Archive for January, 2011

U.S. Court Holds “Manifest Disregard” Cannot Be A Ground to Refuse Confirmation of Convention Award

Monday, January 31st, 2011

In another blow to the misconceptions of  foreign arbitration lawyers about U.S. arbitration jurisprudence, a U.S. federal judge in Washington, in a searching scholarly opinion, has systematically dismantled, and summarily rejected, all arguments advanced for applying “manifest disregard of the law” to refuse confirmation of an arbitration award under the New York Convention.

That doctrine, the Court held, if it survives and in whatever conception it survives, is no more than a ground permitting vacatur of an award that a U.S. Court may lawfully vacate, i.e. one that is made in or under the arbitral law of the United States. It has no role to play in proceedings to confirm a Convention award, the Court held, as it has “no grounding in the treaty.” (International Trading & Industrial Investment Co. v. Dyncorp Aerospace Technology, 2011 U.S. Dist. LEXIS 5954 (D.D.C. Jan. 21, 2011)).

First among the arguments dissected by the Court in DynCorp was the notion that Article V(1)(C) of the Convention is in substance co-extensive with FAA Section 10(a)(4), and permits refusal of confirmation on any ground that would comprise “exceeding powers” of the arbitrator under Section 10(a)(4).  But Article V(1)(C) reaches only situations where the arbitrator decided matters beyond the submission to arbitration, and thus deals with only one of many  potential scenarios in which the arbitrator may be said to have exceeded her powers.

The Convention enumerates quite precisely and exclusively stated grounds for refusing confirmation, and by negative implication excludes all other possible grounds, the Court held. “Such a narrow reading of the New York Convention comports with the context in which the Convention was enacted, as a broad construction of the Convention would do nothing more than erect additional hurdles to confirmation of arbitral awards, which in turn would contravene the ‘principal purpose’ of the Convention, i.e., ‘to encourage the recognition and enforcement of commercial arbitration agreements in international contracts.'”







“[U]nder the law of which the award was made.” The Citadel of Article V(1)(e) Survives Another Assault

Friday, January 28th, 2011

Article V(1)(e) of the New York Convention has withstood another attempted assault in the U.S. court system.   A federal district judge in Washington, D.C. last week rejected the proposition that a court of the country whose substantive contract law but not its arbitral procedural law applied to the arbitration could, by the consent or stipulation of the parties, become a “competent authority” whose purported vacatur of an award may furnish a basis for a judicial refusal to grant recognition and enforcement of an award under Article V(1)(e).  (International Trading and Industrial Investment Co. v. DynCorp Aerospace Technology, 2011 U.S. Dist. LEXIS 5954 (D.D.C. Jan. 21, 2011). 


Credit the creativity of U.S. counsel for the arbitration loser for affording the Court the opportunity for a resounding reaffirmation of first principles in the application of Article V(1)(e).  Their client, a U.S. military contractor, DynCorp, operating in Qatar, lost an ICC arbitration in Paris to its Qatari business partner, concerning the minimum duration of their contract and the right to terminate.   DynCorp took its case to the Qatari courts, and argued that the Arabic language version of the arbitration agreement did not provide that the arbitration would be final and binding, and therefore the Qatari courts could review de novo the arbitrator’s application of Qatari contract law.  At the appellate level in Qatar, DynCorp prevailed.  It then raised the Qatari vacatur in the U.S. court as a defense to the arbitration winner’s motion to confirm the award. And, seeking to bolster its position, DynCorp tried to have the courts in France, where the award had beenmade, give effect to the Qatari set aside judgment. The Paris Court of Appeal said “non.


The U.S. judge rejected the proposition, advanced by DynCorp, that the Qatari court could become a “competent authority” under Article V(1)(e) by consent of the parties. (Consent in any event had not been explicit; DynCorp argued this based on its adversary’s participation on the merits in the Qatari courts.) The court reasoned that to decide an issue of U.S. federal arbitration law that depends upon whether a foreign court had subject matter jurisdiction, the court would apply the U.S. law principle that subject matter jurisdiction cannot be conferred by consent of the parties. (This choice of law solution is not very explicitly acknowledged as such in the opinion.)  The Court went on to reject DynCorp’s argument that the Qatari courts were competent because the award was non-final under the Arabic version of the arbitration clause, holding that the agreement to arbitrate under ICC Rules made the award final and binding by operation of those Rules.


