A judge in the U.S. District Court in Manhattan has vacated a reinsurance arbitration award on grounds of evident partiality of the presiding arbitrator and one party-appointed co-arbitrator. The award was signed by these two arbitrators, with the third arbitrator registering dissent. During the course of the proceedings, the two arbitrators who ultimately signed the award had been appointed to sit together on a second case. Their disclosures about the new appointments failed to mention that parties in the two cases were affiliates, that there was a common witness whose testimony had already been heard and evaluated in the second case, and that an issue in common to both cases was addressed by that testimony.
The Court applied the legal standard stated by the U.S. Second Circuit Court of Appeals in Applied Industrial Materials Corp. v. Olvalar Makine Ticaret Ve Sanalyli A.S., 492 F.3d 132 (2d Cir. 2007): “An arbitrator who knows of a material relationship with a party and fails to disclose it meets [the] evident partiality standard: A reasonable person would have to conclude that an arbitrator who failed to disclose under such circumstances was partial to one side.” Here, the Court rejected the argument that a different standard should apply to relationships with co-arbitrators and witnesses, as opposed to parties, stating that it is the materiality of the relationship that is dispositive, not the arbitration participant with whom the relationship exists. (Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 2010 U.S. Dist. LEXIS 15952 (S.D.N.Y. Feb. 23, 2010)).
Adhering to well-settled principles concerning the separability of the arbitration clause, the U.S. Sixth Circuit Court of Appeals reversed an order that had denied a motion to compel arbitration, and held that the lower court improperly relied upon allegations of fraud in the inducement of the entire contract and that there were no sufficient allegations of fraud pertaining specifically to the agreement to arbitrate. The Court also rejected Appellee’s attempt to characterize the dispute as one involving the existence, rather than the validity, of the entire contract, and held that where the position taken is that the signatory to the contract breached fiduciary duties by entering into it, the challenge was to the validity of the contract and thus it was for the arbitrator to resolve in the first instance. (Moran v. Svete, 2010 U.S. App. LEXIS 3812 (6th Cir. Feb. 24, 2010).
Readers of these Commentaries will have been exposed recently to Second Circuit decision in January 2010 concerning the powers of an international arbitrator to reconsider and change the outcome under the rubric of correcting “clerical” and “typographical” errors. (T. Co. Metals LLC v. Dempsey Pipe & Supply, Inc., 2010 U.S. App. LEXIS 893 (2d Cir. Jan. 14, 2010)).
On the heels of that decision — which sustained the powers of the arbitrator to change the award, as a consequence of the deference due to the arbitrator’s interpretation of the ICDR’s “clerical error” rule — comes a decision of the British Columbia Court of Appeal holding that an arbitrator exceeded his powers by issuing a corrected award in which the arbitrator (i) admitted that there was error in his reliance upon certain evidence, and (ii) provided an alternative rationale for reaching the same result as in the original award. (Westnav Container Services Ltd. v. Freeport Properties Ltd., 2010 BCCA 33 (Jan. 25, 2010)).
Here the arbitration was conducted pursuant to British Columbia’s Commercial Arbitration Act (”BC Act”), not (as in Dempsey) under institutional arbitration rules adopted by the parties in their agreement. The BC Act provided, much like the ICDR Rule 30.1 implicated in the Dempsey case, that an arbitrator was empowered to correct “a clerical or typographical error”, an “arithmetical error” or “an accidental error, slip, omission or other similar mistake.”
In Westnav, the arbitrator was asked to determine the fair market rent for a certain property. In the original award, he relied upon the rent for a certain property as being comparable to the property to be valued. He erred in interpreting the evidence, using a rental value for that comparable property that he attributed solely to the buildings on the parcel, when in fact that figure represented the rental value of the building and underlying land. When the error was called to the arbitrator’s attention, he issued a corrected award that excluded any reliance on that property as a comparable, and furnished different reasons for reaching the same conclusion as to value as had been stated in the original award.
This, the Court of Appeal held, exceeded the arbitrator’s powers, as viewed through the lens of a legal standard (in Canadian and U.K. law) that permits corrections to express accurately the arbitrator’s “first thoughts” but not to have “second thoughts.”
