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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?

Investment Arbitration Briefly Noted: Nice Try Venezuela!

Readers who watch American sports television while preparing briefs to ICSID tribunals will be familiar with a feature called “C’MON MAN!”, showing sports celebrities caught out in acts or declarations of startling incredulity. Surely this feature could be extended on occasion to the arguments of Host States opposing Investor expropriation claims. A case in point is the recent Award in Tidewater v. Venezuela, ICSID Case No. ARB/10/5 (March 17, 2015) (published at www.italaw.com) finding an expropriation, albeit of the lawful variety (once compensation would be determined and paid), of a maritime oil services business that had operated in Venezuelan waters since 1958. The Bolivarian Republic conceded that it had seized a few boats, but insisted that Claimant remained in effective control of its enterprise and was continuing to do business. The Tribunal rejected this effective control position of the Respondent State, taking particular note of the fact that, after the date of the alleged assets seizure, employees of Claimant’s Venezuelan subsidiary who brought employment claims in Venezuelan courts were directed to serve their pleadings on the Attorney General of Venezuela and were informed that only such service would be deemed good and sufficient. The eminent Tribunal chaired by Professor Campbell McLachlan elaborated its findings in measured tones. But surely must have been thinking, with regard to Venezeula’s effective control position: “C’MON MAN!”

Finding Mareva in Alligator Alley

You remember Jacksonville. Situated 480 miles north of Havana, and just south of the Georgia border, it is a place where prominent international arbitrators take afternoon naps at 37,000 feet after downing a glass or two of passable champagne in their capacious first class seats between Miami and New York. It is home to two U.S. Navy bases, a dreadful professional football team, and at least one very meticulous federal district judge who, in what was perhaps her first foray into the thicket of international arbitration after eight years on the federal bench, properly granted an anti-suit injunction against vexatious collateral proceedings in Libya wherein the movant sought pre-Award security for — or, one might say, pre-Award satisfaction of — a money damages claim that said Libyan movant had interposed against a local Jacksonville company in an ICC arbitration seated in Jacksonville. APR Energy LLC v. First Investment Group, 2015 WL 736275 (M.D. Fla. Feb. 20, 2015).

Arbitration Commentaries dares not try to entertain you with a second-hand account of a most faithful application of settled legal principles governing the issuance of foreign anti-suit injunctions in support of pending arbitrations seated in the US. I will, however, take issue with one dimension of the Court’s decision which, while obiter dicta, might tempt an arbitral tribunal or a reviewing court to go astray. This concerns the availability of asset freezing orders (”Mareva” orders) as pre-Award security measures in international arbitrations at a US seat.

The contract in APR Energy — for consulting services to be furnished by a Libyan firm in aid of the construction by a Jacksonville firm of an electric power plant in Libya for the State-owned electric utility — provided that it was governed by Florida law, and that any arbitration required would be held in Jacksonville under ICC Rules. It followed, so this Judge decided, that Florida law concerning pre-judgment remedies applied — by implication, whether the remedies were sought in Libya, in a Florida court, or from the arbitral tribunal. Under Florida civil procedure law, a Florida court may not, in a case pending before the court, grant provisional relief in the nature of a freezing order or asset seizure as security for an eventual judgment that the court might render on a claim for money damages only. (One of the conceptual hurdles for courts is that rules that may fairly be characterized as rules of civil procedures appear in statutes that are not necessarily called “civil procedure” and may at first blush look like rules of substantive law that the contract means to make applicable. Florida’s statute on pre-judgment remedies is a good example).

The arbitration clause carved out permission for a party to seek a preliminary injunction if such relief were necessary to protect the applicant’s rights during the arbitration and if the application did not require the court to resolve any aspect of the merits. On the question whether the Libyan proceeding was within the carve-out, such that the provisional relief request was not required to be arbitrated, the Court readily concluded that it was not exempted from arbitration. In justifying this position, the Court ought to have stopped at the simple proposition that the Arbitral Tribunal could order security under the ICC Rules and that there was no showing of imminent dissipation of assets. But the Court went a step further, and here fell into a regrettable common trap, stating that the relief sought did not need to be sought from the Libyan court, rather than the arbitral tribunal, because the arbitral tribunal could provide the relief under the conditions specified in Florida law on pre-judgment remedies.

The correct analysis, I suggest — and a federal district court in New York was persuaded of this — is that arbitrator’s power to grant such provisional relief is determined by the arbitration agreement and in turn usually by the arbitration rules agreed by the parties. Such rules (e.g. ICC Rules Art. 28) grant arbitrators power to issue any provisional relief they consider to be necessary and appropriate, and such rules do not typically confine the limits of such powers according to limitations on judicial provisional relief at the seat of the arbitration. The Federal Arbitration Act requires enforcement of the parties’ agreement upon the scope of such powers.  Of course, the parties might by agreement confine the arbitrator’s provisional relief powers to the comparable powers exercisable by a judge in the Florida courts in a plenary proceeding before her. But an agreement that Jacksonville shall be the seat of an ICC arbitration, without more, requires the arbitrator only to observe any mandatory limits on her powers specified in Florida’s statute governing international arbitrations. There is indeed such a statute, it is patterned on the UNCITRAL Model Law, and with respect to provisional relief obtainable from arbitrators it does not incorporate limitations on pre-judgment security remedies pertinent to cases brought in the courts of the State.

