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arbitrations by volume of commerce if not sheer number of cases, do not issue reasoned decisions on challenges and do not publish summaries of their decisions for consumption by practitioners.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.

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us

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.

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us

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.]

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us

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.

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us

The pro-arbitration foreign anti-suit injunction is not mentioned in the text of the New York Convention or the U.S. Arbitration Act (FAA). But its importance to the enforcement of agreements to arbitrate transnational disputes is considerable. To be reminded of this, read a recent New York federal district court decision granting such an injunction: Bailey Shipping Ltd. v. American Bureau of Shipping, 2013 WL 5312540 (S.D.N.Y. Sept. 23, 2013). Or continue reading this Commentary.

A definitional note is a useful place to begin. This brand of injunction is “pro-arbitration” because it is granted to protect the jurisdiction of the arbitral tribunal over a dispute that has been lodged with such a tribunal, or that the court has required to be so lodged. It is “foreign anti-suit” because its purpose is to coerce the plaintiff in a pending foreign litigation, who is required to arbitrate, to cease and desist from its prosecution.

Bailey Shipping is such a case. The enjoined party here was was the plaintiff, a sea freight agent that rented cargo space on Greek-flag ships for its customers, and relied on certifications of seaworthiness given by a Greek inspector. Denying any duty to arbitrate, plaintiff — seeking to shift a cargo damage loss — brought suit in a Greek court on several theories including negligent misrepresentation, violation of certain international treaties, and a Greek consumer protection law. Plaintiff then commenced the U.S. federal action to enjoin defendant from pursuing arbitration of any of these claims, and defendant cross-moved to compel arbitration. The latter motion was granted early on, setting the stage for the dispute over whether Plaintiff should be enjoined from pursuing the Greek lawsuit.

Here in the U.S. Second Circuit (the appellate judicial district embracing New York), when attention turns to foreign anti-suit injunctions, the judges turn to a leading Second Circuit case, known in shorthand as China Trade (China Trade & Dev. Corp. v. M.V. Choong Yong, 837 F.2d 33 (2d Cir.1987)). That case provides a multi-factor equation for solving anti-suit injunction issues, and usually the focus is on “comity” — balancing an important U.S. policy served by the U.S. litigation with the sovereign interests of the foreign forum. Usually the dueling lawsuits are essentially in lockstep: the parties are the same and the claims are the same, so the focus shifts quickly to “comity.” But here in Bailey Shipping only one of the several Greek litigation causes of action had been held to be arbitrable — the negligent misrepresentation claim –  and so the scope of the anti-suit injunction turned on whether and to what extent the arbitral award would be dispositive of the Greek litigation.

The remarkably difficult issue presented by this case was whether the U.S. Action (more precisely, the arbitration compelled by the Court in the U.S. Action) would be “dispositive” of the Greek Action. Claimant/Plaintiff, evidently keen on resisting arbitration or at least exerting maximum pressure by fighting a two- front battle in a foreign court and in arbitration, did what claimant will predictably do: fathom causes of action under foreign law that can be said to arise from a source other than the contract containing the arbitration agreement. In this case, the clearly arbitrable cause of action was for negligent misrepresentation. This was based on the defendant’s duty to certify the seaworthiness of the vessel, and the Plaintiff/Claimant’s allegation that the certification had been negligently made (leading to reliance on the certification, and leading ultimately to cargo damage in an accident involving the allegedly unseaworthy vessel). But in the Greek court litigation the Plaintiff also asserted causes of action for alleged violations of Greek consumer protection laws and certain international treaties.

This District Court judge, having no specific federal appellate guidance, adopted a functional approach, seeking to determine which elements of the causes of action pleaded in the Greek Action would necessarily be determined by the arbitral tribunal when it would eventually decide the negligent misrepresentation claim.  The Court did not dwell on the theme of the pro-arbitration “policy” in federal arbitration jurisprudence, but in this approach it was evident that the Court was striving to protect the exclusivity of the arbitrators’ jurisdiction over factual issues involved in the misrepresentation claim. The consequence of the Court’s functional analysis in this case was that prosecution of the treaty-based causes of action in the Greek litigation was enjoined, as those causes of action embraced essentially the same legal and factual elements as the arbitrable negligence claim — the existence and breach of a duty to act with reasonable care and diligence in providing a certification of the seaworthiness of the ship. But the cause of action under the Greek consumer protection law, found to be essentially a strict liability statute dependent only on the falsity of the statement and the status of the claimant as a “consumer,” was held to be in a different category. Whereas the arbitral tribunal would not have occasion to address the status issues involved in consumer protection claim, the arbitration was deemed not dispositive of that claim, and its prosecution was not enjoined.

