Archive for August, 2011

US Court Jurisdiction to Confirm Awards Against Foreign Sovereigns: Understanding the Interplay of the FAA and Foreign Sovereign Immunities Act

Sunday, August 28th, 2011

In an American variation on the Dallah v. Pakistan fact pattern (an award enforcement proceeding against a foreign state that did not sign the arbitration agreement), the US Third Circuit Court of Appeals has affirmed a District Court order vacating a sister court’s earlier confirmation of a reinsurance arbitration award rendered against a non-signatory Brazilian state entity. (Aurum Asset Managers, LLC v. Bradesco Companhia de Seguros, 2011 WL 3562897, 3d Cir. Aug. 15, 2011)).

But unlike in Dallah, the non-signatory question faced by the District Court in the confirmation proceedings in Aurum involved the court’s ability to exercise the subject-matter jurisdiction over a New York Convention award ostensibly conferred by Chapter Two of the Federal Arbitration Act (FAA). If the respondent state-owned Brazilian financial services company was not a party to the arbitration agreement, then the District Court, while having ostensible award-enforcement jurisdiction under Chapter Two of the FAA, either had no such jurisdiction because jurisdiction was a function not only of the FAA but also the Foreign Sovereign Immunities Act (FSIA), or at least the court could not exercise the jurisdiction conferred by the FAA because the Brazilian state entity enjoyed sovereign immunity.

On a technical level, Aurum involved the legal standard for a District Court to grant relief setting aside its own prior judgment confirming an arbitration award, where the foreign state entity had preserved its objections to the jurisdiction of the arbitral tribunal and the District Court by declining to appear in either proceeding. The Third Circuit rejected claimant’s position that the original District Court order confirming the award should stand unless there was a “clear usurpation of power,” reasoning that such a narrow standard for vacating the award-confirming judgment was unjust to a foreign state entity that had neither waived sovereign immunity nor had a full and fair opportunity to litigate that issue, but instead had exercised its right, conferred by U.S. law, to resist jurisdiction by (i) not appearing in the proceedings,  (ii) permitting judgment to be entered in absentia, and (iii) later attacking the judgment in a collateral proceeding. In such a case, the Third Circuit held in Aurum, the District Court in the collateral proceeding properly reconsidered de novo whether the District Court in the original award confirmation proceeding had subject-matter jurisdiction.

Curiously missing from the Third Circuit’s decision is any mention of the New York Convention or FAA Chapter Two.  Viewed exclusively from a Convention/FAA perspective, the Court had subject-matter jurisdiction, as there was an arbitration award arising out of a trans-national commercial relationship (FAA Section 202), and therefore there was a proceeding to confirm that award was “deemed to arise under the laws and treaties of the United States” over which the District Courts “shall have original jurisdiction” (FAA Section 203).

However, Chapter Two of the FAA does not take explicit account of the circumstance that a party to the arbitration agreement or the award is a foreign state. Section 1330 of the Federal Judiciary Code (28 USC), the jurisdiction-conferring provision of the FSIA, provides that District Courts “shall have original jurisdiction” of all nonjury civil actions against foreign states where — and only where — “the foreign state does not enjoy immunity under the FSIA.”

Was the Third Circuit correct to cite lack of subject-matter jurisdiction as the proper basis for the District Court’s order vacating the original confirmation order? Or did the Brazilian entity merely enjoy sovereign immunity from the District Court’s exercise of the jurisdiction conferred by the FAA in Chapter Two? The answer lies in the US Supreme Court’s interpretation of 28 USC §1330 in the Verlinden case in 1983. (Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480). In Verlinden, the Supreme Court held that “[a]t the threshold of every action in a District Court against a foreign state… the court must satisfy itself that one of the [FSIA] exceptions [to sovereign immunity] applies,” and went further to say that despite legislative history calling sovereign immunity “an affirmative defense that must be specifically pleaded,” under the FSIA “subject matter jurisdiction turns on the existence of an exception to foreign sovereign immunity. 28 USC § 1330(a). Accordingly, even if the foreign state does not enter an appearance to assert an immunity defense, a District Court still must determine that immunity is unavailable under the Act.

