The question whether the US Federal Arbitration Act (“FAA”) permits a cause of action that seeks only the relief of a stay or injunction against arbitration proceedings has arisen in several recent cases mentioned in Arbitration Commentaries, including the Chevron v. Ecuador saga, in which the Second Circuit decided not to decide this undecided question, finding that neither Ecuador nor the plaintiffs in the Ecuador environmental litigation against Chevron had shown grounds for such a stay of Chevron’s investment arbitration against the Republic of Ecuador. The question was raised again in a case decided last week, involving a more mundane commercial dispute over Subway sandwich franchises in Ireland. The New York federal district court in this case held that the FAA and New York Convention do permit a cause of action for a stay of arbitration. (Farrell v. Subway International, B.V., 2011 U.S. Dist. LEXIS 29833 (S.D.N.Y. Mar. 23, 2011)).

Farrell owned Subway franchises in Dublin, Ireland.  The franchisor was a Netherlands affiliate of Subway.  The franchise agreement called for arbitration under the UNCITRAL Rules in New York “administered by an arbitration agency, such as the International Centre for Dispute Resolution, an affiliate of the American Arbitration Assocation.”  Subway commenced arbitration by filing a demand for arbitration with the American Dispute Resolution Center, Inc. (“ADRC”).  ADRC is located in New Britain, Connecticut, in close proximity to the New Milford, Connecticut headquarters of Subway’s U.S. parent company Doctor’s Associates, Inc. Although the ADRC holds itself out as willing to administer arbitrations under any rules the parties wish to adopt (www.adrcenter.net), Farrell evidently interpreted Subway’s resort to ADRC as an attempted end-run around the arbitrator appointment process according to Article 6 of the UNCITRAL Rules. Farrell brought an action in the New York Supreme Court to enjoin the ADRC arbitration.  Subway removed the case to federal court under Chapter 2 of the FAA, as a case arising under the New York Convention.

The federal judge agreed with Farrell. The court interpreted the arbitration clause as requiring appointment of arbitrators in accordance with the UNCITRAL Rules, considered Subway’s choice of ADRC to be an attempt to vary from the UNCITRAL Rules’ procedures, and further interpreted the “administered by”  clause as prohibiting a unilateral choice of administering institution. The Court then decided that the FAA permits a court to enjoin arbitration, enjoined the ADRC arbitration “pursuant to the FAA and the [New York] Convention,” and, while noting that the parties were in agreement that their dispute should be resolved by arbitration, provided no affirmative pro-arbitration relief, no such relief having been sought by either party.

The threshold question before the Court was whether Chapter 2 of the FAA confers power on federal courts to stay arbitrations in New York Convention cases.  There is no controlling decision from the U.S. Supreme Court or the US Second Circuit Court of Appeals.   In support of the position that  FAA Section 206 empowers a court to stay arbitration, the court in Farrell cited a 1999 decision of another federal district judge in New York. That decision held that, based on the authority expressly granted in Section 206 to compel arbitration, that “[i]t would follow … that the court should have a concomitant power to enjoin arbitration where arbitration is inappropriate.”   The “concomitant power” seemed logical, to that court, because “a failure to do so would frustrate the goals of arbitration, since there would be delay and increased expense as the parties ligitated in both fora.”

Is this analysis correct? As the following discussion demonstrates, the pragmatic concerns motivating this conclusion are overstated at best.

Suppose it were clearly decided by the Supreme Court or Second Circuit that the FAA, or least Chapter Two, does not authorize a stay of arbitration.   Would the position of the party aggrieved by a wrongful arbitration be made untenable?  I submit the answer is no. If the position of the aggrieved party is that there is no agreement to arbitrate, or the agreement is invalid, or that the issues on which arbitration has been filed are beyond the scope of the clause, the aggrieved party may commence litigation on those issues in a competent court. Normally the adverse party will respond with a motion to compel arbitration, and the arbitrability issue will be resolved in the traditional way.  If the adverse party elects to litigate the merits, it will waive the right to arbitrate. Normally such a waiver, when brought to the attention of the arbitral tribunal (if one has even been constituted), should result in a termination of the proceedings. If the tribunal does not stay its own hand, and the adverse party still attempts to go forward in the arbitration, then the Court may issue an anti-arbitration injunction to protect its own jurisdiction. In that scenario the injunction power comes not from the FAA, but instead from the undisputed inherent power of the Court to protect by injunction its legitimately-acquired jurisdiction. Equally, if the adverse party inexcusably defaults in the court case, having been duly served with process, judgment will be entered on the merits and waiver of the right to arbitrate would be one of the issues implicitly determined by that judgment. In that scenario as well, if the party against whom judgment on the merits by default has been entered still pursues arbitration, the Court may grant an anti-arbitration injunction against that party to protect its judgment from collateral attack, and this is another form of injunction based on the Court’s inherent powers, with no need to find authority in the FAA.

