The 2010 docket of Marc J. Goldstein Litigation & Arbitration Chambers has included engagements as mediator (privately-engaged and court-appointed), sole arbitrator, co-arbitrator, arbitration counsel, litigation counsel, and consulting counsel in foreign litigation.

Industry coverage this year has included pharmaceuticals, commercial banking, investment banking, securities, insurance,  aviation, telecoms, software development, and international sales.

For advocacy engagements, I submit proposals to work alone, or with teams of desired scale assembled from my local, national, and global networks of professional colleagues.

The U.S. Ninth Circuit Court of Appeals, in a sharply divided 2-1 panel decision, has overturned a San Francisco federal district court’s confirmation of a New York Convention award, made in California, between a Belarus claimant and a California respondent-counterclaimant. The award dismissed the Belarus company’s claims and awarded the U.S. party more than $4.2 million in damages and costs on its counterclaims. The position of the panel majority was that confirmation of the award should have been refused, under Article V (1)(d) of the New York Convention, because the arbitral procedure was not in accordance with the agreement of the parties — whose arbitration clause required that arbitration take place “at the defendant’s site.” The panel majority — rejecting as “simply not reasonable” the interpretation given to the arbitration clause by the arbitrator, the district court judge, and the dissenting Ninth Circuit judge — held that “at the defendant’s site,” as applied to counterclaims, unambiguously required that counterclaims be brought in a separate arbitration in the home jurisdiction of the counterclaim defendant. Polimaster Ltd. v. RAE Systems, Inc., 2010 U.S. App. LEXIS 19990 (9th Cir. Sept. 28, 2010).

The agreement at issue contained a two-paragraph dispute resolution clause. The first paragraph provided that the parties should exert every effort to resolve their dispute by negotiation. The second paragraph stated: “In case of failure to settle the mentioned disputes by means of negotiations they should be settled by means of arbitration at the defendant’s site.“

The Ninth Circuit panel majority provides little explanation of its position that the clause is not ambiguous. Most of the majority opinion consists of an attack on the reasoning of the dissent. Insofar as the majority’s position is discernible, it is that the term “defendant” could only be construed to refer to a defendant on a claim made by either party, including a claim first raised by a party that had been already named as a defendant in an arbitration commenced by the other side. Thus, the majority reasons, the gist of the agreement was to preclude the assertion of counterclaims, and to require each party to assert any claims in an arbitration commenced in the geographic location of the opposing party. The dissent takes the position that it is at least arguable that the parties used the term “defendant” to mean only the party identified as the defendant in an arbitration initially filed. The dissent further observes that the existence of even a plausible alternative construction should preclude the conclusion that the agreement is unambiguous.

Overlooked entirely in the cross-fire between the majority and the dissent is the relevance of Chapter 1 of the Federal Arbitration Act (“FAA”), and its interplay with the New York Convention and Chapter 2 of the FAA in a case involving a Convention award made in the United States. In the District Court, the prevailing U.S. party moved to confirm the award, and the losing Belarus party cross-moved to vacate the award. The motion to vacate was (or should have been) governed by Chapter 1 of the FAA, which provides in Section 9 that an award “shall be confirmed unless” one of the grounds for vacatur set forth in Section 10 is established. Article V of the Convention, implemented by Chapter 2 of the FAA, states that confirmation of a Convention award “may be refused” if one of the grounds for refusing confirmation, identified in Article V, is found to be present. Whereas FAA Chapter 1 applies to a Convention award only to the extent that it is not in conflict with Chapter 2 and the Convention (this is the mandate of FAA Section 208), one might suppose that, in an unusual case, an award that does not qualify for vacatur under Chapter 1, Section 10, might still be refused confirmation if a ground for such refusal identified in Convention Article V exists. If any U.S. case law has produced such an award-in-limbo — refused vacatur under Section 10, yet also refused confirmation under the Convention — I am unaware of it. And indeed Article VII (1) of the Convention would appear to prevent this from happening. This so-called “most favored nation” clause in the Convention provides that “the provisions of the present Convention shall not . . . deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the laws and treaties of the country where such award is sought to be relied upon.” That would seem to mean that if the winning side on a Convention award made in the United States seeks confirmation of the award in the United States, and is entitled to confirmation under U.S. law other than the Convention (i.e. FAA Chapter 1), then the Convention does not — may not — prevent confirmation. I do not believe any U.S. case has clearly held that this is the impact of Article VII, but this certainly follows logically from its text.

