A dimension of the problem that should not be overlooked is that counsel in international arbitrations often will leap at the opportunity to accuse an adversary of an ethical violation. This is rather commonplace in the rough-and-tumble context of American civil litigation, and the problem in international commercial arbitrations exists substantially but not entirely because of the participation of American litigators in the process. The tactical deployment of ethical accusations challenges arbitrators to establish rules and regulate attorney conduct even though their jurisdiction to do so is not well-established by national arbitration laws or institutional rules.

I had a recent encounter with such an issue, while appearing as counsel in an international arbitration seated in New York. It involved the use in the proceedings of client-to-client communications related to settlement. American counsel from New York were on both sides, representing US and Chinese parties, respectively, in a contract dispute governed by Hong Kong law and seated in New York. The Sole Arbitrator hailed from a “Commonwealth” nation.

One counsel (your correspondent) submitted in the proceedings e-mails sent from the Chairman of Party X to the CFO of Party Y. The purpose of the use was to show Party X’s intent to arrange its own finances so as to frustrate enforcement of an eventual award. The communications related to settlement, at least to the extent of saying in substance “you should have been willing to settle for a modest sum, because now that we are arbitrating we will make sure there is nothing left when the time comes to enforce the award.” No agreement of confidentiality had been made regulating use of the communications in the proceedings.

Party X’s counsel claimed an ethical violation by Party Y’s counsel, and sought not only a sanction against Party Y counsel but also the exclusion of the e-mails as evidence in support of Party Y’s application for provisional relief. This claim of an ethical infraction was made without citation to any allegedly applicable law, rule, or code of ethics.

Without revealing how the Sole Arbitrator addressed the matter, I raise the question: How should it be addressed? What legal standards should govern?

In terms of arbitral choice of ethical rules, this case was relatively simple: The opposing counsel were admitted to practice in the same jurisdiction (New York) and that jurisdiction also was the juridical seat of the arbitration. The fact that one party was of Chinese nationality and that the law of Hong Kong was to be used to determine the merits does not point in the direction of using the ethics rules applicable to Hong Kong-licensed lawyers to measure the conduct of New York-admitted counsel. New York’s Code of Professional Responsibility does not address the issue of confidentiality of settlement communications or their use in proceedings. Federal and New York rules of evidence for trials before courts do address the subject as a rule of admissibility, and generally provide that such communications may be admitted as evidence for a purpose other than to prove liability or damages. This left the Sole Arbitrator free to adopt an appropriate rule as a matter of discretion. But in this context, following the rules that apply in federal and New York judicial proceedngs would seem to be in keeping with the reasonable expecations of counsel on both sides.

But suppose that the same alleged infraction occurred in an arbitration seated in Geneva, with French Party X represented by French counsel and New York Party Y represented by its New York lawyer. Suppose further that the French code of professional ethics governing courtroom advocacy would prohibit any use of a client communication related to settlement in a judicial proceeding, but would nevertheless allow a French-licensed advocate when practicing before an international tribunal to follow a more liberal rule applicable in that tribunal. Suppose further that the Swiss code of ethics on this point was essentially the same as French code, including the suspension of the rule’s application in proceedings before an international tribunal that adheres to a more liberal rule.

One can readily see why there such energy being devoted to the enactment of some form of universal code. In this scenario just described, the arbitrators’ sensible first instinct might be to look to Swiss ethics laws for guidance and seek to hold both counsel to the Swiss law ethical standard based on the parties’ agreement on Geneva as the juridical seat of the arbitration (although even this is debatable, as the parties likely agreed upon the seat of arbitration for a number of reasons probably not including its judicial rules of ethics governing advocacy). But the Swiss law in this instance would not provide the needed guidance because it permits compliance even by Swiss-licensed counsel with a rule governing the arbitral proceedings even if the same conduct would be an ethical violation in judicial proceedings. There being no applicable rule concerning use of settlement communications to be found in institutional rules of arbitration or (I presume) in Swiss international arbitration law, the arbitrators are in a position to decide what rule should apply.

