(This is a condensed Arbitration Commentaries version, without citations, of what may become a longer and more formal article on joinder of new parties in an ongoing international arbitration. The source material for this Commentary consists of the various reports of the UNCITRAL Working Group and the notes of the UNCITRAL Secretariat, which may be found on the UNCITRAL website.)

The joinder of persons as new parties to an ongoing international arbitration, before an arbitral tribunal already appointed by the original parties or confirmed by an appointing authority, has presented difficulties that have not yet yielded to a unifying transnational practice principle.

The problems unique to joinder are not exclusively those associated with arbitration involving non-signatories to the arbitration agreement. Those challenges are present even if the non-signatory is named in the original Request for Arbitration.  The unique problems arise from the conceptual difficulty of requiring New Party C to arbitrate before a tribunal that has been selected only by Original Parties A and B.

UNCITRAL Rule 17(5), an entirely new provision in the 2010 UNCITRAL Rules,  is the product of several years of debate in the UNCITRAL Working Group that was charged with giving birth to the 2010 Rules. The 1976 version of the Rules had no provision on joinder, so the adoption of any measure was an important new development.  As first introduced as a proposal in 2006, the text would have read:

The arbitral tribunal may, on the application of any party, allow one or more third persons to be joined in the arbitration as a party and, provided such a third person and the applicant party have consented, make an award in respect of all parties involved in the arbitration.

But some questioned whether this was a new development at all. After all, the 1976 Rules did not expressly forbid joinder. If the new party and the existing parties consented, joinder could and presumably did occur.

The challenge was to have a rule that would permit a third person to be joined, and for the joined person to be regarded as having consented that its rights and duties should determined by the award of an arbitral tribunal that it had no role in selecting.

To meet this goal, new text of the proposed Rule emerged:

The arbitral tribunal may, at the request of any party, allow one or more third persons to be joined in the arbitration as a party provided such person is a party to the arbitration agreement, unless the arbitral tribunal finds, after giving all parties, including the person or persons to be joined, the opportunity to be heard, that joinder should not be permitted because of prejudice to any of those parties.  The arbitral tribunal may make a single award or several awards in respect of all parties so involved in the arbitration

Proponents of this text urged the view that if the newly-joined person were already a party to the arbitration agreement, that person could be said to have consented in advance to the prospect of being joined to an arbitration already pending between other parties to the same agreement, before a tribunal chosen by or for those original parties, provided of course that the arbitration to which the third person was being joined was pursuant to that agreement.

Opponents of this text argued that an award against the joined person would be vulnerable to challenge under Article V(1)(d) of the New York Convention as having been made according to procedures that varied from the agreement of the parties. They sought to re-insert the requirement that all parties should consent to the joinder at the time of joinder.

But the proposed reinsertion of such specific consent language was rejected. Consent, said the proponents of 17(5) as adopted, was adequately addressed by the requirement that the joined person be a party to the arbitration agreement.

After nearly four years of gestation, including comments elicited from major arbitral institutions, the proponents prevailed and this major new development in international arbitration procedure came into force in the 2010 UNCITRAL Rules.

To my knowledge no court has yet been required to decide whether an award against a party joined under Rule 17(5) violates the New York Convention. But the case for such a violation would seem to be unpersuasive. The Convention does not elevate equality of the parties in selection of the Tribunal to the status of an independent principle. That principle is enshrined to an extent in virtually all modern arbitration rules and laws, but is sometimes qualified due to the need to serve other important interests.

For example, the ICC Rules do not provide for strict equality of all original parties in selecting a tribunal in all cases. If a Claimant names four Respondents in the Request for Arbitration, and there will be three arbitrators, the Claimant is expected to nominate one arbitrator and the Respondents are to nominate one arbitrator jointly. The four Respondents are only treated equally with Claimant if they fail to make a joint nomination, whereupon the ICC Court will appoint the entire tribunal. (ICC Rule 10).

Of course, joinder under UNCITRAL Rule 17(5) might not save the award against the joined party from vacatur in the courts at a seat of arbitration whose arbitration law does enshrine a principle of strict party equality in choosing the tribunal. But that is not the case in UNCITRAL Model Law countries, where vacatur standards are co-extensive with grounds for refusal of enforcement under the Convention. Nor is it the case under the US Federal Arbitration Act.

