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March 24, 2011

An Important New Chapter in the Second Circuit’s Empowerment of Arbitral Tribunals

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.