It seems useful, therefore, to take note that FAA Chapter Two, as a jurisdiction-conferring statute, contains this flaw. It is ineffective to confer on federal courts jurisdiction to confirm a Convention award against a foreign state unless there is subject-matter jurisdiction over the foreign state based on an exception to sovereign immunity under the FSIA. When there has been no waiver and the foreign state was not involved in commercial activity in the United States, the District Court must analyze whether the so-called “arbitration exception” to sovereign immunity applies, i.e. whether the award “is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.” (FSIA, Section 1605(a)(6)).  In that event, the arbitral tribunal’s determination that it had jurisdiction over the foreign state is entitled to no deference, as the District Court to have jurisdiction to confirm the award must determine de novo whether the foreign state was a party to the arbitration agreement underlying the award. Whereas the FSIA’s arbitration exception to immunity in Section 1605(a)(6) applies to awards resulting from arbitration agreements “made by the foreign state,” it is an open and difficult question whether arbitral jurisdiction over the foreign state based on principles extending the duty to arbitrate to non-signatories is sufficient meet the FSIA’s requirements for federal court jurisdiction in a proceeding to confirm an arbitral award.

Forum Non Conveniens in New York Convention Cases: A Different Complexion, At Least?

Tuesday, August 23rd, 2011

The arbitration community should derive much satisfaction from reading a recent thorough and well-annotated application of the New York Convention and the Foreign Sovereign Immunities Act to confirm an arbitration award against a foreign state, authored by an experienced and well-respected U.S. District Court Judge in New York.  Thai-Lao (Thailand) Lignite Coal Ltd. v. Government of Lao People’s Democratic Republic, 2011 WL 3516154 (S.D.N.Y. August 3, 2011)).  I will find one portion of the decision against which to register a complaint: the possibility of applying the doctrine of forum non conveniens to deny consideration of a petition to confirm a Convention award. But this quarrel is not so much with the Court’s decision as it is with the Second Circuit precedent that the Court was constrained to respect. (Arbitration Commentaries has taken issue with the Second Circuit’s position before. SeeDenial of Award Enforcement Under Article III ‘Rules of Procedure’: An Expanded Commentary on Zeevi Holdings v. Republic of Bulgaria,” April 26, 2011).

First, a brief summary of the Thai-Lao decision.   Two private companies in a joint mining venture, one Thai and the other Laotian, arbitrated claims against the Government of Laos under a contract that provided for arbitration under the UNCITRAL Rules in Kuala Lumpur, Malaysia. An all-American arbitral tribunal — two members from New York and the third from the Washington office of a New York firm — made its award at Kuala Lumpur (after merits hearings held there), under New York law as the contract provided, in favor of Claimants for a sum in excess of $40 million.  Claimants petitioned to confirm the award in the Southern District of New York, and the Court did indeed confirm the award after finding:

(1)             that it had personal jurisdiction over the Government of Laos, as Laos had broadly waived sovereign immunity from jurisdiction, attachment, and execution, in the contract; that the FSIA in any event provided an express exception to immunity for proceedings to enforce a Convention award; and that foreign states under Second Circuit law do not enjoy rights under the US Constitution’s due process clause to assert that requiring them to defend an action in a US court violates due process;

(2)             that while the doctrine of forum non conveniens is, under Second Circuit law, a New York Convention Article III “Rule of Procedure” of the forum  whose application could potentially result in the Court declining to entertain to a Convention award-confirmation summary proceeding, the principles governing application of that doctrine did not justify declining to the hear this case; and

(3)             the arbitral tribunal’s decision that the dispute was within the scope of the arbitration agreement made among the parties was an “arbitrability” determination entitled to judicial deference, because a contract calling for arbitration under the UNCITRAL Rules – rules that confer on arbitral tribunals competence to decide whether they have jurisdiction — provides “clear and unmistakable evidence” of an agreement to arbitrate arbitrability, an agreement that under US arbitration law reverses the presumption that arbitrability issues should be decided by courts, either in the first instance or with little deference to an prior view expressed by the arbitral tribunal.

All of these holdings are unquestionably right. But in the application of the doctrine of forum non conveniens, or I should rather say in the analysis leading to the non-application of that doctrine, the District Court assumed that the doctrine of forum non conveniens has the same content in a New York Convention award confirmation summary proceedings as it does when it is raised as an objection to the Court entertaining a case on the merits. Although that view may be implicit in the Second Circuit’s position that the doctrine does apply in Convention cases, there is no necessary reason why a prudential doctrine mixing considerations of comity, competence, and conservation of judicial resources, should be applied uniformly to ordinary litigations and proceedings with the singular characteristics of award-confirmations under the New York Convention.

Petitioners in Thai-Lao – claimants and award-winners in the arbitration — stated that the reason for seeking confirmation of the award in a US court was that the Respondent, the Government of Laos, was believed to have assets in the US that could be applied to satisfy a judgment upon the award. As that is foremost among the reasons that the Convention and FAA Chapter 2 permit an award to be enforced in a US court without regard to the foreign nationality of all of the parties, it seems odd that any further justification should need to be offered to oppose a forum non conveniens motion lodged against a petition to confirm a Convention award.