Where issues of consent are most likely to arise in joinder practice under Rule 17(5) is in the realm of non-signatories to the arbitration agreement. The drafters of Rule 17(5) obviously selected the phrase “party to the arbitration agreement” with considerable deliberation. Perhaps a person that is required to arbitrate because a signatory signed the contract as her agent is a “party.” But what about a person against whom the arbitration clause may be enforced under the doctrine of arbitral equitable estoppel? Whether that person is a 17(5) “party” to the arbitration agreement probably depends on the view under law applicable to determine who is required to arbitrate under the agreement. No guide to a drafters’ interpretation of “party to the agreement” is to be found in the UNCITRAL drafting history (travaux préparatoires). So joinder practice will still be marked by some variation depending upon the applicable arbitrability law.

That said, Rule 17(5) is a major accomplishment. It may become the transnational standard to which major arbitral institutions gravitate as they review and update their rules on joinder.  Such a rules review at the ICC is in progress (although this writer has not involvement or knowledge of the position the revised ICC Rules will take). An important advance in the efficiency of arbitral proceedings should be the result if Rule 17(5) is widely emulated, and this should be seen as wan improvement that does not give serious offense to the consensual basis for arbitration.

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With best regards.

Today I briefly note two recent arbitrability decisions of US federal district courts, one in Los Angeles and one in Connecticut.

In Los Angeles, the Court granted a motion to compel arbitration filed by an affiliate of Roche Pharmaceuticals, and stayed the action pending completion of an ongoing arbitration in Zurich, but did not dismiss the case entirely. The Court evidently found that plaintiff’s single cause of action for a declaratory judgment of patent invalidity was outside the scope of the agreement to arbitrate, but that whether the parties’ patent license agreement required patent validity to be determined by the country that issued the patent was a question of contract interpretation falling within the scope of the license agreement’s arbitration provision, and was therefore to be resolved in the Zurich arbitration before any further proceedings on the invalidity claim in the California federal court.  No more can be discerned of the parties’ arguments before the Court, as nearly the entire record was placed under seal upon the application of Roche’s counsel. (One Lambda, Inc. v. Roche Molecular Systems, Inc., 2011 U.S. Dist. LEXIS 54627 (C.D. Cal. May 19, 2011)).   

Meanwhile, in Connecticut, there has been a useful decision helping to define the limits of the “offensive” use of equitable estoppel by non-signatories to compel signatories the arbitrate disputes with them.  At the heart of the dispute was the arbitration clause in a consumer’s wireless service agreement with AT&T – reminiscent of the Supreme Court’s recent decision in AT&T Mobility v. Concepcion.  But here the party seeking to enforce the arbitration clause — to avoid a class action litigation challenging alleged unfair debt collection practices — was an independent collection company that contracted with AT&T, unbeknownst to it wireless services customer, to collect delinquent accounts.  The debt collector argued that agency principles justified enforcement of the arbitration agreement by the non-signatory, but this was defeated by AT&T’s contract with the debt collector that expressly declared the latter to be an independent contractor, not an agent. The debt collector argued in the alternative that AT&T’s customer was estopped to deny it the right to enforce the arbitration agreement in view of its involvement in the relationship between AT&T and the customer, but this was rejected by the Court because that involvement was unknown to the consumer and therefore this was not a circumstance where it would be unfair for the consumer, as a signatory to the arbitration agreement, to take the position that it did not expect to arbitrate disputes with a non-signatory. (Lucy v. Bay Area Credit SVC LLC, 2011 U.S. Dist. LEXIS 55088 (D. Conn. May 23, 2011)).   

In a not infrequent scenario in international commercial arbitration, the Claimant seeks to be paid for services rendered or goods delivered or intellectual property licensed to the Respondent, and the Respondent offers a series of defenses and counterclaims that, according to Claimant, are merely contrivances designed to obscure the fact that Respondent is in financial distress and so it cannot or rather would prefer not to pay the obligation. If the Claimant then asks the Tribunal to grant an interim measure in the form of security to satisfy an eventual award of money damages, the first line of opposition will often be that the neither the applicable rules of arbitration nor the applicable arbitration law in the jurisdiction provide in terms for the granting of such relief by the arbitral tribunal.

