Godfather buffs will remember Johnny Fontane’s contract with the famous bandleader. Don Corleone’s most feared enforcer, Luca Brasi, held a gun to the bandleader’s head, and the Don assured him that either his brains or his signature would shortly be on the contract. The bandleader signed, and Johnny Fontane’s singing career was re-launched.

Now we know the rest of the story.

The written contract was nothing but an arbitration clause covering all disputes arising from the relationship. The clause also provided that disputes concerning the making or validity of the agreement would be decided by the arbitrator.  Fontane quit the band; the bandleader sued for breach of contract in a California federal court; Fontane moved to compel arbitration; the bandleader insisted that the Court should deny enforcement of the arbitration agreement based on unconscionabiliity; and Fontane replied that the clause committed that issue to the arbitrator.     

The District Court ruled for Fontane and compelled arbitration. The Ninth Circuit in a 2-1 decision reversed, and held that the allegations of unconscionability required the conclusion that the written agreement alone was not clear and unmistakable evidence that the parties had agreed to arbitrate arbitrability. The Supreme Court granted certiorari.

Fast forward from this 1945 scene in a 1972 movie, to  June 21, 2010.  On that date, the Supreme Court of the United States decided , 5-4, in Rent-a-Center, West, Inc. v. Jackson, No. 09-497, 2010 U.S. LEXIS 4981, in analogous circumstances (albeit the coercion was economic not physical) that the validity of the arbitration agreement is an arbitrable issue.     

That decision rests on a series of legal propositions that the four dissenting justices, and probably a fair number of arbitration lawyers, will find to be remarkable convolutions of arbitration jurisprudence as we knew it until two days ago:

1.       A “stand-alone” written arbitration clause, viewed apart from any other writings or oral arrangements constituting the parties’ relationship, is, for purposes of Section 2 of the FAA “a contract evidencing a transaction involving commerce.”

2.       Based on that premise, a subsidiary clause in a the stand-alone arbitration agreement, providing that arbitrability disputes are arbitrable, fits within Section 2  as “a written provision in … a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising.”

3.       The “First Options” principle, that clear and unmistakable evidence of an agreement to arbitrate arbitrability is required to make arbitrability an issue for the arbitrator rather than the court, simply does not apply when the issue presented is not whether the provision was actually agreed to, but whether the provision is legally binding under applicable state contract law.

4.       An unconscionability challenge to an arbitration clause under state law does not concern whether the arbitration clause was actually agreed to, but only whether it is legally binding, and therefore the “First Options” principle is not implicated.

5.       The severability principle of Prima Paint v. Conklin applies to a stand-alone arbitration agreement just as it does to any other contract.  Thus, if a party contends that the entire stand-alone arbitration agreement is unconscionable or otherwise invalid under a state’s general contract law, that issue must be decided by an arbitrator. Only if the state contract law challenge pertains to a particular written provision in the contract may that challenge be decided by the court.

A critique of this remarkable opinion will follow in a subsequent Commentary.  Your commentator is in transit to Toronto for a two-day visit. Pending my next post, readers should study the Jackson decision, and especially Justice Stevens’s faithful rendition of federal arbitration law in the dissenting opinion joined by Justices Breyer, Ginsburg and Sotomayor.

New York’s arbitration statute, Article 75 of the New York Civil Practice Law and Rules (“CPLR”), addresses in section 7502(c) the circumstances in which a New York court may give a provisional measure in aid of arbitration.

Section 7502(c) is a particularly significant provision of state law in the world of international arbitration, given New York’s role as host to many international commercial arbitrations. The Federal Arbitration Act includes no sections concerning provisional relief, so when interim measures are sought in a New York court under CPLR 7502(c) there is no issue of federal law pre-emption.  Several years ago CPLR 7502 (c) was amended to make it expressly applicable in arbitrations based on agreements governed by the New York Convention. The Legislature made this change to overcome a New York Court of Appeals decision, at odds with federal decision, that had held that the New York Convention’s ouster of judicial jursidiction in an arbitrable matter included an ouster of jurisdiction to give provisional measures. Finally, when a proceeding is brought in federal court to obtain provisional relief in aid of arbitration, Federal Rule of Civil Procedure 64 provides that the relief shall be available under the conditions specified in the law of the state where the federal court is sitting.