One solution certainly is a provision in a uniform ethical code that prohibits all use, or allows particular limited uses, of communications relating to settlement. But until such a code becomes a reality, what is the best practice for arbitrators to follow? As to rules that touch upon advocacy (use of documentary evidence, use of legal authorities, preparation of witnesses, questioning of witnesses, etc.) there must of course be “equality of arms,” and arbitrators would do well to cover a number of such subjects in the first procedural orders. By doing so, tribunals may avoid having to address claims of ethical infractions later on, and will often relieve counsel of a conundrum: whether to engage in the same tactics as the adversary, on the premise that they may be ethically acceptable to the tribunal, or to refrain from such tactics while claiming an ethical infraction, at the risk of giving the other side an advocacy advantage if the tribunal finds the conduct to have been ethically acceptable.

An illustration of this process may be found in the adoption by many tribunals, early in the case, of the IBA Rules of Evidence as “guidelines” for the proceedings. Rule 4.3 of the IBA Rules declares that communications by a party or its counsel with the party’s witnesses in advance of their testimony, to discuss the testimony, is not improper — and this rule is essentially an ethical rule even though it is found in “Rules of Evidence.” The general acceptability of witness contact in international arbitrations, despite its illegality in judicial proceedings in many countries, has come about substantially by virtue of the adoption into procedural orders of the IBA Evidence Rules as guidelines (if not as governing prescriptions).

Much of this ground can be covered with the agreement of the parties, who are likely to be accommodating to the wishes of the tribunal on abstract principles of counsel ethics early in the case. Thus tribunals should have little difficulty securing the agreement of all counsel in most cases that: (i) communications between opposing counsel shall be confidential and not used in the proceedings except by agreement, unless the unilateral use is necessary to disclose that the adversary has acted dishonestly or in bad faith toward the tribunal; (ii) any agreements of the parties concerning the confidentiality of their communications during the proceedings shall be binding upon their counsel regarding use in the proceedings; (iii) counsel shall have an affirmative duty to direct their clients to preserve evidence that may be relevant and material to the proceedings, (iv) counsel shall have an affirmative duty to bring to the tribunal’s immediate attention any circumstances involving an attempt by counsel to influence a witness not to tell the truth, and (v) counsel shall have an affirmative duty to bring to the tribunal’s immediate attention any circumstances indicating a substantive ex parte communication between a party or its counsel and a member of the tribunal.

Article (V)(1)(e) of the New York Convention provides that a Court asked to confirm a Convention award may refuse to do so on the ground that the award has been or may be set aside by a competent court of the country in which, or under the law of which, the award was made. While it is sometimes said that the Convention does not concern itself with vacatur of awards but only with grounds for a court to refuse to confirm an award, Article (V)(1)(e) is widely understood to have the effect of incorporating domestic law vacatur standards at the seat of arbitration when they are applied by courts at that arbitral seat in a proceeding brought to obtain vacatur.

The US Third Circuit Court of Appeals last week joined the neighboring Second Circuit (and others it did not cite) in adopting this view of Article V(1)(e) with regard to Convention awards made at a seat of arbitration in the United States. Ario v. Underwriting Members of Syndicate 53 at Lloyd’s, 2010 U.S. App. LEXIS 17195 (3d Cir. Aug.18, 2010). The Second Circuit was the first of the federal appellate courts to expound this position, in Yusuf Ahmed Alghanim v. Toys “R” Us, Inc., 126 F.3d 15 (1997).

In another aspect of the Third Circuit case that will be of broad interest to practitioners, the Court held that the parties had not clearly agreed to substitute the grounds for vacatur provided by state law, in place of the Federal Arbitration Act grounds, by providing in their agreement that the arbitration would be governed by the Pennsylvania Uniform Arbitration Act. How parties may accomplish by agreement an “opting out” of federal vacatur standards in favor of state law standards has been a subject of considerable attention since the Hall Street decision, in which the U.S. Supreme Court remarked that one way the parties may successfully vary the federal regime of grounds to vacate an award is simply to agree that state law vacatur standards will control.

