Yukos: Worth the Wait for the Dutch Appeal

Just when you thought you knew what you needed to know about enforcement (or not) of annulled foreign awards, along comes the Yukos case in yet another chapter. This one is entitled What to Do While We Wait for the Dutch Appeal?. It is written by a US District Court judge in Washington DC. And the Answer is: Just Wait! (Hulley Enterprises Ltd. v. Russian Federation, 2016 WL 5675348 (D.D.C. Sept. 30, 2016)).

In case you are recently returned from the Gulag, here are the basics: tagged with a $50 billion award by a Dutch-seated Tribunal, for carrying out a tax-based vengeance scheme against the politically hostile oligarchs who came to control the denationalized petrol colossus Yukos, Tsar Vladimir sent his lawyers to a Dutch first instance court to get the Award annulled for lack of jurisdiction. There Vlad won on a point he had lost before the Tribunal: that Russia never validly adopted the arbitration scheme of the Energy Charter Treaty (ECT) — no arbitration agreement=no valid award. The Dutch first instance court, unimpressed with the analysis given by a cobbled-together Tribunal of international law neophytes named Schwebel, Poncet and Fortier, bought this argument, and consumed all the Ossetra Caviar and Stolichnaya-laced Kool-Aid that Vlad presented with it.

America being a land teeming with Russian Federation assets,  Ossetra Caviar being perhaps the most delectable, the Yukos shareholders sought confirmation of the Award in a federal court in Washington D.C.– making their filing in 2014 hard on the heels of Russia’s filing of the annulment case in The Hague. Subject matter jurisdiction of the DC confirmation case was alleged to be based on the Foreign Sovereign Immunities Act (FSIA) — and, for our simple-story purposes, on the FSIA’s “arbitration exception” to sovereign immunity.  That “exception” applies, and permits US courts to exercise jurisdiction over an action against a foreign sovereign, in an action to confirm a foreign arbitral award that “is or may be governed by” the New York Convention. (28 USC §1605 (a)(6)).

The first 18 months or so of this US confirmation action need not concern us here. But once the first instance Dutch Court had annulled the Award , as it did to much consternation in April 2016, the Award-winning Yukos shareholders asked the US Court to stay their own US enforcement case pending an appeal in the Dutch judicial system that might undo the first instance set aside judgment. Putin & Co., Bearish, opposed the motion to stay and insisted that the Court should proceed to address the threshold issue of its subject matter jurisdiction, meaning that the Court should decide upon the applicability or not of the arbitration exception to sovereign immunity under the FSIA with regard to proposed confirmation of an award lawfully judicially annulled at the arbitral seat. Understandably, Russia expected to argue that, with deference to the first instance court in the Hague, the US court should find subject matter jurisdiction absent if, on the view that Russia never signed up for arbitration under the ECT, there would be no possibility of enforcement under the New York Convention.

As a District Court judge concerned with efficiency, comity, and eventually an orderly and thoughtful adjudication, if required, under the New York Convention and the FSIA, to decide as she did in favor of a stay appears to have been an inevitable conclusion. But we should observe closely, and perhaps marvel a bit in this instance, at the method and the analysis. The key points in the view of this observer are these:

1) The proper legal framework for analyzing the stay-versus-adjudicate issue is not Article VI of the New York Convention – which permits the enforcement cofht at the seat. Instead the legal frame of reference is the discretion afforded the court in the exercise of its “inherent power” to manage its own docket, a power well established in American law. That is the situation here because the applicability of the New York Convention is a merits question, and so Article VI may not be invoked as the basis for adjourning the enforcement action in advance of a judicial determination that subject matter jurisdiction exists. Like a dismissal on the basis of the doctrine of forum non conveniens, a stay of proceedings based on the Court “inherent powers to manage its docket” is one of the rare significant adjudications that a federal court may make before its subject matter jurisdiction is determined.

2) Comity, that is to say deference to the adjudicatory power and action of a foreign court, may, and in this case did, favor a stay of the US confirmation of the Yukos award, because the eventual Dutch appellate court judgment sustaining either the Award or the annulment judgment would, under the US case law on enforcement of foreign awards and non-enforcement of annulled foreign awards, decide or substantially influence the eventual decision in the confirmation case. The Court rightly reasoned that if the Dutch appellate courts uphold the annulment as a lawful annulment, the Award-winning Shareholders might well find the chances of confirmation in the US to be so remote that the confirmation case might be withdrawn.  If the Dutch courts reinstate the award, the Court noted, there could be arguments both ways as to whether Russia is entitled under the New York Convention to a de novo examination of the arbitral jurisdiction/ECT issue in the US Court, but even if such de novo review were required the Court might find the Dutch court’s analysis to be helpful and persuasive.

3) An analysis of whether the Shareholders would be entitled to a stay of the confirmation action under NY Convention Article VI served as a useful as a cross check (in dictum) on the court’s “inherent power” analysis — with the Court here finding that the same outcome would have been reached had the Convention been applied.

It is difficult to know from the opinion how extensively the parties briefed the question that is presented in the Dutch courts, that is to say, how much weight the Shareholders placed on the argument that the Dutch appeal was likely to result in reinstatement of the Award. Many sources in the arbitration community have expressed the view that the appeal has a significant chance of success. It would have been a possible outcome for the Court to deny the stay, deny subject matter jurisdiction under the FSIA, dismiss the enforcement action, and leave the Shareholders with the option to apply for reconsideration in case of a reversal in the Dutch courts. This was the outcome sought by the Russian Federation, which made little effort to conceal its desire for the immediate political victory of a US judgment rejecting US jurisdiction over the Russian State. The Court here determined that, on balance, there was more hardship involved for the Shareholders in requiring them potentially to apply for reconsideration than there was for Russia in having the inert confirmation case remain pending during the estimated 2-3 years needed for the Dutch appellate proceedings to be completed.


Do Tell

Your commentator can get cranky about arbitrator disclosure. Okay, okay, I can get cranky about many subjects, but still. Party-appointed arbitrators are not going away any time soon, and courts (at least US courts) are not adopting a strong law-and-order stand on “evident partiality.” So, as you think about the disconnect between the disclosure/independence standards of big providers like the AAA, and the test for vacating awards for “evident partiality” in big reviewing courts like the US Second Circuit Court of Appeals, read Merck & Co. v. Pericor Therapeutics, Inc., 2016 WL 4491441 (SDNY Aug. 24, 2016) and maybe weep just a little bit.

