Practitioners and arbitrators in both commercial and investment arbitrations may profit from studying the thorough and sensitive treatment of confidentiality found in a procedural order issued January 27, 2010 in an ICSID arbitration arising under the BIT between Italy and Argentina. (G Beccara et al v. Argentine Republic, ICSID Case No. ARB/07/5, Procedural Order of 1/27/10, published on ICSID website)

The order deals with confidentiality on several levels. The first and perhaps most generally applicable category concerns public discussion of the case during the course of the proceedings. Here the Tribunal’s approach implicitly recognizes a point to which experienced advocates on international arbitration will attest: clients seek to exploit the absence of clear legal rules imposing a confidentiality duty, to pursue extra-arbitral means of resolving the dispute through public exposure of embarrassing facts about the adverse party or its position.

Experience with this phenomenon surely is part of the motivation for approach taken by the Beccara Tribunal, concerning general public discussion of the ongoing proceedings. Thus the Tribunal orders that “[t]he Parties may engage in general discussion about the case in public, provided that any such public discussion is restricted to what is necessary, and is not used as an instrument to antagonize the Parties, exacerbate their differences, unduly pressure one of them, or render the resolution of the dispute potentially more difficult. . . .” This standard was adopted from substantially identical language used by another ICSID Tribunal, in the Biwater Gauff Ltd. v. Tanzania case (ARB/05/22, Proc. Order No. 3 of 9/22/06).

The balance struck between transparency and the integrity of the proceedings is constructive, and appears to reflect values widely shared among arbitrators acting in investment law cases as well as commercial cases.

For counsel in international arbitration, it is not unusual for a client, intent on using media or other public pressure to influence the adverse party to resolve the dispute, to ask counsel for assurance that no laws, rules, or agreements concerning the confidentiality of the arbitration will be violated by such activity. The answer often is that there are no such laws, rules, or agreements (and such was the case in the Beccara v Argentina case under discussion), but that the proposed actions risk antagonizing the Tribunal. It is sometimes difficult to articulate for a client why this may be so.

The orders adopted in Beccara andBiwater Gauff are indicative of a widely shared norm among international arbitrators that efforts to coerce the other party through publication of embarrassing facts may destabilize the arbitration, making the Tribunal’s task of managing the case and achieving a transparently fair process more difficult. (This is reflected in other elements of the Beccara confidentiality order, barring publication without mutual consent of pleadings, motions, and transcripts of proceedings, on the basis that “their uneven publication or distribution carry the risk of giving a moisleading impression….”) Thus the advice to the client may well be that while no law, rule, or agreement is violated by a proposed publicity campaign, the sensibilities of the arbitrators (or some of them) may be influenced quite negatively, because the actions tend to undermine the tribunal efforts to maintain order and a desirable level of courtesy and respect in the written and oral discourse.

Yesterday a federal judge in New York granted an anti-suit injunction, in aid of arbitration, barring Indian corporate entities from continuing litigation in India over arbitrable disputes with a U.S. company — litigation in which the Indian parties have already obtained ex parte orders enjoining the U.S. party from continuing with pending ICDR arbitration in New York. (Amaprop Ltd. v. Indiabulls Financial Servs. Ltd., 2010 U.S. Dist. LEXIS 27117 (S.D.N.Y. Mar. 23, 2010)).

The arbitration community should be encouraged by the swift and decisive support for international arbitration from the U.S. District Court in Manhattan. But the Court’s anti-suit injunction, combined with the Indian court’s ex parte anti-arbitration injunction, creates an difficult procedural standoff: the U.S. party risks contempt in the Indian court if the arbitration proceeds, while the Indian parties risk contempt in the U.S. court if the India litigation continues.

The New York federal judge, only beginning his analysis from the premise that the India anti-arbitration injunction violates the U.S. federal policy in favor of arbitration that applies with particular for in international cases, proceeded to discuss a variety of case-specific factors that indicated the vexatiousness of the India litigation and the extreme burdens it threatened for the U.S. party:

— that the Indian parties had initially appeared in the ICDR case, indicated their intention to participate and appoint an arbitrator, and obtained an extension of time to answer, while concealing their intention to obtain injunctive relief in India;

— that the Indian parties deliberately omitted critical words, in quoting the arbitration clause to the U.S. court, to create the misleading impression that the type of injunctive relief they had sought in India was permitted under the clause;

— that the proceedings in India were conducted entirely ex parte; even after obtaining that relief the underlying papers were not provided to the U.S. party, and no explanation for proceeding ex parte was provided to the U.S. court;

— that according to competent expert witness testimony of a retired India High Court judge, the average civil case in India’s courts takes at least 15 years to reach initial resolution, with appeals consuming 5 to 10 more years;

— that the pendency of parallel proceedings on the same disputes creates burdensome redundant costs, risks of inconsistent judgments, and potential for tactics to manipulate the timing of outcomes in each forum.

