Are You Ready for Some Football?

You are only human. You lead a busy professional life, and, while you have a few precious hours to watch American football on Sunday afternoons, you have no time (or patience) to slog through 20 pages of the federal district court decision that vacated the arbitration award of National Football League (NFL) Commissioner Roger Goodell that had (in)famously upheld the four-game suspension imposed on a certain player known to be the husband of a famous fashion model. (National Football League Management Council v.National Football League Players Association, 2015 WL 5148739 (S.D.N.Y. Sept. 3, 2015)). If ever there were a task to delegate to Arbitration Commentaries, surely the parsing of this decision qualifies.

So, with full disclosure that your writer lacks independence — he wears a Buffalo Bills wrist bracelet, not a Rolex — here is all you need know to get through the coming rounds of lunches and cocktail receptions:

1. Commissioner Goodell’s independence as an arbitrator and his denial of a motion for recusal were not adjudicated. But how much does a federal judge need to swaddle the word “independent” in a cloak of quotation marks for tea leaf readers to sense the aroma that would result from adding boiling water?

2.  The Second Circuit appeal will be heard orally, at the earliest, in the week of the Super Bowl in February 2016. Giselle’s husband gets to play the full 2015 season.

3. Arbitration law has not been abused in the service of football. The evidence gathered in the league’s investigation was not reviewed for sufficiency. Even a Buffalo Bills fan would agree that Giselle’s betrothed deserves due process, a fair hearing, and adequate notice  of the prospect of employee discipline of the type that was imposed. He also deserves to be flattened by bloodthirsty linebackers.

4. This turns out to be a labor law case, and arbitral power has a particular coloration in the collective bargaining context. #12 with the golden arm is just a rank-and-file member of a union. A lunchpail guy. Discipline gets meted out under disciplinary policies bargained between the union and the league, and the policies are deemed part of the collective agreement from which an arbitral award concerning employee discipline must “draw its essence.” There was no player disciplinary policy that notified players that they were subject to suspension without pay (ouch!) for aiding and abetting, or condoning, or generally being aware of, violations of rules about “competitive integrity” which rules were themselves published only to owners not to players.  And while players are on notice they might be suspended four games for a first offense involving performance enhancing drugs, players have no reason to know that condoning the manipulation of equipment by others would be treated the same for disciplinary purposes as manipulating their own physiology for competitive advantage. No notice = no connection of the sanction to the contract = arbitrator exceeding his powers, dispensing “his (her) own brand of industrial justice.”  Easy.

5. Of course arbitrators have substantial leeway and discretion to exclude cumulative evidence. Do not become sleepless thinking arbitral discretion has been confined by this decision holding that the arbitrator denied a fair hearing by excluding evidence as cumulative. This is professional football mismanagement law, a special niche. NFL commissioners who decline to recuse themselves from serving as arbitrators in arbitrations about discipline they have imposed, based on investigations jointly conducted by outside counsel and the NFL’s General Counsel, had better provide very specific and well-reasoned justifications for denying as “cumulative” the aggrieved player’s request to cross-examine the General Counsel. Judges, like referees, recognize illegal formations.


So cheer. For arbitration law. For sound judicial discretion. And for all opponents of the New England Patriots, always.

Asset Hunting in the Wilds of Manhattan: What to Wear on Your Next Safari

We are all collection lawyers, more or less. That is, those of us who act as advocates in international arbitration. If you don’t have a good collection plan, enterprising Claimant counsels, maybe don’t start the case until you do. A personal favorite move is to grab real estate in Canada on Day #1 of the arbitration. Vancouver is particularly lovely on the first day of an arbitration, when the demonstrably rogue Respondent owns three homes with substantial equity.

But sometimes even the well-heeled international finance types get ahead of themselves, and chart a course to win a battle (a Final Award) without a plan to fight the war (collection!). This seems to have been the recent plight of a foreign real estate vehicle of a U.S. bank that shall remain nameless here, lest they foreclose on your Commentator’s mortgages and cut off his credit lines. But read: In re Harbour Victoria Investment Holdings Section 1782 Petitions, 2015 WL 4040420 (S.D.N.Y. June 29, 2015).

So, you ask, where does Section 1782, of  fit into a collection plan on a Final Award confirmable under the New York Convention? Well, a Manhattan federal judge wondered also, in the case just cited and here reported. So please, do read on.

Petitioner won an Award in London against Respondents from India and first filed confirmation proceedings in India. But, fearing insufficiency of Respondent assets India, Petitioner started a confirmation action in New York, got an ex parte attachment order from a New York State judge against a $20 million apartment in Manhattan (nice!), and asked the judge to permit discovery so Petitioner could show that the record owner of the glam flat was only a flimsy front for the Respondents. Removal to the federal court ensued (no surprise there), and the federal judge, doubting personal jurisdiction over Respondents and equally doubting the alter ego claim, vacated the attachment and denied the discovery.

Enter Section 1782! Petitioner says please let me have this alter ego discovery on ownership of the glam flat “in aid of” the pending foreign confirmation proceedings in India, and “in aid of” the further confirmation proceedings contemplated in Singapore and the UK if Petitioners’ suspicions about who really owns the flat are confirmed. But “wait a minute,” says federal judge #2, who gets the 1782 case as a separate file from the confirmation case pending before her colleague down the corridor  (of the spectacularly-renovated old US Courthouse at 40 Centre St.) — “Isn’t this just the same discovery you were already denied by Judge #1, repackaged under 1782?” And moreover, she asked, “didn’t you settle the confirmation action in India, so you really don’t plan to use the discovery in a foreign proceeding?

Petitioner had only lame (well OK, unpersuasive) answers to these questions — mainly that other creditors were clamoring for the same assets in India, such that the settlement there might crumble. In the view of Judge #2, even if the proposed discovery could be seen as fitting in the 1782 cubbyhole as “in aid of” foreign proceedings, it was more likely than not that the main purpose of the 1782 petition was to end-run Judge #1’s denial of discovery in the confirmation case about true ownership the glam flat, and to eventually use the 1782 discovery in that U.S action — not foreign or international but right down the corridor —  a subversion of 1782. 1782 petition denied, case closed. (Except that WestLaw says an appeal was filed in the Second Circuit US Court of Appeals on August 19).

