheduled such that the Award would be made within 45 days measured from expiration of the comment period? Or is there a risk in that situation that a recalcitrant party might object that the Tribunal became functus officio on day 45 from the notification to the parties of the selection of the third arbitrator? Conversely, if the Tribunal attempts to proceed on a timetable of 45 days from notification to the parties of the selection of the third arbitrator, might a recalcitrant party object at the end of the arbitration that the Tribunal exceeded its powers by taking actions before it was duly constituted? Granted these issues ordinarily should not present insuperable obstacles when both parties are represented by counsel and are actively participating in the arbitration. But that is not always the case. An opportunistic absentee Respondent might make either argument, depending on the course of action  selected by the Tribunal, to interfere with recognition of a Final Award.

One might suppose that a possible perceived virtue of the ICDR practice is to prevent a recalcitrant Respondent from delaying formation of the Tribunal, and the launching of the case, by making a vexatious challenge. But if the parties have agreed to have party-appointed arbitrators, an interval of two weeks for comments on the disclosures made by the Claimant’s party-appointed arbitrator, before that arbitrator is confirmed, is unlikely to delay the case. The Tribunal will still be in the process of formation during this time. Suppose instead that the Respondent wishes to delay the case by making a challenge based on the initial disclosures submitted by an administratively-appointed presiding arbitrator or by one or more of the arbitrators selected via the AAA-favored list procedure. If the Claimant has indicated a need for urgent Tribunal action, e.g. some urgent provisional relief, the ICDR has means at its disposal, other than its automatic appointment practice, to accelerated formation of the Tribunal. The ICDR in its discretion could accelerate the time for the nominee to submit his/her disclosures, and accelerate the time for either party to submit comments on the disclosures. The ICDR also has discretion to fix stringent deadlines for compliance by the nominee with any supplemental requests for information submitted by a party, and for submissions by the parties in support of and in opposition to a challenge. And of course the ICDR retains the capacity to rule quickly, and without a statement of reasons, on any challenge that is made. So it would seem that there are other means available to regulate the use of an initial challenge by a Respondent’ as a dilatory tactic, and that those means do not entail burdens or costs that make them less acceptable than automatically appointing an arbitrator who has furnished a qualified statement of independence.

To fully evaluate the ICDR practice, one must also consider the impact on a challenge that the Claimant might wish to bring, particularly against a party-appointed arbitrator selected by the Respondent. And let us assume that the Claimant, characteristically, is eager for the case to proceed rapidly, perhaps even to obtain some form of provisional relief from the Tribunal, subject to a countervailing desire to avoid having either a co-arbitrator or a presiding arbitrator about whom there could be justifiable doubts as to independence and impartiality.  The ICDR’s automatic appointment practice means that the Claimant in these circumstances might have an array of unattractive options: (i) forego any challenge, (ii) avoid making any request for additional disclosures by the arbitrator, despite a possibly perceived need for additional information, and limit the basis for the challenge to the disclosures initially made, so that the ICDR need not transmit a communication to the arbitrator that would indicate a challenge has been made, and so the challenge process might run its course before the appointment of the presiding arbitrator, (iii) proceed with the case before the Tribunal as constituted until the challenge is resolved, even though the challenged member would know, from having received a request for additional disclosures, that a party is concerned about his or her relationships that might give rise to justifiable doubts, and even though it is likely that the affected arbitrator might share these facts with the other members of the Tribunal, or (iv) ask the Tribunal to stay proceedings until the challenge is resolved, thereby making a disclosure to the full Tribunal that a challenge has been lodged, which unless accompanied by an explanation of the basis for the challenge might reflect negatively on the challenging party and its counsel in the eyes of the Tribunal (or at least the challenging party and its counsel would be concerned that this would be the case).  This unsatisfactory array of options would not arise if the Tribunal were not deemed constituted until a challenge if any based on initial disclosures is resolved.

The potential partisanship of party-appointed arbitrators has been usefully addressed in the ICDR by having an institutional preference for use of a list procedure. When arbitrators are selected from an ICDR-provided list, the chances that either party would suspect bias based on an arbitrator’s initial disclosures are small. And it is understandable that the ICDR would view its procedures for formalizing the appointment of arbitrators in light of the relative infrequency of challenges to list-based appointees resulting from initial disclosures. But there will always be at least a small universe of AAA international cases in which the parties agree to have party-appointed arbitrators. And for so long as the notion of an independent and impartial party-appointed arbitrator remains alive, some parties will strive to appoint arbitrators who have the maximum predisposition toward the appointing side, and they will hope for a minimum of disclosure by the appointee of the foundations for such predisposition.