This was a Big Pharma license arbitration and the Big Pharma Respondent selected as its party-appointed arbitrator one of “its own” — a recently retired Big Pharma chief of global litigation who prior to a 13 year stint in that position had been 14 years as a partner in a big Manhattan law firm that did plenty of Big Pharma work including work for joint ventures between members of that club including Respondent.

Nothing against Big Pharma from this commentator, or against companies selecting One of Their Own Kind as a party-nominated arbitrator. But let’s take a look at the candidate’s AAA initial disclosures as reported in the cited case:

 1) “[I] had infrequent professional dealings over the years” with Respondent’s General Counsel. Oh really? But what kind of dealings might such disclosure hypothetically mask? Do you (appointee) mean that maybe over 25 years you only did eight $30 billion deals for Respondent, one every three years, but those particulars aren’t important enough to deserve mention? And in between the deals maybe you had two lunches per year together at Le Bernardin, not very “frequent” but consistent, sumptuous, and memorable? But why mention such trifling details that would not justifiably create any doubts about your impeccable impartiality?

 2)  “[I] had occasional professional dealings with other members of the [Respondent’s] law department[].” What kind of dealings might is disclosure hypothetically mask? Do you (appointee) mean maybe that on each of those eight $30 billion deals you worked hand in hand with the Deputy GC for M&A and the Deputy GC for Regulatory? And maybe that one or both of them attended roughly half of those Le Bernardin lunches?

Now dear readers obviously I am being a provocateur here. But it is a serious question why such vague and prophylactic disclosures are not systematically rejected by provider organizations as patently inadequate. Assessment of impartiality under the standards stated in arbitration rules and arbitrator codes of ethics would seem to demand particulars that enable an adverse party to judge the texture of a relationship and its probable impact on the candidate’s mindset. The candidate in the cited case made supplemental disclosures but still they do not seem to reveal any contextual details of the relevant relationships. A challenge to his appointment was rejected by the AAA.

This kind of disclosure is perhaps more frequent among candidates who are “friends and family” appointees, in contrast to the disclosures typically made by those who arbitrate for a living or aspire to do so. For the latter group, the parties’ full satisfaction with their independence and impartiality generally evokes very fulsome disclosure, because the candidate is making an investment not only in the pending appointment but in her long-term credibility and stature.

The disclosure standards observed by nominees and imposed by the provider organizations are critical in the US because federal law treads very lightly lest the law interfere with the efficient functioning of the arbitral system. Judicial challenges to an arbitrator during the course of an arbitration are not accepted; the recourse available is against the award, on the basis that it should be vacated because of “evident partiality.” So an impure process may be nullified but not purified. Moreover, as readers of the Merck case will be reminded, for partiality to be “evident” the applicant for award vacatur must show that it is nearly inevitable that the decision was the product of bias. This is an exceedingly difficult showing to make, and will very rarely be made successfully when the only basis for the motion is that some disclosure details were omitted that probably should have been provided. (Thus Award-losers that hire investigators to dig dirt on arbitrators who they perceive to have been biased, in service of a judicial attack on the award, rarely get their money’s worth for the effort).

Some of this post-award dirt-digging however is not just sour grapes by sore losers. It is a derivative of a system that at the provider level allows arbitrators to pass muster without making robust disclosures. The providers are not well suited to conduct a discovery process if an adverse party believes more questions should be answered more pointedly. Challenges often fail because the challengers cannot effectively conduct pre-appointment discovery and the information challengers are able to obtain, largely from their own sources, in a narrow time window, will often be inconclusive.

Are we asking too much to call upon the providers to act more aggressively, especially with “friends and family” party nominees, so that extensive professional relationships especially in a business setting are described extensively and not with generic phrases like “infrequent professional dealings” that do little more than put the non-appointing party on inquiry notice for an inquiry it is not then in an effective position to undertake?


Set Aside Time

If you are a casual reader of recent US case law concerning investment treaty arbitration, and have not committed to spending less time following the US presidential election and more time poring through 400-odd page investment arbitration awards, you might have missed this remark by the Arbitral Tribunal (constituted under the Stockholm Chamber of Commerce Rules pursuant to the arbitration clause of the Energy Charter Treaty) in its December 19, 2013 Final Award in Stati v. Republic of Kazakhstan: “[T]here are only a modest number of investment treaty cases on record in which a state’s mistreatment of an investor was so severe, intentional, and multi-faceted as Kazakhstan’s treatment of Claimants in this dispute. There are even fewer cases on record in which that treatment was admittedly ordered by the Respondent’s Head of State and carried out by dozens of state organs and instrumentalities over a period of years.” (The Award as filed in the District Court for the District of Columbia is published at www.italaw.com and also can be found by PACER subscribers in the electronic docket of the US enforcement case, No. 1:14-cv-00175-ABJ).

Before we turn to a US district judge’s ruling last month, granting a stay of the confirmation action to await a Swedish court’s decision on a set-aside application made by Kazakhstan (Stati v. Republic of Kazakhstan, 2016 WL 4191540 (D.D.C. Aug. 5, 2016)), several preliminary points deserve attention. First, this Energy Charter Treaty award given by a Stockholm Chamber of Commerce Tribunal for Kazakhstan’s breach of the treaty’s fair and equitable treatment (FET) requirement is quite large even by the outsize Texan standards of the energy sector — nearly $500 million. Second, among the grounds raised by Kazakhstan for non-enforcement and vacatur of the Award is that it was at least in part procured by fraud — evidently relating to the bona fides of an expert report presented to the Tribunal by the Claimants concerning one of the affected projects. Third, these grounds had been submitted in extenso by Kazakhstan in at least three fora — the High Court in London and the US District Court in Washington, where confirmation of the Award under the New York Convention (as adopted by national arbitration law) was sought, and the Svea Court of Appeal in Stockholm as the competent court under Swedish arbitration law to consider an award annulment action pertaining to an award made in an arbitration conducted at a Stockholm seat. Fourth, Kazakhstan in the confirmation actions in London and New York did not apply to either court to stay the proceedings in favor of the Swedish annulment action but instead made full legal and factual submissions in support of its position that confirmation of the Award under the New York Convention should be denied – but did refer to the pendency of the annulment action and informed the courts that Kazakhstan would not oppose a stay of the confirmation cases if the judges were inclined to go in that direction.

