Archive for May, 2009

Arbitral Determinations of Arbitrability

Friday, May 22nd, 2009

Courts continue to struggle with the question of how to allocate, between judges and arbitrators, power to decide questions of arbitrability (including the existence, vel non, of a valid agreement to arbitrate). The difficulty is acute in international arbitration cases where recognition and enforcement are sought under the New York Convention and its statutory implementing legislation in the U. S. , Chapter Two of the Federal Arbitration Act.
A recent case in point is Four Seasons Hotels and Resorts v. Consorcio Barr, S.A., 2009 U. S. Dist. LEXIS 39802 (S. D. Fla. May 12, 2009). In this case, the Court refused to confirm that portion of a final award, made by an ICDR tribunal sitting in Miami, that awarded $9 million of money damages, interest, and costs to Four Seasons Hotels. The Court found that the claim arose under a contract that did not contain an arbitration clause, rejecting the completely opposite conclusion that had been reached by the arbitral tribunal in a carefully reasoned section of its final award.
But the Court did not even pause to consider what effect, if any, it was required to give to the arbitrators’ decision on the arbitrability issue.
One might have expected the Court to begin (but it did not) with reference to the Supreme Court’s decision in First Options, Inc. v. Kaplan, 514 U. S. 938 (1995), where the Court held that if there is clear and unmistakable evidence that the parties agreed to arbitrate issues of arbitrability, then the arbitrators’ arbitrability decisions are entitled to the same high level of judicial deference that is normally accorded arbitral determinations of the merits. In those circumstances, “the court’s standard for reviewing the arbitrator’s decision about that matter should not differ from the standard courts apply when they review any other matter that the parties have agreed to arbitrate. ”
One would have further expected the Court to consider (but it did not) the First Options jurisprudence of the Eleventh Circuit federal appellate court, whose decisions were binding precedent for this federal district court in Miami. That Court’s decisions have held that there is indeed “clear and unmistakable evidence” of an agreement to arbitrate arbitrability when the parties in their contract adopt arbitration rules that give arbitrators power to rule on challenges to their own jurisdiction. (E.g., Terminix Intl Co. v. Palmer Ranch Limited Partnership, 432 F.3d 1327 (11th Cir. 2005). Here the parties had agreed, in one of the contracts involved in the case, to arbitrate under AAA/ICDR rules, and those rules of course do give arbitrators such powers.
Application of these principles to the facts of the Four Seasons case should have resulted in enforcement of the tribunal’s final award. The arbitration clause was found in a Hotel Management Agreement between Four Seasons and Consorcio. Certain claims in the arbitration arose directly under that Agreement. Initially that Agreement contained a provision concerning a credit facility made available to the hotel manager by Four Seasons. Later, that provision was superseded by a Loan Agreement that did not contain an arbitration clause.
Thus, the question of arbitrability addressed by the tribunal was not whether a valid agreement to arbitrate existed, but whether the Loan Agreement was (i) separate and independent from the Management Agreement, or (ii) in effect a modification of the Management Agreement, such that arbitration clause of the Management Agreement applied.
The arbitral tribunal adopted the latter construction. It seems quite remarkable that the district court judge would have simply rejected this conclusion and substituted a different view, as he did, without examining the scope of his power to do so.
This would seem to have been an instance where deference to the arbitrators’ arbitrability determination was in order: the arbitrability decision involved a factual determination of the relationship between a contract that clearly provided for arbitration, and another agreement that at least arguably was an amendment of the first one.
Perhaps this decision will be corrected on further appeal to the Eleventh Circuit. But final determnation is already long overdue — the tribunal having rendered its final award in March 2004. (The reasons for this delay apparently relate to prior US court proceedings concerning the effect, upon an earlier Partial Award in the case, of a Venezuelan court decision that purported to nullify that award).

Arbitral Power to Award Fees As Sanctions

Tuesday, May 19th, 2009

When the arbitration agreement states that each party shall bear its own legal fees, do the arbitrators have authority to award legal fees as a sanction for bad faith conduct in the arbitration? In a recent case in New York, two federal judges said yes, and two said no.

But the two votes in favor formed the majority on a three-judge panel of the Second Circuit Court of Appeals, and so that prominent Court has now held, apparently for the first time, that arbitrators do not exceed their powers by awarding fees as a sanction for bad faith conduct in the proceedings when the contract states that each party shall pay its own legal fees. Reliastar Life Ins. Co. v. EMC National Life Co., 2009 U.S. Dist. LEXIS 7647 (2d Cir. April 9, 2009).

