We do not often hear about staying enforcement of an award that is subject to recognition and enforcement under the New York Convention – except of course in the scenario where a vacatur action is pending in a court at the seat of the arbitration. After all, the policy of the Convention and the FAA is to expedite recognition and enforcement by defining narrowly the grounds for opposition, and streamlining the proceedings in which those grounds are to be raised and considered. The Convention of course provides no general authority for courts to stay confirmation proceedings. Article VI of the Convention provides that courts may adjourn a decision on the enforcement of the award only if an application has been made in a proper forum to vacate (or “suspend”) the award.

But courts in the US are divided as to whether there is “inherent authority” in federal district courts, as a matter of case and docket management and equitable discretion, to grant a stay of enforcement. The US First Circuit Court of Appeals held that such inherent power does exist (Hewlett-Packard Co. v. Berg, 61 F.3d 101 (1st Cir. 1995)), and remanded the case for the district court to consider whether to exercise of that power. The US Fifth Circuit declined to decide if such inherent power exists (Wartsila Finland OY v. Duke Capital LLC, 518 F.3d 287 (5th Cir. 2008)), and found that even if it does, the circumstances for granting such a stay were not present.

A stay of enforcement, if tolerated by courts with less than vigilant limitation, could grow into a standard ploy in the enforcement context. Credit a federal district judge in Northern California, therefore, for blowing the whistle earlier this month on what was evidently are purely tactical application for such a stay. (Injazat Technology Fund, B.S.C. v. Najafi, 2012 WL 1535125 (N.D. Cal. May 1, 2012)).

Respondent in Injazat was the loser in a London ICC case, evidently for having misrepresented the finances of the company of which he was CEO, to induce a new investor to put in $3 million. Admitting there were no available Convention defenses, Respondent instead started a new ICC arbitration in London on the very day his opposition to the confirmation petition was due, and asked the federal court to stay enforcement pending the completion of the new case. The argument was simply that the award in its favor against the petitioner Injazat in the new case would be an offset, and, moreover, whereas Injazat was “winding up,” Respondent might have serious collection difficulties.  

The Court found this unconvincing, as there was no proof that Injazat was insolvent and would be unable to satisfy an award, and moreover, Najafi had no convincing reasons for having failed to pursue his counterclaim in the first arbitration or at least more promptly than on the very day his opposition to the confirmation petition was due. (Have sympathy however for Najafi’s US counsel, evidently engaged on the eve of confirmation and not responsible for the client’s failure to prosecute the counterclaim in timely fashion).

Contrast the Injazat case, as did the Court, with the unusual circumstances that justified a stay of enforcement in Hewlett-Packard v. Berg, the First Circuit case above-mentioned.  There HP was able to demonstrate that the first arbitral tribunal had rejected its rather urgent pleas to receive and hear its counterclaim, for reasons the court saw as insufficient. Further, the award in the second arbitration, commenced by HP in timely fashion against the award winner in the first case, stood to be uncollectible as the respondent was now demonstrably insolvent. Consider also how narrow an exception the HP case creates, as reflected in the Fifth Circuit’s decision in Wartsila. In Wartsila — which involved a four-phase infrastructure project, and a first arbitration held while work was still in progress on later phases –  the first arbitration also did not determine all claims, but for a different reason: the Chairman was appointed a High Court Judge in the UK and resigned, and the Tribunal determined not to reconstitute but instead to issue a final award on the claims then before it, without prejudice to either party bringing other claims, asserted but not yet fully presented, in a separate new arbitration. But in Wartsila the Respondent, asking for a stay of enforcement pending the new arbitration on unresolved counterclaims, could offer no evidence of Claimant’s insolvency or any other potential obstacle to collection.

The HP and Wartsila cases, and the handful of other cases reviewed by the district court in Injazat, suggest that a stay of enforcement may only be granted as a matter of discretion where the party seeking the stay was effectively prevented from bringing its allegedly offsetting claim in the initial arbitration and that the insolvency of the award winner in the first arbitration in highly likely to prevent effective realization of the sums that might be awarded on the offsetting claim. One could conceive of the window being opened a bit further, perhaps to accommodate the situation where the award winner in the first case has a history of dodging enforcement of legitimate claims, forcing its creditors to extraordinary efforts and cost despite evident financial wherewithal. In that situation the award winner, seeking the support of the New York Convention for the confirmation of an award in its favor, might equitably be denied such support on a temporary basis if it has a history of flouting the Convention or other federal and state award confirmation laws as its standard business practice. But certainly this California district court was on solid ground in recognizing that a stay of enforcement of an award under the Convention should not be available where the award loser manufactures a scenario of incomplete adjudication by forebearing or omitting a counterclaim in the first proceeding and then commencing an arbitration on that claim just as the confirmation of the first award is about to occur.   

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Today Arbitration Commentaries welcomes Nic Fletcher as its newest foreign correspondent. Nic will report for Arbitration Commentaries, from time to time, on UK law and practice developments. He is the Head of International Arbitration in the Litigation and Dispute Resolution team of Berwin Leighton Paisner, resident in the Firm’s London office. Nic is a member of the ICC Task Force on the New York Convention, is the rapporteur for England and Wales of the Institute for Transnational Arbitration, and is on the executive committee of the Foundation for International Arbitration Advocacy. Nic can be reached at nicholas.fletcher@blplaw.com, and biographical information can be found on the Berwin Leighton Paisner website (www.blplaw.com).

In today’s post, Nic discusses the latest installment from the UK judiciary in the West Tankers anti-suit injunction saga, a ruling that US readers will regard as distinctly “pro-arbitration” – that an arbitral tribunal sitting in the UK is not prevented by European Law – even if a UK court is so constrained —  either from enjoining a party to the arbitration from pursuing judicial proceedings abroad in breach of the arbitration clause, or from hearing a claim against that party for damages consisting of the costs of defending those foreign judicial proceedings.

MJG

The West Tankers saga continues.  Seldom can one case have thrown up so many instalments and provided so many talking points for arbitration practitioners and European law specialists alike.  Two recent English decisions, one of the Court of Appeal and one from the Commercial Court, have added to the complexity and ensured that the saga will continue to rumble on for a while yet.

Readers will recall that the dispute initially arose from a collision between a ship owned by West Tankers and a pier in Sicily owned by Erg Petroli S.p.A., which had chartered the vessel.  Erg sought to recover its losses.  It was insured and its insurers paid Erg up to the policy limits.  In August 2000 Erg referred a claim for its uninsured losses to arbitration in London pursuant to the arbitration clause in the charterparty.  The insurers then commenced court proceedings against West Tankers in Sicily, seeking to recover the sums paid to Erg, in reliance on their rights of subrogation under the Italian Civil Code. 

West Tankers sought and obtained an anti-suit injunction from the Commercial Court in England restraining the insurers from pursuing their claim in Italy, on the basis that the Italian court action was in breach of the arbitration clause.  The insurers objected and appealed directly to the House of Lords.  The House of Lords referred to the European Court of Justice the question of whether the injunction was consistent with EU Council Regulation 44/2001, which lays down rules governing the jurisdiction of courts in EU member states.

In the meantime the arbitration continued, with the insurers declining to participate.  The Tribunal granted declarations that the question of whether the insurers had become transferees of a bare right in delict or whether that right of action was only enforceable in arbitration was itself to be determined by arbitration and that the obligation to arbitrate was an inseparable component of the subject matter of the claim transferred to the insurers by subrogation.  The Tribunal also ordered the insurers to refrain from taking further steps before the Italian courts - a ruling the insurers ignored.

In due course, the Advocate General to the ECJ issued her Opinion, in which she concluded that EU Regulation 44/2001 did preclude the courts of one member state (in this case the United Kingdom) from restraining a person from pursuing proceedings before the courts of another member state, which courts were first seised of the dispute, on the grounds that the court purporting to issue the restraining order considered the foreign judicial proceedings to be in breach of an arbitration agreement.

The Tribunal, which had been considering Erg’s claim for damages as well as West Tankers’ counterclaim, at that point decided that it had to hold over certain matters for decision, pending the final judgment of the ECJ (the Advocate General’s Opinion only being advisory).  The Tribunal did however issue an award declaring that West Tankers was under no liability to Erg in respect of the collision which had set the whole chain of events in motion.  The English Court of Appeal has now confirmed that, notwithstanding that that Award is simply declaratory, judgment may now be enforced in the terms of the Award.