The Court understood its mandate under Second Circuit law to be that it should apply essentially the same forum non conveniens criteria that have been developed by US courts, mainly in domestic cases, to decide whether a particular US court rather than some other US or foreign court should be the exclusive forum to hear the merits and make findings of fact and conclusions of law. But no such exclusive role is contemplated by Convention confirmation proceedings. The Convention contemplates that recognition and enforcement will be sought in multiple for a – a point noted by the Court. And the very limited and defined grounds on which the courts may refuse recognition and enforcement under the Convention should rarely entail the kind of elaborate evidentiary proceedings whose presumed burdens on courts and witnesses who must travel to the forum justify a resource-conserving doctrine like forum non-conveniens.

Would it not therefore be more appropriate, for so long as forum non conveniens remains relevant in Convention cases, for a court simply to address whether the proceeding has been brought mainly for an award enforcement purpose and not as a device to gain some other tactical advantage from having a proceeding in a US court? If the proceedings  has been brought for that purpose, then there should be a strong presumption in favor of the court entertaining the case.

And then what factors might serve to rebut this presumption? The standard forum non conveniens criteria seem ill-suited. “Forum shopping” into a jurisdiction whose courts apply the Convention in a pro-enforcement fashion is consistent with the Convention’s purposes. The “convenience of parties and witnesses” is not a good fit with a “summary proceeding” (a motion, on papers) that should rarely require either discovery or a live testimonial appearance by a witness. And the presence or absence of connective factors other than the losing party’s assets should not matter very much if there is a good faith belief that assets may be found in the jurisdiction of the court. It should not have been necessary for this Court to note, as it did, that two of the arbitrators were New Yorkers, that a procedural hearing was held in New York, that New York law governed, that the award discussed and cited New York law extensively, that the award was in English, and that the damages were stated in US dollars. Had these factors been absent, while assets of the loser were believed to be present, there should have been no less reason for the US court to hear the case.

Nor does it make very much sense to consider the existence of an “adequate alternative forum” where – unlike litigation on the merits – an inherent aspect of the legal regime of the New York Convention is that the same proceeding will be undertaken concurrently in several jurisdictions. Rather the forum non conveniens doctrine as applied in Convention cases (until the Second Circuit reconsiders or the US Supreme Court considers whether it should be applied) should address whether a particular foreign forum is specially suited, or, stated differently, whether the US court is specially unsuited, to address the legal, factual, or public policy  issues raised.

One can imagine scenarios in which a Convention defense to recognition and enforcement would depend upon a de novo application of foreign law – e.g., the Dallah v Pakistan scenario, where it might have been quite reasonable for the U.K. court to have refrained from deciding, in the first instance, whether Pakistan was a proper party to the arbitration under French arbitration law, thereby virtually requiring Dallah to seek enforcement of the award in France.  But if the issues presented in an award-confirmation case are not clearly more suitable — substantively and in efficiency terms — for exclusive resolution by a foreign court, forum non conveniens dismissal of a confirmation petition where assets to satisfy the award are believed to be present in the US should be possible only in exceptional circumstances.



More Thoughts on Confirmation and Vacatur of Partial Final Awards: Uncertainty in Second Circuit Doctrine

Monday, August 15th, 2011

Institutional rules governing international commercial arbitration permit (and thereby to some extent encourage) arbitrators to render partial final awards when appropriate. And those rules, institutional guidelines, and published commentaries suggest or recommend (i) the structuring of complex arbitral proceedings by issue, and (ii) the early determination of some key issues whose resolution might advance the prospects of settlement on remaining contentious issues. Parties might assume that if an arbitral tribunal issues its final determination of a particular issue in the form of an award, in a fashion that complies with applicable arbitral rules about the form and content of awards, and in terms that reflect the arbitrators’ understanding that they give up any power to adjudicate that issue further, then the award should have the same status as an award terminating the entire case, in regard to confirmation or vacatur by a federal district court under the Federal Arbitration Act (FAA). But US law on when partial awards may be presented for confirmation or vacatur – awards which are final in terms of the issues decided, but non-final in relation to the universe of issues submitted for determination — has not kept pace with arbitral practice.