The Dempsey and Westnav cases have much in common. In each case, after issuance of the original award, the aggrieved party asserted that the arbitrator had misinterpreted evidence, and in consequence had misplaced reliance on that evidence. In each case, the arbitrator agreed. In Dempsey, the arbitrator’s response was to disclaim reliance on that evidence, reassess the remaining evidence, and change the outcome. In Westnav, the response was to disclaim reliance on that evidence, and to furnish different reasons for the original outcome.
Each case presents a clear instance of the arbitrator having “second thoughts.” So what explains the divergent results — the arbitrator in Dempsey having had power to change the outcome sustained, while the Westnav arbitrator was denied power to change the rationale of the original result?
The most evident difference is the role of the State — and hence the State’s courts — in controlling the arbitration. In Dempsey, the correction rule was an aspect of the private system of rules, created by the ICDR and adopted by the parties with the understanding the arbitrator would interpret those rules. In Westnav, the arbitration was pursuant to the BC Act, and the correction rule appeared in the BC Act, and it is implicit in the Westnav Court’s decision that in interpreting the BC Act, the Court owes no particular deference to the arbitrator.
Is this a sufficient justification for the different outcomes? The ICDR’s rule on correction of awards, like the correction provision of the BC Act, lies curiously at the boundaries of arbitral power and public policy concerning the finality of arbitral decisions. But the ICDR rule, having no explicit connection to any national law regulating arbitration — despite its provenance in national laws (including the UNCITRAL Model Law) governing arbitration — is, under United States law, to be primarily construed by the arbitrator unless there is egregious abuse. So long as the United States remains a jurisdiction that elects not to adopt the UNCITRAL Model Law or otherwise to establish uniform standards for the conduct of international arbitrations, there will be significant potential for arbitrators to interpret and apply institutional rules of arbitration in ways that would not be sustained under parallel provisions of national arbitration laws.
A recent judgment of the Hong Kong Court of Appeal addresses in painstaking detail the sovereign immunity issues implicated when enforcement and execution are sought of a private arbitration award which, while made in the territory of a Member State of the New York Convention, runs against a sovereign state that is not itself a Member State of the Convention. (FG Hemisphere Assocs. v. Democratic Republic of the Congo, CACV 373/2008 & CACV 43/2009, unpublished judgment, copy available from this writer).
Two members of the three-judge panel agreed, and held, that
(i) at the time of transfer of Hong Kong sovereignty to the PRC, the restrictive theory of sovereign immunity (i.e. no immunity where the State engages in commercial activity) was a principle of customary international law and as such had been incorporated into the common law of Hong Kong;
(ii) the PRC having not abrogated this common law principle by statute applicable to Hong Kong after the transfer of sovereignty, restrictive immunity remains the law in Hong Kong, despite the fact that the PRC applies absolute immunity, by statute, on the Mainland and asserts in international affairs its adherence to the principle of absolute immunity;
(iii) the transactions that gave rise to the ICC award against the Democratic Republic of the Congo (”DRC”) were commercial, and so the DRC had no immunity from the jurisdiction of the Hong Kong courts to enforce the award; and
(iv) the first instance court would be permitted to find, on remand, that all or part of the DRC assets located in Hong Kong, and against which execution was sought, were dedicated to commercial rather than sovereign purposes and thus had no immunity from execution.
The result of the judgment was to reinstate asset-freeze orders of the first instance court, which had restrained PRC and Hong Kong companies that were indebted to the DRC from transferring the funds to the DRC pending final determination of whether those funds should be applied in satisfaction of the ICC award against DRC. A first-level appeals court had vacated those orders.
The separate opinions of the three judges reflect painstaking attention to the evolution of restrictive immunity in 20th century jurisprudence, and in national laws. The dissenting judge finds that restrictive immunity does not deserve recognition as customary international law, having failed to achieve sufficiently widespread recognition and application as a matter of perceived legal obligation. For the dissenting judge, it appears that the world is divided between the developed and capitalist countries countries that seek to treat sovereign states as commercial parties, and less developed and socialist states, which tend to be more protective of sovereign prerogatives. One is reminded that whether an international legal principle deserves recognition as custom can depend heavily on what sources are consulted — and here the reliance of the majority on Western jurisprudence and practice cannot be denied.