On 10 February 2009, the ECJ handed down its decision, agreeing with the Advocate General (albeit on narrower grounds) and concluding that it was incompatible with Regulation 44/2001 for the Commercial Court to have granted an anti-suit injunction to prevent proceedings before the court in Sicily and that it was for the Italian court to rule on its own jurisdiction.

The House of Lords, having the answer to the question it had referred to the ECJ, therefore discharged the anti-suit injunction, but it confirmed the declarations issued by the Commercial Court that the claims raised in the Italian proceedings arose out of the charterparty and fell to be determined in London arbitration.

The arbitration Tribunal then proceeded to consider the claims it had held over.  These included claims by West Tankers (a) that the insurers were liable to them in damages for the legal fees reasonably incurred by them in connection with the Italian proceedings and (b) that the insurers were liable to indemnify them in respect of any award made against West Tankers in the Italian proceedings greater than the liability of West Tankers as established in the arbitration.

By a majority of 2:1, the Tribunal concluded on 14 April 2011 that the answer to both those questions was negative.  They considered that the principle of effective judicial protection under European Law was a free-standing right which operated to protect the right of the insurers under Article 5(3) of Regulation 44/2001 to sue a tortfeasor in the courts of the place where the harmful event occurred.  The key question was whether that principle bound the Tribunal in the same way that it would bind an English Court, so as to proscribe its jurisdiction to award damages or an indemnity for a breach of the obligation to arbitrate.  With evident reluctance, the Tribunal concluded that it did and that although Regulation 44/2001 does not apply to arbitration, EU Law would not allow an arbitral tribunal to ‘cross the divide’ and effectively punish a party for pursuing proceedings in Italy which the ECJ had expressly approved.

West Tankers was granted leave to appeal to the Commercial Court on the specific question of whether, by reason of EU Law, the Tribunal was indeed deprived of its jurisdiction to award equitable damages for breach of the obligation to arbitrate.

Mr Justice Flaux considered that the Tribunal had got it wrong - the Tribunal had, he considered, identified the underlying philosophy of the ECJ’s decision to be that the right to bring proceedings in the court first seised under the Regulation should take precedence not only over any proceedings (including proceedings related to arbitration) in another national court, but also over any proceedings before an arbitral tribunal.  That could not be right. Mr. Justice Flaux opined, observing that the Advocate General had expressly recognised in her Opinion that an arbitral tribunal could reach a different decision to that issued by the Italian court, both as to the scope and effectiveness of the agreement to arbitrate and as to the overall merits.  The insurers could not possibly argue therefore that the Advocate General’s philosophy was that the provisions of the Regulation could circumscribe the Tribunal in the jurisdiction it could exercise.  Nor was there any qualitative difference between a decision of a tribunal on the merits which was inconsistent with any approach that the Italian court might adapt and a decision by the Tribunal to grant a declaration that the insurers should indemnify West Tankers in respect of any liability the Italian court might impose upon them.  Even an award of damages for breach of the obligation to arbitrate would follow from inconsistent decisions and not be precluded by the Advocate General’s reasoning.

Nor did the Commercial Court consider that there was anything in the decision of the ECJ that required the Tribunal to decline jurisdiction to grant damages.  The principle of effective judicial protection was simply not engaged in relation to arbitration proceedings, given that the Regulation has no application to arbitration.  The grant of an anti-suit injunction by the courts of a member state is contrary to the mutual trust which member states accord to one another’s legal systems.  Critically, however, there is no such wider principle of European Law which requires a private arbitral tribunal in one member state to repose mutual trust in any system of law other than that of the national court of the seat of the arbitration.  The Tribunal in the present case was required to recognise some principle of mutual trust in respect of the English Commercial Court, as its own supervisory court, but not beyond.

Although this might have the effect of depriving the Italian court of its jurisdiction to consider the validity of the arbitration agreement, there was nothing in the ECJ’s decision to suggest that its reasoning applied to arbitral tribunals, and not just to national courts.  Arbitration falls outside the Regulation and an arbitral tribunal is not bound to give effect to the principle of effective judicial protection.

The court further held that even if it was wrong on the obligation to give effect to the principle of effective judicial protection, an award of damages could still not constitute illegitimate interference.  There was no legitimate distinction between an award of damages and a declaration of non-liability and the Advocate General had recognised the right of an arbitral tribunal to make an inconsistent award on the merits.  Neither the Advocate General nor the ECJ itself contemplated that the Tribunal should decline jurisdiction altogether until the Italian court had ruled.

The Commercial Court is to be applauded for trying to unlock the process and allow further progress to be made in arbitral proceedings which were commenced some 11½ years ago.  It is of course highly likely that the insurers will seek to appeal this decision, perhaps once again leapfrogging over the Court of Appeal to the UK Supreme Court directly, and a further reference of the involved issues of European law to the ECJ cannot be ruled out.

Regulation 44/2001 is currently the subject of discussion as to whether and how it should be amended.  There is concern in some quarters that the arbitration exception is being emasculated.  It is understood that the current state of play is that the UK and France would like to see the Regulation amended so that it is clear that the task of regulating the conduct of the arbitration and of assessing whether the dispute falls within the ambit of the arbitration clause is a matter solely for the national courts of the seat of the arbitration (a proposal advanced by the Heidelberg study commissioned by the European Commission in September 2007).  In the present case, this would have meant the Commercial Court deciding whether the dispute was properly referable to arbitration, and the ‘Italian torpedo’ exemplified by the commencement of proceedings in Sicily would be a thing of the past.  Other EU Member States have expressed different views.  These range from the position that the Regulation should be left as it is in this regard, for fear that changes would cause more problems than they solve and would increase rather than reduce the number of parallel proceedings, to the suggestion that the arbitration exception should be removed from the Regulation entirely.  If no change is made, however, the present uncertainty will continue.  The Tribunal in the West Tankers arbitration will be free to issue an award of damages, with the potential that that will conflict with a decision of the Court in Sicily, if and when that is finally forthcoming.  The English Commercial Court, as things stand, would give leave to enforce such an award as a judgment.

Given the present state of the law, if a party is seriously concerned that its opponent will seek to commence proceedings in another EU jurisdiction in breach of an arbitration clause, one solution would be to commence immediate proceedings in the national courts at the seat of the arbitration, seeking a declaration as to the arbitrability of the dispute.  That court would be first seised, giving it primacy under Regulation 44/2001 and preventing the ‘torpedo’ from exploding elsewhere.

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That class arbitration in a commercial context remains viable after, and perhaps despite, the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. Animalfeeds Int’l, Inc. (130 S.Ct. 1758), was demonstrated again last week in a decision of the US Third Circuit Court of Appeals. The Third Circuit affirmed a district court ruling that denied vacatur of an arbitrator’s award permitting class arbitration between the Oxford managed care network and a class of doctors on whose behalf the Claimant brought the case under his individual reimbursement contract with Oxford. (Sutter v. Oxford Health Plans LLC, 2012 WL 1088887. (3d Cir. April 3, 2012)). Both the district court and the Third Circuit rejected Oxford’s position that Stolt-Nielsen required the conclusion that the arbitrator had exceeded his powers by allowing class arbitration.

The Oxford dispute resolution clause stated:

“No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and any and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the Rules of the American Arbitration Association with one arbitrator.”

The arbitrator construed this clause as authorizing class actions, in a procedural order in 2003 later incorporated in a clause construction award. The arbitrator considered that the class action the Claimant had commenced in New Jersey Superior Court was “a civil action concerning” a dispute arising under the Agreement. He then reasoned that whereas the clause stated that  “any and all such disputes”  should go to arbitration, the parties evidently intended to arbitrate any action which, but for the arbitration clause, could be commenced in court. This necessarily included a class actios.

This construction of the clause was not inevitable, and was perhaps not even the one most logically derived from the text. The prohibition on court proceedings could have been read as broader than the submission to arbitration. The clause does not unambiguously send to arbitration that which it forbids in court: i.e. “any civil action concerning any dispute arising under this Agreement.” The signatory doctor was required to arbitrate only “such disputes,” not “such civil actions.”

The arbitrator might have found that a dispute between Oxford and another physician who signed a similar contract does not “aris[e] under this Agreement,” but under another agreement. But that interpretation would have imposed a class action waiver, and under the canon of construction that a waiver should be set forth in explicit terms, it was quit. justifiable to reject that interpretation — at least if the text could plausibly support another. And indeed such a broader interpretation was possible, as “this Agreement,” did not necessarily mean only the agreement between Oxford and this particular doctor, but could plausibly embrace the identical reimbursement agreements between Oxford and hundreds or thousands of other doctors.

