At the Kluwer Arbitration Blog you will find an interesting comment by Paul Friedland on the Thomas v. Carnival Corp. decision of the Eleventh Circuit. I commented on the Thomas case here on July 7, 2009.Below is the text of my comment today posted on the Kluwer Arbitration Blog.

Paul,
The concerns you mention are serious ones; yours is a different and insightful reading of a case discussed in my Arbitration Commentaries on July 7, 2009. (http://arbblog.lexmarc.us — “U. S. Public Policy As Basis to Nullify Arbitration Agreement: Beyond the Bounds of Mitsubishi?”)

What troubles me most about Thomas is the position that any waiver, in an arbitration agreement combined with a choice of law clause, of remedies conferred by a US federal statute, violates US public policy and brings about at least partial nullity of the arbitration clause. That is not what the Supreme Court said in the famous Mitsubishi footnote — and US law per Mitsubishi is in harmony with transnational principles that only an offense against fundamental (and some would say international) public policy will result in invalidation of an arbitration agreement or denial of recognition of an award under the Convention.

You are clearly right that notions of unconscionability in some employment contracts motivated the Thomas decision. Perhaps other courts will distinguish the Thomas case on that basis.

The proposed new text of Article 26 concerning interim measures of protection is a considerable expansion from the 1976 rule. It reflects the extensive practical experience of arbitrators with different types of interim measures. It also reflects the convergence of legal standards into a set a generally applicable transnational norms.

The 1976 version of the rule was concise, perhaps to a fault. It permitted the arbitral tribunal to “take any interim measures it deems necessary in respect of the subject matter of the dispute. ” The only specific example mentioned, although not by way of limitation, was “measures for the conservation of the goods forming the subject matter in dispute. ” The 1976 rule further provided that interim measures could be taken in the form of an award, that the applicant could be called upon to furnish security, and that a request for interim measures addressed to a judicial authority would not be deemed a waiver of the agreement to arbitrate.

The proposed draft makes changes, large and small, that would bring the text of the rule in line with contemporary practice. Many of the changes would bring the text into correspondence with chapter IV A of the UNCITRAL Arbitration Model Law.

The draft states that a tribunal may “grant” interim measures, whereas the 1976 rules use the verb “take.” The change is indicative of the use of arbitral interim measures to provide what in common law parlance is relief in the nature of a preliminary injunction. Indeed many of the changes incorporate fundamental concepts of American preliminary injunction practice: maintaining or restoring the status quo; prevention of imminent and irreparable harm; relative balance of hardships; and “reasonable possibility” of success on the merits. Drafting an express provision for issuance of ex parte temporary restraining orders (“TRO”) has been very controversial within the Working Group, as the ex parte nature of the relief is perceived as a violation of due process in some countries. On this point the draft, exceptionally, references the applicable lex arbitri rather than establishing a general rule: it provides that the rule neither creates any right, nor extinguishes any right that may exist under applicable law, to an ex parte TRO.

Readers of the Working Group’s report on its February 2009 session will note that an “alternative proposal” was presented — and garnered considerable support — that would have retained much of the brevity if the 1976 rule and left the elaboration of types of interim measures and the conditions for granting them largely to applicable domestic law. The rejection of the “alternative proposal” is indicative of the extent to which the nature of arbitral interim measures, and the conditions for their issuance, have become transnational rules — part of the international law of international arbitration.

The proposed draft eliminates the reference to “the subject matter in dispute” — reflecting the contemporary understanding that the conservation of goods or other physical assets is far from the only reason or even the principal reason for the granting of interim relief.

The draft notably omits reference to the possibility of granting interim measures in the form of an interim award. One assumes this does not mean a tribunal may never put interim measures in that form. Instead this change appears calculated to discourage the tendency of some arbitrators to use the “award” designation to enhance judicial enforceability of interim measures, even though the interim measures decision may not finally resolve any issue in the arbitration and thus may lack the essential characteristic distinguishing an award from an order.

The Working Group on Arbitration of the United Nations Commission on International Trade Law (UNCITRAL) will convene for its 51st session in Vienna, Austria, from September 14-18, 2009. For the past two years, the Working Group has been engaged in developing a proposed revised draft of the UNCITRAL Arbitration Rules (“Rules”). When completed, this will be the first wholesale revision of the Rules since their initial adoption in 1976.