And if the foregoing analysis is correct, then one may ask, was it not entirely improper for the Ninth Circuit to analyze the Polimaster case, as it did, in terms of whether, under Article V(2)(d) of the Convention, confirmation should be refused because the arbitral procedure varied from what the parties had agreed (because counterclaims were allowed in the same case at the same place)? If a court begins analysis of confirmation a U.S.-made Convention award with Article V, and finds that a ground permitting refusal of confirmation exists, then Article VII would seem to require that the Court go further, determine if the award must be vacated under Section 10, and if no vacatur is so mandated, confirm the award despite a permissible ground for refusing confirmation under Article V. More simply stated, analysis of vacatur under Section 10 would seem to be the whole ball of wax as to confirmation of a U.S.-made Convention award.

If the Ninth Circuit had taken that tack, would the outcome have been any different? Maybe not. But using the Section 10(a)(4) formulation of whether the tribunal exceeded its powers (or manifestly disregarded the law) would have required the Court to be faithful to a well-developed body of its own case law.

First, whereas the parties had evidently agreed to arbitrate the disputed issue of counterclaims jurisdiction, by signing a submission agreement for arbitration in California under the JAMS Rules, the arbitrator’s decision on that issue was entitled to the same deference as is given to any other issue submitted to arbitration.[1]

Second, Ninth Circuit jurisprudence gives a very wide berth to arbitral interpretive discretion when it is claimed that the arbitrator exceeded her powers in construing a provision of the contract. The Ninth Circuit has repeatedly held that the arbitrator does not exceed her powers if she is even “arguably construing” the arbitration agreement. The Ninth Circuit has construed the “exceeding powers” ground for vacatur, FAA Section 10(a)(4), to mean “complete irrationality.” And it has held that an award is only “completely irrational” if it “fails to draw its essence from the agreement,” or if the arbitrators “act outside the scope of the … agreement.” According to the Ninth Circuit, the courts have “no authority to vacate an award solely because of an alleged error in contract interpretation,” and they “need only determine whether the arbitrators’ interpretation was ‘plausible.‘” Langstein v. Certain Underwriters at Lloyd’s, 607 F.3d 634 (9th Cir. June 10, 2010) (internal citations and quotation marks omitted).

The majority in Polimaster insisted that the arbitration clause was unambiguous in requiring separate arbitrations, in separate venues, of claims by each party aginst the other. But that was more easily said, one might think, because the Court thought its scope of review was de novo where the question presented was the existence vel non of an Article V ground for refusing confirmation under the Convention. Had the Court framed the issue as whether the arbitrator’s interpretation of the clause was “plausible,” it might have been able to reach the same result, but it would have had to struggle much more than it did with the evident interpretive tensions in the parties’ agreement on the place(s) of arbitration(s).

A federal district judge in New York has rejected an attempt by a securities broker-dealer, involved in ICDR arbitration related to Bernard Madoff’s Ponzi scheme, to change the arbitral forum by a retroactive amendment to its customer agreement. Anwar v. Fairfield Greenwich Ltd., 2010 U.S. Dist. LEXIS 87449 (S.D.N.Y. Aug. 20, 2010).

Four months after Madoff had admitted the Ponzi scheme in December 2008, the Standard Chartered Bank sent its account holders a new customer agreement, retroactive to November 2008. The new agreement was with a successor entity, a new broker-dealer, and provided for arbitration before a panel appointed by the Financial Industry Regulatory Auhority (“FINRA”). (The original agreement had provided that the bank could modify it on written notice to the customer.)

The customers, mainly Chilean investors holding 24 accounts, started an ICDR arbitration as a consolidated rather than class action. The claim was that Standard Chartered had invested Claimants’ money in a Madoff “feeder fund” without adequate due diligence.

In a partial award in June 2010, the ICDR tribunal ruled that it had jurisdiction despite the purported substitution of FINRA arbitration retroactively, and also held that proceeding with all 24 investor claims on a consolidated (but not “class action”) basis was proper.