Rules that provide for confirmation of arbitrator nominees by the institution after an interval for party comments and internal review by the institution have at least two virtues that the ICDR automatic appointment process lacks.  One virtue is that the institution may more effectively enforce its own standards of independence and impartiality and related criteria for arbitrator disclosure. (And in this respect it is significant that the AAA and ICDR espouse a scope of arbitrator disclosure that is considerably broader than what is indicated by the guidance found in the color-code lists of the IBA Conflict Rules). Another virtue of the nomination-then-confirmation sequence follows from the first: when there is a delay in the confirmation, or the institution requests further disclosures by the arbitrator, it is possible that the institution is enforcing its own criteria, and it is not necessarily the case that the non-appointing party has raised a challenge.  This ambiguity serves the useful purpose of leaving the affected arbitrator-nominee in doubt about whether confirmation delay or a request for supplemental disclosure was initiated by the non-nominating party or by the institution itself.

I suggest that there is room for administrative discretion in application of the current AAA International and Commercial Rules to provide for a pre-appointment interval in all cases or in cases of party appointments. The matter might also usefully be addressed by rule amendment in the process of revising the AAA International Rules, a process said to be in its late stages at this writing. (Readers who concur in the position might register their views with the ICDR).

Do Rule 45 Amendments Impact The Arbitral Subpoena Power?

Certain amendments to Rule 45 of the Federal Rules of Civil Procedure became effective December 1, 2013. This is the Rule governing all aspects of obtaining evidence from non-parties by subpoena in federal civil proceedings.  The amendments have potential relevance to arbitral practice for arbitrations that have their seat in the United States, as Section 7 of the Federal Arbitration Act (”FAA”) in certain respects equates arbitral subpoena power with judicial subpoena power, and in certain respects equates judicial power to compel compliance or punish non-compliance with an arbitral subpoena with the court’s powers in regard to judicial subpoenas. Most important for the present discussion, Rule 45(b)(2) has been amended to provide that a subpoena may be served anywhere in the United States, whereas before December 1, 2013 the subpoena could only be served within the judicial district of the issuing court, or within 100 miles of the courthouse of the issuing court, or statewide where the judicial district was within a state that provided for statewide service of process.

I consider here the implications of nationwide service of process for a subpoena issued by an arbitral tribunal to a witness located at a considerable distance from the seat of the arbitration.

If the witness does not indicate willingness to comply, the arbitral summons served in a far-flung corner of the country with the benefit of the new Rule 45 provision for nationwide service of process may need to enforced by the local federal court in the judicial district where the arbitrators are sitting. Section 7 states: “[T]he United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.”

The new statutory authorization for nationwide service of process clears one procedural hurdle to such enforcement: that there must be statutory authorization for the service of process as a precondition to personal jurisdiction. That was a problem under FAA Section 7 before the recent Rule 45 amendment, as we know from a Second Circuit decision, Dynegy Midstream Services, LP v. Trammochem, 451 F.3d 89 (2d Cir. 2006).  In Dynegy, an Arbitral Tribunal sitting in New York issued a subpoena to a Houston witness calling for the appearance of the witness at a hearing in Houston. When the witness failed to appear, a motion to compel compliance was made in the Southern District of New York, the motion was granted, and the Houston witness appealed on grounds that the New York federal district court lacked personal jurisdiction. The Second Circuit agreed, holding that personal jurisdiction over the Houston witness could not exist because FAA Section 7 in conformity with Rule 45 did not authorize a New York-based arbitral tribunal summons to be validly served on a Houston witness, just as Rule 45 would not allow a Southern District of New York trial subpoena to be validly served in Houston on a Houston witness.

A similar outcome occurred in Legion Insurance Co. v. John Hancock Mutual Life Insurance Co., 33 Fed. Appx. 26, 2002 WL 537652 (3d Cir. April 11, 2002). There, the Third Circuit held that the federal district court in the Eastern District of Pennsylvania did not have power to enforce a subpoena, issued by an arbitral tribunal sitting in Philadelphia, directed to a nonparty witness located in Florida, which required the witness to appear for deposition in Florida and to bring with him certain documents and papers. The Court relied on the language in Section 7 that arbitration subpoenas “shall be served in the same manner as subpoenas to appear and testify before the court,” stated that Rule 45 “governs the service of arbitration subpoenas,” proceeded to quote Rule 45(b)(2), and held: “In light of the territorial limits imposed by Rule 45 upon the service of subpoenas, we conclude that the District Court did not commit error in denying John Hancock’s motion to enforce the arbitration subpoena….”