Given the shortage of definitive appellate guidance, this painstaking District Court decision is likely to be an important reference point in future pro-arbitration anti-suit injunction litigation. We may also expect to see heightened complexity in such disputes, with conflicting expert opinions on foreign law submitted to persuade the U.S. court concerning the essential elements of foreign law causes of action in a foreign court. We may also look forward to such issues arising before arbitral tribunal, with the tribunal invited to issue its own anti-suit injunction as a provisional measure in the form of a partial final award that could be immediately confirmed by a court (perhaps indeed the court in which the foreign litigation is pending). Thus it is a good thing for U.S. and non-U.S. arbitrators who sit on U.S.-seated tribunals to be familiar with the China Trade anti-suit injunction jurisprudence.

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us

The denunciation in early 2012 of the ICSID Convention by the Venezuelan government of the late Hugo Chavez left some US energy sector investors unaffected, as Venezuela had never seen fit to make a bilateral investment treaty with the United States that would have enable US investors to access ICSID arbitration via a US BIT. And in the absence of an investment treaty to channel disputes into arbitral tribunals, it was predictable that the nationalist economic policies of the Chavez government would attract some afflicted investors to try their luck bringing suits against Venezuela in US federal courts. For those of us who enjoy, as players and spectators, international law as it is applied in US courts, perhaps we can look forward to a new golden era of jurisprudential development in the courts. A case in point: the recent decision of a US District Court in Washington in Helmerich & Payne Int’l Drilling Co. v. Bolivarian Republic of Venezuela, 2013 WL 5290126 (D.D.C. Sept. 20, 2013).

From this decision we gain some helpful development of a handful of international law concepts, most notably the “direct effect in the United States” needed to invoke jurisdiction under the commercial activity exception in the Foreign Sovereign Immunities Act. Here, the plaintiff oilfield services company had seen fit to provide in its contracts with Venezuela’s state-owned petroleum companies that a certain percentage of the dollar value of its invoices would be payable in dollars to its account at the Bank of Oklahoma in Tulsa — unless  Venezuela elected not to so pay but instead to pay in Bolivars in Venezuela.  The District Court invoked the principle (from the Supreme Court’s 1992 Argentina v. Weltover decision) that the qualifying US effects of a foreign sovereign’s commercial activity outside the US must be proximately and logically connected but not necessarily important or substantial. But this principle was not necessarily sufficient, in the Court’s view, to resolve the issue in favor of “direct effects” based on the cessation of a stream of US dollar payments to a US bank account. To resolve the case on that basis would have required the Court to hold that the fact that Venezuela had indeed made dollar payments into the US account, even though having the option not to do so, meant there was a “direct effect” in the US when Venezuela terminated the contract. The Court instead opted for a less controversial avenue to finding “direct effect” in the US of commercial activity abroad. The contracts required the drilling company’s Venezuelan subsidiary to purchase an array of required equipment from particular US vendors in various US locations. These “third party effects,” the Court held were “direct” irrespective of the substantiality of the required purchases so long as these requirements were non-trivial.

On this basis the Helmerich & Payne plaintiffs can hope at least to prevail on their breach of contract claims, having established that Venezuela may be sued under the commercial activity exception to sovereign immunity. How they might fare on their expropriation claims is less certain. This decision also holds that the plaintiff Venezuelan subsidiary is deemed a Venezuelan national based on its place of incorporation and therefore may not invoke international law as the basis of an expropriation claim — with the Court finding the suggestion of a contrary position in the Second Circuit’s well-known Sabbatino case (307 F.2d 845 (1962)) to be an isolated instance that has not influenced customary international law toward its view that the nationality of the shareholders should be attributed to the foreign subsidiary where the foreign Government takes action motivated by the shareholders’ nationality. The Court also reserved judgment on whether the “Act of State” doctrine might furnish a merits defense to the expropriation claim.