If one takes at face value a decision last week from a federal district court in Connecticut (Pearl Seas Cruises, LLC v. Irving Shipbuilding, Inc., 2011 WL 3475469 (D. Conn. Aug. 9, 2011)), the law in the Second Circuit on FAA confirmation and vacatur of partial final awards is quite rigid. According to this court’s reading of Second Circuit law, an award that does not terminate the arbitration may be presented for confirmation or vacatur in only two narrow circumstances: (1) when the award finally decides a separate independent claim, and (2) where the parties jointly asked the tribunal in the course of the arbitration to bifurcate the issues of liability and damages on a claim and to enter a partial final award on liability.

If that is indeed all that Second Circuit law permits, a modernization of the law is in order, to bring judicial practice into harmony with arbitral practice. A reading of the relevant case law suggests that this modernizing process can be achieved as a logical progression from the existing principles.  It is not a problem of the law having taken an unsuitably narrow approach to partial final awards, but rather a case of the law having developed only to address the particular circumstances presented, without serious effort to anticipate the range of situations and issues on which arbitrators might render partial final awards.


A Preliminary Issue: Does the Stolt-Nielsen Case Imply That All or Most Partial Final Awards are FAA-Reviewable?


Some readers will surely wonder whether the law in this area was clarified by the Supreme Court’s decision last year in the Stolt-Nielsen case.  After all, the arbitral award reviewed by the District Court, the Second Circuit, and the Supreme Court was a “clause construction award,” a quintessentially “partial final” award that resolved only the issue of whether the arbitration clause in the parties’ contract permitted class proceedings in the arbitration. In Stolt-Nielsen, the AAA’s Rule 3 of its Supplementary Rules for Class Arbitrations provided in pertinent part that the arbitrator “shall stay all proceedings” for at least 30 days to permit any party to move a court of competent jurisdiction to confirm or vacate the Clause Construction Award. Thus the drafters of the AAA class arbitration rules evidently thought there was no non-finality obstacle to FAA review.

When the Stolt-Nielsen clause construction award reached the District Court, non-finality was not raised by any party or sua sponte by the Court. The Second Circuit was equally silent on the point. In the US Supreme Court, the majority and dissenting opinions sparred over whether the case was ripe for review in the Supreme Court. But the majority did not squarely address whether the FAA permitted judicial review in the District Court. Rather, the majority in a footnote addressed the constitutional doctrine of “ripeness,” and concluded that the hardship faced by the respondent, forced to endure “class determination proceedings,”  coupled with the fact that if respondent failed to proceed in the arbitration it would most likely face an FAA Section 4 petition to compel arbitration, satisfied the constitutional test for ripeness of a non-final adjudication. Justice Ginsburg’s dissent questioned “judicial intervention so early in the game,” (emphasis supplied) but had very little to say about what the FAA requires or permits, offering only a cursory review of the positions of federal courts of appeals on the question of confirmation or vacatur of awards resolving fewer than all submitted issues.

How then do we fit Stolt-Nielsen into the jurisprudence on reviewability of interim and partial awards? One’s view depends in part on whether the amenability of an award to FAA confirmation or vacatur is a question of “ripeness” or “justiciability” that a court may raise sua sponte, or whether the absence of an “award” as FAA common law defines that term means the petition may be dismissed for failure to state a claim. If the latter, then a party may waive the failure to state a claim defense. I believe the latter concept is more fitting. The absence of an FAA “award” bars a vacatur action under the FAA in the same way that the absence of a “security” bars an action under Section 10(b) of the Exchange Act — an essential legal element of the statutory cause of action is missing, and so there is a failure to state a claim under the statute creating a cause of action. That is a failure of legal substance.  Some courts use the term “non-justiciable” to refer to an arbitration award that is not final enough to be an FAA “award.” But “justiciability” as it relates to issues presented to courts for initial decision refers to a series of judicially-developed doctrines relating to the suitability of exercising judicial power – the case-or-controversy requirement, the political question doctrine, the Act of State doctrine. These are concerns the courts can and do raise sua sponte.  Whether an arbitral decision styled an “award” by the arbitral tribunal, and complying with the requirements for form and content of an award prescribed by the rules or laws under which the arbitration took place, is also an “award” to which the FAA applies is strictly a question of statutory construction. If the petitioner seeks confirmation or vacatur and claims the arbitral decision involved is an FAA award, and the respondent does not disagree, the non-finality issue is waived, and the court must address the merits provided it has jurisdiction. This, I submit, is the best way to explain FAA review in Stolt-Nielsen: the non-finality issue was waived in the District Court and the Second Circuit. And if that view is taken, Stolt-Nielsen offers very little assistance in a case where the alleged interlocutory character of an award is raised by a party as a statutory bar to confirmation or vacatur.