Those courts holding that the FAA does not itself authorize a cause of action to stay or enjoin arbitration take note of the limited and precise affirmative powers that the FAA does expressly confer on the courts, i.e. to enforce an arbitration agreement or award, and they refer to the principle of statutory construction “expressio unius est exclusio alterius” (the express mention of one thing implies the exclusion of others not mentioned).  Those courts which have either held that the FAA does permit an action to enjoin or stay arbitration, or which have assumed without deciding that such a cause of action exists, have stated either that the power to compel arbitration necessarily implies a power to enjoin or stay arbitration, or that such power is at least not inconsistent with the express powers granted by the FAA. Many of the older cases cited in recent decisions for the proposition that such power does exists under the FAA in fact did not so hold, but were instead decisions affirming district court stay orders based on the inherent powers of the Court.  A recent example of the inherent powers approach to stays of arbitration can be seen in Jock v. Sterling Jewelers, Inc., 2010 U.S. Dist. LEXIS 132759 (S.D.N.Y. Dec. 10, 2010), in which Judge Rakoff after reviewing many of the leading authorities wrote:

The Court concludes that, as a necessary incident to its power to compel arbitration proceedings under § 4 of the FAA, it may preserve the integrity of those proceedings by enjoining later-filed arbitrations that arise out of the same controversy. Any other conclusion would impede rational application of § 4 of the FAA, as well as fundamentally limit the power of a court to enforce its own judgments.  Cf. Landis v. N. Am. Co., 299 U.S. 248, 254 …(1936) (noting that ‘the power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket.’)”

 In regard to international arbitrations taking place in the United States, this inherent/incidental powers approach to stays of arbitration may indeed be a more “pro-arbitration” position than the position that the FAA authorizes a cause of action for a stay of arbitration.  Adoption of this position would mean that a party seeking intervention of a US court, to establish non-arbitrability in a pending international arbitration at a US seat, would have to proceed by starting an action to litigate the merits of the putatively non-arbitrable claims.  The non-U.S. parties to such arbitrations often will have no interest in litigating the merits in a US court.  The consequence of having no access to a US federal court at the seat merely to stay or enjoin the arbitration would mean that more arbitrability issues will be presented to the arbitral tribunal, or will be presented to a foreign court where the non-US party would prefer to litigate the merits if its non-arbitrability position is correct.  Some of those foreign jurisdictions may have higher barriers than does the US to the commencement of litigation on the merits of claims already raised in a pending arbitration, and some of those jurisdictions may have more forceful rules requiring arbitrability issues to be resolved by the arbitral tribunal in the first instance. (Section 32 of the UK Arbitration Act 1996, for example, provides that the Court will not consider an issue of arbitral jurisdiction absent the agreement of all the parties or permission of the arbitral tribunal.) Where the objecting party’s position is that its adversary had commenced arbitration at variance with the agreement, the unavailability of an injunction remedy in federal court should motivate the objector to commence what it regards as a proper arbitration.