For international arbitrators and international arbitration counsel, however, this Third Circuit case is more memorable for its affirmation of the widely-accepted view of the relationship between the Convention and US federal law standards for vacating an award. Thus, district courts in both the Second and Third Circuits must follow the rule that when an international arbitration takes place in the United States, the resulting award may be (i) refused confirmation for a reason stated in the Convention, and/or (ii) vacated, modified, or corrected according to the standards stated in Chapter 1 of the Federal Arbitration Act.

This position is now relatively free from controversy in the United States, and may be expected to be applied by federal district courts in major centers of international arbitration activity. The Fifth Circuit Court of Appeals embraced this view of the relationship of the Convention and the FAA in Gulf Petro Trading v. Nigerian Nat’l Petroleum Corp., 512 F.3d 742 (2008).The Sixth Circuit concurred in Jacada, Ltd. v. Int’l Marketing Strategies, Inc., 401 F.3d 701 (2005). An Eleventh Circuit decision might appear to suggest the contrary, but in that case the Court simply equated certain arguments for vacatur made under FAA Chapter 1 with grounds to refuse confirmation under the Convention and Chapter 2. Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (1998). It is reasonable to expect that in a suitable case the Eleventh Circuit would line up with the others herein mentioned.

For foreign arbitrators sitting in the United States, it is therefore useful to have a working knowledge of the FAA Chapter 1 grounds for vacating, modifying or correcting an award, found in Sections 10 and 11 of the FAA. For example the U.S. case law on “evident partiality” of the arbitrator as a ground to vacate the award is well developed as to the circumstances that may give rise to a reasonable impression of arbitrator bias. This is in contrast to the Convention, which in Article V makes no specific reference to arbitrator corruption, bias, or lack of independence, but rather more generally permits an award to be refused confirmation if “the arbitral procedure was not in accordance with the agreement of the parties,or, failing such agreement, was not in accordance with the law of the country where the arbitration took place.”

As the debate rages on concerning the potential use of 28 USC 1782 to secure non-party discovery for use in international commercial arbitrations, rather little attention is paid to the fact that judicial assistance under section 1782 is a matter of discretion not of right, and that federal judges may not wish to interfere with the arbitral tribunal’s control over the proceedings.

Such reluctance to interfere figured prominently last week in the decision of a federal district judge in Washington to deny section 1782 relief, sought by the American claimant in an ICSID bilateral investment treaty (“BIT”) arbitration against the Republic of Kazakhstan. (In re Caratube Int’l Oil Co., 2010 U.S. Dist. LEXIS 81512 (D.D.C. Aug. 11, 2010)).

The Court devoted nearly no attention to the question of whether a tribunal constituted under the ICSID Rules, per the investor-1782 petitioner’s decision under the US-Kazakhstan BIT to have ICSID-administered rather than UNCITRAL Rules ad hoc arbitration, is a “foreign or international tribunal” under section 1782. The court proceeded directly to what it viewed as the critical questions: What had the parties agreed upon concerning discovery? And what was the position of the arbitral tribunal concerning the scope of discovery and where discovery fit into the procedural flow of the case?

On the first question — what had the parties agreed — the Court took note of the simple fact that the investor had opted for ICSID arbitration and therefore for dispute resolution in a forum where the “‘set[ting] (of) procedural rules for the arbitrators to follow,” is part of the “parties’ bargained-for expectations concerning the arbitration process.”

The court also noted that the petition was ill-timed, having been filed long after a discovery timetable had been fixed by the tribunal and, indeed, after the tribunal had resolved discovery disputes and ordered completion of discovery in four weeks.

The court further noted that ICSID Rule 43 puts the scope of disclosure in the control of the tribunal, and that the parties had additionally agreed that the IBA Rules of Evidence would serve as a guidelines for the discovery process. The court quoted at length Rule 3.8 of the IBA Rules (1999 version) which indicates that an application should be made to the tribunal to determine whether and how disclosure may be sought from a non-party. The court also read ICSID Rule 44 — vesting discretion in the Tribunal on all procedural matters not otherwise specifically addressed in the rules or by agreement of the parties — to have the same effect.

Thus the court concluded that while the section 1782 petition did not violate any judicial “exhaustion” rule, the ICSID and IBA Rules required or at least weighed heavily in favor of a request for permission of the tribunal to proceed under section 1782, and the investor “side-stepped these guidelines” by proceeding unilaterally.