For the Third Circuit panel, the case fell comfortably within settled FAA jurisprudence that an arbitrator acts within his or her powers when the award purports to construe the contract, even if the arbitrator’s construction is at the outer limits of plausibility. Stolt-Nielsen was seen by the Court as neither changing this doctrine nor requiring the rejection of class arbitration in this case.

In Stolt-Nielsen the parties had stipulated that the arbitration clause was “silent” concerning class actions, i.e. that they had made no agreement about class actions. That stipulation, the Supreme Court reasoned, precluded any arbitral finding that the parties intended to permit class arbitration, and left the arbitrators only one way to find that class arbitration was permitted — by resort to the law applicable to the arbitration clause. The Supreme Court held that whereas the arbitrators did not apply such law, but relied instead on other arbitral awards that found class arbitration appropriate when the clause did not preclude class arbitration, the tribunal exceeded its powers.

The Third Circuit was unpersuaded by Oxford’s arguments that Stolt-Nielsen prohibited class arbitration in this case.

The arbitrator having purported to interpret the langauge of the arbitration clause to discern the parties’ intent, and having had before him no stipulation of “silence” about class arbitration, Stolt-Nielsen was inapposite. The arbitrator’s ascertainment of the  parties’ intent based on the words of the clause was procedurally proper, and so the merits of that interpretive exercise were not open to review on a motion to vacate the award based on FAA Section 10(a)(4) for having exceeded the powers conferred on the tribunal by the parties.

The Oxford case should add vitality to the view that Stolt-Nielsen did not signal the end of all class arbitration in commercial cases, especially those that involve neither consumers nor employees. Oxford reminds us that Stolt-Nielsen was fundamentally a case about contract interpretation, and not a policy polemic against class arbitration from the conservative wing of the US Supreme Court. Oxford also reminds us that Stolt-Nielsen will frequently not control the outcome of a contested class arbitration clause construction dispute before an arbitral tribunal, as claimants will avoid making the type of stipulation, concerning the “silence” of the clause,  that in Stolt-Nielsen foreclosed further analysis of the text as a source of the intent of the parties.

Indeed, as more decisions like Oxford emerge from the federal courts of appeals, the class arbitration analytical roadmap for arbitrators should become well-understood. A tribunal not constrained by any explicit class action waiver nor by a Stolt-Nielsen type stipulation regarding the “silence” of the clause, will parse the text and syntax of the clause, in the context of the parties’ overall contract, as a first step to ascertaining their intent. If ambiguity exists, resort may be had to parol evidence.

And if the clause, so construed, permits conflicting inferences about intent, resort may be had to the governing law concerning principles of interpretation, burdens of proof, etc. 

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With this post, Arbitration Commentaries begins a new initiative to bring its readers reports on noteworthy arbitration law and practice developments in important jurisdictions outside the United States. In this commentary, Barry Leon, Chair of the International Arbitration Practice Group at Perley, Robertson, Hill & McDougall LLP in Ottawa, Canada (www.perlaw.ca ), and John Siwiec, an associate in that Group, report on a significant recent case from the British Columbia Court of Appeal on the importance of arbitration being expeditious and providing finality — an important appellate court policy pronouncement at a time when users of arbitration, arbitral institutions and arbitration practitioners are focused on the importance of controlling the cost and reducing the length of arbitration. Barry Leon and John Siwiec may be reached via the e mail links found on the Perley, Robertson website (linked above).

Recently, a unanimous British Columbia Court of Appeal upheld a lower court decision precluding a party from appealing a domestic arbitral award where the appeal would be based on an argument inconsistent with one it advanced before its arbitral tribunal. In doing so, the Court stated that the arbitration process is meant to be expeditious and provide finality.

In VIH Aviation Group Ltd. v. CHC Helicopter LLC, 2012 BCCA 125, the B.C. Court of Appeal held that:

Where parties have chosen arbitration as the method of resolving disputes under a contract, they are expected to present their cases fully before the arbitration panel. Allowing a party to change its position on appeal can be subversive of the arbitration process.[1]

In seeking leave to appeal the arbitral award, VIH Aviation Group Ltd. and Cougar Helicopters Inc. (“Cougar”) changed its position on the method that should be used to interpret the parties’ contract. The B.C. Court of Appeal upheld the lower court’s denial of leave to appeal on discretionary grounds under B.C.’s Commercial Arbitration Act, RSBC 1996, c 55 (“CAA”).

Legislative Framework

The CAA applies to domestic arbitration and is to be distinguished from B.C.’s International Commercial Arbitration Act, RSBC 1996, c 233 (“ICAA”), which incorporates the 1985 UNCITRAL Model Law on International Commercial Arbitration (“Model Law”).

One of the distinguishing features of the CAA compared to the ICAA is that arbitral awards can be appealed to B.C.’s Supreme Court (the trial level court) on questions of law. In contrast, the only recourse against an arbitral award under the ICAA is the prescribed grounds in Model Law Articles 34 and 36, which do not include errors of law.

At the center of the B.C. Court of Appeal’s ruling was the extent of the B.C. Supreme Court’s discretionary power in granting or refusing leave to appeal from an arbitral award under the CAA. Section 31(2) of the CAA states:

In an application for leave … the court may grant leave if it determines that

(a)  the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point of law may prevent a miscarriage of justice,

(b) the point of law is of importance to some class or body of persons of which the applicant is a member, or

(c)  the point of law is of general or public importance.

[emphasis added]

The applicant must demonstrate that the appeal will be on a question of law.

The Dispute

The dispute arose out of a joint venture agreement between Cougar and CHC Helicopter International Inc. (“CHC International”) under which the two companies would provide helicopter services to offshore oilfields in Newfoundland. At the time the agreement was made, CHC International directly owned substantial assets that would be used in the helicopter operations. However, following a restructuring, Cougar asserted its right to terminate the agreement alleging that CHC International had transferred substantially all of its assets.

CHC International’s corporate successor, CHC Helicopter LLC, referred the matter to arbitration seated in Vancouver under the CAA. The arbitral tribunal held that Cougar’s purported termination was invalid and that the joint venture agreement remained in force.

The Parties’ Positions in the Arbitration

The main issue in the arbitration was whether CHC International’s restructuring triggered the termination clause in the joint venture agreement that provided a party the option to terminate the agreement in the event the other party “sold or transferred all or substantially all of its assets”.

The parties differed in their interpretation of “all or substantially all” in the clause although they agreed that the words required a purposive interpretive approach, which included both a quantitative and qualitative analysis of the corporate restructuring. The parties differed on the qualitative effects of the restructuring.

The tribunal found in favour of CHC Helicopter LLC, finding that the restructuring was not qualitatively significant.

Leave to Appeal

In seeking leave to appeal the arbitral award before the B.C. Supreme Court, Cougar’s main assertion was that the tribunal erred in law in failing to interpret the termination clause in the joint venture agreement in accordance with its plain and ordinary meaning – that CHC International’s restructuring led to a “transfer of all or substantially all of the assets” within the plain and ordinary meaning of the words – as opposed to interpreting it using a purposive approach.

The judge accepted that Cougar’s proposed appeal raised an issue of law, and cited B.C case law for the proposition that a failure to apply proper principles of interpretation to the construction of a contract is an error of law. He also found that the criteria for granting leave under Section 31(2)(a) of the CAA, noted above, were met.

Although the statutory criteria had been satisfied, the judge declined to exercise his discretion in favour of granting leave. The judge’s primary motivating factor in refusing leave was that Cougar’s proposed argument on appeal would be inconsistent with the argument it advanced in the arbitration.

Cougar appealed the trial judge’s refusal of leave to appeal to the B.C. Court of Appeal. Cougar contended that its position regarding the interpretation of the joint venture agreement was not inconsistent but a refinement of its previous position.

Potential Subversion of Goals of Arbitration as Ground for Refusing Leave to Appeal

The B.C. Court of Appeal agreed with the judge of first instance that Cougar’s proposed argument on appeal conflicted with its argument before the arbitral tribunal. The Court then considered whether the trial judge erred in treating the change of position as a proper basis on which to refuse leave to appeal.

After reviewing the goals of arbitration, the Court of Appeal found that the trial judge did not err and held that “allowing a party to change positions too readily on an arbitration appeal risks subverting the goals of the arbitration process, which is designed to be expeditious and provide finality.” (VIH Aviation Group Ltd. v. CHC Helicopter LLC, 2012 BCCA 125, at para. 48.)