Is there a moral of the story here? As your Commentator I am committed to finding such, so let’s try this: It is well and good that the New York Convention permits recognition and enforcement proceedings to be taken concurrently in multiple jurisdictions. But a sound collection strategy requires a careful sorting of the issues — apart from whether the Award should be recognized — that each court may be asked to address. Here I wonder why the enforcement court in India could not have been asked to enter a global Mareva injunction against the Respondents and taken measures to permit Claimant to ascertain by disclosure the scope of those assets. The instinct to seek out discovery in a US forum because US courts are generally pro-discovery needs to be reality-checked against the specific context of a complicated international asset hunt in an award enforcement context.

Arbitral Subpoenas: The Good, the Bad, and the Ugly

Shame on you (!!), subpoena-issuing international arbitrators sitting in Dallas, Texas. Here in NYC, where we have wrestled, maybe not to the ground but mightily, with the problem of arbitral subpoenas, we are reading about your case (Matter of Arbitration Between Tang Energy Group Ltd. and Catic USA, 2015 WL 4692459 (N.D. Cal. Aug. 6, 2015), and asking ourselves: “How ‘Bout Them Cowboys??!!

Dear colleagues, if a party in your case wants a subpoena for a non-party witness located in San Francisco — even if he is a recognized international arbitration lawyer in San Francisco — then take your hearts, go to San Francisco, and pack carefully for the return trip. Why would you think the Federal Arbitration Act would provide power to haul in a distant non-party witness for an arbitration hearing in Dallas when the federal district court in the same locale clearly could not? Surely the “in the same manner…” language in FAA Section 7 means this. (If  the lawyer-witness is within the control of a party to the arbitration, as one side seems to argue,  by reason of an attorney-client relationship, then why issue a subpoena? His appearance could be directed with the risk of an adverse inference if he does not appear).

Perhaps, Dallas-seated colleagues, you wonder whether Section 7 permits you, or one of you, to wander off to SFO, when the parties have agreed to arbitrate in Dallas? It is a fair question, but if the FAA clearly does not permit the witness to be forced by subpoena to come to you in Dallas, while the FAA does (post Rule 45 amendments) permit you to issue a subpoena to the witness in SFO, then traveling to SFO to hear the witness (or getting everyone to agree to to a video conference, on the basis that you could make that trip) seems like the way to go! After all, don’t your arbitration rules provide (as most international ones do) that the arbitrators may convene a hearing anywhere to hear a witness, despite the agreement on (and without effect upon) the seat of the arbitration?

We hope there is still time for this to be fixed by the sua sponte issuance of an amended subpoena. As matters stood by reason of the decision of the Magistrate Judge in SFO (the case cited herein), the party that sought the subpoena is required to move to compel compliance in the federal district court in Dallas — a motion doomed to failure because the witness has the same right as under Rule 45 to be compelled to attend a testimonial proceeding only if it is held closer to home.


Your Commentator takes note that the AAA has organized a CLE program for arbitrators whose title asks rhetorically if arbitral subpoenas are worth the paper they are written on. The partial answer, I suggest, is this: If arbitrators systematically issue the subpoena as requested by the party, and thereby expose themselves and the process to the errors that counsel may make in regard to enforceability of the subpoena, then the answer to the AAA’s rhetorical question may, unfortunately, avoidably,  and altogether too often, be “no.”

Speaking of Declarations

All of us had to start somewhere. A few famous people perhaps reading or perhaps declining the invitation to read this post started in this business, sort of, back in the early/mid ’80s in a case-for-the-ages about an aborted hotel venture near the Pyramids. (Your author was, back in the day, doing legal battle with the Ayatollah K, who took our clients’ condo complex in Teheran by force and made a nice living in the real estate business, for a time).

Anyway, more about the Pyramids case (Southern Pacific Properties (SPP) v. Arab Republic of Egypt, for you fussy types; Google it)… The ICSID branch of the case — there was also an ICC case, as a warm-up — was mired for several years in jurisdictional arm-wrestling. And one of the fascinating issues was whether Egypt, in its domestic legislation regarding foreign investment, had given the written consent to ICSID arbitration of that dispute as required by the ICSID Convention Art. 25(1). (If you thought Egypt’s prior ratification of the Convention was itself such consent, an automatic standing offer equivalent to what is given in many BITs, now you know differently…).

My reason for taking you back to the infancy of the jurisprudence on this domestic-legislation-as -ICSID -consent issue is, as you may have guessed, that the same issue has been addressed, in a quite fulsome and helpful way, in a very recent Award. (PNG Sustainable Development Program Ltd. v. Independent State of Papua New Guinea, ICSID Case No. ARB/13/33, Award dated May 5, 2015).

You can well imagine how the argument shaped up in the Pyramids case. Respondent trotted out a 30-something Leslie Gore (now of blessed memory), reprising her 1963 hit It’s My Sovereignty, And I’ll Yield If I Want To. Claimant’s counsel, then as now irrepressible gourmands, urged a favorite recipe on the Tribunal: take equal parts general principles of statutory interpretation and general principles of treaty interpretation, and a teaspoon of “effet utile” (about which more later), and stir until congealed. And this is roughly the formula the Pyramids Tribunal adopted, as it stated (as quoted by the New Guinea Tribunal on May 5, 2015): ” [I]n deciding whether in the circumstances of the present case Law No. 43 constitutes consent to the Centre’s jurisdiction, the Tribunal will apply general principles of statutory interpretation taking into consideration, where appropriate, relevant rules of treaty interpretation and principles of international law applicable to unilateral declarations.

My job as Commentator is to spare you too much detail about what goes on in the kitchen — you could instead read the case(s) in extenso — and instead try to put something digestible before you on an attractive platter. So have in mind that the New Guinea Tribunal had to struggle with considerable conflicting jurisprudence on this rather undeveloped terrain about the role of a State’s unilateral (and usually legislative) declarations as evidence of written consent to ICSID arbitration (or, in parallel, as putative consent to the compulsory jurisdiction of the International Court of Justice). Is it mainly the State’s Party (per the Leslie Gore ballad)? — that is to say, is there more or less a presumption against construing the unilateral legislative act as consent to jurisdiction?, or is there a requirement of clear and unambiguous proof of consent, owing to the significant sacrifice of autonomy entailed in a State submitting to jurisdiction, on an issue of State liability, to an international tribunal? (“You would cry too if it happened to you….“). Or to the contrary should arbitral interpretation of the unilateral State declaration follow more or less the Vienna Convention principles for interpreting a treaty, because the State having already ratified the ICSID Convention is then legislating in a treaty context, and the subject matter of the legislation is the scope of the ICSID Convention obligations the State has agreed to undertake?