The broker-dealer then started this action, seeking declaratory and injunctive relief that the ICDR Tribunal lacked jurisdiction, that consolidated arbitration should be disallowed, and that discovery in the arbitration should be stayed for the duration of the discovery stay in related Madoff class action federal securities fraud cases pending before the federal district judge to whom the application was made.

Turning first to the question of ICDR jurisdiction, the Court, applying traditional injunction criteria, expressed doubt whether arbitrating before an ICDR rather than a FINRA tribunal would qualify as irreparable harm, but focused it analysis on Standard Chartered’s likelihood of success on its claim to have validly changed the arbitration clause. It found the broker-dealer’s position wanting, in part because of deficiencies in the giving of notice of the amendment, and in part (agreeing in this regard with the Tribunal’s analysis) due to the arguable substantive unconscionability of a change in an arbitration clause which (i) shifted proceedings to an arbitral forum, FINRA, admitted to be more favorable to securities broker-dealers, and (ii) required claimants to arbitrate separately in duplicative proceedings their identical claims against the predecessor and successor broker-dealers entities responsible for managing their accounts.

On the consolidation issue, the court found that the broker-dealer could scarcely claim irreparable injury, because the FINRA arbitration rules it sought to enforce provide expressly for consolidation. As to the merits, the court found that the ICDR tribunal’s partial award was subject to only the limited, deferential standards for vacatur specified in Section 10 of the Federal Arbitration Act (fully applicable to international arbitrations with a U.S. seat), because the consolidation question was properly viewed as an issue of arbitration procedure rather than arbitrability. The question therefore was whether the ICDR tribunal had exceeded it powers, and, finding that the tribunal had reasonably relied on New York law and industry custom and usage in construing an ambiguous clause, the court held that the tribunal had acted within its mandate. Further, taking note of the U.S. Supreme Court’s remarks in the Stolt-Nielsen case about the fundamentally different character of class arbitration, the court found that “[u]nlike the differences between bilateral and class arbitration, the differences between the limited consolidation here and bilateral arbitration are not so great.”

The court also gave “significant deference” to the tribunal’s ruling denying a stay of discovery. It went on to note that there was no merit to Standard Chartered’s argument that the stay of discovery in federal securities litigation pending resolution of motions to dismiss, mandated by federal law, extends to arbitrations of claims similar to those pending before a court.

One final comment is in order. The court assumed that FAA standards for vacatur were relevant to its review of the consolidation and discovery stay issues, presumably because the tribunal had included these rulings in a partial award. But these were merely procedural rulings in an ongoing arbitration, and the tribunal presumably retained power to amend them. Further, the proceeding was not brought under the FAA as a motion to vacate the partial award, but in effect as a petition to enforce the amended arbitration agreement providing for FINRA arbitration. The FAA contains no express provision for an action seeking to enjoin a pending or proposed arbitration. The court might have properly resolved the consolidation and discovery issues simply by holding that there is no statutory basis for interlocutory review of procedural orders in an ongoing arbitration.

You will find, in the Legal Developments section of my general website, a summary analysis of the Second Circuit’s decision concerning the Alien Tort Statute in Kiobel v. Royal Dutch Petroleum Co. Please click on the link at the bottom of this message box. Thank you. Kind regards.

Marc Goldstein

For arbitration lawyers outside the United States, the allocation of adjudicatory power, in arbitration-related cases, between U.S. federal courts and courts of the individual states, is considered to be a rather arcane subject. But it is a subject of keen interest to American lawyers acting for their foreign clients because of the perceived decisive advantages of litigating issues arising under the New York Convention and the Federal Arbitration Act (“FAA”)  before a federal district court judge.

Certain provisions in federal procedural law allow for a defendant in a case brought in a state court to insist that the case proceed instead in federal court. The transfer process is called “removal.” Removal is always conditional upon the existence of a statute granting subject matter jurisdiction over the dispute to a U.S. federal court. Chapter 2 of the FAA contains, in Section 205, what is said to be the broadest removal provision in all of federal law.  It provides for removal of any case that “relates to” an arbitration agreement or award falling under the New York Convention. Section 202 of the FAA provides that any case that “falls under the Convention” is deemed to arise under the treaties and laws of the United States, and thus to involve a “federal question” that a federal court has jurisdiction to adjudicate.