Five-time Olympic champion German speed skater Claudia Pechstein today awaits a decision from an arbitral tribunal of the ad hoc Division of the Court of Arbitration for Sport (”CAS”), hoping for a reprieve from a two-year suspension imposed a year ago when blood tests indicated use of performance enhancing drugs.
Respondents in the case are the German National Olympic Committee and the International Olympic Committee. The International Skating Union also appears as an interested party.
Ms. Pechstein previously lost an appeal of the suspension before another CAS arbitral tribunal in November 2009, and last month the Federal Supreme Court of Switzerland refused to grant temporary relief to permit Ms. Pechstein to compete in Vancouver.
According to news reports, the CAS award in November was based on blood tests that showed high levels of a particular chemical in red blood cells, a condition consistent with use of performance enhancers but also explainable on other grounds. Ms. Pechstein is said to have maintained that the test results are attributable to a congenital medical condition.
Respondents’ objection to the jurisdiction of the tribunal in Vancouver has been briefed and a decision is anticipated today or Friday. Ms. Pechstein hopes to compete in the 5,000 meter event on February 24.
The CAS, whose seat is in Lausanne, has operated ad hoc divisions at each of the Olympic Games since Atlanta in 1996. A roster of eight arbitrators is on call to convene in three-member tribunals appointed by the President of the ad hoc Division, to sit in emergency sessions, and to decide cases on a very expedited basis consistent with the requirements of the case in relation to forthcoming competitions.
The CAS Arbitration Rules for the Olympic Games may be downloaded from the CAS website (www.tas-cas.org/adhoc-rules). The Rules require an athlete to exhaust remedies before a sports federation or national Olympic committee having juroisdiction of the matter before filing a CAS Olympics case. While the hearing venues will be in Vancouver or at nearby Olympic venues, the seat of these arbitrations is Lausanne and Chapter 12 of the Swiss Act on Private International Law applies.
The Rules provide for an immediate evidentiary hearing, but further state: “If it considers itself to be sufficiently well informed, the Panel may decide not to hold a hearing and to render an award immediately.” The applicable law, per the Rules, shall be “the Olympic Charter, the applicable regulations, gemeral principles of law and the rules of law, the application of which [the tribunal] deems appropriate.” If no majority can be formed, the presiding arbitrator may decide alone.
A federal district judge in Indiana last week commendably resisted the temptation to impose a permanent stay of an ICDR arbitration that arguably was brought to reopen and relitigate issues decided in an earlier award that had been confirmed by the District Court and uphed by the US Seventh Circuit Court of Appeals. Citing a decision written by Justice Sonia Sotomayor when she was a federal district judge in Manhattan (North River Ins. Co. v. Allstate Ins. Co., 866 F. Supp. 123 (S.D.N.Y. 1994)), the Court held that the preclusive effect of the prior arbitration award is itself an arbitrable issue. Accordingly a temporary stay of this new arbitration, in a long -running battle between a US multinational and one of its former Moscow office executives, was dissolved and the ICDR arbitration will proceed. Masco Corp. v. Prostyakov, 2010 U.S. Dist. LEXIS 10372 (S.D. Ind. Feb. 5, 2010).
When a U.S. District Court Judge vacates an arbitration award on grounds of “evident partiality,” it is an occasion for the arbitration community to take a careful look, to see if the arbitrator’s conduct was clearly improper, or if instead there has been an overzealous judicial intrusion. Therefore, I consider here a new decision last week by a federal judge in Detroit, vacating an award on grounds of the presiding arbitrator’s evident partiality. The Thomas Kinkade Co. v. Lighthouse Galleries, Inc., 2010 U.S. Dist. LEXIS 6443 (E.D. Mich., Jan. 27, 2010).