Further, while CPLR 7502 (c) has no necessary application to a request for interim measures made to an international arbitral tribunal seated in New York, parties will often cite it as a source of applicable standards.

It is therefore quite useful to know what those standards are, and on this point there has been some longstanding uncertainty that has never been resolved by New York’s highest court, the New York Court of Appeals.

CPLR 7502 (c) states in relevant part that the court “may entertain an application for an order of attachment or a preliminary injunction in connection with an arbitration. . . but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.” The statute goes on to say that the CPLR articles concerning attachment (62) and preliminary injunctions (63) “shall apply to the application… except that the sole ground for the granting of the remedy shall be as stated above.”

Before 2000, several decisions in New York’s intermediate appellate court, the Appellate Division, interpreted section 7502 (c) to mean that in the context of a preliminary injunction in aid of arbitration, the traditional equitable criteria mentioned in CPLR Article 63 — likelihood of success on the merits, irreparable harm, and a balance of hardships tipping in favor of the movant — no longer apply and that the sole test for relief is whether the eventual award might be rendered ineffectual. In the attachment context, some New York courts held that the “rendered ineffectual” standard superseded the “grounds” for attachment enumerated in CPLR 6201 —  such as removal of assets from the state, or actual or threatened actions to defraud creditors or frustrate enforcement of a judgment. Other courts went further, and held that the “rendered ineffectual” standard also supplanted the other criteria in CPLR 6212 — that a cause of action exists, probable success on the merits, and that the amount demanded from the defendant exceeds all known counterclaims.

But in 2000 the US Second Circuit Court of Appeals in SG Cowen Securities Corp. v. Messih (224 F.3d 79) interpreted 7502 (c) more restrictively. The Court held that the language “may entertain an application…but only on the ground…..” should be read to mean that the threat that an award will be “rendered ineffectual” is a necessary but not sufficient condition for obtaining relief. The Court read the reference in 7502 (c) to CPLR Articles 62 and 63 to mean that the standards for obtaining relief that those Articles specify remain applicable and that the “sole ground for the granting of the remedy” language did not prevent a court from denying relief where other statutory requirements for relief such as probable success on the merits were not satisfied. Further, the Second Circuit examined the legislative history on 7502 (c) and found that its purpose was to clarify the courts’ power to grant relief rather than to broaden the availability of relief by excusing movants from showing probable success or irreparable harm. Finally, the Second Circuit observed that due process concerns would arise if provisional remedies interfering with property could be obtained without any showing relating to the merits and even if the hardships of the measures upon the enjoined party would be far greater than those suffered by the movant absent interim relief.

For the past decade, decisions in New York state courts have mainly found the SG Cowen case to be persuasive, and have followed it, holding that traditional equitable criteria for preliminary injunctions must be satisfied, and, in the attachment context, that 7502 (c) only obviates the need to show one of the “grounds” in 6201 — but that the CPLR 6212 criteria including probable success on the merits do apply. Federal decisions in the injunction context have followed SG Cowen. In the attachment context, a federal decision earlier this year reviewed the disparate case law, took note that the narrow holding of SG Cowen concerned only preliminary injunctions not orders of attachment, and did not find it necessary to decide whether a ground for attachment such as fruad or misconduct to frustrate creditors must be shown, because the movant could not meet the minimum “rendered ineffectual” threshhold. (Shah v. Commercial Bank, 2010 U.S. Dist. LEXIS 19717 (S.D.N.Y. Mar. 4, 2010)).

Under the current state of the law in New York, parties seeking judicial interim measures in aid of international arbitration here must be prepared to make a substantial evidentiary presentation by documents, affidavits and sometimes live testimony in order to obtain relief. This may for example involve live testimony and cross-examination of experts on foreign law, where foreign law governs the merits and the merits position depends on a contested legal premise. In this context, the courts’ deference to the arbitrator on matters touching upon the merits collides with entrenched principle that preliminary relief in general is “drastic” — and is viewed as such largely because the merits have not yet been fully explored. Therefore many judges are inclined, particularly if the matter appears to have large commercial significance, to make an accelerated and intensive inquiry into the merits in connection with preliminary relief. Absent clear statutory direction or a definitive ruling from the New York Court of Appeals that interprets CPLR 7502 (c) to limit inquiry into the merits, this disposition among judges is likely to remain prevalent in the arbitration interim relief context.