The difference between arbitral power and judicial power to grant an asset seizure or freezing order as a provisional remedy is evident in the Florida International Arbitration Act. Section 684.0018 of the Act entitled “Power of arbitral tribunal to order interim measures” states in pertinent part:

Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, grant interim measures.  An interim measure is any temporary measure, whether in the form of an award or in another form, by which, at any time before the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party to:

(3) Provide a means of preserving assets out of which a subsequent award may be satisfied…

This section stands in contrast to Section 684.0028 of the same Act, entitled “Court-ordered interim measures,” which provides:

A court has the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether the arbitration proceedings are held in this state, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures and in consideration of the specific features of international arbitration.

So it is indeed true that if one were to ask a state or federal court in Florida to provide an asset freezing order as a provisional measure in aid of arbitration, there would be a valid objection that under Florida law (as is the case under New York law and federal common law announced by the U.S. Supreme Court in the Grupo Mexicano case in 1999), an order directing the defendant to freeze or deposit assets to secure an eventual judgment for money damages only is prohibited.

But in Florida, international arbitration is autonomous, and proceedings in the courts are indigenous. At least that is so by the barometer of how the state’s International Arbitration Act treats interim relief. The interim measures powers of international arbitrators are derived from the agreement of the parties and the mandatory international arbitration procedural law of the State.

But what about enforcement, you ask. On what basis shall a U.S. District Court in Florida confirm the Award of a tribunal granting an asset freezing order, when the issuance of such an order by the Court in the first instance would have been contrary to the (civil procedure) law of the state in which the court sits, and indeed contrary to the state’s International Arbitration Act itself?

Faithful long-time readers of Arbitration Commentaries (I hope there are some) will recall that nearly this precise issue was resolved in favor of judicial enforcement of an arbitral Mareva order in CE International Resources Holdings LLC v. S.A. Minerals, Ltd., 2012 WL 6178236 (S.D.N.Y. Dec. 12, 2012). (Although in that case the element of a relevant state statute concerning international arbitration was absent). In CE International, despite the fact that the contract provided that it should be construed and enforced in accordance with New York law, and that arbitral proceedings under the ICDR Rules should take place in New York, the arbitrator granted a Mareva freezing order against the Respondents, in the form of an Interim Award, to provide security for a potential eventual final award of money damages by preventing the dissipation or concealment of assets. The estimable federal district court judge, overcoming an initial temptation to find that the arbitrator had acted in “manifest disregard of the law” in view of the prohibition against judicial freezing orders in damages cases before the courts under New York and federal law, concluded that (i) the ICDR Rules were clear in permitting the arbitrator to grant “any” interim measure, (2) the arbitrator’s powers in regard to interim measures were defined by the agreement of the parties and not by New York case law concerning the powers of judges, and (3) the US public policy favoring enforcement of arbitration agreements — and thus here the parties’ agreement on broad arbitral interim relief powers by virtue of their adoption of the ICDR Rules — trumped any “policy” against pre-judgment security reflected in the law of New York and the United States concerning judicial pre-judgment relief.

This was in fact a rather complex sorting out by the New York federal judge of a multi-variable equation involving elements of choice of law, characterization of state law as substantive or procedural for purposes of applying the parties’ contractual choice of law, sorting of judicial and arbitral roles, and application of the oft-stated FAA-mandated “pro-arbitration policy” versus the “public policy” considerations that motivate certain rules of judicial procedure. But ultimately that equation can be condensed into the simpler proposition stated above: arbitration is autonomous while judicial proceedings are indigenous. “Autonomy” is routinely invoked in relation to arbitration, in theoretical discussion, but its practical applications remain challenging in many contexts. An agreement to arbitrate an international case against a Libyan party in Jacksonville or in New York renders the arbitration Floridian or Manhattanite only to the extent the parties make it so. The parties can reasonably be supposed to have agreed, by virtue of selecting a place of arbitration, to have their proceedings governed by the laws of the place of arbitration concerning the powers of arbitrators and the conduct of arbitral proceedings. They could make a special agreement that the arbitration should be governed by the rules of civil procedure of the state, or that the arbitrators’ powers should be co-extensive with the powers of judges in civil proceedings in the courts of the state. But if they have not done so, it is not reasonably possible to state a persuasive rationale for the mandatory application by arbitrators of such judicial rules and such limitations on judicial powers. This proposition turns out to be remarkably elusive in the real world of the federal courts, as demonstrated by the dicta in this new case from Jacksonville and the initial hesitation of the judge in the CE International case. The instinct of a judge that an arbitrator’s powers should generally be subsidiary to the powers of a judge is quite natural, and it falls to counsel advocating effectively for their clients to guide judges down the proper analytical path.