After four years of proceedings, after the end of the closing arguments, after both counsel had stated on the record that they had received a fair hearing, the presiding arbitrator requested additional briefing regarding Defendants’ damages claims. Plaintiff objected that Defendant was being given a “second bite at the apple,” but was overruled.
Four weeks later, before any further proceedings, the presiding arbitrator made a disclosure: that his law partner had been retained (recently) by the Defendants’ party-appointed non-neutral arbitrator as an expert witness in a legal malpractice case against that co-arbitrator and his firm. This disclosure elicited no objection. But eight weeks later came another disclosure: another of the presiding arbitrator’s law partners has been asked by one of the co-Defendants to represent him in an unrelated NASD arbitration. Plaintiff then registered an objection, and in response the arbitrator’s partner declined the new counsel engagement. Plaintiff renewed its objection, on grounds that the disclosure had “placed them in the unfavorable position of having to demand that [the arbitrator] reject a business opportunity.”
Plaintiff’s ensuing requests for disqualification were rejected by the AAA and the presiding arbitrator. The arbitrator then (1) ordered Defendants to produce documents in support of their damages position, (2) allowed Defendants to introduce some 8800 pages of damages-related documents that were clearly within the scope of a request for production made four years earlier, (3) adjourned further proceedings at least three months to allow Plaintiffs to study the new documents, (4) held new hearings at which Defendants’ witnesses were cross-examined about the new documents, and (5) heard new closing arguments and received new final briefs. Five months later, over the dissent of Plaintiff’s co-arbitrator, the tribunal issued an “interim award “(reserving only issues of costs and sanctions), dismissing Plaintiff’s claim and finding for Defendants on five of 13 counterclaims, awarding Defendants $567,300 in damages. A final award then followed, in which Defendants were awarded $487,000 of legal fees, $258,000 of interest, and $216,000 of costs.
In finding evident partiality, the Court stated that the content of the disclosures alone would not require a reasonable person to find partiality, but the timing of the disclosures — really the timing in relation to irregularities that occurred thereafter in the proceedings — made them troublesome. The Court gave credence to Plaintiff’s arguments that partiality explained the sua sponte reopening of proceedings on damages, the dismissal of Plaintiff’s claim despite admissions of nonpayment by Defendant, and the acceptance of Defendants’ counterclaims despite admitted non-compliance with a contractual notice provision.
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Is this a decision genuinely finding evident partiality? Or has this Court conflated evident partiality inquiry with “manifest disregard,” applying a more critical standard of review of the merits where questions have been raised about the motives of the arbitrator?
As the Court admits, were the decision on evident partiality based on the disclosed relationships alone, there would have been no grounds for vacatur.
Consider the first disclosure: that one of the arbitrator’s partners had been engaged as an expert witness by the Defendants’ party-appointed, in an unrelated legal malpractice case. Would a reasonable person assume that the arbitrator is now biased in favor of that co-arbitrator’s appointing party, because he derives some indirect economic benefit from the co-arbitrator’s engagement of his partner? Depending on the particular facts, there might be an appearance of bias that would justify arbitrator disqualification. But these are not facts that make it reasonably certain that the outcome was be in favor of one side for reasons apart from the merits.