The New Guinea Tribunal’s Award will be remembered perhaps less for its outcome — the State’s objection was sustained and the case was dismissed — than for its painstaking development of an “objective and neutral ” methodology for approaching the question of how to interpret unilateral State declarations of putative consent to ICSID arbitration.  Taking its cue from the Pyramids Tribunal’s reference to a “preponderance of the evidence” standard, and artfully providing extensive footnote references to the no-presumptions norm in the interpretation of treaties while acknowledging the non-treaty character of the State’s unilateral declaration, the Tribunal held that interpretation of the State’s declaration should proceed without any a priori weighting in favor of or against the possibility that the declaration is in fact a consent to ICSID jurisdiction. But, as if to acknowledge and counterbalance the natural gravitational pull of the State’s inevitable “It’s My Party” arguments, the Tribunal observed (para. 257): “It is at least equally true, however, that States should be presumed to desire the effective and just resolution of international investment disputes, in a manner that enhances the prospects for foreign investment and confidence in the rule of law. In the Tribunal’s view, these various considerations are best reflected in a neutral, objective approach toward jurisdictional objections, without preconceived preferences in one direction or the other, consistent with the substantial weight of authority on the issue.” And on the question of whether to apply “effet utile” (everything must mean something) the Tribunal while conceding that this principle was mainly developed in regard to interpretation of treaties, found ample reason to extend it to States’ unilateral declarations made within a treaty framework (para. 268): “Regardless of whether it applies to ‘pure’ unilateral declarations made by States under international law, the Tribunal is of the view that effet utile is one of the common principles of statutory construction that generally apply to the interpretation of such ‘hybrid’ provisions.

Credit the New Guinea Tribunal with gently moving the needle towards the middle on the conceptual balance between Host State sovereignty and Host State interest in attracting foreign investment, and doing so even in a case where, on the language of the relevant State declaration, the State had the clearly better of the argument on the question of consent.

Perhaps this will enrich your re-reading, on July 4, 2015, of one of history’s most famous unilateral State declarations about sovereignty, which celebrates its 239th birthday with barbecues, baseball, and fireworks. Here in the USA, just for today, It’s Our Party. Join us!

Having Tiffany’s Lunch

Pity poor Tiffany’s. Teeming with gold. Silver. Diamonds. Basking in the perpetual cinematic afterglow of a youthful Audrey Hepburn.

But there is real suffering here at 57th and 5th.

Consider: Tiffany’s remains mired in a trademark infringement debacle, in a US court in Manhattan, against online knock-off con artists who keep their accounts in Chinese banks. Legally savvy crooks, they have not bothered to defend the action on the merits, instead absorbing default judgments but wagering, wisely so far, on the ineffectiveness of US judgment enforcement methods to reach their assets in China. In the latest chapter, the federal district judge presiding over the case has vacated a pre-judgment asset freeze order against the defendants. On two grounds. First, as the case is now post-judgment, different legal standards for any asset seizure apply, i.e. state law procedures made applicable by Federal Rule of Civil Procedure 69. Second, at the stage of entering judgment on default, it had become evident that the judgment should be for money damages, and not for an equitable accounting of the ill-gotten profits of the infringers, and so Tiffany’s claim was one for money damages only, as to which, had the claim been so pleaded initially, it would not have qualified for a pre-judgment asset freeze under controlling (Grupo Mexicano) federal law. (Tiffany (NJ) LLC v. QI Andrew, 2015 WL 3701602 (S.D.N.Y. June 15, 2015)).

But this post is not really about what has happened already, but what happens next. We care, arbitration mavens, because this scenario plays out in similar fashion when an international arbitration award is presented for enforcement (and not merely recognition) in a US court, especially a partial award granting as a provisional measure the kind of asset freeze that Tiffany’s had earlier obtained.

Most of you know that in October 2014 the New York Court of Appeals handed a victory to global banks that operate New York branches, ruling that the hoary “separate entity rule” remains the law of New York, such that a judgment creditor’s state law notice to restrain assets (“restraining notice”), served on a New York branch of the bank, has no legal effect to require restraint of the judgment debtor’s assets held in an account associated with a foreign branch. (Motorola Credit Corp. v. Standard Chartered Bank, 24 N.Y.3d 149 (Oct. 23, 2014)). As a consequence, the “action” shifts to the discovery front, with judgment creditors seeking to use information subpoenas issued by the US federal court (in compliance with New York State judgment enforcement law) to the New York branches of those global banks to require disclosure of information about the accounts and assets of the judgment debtors. The “separate entity rule” as endorsed by the New York Court of Appeals in the Motorola case is not a barrier to such discovery.

The contest in legal disputes over the enforcement of such subpoenas  has been, and will continue to be, over the degree of deference that US courts should give to foreign nations’ statutes and regulations imposing bank secrecy and other similar restrictions on disclosure of information for use in foreign judicial proceedings. It is an issue of “international comity,” and it may have decisive impact on whether the Court permits discovery under the Federal Rules of Civil Procedure, which it may do, or alternatively requires use of the Hague Evidence Convention, which it need not automatically do but must at least consider according to a multi-factor test formulated by the US Supreme Court in the 1980s in the Aerospatiale case. Two years ago, your author as judgment creditor’s counsel served an information subpoena on Deutsche Bank in New York for information about the judgment debtor’s accounts in Singapore. Deutsche Bank moved to quash and presented expert evidence concerning Singapore’s bank secrecy law and its exceptions allowing disclosure in aid of judgment enforcement but only upon an order permitting disclosure issued by a Singapore court. The motion to quash was granted by a US Magistrate Judge (in an unpublished order that I will share upon request), despite the absence of evidence of any actual prosecutions or a declaration of prosecutorial policy to prosecute in Singapore for violations of the bank secrecy law in similar circumstances — i.e. where the bank’s disclosure of client account information was made in compliance with an order of a court outside Singapore. The Magistrate Judge held that the judgment creditor should instead secure from the US court a Letter of Request under the Hague Evidence Convention. This was done, and thereafter the Singapore authorities engaged in a series of dilatory actions evidently calculated to cause the Letter of Request to die a bureaucratic death, which it did.