 Let us consider how the Farrell v. Subway dispute might have played out if the law in the Second Circuit were as I suggest it should be. Farrell, if well advised, and understanding the law, would not have sought relief in federal or state court to enjoin arbitration.  Instead, Farrell would have commenced an arbitration under the UNCITRAL Rules, sought agreement from Subway on an administering institution and procedure for selecting arbitrators, and if Subway had refused to participate Farrell would have applied to the Permanent Court of Arbitration in the Hague (“PCOA”), pursuant to Article 6 of the UNCITRAL Rules, for assistance in appointing arbitrators. So far, no role for the courts. As a practical matter, the institution unilaterally selected by Subway to administer and appoint arbitrators might well have declined to proceed once notified that the PCOA’s assistance had been sought. If so, there would still have been no necessary role for the courts, as there would not have been two arbitrations going forward. Subway might then have conceded the legitimacy of Farrell’s UNCITRAL arbitration. If not, it would have had to bring its own FAA Section 4 petition to compel arbitration in accordance with its version of what the agreement allowed.  Chances are that its request for temporary relief to enjoin the UNCITRAL arbitration would have been denied, and the UNCITRAL arbitration would have proceeded. Subway at that point would have been facing sacrifice of its ability to appoint a co-arbitrator, by further refusing to participate in the appointment process in the UNCITRAL case. It would have been significantly motivated to concede the legitimacy of Farrell’s UNCITRAL case.  A pro-arbitration solution, in accordance with the agreement of the parties and without judicial intervention, would have been more likely in a legal environment not provding a cause of action for a stay of arbitration.

Of course, things might not play out so well. Parties might not be well advised. Or they may be obstinate in pursuing aggressive but self-defeating litigation strategies. Statutory interpretation cannot be a cure-all. But if the foregoing analysis is correct, the chances for resolution of the arbitrability disputes without the need for courts to get involved would be increased if the US federal courts declare themselves unavailable for commencing a case whose sole purpose is to enjoin a pending arbitration.  It requires only an interpretation of the FAA according to the plain meaning of its relevant provisions for this objective to be accomplished.    

For New York’s place in international arbitration world, there is more good news.  The US Second Circuit Court of Appeals, reversing the District Court, has held that time-bar issues in a transnational construction dispute governed by ICC Rules are to be resolved by the arbitral tribunal not the court, even though the contract expressly selects New York law as the lex arbitri and even though New York‘s arbitration law (Section 7502 (b) of the Civil Practice Law and Rules) expressly permits application to the court for a stay of arbitration on the ground that the claim would be time-barred in a New York litigation. (Bechtel Do Brasil Construcoes LTDA v. UEG Araucaries LTDA, 2011 U.S. App. LEXIS 5840 (2d Cir. Mar. 22, 2011)).

This was a close and difficult case, and the result turned decisively on the particular language of the contract. It establishes no new principle, and should not be understood as a broad generic ruling about the allocation of power between courts and arbitrators about time-bar issues. Attention should be given to the Court’s careful and precise parsing of contract language to discern the intent of the parties, and its efforts to sort out the precise scope and consequences of the parties’ choice of New York lex arbitri. This has been done with an articulated sensitivity to the much-vaunted pro-arbitration policy of the Federal Arbitration Act (“we must construe the parties’ intentions ‘generously’ in favor of arbitrability”) and to the particular force of that policy in relation to international commerce.    

The parties here had agreed to resolve “any dispute, controversy, or claim arising out of or relating to the contract” under the ICC Rules, which of course provide that the tribunal shall have power to determine the scope of arbitrable issues (Art. 6(2)).  New York law was chosen not only as the law “under which the Contract is to be construed,” but also as “the law governing the procedure and administration of any arbitration,” and as the law governing “any arbitration proceeding or award rendered hereunder and the validity, effect and interpretation of this agreement to arbitrate.”

Under principles now well-settled in the Second Circuit (and as reported several times in Arbitration Commentaries) an arbitration clause of this breadth incorporating institutional rules that empower arbitrators to decide upon their own jurisdiction, is generally sufficient to justify the conclusion that the parties agreed to arbitrate arbitrability or arbitrability-like “gateway” matters such as the a Statute of Limitations obstacle to all or a portion of one or more claims.  But here the selected arbitration procedural law of New York appeared on its face to take back for the courts some of the powers the arbitration clause, standing alone, appeared to give to the tribunal. Specifically, CPLR 7502(b) permitted a party to an arbitration to apply for a stay of arbitration in court on the basis of a time-bar defense. But while this seems plausible at first blush, even to the Second Circuit, the Court upon construing the lex arbitri language of the contract under New York contract law but with the distinctly pro-arbitration attitude toward ambiguities required by federal law, found that the parties choice of New York arbitration procedure did not go this far.  “The law governing the procedure and administration of the arbitration” did not encompass law related to judicial determination of an issue that might prevent the arbitration from going forward. Nor was this matter covered by broad reference to New York law governing “the effect… of the agreement to arbitrate,” the word “effect” being in particular one of those ambiguous terms deserving pro-arbitration construction absent clear evidence of the intention of the parties.