The affirmation by the B.C. Court of Appeal of the importance of arbitration being expeditious and providing finality is a welcome appellate court policy pronouncement at a time when users of arbitration, arbitral institutions and arbitration practitioners are focused on the importance of controlling the cost and reducing the length of arbitration.

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Exchanges rates and interest rates are interesting, and important, especially in high-value cases.

So one might suppose that a (nominally) Nigerian company involved in a high-stakes London-based arbitration against the Government of Nigeria, and anticipating that it might seek recognition and enforcement of the award elsewhere than in Nigeria, would have given attention during the arbitration to (i) the proper currency of the award, (ii) the convertibility of the award currency into the currency of the enforcing jurisdiction upon entry of judgment confirming the award, (iii) the relevant reference date for currency conversion and (iv) the applicability of the interest rate utilized in the award to the calculation of post-award/pre-judgment interest.

But that did not occur in the arbitration underlying the latest in a series of decisions from a federal district court in Washington concerning US enforcement of the award. (Continental Transfert Technique Ltd. v. Government of Nigeria, 2012 WL 1005203 (D.D.C. Mar. 27, 2012)).

It appears Claimant did not consider the difficulty in having a US judgment awarding Nigerian currency — equivalent to US $250 million at the award-date exchange rate — until after the US judgment had been entered. Claimant’s problem touched off a dispute over the power of the federal court to provide a solution, either as a clerical correction or substantive amendment of the judgment.

The award creditor who has obtained a confirming US judgment may discover only in its dealings with the execution authorities — the US Marshal’s office in the district where assets may be found –   that the Marshal is unwilling or unable to execute the judgment except in the strictest compliance with its terms. The Marshal’s Office is not in the business of making calculations, conversions, or interpretations.  Further, when one arrives at the Marshal’s office with a judgment confirming an arbitral award, the award itself is quite useless. The Marshal is interested only in what the Judgment provides.

In this case the Claimant, presumably upon discovering that the Marshal would not convert Nigerian currency to dollars and select an exchange rate, asked the Court to rectify the matter as correction of a “clerical error” in the Judgment. The Court denied this relief, ruling that at least the reference date for conversion, if not convertibility itself, was a matter of substantive rights not yet adjudicated,  and any change in the Judgment would therefore need to meet the stiffer legal standard for substantively amending it as opposed to clerically correcting it. The Court left open whether amendment could be possible an invited another round of briefs.

One approach used by arbitral tribunals in addressing the conversion issue is to secure to the creditor the amount in the creditor’s national currency that it would have had if the debtor had fully performed its commercial obligation. (See H. Smit, Substance and Procedure in International Arbitration, 65 Tul. L. Rev. 1309 (1991), republished at www.translex.org/128900). One might also suppose that tribunals, extending this practice, would sometimes give their award in a currency in which the debtor ordinarily holds its cash reserves, even if not its own national currency.

In all events there are potentially arbitrable issues of fact regarding the timing of currency conversion, and the creditor who fails to present the issue to the arbitral tribunal bears risk that an enforcing court will only convert the currency as of the date of the judgment confirming the award. (See, in this regard, a brief discussion of exchange rate issues in an article by Noel Matthews, James Nicholson, and Alexandre Riviere of FTI Consulting, titled “Calculating Pre-Judgment Interest,” in Global Arbitration Review’s The European & Middle Eastern Arbitration Review 2012. The authors observe: [F]luctuations in exchange rates may mean that it may make a significant difference to the final sum claimed whether the damages are translated into hard currency at the date of breach, at the then-prevailing exchange rate, at the date of the hearing or award, or periodically as lost cash flows would have been realized.  The determination of which method is appropriate may require a tribunal to take a position on whether the claimant would have translated its losses into hard currency at an earlier or later date.”)

The award creditor in Continental v Nigeria also did not obtain a clear ruling from the arbitral tribunal on the rate applicable to post-award, pre-judgment interest. The stakes are significant, as the tribunal gave pre-award interest at 18 percent, and there have been nearly four years of post-award proceedings in the UK and US courts with more to come.  In the latest decision, the federal court in Washington rejects the notion that its judgment might be “clerically corrected” to apply the pre-award interest rate to the post-award, pre-judgment period.

Arbitration counsel are wise to specify in their submissions to the tribunal that the desired rate of pre-award interest should apply up to the date the award is satisfied. If so stated, a judgment confirming the award, in order to carry out its terms, should provide for pre-judgment interest at the pre-award rate specified by the tribunal.

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The persistent problem of what may be called the “party-disabled arbitrator”  and the resulting “truncated tribunal,” especially in arbitrations involving States, surfaced this month in a federal district court decision from New Orleans.  The party-disabled arbitrator begins the proceedings as the party-appointed arbitrator, but at some point the party determines that its interests are best served by attempting to obstruct the functioning of the tribunal by interfering with the ability of its party-appointee to continue to carry out his or her mandate.  (For a long historical view of the problem, see Judge Stephen Schwebel’s treatment in the 1994 Lord Goff lecture, “The Validity of an Arbitral Award Rendered by a Truncated Tribunal,” reprinted in S. Schwebel, Justice In International Law: Further Selected Writings (Cambridge University Press 2011)).  In First Investment Corp. of the Marshall Islands v. Fujian Mawei Shipbuilding, Ltd., 2012 WL 831536 (E.D. La. Mar. 12, 2012), the US court never reached the merits of the truncated tribunal issue, finding instead that it lacked personal jurisdiction over the Chinese corporate award debtors, and lacked subject matter jurisdiction over the People’s Republic of China. But the court’s opinion provides the background of that issue in considerable detail, and reveals that it was the decision of a PRC court, refusing to confirm the award on the basis that a truncated tribunal lacked power to issue it, that led to this failed effort to have the award confirmed in the US.

The underlying dispute involved a shipbuilding contract between a Marshall Islands entity and two Chinese companies, the first wholly-owned by the PRC, the second wholly-owned by the first. Arbitration was to (and did) take place in London before a three-member tribunal under English law and the arbitration rules of the London Maritime Arbitrators Association (LMAA). Each side appointed an arbitrator — Respondents appointed a PRC national — and the party-appointees jointly selected Professor Martin Hunter to preside.

After the closing of the proceedings and deliberations by e mail, including issuance of a deliberations memorandum by the Respondents’ party-appointee, Professor Hunter circulated a draft award. Respondents’ arbitrator then provided written comments and a draft dissenting opinion. Professor Hunter proposed a deliberations session in London to work out the points of disagreement, and the Respondents’ arbitrator agreed to attend while also stating that he was willing to complete deliberations by e mail. Before the scheduled London session, PRC authorities detained the arbitrator, preventing his attendance and his further participation.  (A case comment on the PRC Court’s decision on the website of a PRC law firm asserts that the detention was for reasons unrelated to the arbitration. See www. Internationallawoffice.com/newsletters/detail.aspx?g=d207afa3). But the US court decision appears to accept the premise that the detention was specifically intended to prevent the arbitrator from participating in the remaining deliberations and issuance of the award.) When it was evident the Respondents’ arbitrator could not participate further, and could neither receive the revised draft of the award nor attend a deliberations session in London, the final award was issued, signed only by Professor Hunter and Claimants’ appointee, and including the detained arbitrator’s dissenting opinion as provided in draft form prior to his detention. Concurrently, the Tribunal acting by majority issued a procedural order explaining its reasons for believing it was empowered to proceed with issuance of the final award, including mention of the fact that the detained arbitrator had expressed willingness to have the award issued without further deliberations if his dissenting opinion were included.

Today this scenario is widely regulated by rule, in the 2010 UNCITRAL Rules and those most major arbitral institutions. But there are considerable variations in conditions and methods, reflecting a lack of consensus on this very delicate issue involving an ostensible collision of fundamental arbitral values. The issue is removed from the discretion of the other two arbitrators by UNCITRAL Rule 14(2)(b) (appointing authority decides), ICC Article 15(5) (ICC Court decides), and Stockholm Chamber of Commerce Article 17(2) (Board of the Arbitration Centre decides).  At the other end of the spectrum, the decision whether to proceed is left to the sole discretion of the other members of the tribunal by ICDR Article 11 and LCIA Article 12.  And the latter rules permit a decision to proceed as a truncated tribunal if the third arbitrator’s failure to participate occurs at any stage – as does the Stockholm Rule – whereas the UNCITRAL and ICC Rule permit authorization for a truncated tribunal to be considered only when the difficulty arises after the closure of the proceedings.   The Singapore International Arbitration Centre rules contain no provision for a truncated tribunal, and instead provide in Article 13.2 that an arbitrator who fails to participate or is prevented from participating shall be challenged, and if the challenge is accepted shall be replaced.