Your author made anguished cries in this space. And now (with no claim of cause and effect, as the judge in the case about to be described is not a known reader of these rants) there is better news for judgment creditors from lower Manhattan, where the most recent published decision on this same question adopts a more inquisitive and less presumptive approach to the public policy interests of foreign States that are ostensibly served by statutes or regulations blocking information disclosure by financial institutions. See Motorola Credit Corp. v. Uzan, 2014 WL 7269724 (S.D.N.Y. Dec. 22, 2014). The District Court in this case did, and said that in the further proceedings it would, insist upon evidence that the foreign State had actually prosecuted or would prosecute violators of its nondisclosure/secrecy laws, or require other comparable evidence that the laws were fundamental public policies of the foreign State and not merely solicitous gestures toward powerful international banks whose local operations breathe life into local economies. Such a more formidable showing is to be required before the Court will  conclude that the foreign State’s interest in enforcement of its nondisclosure laws is a compelling reason of “international comity” to deny enforcement of the US domestic subpoena to the global bank’s New York branch and instead require the judgment creditor to try her luck domestically under the Hague Evidence Convention in the jurisdiction where the assets are believed to be on deposit.

This, I believe, is progressive thinking about “comity” given two fundamental contextual features: (1) a global economy in which foreign States sometimes seek to subsidize economic growth through legislation that makes the State a regulatory haven for particular industries, and (2) a US legal environment in which creative lawyers make “comity” arguments on behalf of their client global banks (and not directly as advocates for the foreign States in which their clients operate), framing such legislation as a broader reflection of fundamental domestic policy in the enacting foreign State than may in fact be the case. (For this reason, courts in some similar cases have considered it significant whether the foreign States themselves appears as amicus curiae to articulate for themselves their public policy perspectives)

It appears that Tiffany’s and a number of Chinese banks will shortly be entering the ring to counter-punch on these issues. The outcomes should be watched closely by all of us who calibrate the effectiveness of US courts for enforcement of awards and judgments against judgment debtors whose wealth is strategically held or concealed abroad.

D(id you) C(alculate) F(airly)?: DCF Methodology in Recent Treaty Cases

Responding to the anguished cries of readers for a succinct review of the fate of Discounted Cash Flow (DCF) valuation methodology in recent investment arbitrations — a review to be offered without payment of conference fee, airplane fare, or subscription — Arbitration Commentaries steps to the lectern and reports:

1. In the now-legendary Yukos case, the controlling shareholders of the erstwhile oil colossus advanced DCF valuation as one of four alternative valuation methods, along with “comparable companies” and “comparable transactions” valuations as of the same date as the DCF valuation, and a “market capitalization” approach as of an earlier date. The Tribunal ultimately rejected DCF methodology entirely, along with each of the other valuation approaches proposed by Claimants other an “comparable companies.”  A full examination of the report of Russia’s valuation expert would be necessary to understand the Tribunal’s decision to accept that report as a decisive refutation of Claimant’s DCF analysis. But it is evident from the Award that the Tribunal’s determined that it could not rely upon historical information used as inputs to the DCF analysis, that it could not be confident that Claimant’s DCF analysis reliably captured all of Yukos’s operating expenses, and that Claimant’s DCF model did not, in the estimation of the Tribunal, take into account business risks that Yukos would have faced as a going concern had it not been effectively dismantled by the Russian State in 2004. (Yukos Universal Limited (Isle of Man) v. Russian Federation, PCA Case No. AA 227, Final Award dated July 18, 2014).

2. A Canadian mining investor called Gold Reserve and the Government of Venezuela, arbitrating over alleged taking or interference with mining concessions, agreed in principle on the use of DCF methodology — but not its exclusivity as the sole proper valuation approach. Claimant — perhaps concerned about relying too heavily on DCF to value an asset with no earnings history and many contingencies affecting its future profitability — advocated a weighted three-method approach assigning 50 percent weight to DCF, 35 percent comparable companies, and 15 percent comparable transactions. Venezuela urged the Tribunal to use DCF only, because the proposed comparables were not very comparable and the criteria offered to make adjustments based on the comparables to value the assets at issue were not reliable. The Tribunal on this point ruled for Venezuela, and used only the DCF approach. As would also be the case in the Mobil-Venezuela arbitration discussed below, the DCF experts differed on “country risk” for purposes of the discount rate, and took opposite sides of the question whether the market’s perception that Venezuela was a country that might nationalize natural resources assets was an appropriate risk factor or an impermissible charge against value based on conduct — i.e. expropriation without prompt adequate and effective compensation — that was prohibited by the BIT. Here the Tribunal agreed with Claimant to a degree, holding that the risk of unlawful expropriation should not be taken into account in the discount rate, but nevertheless considered that other political risks of doing business in Venezuela warranted a country risk factor significantly greater than what Claimant’s expert proposed. Claimant’s expert had advocated a valuation of $1.3 billion, and the Award was $713 million, with $130 million of the downward adjustment attributable to the Tribunal’s partial acceptance of Venezuela’s position on “country risk.” (Gold Reserve, Inc. v. Venezuela, ICSID Case No. ARB (AF)/09/1, Award dated Sept. 22, 2014).

3. Mobil and the Republic of Venezuela, arbitrating over nationalized oil exploration concessions, agreed upon the utility of DCF but stood very far apart on the discount rate, Mobil’s expert urging 8.7 percent while the Republic’s expert urging nearly 20 percent. Accounting for most of the gap was “country risk,” and in particular the very risk that came to fruition and provoked the arbitration, i.e. that Venezuela would opt to nationalize petroleum exploration.  That risk shoud be omitted from the discount rate, argued Mobil, because including it would in effect take a negative charge against the value of the assets for pre-expropriation steps taken by the Government that diminished value because they foretold a potential expropriation. Factor in that risk, argued the Government, because any hypothetical willing buyer who might have thought about buying Mobil’s oil concessions in Venezuela before the Government acted, would have factored the risk of expropriation into her bid. Citing decisions of a number of other investment tribunals, this Tribunal sided with Venezuela on the discount rate “country risk” question. (Venezuela Holdings B.V. and Mobil Cerro Negro Holding Ltd. et al. v. Venezuela, ICSIDE Case No. ARB/07/27, Award dated Oct. 9, 2014).