A recent decision from the federal district court in New York identifies a case that is clearly not removable from state court under FAA Section 205: one involving orders of attachment to obtain execution of a court judgment entered upon a Convention award. Samsun Logix Corp. v. Bank of China, 2010 U.S. Dist. LEXIS 96306 (S.D.N.Y. Sept. 9, 2010).

The defendants seeking removal in the Samsun case were Chinese banks allegedly holding deposit accounts of the judgment debtor.

The Court seems to adopt a sensible position that for an action to be “relat[ing] to” the New York Convention, it should be at least “conceivable” that a claim or defense in the action could depend on an interpretation of the agreement to arbitrate or the award. It gives, as an example, a case in which plaintiff had asked a New York State court to dismiss the arbitration panel that had been constituted pursuant to the parties’ agreement. In that case the Court found that the dispute had a clear relationship to the arbitration agreement, the panel having been constituted purportedly pursuant to the arbitration rules therein adopted. Accordingly, removal under Section 205 in that case had been upheld.

But in this case not only was the arbitration concluded and an award entered, but judgment had been entered on the award. A point not mentioned in the opinion is that under U.S. law the judicially-confirmed award is considered to be merged into the resulting judgment, and it ceases to have a separate existence. This principle would seem to reinforce the notion that there was nothing about the judgment creditor’s ability to obtain execution through a garnishment process against the defendant banks would conceivably turn upon interpretation of the arbitration clause or the award.  As the defendant banks offered no contention that the award somehow immunized the deposit accounts from execution, their defenses depended entirely on applicable law concerning execution of judgments and aspects of the bank-depositor relationship that might perhaps protect the accounts.

This is the initial draft of what will eventually be a longer and hopefully more thoughtful article concerning the difficulties, under existing American law and practice, of arbitral subpoenas in U.S.-seated international arbitrations. Your comments on this draft, on this site or to the author privately, are most welcome.

Parties to international commercial contracts often select New York as the place of their arbitration, and they do so for a variety of reasons, some of them related to the hospitable legal and professional environment for arbitration, including New York’s concentration of skilled arbitrators who are well-versed in New York commercial law.  

But the ability of the arbitral tribunal seated in New York to secure the testimony and records from witnesses other than the parties is likely not a major consideration.  Foreign companies, even when represented in contract drafting be competent counsel, probably have only a hazy understanding of the territorial limits that U.S. law and procedural rules place upon the effectiveness of an arbitrator’s subpoena to require the appearance of a non-party witness.  This is understandable, as a well-developed body of case law on this subject has only recently begun to emerge, and many issues have not been addressed.

American arbitration lawyers who gain familiarity with the UNCITRAL Model Law and other modern national arbitration laws have a general understanding that the courts in countries having such laws have the power to require the appearance of a non-party witness to testify, and that this power effectively extends from border to border. If a foreign lawyer made the same assumption about the United States, she might be surprised to find that American judges and practitioners generally consider the arbitral subpoena power to be territorially limited to a certain radius around the juridical seat of the arbitration.

The reason is that the subpoena power of an international arbitrator sitting in New York (or elsewhere in the U.S.) is no different than that of an arbitrator sitting in New York in a non-international case that involves interstate commerce and to which the Federal Arbitration Act (“FAA”) therefore applies.

The subpoena power under the FAA is governed by the same provision for domestic and international cases — Section 7. Section 7 is found in Chapter 1 of the FAA, in the original arbitration statute enacted in 1925, 45 years before the U.S. accession to the New York Convention.[1]

Under Section 7, the subpoena of an arbitrator is required to be served upon the witness “in the same manner as a subpoena to appear and testify before the court.” Therefore, the service requirements of Rule 45 of the U.S. Federal Rules of Civil Procedure (“FRCP”) apply, and those requirements scarcely reflect policies attuned to international arbitration, but rather reflect pragmatic compromises made in consideration of the vast expanse of American territory:

1) in the case of an individual, the subpoena must be delivered in person to the witness.

2) the subpoena may be served (i) within the federal judicial district of the seat of the arbitration[2], or (ii) outside that district but within a 100 mile radius of the seat of the arbitration[3], or (iii) within the state of the seat of the arbitration, if a statute or court rule of the state permits statewide service of a subpoena (as New York’s Civil Practice Law and Rules, for example, does).