The proliferation of BITs and the strategic deployment of foreign investment via countries who have BITs in place with the host state have diminished but not entirely pre-empted the role of US courts in resolving investment disputes. When a US Court has the opportunity to study with care international law principles that apply uniquely to the resolution of such cases in the courts, as is evident in the case here discussed, the analysis is worthy of our close attention.

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us

Shall we applaud, or regret, the latest decision from a panel in the US Second Circuit Court of Appeals concerning the quality of proof needed to vacate an international arbitration award for “evident partiality or corruption”? (Kohel Beth Yechiel Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, No. 12-3247-CV (2d Cir. Aug. 30, 2013). Shall we applaud the fact that an arbitral award survived a motion to vacate by the losing side, and see this as another heartening judicial vindication of the arbitral process and an admirable exercise in judicial non-intervention– even though the “process” in this case was an unreasoned majority decision of a three-member rabbinical tribunal operating with non-neutral party appointees and under no rules and no governing law? Shall we applaud a decision that announces a legal standard of “abundantly clear” proof of corruption and bias, and finds the proof in this case unacceptably murky because it consisted of nothing more than a hearsay report of one neutral bystander who claimed to have heard the presiding arbitrator state that the Claimant would have the decision it wanted in a few more days?

Or shall we regret the fact that this Second Circuit panel, even while repeating the settled proposition that proof of actual bias is not required and that objective facts warranting an inference of bias will suffice, seems to inject rigidity into that supposedly flexible standard by holding that the evidence of bias or corruption must be “abundantly clear,” indeed “clear and convincing”? Have we not seen a flurry of recent commentary urging flexibility in the standards applicable to proof of arbitral corruption, to take into account the offense against public policy that arbitral corruption represents, and the intractable difficulty of proving misconduct that is inevitably disguised and concealed? Why do we not see this theme in the Second Circuit’s decision?

I suggest this is not destined to be a landmark case in the jurisprudence of “evident partiality or corruption” as a basis for annulment under US law. The case against the presiding arbitrator rested on hearsay, and the arbitration itself was un-transcribed, depriving the courts of any direct look at the challenged chairman’s conduct. Those who hope for judicial sensitivity to the difficult task of proving arbitral corruption should not despair, but should instead reasonably hope that even a standard of “abundant clarity” will be judiciously applied according to the context in every case.

* * *

This month’s review of the applaudable and regrettable would be incomplete without a brief word about a decision from the US Eleventh Circuit Court of Appeals that also concerned alleged arbitrator bias. (FDIC v. IIG Capital LLC, 2013 WL 4007573 (11th Cir. Aug. 7, 2013). We can applaud the fact that the Court rejected as a non-starter (i.e. not even deserving of an evidentiary hearing) the contention that there might have been improper contact between an eminent arbitrator and the eminent arbitration specialist appearing before him as counsel, when the latter at the invitation of the former joined as a faculty member for a symposium held while the case was sub judice.  We can regret that evidently neither of these widely-admired members of our community saw fit to disclose the matter. In an IBA-colored world of disclosure categories, could there not be a True Blue List — matters not requiring disclosure but which if disclosed as a matter of prudence would do far more good than harm by simply keeping the arbitral air fresh and breathable? Professional conference contact during the case between arbitrator and counsel, or between arbitrator and arbitrator, is on my True Blue List.

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us

One of the least discussed powers of the Arbitral Tribunal is the power of suggestion.

Professor Piero Bernardini, a well-reputed continental arbitrator and scholar, has described the arbitrator’s task in achieving an efficient process as “a balance between ‘proactive and judicious efforts’ to move proceedings forward in an efficient manner while at the same time ensuring respect for party autonomy and equality.” Volumes have been written about arbitral efficiency and party autonomy but rather little about how these themes are harmonized in the day-by-day practice of the craft of arbitrating.