So what has happened here, unusual if not without precedent, is that stays of proceedings for award confirmation under the New York Convention have been granted effectively sua sponte by the Courts of two States where confirmation was requested. This presents a useful opportunity to compare the approaches taken by the UK and US judges in reaching the same result.

For the High Court in London in its sua sponte adjournment Rulings of September 1, 2015 (2015 EWHC 2542 (Comm), also published at www.italaw.com), these were the key elements:

1) the annulment application could not be regarded as having been made in bad faith or as having only “a fanciful, as opposed to real, prospect[] of success” (It is not evident in the Judgment whether the High Court had the benefit of reading the Orders of US Southern District of New York Judges Wood and Stein, who had, respectively, granted Kazakhstan’s Section 1782 petition for discovery from a law firm in aid of its annulment proceeding in Sweden, and denied the Stati group’s motion for reconsideration. Those orders reveal that Kazakhstan was seeking evidence that in parallel arbitrations involving one of the same gas exploration projects, a substantially lower valuation had been submitted for purposes of quantifying the loss. The actual submissions made to the Swedish court evidently are confidential, and while they may have been available to the High Court, they are not available to your commentator.)

2) there being a “high degree of overlap,” in the issues, the Swedish court’s reasoning especially on the presented issues of Swedish arbitration law would be helpful and perhaps persuasive to the UK court at a later hearing, and having the hearing at a later date would help to avoid inconsistent judgments and would be in the interests of comity,

3) considering the High Court’s own resource limitations and the demands of other High Court applicants in other urgent matters, there was a public interest in deferring consideration of a complex and time consuming matter that ultimately might not need to be heard and would likely consume time that could more properly be devoted to other cases, and

4) the claimants’ interests in moving forward expeditiously with enforcement against any assets found in the UK, and potential prejudice from delay, could be addressed if appropriate by an award of security (denied, however, in a separate contemporaneous judgment, wherein considerable emphasis was placed on the fact that Kazakhstan stood fully prepare to proceed with a hearing on its opposition to the confirmation application).

The federal district court in Washington D.C. faced the same stay of confirmation question with regard to the same award, and resolved that issue (and also a series of issues concerning subject matter jurisdiction over Kazakhstan under the Foreign Sovereign Immunities Act) this past month. But with hearings in Sweden on the annulment application now said to be only a few weeks away, pragmatism carried the day in favor of a stay of enforcement, and there was little occasion for nuanced balancing of “the [New York]Convention’s policy favoring confirmation of arbitral awards against the principle of international comity embraced by the Convention” (the quoted language being a formula embraced by at least two federal courts of appeals). What stands out about the US court’s adjudication is how formulaic the decision appears to be, largely because a leading court of appeals case, in particular the Europcar case in the Second Circuit in 1998, set forth a “non-exhaustive list of six factors” to be applied by district court asked to stay confirmation proceedings under the Convention. Multi-factor checklists of this type sometimes discourage a full display of in depth analysis, and move the written opinion in the direction of a more cursory tallying of pluses and minuses.We see here the reference to “international comity” but without any particular analysis of whether issues of Swedish arbitration law predominate in the annulment proceeding. One sees here a hopeful view that the imminence of the hearings in Sweden might foreshadow a near term resolution of the matter, but only a glancing reference is made to the prospect of a further appeal in the Swedish courts, the time that might involve, and how this might relate to the age of the dispute, the years that were involved in reaching a final award, and the eminence of the tribunal that rendered the award and the compendious and evidently meticulous nature of its work product. Certainly one does not see mention in the opinion that the New York Convention’s enforcement design was intended to eliminate the “double exequatur” requirement under its leading forerunner conventions and the arbitration laws of many States (a point which in contrast was duly noted by the High Court in London), and the court does not identify as a concern that too liberal of an attitude favoring stays of confirmation action may creates a drift toward the old regime.

These comments are not meant to suggest that the US court has reached the wrong result. Your commentator has read neither the entirety of the Tribunal’s award nor any of the submissions made to the Swedish court. But it is reasonable to assume that the US judge did that reading. And so there is an opportunity in a case like this, one that has a certain transnational prominence, and an importance to the investment arbitration system, for a US judge to conduct the required “balancing” in a rather more visibly thorough way. It might be said, in opposition to this, that “comity” militates in favor of reticence — i.e. the judge deciding to adjourn the confirmation case should avoid publishing comments that might be seen as an attempt to influence the judgment of the annulment court at the arbitral seat. And while there is merit to that position, still one would hope for an approach wherein there is an inquiry in the published opinion into whether there is a “prima facie” basis for the annulment if the record allows such an inquiry to be made. (Compare, on this point, the High Court’s approach in its separate judgment denying security: “[M]y conclusion is that the challenge to the Award in the Swedish proceedings has a real chance of success. Beyond that, I do not feel able to place the merits at any particular point on a sliding scale between arguable and manifestly valid.”)

The action now shifts back to Sweden, where, according to the District of Columbia opinion, hearings on the annulment questions are to be heard in September-October.

Making US Arbitration Law Great Again

Dear foreign readers, this is one of those posts about the architecture of American arbitration law that may leave you convinced that the US could make itself great again by shredding the Federal Arbitration Act (FAA) and installing in its place the UNCITRAL Model Law, or at least the Magna Carta. But do read on. This report concerns one of the infamous “circuit splits” — divergent positions among US federal courts of appeals — that may lead to definitive adjudication in the US Supreme Court. And whereas this split derives from opposite positions about what the Supreme Court has said about the FAA in a heretofore rather obscure 2009 case, and the present situation makes for a rather messy polyglot of state court and federal court jurisdiction in FAA cases, the Supremes, with or without a ninth Justice, may find this issue too ripe to resist.