But in the First Investment case, the LMAA arbitration rules had no provision for a truncated tribunal, and the English Arbitration Act of 1996 (as the lex arbitri of this London-venued case) does not address the question. The LMAA Rule reading most closely on the situation stated that “After the appointment of the third arbitrator decisions, orders or awards shall be made by all or a majority of the arbitrators.”   That is to say, neither the rules nor the lex arbitri directly addressed the power of the tribunal to proceed when the participation of a party-appointed arbitrator was evidently interfered with at the behest of the appointing party after the closure of the proceedings but prior to issuance of the award.

Measured against the array of different approaches taken by the leading arbitration rules, and against disparate judicial decisions in different national courts, the decision of the PRC court in the First Investment case, applying the New York Convention to refuse to confirm the +$30 million award on the ground that the procedure had been not in accordance with the agreement of the parties, should not necessarily be seen as an outlier or as a partisan application of the New York Convention in favor of PRC-affiliated entities.

For example, the Swiss Supreme Court in a decision in January 2011 stated the governing principle of Swiss federal law to be that unless the parties have so agreed, upon the (even unjustified) resignation of one member of a three-member tribunal, the remaining two arbitrators have no power to proceed further with the case absent agreement of the parties that they may do so. The Swiss Supreme Court in that case stated however that the rule is different where the arbitrator appointed by a party does not resign but instead without justification refuses to participate, especially in deliberations.  In such case, said the Swiss Supreme Court, the Tribunal remains properly constituted and may proceed to an award, if necessary circulating the draft to the recalcitrant arbitrator to make clear the continued opportunity for that arbitrator to participate. (See Swiss Supreme Court decision of Jan 3, 2011 in Belmonte v. World Anti-Doping Agency et al, English translation published at www.praetor.ch. See also, N. Voser & S. Stark Traber, “Swiss Supreme Court Holds That the Principle of Ne Bis Idem Forms Part of Public Policy,” www.arbitration.practicallaw.com/9-504-9921 (Mar. 2, 2011)) Gary Born in his treatise records that the “predominant response” of international tribunals in cases involving State parties has been to recognize an obligation of the remaining two arbitrators to proceed (G. Born, International Commercial Arbitration (Kluwer 2009), Vol. 1 at 1590) — this however being more an arbitral view of the problem than a consensus view of national courts asked to enforce the awards of such tribunals when they are subject to judicial confirmation. In a 2010 decision, Russia’s highest commercial court set aside award in favor of a Moscow real estate corporation, reasoning that award rendered by two arbitrators more than two months after death of the third constituted breach of the principle of equal treatment of the parties and equal representation in the arbitral tribunal. (See Philipp Peters, “Arbitration Decisions by Truncated Tribunals — An All Time Favorite,” www.Kj-legalcom, Dec. 27, 2010).  But the case of a deceased arbitrator is perhaps distinguishable and not indicative of how that court would have ruled in a case involving unjustified non-participation by an arbitrator that was apparently procured by the appointing party.

The element of the PRC court’s decision in First Investment that may be debated is its interpretation of the factual record. What that court viewed as the election of Professor Hunter and the Claimant’s appointee to proceed with final deliberations as a truncated tribunal, could quite plausibly be viewed as a unexceptional final award by majority issued after completion of deliberations by the full tribunal.  Indeed the procedure followed by the majority after the detention of the Chinese party’s appointed arbitrator hued quite closely to the formula recommended in the Fouchard Gaillard Goldman treatise:

The two remaining arbitrators can circumvent the passivity or obstruction of the first arbitrator and deliberate validly by putting questions to the first arbitrator in writing and by forwarding him or her a draft of the award.  By considering the first arbitrator’s silence to constitute a negative response or disagreement, the award can be made by a majority decision of the two remaining arbitrators, without infringing the requirement for collegial deliberation.

(P. Fouchard, E. Gaillard, B. Goldman, International Commercial Arbitration (Gaillard & Savage, eds.) (Kluwer 1999), § 1136 at 616).

An arbitral tribunal that follows this prescription should not often be condemning the prevailing party to an enforcement morass. Indeed the Respondents in the case under discussion apparently were sufficiently confident that Professor Hunter’s chosen course would be sustained by the UK courts that they elected not to seek vacatur of the award. Of course a tribunal would be wise first to elicit the comments of the parties — and the US federal court decision in First Investment indicates that Professor Hunter and his colleague did so. The party comments so elicited might in some cases reveal that the party expecting to prevail would prefer the appointment of a replacement arbitrator even considering the attendant delay and cost. Such a response might be forthcoming especially where the applicable rules or governing arbitration law provide (i) for institutional- or appointing authority-appointment of the replacement arbitrator, and (ii) for the reconstituted tribunal to have discretion to move forward without repeating proceedings.

Should a US court ever face this issue in an enforcement or vacatur context, perhaps a rather straightforward common law contract analysis could lead to a satisfactory solution. Each arbitrator is contractually bound to the parties and to the appointing institution or authority to serve and participate fully in the work of the tribunal up to the issuance of the final award. The failure to do so, whether by resignation or by failure of participation, unless legally justified, is a breach of contract. The breach being one that causes irreparable injury, i.e. injury that cannot be measured or adequately remedied by money damages, it should be the subject of an equitable remedy. Specifically the purported resignation or non-participation should not be recognized as a lawful withdrawal from the Tribunal, and the further actions of the Tribunal taken by majority — provided that the applicable rules permit decisions, awards, and orders by majority — should be seen as actions of the full tribunal deciding by majority vote, not actions of a truncated tribunal, unless the recalcitrant arbitrator is deprived of the opportunity to participate in those actions by the procedures adopted by the majority.

Sound reasons of policy and principles of international law support this approach, but the contractual approach has the advantage of avoiding judicial adoption of a rule of decision based on sources that may themselves generate controversy in a US judicial forum. In regard to policy, I refer to Judge Schwebel’s report of the position taken by the ICC Court of Arbitration in Case No. 5017 (1987), Ivan Milutinovic PIM v. Deutsche Babcock AG. (See S. Schwebel, “The Authority of a Truncated Tribunal,” reprinted in S. Schwebel, Justice in International Law: Further Selected Writings (Cambridge University Press 2011)).  When a party-appointed arbitrator in that case withdrew at a late stage of the hearings, the ICC Court refused to accept the purported resignation and declared that the withdrawing arbitrator was obliged to continue. The final award in that case, which included fully reasoned support for the conclusion that the tribunal had power to adjudicate, was accepted by the ICC Court. Notably, the award expressed that it is “‘more and more accepted that in international commercial arbitration the possibility of delaying tactics is a serious concern and the elimination of these effects a primary task of all involved.’” The Swiss Federal Tribunal ultimately sustained vacatur of the award — an outcome Judge Schwebel terms “calamitous” and “inconsonant with the principle that a party may not invoke its own wrong — or a wrong that it adopts as its own — to deprive another party of its rights.”  As we have seen above, the Swiss Supreme Court in 2011 identified the distinction in earlier Swiss case law between the resignation of the arbitrator (requiring replacement) and the willful unjustified nonparticipation (permitting the remaining arbitrators to proceed).

It may be inferred that under Swiss contract law it was deemed not possible or not appropriate to treat the arbitrator’s purported resignation as ineffective to terminate his or her mandate and to de-constitute the tribunal.   But under the common law of contracts of most US states and “federal common law,” there is ample support for the view that the purported termination of a contract without just cause is legally ineffective if there would be no adequate remedy at law for the contractual breach. More ambitiously, US courts might derive from international arbitral case law (notably decisions of the Iran-United States Claims Tribunal, and the seminal award in Himpurna California Energy Ltd. v. Republic of Indonesia, Final Award of Oct. 16, 1999 reprinted in 15 Mealey’s International Arbitration Report (Feb. 2000)) a rule of customary international law that a party that has consented to an international adjudicatory proceeding cannot take actions calculated to frustrate the agreed process, and if it does so by preventing its own party-appointing arbitrator from functioning, may not be heard to complain that the award rendered by the remaining arbitrators is not in accordance with the agreement of the parties.  And that rule might translate into a New York Convention rule of “unclean hands,” preventing the offending party from invoking an Article V defense to enforcement of the award where the opportunity for the defense to be asserted arises from the invoking party’s own unlawful conduct. The difficulty with such a rule in practice, however, is that its application should not occur except upon detailed findings of fact, upon a full evidentiary record, concerning the culpability of the party in the interference with its appointed arbitrator.  The contractual approach both absolves the US court of the need to make judgments about the conduct of parties who often will be, or will be owned or controlled by, foreign States, and permits the US court to conduct a streamlined summary confirmation proceeding in accordance with the intent of Congress in the enactment of the implementing legislation for the New York Convention.  