I will attend the Working Group session as a member of the observer delegation of the Association of the Bar of the City of New York.

In this post and ensuing posts, I will discuss some of the salient proposed changes in the Rules that will be considered at the upcoming Working Group session.

These posts do not purport to make a comprehensive review, even of the changes in a single Rule. The purpose here is to distill some highlights. Complete reports on the Working Group’s work can be read and downloaded at the UNCITRAL website.

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Power of Tribunal to Rule on Its Jurisdiction

Article 21 (1) of the Rules concerns the power of the arbitral tribunal to make decisions about its jurisdiction. The present text of Article 21 (1) states: “The arbitral tribunal shall have the power to rule on objections that it has no jurisdiction, including any objections with respect to the existence or validity of the arbitration clause or of the separate arbitration agreement.” The proposed amended Article 21(1) first sentence would state: “The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.” The Working Group’s comment states that there was sentiment in favor of re-drafting the rule along the lines of Section 16(1) of the Model Law — whose phrasing corresponds to the above-quoted passage from the proposed revised rule.

The Working Group’s March 2009 report on its June 2008 session states that the purpose of the re-drafted text is “to clarify that the arbitral tribunal had the power to raise and decide upon issues regarding the existence and scope of its own jurisdiction.”

In certain circumstances an arbitral tribunal may wish to rule on its own jurisdiction even if there has not been an objection made by a party. For example, a party might express its views on the tribunal’s jurisdiction by refusing to appear in the proceedings. Parties might also raise no objection to jurisdiction until after the final award, and then in a friendly home court (one that might not apply a waiver doctrine), raise the tribunal’s lack of jurisdiction as a ground for denying recognition and enforcement. The arbitral tribunal, anticipating such tactics, may wish to enhance the enforceability of its award by providing a reasoned ruling on its jurisdiction. The absence of an “objection” should not prevent it from doing so. Thus the proposed amendment is very desirable.

A new commentary on this subject is posted under Legal Developments at my general website.
Click-through on the link under “Links and Resources” at the left margin, for Marc J. Goldstein Litigation and Arbitration Chambers (www.lexmarc.us).

The Seventh Circuit U. S. Court of Appeals has addressed one of the difficult issues arising from the mid-stream replacement of a party-appointed arbitrator. The Court held that the Federal Arbitration Act (“FAA”) generally requires that a party who contests its opponent’s appointment of a replacement party-arbitrator, on the ground that the substitution is not within the agreement if the parties, must do so by an application to the Court at the time of the substitution, or else the objection will be forfeited. WellPoint, Inc. v. John Hancock Life Ins. Co., 2009 U.S. App. LEXIS 17841 (7th Cir. Aug. 7, 2009).

The basis for the Court’s holding in WellPoint is Section 5 of the FAA. That Section — fully applicable to international arbitrations held in the U. S. — provides in pertinent part that the Court may appoint an arbitrator to fill a vacancy if for any reason there is a failure of the parties to do so by agreement.

In WellPoint, the Claimant had asked its own party-appointee to resign, several years into the case but before any hearings on the merits. Respondent John Hancock objected, but while maintaining its objection Hancock proposed a method to break the impasse on naming a replacement. After the method Hancock proposed was adopted and used by WellPoint, the case went forward before the re-constituted panel, and resulted in an award against Hancock. Hancock then moved to vacate, arguing that the re-constituted panel was not properly constituted in accordance with the arbitration agreement, and therefore lacked power to render the award.

Efficiency considerations, the Court held, preclude a construction of the FAA that would permit a losing party to forego using Section 5 to obtain an interlocutory court selection of a replacement arbitrator in lieu of the opposing party’s attempted unilateral selection, proceed to award before the contested re-constituted panel, and formally raise the issue of the winning party’s appointment of a replacement arbitrator for the first time only in a motion to vacate the award.

By finding waiver/estoppel-type principles dispositive, the Court avoided having to decide whether an agreed-upon methodology for replacment of a party-appointed arbitrator was implicit in an arbitration clause that, on its face, only addressed the procedure for initial appointments.