Arbitral tribunals seated in New York, intent on preserving their neutrality, may  prudently seek to avoid studying a judge’s decision on an interim measures application or the record made before the court. But the tribunal must know if provisional relief from a court has been granted, and so a tribunal mindful of New York law cannot help but infer that at least on a “first look” basis, a judge may well have found probable merit to the movant’s position on the merits.

One good solution for parties inclined toward a New York seat but not sanguine about this landscape for judicial interim measures is to use the ICDR’s emergency arbitrator process, the ICC’s pre-arbitral referee procedure, or comparable procedures provided institutionally or created specially by contract to address truly urgent requests that must be heard before the tribunal is constituted. Subject to the particulars of the applicable rules of arbitration, the emergency arbitrator selected will have considerable discretion in choosing applicable standards for provisional relief. And the emergency arbitrator is likely to be more persuadable than a New York state or federal judge to be guided by transnational arbitral norms concerning provisional measures that de-emphasize the merits and focus mainly on the extent of truly irreparable harm and the relative hardships and risks the parties bear with or without provisional relief.

Investment treaty arbitration awards rarely find their way into the US courts for review, as the ICSID Rules under which many such arbitrations occur include their own appellate process (see, in particular, Rules 50 and 52-54 of the ICSID Arbitration Rules concerning annulment proceedings). The grounds for annulment under the ICSID Rules overlap substantially with the grounds to set aside an award under Chapter 1 of the Federal Arbitration Act, and so a set aside motion following denied of an annulment application would most likely be rejected based on collateral estoppel principles.

So on the rare occasion when an investment treaty award is the subject of a vacatur or confirmation decision of a US court, the occasion deserves appropriate notice even if no significant developments in the law emerge from the case.

In that context I report upon a decision this week by a US district court judge in Washington D.C., denying the Republic of Argentina’s motion to vacate a $185 million award against the Republic and in favor of a British investor, made in an ad hoc arbitration under the UNCITRAL Rules as provided in the Argentina-United Kingdom bilateral investment treaty. (Republic of Argentina v. BG Group PLC, 2010 U.S. Dist. LEXIS 56055 (D.D.C. June 7, 2010)).

Turning no new doctrinal ground but rejecting arguments advanced by Argentina, the Court held:

1. That an award made in the US between a UK investor and a foreign State falls under the New York Convention as an award “not considered as domestic” (Convention Art. I(1)) under US law, and thus supports federal court jurisdiction under Chapter Two of the FAA. Argentina urged that the US in adopting the Convention had declined to adopt the “not considered as domestic” branch, and cited the US reciprocity reservation that it would “apply the Convention, on the basis of reciprocity, to     the recognition and enforcement of only those awards made in the territory of another Contracting State.” The Court found that the purpose of this reservation was not to limit Convention jurisdiction in US courts to awards made abroad, but only to exclude Convention jurisdiction over awards made in States not members of the Convention. Further, the Court held, whereas FAA Section 202 treats as a non-domestic Award covered by the Convention a dispute between US parties that involves some reasonable relationship with a foreogn state, it would be “nonsensical” to conclude that arbitration awards made in the US beteeen two foreign parties are excluded from Convention coverage in the US.

2. That the ICC Court of International Arbitration (the agreed-upon appointing authority) did not exceed it powers in rejecting a challenge of Arbitrator Albert Jan van den Berg. In reaching this decision, the district court focused on the parties’ agreement investing powers in the ICC Court. But curiously the district court did not address whether Section 10(a)(4) of the FAA has any applicability to decisions of an appointing authority, not the arbitral tribunal that made the award.

3. That the Tribunal based its decisions allowing derivative claims and selecting the measure of damages from plausible constructions of the BIT and  resort to principles of international law, and therefore did not exceed its powers by — in words tsken from the Supreme Court’s recent Stolt-Nielsen decision — “dispensing its own brand of industrial justice.”