***

“Alligator Alley” is an affectionate Florida appellation for a section of Interstate Highway #75 between Miami and Tampa.It does not serve Jacksonville, but all federal courthouses along its path are, like the one in Jacksonville, in the federal judicial district known as the Middle District of Florida (M.D.Fla.).

9th Circuit Rescues Gambling Las Vegas Arbitrator

Here in the United States, where most otherwise-retired lawyers, and a fair number of late-career pastry chefs and insurance sellers, seek to reinvent as commercial arbitrators, the warning to aspiring arbitrators “not to give up [their] day job[s],” at least not without a healthy sustaining pension, is often heard. But one arbitrator in Las Vegas heeded this warning a bit too seriously, causing enough “evident partiality” havoc in the federal district court there to move the 9th Circuit Court of Appeals into an immediate rescue action by means of the rarely-used writ of mandamus. In re Sussex, 2015 WL 327558 (9th Cir. Jan. 27, 2015).

Las Vegas being the original outpost of legalized casino gambling in the USA, the local attorney in today’s story decided to roll the dice on a mini-Burford-of-the-Desert scheme, exploring whether he might raise a fund to invest in high-value high-probability claims. But the attorney had a better run of luck at the AAA casino than in the litigation funding market, managing to garner sole arbitrator appointments in three related class-action arbitrations brought by 385 disgruntled investors in condo units at the MGM Grand. Not bothering to disclose the funding venture to the AAA, our arbitrator attracted a challenge by the Respondents when the venture was discovered and the Respondents advanced the suspicion that the reason for non-disclosure was that the arbitrator intended to rule for Claimants and then point to the award as an attraction for investors to invest in a fund that would finance similar class or mass claims. The arbitrator told the AAA he had no such intentions, and that the proposed litigation funding venture had never launched, and the AAA denied the challenge. Unsatisfied, Respondents asked the federal district court to remove the arbitrator, and that request was granted — leading to the 9th Circuit’s intervention, and grist for this blog (reason enough to cheer the 9th Circuit, but there is more).

This is not mainly a tale about arbitrator ethics, readers. It is mainly about the 9th Circuit staying in line, in an emphatic way, with settled federal case law in most arbitration-active US jurisdictions that flatly prohibits mid-arbitration judicial intervention for nearly any reason (with a handful of exceptions for enforcement of certain partial final awards, enforcement of arbitral subpoenas, and filling arbitral tribunal vacancies where no other method exists, all topics you will have read or been invited to read about in these web pages). That doctrine is particularly well-developed in regard to mid-arbitration bias challenges against an arbitrator.

The 9th Circuit was not particularly out of line before this Sussex decision. In the 9th Circuit case relied upon by the district court to justify intervention to remove the arbitrator here, the Circuit had reversed a district court ruling that changed the venue of arbitration, and the Circuit said that such mid-course intervention was improper except in the most extreme circumstances. The district judge whose order was reversed here thought this situation fit within the “extreme” exception — taking the view that it was inevitable that any award by this arbitrator would be tainted by bias, so that it would be unfair to the parties to require them to bear the cost of arbitrating the case twice.

The 9th Circuit to its credit was careful to hold that this district court intervention would have been improper even if the district court had been clearly correct (rather than clearly wrong, as it was) in forecasting an eventual vacatur for “evident partiality” of any award this arbitrator might render in the case. In the 9th Circuit Court’s view, the added cost of possibly having to repeat proceedings is not an “extreme circumstance,” in part because if it were, district courts would be barraged with such applications and urged based on the size of the case and the burdens relative to the means of the parties to find the “extreme” requirement satisfied.

So, for readers abroad and on the US Eastern Seaboard who may equally view the 9th Circuit as a “foreign” court, this is a gratifying reaffirmation of the US judicial norm of non-intervention in an ongoing arbitration. One might perhaps have hoped that the Court would have gone further, and held that the challenge process in the AAA Commercial Rules was exclusive and final and represented the binding agreement of the parties with regard to mid-course relief for arbitrator bias. But the Court’s reasoning makes that effectively, if not explicitly, true.

As for our colleague in Las Vegas, it does seem remarkable that he would have jeopardized an interesting and presumably lucrative AAA appointment by withholding disclosure of facts about his having waded but ultimately not dived into the turbulent waters of third-party litigation funding. Having not actually formed a fund to invest in any claims, much less the claims of the claimants appearing before him, he could not reasonably have supposed that the bias claim against him was sustainable. Why gamble in this fashion with such a promising leap forward in an arbitration career — even in Las Vegas?