4. British Caribbean Bank and the Government of Belize, arbitrating over deprivation of the Bank’s right to repayment of its loans to a telecoms firm, argued over the consequences of the Bank’s decision not to submit any expert valuation report. The Bank argued that its loan was expropriated and that, perforce, the fair market value of the expropriated property was the principal and interest due on the loan. Not so, said Belize, the FMV of the expropriated loan is what a willing buyer would pay to own the loan, which is not necessarily the face amount plus interest, and so if there is no valuation report, the Claimant should lose on damages. On the expropriation claim, the Tribunal agreed with Belize, but that is not the end of the story.   The Bank also had a fair and equitable treatment (FET) claim, prevailed on this as to liability, and on damages argued that whereas the relevant treaty set forth no particular compensation standard, the standard furnished by international law is simply to provide reparation sufficient to cancel out the economic effects of the unlawful act.  The Bank said no valuation report was needed for this FET claim, that the sum sufficient to provide such reparation is the principal of the loan plus interest. The Tribunal agreed, and this was the sum awarded. (British Caribbean Bank Ltd. v. Belize, PCA Case No. 2010-18, Award dated Dec. 19, 2014).

5. Romania, arbitrating with an investor of US nationality over impairment of its State-granted concession to sell consumer goods from kiosk locations throughout the country, insisted that the investor’s DCF valuation should be rejected because it was premised on the thesis of expropriation, which Romania contended had not occurred, and further because the Claimant was not a going concern and indeed had a history of losses and its prospects for future earnings were uncertain. The Tribunal sustained Claimant’s FET claim while rejecting its expropriation claim, and stated that it was rejecting the DCF approach in part because it had rejected the expropriation claim. But evidently the main rationale for rejection by the Tribunal of the DCF valuation was the Claimant’s history of losses and uncertain future prospects. As a result, a DCF valuation of $223 million per Claimant’s expert was rejected in favor of an award (on the principal claim) limited to Claimant’s actual investment of $7.5 million. (Awdi v. Romania, ICSID Case No. ARB/10/13 (Award dated March 2, 2015).

6. Following the lead of the Mobil Cerro Negro Tribunal as discussed above, another Tribunal addressing expropriation by Venezuela of oil service industry assets accepted the notion that a hypothetical pre-expropriation willing buyer would take into account in evaluating political risk the attitude of the Republic toward possible nationalization of petroleum industry assets. Here the Republic urged a 14.75 percent “country risk” premium in the discount rate, and this was accepted by the Tribunal as “conservative” — at least by comparison to the 18 percent “country risk” premium endorsed in the Mobil Cerro Negro Award. (Tidewater Investment SRL et ano. v. Venezuela, ICSID Case No. ARB/10/5, Final Award dated March 13, 2015).

Judicial Pro-Arbitration Injunctions: Re-Thinking “Probability of Success”

When the U.S. Second Circuit Court of Appeals speaks about arbitration, here at Arbitration Commentaries the ignition key turns, and the engine of this rusty old four-by-four squeals, wheezes, and eventually springs to life. This month’s fuel is judicial provisional relief in aid of arbitration. (Benihana, Inc. v. Benihana of Tokyo, 2015 WL 1903587 (2d Cir. April 28, 2015)).

First, a few facts about the case. It is about restaurants and hamburgers. In simplified form with some innocent liberties taken: Franchisor asserts menu control rights over franchisee, which franchisee allegedly violates by allegedly selling hamburgers in its franchised restaurant in Hawaii. Arbitration ensues, but franchisor seeks and obtains judicial provisional relief of two kinds: first, to enjoin sale of hamburgers in Hawaii during the arbitration, second (more interesting and less caloric than the first), enjoining franchisee from arguing to the Tribunal for any extension of the default cure period in case the Tribunal should determine that the franchisee was in default and that termination of the franchise agreement was justified on that basis.

The Second Circuit affirmed branch one of the injunction and vacated part two. As you would expect. So I will not herald as a terrain-shifting development that a US appellate court rejected the notion that an injunction in aid of arbitration obtained from a federal district court may foreclose a party from making an argument for final relief to an arbitral tribunal (at least absent some very clear language in the arbitration agreement limiting the power of the arbitrators).

I would however suggest that the Court’s eminently sound reasoning in support of this outcome speaks in favor of a broader reconsideration of the standards governing issuance of judicial provisional relief in aid of arbitration — which at this time, whether in a domestic or international case, are in lockstep with the standards for issuance of preliminary injunctions in cases pending before the courts. In particular, the requirement of “likelihood” or “probability” of success on the merits as a criterion for issuance of injunctive relief (sometimes varied slightly in the federal courts to allow in the alternative “serious questions going to the merits” combined with serious hardship) is at odds with US arbitration jurisprudence that in most contexts reserves to the arbitrators unfettered jurisdiction to decide the merits.

The Second Circuit, cutting through the parties’ arguments that the question of whether the tribunal could extend the default cure period was a question of “arbitrability,” rightly determined that this was “a merits argument masked as a jurisdictional one” and that the merits, obviously, were for the arbitrators. Said the Court: “Once arbitrators have jurisdiction over a matter, ‘any subsequent construction of the contract and of the parties’ rights and obligations under it’ is for the arbitrators to decide.” A court has “‘no business weighing the merits of the claims…’” said the Second Circuit quoting a venerable and venerated US Supreme Court arbitration case. And later, in the same line of reasoning, the Second Circuit said: “Prohibiting a court’s assessment of the merits until after the arbitral decision has been rendered is consistent with the structure of the Federal Arbitration Act (“FAA”) and with the ‘strong federal policy favoring arbitration as an alternative means of dispute resolution.’

In federal and state courts in the US, “probability of success” prevails as a litmus test for a preliminary injunction because our legal tradition expresses reluctance to permit relief resembling what could be obtained in a final judgment when there has been only an accelerated and perhaps partial and perhaps skewed assessment of the facts and law relevant to liability. Lurking in the background is concern that the “preliminary” injunction will have a duration through the final adjudication, which could be quite a long time, and so there is a pressing need to try to get it right.

But the judicial injunction in aid of arbitration serves a different function. The interval to which it is addressed is shorter: up to the time when the Arbitral Tribunal is able to hear and decide the application for provisional relief. That should ordinarily be a matter of a few weeks, and so there should be less concern in the courts about getting it right and a rather singular focus on preventing an alteration of the status quo so irreversible that, in a few weeks time, a provisional measure from the Tribunal would be ineffectual to address it.