Dear Readers: As many of you know, I announce new posts on Arbitration Commentaries in a number of Linked In Discussion Groups relating to international litigation and arbitration. Recently many of those announcements may have escaped your attention because the emails you receive from the Linked In groups of which you are a member have a “subject” headline bearing the name of another person who has also  started a discussion or made a job or news posting .  Please know that you may “subscribe” to Arbitration Commentaries by clicking on the “RSS Feeds” link at the top of the Home Page, and following the subscription instructions. New posts to Arbitration Commentaries will then be delivered automatically.

“Evident partiality or corruption in the arbitrators” is one of the statutory grounds for vacatur of an arbitration award made in the United States, as provided on Section 10(a)(2) of the Federal Arbitration Act. I take brief note here of a decision this week in the Ninth Circuit US Court of Appeals that usefully reiterates aspects of the meaning of those terms. (Lagstein v. Certain Underwriters at Lloyd’s, 2010 U.S. App. LEXIS 11836 (9th Cir. June 10, 2010)).

In this case, the Lloyd’s underwriters, after receiving a large award against them from a tribunal composed of retired Nevada state court judges, hired investigators to comb through archives in quest of embarrassing facts that the arbitrators had not disclosed. The detectives managed to find that one of the ex-judge arbitrators had been mired on an ethics controversy as a trial judge a decade earlier, and that a second arbitrator, then a judge of the Nevada Supreme Court, had sided with his colleague in appeals relating to the ethics matter.

Of course these matters had nothing at all to do with the parties to the arbitration. To show evident partiality, the Court held, a party challengin an award “must establish specific facts indicating actual bias toward or against a party,” or show that the arbitrator failed to disclose information that “creates a reasonable impression of bias.” The Court also rejected the notion that there was “evident corruption.” Having not previously decided the meaning of this term, the Court held the allegations of corruption mustat least relate to the case or the parties, and not merely some prior instance of improper conduct.

The US Second Circuit Court of Appeals last week added an instructive new chapter to the ongoing tug-of-war, in Congress and the courts, over the use of arbitration clauses by consumer products companies avoid liability to consumers. (Hines v. Overstock.com, Inc., 2010 U.S. App. LEXIS 11265 (2d Cir. June 3, 2010)).

Overstock.com is a well-known internet discount home furnishings merchant.  Plaintiffs alleged that Overstock had sold them a vacuum cleaner, as new, which was in fact “refurbished,” and that when they returned the item they were charged a $30 restocking fee even though Overstock had given assurances they could return the item for a full refund. They brought suit in US District Court in New York, seeking to proceed on behalf of a class. Overstock petitioned under Section 4 of the Federal Arbitration Act to compel the named plaintiffs to arbitrate under AAA Rules in Salt Lake City, Utah, as provided in an arbitration clause in Overstock’s Terms and Conditions of Use for its website.

Overstock’s website included its “Terms and Conditions of Use,” according to the evidence accepted by the District Court, only on a link to be found if the consumer scrolled down to the bottom of a web page that was not necessary to read in full to effectuate an online purchase. In addition, only by scrolling to the end of the Terms and Conditions would the consumer see the notice advising that by using the Overstock.com website, the consumer was deemed to have agreed to arbitrate all disputes concerning the use of the site.

The District Court granted summary judgment denying Overstock’s petiition to compel arbitration, and here the  Second Circuit affirmed. Overstock cited the language in FAA Section 4 directing the district courts to proceed to try the issue of whether an agreement to arbitrate was made, when that matter is put in issue, as it was here. But Plaintiffs argued, and the Second Circuit agreed, that no trial on the issue of the making of the agreement to arbitrate is required, and summary judgment denying the motion is proper, unless the moving party shows at least prima facie the existence of such an agreement. Here, the Court held, there was insufficient evidence of even constructive knowledge of the agreement to arbitrate, where there was nothing directing the consumer to find, much less to read the arbitration clause, and nothing requiring the consumer specifically to express agreement with the arbitration clause or, for that matter, the terms and conditions more generally.