It should be recalled that in US domestic arbitration cases, those not qualifying as international under the New York or Panama Convention, access to the US federal courts for FAA remedies requires an “independent” basis of jurisdiction because the domestic FAA (Chapter One) does not confer jurisdiction on US District Courts but only specifies the relief they have power to grant if criteria for subject matter jurisdiction are satisfied. A question of federal law (“federal question”) is such a criterion, but it must be a question other than one of federal arbitration law. Thus, whether a domestic award should be vacated for manifest disregard of Montana contract law presents no federal question, whilst vacatur for manifest disregard of the US antitrust laws assuredly does. When the FAA action is a non-diverse one between Montana’s two human residents, their FAA issues related to commercial disputes over grazing lands for bison herds that straddle the Montana-Idaho border are cognizable only in the Montana and Idaho state courts, unless for instance the underlying commercial dispute concerns the scope of federal statutory grazing easements in the Wallowa-Whitman National Forest, in which case there is a “federal question” in controversy and this (plus a modest filing fee) unfurls the welcome mat on the federal courthouse veranda.

Now suppose these two herdsmen have an agreement to arbitrate, but one is recalcitrant and files a plenary action in the Montana state court. If the other files a petition in the federal court for an order compelling arbitration under FAA Section 4, what is the basis for federal jurisdiction? Petitioner says the arbitration involves a federal question. Respondent says the federal court petition presents only the question of arbitrability, governed by state contract law, and thus no independent basis for federal jurisdiction exists. Does the federal court “look through” the Section 4 petition to compel arbitration to see if there is a “federal question” presented in the underlying putative arbitrable controversy? This, in essence, was the main question decided by the Supreme Court in Vaden v Discover Bank, 556 US 49 (2009) (alas, the case involved credit cards in Maryland not bison in Montana, but no matter).

“Looking through” to the underlying arbitration to see if, on the merits, it involves a question federal law is indeed the way to go, held the Supreme Court in the  Vaden case. (And only federal claims count, not federal counterclaims or defenses, – a detail US lawyers know very well and foreign lawyers may bypass). And that conclusion, in a case (Vaden) that concerned only federal subject matter jurisdiction over an FAA Section 4 petition to compel arbitration, and contained no intended hint about the outcome if a different FAA application for relief had been made (confirm or vacate an award, enforce an arbitral subpoena, etc.), was held to be “driven by” the particular language of FAA Section 4 that instructs federal courts that they may be asked to grant a petition to compel arbitration if “save for” the arbitration agreement the controversy between the parties would be judicially cognizable in the federal court. (“A party aggrieved… may petition any United States district court which, save for such agreement, would have [subject matter] jurisdiction …in a civil action… arising out of the controversy between the parties…”).

The day had to come – post-Vaden —  when federal courts of appeals would need to confront this “look through” (or not) question in the framework of a party’s quest for federal jurisdiction over an FAA application for relief other than a Section 4  petition to compel arbitration. And indeed two such days did arrive – August 11 and 22, 2016 — in cases decided by the US Second and Third Circuit Courts of Appeals, each addressing whether to “look through” to the underlying arbitrated dispute in search of a “federal question” when the petition before the US district court is one that seeks to set aside the final arbitration award under FAA Section 10. (Doscher v. Sea Port Group Securities, 2016 WL 4245427 (2d Cir. Aug. 11, 2016); Goldman v. Citigroup Global Markets, 2016 WL 4434401 (3d Cir. Aug. 22, 2016)).

The Second Circuit in Doscher held that Vaden‘s reasoning as understood by the court mandates the same “look through” approach to jurisdiction over a Section 10 petition to vacate as was applied in Vaden to a Section 4 petition to compel. And the court’s analysis strongly implies that the same approach would be required no matter what relief is sought under FAA Chapter 1. For the Second Circuit, the main analytical challenge was to reconcile the Vaden case’s statement that its conclusion was “driven by” the “save for the arbitration agreement” language in FAA Section 4 with Vaden‘s assertion that nothing in FAA Chapter 1 purports to enlarge federal jurisdiction (the Court, per Justice Ginsburg, having referred to FAA Chapter 1 as a statute with an “antijurisdictional cast”). If Section 4’s “save for” clause justified a “look through” approach to Section 4 petitions to compel arbitration, but not other FAA Chapter 1 petitions (e.g. to confirm or vacate an award, or to enforce an arbitral subpoena or appoint an arbitrator) then Section 4’s language would have a federal jurisdiction-enlarging consequence relative to other FAA petitions for relief. The position of the Second Circuit in Doscher is that the “look through” expressly endorsed for Section 4 by the Supreme Court in Vaden is by implication the approach to be taken across the board under FAA Chapter 1. This approach also commends itself, per the Second Circuit, because it negates the utility of a familiar arbitration lawyer’s gambit whereby a party seeking to arbitrate first brings a federal court plenary action merely to vest the federal court with jurisdiction, and then moves to compel arbitration and for a stay under FAA Section 3. The gambit triggers a federal arbitration law rule that the district court’s subject matter jurisdiction, once properly vested notwithstanding that the case belonged in arbitration to begin with, endures throughout a stay pending arbitration and on into the post-award stage, such that the subject matter jurisdiction initially established may later be relied on to make applications for FAA remedies during or after the arbitration. Under the Second Circuit’s reasoning, the access advantage until now often gained by such artifice is available to all parties that could have, but for the arbitration clause, proceeded with a jurisdictionally-proper plenary action in the federal district court.

The Third Circuit in Goldman did not adopt this position, and wrote its opinion without reference to the Second Circuit’s decision eleven days earlier. For the Third Circuit, the presence of the “save for the arbitration agreement” language in FAA Section 4, the absence of comparable language in FAA Section 10 (or any other Section in FAA Chapter 1), and the Vaden Court’s statement that its decision was “driven by” the “save for” language in Section 4, combine to support the conclusion that the “look through” approach does not apply to a FAA Section 10 petition to vacate an award.  In the Third Circuit’s view, it is plausible to suppose that the US Congress when it enacted the FAA (in 1925) placed greater emphasis on enforcement of arbitration agreements than on other arbitration-related judicial relief, and for this reason included in Section 4 special language to facilitate access to federal court to compel a recalcitrant party to arbitrate. The Third Circuit panel took note of the fact that its approach was in harmony with that taken by the District of Columbia Circuit in 1999 (ten years before Vaden) and by the Seventh Circuit earlier this year.