Rule 45 (b) (2) as amended to permit nationwide service of a judicial subpoena, and by extension nationwide service of an arbitral summons to a non-party witness, solves the problem found to exist in Dynegy and in Legion Insurance. But this does not mean that the federal district court at the seat of the arbitration will always have personal jurisdiction over a witness upon whom valid personal service of the arbitral summons has been made. Statutory authorization for nationwide service of process is a necessary step to establish personal jurisdiction, but there is one more step: personal jurisdiction must comport with due process under the US Constitution. See Licci v. Lebanese Canadian Bank, 673 F.3d 50, 60 (2d Cir. 2012).

Assuming no constitutional obstacle to jurisdiction, the urgent new question presented in regard to enforcement of an arbitral witness summons is this: Do Rule 45’s geographic limitations on the places where witness compliance with a judicial trial or hearing subpoena may be required apply to the arbitral summons?  Amended Rule 45 does not fundamentally change the Rule’s geographic boundaries for the place of compliance, but merely consolidates them in amended Rule 45(c).  Rule 45(c)(1) now provides that “A subpoena may command a person to attend a trial, hearing, or deposition only as follows: (A) within 100 miles of where the person resides, is employed, or regularly transacts business in person; or (B) within the state where the person resides, is employed, or regularly transacts business in person, if the person (i) is a party or a party’s officer; or (ii) is commanded to attend a trial and would not incur substantial expense.”

Until now, there has been no occasion for federal courts to consider whether Rule 45’s geographical limits on the place of compliance with a subpoena calling for the testimonial appearance of the witness apply to an arbitrator’s summons to appear and testify. As illustrated by the Dynegy and Legion Insurance cases, before the December 1, 2013 amendment, Rule 45’s territorial limitation on service of process answered the place-of-compliance question. But now that an arbitral summons, like a federal subpoena, may be served nationwide, the question is squarely presented whether there are territorial limits on where a witness served with an arbitral subpoena may be required to appear to give evidence in the arbitration.

The question does not seem to be answerable from the text of Section 7 alone. There is no mention in Section 7 of the place of compliance with an arbitral subpoena. But the final sentence of Section 7 does refer to the judicial enforcement power with respect to arbitral subpoenas, and states in part that a district court in the district where the arbitrators are sitting “may compel the attendance of such person or persons before said arbitrator or arbitrators … in the same manner provided by law for securing the attendance of witnesses … in the courts of the United States.” (I have removed, by ellipsis, the interspersed sections of the same sentence that deal with the power of the court to punish noncompliance with an arbitral subpoena by contempt.  The grammatical structure of the sentence and its punctuation are obstacles rather than guideposts to discernment of its meaning). This text is inconclusive. It might be strictly construed to refer only to the modalities of judicial compulsion. But it is also plausible to interpret this text broadly, i.e. to equate “in the same manner” with “in the same circumstances,” and thus to find that an order compelling compliance with an arbitral subpoena is available only in regard to an arbitral subpoena that respects the geographic limitations of Rule 45(c)(1).

This broader interpretation, which would maintain the territorial limits on an arbitral subpoena that have existed until now, fits well with the objectives of the FAA, and with the balance struck in the text of Section 7 between the search for truth in arbitration and privacy interests of non-parties.  The primary purpose of the FAA was to ensure enforcement of pre-dispute arbitration clauses. But the impetus to enforce those agreements, as the Supreme Court has stated, was that arbitration offered the prospect of more “streamlined proceedings” than were generally possible in the courts. Limits on the participation of non-parties, and upon the expense and burden associated with their participation — like limits on discovery, and like limits on the scope of judicial review of arbitral awards — fit with the notion of arbitration as a streamlined method to resolve disputes. It would undermine these values if, as an accidental by-product of the Rule 45 amendments, Section 7 were now understood to eliminate territorial limitations on the obligation of non-parties to comply with an arbitral subpoena. Moreover in the absence of any new expression of Congressional intent with respect to the impact of the Rule 45 amendments on arbitral subpoena practice under FAA Section 7, it would seem imprudent to find any fundamental change in the scope of the arbitral subpoena power based on a revision of Rule 45 that evolved — from the federal Judicial Conference, to formal issuance by the U.S. Supreme Court — essentially without reference to any impact on arbitration.