In an international arbitration (and indeed in some domestic arbitrations), these limits will often leave many witnesses beyond the generally-understood reach of an arbitrator’s subpoena. If an important witness might for example be a retired officer or employee of a corporate party who has moved her primary residence to Florida or Arizona, the subpoena of the arbitral tribunal sitting in New York cannot be served with legal effect unless she is found, for personal delivery, in New York State or within 100 miles of New York City.[4]

Whereas the party who applies to the tribunal for issuance of the subpoena is (by custom) responsible for its effective service, parties will sometimes ask the tribunal to issue a subpoena even though the witness’s residence is known to be outside the permitted range for service. This presents something of a dilemma for the arbitral tribunal.

The tribunal might issue the subpoena, leaving its effectiveness to be determined by the actions of the party that requested it. A process server instructed by the party or its counsel might conceivably locate the witness in New York and deliver it to her at a conference or in a hotel room.  But it is more probable that the party will put the subpoena in the hands of a process server in Florida, Arizona, etc., and the witness, if she is not represented by counsel, may proceed under the mistaken impression that the subpoena is legally effective to require her compliance by traveling to New York to appear and give testimony on the date specified.

In the latter case, the arbitral tribunal has been made a party to a deception, unless the subpoena on its face indicates the conditions for its effectiveness. Here, the arbitrator has the ability to take practical steps, because the content and format of the arbitral subpoena are for the arbitrator to decide. Thus, the tribunal might elect to include a legend that the subpoena will only be valid if it is served “in compliance with territorial restrictions on effective service provided by the Federal Arbitration Act and the Federal Rules of Civil Procedure.” That formula, without delving into the details, should give the witness fair notice that a subpoena calling for an appearance to testify at a distant venue may not be valid, and that the witness should consult counsel to find out whether the subpoena is valid.

Even if the subpoena has been validly served, the attempt to secure testimony from a witness located far from the where the arbitrators are sitting may fail. Rule 45(d)(3) FRCP provides that “the issuing court must quash” a subpoena that “requires a person who is neither a party nor a party’s officer to travel more than 100 miles from where that person resides, is employed, or regularly transacts business in person….” (except within a state that provides for statewide service of process). Here the language of Rule 45 and FAA Section 7 produce a complication.

The Rule 45 motion to quash procedure is not directly applicable to a subpoena issued by an arbitral tribunal as opposed to an “issuing court.” Further, Section 7 of the FAA does not provide for a motion to quash.[5] Instead it provides that if a person fails to comply with a validly served subpoena, the federal district court for the district in which the arbitrators are sitting “may compel the attendance of such person or persons….” The phrase “may compel” leaves the court with discretion to deny a motion to compel under the circumstances in which the court would quash a judicial subpoena. But this result is not compelled by the text. There does not appear to be case law on this point, as it is understandable that the instances when an arbitral subpoena can be effectively served within its territorial limits on a witness who normally resides beyond those limits, will occur infrequently. But given the overall position of the FAA to make the obligation of a non-party to participate as an involuntary witness more limited in arbitration than in judicial proceedings, a court should normally exercise it discretion to decline to compel attendance of a witness before an arbitrator sitting in a particular place, if the court could not compel the same witness to comply with, and indeed would be required upon motion to quash, a judicial subpoena of a similarly-located witness to appear and give testimony.

Another issue that may arise is whether Section 7’s empowerment of arbitrators to subpoena witnesses to “attend before them” might be construed to permit an arbitral subpoena that calls for a witness to testify by video conference. This issue does not appear to have been addressed in any reported case. One would think that under settled rules of statutory construction, the 1925 arbitration statute should be interpreted according to the ordinary meaning that its terms had at the time of their enactment, and so “attendance” should be interpreted to mean a physical appearance in the presence of the arbitrators. In that case, a subpoena for video or telephonic testimony, designed to avoid the requirement that the witness travel more than 100 miles to the place of the arbitration, exceeds the powers of the arbitrator under the current law.