It is of course possible to reconcile that traditional judicial injunction standard of “probability of success on the merits” with the Second Circuit’s solemn incantation of the exclusivity of the arbitrators’ power in regard to the merits. The findings of fact and conclusions of law provisionally made by a court for purposes of an injunction in aid of arbitration do not bind the Tribunal. But certainly the Tribunal will be influenced by those findings, often to the point of giving them tacit presumptive validity. Arguably this erodes the arbitral process, and transforms it into a hybrid judicial-arbitral process whenever judicial interim relief is sought. And this dilutes the practical effectiveness of the principles stated by the Second Circuit as quoted earlier in this post.

Perhaps the time has come in the USA for judicial re-thinking of standards for issuance of an injunction in aid of arbitration.

Miami Vice

Just when you thought America’s international arbitration lawyers had finally moved on from the exhausted (but not quite conclusive) debate over whether the federal international judicial assistance statute codified at 28 USC §1782 (“1782”) applies to private international commercial arbitrations, along come two decisions from two federal district courts, involving essentially one coordinated quest for discovery in the same arbitration.  Each federal district court decision reaches the same result: thumbs down on the proposed use of 1782 for non-party discovery in private arbitration because a private, contract-based Arbitral Tribunal is not the type of “tribunal” Congress had in mind when, in 1964 (as the elected members headed home to watch the Beatles on the Ed Sullivan Show), it tweaked the language of 1782 to substitute “foreign or international tribunal” in place of “foreign judicial proceedings.” In re Application of Grupo Unidos Por El Canal, S.A., 2015 WL 1815251 (N.D. Cal. April 21, 2015); In re Application of Grupo Unidos Por El Canal, S.A., 2015 WL 1810135 (D. Colo. April 17, 2015).

The primary rationale of each decision is not surprising: that the reference to “arbitral tribunals” in a 1964 law review article by Professor Hans Smit (who had been the Rapporteur of the International Rules Commission that urged Congress to update 1782 with the 1964 amendment), despite the reference having been favorably quoted in a footnote by the US Supreme Court in its 2004 Intel decision, demonstrates only that a 1782 “tribunal” is a sovereign or multi-sovereign adjudicative body — one that is established by, or pursuant to an international agreement among, one or more nation-states.

But wait readers. Patientez. Do not head for the cocktail hour quite yet. There is more nourishment here.

Understand first that this is no “ordinary” international commercial arbitration but a dispute over cost overruns on (according to one of the opinions) one of the largest ongoing infrastructure projects in the world: the installation of new locks on Panama Canal. Add to the mix that this is an ICC arbitration before three eminent arbitrators of English, Spanish and Belgian nationality, sitting in Miami, Florida, United States of America. (One can imagine much good wine being consumed at dinners for the visiting dignitaries hosted by an arbitration professor at the local university). Not yet impressed? Then consider that the arbitration clause in the contract and the Terms of Reference in the arbitration each provides that, in addition to the ICC Rules, the proceedings will be “governed by” the IBA Rules of Evidence. And — just as an indication of how well connected this Tribunal must be in the corridors of the ICC — the Terms of Reference dated in June 2014 provide that “discovery” will begin — BEGIN — on May 29, 2015.  Even ICC Rules are made to be broken.

This scenario invites us to consider the relationship between the arbitral subpoena power under Section 7 of the Federal Arbitration Act (FAA) (which applies to international arbitrations at a U.S. place of arbitration even when the arbitration agreement does not provide, as this one did, that the FAA applies), and the potential use of 1782 in an international arbitration at a U.S. seat.

According to one of the opinions in these cases, no application had been made to the Arbitral Tribunal for permission to undertake the discovery contemplated by these 1782 petitions. (According to the other opinion, the 1782 applicant, to the Court’s displeasure, had sought in its application to obscure the fact that this was a Miami arbitration). This observation was made not in relation to the possibility of an arbitral subpoena as a viable way of obtaining the same non-party evidence — it does not seem to have occurred to the judges here that this was possible —  but in regard to Article 3, Section 9 of the IBA Rules of Evidence. That section states in pertinent part that permission of the Tribunal should be sought before a party seeks evidence from a third party by compulsory process … something that many understand FAA Section 7 also to require .

We are left to wonder why the issuance of subpoenas by the Arbitral Tribunal was not a more viable option for this party as compared with 1782 petitions that faced serious obstacles even if the courts petitioned were to adopt the minority view that a private contractual Arbitral Tribunal is a 1782 “tribunal.” (Among the other obstacles to using 1782: whether a Miami-seated Tribunal is “foreign or international” for purposes of 1782; whether the documents sought were located in the US; and whether the parties’ agreement to elevate the IBA Evidence Rules to the status of “hard” procedural law for their case was a discretionary factor weighing against the 1782 application given that the Tribunal’s permission had not been sought).

We might suppose that the volume of responsive documents and their locations were considerations factored in by the applicant. Evidently the universe of documents requested from one of the witnesses was about 165,000,000 printed pages if the documents were to be printed. What fraction of them is in electronic storage and arguably “cyber-located” (the Colorado court’s terminology) in the US is unclear. The applicant might also have been reluctant to begin educating foreign arbitrators on the vagaries of US arbitral subpoenas and their judicial enforcement under FAA Section 7. (A note to foreign arbitrators: Here in New York the organized arbitration bar has just completed a major written project on this topic, and it will be presented by this commentator, the rapporteur of the project, at, among other places and dates, a venue reasonably close to Wembley Stadium, in November. Tickets are still available but the pre-sale has kept pace with the US football booked into Wembley for October).

Under the prevailing US view of US arbitral subpoenas, a documents-only discovery subpoena probably would not be judicially enforced, and if this prognosis for enforcement were impressed upon non-US arbitrators they might be quite reluctant even to issue such a summons. And under the prevailing US view the arbitral subpoena may only require the witness to testify at a hearing in the presence of the arbitrator and to bring with her documents to be received as evidence at such hearing. But the exercise the applicant in the Panama Canal arbitration had in mind here probably was to secure delivery of vast troves of documents for use by experts in composing reports on damages. The text of FAA Section 7 (a relic of the Roaring ’20s) seems to envision a more homespun witness event, consisting mainly of oral testimony aided by a few items of correspondence brought along in a satchel tossed on the jump seat of the Model T for the ten-mile ride on a dusty dirt road to the arbitrator’s storefront office across the way from the county courthouse.