Now consider the second disclosure: that another of the arbitrator’s partners had been contacted to take on a case as counsel for one of the defendants — but had not yet accepted the engagement. The thesis of Plaintiff was that a reasonable person should assume the outcome to have been a result of bias, because the arbitrator is motivated to retaliate against the Plaintiff for having objected to the new engagement and thereby forced the arbitrator’s firm to turn it down. As an abstract principle, this makes no sense. Surely it would have been preferable for the arbitrator’s firm to simply decline the proposed engagement. Instead, the firm declined the engagement after they were unable to obtain a conflict waiver from the adverse party in the arbitration. Whether the latter circumstance creates an inference of actual bias depends on a more specific inquiry into the relationship between the arbitrator’s firm and the prospective client, the economic importance of the proposed engagement to the firm, the arbitrator’s economic interest in firm revenues from clients introduced by other partners, etc. But under this Court’s analysis, it seems that the arbitrator is equally suspect whether his firm accepts the engagement without disclosure, or declines the engagement after making disclosure and seeking a conflict waiver. The arbitrator should disclose the approach, whether the firm has interest in the engagement or not, as even if the engagement has been declined, the adverse party is entitled to consider whether the arbitrator’s judgment is influenced by the prospect of future business. But unless the arbitrator has created a clear conflict of interest, the question of partiality should turn on an assessment of the actual subjective impact on the arbitrator’s judgment. Parties unhappy with anticipated arbitration results should not be able to force replacement of the presiding arbitrator, and send the proceedings back to the beginning, merely by making a tactical offer of new business to the arbitrator’s law firm. In a recent decision involving a challenge to a Canadian arbitrator in a NAFTA arbitration, the arbitrator had disclosed that his firm was doing work in an unrelated matter for the Government of Mexico. The solution was not to automatically disqualify the arbitrator, but to instruct that unless his firm were to give up the engagement for Mexico, the arbitrator should resign. That approach seems to strike the right balance.
But if the disclosures themselves are insufficient to draw the conclusion of evident partiality, what significance should be ascribed to the arbitral decisions that follow the disclosures — here in particular, the reopening of the proceedings to allow Defendants to submit more proof, and the eventual award in Defendants’ favor?
In the opinion of this federal judge, the seemingly aberrational decisions of the arbitrator serve as circumstantial evidence of bias.
But this seems to be an unsatisfactory approach, which involves speculation about the arbitrator’s motives rather than examination of objective facts about the arbitrator’s (and his or her law firm’s) business relationships with non-neutral parties in the arbitration. The aberrational decisions might legitimately open inquiry into those objective facts; they might for example constitute “clear evidence of impropriety” sufficient to justify permitting the moving party to take discovery in support of its motion to vacate the award (see, e.g., Andros Compania Maritima S.A. v. Marc Rich & Co. A.G., 579 F.2d 691, 702 (2d Cir. 1978)). But the conclusion of evident partiality should be based on such objective relationship facts, and not a federal judge’s re-assessment of the merits and conclusion that no reasonable basis other than bias of the arbitrator can explain the outcome. That latter approach amounts to expanded merits review of arbitrators whose impartiality is in doubt, makes the issue of evident partiality depend on whether the procedural and substantive decisions of the arbitrator are rationally explainable on neutral grounds, and thus obscures the focused inquiry that should occur into the specific issue of arbitrator bias.
On the eve of the 52d Session of the UNCITRAL Working Group II (Arbitration and Conciliation), which convenes at the United Nations in New York on February 1 for a five-day deliberation, arbitration practitioners in the United States have just been reminded, by a decision of the influential Second Circuit U.S. Court of Appeals, that when parties agree to arbitrate under arbitration rules like those of the UNCITRAL, they bargain for the nearly unreviewable discretion of the arbitrator in the interpretation of those rules.
As the UNCITRAL Working Group undertakes its “third reading” of the proposed revised UNCITRAL Arbitration Rules, perhaps the penultimate step in a process that began in earnest at the 45th session of the Working Group held in Vienna in September 2006 (and may culminate in approval of the revised rules when UNCITRAL, i.e. the Commission itself, convenes in New York in June), it seems useful to ask: Who shall be the guardians of the drafters’ intentions once this arduous process has been completed? And if the answer is that this responsibility devolves upon arbitrators appointed in individual cases, who will have nearly unreviewable discretion in the interpretation of the rules, then what measures might be taken by UNCITRAL to furnish coherent guidance in written form?
A perusal of the Provisional Agenda for the forthcoming Working Group sessions gives an indication of just how daunting may be task, for arbitrators who will not have attended all of the sessions, to ascertain why the revised text of a rule was so revised, or why an unrevised text of a rule was left as is. The listed background documents pertinent to the discussions to be held this week include 8 reports on the work of the Commission, covering its 32d through 42d sessions, 6 reports of the Working Group covering its 45th through 51st sessions, and 8 notes, and 7 addenda to notes, of the Secretariat concerning revisions of the rules. This week’s session should culminate in a report summarizing its main conclusions, for submission to the 43d session of the Commission scheduled to be held in June.