The absence of specific provision for security in some institutional rules governing international arbitration (e.g. the AAA International Arbitration Rules, in contrast to, e.g. the 2010 UNCITRAL Arbitration Rules and 2006 amendments of the UNCITRAL Model Law) is rarely the only reason for the frequent denial of such relief. But arbitrators may justifiably consider that the absence of specific mention of security for the amount in dispute as a species of provisional measure, in some arbitration rules, and only fairly recent addition of such specific mention in the UNCITRAL Rules and in the Model Law, is reflective of the reasons often mentioned in arbitral awards and in commentaries why such relief should often be denied – e.g., that the relief may impose undue hardship, that granting the relief may imply a pre-judgment of the merits, and that financial distress of a commercial counterparty (unless the product of misconduct to conceal or dissipate assets) is a business risk that parties either do or do not address by specific provisions in their contracts.

And yet arbitral attitudes toward pre-award security in a particular case cannot help but be influenced by judicial attitudes toward such arbitral relief in the courts at the seat of the arbitration. And in that regard, attention should be given to the decision last week by a well-respected US district judge in New York, one of that court’s most frequent authors of decisions about arbitration, in On Time Staffing, LLC v. National Union Fire Ins. Co., 2011 U.S. Dist. LEXIS 50689 (S.D.N.Y. May 12, 2011). In On Time Staffing, the Court refused to vacate an arbitration panel’s interim award ordering security for a portion of the amount in dispute. The outcome, the rationale stated in the decision, and the Court’s reminder that a similar decision was made by the US Second Circuit Court of Appeals eight years ago, may well encourage parties arbitrating in New York to seek such relief more often, and may well lead to such requests more frequently being granted.

In On Time Staffing, Claimant was the provider of workers compensation insurance to Respondent.  When Respondent allegedly was in default in payment of premiums, Claimant commenced arbitration and made its request for pre-hearing security in the demand for arbitration.  The Court’s decision reports that Respondent cited a provision of the insurance agreement that entitled the insurer to “additional collateral” if the insured disputed payment obligations without providing written particulars.  But the Court, refusing to vacate the panel’s order for security as exceeding the powers of the arbitrators (Federal Arbitration Act Section 10(a)(4)), cited only the broad powers the contract’s arbitration clause conferred. The Court did not rest its decision on the insurer’s right to enforce a specific contract right to security.

A broad arbitration clause, the court stated, confers on arbitrator “the discretion to order remedies they determine appropriate.”  (Quoting from the US Second Circuit Court of Appeals decision in Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255, 262 (2d Cir. 2003), in which the Court upheld an arbitration panel’s award of pre-hearing security even though the arbitration agreement did not expressly authorize the panel to issue such an award). 

While the reluctance of arbitrators to grant pre-award security for the amount in dispute does not arise mainly from a concern that they lack sufficient power, and so the Court’s holding that the arbitrators did not exceed their powers is not itself  a particularly significant development, the Court’s attitude clearly was in favor of the view that security for the award is in proper circumstances appropriate to ensure that the arbitration will not be a meaningless exercise. Said the Court: “The Panel, in the absence of language in the arbitration agreement expressly to the contrary, possesses the inherent authority to preserve the integrity of the arbitration process to which the parties have agreed by, if warranted, requiring the posting of pre-hearing security. . . . Otherwise, an arbitration panel with a well-founded concern that a party was financially unable to satisfy an eventual award would have no recourse to protect itself against the risk that its significant expenditures of time and effort would be for naught.”

It is notable that the Court’s rationale focuses on protection not of the Claimant’s economic interest in realizing proceeds of an eventual award of money damages, but rather on the arbitration process agreed upon by the parties. The Court refers to the right of the arbitral tribunal to “protect itself.”   This approach reflects a view an agreement of the parties to arbitrate, perhaps especially when the clause states that the decision of the arbitral panel will be “final and binding,” commits the parties to a dispute resolution process that includes eventual compliance with the arbitral tribunal’s decision.  This is not to say that the agreement implies a waiver of the rights of limited judicial review provided by the Federal Arbitration Act and the New York Convention. But it does imply that non-compliance with an award, without moving to vacate the award or opposing its enforcement on grounds permitted by the Convention, is a breach of the agreement to arbitrate. And it would follow from that premise that the costs incurred by an award winner to obtain enforcement by reducing the award to judgment and having execution on the judgment, should be recoverable as money damages for breach of the arbitration agreement.