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Investment treaty arbitration is a fertile ground for the judicious use by investors and States of the discovery opportunities afforded by section 1782. It is rather well-accepted that an ICSID tribunal is effectively a creature of an inter-governmental agreement and therefore is the kind of “tribunal” contemplated by section 1782. But whereas the arbitral body exists because the State parties, to the Washington Convention or a particular BIT or both, have ceded a part of the sovereign judicial function, it makes good sense and good policy that discovery should be the exclusive domain of the tribunal except as the parties may agree. One should expect to find investment arbitration parties making 1782 discovery a well-defined aspect of a proposed discovery program in the earliest stages of

The recent decision of a US court in New York confirming, under the New York Convention, an ICDR Panel award in favor of Hoffmann La Roche (HLR), and its US subsidiary and customer, comes a good news for at least two important reasons. One concerns arbitration rights of non-signatories; the other, the recovery of legal costs by prevailing parties of foreign and US citizenship in an international arbitration with a seat in New York and New York law applicable to the merits. F. Hoffmann La Roche Ltd. v. Qiagen Gaithersburg, 2010 U.S. Dist. LEXIS 81374 (SDNY Aug. 11, 2010)

The case involved a cross-license agreement originally between predecessors in interest of Claimant and HLR. A US wholly-owned HLR subsidiary used the licensed rights to develop diagnostic devices which it sold to a third party (also of US nationality). Claimant claimed that those sales violated the license.

The Tribunal granted HLR’s customer, which had no contract with Claimant, the right to join as a party to the arbitration. In this decision, the Court upholds that joinder. It reviews US jurisprudence concerning the doctrine of estoppel as a basis for permitting non-signatories to the agreement to participate in the arbitration. It holds that those principles permit a non-signatory, whose rights are closely intertwined with the disputed provisions of the contract that contains the arbitration clause, to compel the signatory party that contests its rights to arbitrate their dispute.

This decision also upholds the decision of the Tribunal to award legal costs including attorneys’ fees to HLR and its US subsidiary ($3.1 million!) and customer ($2.9 million!), based on Article 31 of the ICDR Rules, even though the place of arbitration was New York and the contract provided that the governing law was New York law. The court noted that the Panel correctly decided that the parties’ agreement on New York law was to be construed as a choice of law concerning the merits , and not concerning the allocation of legal costs, especially where the parties had agreed to arbitrate under ICDR Rules and ICDR Rule 31 is explicit in giving the arbitrators discretion in making allocation of legal costs between the parties.

The court also noted that the Tribunal in making the award of legal costs took note of the fact that the Claimant had itself repeatedly requested an award of legal costs in its favor.

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Marc J. Goldstein Litigation & Arbitration Chambers frequently represents non-U.S. companies in arbitrations, and in litigations including those related to arbitrations, in the United States.

The firm’s principal Marc J. Goldstein was recently named to Best Lawyers in America 2011, in the specialty of international arbitration, a distinction that has been conferred on him in each year since he founded this firm in 2007.

This opinion by Seventh Circuit Chief Judge Frank Easterbrook skips rather lightly over some important distinctions between judicial and arbitral power. A closer look at the premises of the decision therefore seems appropriate.

A few distinctive features of the case put it in context. First, the arbitrator was a non-lawyer — a specialist in valuation of intellectual property rights, here patents on chemical formulas licensed for use in a cancer drug. Second, the license agreement provided for arbitration if the licensor believed the royalty rate was unduly low because the licensee was selling the drug in related-party deals rather than at arm’s length. Thus, the license provided for a serial arbitrations on the same issue, based on changed circumstances over time. Third, the arbitration evidently was not conducted under AAA or other rules, or under relevant state arbitration law, any of which might have addressed the ability of parties to request, or the arbitrator to grant, reconsideration.

Judge Easterbrook equates the arbitrator’s reservation of a right to reconsider based on new evidence with the right to such relief in a judicial proceeding conferred in Rule 60(b) of the Federal Rules of Civil Procedure. He suggests that the arbitrator may make such a reservation (where applicable arbitration rules, law, or the agreement of the parties don’t forbid it), without thereby rendering the decision non-final, subject to the 90-day limit FAA Section 12 for a motion in federal court under FAA Section 11 to modify or correct an award. And he cast aside the parties’ submissions regarding the “functus officio” doctrine as technical arcana of no use in deciding the case.