Most critically, the Court was confronted with a New York Court of Appeals case that had construed contract language choosing New York law to govern “the agreement and its enforcement“  as language reflecting agreement to have the court rule on threshold time-bar issues under CPLR 7502(b).  But in view of the interpretive restraints of federal arbitration policy, “interpretation and effect” did not so clearly reach the judicial role in the arbitral process as “enforcement,”  and so the argument that the New York Court of Appeals’ decision controlled the outcome was rejected.

An incremental shift toward greater empowerment for arbitrators is discernible here.  Once there is “clear and unmistakable evidence” of an agreement to arbitrate arbitrability (and analogous gateway issues), then even a choice of lex arbitri that confers certain powers on courts not arbitrators will not disenfranchise the arbitrators unless it is “clear and unmistakable” that the lex arbitri choice included those power-allocation provisions. The Second Circuit does not state the principle in such stark terms, but it seems a useful way to understand the case for future reference in proceedings before federal courts in the Second Circuit.

You may learn very little you did not already know, about federal arbitrability law or investor-State arbitration, from the Second Circuit’s decision in Republic of Ecuador v. Chevron Corp., 2011 U.S. App. LEXIS 5351 (2d Cir. Mar. 17, 2011)). But the decision so elegantly combines fundamental principles from these separate domains of arbitration jurisprudence that it serves to enrich our appreciation of some basic precepts.

In case you have not subscribed to Arbitration Commentaries or the OGEMID discussion forum before today (for shame), here is a primer on Chevron/Texaco’s travails In Ecuador: Citizen groups from Ecuador sued Chevron in New York federal court for environmental harm from oil drilling and toxic waste disposal. Chevron obtained forum non conveniens dismissal, promising to litigate in Ecuador courts. The Government of Ecuador, allegedly, interfered in the litigation in Ecuador to prejudice Chevron’s defense.

Chevron then started an arbitration against Ecuador under the UNCITRAL Rules as permitted in the bilateral investment treaty (BIT) between Ecuador and the United States. A judgment against Chevron has been entered in the Ecuador litigation, the enforcement of which Chevron resists in the US proceedings.

The Ecuador litigation plaintiffs and Ecuador applied separately to the US District Court in New York to enjoin Chevron from pursuing the BIT action. The District Court denied both motions, and in this Second Circuit decision those denials of a stay are affirmed. This commentary concerns the Second Circuit’s position on the Ecuador Government’s attempt to halt the BIT arbitration.

Ecuador argued that by starting the BIT arbitration, Chevron violated the promise it had made to the District Court, to litigate the merits in Ecuador’s courts, as the basis for forum non conveniens dismissal in the original US case. This promise operated as a waiver and estoppel barring the BIT case, said Ecuador.

But Chevron maintained, and the Second Circuit agreed, that: (1) in the BIT, Ecuador offered to arbitrate under the UNCITRAL Rules, (2) those Rules vest power in the Arbitral Tribunal to resolve objections to the Tribunal’s jurisdiction, including objections to the validity of the arbitration agreement, (3) in BIT cases, the bilateral agreement to arbitrate between investor and State arises when the investor accepts the State’s arbitration offer by filing its case, (4) given this contractual basis for investment arbitration, conduct that allegedly operated as a waiver of, or estoppel against, Chevron’s right to file its BIT case concerned the validity of the arbitration agreement, and (5) both sides having agreed to arbitrate under the UNCITRAL Rules, they had “clearly and unmistakably” agreed to arbitrate arbitrability. As between Ecuador and Chevron, therefore, the issues of waiver and estoppel were for the Tribunal to decide.