Indeed, as the federal appellate cases mentioned in the Stolt-Nielsen take various positions on when an arbitrator’s partial award is an FAA award, it is useful to consider on what basis the courts have decided that question, and whether their approaches are justified as an exercise in statutory construction. I will take the Second Circuit as a case study.

Second Circuit Law of FAA Review of Partial Final Awards




Taking as the first of the “modern” Second Circuit cases on the issue Michaels v. Mariforum Shipping S.A., 624 F.2d 411 (2d Cir. 1980), we find that the Court there held that an FAA motion to vacate an interim award on liability, where damages issues had been reserved, was “premature.” The Court in Michaels stated that under the FAA “a district court does not have the power to review an interlocutory ruling by an arbitration panel.” But the 1957 Second Circuit case cited in support of this proposition involved proposed review of evidence rulings in an ongoing arbitration, scarcely a solid basis to conclude that the statute bars a petition to vacate a final determination of liability issues. But the Michaels court also rested its decision on “policy considerations, no less than the language of the Act and precedent construing it.” The Court cited the potential inefficiency in the arbitral process that could result from piecemeal review. But whereas Michaels holds that such policy considerations are relevant to whether a given award is eligible for confirmation or vacatur, the decision implies that there could be some situations where pro-arbitration policy considerations would weigh in favor of FAA review of an interim or partial award.

A significant advance in the Second Circuit’s thinking about partial final awards took place in Trade & Transport, Inc. v. National Petroleum Charterers, Inc., 933 F.2d 191 (2d Cir. 1991). The question in Trade & Transport was not finality for purposes of confirmation or vacatur strictly speaking, but finality sufficient to avoid re-hearing of the issues decided in a partial final award when one member of the tribunal thereafter died and had to be replaced. The Court reasoned that whereas the parties had specifically stipulated that the tribunal should enter a partial final award finally deciding some but not all of the issues submitted to arbitration, the tribunal upon rendering such award was functus officio on the submitted issues, and therefore the proceedings on those issues did not need to be repeated before the re-constituted tribunal.

Several years later in Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 157 F.3d 174 (2d Cir. 1998), the Court cited Trade & Transport for the proposition that “an arbitration award, to be final, must resolve all the issues submitted to arbitration, and … it must resolve them definitively enough so that the rights and obligations of the two parties, with respect to the issues submitted, do not stand in need of further adjudication.” (emphasis in original). Rocket Jewelry could possibly be read as a step backwards – because Trade & Transport clearly involved an interim award that left unresolved many issues the parties had “submitted” in the sense that they were presented in the arbitral pleadings and proceedings for eventual arbitral determination.  And whereas the argument made against finality of the award in Rocket Jewelry was that the parties had unresolved disputes that they had excluded entirely from arbitration and that had to be resolved in litigation, the Second Circuit had no occasion to delve more deeply into the question of when an award may be final even though issues remain for arbitral determination. But Rocket Jewelry did confirm Trade & Transport as good law, and so the term “submitted” as used by the Court is best read as a reference to the issues the parties have asked the tribunal to determine in an award, whether that requested award terminates the arbitration or leaves issues to be resolved in a further award.

The Second Circuit did not explain in Rocket Jewelry, and in case law since then has not explained, what elements of the procedure that led to the partial final award in Trade & Transport caused that award to be seen, through the prism of subsequent decisions, as an FAA-reviewable award. As a result, cases such as last week’s decision in the District Court in Connecticut cite Trade & Transport for the proposition that when the parties by stipulation have explicitly bifurcated liability and damages, the resulting award on liability is FAA-reviewable, as an “exception” to the “general rule” that FAA-reviewable award is one that resolves all issues. This regrettably elevates a description of what occurred in Trade & Transport into a purported rule of law. But neither the Trade & Transport decision nor the Rocket Jewelry decision suggests that only this precise procedural pattern will qualify for FAA review an award that finally resolves fewer than all issues. What if the “bifurcated” (or separated) issue were a jurisdiction objection, or liability and damages on one of several causes of action, or the cause of action against one respondent but not the others? What if the decision to issue a partial final award had been made by the tribunal, and had been announced in advance of the proceedings leading to it, over the objection of one party that urged the tribunal to decide all issues together in a single case-terminating award? Is that situation outside the “exception” of Trade & Transport because there was no stipulation of the parties?

On a careful reading of Trade & Transport, it is certainly clear that there is no subject matter limitation, i.e. a liability determination with damages issues reserved.  The rationale of the Trade & Transport decision was the parties’ agreement that the tribunal should issue a partial final award vested the tribunal with the authority to do so.  On this basis, district courts in the Second Circuit should have no hesitation to conclude that partial final awards addressing jurisdiction issues, or claims against fewer than all parties, or critical legal or factual threshold issues germane to a cause of action, may be the subjects of a partial final award that is immediately eligible for FAA confirmation or vacatur.