But this cautious approach need not mean that arbitral tribunals and courts asked to enforce or quash arbitral subpoenas must apply Section 7 without reference to the conveniences afforded by 21st century technology. Suppose that an arbitral tribunal sitting in New York does wish to hear from an unwilling nonparty witness residing in Seattle. Suppose the Tribunal issues a subpoena that calls for the witness to appear and give testimony by video conference at the offices of a Seattle law firm or in the Seattle regional office of the AAA, with a video link to a New York location where the arbitrators, or at least one of them, will be present. A judge in the Southern District of New York should have personal jurisdiction over the witness in a subpoena enforcement proceeding unless there is a constitutional due process obstacle. That judge should also find no offense to Rule 45 (c)’s explicit territorial limitations and their implicit arbitral application through FAA Section 7: the witness “attends” the proceeding in Seattle upon the command of the subpoena, and neither Rule 45 nor FAA Section 7 imposes any requirement that the arbitrator appear in the physical presence of the witness. While application of FAA Section 7 requires reference to Rule 45, it does not require reference to Rule 43, which expresses the judicial preference for testimony in open court but provides that “for good cause in compelling circumstances and with appropriate safeguards, the court may permit testimony in open court by contemporaneous transmission from a different location.” This language was added to Rule 43 in 1996, and prior to that time if a non-party witness could only “attend” a trial or hearing more than 100 miles from his residence or workplace by traveling to the physical location of the hearing, it was by virtue of Rule 43, not Rule 45.  Thus, arbitral tribunals should be able to avail themselves of the new Rule 45 provision for nationwide service of process to obtain evidence from a distant non-party, without imposing travel burdens on themselves or the witness and without deciding that there has been any change in Section 7’s limitations on the territorial boundaries of the place of compliance with an arbitral subpoena.

The Duty to Disclose Friendship

Little actual intelligence is available about the decisions of arbitral institutions on challenges to arbitrators. Arbitral institutions tend not to elaborate their procedures for ruling on challenges in their Rules or their publications. And the great majority of the more prominent institutions, probably accounting for a majority of international commercial arbitrations by volume of commerce if not sheer number of cases, do not issue reasoned decisions on challenges and do not publish summaries of their decisions for consumption by practitioners. These features of the arbitration landscape regularly draw criticism, but attract little reform.  The London Court of International Arbitration has been a pioneer; it has for many years issued reasoned decisions on challenges, and has published digests of those decisions for the period 1996 to 2010 (Arbitration International, Vol.  27, No. 3, 2011). A project has been afoot recently to create a database of decisions on arbitrator challenges. (See James H. Carter, Reaching Consensus on Arbitrator Conflicts: The Way Forward, Dispute Resolution International, Vol. 6, No. 1 at p 17 (2012)).

One limitation on the reliability of information in such a database would be that arbitral institutions rather than the counsel or arbitrators involved in a challenge would be the primary sources of information. Where a challenge has been unsuccessful, and the case proceeds, the challenge process is itself a confidential aspect of the proceedings (by custom if not by rule or by law) and neither counsel nor the arbitrators will be inclined to expose to one another their impressions of the matter while the case or any post-award litigation remains open. But the successful challenge stands in a somewhat different posture, at least for the rejected arbitrator who takes no part in the proceedings. Perhaps the larger portion of such successful challenges occur when the parties discover a matter that the arbitrator has failed to disclose. In such cases we would not expect to see public commentary by the arbitrator for the obvious reasons. But on those occasions when the successful challenge is based on a matter that the challenged arbitrator did disclose, completely and candidly, the arbitrator will not inevitably have a self-protective reason to keep the matter out of public view.

Today I report on such a case. All names, except my own, are omitted. But to escape the awkwardness of using the first person pronoun, your Commentator herein assumes the mantle “Arbitrator X.”

Arbitrator X was nominated as a co-arbitrator by the Respondent, in an international case administered by a major arbitral institution (having its seat outside the U.S.) under its rules. The seat of the arbitration was within the United States, and the law governing the contract was the law of an American state. Claimant was an American company represented by American counsel.

Arbitrator X made the following initial disclosures concerning his relationship with an attorney who was acting as co-counsel for the Respondent: (1) that they had been acquainted professionally for about ten years through an international bar association of which both were members, and in which they had functioned collaboratively in leadership roles on one of that bar association’s committees, (2) that during that ten year span they had had lunch or dinner when visiting the other’s home city on perhaps six to eight occasions, of which three were dinner engagements that also included the spouse of one or the life partner of the other,  (3) that in 2010, Arbitrator X upon the invitation of another professional acquaintance in the home city of the counsel in question, had joined a group of approximately ten lawyers and businessmen, collectors and aficionados of fine wines, including the counsel in question, who gathered in a restaurant for wine-tasting dinners four times per year, and (4) that Arbitrator X and the counsel in question were regular attendees at these dinners.

After the institution had issued its unreasoned decision accepting the challenge and refusing to confirm the nomination, Arbitrator X had occasion to review the decision with a number of thoughtful observers. One remark made or confirmed by a number of persons was that experienced European arbitrators would not have made the disclosures of social contact with Respondent’s counsel that were made in this instance by Arbitrator X.