In one sense, the latest Chevron-Ecuador decision is simply on old twist on a familiar theme. The arbitration-dodger brings collateral litigation, on the merits or over arbitrability, in the teeth of a broad and prima facie valid arbitration agreement that incorporates rules conferring jurisdictional competence on the arbitrators. The Second Circuit decision reminds us that (1) US case law assigning arbitrability decisions to arbitrators in such circumstances applies in cases arising under the New York Convention and FAA Chapter 2, and including investor-State cases, (2) the fact that conduct affecting the validity of the arbitration agreement occurred in a litigation context (i.e. Chevron’s promises to the US court to litigate in Ecuador courts) creates no special circumstance making the court in which that conduct occurred primarily responsible for deciding arbitrability.

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Whether such cases must be addressed, one-by-one, burdening judges and stalling arbitrations, is a question judicial rule-makers in the US may wish to address seriously and soon. Imagine a path-breaking Local Practice Rule in an arbitrability-preoccupied venue like the Southern District of New York:

“When in the course of a pending arbitration the court is to asked to decide whether the court or the arbitral tribunal should determine in the first instance an objection to the arbitral tribunal’s jurisdiction:

    (1) The application shall be brought on by Order to Show Cause on not more than five days notice unless the Court shall otherwise direct;

    (2) The application shall include the full text of the alleged agreement to arbitrate, and of any rule or provision of law to which reference is made in such agreement concerning the powers of the arbitral tribunal to resolve objections to the tribunal’s jurisdiction; and

    (3) The Court shall rule on the application with due regard for the efficiency of the arbitral process; and

    (4) The Court shall award attorneys’ fees and costs to the prevailing party, unless that party shows good cause why no such award should be made.”

How much did the Supreme Court in Stolt-Nielsen really resolve about arbitral class actions?  No single case can answer that question, but much is to be learned from the US Second Circuit Court of Appeals’ new decision, reaffirming its prior decision issued before Stolt-Nielsen, in In re American Express Merchants’ Litigation, 2011 U.S. App. LEXIS 4507 (2d Cir. Mar. 8, 2011).  Here the Court holds that Stolt-Nielsen does not require any change in the Court’s prior ruling that the class action waiver contained in the arbitration agreement between Amex and it merchants is unenforceable under the FAA, violating public policy because its practical effect was to prevent any subscribing merchant from bringing an antitrust claim against Amex.

The plaintiff merchants proved that the costs for economics consultants were so high, relative to the individual merchant’s alleged damages, and the prospects for recoupment of such expert costs were so uncertain, that no individual merchant could be expected to bear them given the small amount of damages a single merchant might claim. On the basis of this evidence, the Court had concluded prior to Stolt-Nielsen that the Amex class action waiver operated as a prospective waiver of antitrust claims against Amex. The class action waiver was therefore unenforceable, under the contract law doctrine that contracts made in violation of public policy will not be enforced. Said the Court here: “Eradicating the private enforcement component from our antitrust law scheme cannot be what Congress intended when it included strong private enforcement mechanisms and incentives in the antitrust statutes.”

Amex’s arguments that this outcome was barred the rationale of Stolt-Nielsen were rejected. First, said the Court, Stolt-Nielsen concerned interpretation by arbitrators of an arbitration clause that was silent concerning class actions.  Its holding that arbitrators may not rely merely on their own conceptions of public policy to interpret such a “silent” clause, the Court reasoned, is not controlling in a case involving an explicit class action waiver.  Such a clause, the Court held, must face scrutiny under Section 2 of the FAA, i.e., it may be denied enforcement “upon such ground[s] as exist at law or in equity for the revocation of any contract.” Further, Stolt-Nielsen does not hold that public policy is an inappropriate basis for deciding the enforceability of an arbitration clause, but only that public policy may not be used by arbitrators as a means to determine the intent of the parties.  That holding, the Second Circuit states, has no bearing of the powers of courts under FAA Section 2 to find that enforcement of a particular arbitration clause would violate an expressly stated and important public policy like private civil enforcement of the antitrust laws.