The question remains whether an interlocutory stipulation that there should be a partial final award is a necessary element. I suggest that this is not the case. The Second Circuit in Trade & Transport looked to the joint application for a partial award that was made in that case as the source of the tribunal’s authority to issue the partial final award. What was critical to the Court was that the partial final award was authorized by the parties, not that the authorization had to take the form of a joint request in the course of the proceedings.  If I am correct in that regard, then whenever the parties have agreed to arbitrate under rules or arbitration laws that authorize tribunals to issue partial final awards, the tribunal’s authority to issue the partial final award is established — at least provided the parties have been given an opportunity to be heard on whether there should be a partial final award and were on notice that a certain phase of the proceedings would culminate in a partial final award on particular issues or claims.

One often finds the statement in decisions concerning FAA reviewability of a partial award that it is the content of the arbitral decision, not the label “award” or even “partial final award,” that determines whether judicial action under the FAA may be sought. The matter is not quite so black-and-white, as the arbitrators’ intentions may well be relevant. The content-trumps-label principle is sound insofar as it relates to the functus officio doctrine: if the arbitrators have expressly left open the possibility to modify an interim ruling, then they cannot trigger FAA review by mis-identifying their decision a “partial final award.” Equally, a tribunal cannot trigger FAA review of a purely procedural decision by calling the ruling, for example, a “partial final award on admissibility of evidence.” (See, e.g., Accenture LLP v. Spreng, 2011 WL 2090825 (2d Cir. May 27, 2011), holding that an arbitral order denying leave to amend the request for arbitration to add a fraud claim on the eve of the merits hearing, which did not prevent claimant from making that claim in a separate case, was not an “award” eligible for vacatur under the FAA). But where an interim award resolves in what appears to be a final way an issue of jurisdiction or the merits, then the tribunal’s declaration that it is a “partial final award” is a useful clue to the tribunal’s intentions and also should invite the district court to satisfy itself that the tribunal had authority, by rule, by law, or by agreement of the parties, to issue a partial final award.

A separate strand of the Second Circuit’s award finality jurisprudence holds that “an award which finally and definitely disposes of a separate independent claim may be confirmed although it does not dispose of all the claims that were submitted to arbitration” A leading case is Metallgesellschaft A.G. v. M/V Capitan Constante, 790 F.2d 280 (2d Cir. 1986), where the Court affirmed confirmation of a partial final award for maritime freight charges that left still to be resolved certain issues of counterclaim and setoff.

The Second Circuit has had little occasion to shed more light on the “separate independent claim” formula.  In Zeiler v. Deitsch, 500 F.3d 157 (2d Cir. 2007), the Court affirmed confirmation of a series of orders that required one joint owner of property to render accountings to the other and to transfer certain documents. The Court observed that these “accounting orders” were final awards for FAA purposes in part because they “require[d] specific action and [did] not serve as a preparation or a basis for further decisions by the arbitrators.” In a footnote, the Court distinguished the Michaels case, and stated that “the accounting orders in the pending case are not segments of a future conclusive award, nor are they determinations required for furtherance of arbitration.”  But the Court went on to say that the “confirmable nature” of these accounting orders “stem[med] from the unique character of the arbitration,” whereby the parties had agreed to have the arbitrators “preside over the continuing process of sorting out the details of a commercial relationship.” Thus Zeiler may fairly be said to belong in the Trade & Transport strand of the jurisprudence which focuses not on the nature of what the tribunal decided in the partial final award but upon the authority conferred on the tribunal to decide in a final way at a non-final stage a subset of the issues submitted in the arbitration.

This state of the law in the Second Circuit leaves uncertain the position the Court would adopt concerning partial final awards that resolve questions of arbitral jurisdiction over a claim or a party.   An objection lodged against a claim based on alleged non-arbitrability is not a “separate independent claim” but rather it is a defense to a claim positing that the tribunal lacks power to resolve the claim.  If the “separate independent claim” requirement is literally applied, then a partial award on jurisdiction that does not qualify for FAA review based on the Trade & Transport vesting-of-authority principle would possibly fail to qualify for FAA confirmation or vacatur.   Perhaps the issue will be treated by courts in the Second Circuit as a question of first impression to be decided based upon essential principles of FAA arbitrability law: especially that parties should not be required to arbitrate if they have not agreed to do so, and if they have agreed to arbitrate they should only be required to arbitrate those disputes they have elected to so submit.