It is so well understood in American arbitration law that Article V(1)(e) refers to vacatur orders issued either by the court at the seat, or, much less frequently, by a court in the place whose lex arbitri applied by agreement even though that place was not the seat, that judges do not any longer find it necessary to explain fully where that understanding originates. The phrase “or under the law of which, the award was made,” is not self-evidently limited to arbitral procedural law to the exclusion of the law applicable to the merits. Yet the court here writes that “the plain language of Article V(1)(e) is unambiguous” in referring to “the country in which, or under the [arbitral] law of which, that award was made.” But if the matter is unambiguous, why does the court insert the bracketed word “[arbitral]” in what appears to be an effort to compensate for the possible ambiguity?


The understanding reflected in that bracketed word “[arbitral]” can be traced back through U.S. jurisprudence to the original understanding of the drafters of the New York Convention. The U.S. Second Circuit Court of Appeals in Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys “R” Us, Inc., 126 F.3d 15 (2d Cir. 1997) “note[d] that Article V(1)(3) specifically contemplates the possibility that an award could be rendered in one State, and under the arbitral law of another state,” and cited in support of that interpretation Professor Van den Berg’s seminal 1981 work, The New York Arbitration Convention of 1958: Toward a Uniform Judicial Interpretation (at p. 355).  Seven years before Yusuf , a federal district judge in Manhattan was asked to decide specifically that “under the law of which” embraced the substantive law that applied.  In rejecting that position in favor an interpretation limited to the agreed lex arbitri, the district court in International Standard Electric Corp. v. Bridas Sociedad Anonima Petrolera, Industrial YT Comercial, 745 F. Supp. 172  (S.D.N.Y. 1990) also cited Professor Van den Berg’s 1981 treatise, and usefully quoted what he had to say there, i.e.


The phrase “or under the law of which“ the award was made refers to the theoretical case that on the basis of an agreement of the parties the award is governed by an arbitration law which is different from the arbitration law of the country in which the award is made.


The Bridas court also traced Professor van den Berg’s interpretation to the commentary of the Soviet delegate to the 1958 U.N. Conference who offered the amendment embracing the language at issue.  That comment can be found today in the Travaux Preparatoires of the Convention on the UNCITRAL website.  Even further, the Bridas court on this point had received an affidavit from Professor Bermann  discussing a series of foreign judicial decisions that had so construed the relevant language.


So there is indeed a rich jurisprudential history underlying the shorthand “under the [arbitral] law of which the award was made.” In the interest of clarity and consistency of outcomes, it would be useful for judges facing this issue to carry forward this legacy in specific and precise terms.


A U.S. Court Changes the Seat of an International Arbitration

Monday, January 24th, 2011

Last month in a decision below the Mason-Dixon Line and perhaps below the radar detection devices of the international arbitration bar, a federal district court in Mississippi enforced in part a contractual agreement for ICC arbitration between a major U.S. defense contractor and the Government of Venezuela, but declined to enforce the agreement insofar as it named Caracas, Venezuela as the seat of the arbitration. Instead the Court directed the parties to reach agreement on another seat within 15 days failing which the Court would name a seat. (Northrop Grumman Ship Systems, Inc. v. Ministry of Defense of the Republic of Venezuela, 2010 U.S. Dist. LEXIS 134830 (S.D. Miss. Dec. 4, 2010)). An appeal to the Fifth Circuit has already been filed, and so Arbitration Commentaries views this as a percolating case with an importance that transcends its roots in a District not well known for international arbitration jurisprudence. 

Whether the District Court’s result comports with the New York Convention and Chapter Two of the Federal Arbitration Act requires, to begin, some textual analysis in which the district court did not engage.

Article III of the Convention provides that a court seized of an arbitrable dispute “shall refer the parties to arbitration…. unless it finds the agreement to be null and void, inoperative, or incapable of being performed.” Further, Section 206 of the FAA authorizes a federal district court to enforce the arbitration agreement by directing that arbitration “be held in accordance with the agreement at any place therein provided for….

Neither of these provisions received attention from the court, which instead purported to apply a Supreme Court case from the early 1970s (Bremen v. The Zapata, 407 U.S. 1 (1972)), before there was hardly any New York Convention jurisprudence in the U.S., and which did not involve an agreement for international arbitration but instead an agreement between U.S. and German parties to resolve disputes in the English Commercial Court. The Bremen v. Zapata case held that the forum selection clause in an international contract should be upheld unless it would be “unreasonable” to enforce it. In a 1974 U.S. Supreme Court case not cited by the Mississippi District Court, the Court held that an agreement for international arbitration is a special case of a forum-selection clause that must be enforced “in accord with the explicit provisions of the Arbitration Act.” (Scherk v. Alberto-Culver Co., 417 U.S. 506 (1974)).