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Each time a US court declines to entertain a petition to confirm a foreign arbitration award, there are at least two questions that we as practitioners in the field should ask: (1) Was the Court’s decision correct?; and (2) What lessons can we learn from the experiences of the parties that we can use as arbitrators or as counsel?  Last week a Federal District Court in New Orleans denied the petition of a group of American companies to obtain confirmation of an award made in consolidated London arbitration proceedings against a shipbuilding firm domiciled in China.  The Court held that it lacked personal jurisdiction over the Chinese Respondent.  [In re Arbitration Act of 1996 (Covington Marine Corp. v.  Xiamen Shipbuilding Industry Co.), 2012 WL 876240 (E.D. La. Mar. 14, 2012)]

It is no longer controversial that a US court must have personal jurisdiction over the award debtor as a pre-condition to recognition and enforcement of an award under the New York Convention and FAA Chapter Two.  (See in this regard Section 4-27 of the Restatement (Third) of the  US Law of  International Commercial Arbitration and the Reporters’ Notes to that Section). In this case, the award creditor named the People’s Republic of China (PRC) as a Respondent in the confirmation case, although the PRC had not been a party to the underlying arbitration (or the merits appeal of the initial award to the High Court in London, or the proceedings on remand before the arbitral tribunal after the High Court rejected the original award’s merits conclusions), and alleged that the award debtor was an agency and instrumentality of the PRC.  Had this argument succeeded, personal jurisdiction over the award creditor itself would have become irrelevant, as US decisions hold that foreign States are not “persons” entitled to the protections of due process clauses of the US Constitution.

But in an order preceding this decision, the federal district court  in New Orleans had held that the allegations that the PRC dominated and controlled the award debtor such that it was an agency of the PRC had not been established, and dismissed the action as against the PRC.  The award creditor was left to establish personal jurisdiction based only on the award debtor’s contacts with the forum (or at least with the United States), and was unable to establish any – including offering no evidence to support its pleaded allegation that the award debtor had or would in the future have property in the jurisdiction of the district court.

The lessons to be learned from this?  One wonders what was the intended enforcement strategy of the Claimants at the time they commenced the arbitrations.  The Respondent was a shipbuilding company in the PRC, and on the surface would seem to have been unlikely to have significant assets outside the PRC.  Would it not have been preferable to name the PRC as a Respondent in the arbitration – while reserving the position that it while the arbitral tribunal could provisionally decide upon its jurisdiction over then non-signatory, it would ultimately be for an enforcing court to decide that matter? Alternatively, would it not have been useful to take advantage of Article 32 of the UK Arbitration Act of 1996 – which allows a party to obtain a court adjudication of a preliminary point of jurisdiction in a pending arbitration, either upon agreement of the parties, or with permission of the arbitral tribunal and the Court if it is satisfied that substantial time and costs could be saved in the arbitration by making the preliminary ruling? 

By seeking determination of the PRC’s status from the arbitral tribunal or from a court at the seat as a preliminary matter, one would think Claimants chances of having a more fulsome factual inquiry into the Respondent’s relationships with the PRC would have been enhanced. There is no indication in the US court’s decision that the Claimants as award creditors sought discovery on the question of whether Respondent was indeed a PRC state-controlled entity. But a confirmation proceeding in a US court is intended to be a summary proceeding, and a federal district judge may be understandably reluctant to transform what should be a routine confirmation case into a jurisdiction mini-trial, and to order a foreign-based award debtor, with no evident connections to the forum, to produce evidence in a foreign language, with the necessary costly translations, concerning its alleged relationship with the foreign Sovereign. (The burdens of making such an inquiry moved the Second Circuit in the much-discussed Monegasque case to sustain dismissal of a confirmation case based on forum non conveniens so that a court in the Ukraine would determine the relationship between the award debtor and the Government of Ukraine. In that case also, the State’s liability to satisfy the award was raised for the first time at the confirmation stage).

And what might an arbitral institutions and tribunals do to manage this problem? One might hope that the issue of joinder of additional parties would be systematically raised by the administering institutions in communications with the parties prior to the formation of the arbitral tribunal – perhaps with appropriate mention of the difficulties that might attend the joinder of parties after formation of the tribunal in view of their non-participation in the selection of the tribunal. Arbitral tribunals might also systematically raise the additional party joinder issue in preliminary conference hearings, while being mindful that the applicable rules or arbitration law may confine or eliminate the power of the tribunal to join new parties absent consent of all the existing parties.

It seems trite to say that all participants in the arbitral process should work towards the eventual enforceability of the award, including its execution if necessary against property that legally should be subject to application for that purpose. But if the “where is the money?” question were systematically on the pre-arbitral agendas of all the players, perhaps disappointing outcomes (from a prevailing Claimants’ perspective) like the one in this recent case from New Orleans would more often be avoided.    

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For those whose careers in international arbitration have origins connected to the Iran-US Claims Tribunal (Tribunal) — and I am one of many — yesterday’s decision by the federal court of appeals in Washington, allowing a US company to recover damages for expropriation from the Islamic Republic of Iran under the 1955 US-Iran Treaty of Amity, as interpreted under Iranian law, resonates like a fondly-remembered ballad from the American Songbook. (McKesson Corp. v. Islamic Republic of Iran, 2012 WL 615831 (D.C. Cir. Feb. 28, 2012)). I leave it to others to consider the potential for future US litigation against Iran under this venerable treaty, and for the bearing of a heavier jurisdictional burden by the Foreign Sovereign Immunities Act (FSIA), should Iran in the future take measures against US investors and investments. And I invite readers to read more elsewhere about the Court’s necessary and important preliminary holding that the “Act of State” doctrine did not shield Iran from US jurisdiction where its conduct, distinctly non-sovereign in the Court’s view, consisted of the takeover of the board of directors of a private company and the subsequent making of corporate governance decisions about dividends to the US shareholder.

Instead I will focus this post on the Court’s holding that the FSIA provides no basis for an implied cause of action based on violations of customary international law.

To summarize the case’s background very briefly: McKesson since 1960 had been in a joint venture with private parties in Iran in the dairy business. After the Islamic Revolution of 1979, the Islamic Republic took over the joint venture’s Board of Directors and effectively froze out McKesson. But in its claim in the Iran-US Claims Tribunal, the Tribunal held that the expropriation of McKesson’s property rights in the joint venture did not culminate until after the outside date (provided in the formative Algiers Accords) for actions taken by the Islamic Republic to be within the subject matter jurisdiction of the Tribunal. Thus McKesson achieved only a limited recovery in the Tribunal and, after the Tribunal’s final award, revived in federal court case against Iran. After more than 25 years of litigation since this revival of suit in 1986, and after four prior trips to the DC Circuit, McKesson obtained a final judgment from the district court for expropriation damages in excess of $43 million.

The important element of the DC Circuit’s decision that I highlight here is its ruling that no implied federal judicial cause of action for expropriation arises from customary international law or the FSIA.  The consequences of that ruling, which reverses the order of the district court, are considerable. Had the Court accepted the position of the district court that a right to sue for expropriation compensation is implicit in the certain exceptions to sovereign immunity under the FSIA, an area of international investment law essentially regulated by treaties and through arbitrations would have found a new domain in the federal court system.  This would have expanded the potential for investment claim litigation against foreign states with which the US does not have investment treaties.  Further, US investors with investment claims against State parties to investment treaties with the US that provide for arbitration might have brought lawsuits instead, thus raising the question of the exclusivity or arbitration under the treaties.

But it was not to be. The DC Circuit disagreed with the district court’s view that the FSIA was, like the Alien Tort Statute (ATS), not exclusively a jurisdiction-conferring statute but also one that provides a substantive cause of action for redress of a limited number of violations of customary international law.