That principle suggests that partial final awards on jurisdiction should be FAA-eligible for confirmation or vacatur at the time they are made. That is not to say that in every such instance the district should immediately decide the petition for confirmation or vacatur. There could be prudential reasons to await further arbitral proceedings. But equally there could be compelling reasons to decide a jurisdiction issue before the tribunal proceeds much further, as for example when the arbitrators’ jurisdiction decision appears prima facie to be contrary to settled arbitrability law and the costs to the parties that would result if the correction is made only after the arbitration is concluded would be unacceptably large.  This approach would apply even to situations where the parties have agreed to “arbitrate arbitrability,” as the agreement of the parties to empower the arbitrators to resolve jurisdiction issues means only that the arbitrators’ jurisdiction decision is reviewed judicially as an award under the FAA and not de novo. The agreement to “arbitrate arbitrability” implies nothing about the timing of FAA review of the arbitrators’ arbitrability decision.  



It is trite to say that arbitrations are growing more complex, with more parties, more claims and defenses, and more issues of liability and damages. For better or worse, the FAA scheme for confirmation and vacatur dates from an earlier era when “award” had a universally understood meaning as the single decision by which an arbitrator would decide the entire dispute. But the courts appear to have accepted that the FAA concept of an “award” must be fluid and should keep pace with the parties’ legitimate expectations about how arbitration will serve their needs. It is to be hoped that future court decisions will incrementally expand the universe of FAA-eligible partial final awards in accordance with this view.

Confirmation and Vacatur of Partial Awards on Jurisdiction: Lessons from a Fifth Circuit Case

Monday, August 8th, 2011

The rights and obligations of non-signatories to the arbitration clause has been a frequent topic in Arbitration Commentaries since its inception. In American arbitration law, the subject is a difficult one for several reasons. First¸ important distinctions exist in the law, depending on whether the non-signatory seeks to compel arbitration with a signatory or is on the receiving end of a demand for arbitration from a signatory.  Those distinctions can become blurred, even without the assistance of advocates who have an interest in a particular result.  Second, the non-signatories issue is often entangled with the American version of the compétence-compétence principle — i.e. the power of the arbitrator to rule on her own jurisdiction – and that principle is itself somewhat less than a model of clarity. Third, there is a complex interaction between initial decisions on arbitrability of claims by or against non-signatories, by arbitrators or federal district judges, and review of those initial decisions by federal district courts or courts of appeal.

Into this simmering stew there was added last week a new decision by the US Fifth Circuit Court of Appeals, which – reversing the decision of the district court – held that substantial money damages awards against two non-signatories had to vacated as exceeding the powers of the arbitrator (FAA Section 10(a)(4)),  because the arbitrator had no jurisdiction over the non-signatories. (DK Joint Venture 1 v. Weyand, 2011 WL 3342270 (5th Cir. Aug. 4, 2011)).

The main theme of this Commentary is how arbitrators and judges might help the parties, in such situations, to avoid the extra effort and cost that may well be involved if the parties, following a judicial determination of non-arbitrability made only upon review of the final award on the merits, must begin anew to litigate the merits in a state or federal court.  But first a brief description of the new Fifth Circuit case is in order.

Claimants were investors in oil and gas ventures, and had signed subscription agreements that provided for arbitration under AAA commercial arbitration rules. Claiming breach of contract and fraud, and unable to proceed against the signatory enterprise because of its intervening bankruptcy, they demanded arbitration against the CEO and CFO who as agents of the enterprise but not as individuals had signed the subscription agreements.  In addition , claimants commenced suit in a Texas court to obtain an order compelling arbitration, and after the defendants removed that suit to the federal court, the court made an order compelling arbitration. The individual defendants renewed their objection to arbitral jurisdiction before the arbitrator, and the arbitrator (evidently considering the matter de novo despite the order of the federal district court), held that the tribunal had jurisdiction over the individual CEO and CFO even though they had not signed the subscription agreements except as representatives of the enterprise. The arbitration then proceeded to a final award, which was against each of the individuals in the sums of $13 million and $700,000 respectively. The same district court judge who had earlier granted the order compelling arbitration then was assigned the new case seeking confirmation of the award, and predictably entered judgment on the award, rejecting the non-signatories’ position that the award should be vacated because the tribunal had lacked jurisdiction over them.  Their appeal to the Fifth Circuit ensued, and the Fifth Circuit held that, under agency principles, there was no basis for the signatory investors to enforce the arbitration clause against the non-signatory agents of the enterprise and, as a subsidiary matter, there was no basis for the court to give deference to the arbitral determination of jurisdiction, because the non-signatories disputed whether they had ever agreed to arbitrate any issues. (Most federal courts accept that an agreement to arbitrate under arbitration rules that give the arbitrators power to rule on their own jurisdiction is sufficient “clear and unmistakable evidence” of an agreement to arbitrate arbitrability that the scope of review of the arbitrator’s arbitrability decision is the same deferential FAA review that applies to other issues the arbitrator determines. But that principle is inapposite, as the Fifth Circuit correctly held in this case, where the party contesting the arbitrator’s arbitrability decision takes the position that the party never agreed to arbitrate any matter.)