The District Court made its decision after a remand from the U.S. Fifth Circuit Court of Appeals. The Fifth Circuit had been asked to vacate a District Court order approving a settlement, and did so, on the ground that the attorney who executed the settlement for the Government of Venezuela lacked authority. (Northrop Grumman Ship Systems, Inc. v. Ministry of Defense of the Republic of Venezuela, 575 F.3d 491 (5th Cir. 2009)). The Fifth Circuit, through dicta in the decision directing the remand, attempted to put the District Court on the right track. Stating that “the record before us is insufficient to determine whether the present conditions in Venezuela render the arbitration-clause unenforceable,” the Court remanded the case for “a proper determination of this issue.”  As if this was not enough of a hint that the “arbitration-forum clause” clause had to stand or fall as a unit, and not be severed into separate arbitration and forum clauses so as to render one enforceable but not the other, the Fifth Circuit elected to “reiterate governing principles.”  In this regard, the Court cited in particular its decision in National Iranian Oil Co. v. Ashland Oil, Inc., 817 F.2d 326, 332 (5th Cir. 1987), for the proposition that “a forum selection clause establishing the situs of arbitration must be enforced unless it conflicts with an explicit provision of the Federal Arbitration Act.”  The Court reminded that contractual doctrines of impossibility or impracticability of performance could be, under FAA Section 2, sufficient to render the clause unenforceable, as Section 2 “grounds that exist at law or in equity for the revocation of any contract”  — provided that the party seeking revocation had no reason to foresee, at the time of contract, the conditions giving rise to the alleged impossibility of performance.

National Iranian Oil  is an intriguing and instructive case.  Iran sought to get the benefit of arbitration, and yet avoid wholesale non-enforcement of the arbitration clause and litigation in a U.S. court, by making three arguments: that fair and neutral arbitration in the contractually-agreed Teheran forum was impossible or impracticable, that the arbitration agreement and the agreement on the seat were severable and should be viewed as separate contracts, and finally, that enforcement of the arbitration agreement, for arbitration in the U. S. instead of Teheran, could be done under the New York Convention and FAA Chapter Two because the problem that Iran was not a Member State of the Convention would thereby be avoided.  Iran lost on all three points.  Most important for purposes of the Northrop Grumman-Venezuela case, the Fifth Circuit in National Iranian Oil held that the question of severability of the arbitration clause and the agreement on the seat depended on the intent of the parties as manifested, in the first instance, in the express terms of their agreement.  Based on the facts that Iran’s form contract provided expressly that Iranian law would govern the interpretation and rendition of any arbitral awards, as well as all issues of interpretation of the contract, and that the Appeal Court of Tehran was the default appointing authority, the Court concluded that this arbitration-forum clause was an integral, non-severable unit and that it had to be enforced, or not, in its entirety.

Despite the Fifth Circuit’s guidance and specific reference to National Iranian Oil, the District Court’s decision last month avoided entirely the question of integration versus severability of the arbitration agreement, on the one hand, and the choice of Caracas as the seat, on the other. It simply found that arbitration in Caracas is no longer reasonable in view of the deterioration of diplomatic relations between the U.S. and Venezuela and the record of pro-Government bias in the Venezuelan legal system established by Northrop Grumman’s expert evidence. The Court ordered arbitration, ordered the parties to submit an agreement on another place of arbitration within 15 days, failing which the Court would select a new seat of arbitration.  According to the docket, no agreement on a seat has been submitted nor has any order designating a seat been made. Instead, a Notice of Appeal has been filed by the Government of Venezuela. 