In this regard the appellate court cited Supreme Court and federal circuit cases (its own and the 9th Circuit) for the position that the FSIA is “purely jurisdictional,” and found no evidence that Congress in enacting the commercial activity exception to sovereign immunity intended that the FSIA would also serve as a source of substantive rights. The ATS, the Court observed, was enacted against a very different practical backdrop — i.e. Congress’s desire to facilitate certain substantive causes of action such as tort claims by ambassadors — whereas the FSIA was enacted one year after the Supreme Court had (in Cort v. Ash) “signaled its reluctance to imply causes of action when faced with statutory silence.”

The Court also observed that given the substantial judicial discretion involved in fashioning common law causes of action from customary international law norms, it was strongly disinclined to allow the use of such discretion in regard to claims against foreign States — a matter in the Court’s view that is better left to Congress in view of the potential impact on foreign relations.

So expropriation and other international-law based property claims against foreign sovereigns will, for US investors, remain almost entirely in the domain of treaty-based arbitration. It is this road-not-taken, rather than the Court’s recognizing of a cause of action for the Plaintiff based on an old treaty interpreted under Iranian law, that should be of greatest interest to US foreign investors and their counsel.

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1999 was not so very long ago. And over the last dozen years some areas of the law have necessarily moved rapidly to keep pace with developments in technology and their impact on how business is conducted.  That has not necessarily been the case in every corner of the law of international commercial arbitration.

 Until a few weeks ago, counsel looking for guidance in US law on the “agreement in writing” requirement of the New York Convention could read, unhelpfully, a 1999 decision of the US Second Circuit Court of Appeals in Kahn Lucas Lancaster, Inc. v. Lark International, Ltd., 186 F.3d 210 (2d Cir. 1999). That case dated from an era in which international contracting often involved use of the fax machine – e mail was mostly with us, but transmission of sizeable documents via e mail in digitally compressed scanned electronic files was not.

The Court in Kahn Lucas held that the phrase “signed by the parties or contained in an exchange of letters or telegrams” (Convention Art. II) stated a condition for an enforceable agreement to arbitrate under the Convention, whether the agreement was based on (in the Convention’s words) “an arbitral clause in a contract” or a separate “arbitration agreement.” There was no enforceable agreement to arbitrate, the Kahn Lucas court held, because the arbitration clause in the buyer’s purchase order was not signed by the seller nor was it adopted by the seller in an exchange of letters or telegrams – notwithstanding that the parties did enter into a contract for the sale of goods.

But until this year, there was little guidance to the application of  the “agreement in writing” requirement to the contracting methods characteristic of contemporary international goods and commodities procurement – typically involving innumerable e mail exchanges, PDFs of contracts, e-mailed expressions of assent in lieu of signatures,  e-mailed amendments and counteroffers, and – notably in both cases discussed below – sellers’ “General Terms and Conditions” that, because they contain formal legal detail rather than commercial terms, often receive little or no direct attention in the e mail exchanges. 

Glencore Ltd. v. Degussa Engineered Carbons L.P., 2012 WL 223240 (S.D.N.Y. Jan. 24, 2012)

In Glencore v Degussa, the contract, made by email, was for sale and delivery of feedstock oil at the buyer’s Texas and Louisiana chemical plants. The buyer and its insurer brought suit in a Texas court claiming damages resulting for oil deliveries that did not meet specifications. Seller Glencore (a Swiss company) commenced arbitration on the same claims, against the buyer and insurer, relying on a provision in its “General Terms and Conditions” for AAA arbitration in New York.  Buyer and insurer refused to participate in the arbitration or to withdraw the court action, and Glencore petitioned to compel arbitration.

The question presented was whether the Glencore General Terms and Conditions (“GTCs”), seen by buyer only in late stages of the negotiations and received without comment, nevertheless were part of an “agreement in writing” between the Parties by virtue of the sequence and content of their e mail exchanges. The Court held that this was indeed the case, and granted the motion to compel arbitration.

Glencore had sent its standard sales contract by e mail. It did not include the GTCs but rather only a reference to them. The contract stated that the GTCs would govern, and that if this was contrary to buyer’s understanding then buyer should respond immediately by fax with specific points of disagreement. Buyer did not so, but instead two weeks later after Christmas-New Year holidays replied by e mail asking Glencore for only one change: to state its corporate name accurately. In ensuing e mail exchanges, Buyer asked for and received the GTCs, and did not comment.

Additional contracts were made for feedstock oil supply for ensuing calendar quarters. The contract process followed the same pattern: after delivery of seller’s standard contract, buyer requested minor changes, none of which referenced the GTCs.

The District Court considered that there were two separate analytical steps concerning formation of the arbitration agreement. First, there needs to be contract formation “under ordinary state law contract principles.” (The quotation comes from First Options v Kaplan, a domestic arbitration case, and so in its original context it refers to the applicable law of a state of the United States. But if the parties have different nationalities, this could readily mean the applicable contract law of a foreign State). Second, if there is an arbitration contract, it must in addition satisfy the “agreement in writing” requirement of the New York Convention.

As to the first, “state law,” contract inquiry, the Court found an agreement to arbitrate on two different theories — each under Texas’s version of the Uniform Commercial Code (“UCC”), which it found applicable based on a traditional grouping of contacts choice of law approach. Under the UCC, the buyer had objectively manifested its assent to the seller’s contract including the General Terms. Alternatively, under UCC §2-207(2) which concerns proposed additional terms to an existing contract between merchants, the arbitration clause became part of the contract because it did not “materially alter” the commercial agreement — under a legal standard that treats as a “material alteration” a term that would “impose surprise or hardship” were it included in the contract without having been specifically discussed.

Turning next to the question whether the Convention’s “agreement in writing” requirement was satisfied, the Court first observed that this requirement imposes a more stringent test that the UCC standards of contract formation. To illustrate this point, the Court noted that incorporation of additional terms under UCC 2-207(2) is essentially presumptive absent special circumstances, and that the presumptive inclusion does not satisfy the Convention’s alternative criteria of signature of “an exchange of letters of telegrams.”

Here, the Court held, the “exchange” requirement of the Convention was satisfied because the arbitration clause was incorporated by reference in the contract when it was sent, the buyer replied asking for other changes but not mentioning the GTCs, the buyer further confirmed that the seller’s contract was the agreement by referring to it as such in e mail communications about its parent company’s payment guaranty, and, finally, there was a specific request for delivery of the GTCs and delivery of same followed by no comment and contract discussions for new contracts in subsequent calendar quarters.

Copape Produtos de Petroleo Ltda. v. Glencore Ltd., 2012 WL 398596 (S.D.N.Y. Feb. 8, 2012)

Copape v Glencore involved some different twists in the contract negotiations, and ultimately some differences in the Court’s approach (which notably included no reference to the Glencore-Degussa decision). Here the buyer was a Brazilian company that contracted with Glencore in Brazil through a Glencore affilate in Brazil.  The contract at issue was the fifth between the parties, and in each of the four prior contract negotiations by e mail Glencore had sent it standard contract referencing the Glencore GTCs, without buyer ever requesting a copy. The fifth contract’s negotiation began with an indicative offer by Glencore that referenced its standard contract.  The buyer replied that the contract would be governed only by the Glencore GTCs insofar as buyer specifically approved them. As the exchange of e mails t progressed, Glencore eventually sent the standard contract that referenced its GTCs. But buyer never requested a copy of the GTCs, and in the final exChange of e mails Glencore wrote “Other terms and conditions remain unchanged” and buyer replied “OK.”

After buyer allegedly breached the contract, buyer commenced suit in Brazil. Glencore commenced an ICDR arbitration, buyer moved in federal court in New York to enjoin the arbitration, and Glencore cross-moved to compel arbitration.

In contrast to the two-level approach taken in Glencore-DeGussa, the distrIct court in Glencore-Copape considered that, even though jurisdiction was based on the New York Convention,  the court was presented with only “a single question — whether Copape ever became bound by the arbitration clause…” and that the law governing this question was “the federal law of arbitrability,” law which the court said includes “general principles of contract law including the Uniform Commercial Code.”

This brought into play, as in Glencore-Degussa, Section 2-207(2) of the UCC.

As we have seen, the approach of that Section is to avoid having an acceptance that contains proposed additional terms operate as a counter-offer only. And it further provides for presumptive incorporation of the proposed additional terms unless the party who made the original offer shows that one of three situations exist: the offer strictly prohibited additional terms, or the additional terms make a material alteration, or objection to the added terms is made within a reasonable time.