Query whether  FAA Section 7 is necessarily so hemmed in by its language, so cryogenically frozen into a century-old paradigm of US domestic arbitration? Perhaps not. The arbitrators  in this Panama Canal case ought to be amenable to the view that all Section 7 requires is that the subpoena provide for the physical appearance of the witness to testify before one or more of them and bring along the documents. If that occurs, or if the mere prospect of such an event prompts an agreed tender of documents without a hearing, Section 7 is not offended. And if the arbitrators opt to schedule this event nine weeks (or more) ahead of the merits hearing, in recognition of the work needed to make intelligent use of the documents in the arbitration,  the Tribunal should not be seen as violating the FAA, but  instead as applying a 1925 statute pragmatically to the needs of 2015 arbitration. Section 7 does not in terms prohibit the use of evidence in a way that looks like discovery; it only specifies the manner in which the evidence shall be obtained if compulsory process is ultimately the only way to obtain it.

Arbitration Commentaries invites the skilled advocates in its audience to a contest: to compose the most persuasive statement of contrition in support of a (hypothetical) application to this Panama Canal arbitral tribunal to issue an FAA arbitral subpoena notwithstanding two failed attempts to use 1782. The winning contestant will receive a dinner in Miami, but not necessarily with the Tribunal or the local arbitration professor.


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Bifurcated Arbitration and Interlocutory Review: Once More to the Well

Dear Readers, if you turned to these pages to learn about recent decisions in big, impactful international investment disputes over (lawful) expropriation of maritime assets in Venezuela or (alleged) denial of justice to American energy titans in Ecuador, you may be disappointed. (But see “Nice Try Venezuela”, below). This post is inspired by a gritty quotidian domestic dispute, between a Miami limousine service and one of its drivers — the cherubic talkative type who might ferry an eminent international arbitrator to Miami International Airport for an early morning flight to Washington.

But seriously. We need to talk — about the eligibility of interlocutory awards for confirmation or vacatur under the Federal Arbitration Act. Perhaps there will be readers on the U.S. Court of Appeals for the Eleventh Circuit, whose three-judge panel decided Schatt v. Avventura Limousine & Transp. Service, Inc., 2015 WL 1134910 (11th Cir. Mar. 16, 2015).

The Avventura arbitration, under AAA Commercial Rules, involved claims under the Fair Labor Standards Act (FLSA) asserting that the Claimant was an employee protected by the FLSA and had been compensated less fairly than the Act requires. The position of Respondent (the  putative employer) was that Claimant was not an employee but only an independent contractor to whom the FLSA did not apply. This liability issue, i.e. whether the FLSA applied at all, was bifurcated, evidently by agreement of the parties and with consent of the arbitrator. In an “Interim Award on Liability,” the arbitrator decided that Claimant was an employee, and she set in motion a damages phase of the case. Thereafter, the U.S. District Court in Miami granted a motion to disqualify Claimant’s counsel based on improper contacts with Respondent during the arbitration, contacts found to have been calculated to undermine the effectiveness of Respondent’s counsel. The District Court also received Respondent’s motion to vacate the Interim Award on Liability, and ruled that (1) the award was sufficiently final to be subject to review under the FAA, and (2) based on the same circumstances that warranted disqualification of counsel, the award had been “procured by fraud, corruption, or undue means” (FAA § 10 (a) (1)) and therefore should be vacated. In Avventura, the Eleventh Circuit reversed on the basis that the Interim Award was non-final and therefore the District Court lacked power to apply the FAA grounds for vacatur.

At least in part because Respondent did not submit a brief, the Eleventh Circuit in Avventura did not consider case law from other Circuits that permits FAA review of arbitration awards that do not end the arbitration in at least three circumstances:

1) an award of provisional relief, where judicial enforcement of the award is necessary for the provisional measures to be effective,

2) an award that fully resolves a separate and independent claim within the arbitration,

3) an award that finally determines liability, where the parties have agreed to the bifurcation of the arbitration into liability and damages phases.

The Avventura award appears to have qualified for FAA review under Category 3.  But the Court did not evidently find that  case law in its own research, and adopted what we may call the Anti-Schubert Rule: no Unfinished Symphonies.  The Court treated “final[ity]” in the FAA as a literal concept, and held that an award is not final when “the arbitrator’s work [is] not complete.”

The Eleventh Circuit will undo its Anti-Schubert Rule in due course, we may reasonably predict. My concern is, more broadly, with Category 3, concerning bifurcated arbitrations, and why it is (or is not) necessary for there to be an express agreement of the parties to bifurcate, made during the arbitration, as a precondition of FAA review of a partial award on liability.

The reason given by courts for assigning importance to the parties’ agreement to bifurcate (as originally stated by the Second Circuit in the Trade & Transport case in 1991, and repeated by the First Circuit in the Hart Surgical case in 2001) was that such agreement provided assurance to the courts that the parties and arbitrators understood during the arbitration that the award on the bifurcated issue (usually liability) would be final and binding and that the arbitrator would be functus officio with respect thereto. But if the rules of arbitration adopted by the parties provide for partial and interim as well as final awards, and provide that all such awards shall be final and binding on the parties, and provide that awards may only be modified by arbitrators to correct clerical errors, isn’t is fair to say that the power of the arbitrator to make a partial award that has sufficient finality to be judicially reviewable is built into the agreement to arbitrate? (The final and binding status of any award the tribunal might issue is clear in, for example, the arbitration rules of the ICDR, ICC, and UNCITRAL, and in the 2010 JAMS Comprehensive Arbitration Rules; the AAA Commercial Rules are less clear but the same conclusion is inferrable). Arguably, the existence or not of an explicit bifurcation agreement made during the arbitration should only matter if the rules governing the arbitration leave uncertainty about the ability of the arbitrator to reconsider, and reverse or modify substantively, an interlocutory decision called an “award.”

In the future courts may wish to consider whether an agreement of the parties to bifurcate liability and damages, or to bifurcate the arbitration in some other fashion that entails multiple awards, ought to be the necessary predicate for a court to decide that a partial or interim award is reviewable.  “Finality” under the FAA is not defined precisely, and so it should be determined pragmatically. Absent other indications of what the parties intended, or expected, core principles underlying the FAA would suggest that the finality of an award that leaves some issues still open should be determined according to (1) the arbitrator’s indicated intention that the decision resolves a matter permanently and irreversibly, not temporarily or provisionally, (2) the importance of immediate review to the effectiveness of the arbitral decision, and (3) whether review is more likely to advance the completion of the arbitration or, at the opposite pole, disrupt the case with piecemeal review.