The FAA, Section 16, makes an order denying a motion to compel arbitration under the Convention and Chapter Two immediately appealable, and conversely prohibits an immediate appeal from an order under Chapter Two directing arbitration unless the District Court certifies a controlling question of law for immediate appeal (which this Court has not done). One wonders how Section 16 applies to an order that granted in part Venezuela’s motion to compel arbitration by directing arbitration in a place other than the place stated in the agreement.  Seemingly, the issue of severability or integration is jurisdictional, as well as potentially dispositive of the merits: If the arbitration clause is fully integrated, the District Court order effectively denied Venezuela’s motion to compel arbitration in Caracas, and should be appealable.  If the arbitration agreement and agreement on the seat are severable, Venezuela’s motion to compel arbitration has been granted, and the decision setting aside the agreement on the seat might be regarded as interlocutory.   But this issue should bring the Fifth Circuit back to the text of Section 206 of the FAA.   In a Convention case, the District Court’s power is to compel arbitration “in accordance with the agreement at any place therein provided for.”  The text of Section 206 strongly suggests that the purported “partial granting” of a motion seeking that relief, by ordering arbitration at a place not provided for in the agreement, should be regarded as a denial of the motion to compel, and further that this was an order the District Court was without power to make.  

Arbitration law watchers will be watching for the Fifth Circuit’s next decision in the Northrop Grumman- Venezuela case.  Even assuming the District Court had solid grounds for concluding that the legal and political environment in Venezuela are unfavorable for arbitration, the Fifth Circuit may hesitate to accept this as a basis to discard entirely the arbitration clause, because the consequence is to expose both parties to concurrent litigations in the courts of the United States and Venezuela. Perhaps one of the parties will point out to the Fifth Circuit that in an ICC arbitration there are steps available that might mitigate the impact of the hostile environment, notably that the Tribunal may conduct its hearings and proceedings and deliberations in another location even though the juridical seat of the arbitration remains in Venezuela (ICC Rules 14(2) and 14(3)). The Fifth Circuit might also consider the prospects for enforceability of the Award and execution of the resulting judgment in States other than Venezuela, even if the Venezuelan courts purported to set aside the award. Further, the appellate court may wish to consider the possibility that the U.S. Claimant might obtain from the Tribunal an order for security, and the court may take into account the statements of the Government of Venezuela as to its prospective willingness to comply with such an order should one be entered. Each of these factors should impact an analysis of whether enforcement of the arbitration clause for arbitration with a seat in Caracas is “impossible” or “impracticable.”    

Finally, I present a war story, one I have often told.  More than ten years ago I was counsel an ICC arbitration against the Government of Serbia for an American claimant whose property, allegedly, had been expropriated by the Milosevic regime after the Serbian Government had assumed ownership of my client’s private Yugoslav joint venture partner.  By virtue of this assumption of contract rights, the U.S. party found itself in privity with the Serbian Government in a contract that provided for ICC arbitration with a seat in Belgrade.  Belgrade in 2000 was the scene of NATO shelling, drive-by political assassinations, manipulated elections, abuses of political dissidents, and an intimidated and regime-controlled judiciary – a scenario quite different from the one that prevailed when my client signed the contract in 1990.

Claimant asked the ICC Court to conclude that the agreement on the seat of arbitration had ceased to exist (under the civil law principle rebus sic stantibus), such that the ICC Court, in accordance with ICC Rule 14(1), could fill the void by selecting a seat. The Court referred the factual and contract interpretation issues to the Tribunal for decision, hearings were held, extensive evidence was presented. Before the Tribunal issued an award, Milosevic was ousted from power in a popular coup, and was replaced by a new and purportedly more democratic regime.  The Partial Award took into account the regime change, and concluded that the agreement on the seat of arbitration remained intact.

Could Northrop Grumman follow the same course at this stage and take the issue of the seat of arbitration to the ICC Court? One would think so.  Perhaps in view of the latest appeal filed by Venezuela, this is a course of action that will receive serious consideration.


Enforcement of International Arbitration Clauses By Non-Signatories: The Meaning of “Arbitral Equitable Estoppel”

Tuesday, January 18th, 2011

Today I will attempt to bring some clarity to American federal law concerning enforcement of international arbitration clauses by non-signatories.  I will discuss two recent cases, one in Texas and the other in New York, in each of which a non-signatory sought to compel a signatory to arbitrate claims on which the signatory had commenced litigation. 