Many international followers of Arbitration Commentaries will have recently spent time reading, or reading about, the Judgment of the U.K. Supreme Court in the Dallah v. Pakistan case, where, applying French law (and transnational principles as incorporated therein) to the question of whether a foreign state as a non-signatory was bound by the arbitration agreement signed by a state-created entity, found that the answer to that question depended upon the “common intention” of the foreign state and the party demanding arbitration. (In the event, the Court determined — reviewing the question de novo despite the arbitral tribunal’s partial award confirming its own jurisdiction – that there was no common intention to submit disputes with the foreign state to arbitration, and that the final award granting $20.5 million in damages against the state therefore would be refused enforcement). 

But this post is not so much about Dallah  as it is about transnational convergence and diversgence in the law of arbitrability, as reflected in U.S case law. My text for today is a new decision from the U.S. District Court in Manhattan, holding that the Republic of Iraq, seeking damages relating to the corruption of the infamous U.N. Oil-for-Food Programme, may not compel arbitration, on a third-party beneficiary theory, under the arbitration agreement contained in the contract between the United Nations and BNP Paribas. (Republic of Iraq v. ABB AG, 2011 U.S. Dist. LEXIS 141766 (S.D.N.Y. Mar. 3, 2011)).

 Iraq brought this lawsuit in the federal district court in 2008, and only after two years of litigation did it elect to proceed by arbitration and to file a motion to compel arbitration of its own claims. The arbitration clause in the U.N.-BNP Paribas contract (a contract governing BNP Paribas’s administration of Programme funds) provided for ICC arbitration in terms that led the court to conclude that neither side had manifested any intention for Iraq to be a third-party beneficiary of the arbitration agreement. Thus, the clause provided in pertinent part that arbitration would proceed unless there was amicable settlement “within sixty (60) days of after receipt by one Party of the other Party’s request for such amicable settlement,” and failing such settlement the case would be “referred by either Party to arbitration.” Whereas “Party” was defined in the contract to refer only to the U.N. or to the bank, the Court held that the plain language of the clause conclusively contradicted Iraq’s claim that it was an intended third-party beneficiary of the agreement to arbitrate.

The absence of any mention of third parties generally or Iraq specifically in the contract led the Court to conclude, firstly, that the parties had not agreed to arbitrate over the arbitrability of Iraq’s claims. The could be no “clear and unmistakable evidence” of such an agreement to arbitrate arbitrability where there was no contract between the disputants, no evidence that either signatory intended to arbitrate arbitrability with any third parties, and no evidence that the relationship between the non-signatory and one of the signatories was such that a duty to arbitrate arbitrability with the non-signatory could be inferred from the agreement to arbitrate arbitrability with the signatory.  (In this regard the case serves as a useful reminder that, in some circumstances, such so-called “relational sufficiency,” generally a corporate relationship, plus close connection of the non-party’s claims to the contract, can lead to a conclusion under US law that arbitrability disputes with non-signatories must themselves be arbitrated.)  

Turning then to the issue of substantive arbitrability of Iraq’s claims, the court first noted that this was a question of New York contract law. Under such law, the court found, third-party beneficiary status of a non-party in relation to the contract sought to be enforced depended upon the intention of the parties who had entered into the contract. And whereas the contract in question was the agreement to arbitrate, not the commercial contract in which that agreement was found, it was necessary to look at the intention of the parties to the arbitration agreement with respect to the arbitration agreement itself. Citing New York decisions that denied third parties the right to compel arbitration even where it was clear that they were intended beneficiaries of commercial terms of the contract, the court found the language of this arbitration clause, notably its use of the defined term “Party,” contradicted in clear terms any suggestion that any third party would have the right to invoke the agreement to arbitrate.

By deciding the case on these terms, the court’s decision did not need to address, and indeed barely alluded to, the issue of whether the true third-party beneficiary of the Oil-for-Food Programme was the Republic of Iraq, or instead the citizens of the Iraqi State.