Shipowners typically agree with their typically-offshore insurers to arbitrate disputes over coverage, and those arbitration agreements are governed by the New York Convention.

And the laws of some U.S. states, including Louisiana, allow injured ship workers to bring claims in court against those insurers directly when their employers are bankrupt.

Could this mean that the injured worker must arbitrate his direct action claim against the insurer, as a third-party beneficiary of the employer-insurer agreement to arbitrate? Could this mean that such direct action statutes violate the FAA to the extent they require the direct action to proceed in court?

The U.S. Fifth Circuit Court of Appeals has held that these outcomes are legally possible, and returned the case to the District Court to decide the issues. This holding, the Court stated, is required by the U.S. Supreme Court’s decision in 2009 that nonsignatories may be compelled to arbitrate and have their court actions stayed if applicable state contract law makes the agreement to arbitrate enforceable against them.
(Arthur Andersen LLP v. Carlisle, 129 S. Ct. 1896).

The Carlisle decision, according to the new Fifth Circuit case, overrules prior Fifth Circuit precedent permitting only lawsuits commenced by signatories to be stayed pending arbitration under FAA Section 3. A District Court must determine, the Court held, whether the arbitration agreement is binding upon the injured employees, under one of the various state law theories of enforceability against nonsignatories — notably third-party bebeficiary –such that they would be required to arbitrate their direct-action claims against the insurer. (Todd v. Steamship Mutual Underwriting Ass’n (Bermuda) Ltd., 2010 U.S. App. LEXIS 5637 (5th Cir. Mar. 18, 2010)).

In this case, the workers had already obtained a money judgment against their employer, and brought the direct action to collect the judgment from the insurer. The Court stated that “the district court may wish to consider whether the existence of [the] judgment has any bearing on whether [plaintiff] must arbitrate… to collect on this judgment.”. It seems possible the Court means to suggest, elliptically, that it may be sensible to view the worker as a third-party beneficiary of the employer-insurer contract on a claim to enforce a judgment against the employer, but not on an unliquidated direct claim.

An excellent article in the most recent issue of Arbitration International (Vol. 25, No. 4) discusses the challenges facing all participants in international arbitrations (and indeed all arbitrations) to rein in costs. The article, entitled “Inside Out: A User’s Perspective on Challenges in International Arbitration” is written by Jean-Claude Najar, General Counsel France for General Electric.

I take a quote from Mr. Najar’s article as the theme for this Commentary: ”

“(A)rbitral tribunals should be assessed on the robustness of their cost-saving procedures.
While the parties do exercise a fair amount of control over an arbitral proceeding, arbitrators should play a key role in containing the proceedings. Arbitrators need to feel that they are expected and empowered to act forcefully, using their discretion as a neutral party to keep proceedings as efficient as possible.”

Briefly I will comment here on some efforts within my own recent experience to rein in costs while still providing a thorough and fundamentally fair
process to the parties.

1. Hearing and Partial Award on a Separable Merits Issue:

Some years ago I was counsel in a China-related case arbitrated in Singapore. The tribunal elected to hold an evidentiary hearing, and to issue a partial award, on a critical separable mixed issue of law and fact: whether an amendment to the contract that disproportionately favored one side had been induced by economic duress, and should therefore be declared unenforceable. In the event, the tribunal did indeed hold that the amendment should be nullified. While a variety of other factors thereafter caused delays in reaching a final outcome, the partial award was the key determinant in bringing about a resolution by settlement prior to the scheduled hearing on remaining issues.

Drawing upon this experience in a recent case, a tribunal in which I was presiding (by the grace of my very experienced co-arbitrators) held hearings and issued a partial award on a severable, and seemingly essential, mixed issue of law and fact. The issue was not unlike the one in the above-mentioned Singapore case: here, whether a family trust was invalid because the settlor had been the victim of undue influence by other family members.
Following the partial award, which rejected the claim of indue influence, none of the parties requested further proceedings.

2. Resolving Claims As a Matter of Law Without Evidentiary Hearing:

It may occasionally appear that a claim may be sustained, or rejected, as a matter of law, even if all the material facts are assumed to as alleged by the party that would be aggrieved by the outcome.

To some extent this approach collides with parties’ expectation that in arbitration, whatever the issues may be, there will be some opportunity to present oral testimony to the tribunal and to cross-examine the main witness or witnesses for the opposing side.

Yet particularly in international arbitrations, and increasingly in U.S. domestic arbitrations influenced by arbitrators’ exposure to international practice, there is the opportunity through written witness statements to define with reasonable precision each party’s case-in-chief.

On that platform, the tribunal may assess whether the outcome does not at all depend on the veracity of a party’s contentions of fact that are disputed. If so, it may be desirable to move toward an award without hearing redundant testimony on direct or cross-examination.