One of the presumed character differences between the judge and the arbitrator is that the former as an officer of the state may carry on imperiously while the latter as an agent of the parties should proceed collaboratively whenever possible. V.V. (”Johnny”) Veeder has summarized this distinction with the observation that the arbitrator “is the master of the arbitration but not the parties’ master.”

And yet surveys of corporate users of arbitration report widespread dissatisfaction with the arbitral process and a shift in preference toward the courts (at least where the courts are familiar and close to home). And US parties and counsel are not alone in clamoring for the appointment of ex-judges as arbitrators.

Does this mean the arbitration users would actually prefer more imperium from their arbitrators? Perhaps not precisely so. But it may very well be the case that what parties to complex, contentious, and high-value disputes really want (not to mention need) most of all are innovative procedural solutions, that they are encouraged to adopt, that invite efficiency gains without material sacrifice in the scope of evidence-gathering or the presentation of legal positions.

And that is where the arbitrator’s power of suggestion can and in appropriate circumstances should come into play. One of the heralded virtues of arbitration is the supposed flexibility of the procedure. But the source of that flexibility will rarely be the parties. Often the parties have counsel more accustomed to judicial proceedings and predisposed toward importing judicial notions of orderly procedure into the arbitral process (and not only in regard to pre-hearing discovery, although this import receives the most attention).

And yet if those court-oriented litigators, acting with the presumed consent of their clients, have selected vastly-experienced specialists in arbitration to preside over their case, there must be a reason that they have done so. And a good candidate for that reason is that the parties actually want guidance through the arbitral process from experts in arbitral procedure whose specialty is harmonizing efficiency, fairness, and party autonomy.

Arbitrators are not the masters of the parties but the parties are the masters of the procedure only to the extent that they are clearly (and resolutely) in agreement. But the arbitral tribunal wielding the power of suggestion may lay the foundation for party agreement on a variety of issues, steering away from poorly conceived agreed solutions, and providing a rallying point toward which the parties might migrate when the chances of their reaching an agreed solution without arbitral input are not great.  In other circumstances, the tribunal detecting an intractable difference might invite the parties to reach agreement on a matter or else submit their respective proposed solutions within a finite time frame. This is the exercise of the power of suggestion in another form: to hasten (but not “rush”) the parties toward agreement or at least constructive solution-driven, thinking.

In some cases the advocates are accomplished and reputed arbitration specialists who can be relied upon to advance effective solutions that the client is willing to accept. And where that is so the arbitrator’s power of suggestion should be invoked more reluctantly. But even then, the role of advocate has a curious tendency to channel the thinking of experienced hybrid arbitrator-advocates toward zero-sum solutions.

So, if the question “Whose Arbitration Is It Anyway?” must inevitably be answered “Yes, it is the parties’ arbitration,” still each arbitrator might usefully consider from the outset “What is the Arbitration the parties want?” The prudent exercise of the power of suggestion will often be a valuable way to have that question answered, and perhaps answered in a fashion that draws in the parties to an efficient procedure they would not achieve on their own.

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us

You may not recall the last time a hearsay objection was sustained by an arbitral tribunal. And understandably so. Arbitrators “take [the hearsay evidence] for what it’s worth,” and steer clear of challenges to their awards on grounds (FAA Section 10 (a)(3)) that they committed “misconduct” by “refusing to hear evidence.”

But just suppose: In a real estate arbitration to determine fair value for purposes of a partner buy-out, all of Respondent’s written evidence of fair value is excluded as hearsay by the arbitrator. For example, a written offer to purchase the property was excluded as hearsay, on the theory that without the offeror as a witness, the written offer was not subject to cross-examination. Respondent evidently does not offer as witnesses the authors of the excluded hearsay documents. The facts relied on by Respondent’s expert for her opinion on fair value having been excluded, her opinion now carries no weight. Claimant wins.

Consider now two judicial review scenarios, in each of which the Respondent moves to vacate the award on the basis of the arbitrator’s misconduct in refusing to hear evidence.