Ultimately the instrumental test for deciding the arbitrability of claims with a non-signatory is the same in Republic of Iraq as it was in Dallah: the common intention of the parties as objectively manifested in the words of the agreement. The route to this conclusion was more circuitous for the Dallah court.  As it was a UK court asked to refuse enforcement in the UK of an award made by an arbitral tribunal that had its seat in France, the Dallah court first had to determine what was meant by the language of the New York Convention and the 1996 UK Arbitration Act permitting refusal of enforcement if the arbitration agreement had been invalid under law of place where the award was made.  Ultimately the UK Supreme Court accepted the agreed position of both parties experts’ that while the Convention and the Arbitration Act certainly required reference to French law as the law of the seat, this did not mean domestic French contract law or arbitration law, but rather transnational principles regarding the enforceability of arbitration agreements that have been incorporated into the French law of arbitrability by French courts and commentators.   But the essential principle French law principle so stated, and applied by the UK Supreme Court, was that of the “common intention of the parties” as objectively manifested in their words and actions.  The federal district court in Republic of Iraq, using New York contract law, arrived at the same destination, and certainly with less expenditure of analytical fuel.       

In another respect however, the Dallah and Republic of Iraq cases show wide divergence between US and UK/Continental arbitration law and practice – over the matter of agreements to arbitrate arbitrability.  Each of the decisions cites the US Supreme Court’s decision in First Options v. Kaplan, and its now-talismanic formula of “clear and unmistakable evidence.”   But Dallah provides observers of American law with a useful reminder that the “clear and unmistakable evidence” formula, in its inception in First Options, was a test to determine what would be the scope of judicial review of an arbitrator’s decision that a claim was arbitrable. The Dallah court (in the lead opinion of Lord Mance) uses First Options in precisely that way, to support the conclusion that UK courts, when asked to enforce an award, would review the arbitral tribunal’s determination that it had jurisdiction de novo (“independently” in the word of Justice Breyer, repeated by Lord Mance) unless the parties had clearly agreed to arbitrate over jurisdiction, in which case the jurisdiction award should be treated like any other merits determination by the tribunal.  But in US jurisprudence, the First Options formula has become a gateway formula, used by courts to decide whether to refer arbitrability issues to an arbitral tribunal – a tribunal that, if it has even been constituted, has not yet addressed the arbitrability issue.

That this has happened in the US is a byproduct of a litigation system that, even 86 years after the Federal Arbitration Act, has residual vestiges of hostility toward arbitration. Parties who have signed arbitration agreements routinely bring their claims in litigation despite the arbitration clause, seeking the advantages in court of broader discovery and appeal rights. These usually face, or at least believe they face, no adverse consequences other than dismissal/stay if a motion to compel arbitration succeeds.  (However there is momentum behind the view that even where arbitrability was questioned in good faith, a judicial determination that the claims are arbitrable might lead to an award of damages by the arbitral tribunal for breach of the arbitration clause.) And parties named as Respondents in commenced arbitration proceedings have no compunction to respond by filing collateral litigation over the same claims or some subgroup of the claims in the arbitration that, they assert, are outside the scope of the arbitration agreement.  If there are any court rules or statutes in the United States that require courts to dismiss such suits immediately upon presentation of a prima facie valid arbitration agreement between some parties and governing some disputes, I am not aware of them. As a result, pre-arbitration litigation over arbitrability is a cottage industry for lawyers in the United States, and a major obstacle to the efficiency of arbitral dispute resolution here. In contrast, both the UK and French systems, by statute, push a far wider swath of initial arbitrability decisions to the arbitrators, as is noted by Lord Collins in his concurring opinion in Dallah. French law apparently requires dismissal of litigation if a prima facie valid arbitration agreement may govern the dispute – something roughly equivalent to the ICC’s Article 6 (2) prima facie threshold for launching a case.  The UK Act requires the arbitrability decision to be made by arbitrators unless both parties agree to have a judicial determination, or unless the arbitrators themselves ask the court to decide.

These are the fundamental differences that have prompted some American international arbitration practitioners to remark that “compétence-compétence” as it is known in Europe is essentially non-existent in the United States. And until courts and legislatures in the United States come to grips with this issue, litigation over arbitrability will continue to be an aspect of international arbitration in the United States that fosters an unfavorable image for US venues as potential seats of international arbitrations.

A commentary on the US Second Circuit Court of Appeals’s recent denial of panel rehearing in the Kiobel case appears on my general website, www.lexmarc.us.  This three-judge Second Circuit panel held in 2010 that the US Alien Tort Statute does not provide for causes of action against corporations, on the grounds that corporate liability for international human rights violations has not achieved the status of a generally-accepted principle of customary international law.