The view that compliance with the award by the loser is a part of the contractually agreed process is considerably different than what may be said to be the prevailing view: that the arbitral process agreed upon culminates in an award that constitutes an entitlement to use the judicial process to obtain a judgment according to the terms of the award and to have execution on the judgment using the laws and means the state provides for this purpose.  If arbitrators agree with this emergent view that the agreement to arbitrate generally includes an agreement to implement the results of the arbitration in a voluntary or at least self-executing way, they may, other things being equal, be more favorably inclined toward requests for pre-award security. 

A US district judge in Manhattan held last week that a party’s right to appoint a replacement co-arbitrator upon resignation of its original appointee is inherent in an arbitration agreement that provides for party-appointed arbitrators, even when there is nothing specifically stated about replacement of an arbitrator who resigns. The Court so ruled in an ongoing reinsurance arbitration  (Northwestern Nat’l Ins. Co. v. Insco, Ltd., 2011 U.S. Dist. LEXIS 50789 (S.D.N.Y. May 12, 2011)). In an arbitration marked by charges of bias and conflict of interest against the presiding arbitrator and the respondent reinsurer’s party appointee, the latter eventually resigned on the basis that if the award was favor of the reinsurer, a motion to vacate based on alleged evident partiality would ensue. But when the reinsurer declared its intention to appoint a replacement, claimant petitioned the US District Court under Section 5 of the Federal Arbitration Act, claiming there had been a lapse in the agreed method for appointment, and that the court should therefore appoint the replacement. Denying the petition, the Court held that permitting the party to appoint a replacement where it wished to do so was consistent with the intent of the parties that each should have the right of appointment of one arbitrator, and judicial selection of the replacement arbitrator would frustrate that intent. 

We are reminded by a painstaking recent opinion issued by a federal district judge in Manhattan that New York State arbitration law often will have a very limited role to play when the parties elect to conduct arbitration in New York under a contract that contains a general choice of law provision selecting New York law. This is certainly true for U.S. domestic arbitration, and should apply equally to international arbitration where the parties’ choice of New York as a seat of arbitration should reasonably imply that they have selected U.S. federal arbitration law, and not also the laws of New York State that limit the powers of arbitrators, as the lex arbitri. 

In In re General Security National Insurance Co., 2011 U.S. Dist. LEXIS 49518 (S.D.N.Y. April 29, 2011),  the Court rejected a motion to vacate an award of attorneys’ fees to the prevailing party, finding that the award did not exceed the powers of the arbitrator and that it was not made in manifest disregard of the law.

This award of legal fees  was contested because the arbitration agreement, incorporated in a reinsurance contract, did not specify any institutional or ad hoc rules, but did provide that the hearing would be held in New York. A general choice of law clause in the reinsurance agreement, separate from the arbitration clause, provided that the contract would be interpreted in accordance with New York law. New York’s arbitration statute, CPLR Article 75, provides in Section 7513 that  arbitrator fees, but not attorneys’ fees,  may be allocated in the final award.

It was entirely reasonable, the Court held, for the arbitrators to have assumed that Section 7513 of the CPLR did not govern the proceedings, because the contract’s general New York choice of law clause, under well-developed Second Circuit authority, calls for application only of substantive New York law and not New York law limiting the remedial powers of arbitrators.  Further, whereas the arbitration clause broadly provided for submission of all disputes to arbitration, and specified no limits on the arbitrator’s remedial powers, the agreement was reasonably construed by the arbitrator as conferring power to award attorneys’ fees.  In addition, fees were also requested by both sides in the course of the proceedings. Further, the Court recalled that in a 2009 case the Second Circuit had held that an arbitral tribunal has inherent power, even when the clause provides that each party shall bear its own legal costs (which was not the case here), to award attorneys’ fees based on its assessment of the conduct of the parties and counsel during the proceedings. (Reliastar Life Ins. Co. v. EMC Nat’l Life Co., 564 F.3d 81 (2d Cir. 2009), reported upon in Arbitration Commentaries in May 2009, a posting that is accessible by clicking on that month in the “Archive” section at the left margin).