For those attempting to follow along, the current working documents issued by the Secretariat are working paper (WP) 157
(Draft Rules 1-16), 157 addendum (”Add”) 1 (Draft Rules 17-32), and 157 addendum 2 (Draft Rules 33-43). The prior drafts, from which the current drafts are most directly descended, are found in WP 151 and WP 151, Add. 1.
For the ambitious, all of this material is found on the UNCITRAL website.
It is an imposing challenge to track the history of any particular
change. Take as an example what is the currently proposed draft Article 30(1)(a). It concerns the powers of the tribunal to terminate proceedings if the claimant fails to transmit its statement of claim. The Secretariat’s “Note” (WP 157, Add 1) contains the draft text, which provides that the tribunal “shall issue an order for termination of the arbitral proceedings, unless there are remaining matters that may need to be decided and the tribunal considers it appropriate to do so.” That first portion of the language is essentially unchanged from present Article 28(a). The “unless” clause is a new feature. But the explanatory note in WP. 157 Add 1 is obscure about the purpose of the change, stating that the provision “has been redrafted to clarify that the power of the arbitral tribunal in case the claimant fails to submit its statement of claim is not linited to a dismissal order for termination.” To track the drafting history, one must first go to the Working Group Report from the previous session (A/CN.9/684), which discusses the text of the previous proposed revised draft, which text is found as draft Article 28(1)(a) in WP.151 Add. 1. The enterprising student of drafting history will find that paper on the UNCITRAL website, and will find that the “unless” clause proposed in that draft was “unless the respondent has submitted a counterclaim.” The Working Group report of the Vienna session in Septmber 2009 (CN 684) contains extensive commentary reflecting (1) dissatisfaction with limiting the tribunal’s option to conduct further proceedings to the circumstance of a respondent’s counterclaim; (2) some sentiment in favor of language that would clearly signal the power of the tribunal to conduct preceedings leading to dismissal with prejudice of claimant’s claim; (3) some concern that in some jurisdictions a dismissal with prejudice of claimant’s claim where claimant had not submitted a statement of claim, but only a notice of arbitration, might be subject to annulment; and (4) an underlying motive to expand the tribunal’s discretionary powers to adjudicate claims not fully pleaded, derived from experience that claimants sometimes present vexatious claims in a notice of arbitration, which the Tribunal may wish to address on the merits for reasons (inter alia) of deterrence. One also learns from the Working Group report that the Working Group “requested the Secretariat to reformulate the text, taking account of the suggestions made….” Which is to say — and I say so here with the benefit of having been an observer at the the Vienna session — that several dozen of the best arbitration thinkers on the planet were unable to reach consensus on suitable language, that the Secretariat’s current draft does not necessarily give expression to a consensus view expressed by the Working Group, and that it may be quite hazardous to treat the Working Group reports as authoritative guides to interpretation of a redrafted rule, most especially where the rule emerges from drafting delegated to the UNCITRAL Secretariat after the Working Group’s earlier deliberations failed to find a solution.
One lesson to be learned is that these revised rules often are meant to express permissible rather than mandated or recommended approached to a procedural issue. They are often intended as procedural chameleons, whose complexion will change depending on the applicable procedural law, the nature of the dispute and the disputants, and a variety of other factors.
Still, one may hope that when this revision process reaches an end, as it might this year, the UNCITRAL will see fit to produce an annotated synthesis of the drafting history that offers arbitrators some accessible guidance, to which they may refer day-to-day and in the course of a hearing, to the changes and the deliberative process from which the revised rules emerged.
(Marc J. Goldstein acts from time to time as a mediator in commercial arbitrations and commercial cases in state and federal courts in the United States. Beginning with this post, Arbitration Commentaries will occasionally be a forum for mediation commentaries as well.)
A not unusual dynamic in the mediation of complex cases is that one party insists, through the course of a full day of mediation or even multiple sessions, that it will not make a material move toward settlement, and that it would rather try the case, and yet the same party expresses willingness to continue the mediation and even to return to further sessions.