Most rules however imply that some form of oral hearing shall be held, while also declaring the tribunal’s power to limit proceedings and exclude cumulative or redundant evidence. The solution often will be to conduct an oral hearing to hear legal arguments as to the proposed disposition without oral testimony.

3. Restricting Written Submissions on Disclosure Disputes

The simple expedient of requiring any procedural dispute to be introduced via conference call with the sole arbitrator or chairperson will discourage and limit the scope of disagreement. Counsel are invariably more willing to say precisely what it is they want when required to do so orally. Written submissions are more broadly phrased, often to avoid some admission or waiver.

4. Limitations on Obtaining Information By Subpoena from Non-Parties

It is useful to ask pointed questions about the reasons a particular subpoena is sought by a party. This may be advisable even if the non-requesting party raises no objection (as that party may be silent because it is drafting subpoenas of its own). Has the legal sufficiency of the claim to which the evidence pertains been established prima facie? Is it established that the evidence is relevant, material and non-cumulative? In the procedural timetable, it may make sense to schedule presentation of subpoena requests are exhibits and written testimony of the parties have been submitted — and then to require a specific showing that the evidence is needed to fill gaps in the parties’ proofs .
* * * *

Arbitrators should never lose sight of the principle that the arbitration “belongs to the parties.”
But the discretion of the arbitrators to regulate the proceedings is an essential part of what was bargained for. And ultimately the objectives of the parties, in a case destined for resolution by an award, are to win or to accept defeat only after exhausting all avenues to postpone final determination and impose high process costs on the likely winner. Efficiency gains in arbitration are therefore primarily in the domain of the arbitrators, and the artful arbitrator will implement measures more or less with the support of the parties whenever possible.

A new federal district court decision from Dallas embraces the position of the U.S. Second and Third Circuit Courts of Appeals that the U.S. Federal Arbitration Act (“FAA”) does not permit non-party subpoenas for pre-hearing document discovery, but only permits such subpoenas if they require the non-party to appear at an arbitration hearing and to bring the documents to the hearing. In those earlier cases, the courts concluded that this result was required by the clear language of FAA Section 7. (The Second Circuit’s decision in the Life Receivables case was discussed in an Arbitration Commentaries posting on January 15, 2009, which may be found in the Archives section of this site.) Noveposting Here, the Court “declines to read greater powers in to the text of Section 7 despite policy preferences favoring arbitration efficiency, because the court’s policy preferences cannot override the clear text of the statute.” (Empire Financial Group, Inc. v. Penson Financial Services, Inc., 2010 U.S. Dist. LEXIS 18782 (N.D. Tex. Mar. 3, 2010))

In a practical demonstration of how rigorous are the standards under New York law for compelling a non-signatory to arbitrate under the “estoppel” and “alter ego” doctrines, the Chief Judge of the U.S. District Court in Manhattan has issued a decision denying a motion to compel Deutsche Bank AG (“DB”) to arbitrate before a FINRA panel claims relating to the marketing of Auction Rate Securities (“ARS”). (Oppenheimer & Co. v. Deutsche Bank AG, 2010 U.S. Dist. LEXIS 19655 (S.D.N.Y. Mar. 2, 2010).

The case is one of many that arose in the wake of the collapse of the ARS market. Here, US Airways brought its claims in arbitration against Oppenheimer & Co., for damages resulting from sale of ARS to US Air allegedly in violation of the company’s investment policies. Oppenheimer asserted third-party claims in the same arbitration against DB and its affiliate Deutsche Bank Securities, Inc., a FINRA member firm that was required, by reason of such membership, to arbitrate the dispute.

First analyzing estoppel as a basis for requiring DB to arbitrate , the court noted that New York law requires that the party knowing accepted the benefits of an agreement with an arbitration clause, and those benefits must “flow[] directly from the agreement.” Here, the question was whether to view DB’s benefits from the FINRA membership of its securities broker-dealer affiliate as “direct” or “indirect.” Whereas DB did not avail itself of any rights created by the agreement, but rather benefitted mainly from the client relationships established by its affiliate, the benefits were viewed as “indirect,” and so estoppel did not furnish a basis to require DB to arbitrate.

The direct/indirect distinction may appear to be somewhat artificial, and difficult to apply, but what the courts do in such cases turns on the perceived legitimacy of boundaries internally created among separate business units in multi-tiered, multi-national corporation. Reliance on separate entities will be ignored when one entity enters into a contract essentially as a proxy for its parent or one or more other affiliates.

Turning to the contention that DB and its U.S. securities broker-dealer affiliate — an indirect subsidiary — were “alter egos” and that their “corporate veil” should be “pierced,” the Court held that mere ownership control and direction of policies and management was insufficient to justify compelling arbitration under these theories. Lacking was proof of “actual domination” in the affiliate’s affairs, any indication that the affiliate was undercapitalized, or evidence that the parent entity disregarded corporate formalities or made improper use of the affiliate’s funds.