In the Texas case, a US company (“Licensee”) had an arbitration agreement with a Dutch company (“Licensor”), contained in a technology license agreement. After Licensee rejected a takeover bid from Licensor, the US subsidiary of the Dutch company (“Licensor Sub”), according to Licensee, conspired with another US company, to poach Licensee’s largest customer. Licensee sued Licensor Sub in a Texas court; Licensor Sub removed the action under FAA Section 205 and moved to compel arbitration; and the motion was denied by a federal district judge in Houston.  (QPro, Inc. v. RTD Quality Services USA, Inc., 2011 U.S. Dist. LEXIS 438 (S.D. Tex. Jan. 4, 2011).  The US Fifth Circuit Court of Appeals, whose precedents governed, has recognized “equitable estoppel” as a basis for a non-signatory to enforce an arbitration clause against a signatory in two scenarios: first, when the signatory, in bringing an action against the non-signatory, must rely upon the contract containing the arbitration clause as the basis for its claims; second, where the signatory’s lawsuit alleges substantially interdependent and concerted action between the non-signatory defendant and the signatory.    

Why did the motion to compel arbitration fail in this case?  First, the cause of action had nothing to do with the license agreement containing the arbitration clause.  The suit alleged tortious interference with Licensee’s relationship with its largest customer, not with the technology license. Second, Licensor (non-signatory’s parent company) was not alleged to be a concerted actor in the tortious interference; no arbitration claim based on the same facts had been brought against Licensor; and Licensor was not named as a defendant. The complaint alleged that Licensor had been motivated to direct Licensee’s tortious conduct as retaliation for Licensee’s rejection of its takeover bid, but Licensor was not alleged to have participated in execution of the tortious interference scheme.

Fast backward (by approximately three weeks) to the New York case — and read on with caution, as your Arbitration Commentator was counsel for the movant/ prevailing party on the motion to compel arbitration.  On the eve of the hearing on the merits in a pending arbitration between my Chinese corporate client and its US customer, arising from a troubled software development project, the US customer filed suit in the federal district court in New York against the CEO and largest shareholder of my corporate client — a signatory only in his corporate capacity but not individually to the software development contract at issue in the arbitration.  The complaint against the CEO parroted the counterclaims made in the arbitration – alleging fraudulent inducement of the contract and tortious interference with the customer’s capital-raising efforts – and alleged that the CEO as the alter ego of the corporation was entirely responsible individually for the corporation’s prospective liability on the counterclaims.

The arbitral equitable estoppel principles in the jurisprudence of the US Second Circuit Court of Appeals, concerning when a non-signatory may compel a signatory to arbitrate, are not materially different from those of the Fifth Circuit discussed in the Texas case. But the plaintiff here sought to escape application of those principles by arguing (1) that the corporation’s alleged misconduct would be determined in the arbitration, and would collaterally estop the CEO; and (2) therefore, only the alter ego facts would have to be determined in the lawsuit, and these facts were independent of the software contract and independent of the corporation’s alleged misconduct.

The New York federal judge flatly rejected the second argument, finding persuasive the movant’s position that the alter ego claims were completely intertwined with the corporation’s conduct that formed the basis for the counterclaims (because under New York alter ego law, domination and control, and fraud or other misconduct by the dominating person, would have to be demonstrated in connection with transactions that caused the harm for which recovery was sought).   (Charity Folks, Inc. v. Kim, Civ. No. 1:10-cv-08765 (S.D.N.Y. Dec. 13, 2010), unpublished Memorandum Opinion obtainable with subscriber password on the Southern District of New York’s website,, or by contacting this writer. I will attempt to establish a link here shortly).

These arbitral equitable estoppel principles seem fairly straightforward and not particularly difficult for courts to apply, once the facts and pleadings and procedural posture and claims in the related arbitration, if one is pending, are understood.  However, these rules do seem to have become somewhat disconnected from the principles of federal arbitration law from whence they sprung.  The main point is that the arbitration agreement justifies a reasonable expectation on the part of the each signatory that disputes with the counterparty signatory, commenced by that other signatory, and involving the subject matter of the contract, will be arbitrable, whether the dispute is framed as one involving the liability of the signatory, or that of the signatory’s parent, subsidiary, officer, director, employee, etc.  This is the element of reasonable reliance that underlies the “estoppel”  notion. Were the rule otherwise, the assumed benefits of agreeing to arbitration would be lost so long as the signatory claimant can fashion of theory of liability that involves the non-signatory.  Further, if the rule were otherwise, signatory parties who at the time the dispute arises would prefer to resolve the dispute using litigation procedures, would have large incentives to use the discovery tools available in litigation, obtain judgment, and then claim collateral estoppel effect in an ensuing arbitration against a signatory who was in privity with the litigation defendant.

Thus, arbitral equitable estoppel is the doctrine by which the rights gained from choosing arbitration are preserved against erosion threatened by “party-shopping” an arbitrable dispute into a judicial forum.