For the panel majority, it was self-evident that arbitrators have “inherent authority” to award fees as sanctions if the parties have conferred broad authority on the arbitrators to resolve disputes. Rejecting the position that the specific contract language negated this authority, the majority construed that language as merely a declaration that the “American Rule” on attorneys’ fees would apply. The American Rule of course provides that ordinarily each party shall bear its own fees, with certain exceptions including, notably, fee-shifting as a sanction for bad faith conduct during the proceedings. The parties’ declaration that each would bear its own fees, taken to mean “the American Rule applies,” meant, to the panel majority, that the bad faith exception also applies unless the parties excluded it in specific terms.

For the dissenting judge on the Second Circuit, and the federal district judge whose decision was reversed, the issue was as simple and the answer as clear as the words in the agreement. The parties had made a clear decision to bear their own legal costs without exception, and the interpolation of the “American Rule,” including its exceptions, into those unambiguous words was a contradiction of the parties’ intent as expressed in the contract.

Which side has the better argument? The panel majority’s approach to contract interpretation seems flawed. It is certainly true, as the majority states, that providing arbitrators with power to sanction bad faith conduct by awarding legal fees and costs fee-shifting will promote efficient arbitrations. But the majority seems to engage in creative contract interpretation to make its own conception of good arbitration procedure to match the intent of the parties as reflected what they wrote in the agreement. According to the majority, the contract’s declaration that each party shall bear the legal fees of its own counsel is to be construed as an adoption of the “American Rule” on attorneys’ fees. But there is no objective evidence in the words of the contract that the drafters and signers of the contract were even familiar with the American Rule. Further, if simple language that “each party shall bear its own legal costs” is construed as an adoption of the American Rule, then the words mean, among other things, that each party shall bear its own legal costs unless the claims in the arbitration arise under a statute that provides for recovery of such costs by the prevailing party. That would seem to be a fundamental departure from what the parties said. The majority did not deal with that conundrum, as it was concerned only with an exception for sanctions in case of bad faith procedural conduct.

Further, the Court’s construction depends on the assumption that parties of Amercian nationality are aware of the American Rule on attorneys’ fees. But if the same language appears in a contract between parties at least one of whom is not American, the slender justification for this assumption falls away.

The majority proceeds from the premise that arbitral authority to award fees as a sanction is an “inherent power” of arbitrators resulting from the parties’ conferral of power to resolve disputes without making specific limitations on their remedial powers.
But calling the conferral of power to award sanctions “inherent” seems transparently to be a device to interpolate a judicial view of sound arbitral procedure into the terms of a private contract. In fact, what the parties stated in this contract was that the arbitrators should (i) consider customary and standard practices in the life or health reinsurance business, and (ii) apply New York law and the Federal Arbitration Act.

On this point, the dissenting judge seems to have it right when she writes: “Inherent authority is authority which is not conferred; inherent authority is possessed regardless of the intentions of those who have power to confer authority….[T]he notion of authority inhering in an arbitral panel, whose authority is derived from the agreement of the parties before it, is problematic.”


Much more can and should be said about this provocative and important decision. I offer the foregoing as an introduction to the issues raised, and hope to have more to say in the coming days.

Attachment in Aid of Convention Award Enforcement

Thursday, May 14th, 2009

A U.S. District Court judge in San Francisco recently granted an order of attachment, in aid of enforcement of the award of the ICC tribunal seated in Stockholm. Recognition and enforcement in the U.S. court were therefore governed by the New York Convention and Chapter Two of the Federal Arbitration Act. The Court’s opinion is a useful guide to many of the essential elements of recognition and enforcement of a Convention award in the U.S. federal courts. The case is Sony Ericsson Mobile Communications AB v. Delta Electronics (Thailand) Public Company Limited, 2009 U.S. Dist. LEXIS 36497 (N.D. Cal. April 15, 2009).
Here, rather than provide a conventional case comment, I propose to identify the generally-applicable legal principles underlying the Court’s decision. These will be familiar to most experienced U.S. arbitration practitioners, but perhaps instructive for others:
1. An award falls under the Convention, and therefore may be enforced in a court of the United States, if (inter alia) it is made in the territory of a Convention Member State. This award was made in Stockholm, Sweden, and therefore the award was subject to recognition and enforcement in the U.S., even though the parties were of Swedish and Thai nationality.
2. That the Convention confers subject matter jurisdiction does not preempt inquiry into in personam jurisdiction, under well-developed due process principles. (Thus Sony Ericsson’s initial U.S. confirmation action, in the Southern District of New York, had been dismissed for lack of in personam jurisdiction over the Thai Defendant).
3. The fact that parallel proceedings to enforce an award are pending abroad (here, in Thailand) will not ordinarily prevent the U.S. court from hearing the case. The general principle, applicable to all cases not only arbitration award enforcement, is that there must be “exceptional circumstances” to justify a federal court declining jurisdiction on the basis of a parallel proceeding abroad. Further, simultaneous proceedings to enforce the same award are consistent with the New York Convention.
4. The issuance of “prejudgment” remedies such as writs of attachment, is, in the federal courts, determined under the standards and according to the procedures established by the law of the state where the U.S. District Court seized of the action is located. Here, the availability of a writ of attachment was determined by California law.
4. State provisional remedy law and New York Convention enforcement law intersect, because the Court must determine whether the Petitioner has a “probably valid” claim for recognition and enforcement. The Petitioner will have a probably valid claim unless it is probable that the Court will find that one of the Convention grounds for refusal or deferral of recognition or enforcmeent exists. The burden is on the Respondent to show that such a ground exists.
5. If the Respondent asserts, as a ground for refusal of recognition and enforcement, that the arbitral tribunal lacked jurisdiction, the Court must decide what degree of deference is due to the arbitral tribunal’s determination, in the award, that it did indeed have jurisdiction. If the parties have clearly agreed to submit questions of arbitrability to the arbitrators, the court will defer to the arbitrators’ arbitrability determination. If not, the court considers the arbitrability issue de novo.