Which is the more cogent analysis? The Third Circuit follows a traditional path to statutory construction, noting the presence of important language in Section 4 (“save for…”) that is absent in Section 10 and elsewhere in Chapter One. But the Vaden Court per Justice Ginsburg referred to the “anti jurisdictional cast” of FAA Chapter 1. And the Third Circuit does not come to terms with this phrase. If the “save for” language in Section 4 allows for federal subject matter jurisdiction of Section 4 petitions in circumstances where other FAA petitions must be filed in state court, i.e. when there is an issue of federal law raised in the arbitration by the Claimant, then it would seem that Section 4 does have a “jurisdictional cast” while other Sections in FAA Chapter 1 do not. Reading the “save for” language of Section 4, by implication, into the other Sections of FAA Chapter 1 concerning judicial relief, which is what the Second Circuit has done, leaves the statute’s neutrality on the question of subject matter jurisdiction intact.

Stay tuned, dear readers, for possible certiorari petitions, and perhaps a petition for rehearing en banc in the Third Circuit, where a different three-judge panel in an earlier (but still post-Vaden) case had taken the “look through” view of jurisdiction under FAA Section 10 in what amounted to a dictum. In the Second Circuit, in contrast, we are told in a footnote to the Doscher opinion that it was pre-screened by every judge of the Second Circuit and that not one judge disagreed with it.

And for those of you international arbitrators who remain unconvinced that you have any stake in this arcane American quarrel, consider this: When you sit as an international arbitrator at a US seat, and issue an arbitral subpoena under FAA Section 7, you may wonder, even in the drafting of the subpoena, in what court the subpoena may be enforced if the witness is recalcitrant. FAA Section 7 is another of those Sections that appears to confer remedial powers on US district courts, but evidently does so only upon the condition that subject matter jurisdiction is independently established. (Section 7 states that the US district court for the federal judicial district in which the arbitrators, or a majority of them, are sitting, may compel compliance and sanction non-compliance).  The witness may be a former executive of the Montana-seated corporation appearing before you as the Claimant in an energy dispute against a company from the neighboring Province of Alberta. Does the US district court in Montana lack subject-matter jurisdiction because the motion to compel compliance with the subpoena involves non-diverse citizens of the same State, leaving your subpoena to be enforced, or not, on some unknown timetable and subject to state law rules on appealability, in the Montana state trial court? Or may the federal court in Montana “look through” the jurisdictionally non-diverse petition to enforce the subpoena to the underlying arbitration which is plainly based on an arbitration agreement that “falls under the [New York or Panama] Convention” as per FAA Chapter Two where arbitration issues are expressly declared to be federal questions (“aris[ing] under the laws and treaties of the United States”) for purposes of subject matter jurisdiction?

Do stay tuned, and beware of the wildlife during your Montana holidays and hearings.


Null But Not Void

One may read several times over the long-awaited decision of the US Second Circuit Court of Appeals upholding the confirmation under the Panama Convention of a $300 million commercial arbitration award against Mexico that had been annulled by a Mexican court at its Mexican seat, searching upon each fresh reading for some hint of a more generous opening for US enforcement of annulled foreign awards than the very restrictive case of an annulment that offends fundamental principles of US public policy. The repeated readings are not likely to bear fruit; the Second Circuit evidently is willing to go only this far and no farther.  (Corporacion Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. Pemex-Exploracion Y Producion, No. 13-4022, 2016 WL 4087215 (2d Cir. Aug. 2, 2016)). But at least we now know that such an annulled foreign award still is considered to exist such that US judicial discretion may be brought to bear upon it. That much is implicit in the basic architecture of the Court’s opinion, which is that the judicial discretion to enforce an annulled foreign award is not expressly limited by the Panama or New York Conventions, but is impliedly limited by principles of comity applicable to foreign judicial judgments including judgments annulling arbitration awards.

So, foreign sovereign readers, you may ask how you might get into trouble with the US courts and have your judicial judgments concerning arbitral awards forfeit the warm blanket of comity among nations in the courts of the United States. Well, start out with an organic law governing the affairs of a state-owned enterprise that expressly authorizes the company to put an arbitration clause in a contract. Add to that a law that says if the counterparty breaches the contract, the state owned company can rescind the contract. Then, when a dispute breaks out, and the counterparty wants payment, and the state owned company declares a rescission, and an arbitration begins, and the arbitral tribunal rules that it has jurisdiction, go to work on the legislative front. Pass a law that says rescission of a contract by a state-owned company is a sovereign act that cannot be arbitrated but only challenged in court. Pass a law that says the judicial challenge to such a sovereign act can only be brought in a particular court, and only within 45 days of the accrual of the cause of action.  And for good measure, seize the counterparty’s 94 percent-complete work product and forcibly banish its personnel from its work sites.

If, dear sovereigns, you follow this formula with care, you will learn, as did PEMEX the state-owned petroleum enterprise of Mexico, that un-waiving sovereign jurisdiction in the courts of the State) collides with the American conception of the rule of law: “Giving effect to [PEMEX’s] twelfth-hour invocation of sovereign immunity shatters [Plaintiff]’s investment-backed expectations in contracting, thereby impairing one of the core aims of contract law.” You too, dear sovereign, may hear from another US court, quoting this one, that “[r]etroactive legislation that cancels existing contract rights is repugnant to United States law.”  You too may hear from a US court that expropriation without payment of compensation violates US domestic policy not to mention many international trade treaties including the NAFTA. And you too may hear that American jurists tend to regard the meaningful availability of some forum to resolve a claim as a fundamental principle “firmly embedded in legal doctrine.” (Of course you may also read, in other chat rooms, that Uruguay recently convinced two non-American international arbitrators, but not the American-Born dissenting arbitrator, that effective denial to a foreign investor of a judicial forum to resolve vis-à-vis the Host State conflicting rulings from different domestic courts was not a denial of justice in violation of an investment treaty’s guarantee of fair and equitable treatment. Nice work Uruguay. But at least in that case the forum stalemate was an anomalous result of an ordinary allocation of judicial power, and not the foreordained outcome of a post-dispute gerrymandering as was done by Mexico).

But take heart, foreign sovereigns, this ruling from the US Second Circuit professes to be an exceptional response to an exceptionally egregious violation of the above series of related bedrock principles bundled into the American conception of the rule of law. The decision does not move the US in the direction of French doctrine in viewing foreign arbitral awards as having a tenuous link to the legal order of the arbitral seat. And the decision does not even hint that State court judgments annulling awards against that State are generally subject to an enhanced level of scrutiny as compared to other award annulment judgments.  One can detect here nearly no movement in US jurisprudence, but only a set of circumstances without precedent in the limited body of US case law concerning enforcement of annulled foreign awards.