If indeed that is the case, then one question for examination is why arbitrators from Europe would view as inconsequential a degree of social contact between the nominating counsel and the party-appointed arbitrator that an American arbitrator considered appropriate to disclose and that the institution considered sufficient to deny Respondent its first choice of an arbitrator.  Perhaps European arbitrators more pervasively than their American colleagues believe that their duty to act impartially even where they have some degree of personal affinity with the appointing counsel is so fundamental that it would be unjustifiable for the other party to have any doubts about the arbitrator’s impartiality .  Perhaps American arbitrators remain strongly influenced by the legacy of explicitly biased party-appointed arbitrators in domestic commercial arbitration prior to the 2004 amendments to the ABA-AAA Code of Ethics for Arbitrators, and perhaps it is that legacy that impels them to make fulsome disclosures so that the parties may be more fully satisfied that arbitrator conduct is not influenced by undisclosed bias.

A related question is why American arbitrators might find inadequate, as a guide to disclosure in such circumstances, the relevant guideline in the IBA Rules on Conflicts of Interest in International Arbitration. In the IBA Orange List, disclosure is required, and justifiable doubts about an arbitrator’s impartiality may possibly be found t0 exist, if a “close personal friendship” exists between the arbitrator and counsel, “as demonstrated by the fact that they regularly spend considerable time together unrelated to professional work commitments or the activities of professional associations or social organizations.” (Guideline 3.36).

Arbitrator X might well have been persuaded that these circumstances were outside Guideline 3.36.  In regard to the oenophile dinners mentioned in the disclosure, even a one-on-one dinner four times per year for a total of 10 hours spent together per year is arguably not what the Guideline means by “considerable time.”  And if the time were spent substantially by one international arbitration lawyer catching up with another about developments in their respective practices, and each hopes that the relationship will lead to professional opportunities, how could this be “unrelated to professional work commitments”? As the gatherings were in fact group dinners for ten, the contact between Arbitrator X and counsel, when both attended, was generally much more diluted than what Guideline 3.36 seems to mean by time spent “together.”

But there were good reasons to regard Guideline 3.36 as inadequate to decide whether disclosure was required. Time spent together is unlikely to be a reliable indicator of whether a friendship is “close” or “personal” in the wide professional circle of an international arbitrator. The friends one considers “close” and “personal” may live so far away, or have such busy and complicated lives, that regular visits are not even possible. And yet such friendships may be “close” and “personal” as evidenced by the fact that there are exchanges on a daily basis of e-mails or text messages about their families, pets, spouses, ex-spouses, recently attended concerts and sporting events, holiday celebrations, etc.

Arbitrator X did not have such a relationship with the counsel in question. If he did, he would have turned down the appointment. But if there was no such relationship, and IBA Guideline 3.36 did not fit, what was the rationale for disclosure? The answer, I believe, is that personal affinity, sympathy, and affection are derivatives of exposure. It is logical to believe that such feelings may intensify with frequency of exposure, and so it makes sense for arbitrators to make disclosure of the nature and frequency of their exposure to an appointing counsel when the exposure has been more than occasional and random. Such exposure can be objectively quantified and reported, whereas it is more difficult to provide subjective assessments of  the arbitrator’s feelings toward an appointing counsel. Disclosure of the frequency of contact permits counsel to inquire further if they care to do so, and allows the arbitrator to avoid the negative inferences that could arise if the frequency of contact were later discovered rather than initially disclosed.

But what about the institution’s decision to accept the challenge and reject Arbitrator X? The institution did not seek any additional facts about the relationship, from Arbitrator X or the counsel in question. The disclosure itself was the entire factual record for the challenge. If the regular contact between arbitrator and counsel had instead occurred at monthly lunches of the New York International Arbitration Club, is it fair to assume that the challenge would have been rejected, irrespective of the content of their communications on those occasions? If the arbitrator and counsel had been fellow members of the Board of Trustees of a non-profit organization, seeing one another regularly at Board meetings and fund-raisers for the organization, would the result have been different? And is it in fact the unstated position of the institution (at least in regard to pre-appointment challenges) to treat the hybrid social/business context of the regular contact between counsel and arbitrator as a proxy for the closeness of their personal relationship, in substantial part because the institution prefers not to invest the resources needed to develop the relevant facts further, but instead prefers to invite the affected party to make another nomination? That could be a defensible position for the institution to adopt — if indeed that is the position, and if it were adopted explicitly so that arbitrators and counsel might make more informed assessments of the risks attendant upon social contact with professional colleagues, and their obligations to disclose such contact.