Also, the Court was able to dodge the issue of whether any or all proceedings need to be repeated when a party-appointed arbitrator is replaced. In dicta, however, the Court condemned the so-called federal “general rule” — requiring proceedings to begin anew — as an ill-advised waste of resources.

Indeed, the posture of the WellPoint case at the time the original party-arbitrator for Welloint resigned would have been an attractive one for declining to apply that “general rule.” The parties had conducted extensive discovery, and the panel had ruled on numerous discovery disputes. But there had not yet been any interim awards, nor even hearings for the taking of testimony. Further, the resignation was not occasioned by death or disability of the arbitrator. WellPoint had asked its arbitrator to resign shortly after Hancock amended its counterclaim to increase the alleged damages ten-fold. WellPoint had also engaged new counsel at that point. It is inferable that WellPoint, advised by new counsel, was simply second-guessing its original selection.

As discussed in a July 28, 2009 posting on this site (“Judicial Replacement of the Deceased or Disabled Arbitrator”), the so-called federal “general rule,” that all proceedings must be repeated after replacement of a party-appointed arbitrator, is out of step with contemporary practice globally. The general trend is to vest the panel or the sponsoring arbitral body with discretion to decide which if any proceedings should be repeated. The Seventh Circuit’s decision is a welcome indication the American law may be moving into harmony with contemporary practice.

The Fifth Circuit U. S. Court of Appeals last week reaffirmed its position that 28 U. S. C. 1782, which provides for federal assistance in obtaining discovery for use in foreign and international tribunals, does not apply to private commercial arbitration tribunals. El Paso Corp. v. La Comision Ejecutiva Hidroelectrica del Rio Lempa, 2009 U. S. App. LEXIS 17596 (5th Cir. Aug. 6, 2009). The Fifth Circuit had adopted that position ten years ago in Republic of Kazakhstan v. Biedermann Int’l, 168 F. 3d 880 (5th Cir. 1999). In that case, the court examined the legislative history of the 1964 amendments to section 1782 — which substituted “foreign or international tribunals” for “foreign courts” — and concluded that the expansion was intended to cover international government-sanctioned tribunals but not private international commercial arbitral tribunals.

The Fifth Circuit in El Paso rejects the notion that its position is in conflict with the interpretation of Section 1782 given by the Supreme Court of the United States in Intel Corp. v. Advanced Micro Devices, Inc., 542 U. S. 241 (2004). The El Paso panel notes that the status of private arbitral tribunals under Section 1782 was not a question presented to or addressed by the Intel Court. The panel also parts ways with those judges and commentators who have believed the Intel Court, in dicta, had accepted the view that private arbitral tribumals were within the coverage of Section 1782.

The Fifth Circuit’s decision in El Paso appears to be the first occasion since Intel that a federal appellate court addressed the issue of whether a private arbitral tribunal is within the coverage of Section 1782. At present there is no conflict in the circuits; only the Fifth and Second Circuits have addressed the issue, and their positions are the same.

Decisions of federal district courts have been sharply divided. Only two days before the El Paso decision, a federal district judge in Florida held that an arbitral tribunal constituted under the auspices of the ICC Court of International Arbitration is not within the coverage of Section 1782. (In re: Application of Operadora DB Mexico, S. A. de C. V. , 2009 U. S. Dist. LEXIS 68091 (M. D. Fla. Aug. 4, 2009). (Indeed the Florida district court’s decision is a particularly thorough and elegant exposition of the position that Section 1782 does not apply to private tribunals, and it may well become the model for future decisions).

A great deal has been written about whether more U.S.-style discovery in international arbitration is a good idea when it is imposed by federal judges who may ignore the wishes of the arbitrators and the discoverability of the information under the law governing the arbitration. Only one of the points in that debate will be noted here: that if Section 1782 applied to private arbitral tribunals sitting outside the United States, the rights of international arbitration litigants to obtain discovery from non-parties would be greater in an a foreign arbitration than in an international arbitration taking place in the United States. In the latter case, non-parties may only be subpoenaed to testify at a hearing and to bring documents with them to the hearing. Among the salutary effects of excluding private arbitral panels from Section 1782 is to avoid an odd inconsistency in the U. S. approach to non-party witness participation in international arbitrations.