In scenario one, the Court is persuaded to vacate the award. While recognizing that the arbitrator had wide discretion in regard to admissibility of evidence, the Court concludes that the arbitrator excluded what amounted to the entirety of Respondent’s factual case. The Court notes that such “technical” objections as hearsay need not be and generally are not obstacles to admitting evidence in arbitration, and that the categories of exclusion mentioned expressly in the AAA Commercial Arbitration Rules are irrelevance and redundancy (cumulative evidence). And the Court bemoans the fact that the arbitrator did not provide a statement of the reasons for the exclusion of evidence. In this context, the Court concludes, exclusion of essentially all of one party’s fact evidence on the ultimate (and only) issue, the value of the property, was clearly prejudicial and amounted to arbitral misconduct. (LJL 33rd Street Assocs. v. Pitcairn Properties, Inc., 2012 WL 613498 (S.D.N.Y. Feb. 15, 2012)).

Now consider how another court viewed the same issue:  An arbitrator need not apply technical evidence rules, such as the common law rule against hearsay that in the US is widely codified at the state and federal level. But certainly it is well within the discretion given the arbitrator under rules like the AAA Commercial Rules to decide, with regard to particular evidence, that the hearsay rule will be applied.  The arbitrator’s decision to apply the hearsay rule cannot be said to be misconduct, where the party whose evidence is excluded has other non-hearsay means to prove the facts. Where the hearsay declarants could have been witnesses but the Respondent elected not to call them, the prejudice from exclusion of the hearsay evidence is self-inflicted by the Respondent. The arbitrator’s evidence ruling thus does not furnish a basis to vacate the award. (LJL 33rd Street Assocs. v. Pitcairn Properties, Inc., 2013 WL 3927615 (2d Cir. July 31, 2013)).

Which result is more persuasive? I have juxtaposed the decision of the District Court and US Second Circuit Court of Appeals, in the same case, and I obscured that fact to invite the reader to give equal consideration to the district court and appellate court opinions (each penned by a judge among those most expert on arbitration law issues). One can readily agree with both decisions. The solution seems to lie in details of the arbitration proceedings that are not fully explained in the decisions and may not have been clear in the record in either court. One cannot tell from the reading whether Respondent had adequate opportunity after learning of the arbitrator’s ruling excluding the hearsay evidence to seek leave to present witness testimony from the authors of the hearsay documents. The Second Circuit seems to assume, but does not demonstrate with reference to the Record on Appeal, that there was indeed such an opportunity.

Is there a lesson in this beyond yet another judicial vindication of poorly-exercised arbitral discretion? May I be so bold as to suggest that the American Arbitration Association would do well to implement some form of advisory system for arbitrators in need of guidance? Let us assume that the parties in this case thought that the credentials required for the arbitrator in this case were mainly those of a Manhattan commercial real estate lawyer, perhaps a litigator in that field, and that they selected accordingly. Let us further assume that the arbitrator had little to no experience as an arbitrator, and followed her instincts as a trial lawyer donning a judge’s robe.

In this case, the arbitrator probably was motivated to exclude the hearsay, rather than have the lack of testimony from the authors of the documents affect the probative value, because the arbitrator was required to appoint a valuation expert and turn over the fact evidence to her. The arbitrator could understandably have been concerned that the non-lawyer valuation expert would not exercise the proper judgment about the weight of the hearsay evidence.  A proper course of action would have been to admit the hearsay evidence upon the condition that the authors be made available for cross-examination, and to record that course of action in a clearly-worded procedural order. This may seem obvious to experienced arbitrators. But the question here that I pose is how shall this approach be made obvious to inexperienced arbitrators, in time for them to make better decisions in handling their cases? We should look to the AAA to harness the wealth of human resources at its disposal among the most experienced and skilled arbitrators to establish a confidential consultation system for arbitrators facing difficult issues.

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us

Last week’s decision by the US Ninth Circuit Court of Appeals that incorporation of the UNCITRAL Rules in an arbitration clause is considered as a matter of federal arbitration law to be a clear and unmistakable delegation to the arbitrators of exclusive power to decide the scope of arbitrable issues — [Oracle America, Inc. v. Myriad Group A.G., 2013 WL 3839668 (9th Cir. July 26, 2013)] — may at first blush appear to be uneventful news, at least for practitioners who do not practice in the 9th Circuit or often frequent its federal district courts to pursue or resist arbitration. The view from 37,000 feet — good for admiring California’s High Sierras, less ideal for appreciating its federal arbitration jurisprudence — might be that this is only an instance of another appellate court leaping on a bandwagon already occupied by most of its “sister” federal appellate circuits. But this case had some curious elements that the Court did not address.