The situation presents several concerns for the mediator. One is the possibility that the party taking this position is using the mediation process merely as a vehicle to delay the progress of the case in court or in arbitration (assuming that some stay of proceedings pending mediation is in effect). It is a fair question to raise with that party in private session. However unless the circumstances are extreme, it should be for the other party to form a judgment about whether the mediation continues to be a productive route toward settlement. The mediator’s role is to help the parties toward settlement so long as they desire help — and to encourage them, with conviction but not coercion, that they should continue to desire the mediator’s help.
Another difficulty in the stubborn case arises when the parties (through counsel) openly welcome evaluative comments by the mediator, to be delivered in private session, but will not concede to the mediator in confidence any uncertainty about
the outcome on critical disputed issues of law or fact. Should the mediator suggest the futility of the exercise? Or be critical of the party for a perceived lack of candor? I think not.
For as long as the mediation is continuing with voluntary participation of parties effectively represented by counsel, the mediator should assume that his invited confidentially-expressed evaluative comments have an important impact on both sides, especially when the case is advanced and the mediator has become familiar with the key legal principles and essential disputed fact issues. Even with a mediator who enjoys great confidence from the parties, litigation counsel will understandably be reluctant in many cases to show outwardly any doubt of their positions on the merits.
But the mediator should persevere. Often there will be an advance on settlement terms without any accompanying explanation. And often the mediator will learn, at the conclusion of a difficult but successful session, that the party who was most aggressive defending its position against evaluative mediator input, is most grateful for the mediator’s determination in creating uncertainty about the outcome.
01.22Post-Award Reconsideration: More Evolved Thoughts on the Second Circuit’s T. Co. v. Dempsey Decision
Dear Readers:
In my continuing quest for objective reactions to my non-objective analysis of T. Co. v. Dempsey, with regard to the reconsideration of the award by the arbitrator, I present the following further provisional thoughts. Your comments are most welcome.
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Parties adopting the ICDR Rules do not agree to arbitrate the issue of correctible errors in the award to the same degree that they agreed to arbitrate the merits. By adopting the ICDR Rules, they agree that either party may present the correction issue to the arbitrator without prejudice to the right of that party to submit the same correction issues to a judge under FAA Section 11, either without first asking the arbitrator to make corrections, or notwithstanding the decision of the arbitrator refusing to make corrections. By actually submitting a corrections issue to the arbitrator, they do not, under the Rules or existing law, foreclose consideration of the same corrections by a federal judge.
Moreover the process for obtaining a decision on corrections from the arbitrator is not the same process as that for obtaining an award. The arbitrator is not required to hear the parties. The arbitrator may deny the application without any statement of reasons, indeed without issuing an order or decision.
Further, whereas the ICDR Rules do not mention an amended final award or a corrected final award as types of awards the arbitrator may issue, the parties, by adopting the Rules and submitting the 30(1) dispute to the arbitrator, do not manifest an expectation that the arbitrator will decide the corrections issue in the form of an award. Rule 30(1) states that if the arbitrator finds the application to have merit, the arbitrator shall make the corrections. The reasonable expectation of the parties is that, if the arbitrator finds the application to have merit, this would normally result in a few handwritten (or word-processed) corrections of typos or miscalculations, which could readily be done on the face of the award without issuance of an amended award. And if the requested corrections are without merit, the parties’ expectation is not to receive an award deciding as such, but to hear nothing from the arbitrator or perhaps to hear from the ICDR that the arbitrator refused to make the requested corrections.
The Second Circuit proceeded to analyze the District Court’s order vacating the amended award from the assumed premise that the arbitrator was empowered by the parties to decide the corrections issue in the form of an award. The fact that the arbitrator did in fact issue an amended award, and also issued before that an intervening Amendment Order that stated the reasons for the Amended Award, seems to have led the Second Circuit to assume that the issuance of such an Amended Award was part of the agreement of the parties to arbitrate the issue of corrections. That is incorrect. Corrections made or not made to an award have a different status under the ICDR Rules — they are simply accepted or rejected corrections to an award. As such, those decisions are not final and binding decisions of the arbitrator under the ICDR Rules or the parties’ agreement to arbitrate. Certainly the parties could have made the agreement the Second Circuit attributed to them, i.e. to arbitrate the issue of corrections, to have the arbitrator issue an award upon the corrections applications, and even to have the arbitrator withdraw or suspend the effectiveness of the original award. But the parties in the Dempsey case made no such agreement.