Bluster in the Windy City

Dear Readers, I do like Chicago. It’s my kind of town. The Friendly Confines. The Tarzan Pool.  The Tribune Tower. And of course, not to be missed, the US Seventh Circuit Court of Appeals, usually friendly confines for arbitration awards.

But sometimes even the best of friends can be cranky and difficult. They have bad hair days. And today, here in the friendly confines of my New York summer office, I submit to you that the eminent Seventh Circuit jurist Richard Posner had such a day in Bankers Life & Casualty Co. v. CBRE Inc., 2016 WL 4056400 (7th Cir. July 29, 2016), in which, joined by only one of his two panel colleagues, he held that a three-member arbitral tribunal of retired Illinois judges exceeded their authority and that their award rejecting a breach a contract claim had to be vacated for that reason.

This was a commercial real estate case between a tenant (Bankers) and broker (CBRE).  CBRE knew that another tenant in the building (Groupon) needed more space, and that Bankers could make do with smaller and cheaper space elsewhere. So Bankers contracted with CBRE to sublease its space, presumably to Groupon, and the contract provided that CBRE would answer Bankers’ questions about the potential sublease. Bankers had its eyes on suitable space in another building and asked CBRE: “What would be our net savings if we move to the new place and sublease to Groupon?”  As its answer, CBRE provided a written cost-benefit analysis that answered the question this way: “$7 million estimated, as indicated by this cost-benefit analysis, but we disclaim any responsibility for errors in this estimate.” CBRE made a big mistake: The $7 million did not account for a $3.1 million tenant improvement allowance that Bankers had offered to Groupon and that CBRE knew had been offered by Bankers to Groupon. Bankers did not notice CBRE’s mistake until it was too late, relied on the $7 million net savings estimate, closed the real estate deals, discovered the mistake later on, and brought an arbitration claim under JAMS Rules.

The panel issued an award rejecting all three of Bankers’ claims (breach  of contract, negligent misrepresentation, and an Illinois statutory claim). Our focus is on the breach of contract claim because that is the claim whose resolution was, per Judge Posner and one colleague, in excess of the panel’s authority. The panel, interpreting the contract, and not overlooking the “answer our questions,” provision but instead quoting it in haec verba, held that there was no express promise in the contract to provide an accurate representation of net savings from subleasing and moving, and that the “entire agreement” clause in the contract precluded implying such a term. CBRE moved for reconsideration, and the panel, evidently not alerted to the fact that the JAMS Comprehensive Arbitration Rules do not provide for reconsideration but only for correction of arithmetic or typographical or clerical errors in an award (Rule 24(j)), issued a procedural order denying Bankers’ reconsideration motion based on its lack of merit. In that order, the panel specifically addressed the argument that the “answer our questions” provision necessarily implied a duty to provide accurate answers and that the duty was breached by providing an inaccurate answer. The panel stated that the “answer our questions” duty was fulfilled by providing the cost-benefit analysis that included the disclaimer of responsibility for errors, and that CBRE’s position about the “answer our questions” clause furnished no reason to reconsider and alter the award’s outcome on the breach of contract claim.

The District Court confirmed the award, and reasoned that whether the panel’s interpretation of the contract was right or wrong, it was an interpretation of the contract and so the Court was required to confirm the award under the Illinois Uniform Arbitration Act which in substance and application is not materially different from the FAA. (The transcript of the hearing at which the District Court’s order was announced is available in the docket on the Northern District of Illinois website. I have downloaded it.)

But for Judge Posner the matter looked different. First, he treated the order denying reconsideration as an award, and subjected its reasoning to review according to the legal standards applicable to an award. He proceeded to analyze the panel’s position regarding the “answer your questions” provision, and concluded that the contractual duty to answer questions accurately could not be excused by the disclaimer in CBRE’s cost-benefit analysis because the disclaimer was not contractual but instead was a unilateral term inserted by CBRE in the cost-benefit analysis. In effect, per Judge Posner, the arbitration panel gave contractual effect to a non-contractual term and by doing so exceeded its powers which were, in relevant respect, confined to interpreting the contract as written.

It is a technical objection, I suppose, but I think a correct technical objection, to state that the Seventh Circuit ought to have treated the reasoning in the panel’s procedural order denying reconsideration of the award as a nullity because the proper ground for denial of reconsideration, under the JAMS Rules, should have been that the panel lacked power to entertain the reconsideration motion. As to the merits, the panel was functus officio save for potential correction of clerical or typographical or arithmetic errors appearing on the face of the award, and so the panel’s observations in the procedural order denying reconsideration about the disclaimer in the cost-benefit analysis and its relationship to the “answer your questions” obligation ought to have been treated as statements having no legal effect, and certainly not as an additional award. (The parties had stipulated that the initial award, denominated “Final Award,” should be re-named “Interim Award,” but this was because the panel had not yet dealt with cost-shifting . The re-naming did re-open the award, either for changes in result or for embellishment of its rationale.)

The panel’s actual award, as opposed to the procedural order that the Seventh Circuit majority erroneously treats as an award, did not even mention the disclaimer in the cost-benefit analysis, and so the vacatur of that original award based only on the supposed excess of power in referring to the disclaimer in a post-award order denying reconsideration seems quite dubious. The case was already decided without reference to the disclaimer, and so the Seventh Circuit majority has reverse-engineered the reasoning of the subsequent order into the award in order to come up with an excess of authority outcome.

But let’s suppose that the panel’s reasoning in the subsequent order had in fact appeared in the original award. What then?  Wasn’t the panel entitled to consider that the question Bankers had asked CBRE was “what do you estimate to be the net savings we can reasonably expect to achieve by moving and subleasing”? And wasn’t the panel entitled to to interpret the “answer your questions” provision as containing no implied prohibition against including a disclaimer of responsibility for errors affecting an estimate in the answer to a question that called for the making of such an estimate? One can certainly disagree with this interpretation of the contract, but it is not a “wacky” interpretation or a failure to give any interpretation.