Greatly simplified, this case involved an IP license for a Swiss company to make use of Java software, one of Oracle’s major products.  But the arbitration clause in the license was also a litigation clause. It said that all disputes under the license shall be arbitrated, except that either party could opt to litigate a dispute relating to that party’s “Intellectual Property Rights.” And it said that in a case eligible for litigation, if litigation were elected the court’s jurisdiction would be exclusive.

The clause provided for arbitration under the UNCITRAL Rules, and those Rules of course provide that arbitral tribunals have power to rule on issues of their own jurisdiction. I have referred, in recent posts, to the principle that the adoption of such rules delegates arbitrability to the arbitrators as the Incorporation-by Reference Principle. I will continue to use that shorthand here. Dutifully, your Commentator reviewed all the Incorporation-by-Reference Principle First Options “arbitration of arbitrability” case law cited in the Ninth Circuit’s decision. Not one of the arbitration clauses involved in those cases was this type of hybrid arbitrate-unless-you-litigate formulation. So, the Ninth Circuit might have analyzed in its opinion, but did not, what were the reasonable expectations of the parties as to the forum in which arbitrability would be determined if Oracle filed a trademark/copyright infringement suit in federal court, as it did, and if Oracle alleged, as it did, that the action fell within the express elective litigation carve-out for disputes involving its IP rights.

This case highlights how very little the Incorporation-by-Reference Principle has to do with the actual intentions of the parties. The courts have embraced the Principle largely without analyzing why the parties’ adoption of an arbitration rule of compétence-compétence that empowers arbitrators to decide jurisdiction must necessarily divest a court of such power. That position is a matter of interpretation, which is really to say it is a matter of federal pro-arbitration policy. A main tenet of federal arbitration law is that any doubts about the scope of arbitrable issues are to be resolved in favor of arbitration.  Thus, if an adopted arbitral compétence-compétence rule like UNCITRAL Rule 23(1) (2010) makes arbitrability arbitrable, any doubts about whether that Rule makes the Tribunal’s jurisdiction over arbitrability exclusive are to be resolved in favor of exclusivity.  But this means that what the US federal courts are treating as “clear and unmistakable evidence” is partly evidence and partly presumption — or, stated another way, the “evidence” is only “clear and unmistakable” because of a policy-based rule of construction in the absence of which one would be hard-pressed to characterize such compétence-compétence rules as conferring exclusive arbitrability jurisdiction on arbitrators.

Further, even though most courts have not so stated expressly, a critical contextual element of the Incorporation-by-Reference Principle is that the arbitration clause broadly commits all disputes between the parties to arbitration without material exception. When the contract does not expressly sanction any entrée to a judicial forum for merits adjudication, there is considerable appeal to the position that the arbitral compétence-compétence rule, in context, represents an exclusive forum choice for arbitrability disputes.

Given these dimensions of the Incorporation-by-Reference Principle, it is curious that the Ninth Circuit panel did not spend any energy on the question of whether the express litigation carve-out in the arbitration clause had any significance as evidence of the parties’ intentions. The fact that the panel did not do so does not necessarily mean that the panel’s decision is unsound. It does however confirm our understanding that the Incorporation-by-Reference Principle, as an implementation of the First Options “clear and unmistakable evidence” test, is not genuinely a rule of evidence or a barometer of the intentions of the parties, but a policy-based pro-arbitration federal common law rule on the allocation of power between courts and arbitrators. It may well be a good thing for there to be such a rule. But if we admit that the rule is policy-driven, then we might also hope that the US Supreme Court in a proper case would hold that First Options is a precedent that has outlived its useful life and should be supplanted by express rules of construction, emanating from the FAA, for deciding on the allocation of arbitrability jurisdiction between courts and arbitrators.

Filed under: Uncategorized | Post a comment | Visit Marc's website at www.lexmarc.us