Arbitration Clause Held Null and Void Due to Conduct Waiver

Wednesday, May 13th, 2009

Federal district courts have ample power to dissolve a stay of proceedings pending arbitration, and order the parties to proceed with the litigation, where the party that initially invoked arbitration thereafter acts systematically to prevent the arbitration from taking place. A recent federal district court decision makes these powers clear.
In Apple & Eve, LLC v. Yantai North Andre Juice Co., 2009 U.S. Dist. LEXIS 32548 (E.D.N.Y. April 27, 2009), the defendant was a commercial entity domiciled in the People’s Republic of China. After plaintiff commenced suit in a New York State Court, defendant removed the action to federal court and successfully moved to compel arbitration even though the arbitration agreement did not specify an arbitral institution in China that would administer the case. Thereafter, defendant (1) refused to arbitrate under the auspices of the Hong Kong International Arbitration Centre, insisting that it was only bound to arbitrate in Mainland China, and (2) without disclosure to the plaintiff or the Court, filed an action in a People’s Court in the PRC seeking to declare the arbitration agreement null and void.
Invoking the “null and void” exception under Article II of the New York Convention and Section 201 of the Federal Arbitration Act, the Court held that waiver by conduct is a suitable ground to determine that an arbitration clause has become null and void, and that there was a clear waiver here. Further, the Court held, the question of waiver was for the court not the arbitrator to decide, where a litigation–conduct waiver was involved –taking the view that judicial determination of the waiver issue was part of the court’s inherent power to regulate the litigation practices of the parties in a pending case.
Further, defendant’s waiver of arbitration justified the conclusion that it was “in default in proceeding with [the] arbitration” – i.e. that the standard in FAA Section 3 for denying a stay of an apparently arbitrable dispute had been satisfied.


Tuesday, May 12th, 2009

Dear Readers
I apologize that there have been no new postings between April 2 and today’s date. In the interim, I prepared for the trial of an international commercial case governed by the UN Sale of Goods Convention (CISG), which was pending in the U.S. District Court for the District of New Jersey. With active encouragement from the Court and assistance with mediation by the assigned U.S. Magistrate Judge, the matter was resolved before opening statements. The client having returned to Italy yesterday, I am at liberty to return to blog-posting for a few days. Warm regards.

Supreme Court Decision on FAA Appeals

Tuesday, May 12th, 2009

The Supreme Court of the United States has held that any litigant –-whether or not a signatory of the agreement to arbitrate — who suffers denial of an application to stay the litigation pending arbitration, is entitled to an interlocutory appeal of that order. Section 16(a)(1) (A) of the Federal Arbitration Act, the Court held, clearly provides for such an interlocutory appeal, without reference to the contractual status of the appellant, so long as the District Court order did in fact deny a stay. The Court further held that such a litigant may not have an application for a stay denied solely on the ground that it is not a signatory to the written agreement, provided that enforcement by or against the non-party is permitted under traditional principles of state contract law. Thus the proper course of action for a federal court of appeals in confronting an appeal from an order denying a stay under Section 3 of the Federal Arbitration Act is to accept jurisdiction and, if the petitioner is not entitled to relief because it may not enforce the arbitration agreement, then the appeal should be dismissed on the merits. Arthur Andersen LLP v. Carlisle, 2009 U.S. LEXIS 3463 (U.S. May 4, 2009).