I submit that this case illustrates several shortcomings in the disclosure and challenge system. One, certainly, is that the IBA Guidelines while enormously useful threaten to function as a Code of Conduct for arbitrators who prefer not to analyze disclosure issues thoroughly and/or prefer to avoid disclosure where it is avoidable. Another is that institutions, while quite properly setting their own standards for what might be viewed as justifiable doubts about impartiality, do a disservice to their own credibility by issuing unreasoned decisions and delaying if not avoiding entirely the publication of summaries of decision or explanatory notes. The consequence is that challenge decisions lack predictive value from one case to the next, may appear to be arbitrary, and leave counsel and arbitrators to speculate (as has been done here) about the reasons a particular position was adopted in a particular case.

Getting Ready for the Big Game: A BG Group Preview

All over Arbitrationland, workers are coming off their shifts, feeding their children, walking their dogs, donning their Team Colors — making all final preparations for the Big Game, BG Group v Argentina, to be played December 2 at 10:00 a.m. US East Coast Time, at a neutral venue near Union Station in Washington, D.C. Rabid fans are clamoring for invitations to the best BG Case parties. Party hosts are stocking up on Beef Empanadas and Guinness.

Argentina has been on a bit of a winning streak in this long-standing rivalry, masterfully running the First Option(s) offense* with Kaplan, its star player, leading the way. (*Devotees of American football will know the “Read Option” offensive scheme, wherein the quarterback rebuts the presumption that running backs run and quarterbacks hand-off, by clearly and unmistakably doing just the opposite, after just enough fakery to convince defenders that the presumption will dictate the play). But many analysts say the First Option(s) scheme will falter in a game at this level. They say the presumption that courts not arbitrators decide whether an agreement to arbitrate a particular dispute exists doesn’t apply in the ITL (Investment Treaty League) and that the First Option(s) scheme reliably puts points on the scoreboard only in the CAL (Commercial Arbitration League). After all, the pundits tell us, the question of who decides (court or arbitrator) whether a pre-condition for arbitral proceedings has been fulfilled (or is impossible to perform, or is rendered inoperative) is not so arcane that treaty parties would likely not have thought about it when negotiating their BIT, and their thoughts on the subject likely were: (1) that Treaty interpretation issues are suited for Treaty law experts, i.e. Arbitrators; (2) on the UK side, that the issue shouldn’t be resolved in a possibly-biased Argentine court (Argentina being, in this deal, the presumed capital importer and risk exporter); and (3) on both sides, that the issue should not be resolved in a court at the seat of arbitration, since in the UNCITRAL Rules arbitration scenario the identity of that court is, at the Treaty-signing stage, a mystery, and will only be known once the arbitral tribunal (barring party agreement) in a given case selects the seat. It seems bizarre, the thinking goes, that either party would have expected either an initial arbitrability decision or a de novo review of the arbitral arbitrability decision in the courts of an unforeseeable State (which here turned out to be the US) in which neither party is domiciled. Besides, don’t the UNCITRAL Rules assign arbitrators power to decide issues of jurisdiction? And given that those issues involve international law and treaty interpretation, not state (in the sense of the US 50) contract law, isn’t that assignment on par with assignment of the merits to the arbitrators, in terms of the scope of judicial review?

So goes, in significant part, BG Group’s arguably formidable defense to Argentina’s First Option(s) scheme. But do not think that BG lacks firepower on offense. Its multi-talented quarterback, Howsam, could be a compelling performer in the December 2 showdown, perhaps reprising a play that scored points on this field in 2002:

“[F]or the law to assume an expectation [of the parties, about whether the court or arbitrator has primacy] that aligns (1) decisionmaker with (2) comparative expertise, will help better to secure a fair and expeditious resolution of the underlying controversy - a goal of arbitration systems and judicial systems alike.” 537 U.S. 79 at 85.

This may be the under-considered aspect of Howsam’s game that ultimately wins for BG. We can also expect BG Group to contest Argentina’s contention (given some credence by the amicus position of the US) that fulfillment of the Argentine litigation pre-condition is a matter of “consent” and that issues of “consent” involve a “substantive arbitrability” issue, for a court to decide de novo, of whether an agreement to arbitrate was formed. (The US amicus suggests a remand for the D.C. Circuit to address whether the litigation pre-condition in the BIT is or is not a matter of “consent” to arbitration). Expect BG Group to urge that every pre-condition to an arbitration involves “consent,” and if this were the measure of whether court or arbitrator decides, then players like Howsam and John Wiley (a BG Group stalwart from the early ’60s) are obsolete legends. After all, whether a time limit has passed (Howsam) or a grievance process has been completed (John Wiley) — matters held to be for arbitral determination — are equally matters of “consent” to arbitration.  Look for BG Group to say Argentina’s position on “consent” is only superficially plausible, and that this plausibility derives from the fact that the pre-condition here requires litigation and that generally (but not in this BIT) an agreement to litigate implies a refusal to arbitrate. Look for BG Group to counter that in fact the litigation pre-condition in this  BIT might as well be that the dispute shall be submitted to an association of French Michelin three-star chefs for 18 months, i.e. that it is more about the timing of arbitration than the willingness of Argentina to undertake it. That position has some appeal, but it may not be a clear winner, because placing this pre-condition on the “procedural” side of the boundary between “substantive” and “procedural” arbitrability does not especially help courts to solve future boundary disputes.  The “comparative expertise” principle of Howsam has more resonance, as it can furnish a convincing basis in existing precedent for different treatment in the US courts of investment arbitration as compared to commercial arbitration. That play ought to be the winner on December 2.