This approach takes some needless liberties with the FAA and arbitral common law principles. Before this case, we have understood Section 12 of the FAA to concern only a petition to a federal district court, not to an arbitrator, to modify (or correct) an award. And while it is correct to say that the passage of the 90 days without asking the arbitrator to modify the award means the award stands because a court must then confirm it without change, it is wrong to imply, as the decision does, that Section 12 directly permits a request to the arbitrator to modify or correct an award within 90 days after issuance. The FAA does not address that, and it disconcerting that a federal court of appeals would suggest that it does.

Second, the only permitted grounds for a federal judge to grant a petition to modify an award are those stated in FAA Section 11 — e.g., a material miscalculation of figures, or a material misdescription of a person, thing, or property in the award. FAA Section 11 does not provide for changing an award based on new evidence.

Third, federal appellate courts including the Seventh Circuit have recognized the “functus officio” doctrine as a federal common law principle that is read into the FAA as a limit on arbitral power. Thus, it is well-settled that an arbitrator is without power to act once she issues a final award, except to correct a mistake that clearly appears on the face of the award. A different sort of change — i.e. merits reconsideration — unless allowed by agreement, exceeds the arbitrator’s powers, and the purported amended award is be subject to vacatur under FAA Section 10(a)(5).

In this case, a non-lawyer arbitrator presumably not immersed in these nuances of arbitration law issued a decision that was contradictory — “final” and yet subject to revision based on new evidence, and with no stated time limit for presenting new evidence. The question the Court should have addressed was whether this was an award or an interlocutory order. If there was ambiguity about that, ample authority permitted remand to the arbitrator for clarification. The Seventh Circuit concluded that it was an award — or that it became an award 90 days after issuance — by superimposing on the purported arbitral reservation of power to reconsider the 90-day temporal limit of FAA Section 12. But this was an erroneous extension of FAA Section 12 beyond its judicial domain. Two possible approaches would have been more satisfactory. One would have been to remand to the arbitrator with directions to resolve the ambiguity. The other would have been to construe the arbitrator’s reservation of power simply as a recognition that under this license agreement, an award concerning the royalty rate was “final,” for the time being, but that the parties could re-open the issue, in a new arbitration whose outcome would have only prospective effect, based on changed circumstances in the future.

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Not all readers of Arbitration Commentaries outside the United States will be aware that Chief Judge Easterbrook is widely regarded as one of the country’s most brilliant jurists. But as the opinion in this case illustrates, even the most brilling legal minds can produce troublesome applications of federal arbitration law when distinctions between judicial and arbitral power, reflected in the FAA and in evolved case law, are subordinated to reasoning that applies statutes and rules loosely and by analogy to advance what the court believes to be a sensible outcome.

The US Seventh Circuit Court of Appeals has held in a new decision that the question whether a contract containing an arbitration clause ever existed should be decided by a federal district court when it is asked to compel arbitration, and not by the arbitrator in the first instance, unless the arbitration clause indicates that the parties delegated that specific issue of contract formation to the arbitrator. (Janiga v. Questar Capital Corp., 2010 U.S. App. LEXIS 15983 (7th Cir. Aug. 2, 2010)). The Court observed that any doubt on this question appears to have been resolved recently by the Supreme Court of the United States in Granite Rock Co. v. International Brotherhood of Teamsters, 130 S.Ct. 2847 (2010), where the Supreme Court said “[i]t is similarly well settled that where the dispute at issue concerns contract formation, the dispute is generally for the courts to decide.” Whether the issue concerns contract formation, for a court to decide, or rather concerns contract validity, for the arbitrator to decide, of course depends on what grounds are asserted, by the party opposing arbitration, for saying that no contract exists. In Janiga, that party had admittedly signed the agreement, but asserted that he lacked sufficient fluency in English to have appreciated the legal significance of the document he signed. This was, in the Seventh Circuit’s view, a queston of contract formation that was properly within the province of the district court judge.