Thus an arbitration clause could readily become binding under the UCC without either the signature or the “exchange of letters or telegrams” required by the New York Convention. If the clause is contained in a set of proposed additional terms, and no timely objection is made in response, the UCC recognizes the silence as acquiescence, while the Convention evidently does not.

Whereas the court in Glencore-Copape did not discuss the potential divergence between UCC and Convention criteria for a binding agreement to arbitrate, it is helpful to note that the further e mails dispatched by Copape with reference to Glencore’s GTCs would appear to satisfy the “exchange” requirement of the Convention. Critically: (i) Copape raised objections to certain other provisions of the Glencore standard contract but did not object to the provision incorporating by reference the GTCs; (ii) when Glencore e mailed what were intended at the time as final commercial terms, it wrote “other terms and conditions remain unchanged” and asked Copape to “reconfirm by return,” and (iii) Copape replied “OK.”.  And while the court states that this would have been sufficient to find a duty to arbitrate, the court then noted that after further exchanges about business terms and timing, Glencore revised and re-sent the standard contract and Copape confirmed acceptance of it (presumably be e mail).

Although the Glencore-Copape decision, unlike Glencore-DeGussa, fails to take note of the Convention’s “agreement in writing” requirement as a separate and distinct prerequisite to finding an enforceable agreement to arbitrate in a case falling under the New York Convention, Copape does not in the final analysis stretch the limits of “exchange of letters or telegrams” to include the kind of silent acquiescence/contract by estoppel that is permitted by UCC 2-207(2).  This is simply a case of incorporation of the arbitration clause by reference to General Terms and Conditions, with a responsive e mail expressly accepting the contract that references the General Terms, among which is the agreement to arbitrate that the buyer could have, but elected not to, become specifically aware of.

Concluding Remarks

It is evident from the two decisions that the Convention’s requirement that the arbitration agreement be “contained in” a written exchange, as understood in New York federal courts, does not require that arbitration be mentioned in the communications, but only that arbitration be part of the documentation referenced in the communication. What is however troublesome in the Glencore-Copape decision is that it may be read to imply that in a US federal court the “agreement in writing” requirement presents an issue of federal common law of contracts derived from uniform state law, i.e. the UCC. That should not be the case. The Convention’s “agreement in writing” requirement, and the term “contained in an exchange of letters or telegrams,” as treaty language, should have a uniform  whas applied to particular facts, using established principles of treaty interpretation, and taking into consideration decisions of foreign and international tribunals, the opinions of leading commentators, and transnational sources of commercial principles.

An examination of the “agreement in writing” requirement under such transnational principles is beyond the modest scope of the post.  But US courts should not fail to consider them. There is no indication in the New York Convention that Contracting States are meant to reference only their own domestic law of contractual consent when deciding whether an “agreement in writing” to arbitrate exists in proceedings to compel arbitration.

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A tale from the Second Circuit: Two reinsurance executives regularly sitting as arbitrators were appointed, respectively, as party-appointed arbitrator and “umpire” (presiding arbitrator) in a reinsurance arbitration. While the case was pending but before the hearing, the same individuals were appointed, again as party-appointed arbitrator and umpire, in a second arbitration that bore certain relationships to the first. There was a similar but not identical issue of contract interpretation. There was a common witness whose testimony was important in each case. And there was a business connection, essentially successorship, between Claimant in Arbitration 1 and Respondent in Arbitration 2. These arbitrators elected not to disclose their appointments in Arbitration 2 to the parties in Arbitration 1.

After the Award in Arbitration 1, the loser learned of Arbitration 2, moved to vacate the award in a New York federal district court based on “evident partiality,” (FAA Section 10(a)(2)), and obtained the vacatur order. But last week, the US Second Circuit Court of Appeals reversed, holding that “evident partiality” depends upon objective evidence of bias, and that there no such evidence on the facts of this case. (Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 2012 WL 335772 (2d Cir. Feb. 3, 2012)).

The Second Circuit declined to adopt any particular criteria by which to evaluate allegations of bias. But the Court did find “useful,” but not “mandatory, exclusive, or dispositive” considerations such as

(1) the extent and character of the personal interest,pecuniary or otherwise, of the arbitrator in the proceedings; (2) the directness of the relationship between the arbitrator and the party he is alleged to favor; (3) the connection of that relationship to the arbitrator; and (4) the proximity in time between the relationship and the arbitration proceeding.”

However the Court did fashion a legal standard of sorts that will probably be cited often, stating: “[A] court must focus on the question of how strongly the relationship tends to indicate the possibility of bias in favor or against one party, and not how closely that relationship appears to relate to the facts of the arbitration.”

The Second Circuit framed the question presented as whether “the failure of two arbitrators to disclose their concurrent service as arbitrators in another, arguably similar, arbitration constitutes ‘evident partiality’ ….”, But the Court devoted relatively sparse attention to the implications of the commonalities between the cases. And one might have hoped for a more searching discussion of the ways in which pre-disposition to particular result, formed in an undisclosed second arbitration, might possibly constitute evidence of bias.

While essentially accepting the Distirct Court’s view of the relatedness of the two arbitrations, the Court observed that “the fact that one arbitration resembles another in some respects does not suggest to us that an arbitrator presiding in both is somehow therefore likely to be biased in favor of or against a party. And in support of this position the Court cites “Cf.” (i.e. by analogy) a remark of US Supreme Court Justice Anthony Kennedy to the effect that “the fact that the same judge presides over related cases ordinarily does not suggest that judge is biased.”

But the Court did not address or even acknowledge the imperfections in extending that analogy to commercial arbitration.

Suppose US District Judge X was presiding over multiple related but unconsolidated cases involving the same Ponzi scheme, and in each case was hearing claims of different investors, against the same investment manager, concerning that investment manager’s due diligence in regard to the same investment vehicle. Most observers would presumably agree there is no issue of judicial bias and no issue of procedural unfairness. The fact that the judge will, in each case before her, be influenced by evidence and legal argument in each of the cases is a known and assumed systemic risk of litigation. But that risk is offset by the public nature of federal court litigation, including full electronic access to the dockets in each case. Competent counsel may monitor the progress of each case and, indeed, by judicial process may obtain the evidence in the related cases, and have adequate opportunity to credit or discredit that evidence.

The privacy of related commercial arbitrations results in an entirely different dynamic. If not made aware of a pending related proceeding before the same arbitral tribunal, or one or more arbitrators in common to the two separate tribunals, a party is in no position even to assess the risk of that the arbitrators will develop a pre-disposition in the course of Arbitration 2 on issues central to resolution of Arbitration 1. 

Does this mean that the Second Circuit came to the wrong conclusion in Scandinavian Re? Not necessarily, especially under existing American law.

The American law concept of “evident partiality” is mainly albeit not exclusively focused on the relationships, personal and economic, between the arbitrator and the parties or their counsel. The Federal Arbitration Act does not distinguish, as international arbitration rules do, between “independence” and “impartiality.” Lack of impartiality, as it is widely understood under international arbitration rules, and in international arbitral practice, would include, for example, an arbitrator forming a judgment on crucial issues based upon her own fact investigation or her own legal research – especially if the results of such investigation or research are not disclosed to the parties during the proceedings so that they have an adequate opportunity for comments.

The arbitrator who fails to disclose her appointment in related Arbitration 2 to the parties in Arbitration 1 does not reveal any bias by the omission, but she does fail to alert the parties to the risk that an issue will be pre-judged by her and that she will seek to influence her fellow arbitrators in Arbitration 1 based on what she heard and read in Arbitration 2. Assuming Arbitration 2 is a private proceeding, the parties in Arbitration 1 proceed in ignorance of the fact that probative evidence and/or relevant legal argument is being presented to a member of the tribunal (or in the Scandinavian Re case, two members) in another case.  If the arbitrator, acting in an unbiased fashion in Arbitration 2, is persuaded by the evidence, legal argument, or witness credibility of a party positionally aligned with a party in Arbitration 1, the arbitrator has an undisclosed pre-disposition.  The election not to disclose the pre-disposition, prior to the award in Arbitration 1, implies that the arbitrator intends to deprive the party in Arbitration 1 who is disadvantaged by the pre-disposition of the ability to effectively persuade that arbitrator and the other members of the tribunal to adopt the opposite view. The arbitrator who in this fashion covertly subverts the what may be called the transparency of the arbitral decision process –  i.e. the  shared but often unstated assumptions that the tribunal will render its decision based on the record developed by the parties — may, on this view, be found to have been “evidently partial” if the undisclosed pre-disposition relates to a material matter.

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