Arbitration Commentaries’ fearless forecast: BG Group 9, Argentina Nil. Enjoy the Game. And go easy on the Guinness.

Judicial Attention to the Powers of Emergency Arbitrators

Is emergency arbitral relief granted by an emergency arbitrator inherently provisional, and therefore not final, and therefore beyond the powers of the emergency arbitrator insofar as the relief ordered would require a party to do something with irreversible consequences, and, finally, not capable of judicial recognition as an Award because of its necessarily provisional nature, being subject to modification by the regular arbitral tribunal in due course? This week’s answers are no, no, no, and no. (Yahoo!, Inc. v. Microsoft Corp., 2013 WL 5708604 (S.D.N.Y. Oct. 21, 2013)).  But tune in again next week. The case will be argued in the U.S. Second Circuit Court of Appeals on November 6.

Yahoo and Microsoft made a deal, to combine search engines and migrate Yahoo’s search engine advertising business to Microsoft’s Bing, all in the interest of competing more effectively with Google.  The parties agreed to arbitrate and opted into the AAA’s then-optional Emergency Arbitration rules (now incorporated into the AAA Commercial Arbitration Rules, and binding with regard to disputes arising from arbitration agreements made after October 1, 2013). In their arbitration clause, the parties agreed “that the [emergency] arbitrator is authorized to compel and award interim injunctive or emergency relief,” and further provided that “the [emergency] arbitrator… may compel and award specific performance.”

Yahoo after substantially performing the migration in most markets paused the migration effort in two important Asian markets and Microsoft, concerned that Yahoo was repudiating the unperformed remainder of the deal, commenced Emergency Arbitration.   A renowned arbitrator was appointed by the AAA; volumes of evidence and written argument were presented; two days of intensive oral hearings were conducted; and the following week the Emergency Arbitrator made an Award. He found that there was urgency, amounting to “emergency” as that term was used in the agreement of the parties, for Yahoo to complete the migration. His Award directed Yahoo to complete the migration, promptly.

In this decision the district court denied Yahoo’s motion to vacate, and rejected Yahoo’s argument that the contract phrase “interim injunctive or emergency relief” confined the emergency arbitrator’s powers to relief that was temporary in nature. One can perhaps see the argument that “emergency relief” was intended to be a narrower subset of “interim injunctive relief.” One can also perhaps see the argument that the term “interim” in the grammatical structure of the phrase modified both “injunctive” relief and “emergency relief.”  But the Emergency Arbitrator did not accept these arguments, especially in the context of an agreement that, in the next sentence, granted the Emergency Arbitrator power to order specific performance. The Emergency Arbitrator made a not nonsensical construction of the arbitration agreement.  That was sufficient for this district judge to conclude that, under governing Second Circuit law, the Emergency Arbitrator acted with his powers.

Is there something special here that might motivate the Second Circuit to see a need to clarify or modify existing law, or even reverse the judgment of the District Court?  In the Arbitration Commentaries crystal ball, this is not foreseen. Be prepared for a disposition by Summary Order affirming the judgment. (Caveat: The record on appeal is under seal. Your commentator cannot study it).

But if the mood does strike this Second Circuit panel, it might be tempted to nibble at the heels of one of its often-cited cases on deference to arbitral decisions about the scope of arbitral power: T. Co. Metals v. Dempsey Pipe & Supply, Inc., 592 F.3d 329 (2d Cir. 2010).  In that case the arbitrator was asked to correct a “clerical error” in his Final Award under the AAA International Rule allowing such corrections. But the error involved was not clerical; rather the arbitrator had misinterpreted data in certain exhibits, and concluded that he could invoke the clerical error rule to revisit a subjective judgment affecting damages that initially had been based not only on the mis-interpreted data but also on several other items of evidence that the arbitrator had correctly understood. Might the Second Circuit, after Stolt-Nielsen, ­have Second Thoughts about this aspect of Dempsey Pipe­ and conclude that when an arbitrator does not interpret an AAA Rule but revises it (in this instance, to allow correction of non-clerical judgmental errors) he or she applies his or her own notions of good arbitration practice rather than the terms of the parties’ agreement, and thereby exceeds his or her powers? ­

[The author of Arbitration Commentaries, a dedicated full-discloser, discloses that he was counsel for the defeated appellee in Dempsey Pipe, and still seeks vindication.]