A solution that is sometimes discussed in arbitration circles — but how frequently it is practiced is unclear — is for the tribunal to move its “sitting” place to the location where the witness can be effectively served with an arbitral subpoena. In international arbitration the selection of the “seat” or “place” of arbitration by the parties, or in default of a party choice by the administering institution, has considerable legal significance. That significance lies in the resulting invocation of the legal regime governing arbitration at the seat, including the powers of the courts to set aside awards and to support the arbitral process as needed. But it is more than arguable that the word “sitting” as used in Section 7 of the FAA (“….upon petition the United States District Court for the district in which the arbitrators, or a majority of them, are sitting” may compel compliance with the subpoena) refers not to the legal seat of the arbitration as that term is understood in contemporary international practice, but simply to the physical location where the arbitrators, by agreement of the parties, convene to hear testimony. If the parties have adopted arbitration rules, such as ICDR Article 13(2), that permit the tribunal to convene at any location they deem appropriate to hear witnesses[6], then the agreement of the parties fully supports the Tribunal in “sitting” for FAA Section 7 purposes, wherever it needs to “sit” to obtain power to compel the appearance of a witness. The New York-based tribunal’s subpoena for the Houston-based witness should simply command the witness to appear before the tribunal (or at least one of its members, as Section 7 provides) at a Houston location on the specified date, and the arbitrators (or one of them) should plan to be there. A motion to compel compliance could then properly be brought before the federal district court in Houston, which would be where the tribunal is “sitting” in relation to this particular witness and subpoena for Section 7 purposes, even if the “place” of arbitration designated by the parties or the ICDR is in New York.

Whether it is prudent for the tribunal to take such a step is a different issue.  Sometimes the distant witness will be one that only one party is eager to present, while the other party might prefer that this witness be treated as beyond the reach of arbitral and judicial compulsion.  Further, the testimony of this witness might be more significant, in the scheme of things, if the proponent’s theory of the case is adopted, while the other side might contend that, on its theory of the case, that witness’s testimony is largely irrelevant. Thus, a tribunal that ventures to be a pioneer in testing uncharted Section 7 waters risks being perceived by the parties, at a relatively early stage, as having has already inclined toward the witness-proponent’s theory of the case. On the other hand, if the witness is clearly an important one on any theory of the case, and the testimony (or records in that witness’s possession) cannot be obtained with the same degree of personal knowledge from others, then the tribunal quite justifiably may wish to test the limits of its Section 7 powers by “sitting” temporarily where the witness is located, and issuing a subpoena commanding the witness’s appearance before them at that location.  (Obtaining the agreement of the parties to add the distant location as a second “place” of the arbitration is another solution, and there should be no doctrinal or practical difficulty in having two “places” of arbitration in the same country and sharing a common legal regime, the FAA, and the same judicial system.  But the agreement of the parties in this respect will not always be forthcoming.)

The need for a tribunal sitting in New York to go through such contortions to compel the appearance of a witness residing in Miami, or else to forego that witness’s testimony, exposes the fundamental problem, which is that the United States has failed to modernize its arbitration law in important ways. At least for international arbitrations, there should be nationwide service of process for arbitral subpoenas. It is against the reasonable expectations of a foreign party that agrees to arbitrate in the United States that there should be no mechanism (or at least no tested and legally established mechanism) to secure the testimony of a former officer of a U.S. corporate party, who resided in New York (where the corporation has its headquarters) at the time of the contract and at the time of events giving rise to the dispute, but who prior to the request for her appearance to testify had retired and moved to Arizona. The Arizona witness should, in turn, have the ability to seek a protective order from the federal district court at the place where she is served with the New York tribunal’s subpoena, and that court should have the power to modify the subpoena to reconcile the competing concerns of the parties, the tribunal, and the witness by, for example, requiring the tribunal (or one of its members) to preside at a hearing in Arizona to hear the testimony, or requiring that the testimony be adduced by video conference.

But modernizing amendments to the FAA are the stuff of arbitrators’ dreams.  In our waking hours, arbitrators should be keenly aware of the precise words of FAA Section 7, and Rule 45 FRCP, and how the unvarnished plain meaning of words like “sitting” in an arbitration statute enacted during Prohibition and the presidency of Calvin Coolidge might sometimes legitimately be used to good advantage in serving the needs of parties to international arbitrations taking place in the United States.