Like the dissenting judge on the Seventh Circuit panel, Arbitration Commentaries dissents, and offers its fearless forecast that this case if it is even long remembered will be viewed more as a bad hair day for Judge Posner than as a significant precedent concerning judicial review of arbitration awards.


Patriot Games

Arbitration lawyers follow Tom Brady’s case as they would track a Patriots game while in dutiful attendance at a painfully mis-scheduled wedding of an in-law’s niece on an otherwise perfect October Sunday. At obsessively frequent intervals, they check the Internet for score updates and game highlights. You are reading this, so how can you disagree? Arbitration Commentaries is your nfl.com.

You should know by now that the most popular Ted in Boston is not a Williams, not a Kennedy, but an Olson, as in Theodore C. Olson, the ex-Solicitor General now enlisted by the Brady team for the en banc initiative to rescue victory from the nearly-clenched jaws of defeat in the US Second Circuit Court of Appeals.  (Dear Non-US Readers, en banc is a discretionary reconsideration process in the federal courts of appeals whereby the full contingent of that judicial circuit’s appellate judges might hear anew a case decided by a three-judge panel. Brady is a practitioner of American professional football. Williams is a venerated practitioner of American professional baseball, who toiled for the Boston team from 1939 to 1960 with two wartime interludes as a fighter pilot).

This post is your first quarter update on the en banc contest.

The Brady en banc brief sounds two main themes. Your commentator thinks one could be a winner, the other maybe not. The first theme (the “maybe not”) is that the arbitration agreement didn’t give the NFL Commissioner power — when he acts in an arbitral capacity to hear an appeal of a disciplinary action taken by the League against a player —  to uphold the discipline based on new factual findings resulting from evidence introduced in the appeal hearing, i.e. findings of fact that were not made by the employer at the time the discipline was imposed. The Brady Brief seizes on language in the Second Circuit majority’s decision that nothing in Article 46 of the NFL Labor Agreement “purports to limit” the Commissioner’s authority in this respect. And, says the Brady Brief, this is wrong because arbitral authority must be based on an affirmative delegation in the arbitration agreement, not an inference of arbitral power derived from silence (the absence of a limitation) in the arbitration agreement, as the latter is the type of approach to arbitral power that the Supreme Court’s majority condemned in Stolt-Nielsen.   I say “maybe not” to this position because the Second Circuit majority, in the very next sentence, said that the agreement does expressly authorize the Commissioner to hold a hearing and to receive evidence, and that it is a reasonable construction of that express authorization that the result of the evidentiary hearing could be an outcome based on the evidence presented at the hearing that was not available to be considered at the time of the initial disciplinary decision.

The second theme is that for an arbitrator’s decision to “draw its essence” from the contract, the arbitrator’s award must reflect that the arbitrator actually has given consideration to portions of the contract that arguably bear upon the outcome. Here the Brady Brief perhaps gives #12 more hope, because the argument concerns the arbitrator’s decision process rather than the outcome. Process is entitled to less deference than outcome. At issue is whether the Labor Agreement’s provisions concerning discipline for “equipment/uniform violations” should have been explicitly considered by the NFL Commissioner in his award. The Second Circuit majority doesn’t address the Commissioner’s failure to reference those portions of the Labor Agreement in the award. Its approach instead is to show that, if the Commissioner had analyzed those provisions, he readily could have construed them (and perhaps did) as permitting suspension for four NFL regular season games as a sanction for a first offense.

But whether such a construction of the Labor Agreement’s provisions concerning “equipment/uniform violations” could have been given by the Commissioner seems besides the point: the question is whether the Commissioner’s decision fails to “draw its essence” from the contract if the Commissioner bypassed in the award an analytical step that was arguably necessary to an outward appearance of thorough consideration of the contract’s bearing upon the Commissioner’s range of disciplinary discretion in regard to the infraction in question. (Who said “Justice must not only be done but must be seen to be done“? Williams? Kennedy? Brady? It was a favorite expression of the late great Pierre Lalive, who was always more of a tennis guy than a football guy.) Here there is some vulnerability in the Second Circuit panel’s reasoning.

Another fourth quarter rally for the Patriots is not out of the question.  Stay tuned.


One Step at a Time

If you drafted this arbitration clause, ‘fess up: “In the event of any dispute and if the Parties cannot resolve the dispute through negotiation, the Parties agree first to try in good faith to settle the dispute by formal arbitration under the [ICC Rules] before submitting the matter to litigation….” Talk about a step clause to trip over. What is a district court judge to do?

The answer: Enforce the arbitration agreement as an agreement for binding arbitration, the only form of arbitration the ICC Rules permit. So held a judge of the US District Court in New York. Celltrace Communications Ltd v Acacia Research Corp., 2016 WL 3407848 (S.D.N.Y. June 16, 2016). Never mind any presumption in favor of arbitration, said the Court — finding correctly that there can be no such presumption where the question is whether an arbitration agreement even exists. The interpretation mandated by New York contract law principles (to give full meaning to all words of the contract, including the incorporated words of the ICC Rules, and construe them in harmony) is that the reference to litigation in this clause only contemplates post-award litigation for confirmation or vacatur of the award.

And what does it mean “first to try in good faith to settle by formal arbitration under ICC Rules”? Certainly not what the Plaintiff here did — to send an E mail to opposing counsel purporting to request arbitration. In the context of ICC arbitration, the good faith effort (the “old grandes écoles try”?) “requires, at a minimum, sending a request to the ICC Secretariat to initiate arbitration and continuing to act in good faith to complete the arbitration process.” (Best efforts buffs will find some interesting  research results here concerning what it means to “try in good faith” to accomplish a task).

Seriously, young and aspiring arbitration lawyers, do not draft a clause like this one, lest someone try in good faith to channel your legal career in another direction. For online guidance to stumble-free step clauses, see, e.g., AAA International Centre for Dispute Resolution, Guide to Drafting International Dispute Resolution Clauses, www.adr.org/aaa/ShowPDF?doc=ADRSTG_002539 (last visited July 1, 2016).