If the parties did not agree to bifurcation, but instead had bifurcation imposed by the arbitrator(s), the absence of agreement should not necessarily determine that a partial award on liability lacks jurisdictional eligibility to be confirmed or vacated. This circumstance instead requires courts to make record- and context- specific pragmatic judgments about the virtue or vice of interlocutory review.  Suppose the arbitration is conducted under a provider’s rules that permit (as nearly all do) partial and interim awards and contain no limits on arbitrator discretion to bifurcate. Bifurcation of liability and damages is sought by Claimant, opposed by Respondent, and granted by the arbitrators in an early procedural order that states expressly the Tribunal’s intention that the liability phase will culminate in a partial award on liability that finally determines liability and leaves the Tribunal functus officio as to liability, and will be, as far as the Tribunal is concerned, subject to judicial review. Suppose further that the prospective virtue or vice of interlocutory review was clearly argued to the Tribunal in the motion to bifurcate. If the Tribunal after hearing the liability phase of the case follows through with a partial award on liability, the Tribunal’s judgment that interlocutory review provides more virtue than vice should be respected by the court absent some compelling countervailing consideration relating to the arbitral process.

The Strange Career of the Reasoned Award

The Yankees win!! The….Yankees…..WIN!!!

New Yorkers of a certain sporting obsession will recognize this as the triumphal incantation that concludes their radio baseball broadcasts, on the not-so-frequent occasions when the Yankees do, as they once did prodigiously, win.

New York arbitration lawyers will also recognize this as the form of a “Standard Award” in domestic commercial arbitration. Declare a winner, and sign off.

Those of you seeking a primer or a refresher course in the architecture of American arbitration awards would, by reading Tully Construction Co. v. Canam Steel Corp., 2015 WL 906128 (S.D.N.Y. Mar. 2, 2015), be informed, or reminded, that here in the USA we have : (1) the Standard Award (“The Yankees win!“) (2) the Reasoned Award (perhaps not more than “The weight of the credible evidence shows that, after nine innings, the Yankees have four runs and the Red Sox only two!“), and (3) Findings of Fact and Conclusions of Law (wherein the arbitrator must actually think and act like a judge). As an historical matter, there have been relatively few domestic arbitrations wherein the parties demanded an Award in form of Findings of Fact and Conclusions of Law as understood in the litigation process. Americans, as a rule, like their arbitration outcomes raw and lean. (And besides, as one reader has pointed out, it was thought that if the courts could not ascertain the basis for the decision, it would be more difficult for them to disagree with it).

The Tully case involved a dispute over steel components supplied to repair New York’s Bronx-Whitestone Bridge (a viable route to Yankee Stadium from Queens and Long Island). The parties opted to tear up their AAA arbitration agreement in favor of a non-administered process before a designated sole arbitrator using AAA Rules for Complex Construction Cases. Those Rules provided, concerning the form of the Award, for (1) “a concise financial breakdown of any monetary awards,” and (2) unless otherwise agreed by the parties, “a reasoned award.”  The arbitrator, for his Award, provided the prescribed breakdown (by categories) of the monetary relief, and declared “Tully Wins!”  When asked by losing side to withdraw this Award and provide a reasoned award, the arbitrator ruled that the awards was reasoned under all applicable state and federal law.

Not correct, held the U.S. District Court in Manhattan, granting a motion to vacate the award. From the Court’s decision, we are reminded that the “Standard” award, as a custom, evolved from early decisions holding that there is no federal common law principle requiring the arbitrator to state reasons for the result if the parties have not agreed that she should do so. We also learn that federal appeals courts have developed no uniform standard of what constitutes a reasoned award, and that district courts have allowed that it stands somewhere — and imprecisely so — between the Standard Award and Findings of Fact and Conclusions of Law. In practical terms the “somewhere” is a large domain — the courts evidently recognizing that judicial second-guessing of the arbitrator on the sufficiency of the exposition of reasons collides with the objectives of efficiency and finality. But Tully was a case about the absence of any exposition of reasons — and by issuing a purported final decision not in the form specified by the arbitration agreement, the arbitrator was held to have exceeded his powers. The case was remanded to the arbitrator for re-issuance of the award in compliant form.

Tully provides an important reminder about the domestic arbitration culture of the United States. The “Standard” arbitration award is a custom associated with domestic arbitration’s roots as a streamlined alternative to judicial process. But it is ironic that the standard award and the minimally-reasoned award retain popularity with arbitration users despite the inundation of domestic arbitration with pre-hearing and hearing process associated with courthouse litigation. In Tully, the arbitrator heard 17 days of testimony from nine fact witnesses and two experts, and admitted more than 800 exhibits. The demand for Arbitration had been filed December 30, 2009, and the hearing began November 6, 2012 —  so it is fair to assume there was an extensive discovery process. And yet the award took the form of a listing by categories of the amounts of monetary damages, essentially one page that mentioned no exhibits and cited no testimony. And still the arbitrator believed he had made a reasoned award.  Perhaps both parties expected more, but once the result was announced only the loser really cared.

Award-writing seems not to be a skill that is particularly valued in our domestic arbitration culture. The AAA’s Procedures for Large Complex Cases do not require a reasoned award, much less findings of fact and conclusions of law, unless the parties insist.  One rarely if ever sees, in the domestic setting, a provider-sponsored arbitrator training program focused on award-writing skills. The JAMS Arbitration Rules at least require, unless the parties agree otherwise, a “concise written statement” of the reasons for the award. One senses that JAMS’s instincts were toward more elaboration, but “concise” was adopted as an  acceptable limit beyond which JAMS could not go and expect to remain competitive with the AAA.  The CPR’s rules for domestic arbitration, administered and non-administered, say only that the award “shall state the reasoning” — a standard that seems more permissive than a “reasoned award” and surely does not push the envelope beyond the forgiving standards applied by reviewing courts.

And yet the provider institutions purport to be responding to user tendencies to prefer adjudication in the court systems, doing so notably by creating procedures for appellate arbitration. Perhaps the time is ripe for reconsideration of rules concerning the content of awards, especially for the type of large and complex case wherein parties would naturally expect the discipline of writing an opinion to be a primary line of defense against erroneous decision.  After all, how can the parties have confidence that the arbitrator has reached a correct result, or even that she paid sufficient attention to the massive record presented to her, if she has not completed the intellectual exercise of explaining her position in full written form?