Consumer Arbitration Unconscionability Trumps FAA Pre-Emption in Ninth Circuit Once Again

A California grocery chain, presumably emboldened by Supreme Court decisions that appeared to sustain corporate arbitration policies used to stifle consumer and employee class actions, took a gamble and, at least in the U.S. Ninth Circuit Court of Appeals, lost. This grocer fashioned an arbitration policy, imposed on applicants for employment as a condition for receiving their applications, that: (1) ensured that when an employee demanded arbitration, the grocer would pick the sole arbitrator, and (2) required the arbitrator to obtain advance deposits in equal shares from employee and employer at the start of the arbitration, with no prospect of reapportionment based on outcome.  A federal district judge in Los Angeles held this policy was unconscionable under California law, and that the Federal Arbitration Act did not pre-empt that California law, and denied the grocer’s motion to compel arbitration, thereby allowing a class action for California Labor Code violations to proceed. A unanimous panel of the Ninth Circuit has affirmed. Chevarria v. Ralphs Grocery Stores, 2013 WL 5779332 (9th Cir. Oct. 28, 2013).

Having in mind that the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011) reversed a Ninth Circuit panel decision that had applied California unconscionability principles to deny enforcement of an arbitration agreement that required individual rather than class proceedings, a natural point of departure for considering Ralphs Grocery is a brief revisitation of Concepcion. The five-justice Supreme Court majority in Concepcion (the Court’s conservative bloc) was troubled by the perceived behavioral tendency of the so-called “Discover Bank Rule” (that deemed unconscionable arbitration agreements whose tendency was exculpate corporate misconduct against consumers by making small claims not worth pursuing) : in the majority’s view, corporations that did not draft their consumer agreements to allow class-wide arbitration would bear the risk that they could not require consumers to arbitrate, making the Discover Bank Rule an anti-arbitration rule.  The Rule was deemed to “stand in the way of the accomplishment of the FAA’s objectives” because one of those objectives was “to facilitate streamlined proceedings.” 131 S.Ct. at 1748. That was and remains a very debatable perspective on the FAA.  The Ninth Circuit in Ralphs Grocery does not challenge that premise of Concepcion, but in effect embraces it.   No conceivable objective of the FAA is obstructed, the Ninth Circuit tells us, by an unconscionability rule that prohibits enforcement of an arbitration agreement designed to prevent employees from arbitrating with employers, and designed to ensure that the employer wins if the employee does arbitrate. Thus, says the Ninth Circuit panel: “Federal law favoring arbitration is not a license to tilt the arbitration process in favor of the party with more bargaining power.  California law regarding unconscionable contracts, as applied in this case, is not unfavorable towards arbitration, but instead reflects a generally applicable policy against abuses of bargaining power.” 2013 WL 5779332 at *9. The Ninth Circuit also did not see the Supreme Court’s recent American Express decision as an obstacle. The arbitration policy at issue here imposed prohibitive costs upon consumers as a condition of filing an arbitration demand — requiring the employee to advance half the cost of the arbitrator’s expected fees without prospect of reapportionment after the result– whereas the costs involved in American Express were expert costs for proving a claim not for initiating the claim.

The Supreme Court of the United States might well send a message to corporate drafters of consumer arbitration clauses by denying certiorari in the Ralphs Grocery case. The Court’s temptation to dodge this case may prove irresistible, because to decide the case would conceivably require the Court to develop a new dimension of pre-emption analysis — i.e. whether the FAA applies at all to an adhesive employment agreement that requires an employee to abide by whatever arbitration policy if any that employer may impose from time to time. The best view of Ralphs Grocery may well be that no agreement to arbitrate was present because the agreement permitted the employer at any time to modify the arbitration policy or eliminate it entirely. The only agreement made by the employee was submit to the unilateral whim of the employer as it might be exerted from time to time. Within existing pre-emption doctrine, one could readily see the Supreme Court holding that this application of California unconscionability law has a disproportionate impact “on arbitration.” But the impact is, in practical terms, not upon a bilateral arbitration agreement but a unilateral employer-imposed term and condition of the application for employment. The FAA should not apply to such “arbitration,” and so pre-emption should not be an issue. It is considerably less difficult for the Supreme Court to embrace that view sub silentio by denying certiorari, than by granting certiorari and taking that bold a step in doctrine expressly.