Penniless Parties

Get ready for the upcoming conference on Impecuniousness in Commercial Arbitration. No, not another session on third-party funding. Rather, our subject will be the law applicable to the inability of a party to pay its share of the arbitrators’ fees. And our main text will be a new (really) decision from the US Ninth Circuit Court of Appeals, holding that when an AAA commercial arbitration under the Commercial Rules has been terminated by the tribunal due to Claimant’s non-payment of deposits for arbitrator fees, and the reason for non-payment was genuine inability to pay, the federal district court should allow the Claimant’s case to proceed on the merits in court. (Tillman v. Tillman, 2016 WL 3343785 (9th Cir. June 15, 2016)).

I spare you the specifics of the case, save to note the Claimant did indeed try quite diligently to pursue the arbitration but simply ran out of money and could not pay, that Respondent declined to advance Claimant’s share of deposits, and that the arbitrator first suspended and ultimately terminated the case all as provided in AAA Commercial Rule R-57.

The case had originally been brought in court, but having been stayed pending arbitration under FAA Section 3 upon the granting of Respondent’s motion to compel arbitration. After the termination of the arbitration, Claimant sought to have the Section 3 stay vacated so that the case could proceed in the district court on the merits. Respondent sought to have the stay vacated so that the district court could enter an order of dismissal. The district court round went to the Respondent, with the district court finding that the FAA deprived the court of power to permit further litigation once a stay of proceedings pending arbitration had been granted. The Ninth Circuit rejected this conclusion in the narrow circumstances of this case where there was a clear evidentiary showing by the Claimant that she had attempted to participate in the arbitration in a fulsome way but was prevented by financial incapacity for proceeding to the stage of a merits hearing and a final award. On that foundation of facts, the Ninth Circuit drew two conclusions in applying the FAA’s text: first, that Section 3’s requirement that a stay pending arbitration endure until arbitration “has been had in accordance with the agreement” was satisfied where the arbitration had proceeded up to the point of a final order of termination under Commercial Rule R-53; second, there would no statutory basis for a renewed order compelling arbitration under Section 4, because there was no “failure, neglect, or refusal” to arbitrate.  Thus finding no basis in the FAA itself to penalize Claimant with summary dismissal of her court case under Federal Civil Procedure Rule 41(b) (involuntary dismissal for failure to comply with a court order), the Ninth Circuit held that such dismissal by the district court was erroneous,  a violation of the public policy-driven principle that “‘[d]istrict courts have an obligation and a duty to decided cases properly before them.'”

And in response to the position of Respondent  (and maybe a few naysayers in the arbitration community) that this position is an affront to the “‘liberal federal policy favoring arbitration,'” the Ninth Circuit says NO: “Our decision that Tillman’s case may proceed does not mean that parties may refuse to arbitrate by choosing not to pay for arbitration…. Here… the district court found that Tillman had exhausted her funds and was ‘unable to pay for her share of arbitration.'” Accordingly, the Court’s judgment that the case should proceed on the merits before the district court “does not run afoul” of the pro-arbitration policy.

What should be the result on the same question an arbitration governed by FAA Chapter Two and the New York Convention? Article II(3) of the Convention provides that the Court of a Contracting State shall refer the parties to arbitration at the request of one of them but need not do so if the arbitration agreement is (inter alia) “incapable of being performed.” Section 206 of the FAA speaks in permissive terms, i.e. that “[a] court having jurisdiction under this chapter may direct that arbitration be held in accordance with the agreement…” Thus Chapter 2 presents no unique obstacle to a result similar to that achieved in Tillman. And FAA Sections 3 , the sections interpreted an applied in Tillman, applies with equal force to international cases under Chapter Two — as Chapter Two has no separate provision concerning stays of proceedings in the US District Courts.

On the theory that good law sometimes promotes bad behavior, it is worthwhile to consider some possible consequences. Perhaps even as this is written some creative 9th Circuit plaintiff’s lawyers are devising schemes to contrive a state of impecuniousness for their clients.  Defense lawyers keen to maintain the arbitral forum or at least to stymie efforts by Claimants to escape may demand discovery into the Claimants financial affairs, hoping to show that the position of impecuniousness is a ruse. Arbitrators suspecting a ruse may be reluctant to enter termination orders, and may conclude that indefinite suspension — putting the Claimant in limbo with no recourse to the courts — has more potential effect than the threat of termination to influence Claimants to come up with the necessary funds.  And what shall become of the AAA’s longstanding practice, in domestic and commercial cases, to withhold from the tribunal both the identity of the non-paying party and the circumstances of non-payment (even though this is usually self-evident, and in any event a party may bring the matter to the arbitrator’s attention, e.g. Rule R-57(a))? And what of the position that under a broad arbitration clause, the question of whether non-payment is a material breach of the agreement to arbitrate, or a non-performance excused by “impossibility” to perform, is an arbitrable issue that the tribunal should decide — presumably before entering a termination order?

All of this is surely wonderful fodder for our first annual Impecuniousness in Commercial Arbitration conference, appropriately to be convened at a sunny Ninth Circuit locale. Beverly Hills in February perhaps?

Swirling Rumors

Rumors have reached Arbitration Commentaries concerning the recent professional activities and virtual invisibility of our founder and long-time supporter Marc J. Goldstein. It has been said that he is locked in a consuming legal battle on behalf of a European technology client against a once-mighty and still formidable American technology colossus, that the controversy is pending in a federal judicial forum in New York, and that there is as a consequence indeed a measure of truth to the “Litigation” within Marc J. Goldstein Litigation & Arbitration Chambers.   So intensive are the supposed demands of the dispute that Mr. Goldstein has reportedly declared that he must defer completion of a requested contribution to this space about the Yukos judicial annulment decision in the Netherlands,  a position we can readily understand given the demands of deciphering the Dutch jurists’ exhaust(ive)(ing) analysis of Russian law in the turgid English translation presently available. It is also reported that Mr. Goldstein’s name has been restored to the Mediator Roster of the U.S. District Court in Manhattan, a roster from which he had taken leave some 15 months ago to divert energies as a mediator away from disputes between afflicted citizens and the City of New York. But alas this Roster turns out to be an online resource where disputants interested in the skill sets of mediators can find good listings of their areas of specialization, even if rather few of the commercial cases on the docket of that Court, as compared to its staggering docket of  cases under federal civil rights statutes, are mediated through the Court’s ADR office.  If you would like to verify any of the foregoing, Arbitration Commentaries would be pleased to contact Mr. Goldstein on your behalf.


(Attorney Advertising)