Thus, the Amended Award exceeded the powers of the arbitrator not because the arbitrator misconstrued ICDR Rule 30(1), but because there was no basis in the ICDR Rules for issuance of any Amended Award. The arbitrator decides the corrections application after having issued the final award, after having become functus officio under applicable law. Rule 30(1) notably does not state that the arbitrator’s jurisdiction is reinstated by the Rule 30(1) application. The better view of the arbitrator’s powers under 30(1) is that they are ministerial powers, not adjudicative powers, and that they are assigned to the arbitrator rather than the administrator simply because the arbitrator is in the best position to know whether the words used in the award were those he or she intended to use, and if indeed a typist in the arbitrator’s office mis-transcribed.
The proper framework for confirmation of an award that would embrace the arbitrator’s Rule 30(1) corrections is for a party or the parties jointly to move the District Court under FAA Section 11 to modify and correct the Original Award in accordance with those corrections, and to confirm the Original Award as so modified and corrected by the District Court. Within that framework, the arbitrator’s scope of discretion is limited as a practical matter by the text of Section 11 and jurisprudence surrounding it. And if that framework is followed, there would be one functus officio doctrine — the one applied by the District Court in the T. Co. v. Dempsey case, based on the jurisprudence of FAA Section 11. As things now stand in the Second Circuit, there are two functus officio doctrines, one applicable if the corrections are sought from the District Court, and another (whose content may vary from case to case) if the corrections are sought from the arbitrator.
Even without accepting the “ministerial not adjudicative” view of the arbitrator’s correction powers under ICDR 30(1) and comparable clerical error rules, one can reach the conclusion that arbitral discretion to make corrections to a final award is constrained by FAA Section 11.
The ICDR Rules do not provide for the arbitrator to vacate or withdraw a final award as part of the powers conferred by Rule 30(1). Nor do the Rules state that if the arbitrator accepts to make corrections, the corrected award shall be deemed the final award and the uncorrected final award shall be a nullity. The parties of course could make such impact on an original final award part of their agreement to arbitrate, but in the Dempsey case they did not do so.
As such, the original award remains a confirmable award after the arbitrator issues corrections. Assuming it is a domestic award, Section 9 of the FAA governs and provides that the upon a timely application the court “must grant” an order confirming the award “unless the award is vacated, modified, or corrected as prescribed in section 10 and 11 of this title.” The arbitrator’s purported amendment of the award is not a ground for vacatur under Section 10. The party seeking confirmation of the award subject to the arbitrator’s Rule 30(1) corrections must cross-move to modify and correct the original award in accordance with Section 11. The Court lacks power to implement an arbitral award correction that does not fall within the Section 11 categories, and so arbitral corrections exceeding the boundaries of Section 11 are ineffectual as a matter of law. The Court is subject to the affirmative command of the FAA to confirm awards unless modified or corrected according to Section 11. The First Options rule of deferential review of arbitral decisions on matters the parties clearly and unmistakably agreed to arbitrate is derived from the pro-arbitration policy of the FAA generally. But it should not trump a clear affirmative command of the FAA concerning judicial review of awards.
I do not think the Second Circuit panel in the Dempsey case would disagree with this framework of analysis. The Court’s error, in my view, is to have viewed the parties’ submission of the corrections issues to the arbitrator under 30(1) as an agreement to arbitrate the corrections issue and to have the arbitrator supersede the original award if he found the corrections to have merit. But this reads too much into the agreement to arbitrate under ICDR Rules, and into the submission of corrections issues to the arbitrator under Rule 30(1) without further agreement of the parties on the consequences of a disposition under Rule 30(1).