The Federal Arbitration Act (“FAA”) of course gave the non-signatories no option to appeal, before the conclusion of the arbitration, from the district court’s initial decision granting the motion to compel arbitration. But here the arbitrator evidently considered that the AAA commercial rules required the arbitrator to decide that issue de novo if it was raised, as it was. The Fifth Circuit’s decision leaves unexplained the procedural details of the arbitrator’s handling of the jurisdiction issue. But what should have happened (and perhaps did) is that the arbitrator would enter an interim or partial final award on jurisdiction, paving the way for an immediate submission of a motion to vacate that award in the federal district court.

 To my knowledge no federal court of appeals has decided whether a partial final award on jurisdiction is an award within the meaning of the FAA, i.e. an arbitral decision subject to confirmation or vacatur under FAA standards and within FAA time limits. But it is fairly arguable that any arbitral ruling that decides, without room for modification later on, whether all claims against a party shall be dismissed, and decides that issue without leaving room for modification, should be regarded as an award under the FAA. Obviously if an award on jurisdiction found no jurisdiction, and thus ended the entire case, it is a final award for FAA purposes. The fact that a partial award on jurisdiction finds that jurisdiction exists, and therefore leads to further proceedings on the merits, should not as a matter of FAA law lead to a different status of the partial award in regard to confirmation or vacatur. On this view of the law, the aggrieved non-signatories in DK Ventures could have and perhaps should have (i) moved immediately in the district court to vacate the jurisdiction partial award (although we do not know if there was one, as there should have been), (ii) consented to entry of judgment by the district court denying their motion to vacate the partial award (in accordance with the court’s earlier order compelling arbitration, which in effect collaterally estopped the non-signatories on the motion to vacate), and then (iii) immediately appealed the district court judgment denying vacatur to the Fifth Circuit. The arbitral tribunal, in the meantime, if it did not view with favor a complete stay of the arbitration pending the vacatur appeal to the Fifth Circuit, might have sought consent of the parties to carry forward initially only those proceedings that would have had to occur even if the case were ultimately litigated – i.e. document discovery – and then, if the Fifth Circuit’s decision was still awaited, might have revisited the question of whether to stay proceedings based on the projected timetable in the Fifth Circuit.

Whether a partial final award on jurisdiction may be confirmed or vacated under the FAA — that is to say whether federal courts will regard such a decision as an award under the FAA — is an open issue. Case law directly on point is sparse. In A.G.K. SARL v. A.M. Todd Co., 2009 WL 2526432 (E.D. Pa. Aug. 18, 2009), the question was presented but not decided. The arbitrator in that case (not identified in the decision), which involved an international sale of goods contract,  bifurcated the arbitration into jurisdiction and merits phases, and entered a “partial final award” on jurisdiction “made at New York, New York.” Evidently the arbitrator intended that confirmation or vacatur could be sought before the merits phase of the arbitration went forward to completion.

In the A.G.K. case, a federal district judge in New York denied vacatur of the jurisdiction award on the view that the judge in Philadelphia who had heard the motion to compel arbitration should decide the vacatur motion, but went on to say in dictum that the partial final award was “interlocutory” despite its nomenclature of finality. But the federal district judge in Philadelphia, in the decision cited in this paragraph, neither agreed nor disagreed with the position that the award was “interlocutory.” Denying the motion to vacate without prejudice to renewal, the Court stated that it preferred (implying that the Court was not necessarily required) to await the final award on the merits before considering vacatur or confirmation of the partial final award on jurisdiction.

In the US jurisprudence concerning the ripeness of arbitral awards for FAA review, finality is the touchstone for whether an award (whether or not so denominated by the tribunal) is subject to confirmation or vacatur. Whereas under the FAA a motion to vacate an award must be made within 90 days of the award’s delivery, this issue sometimes arises in the context of whether the arbitral decision did or did not trigger the running of the 90-day limitations period. The cases often use phrases like “separate, independent claim” to describe what issues an arbitral decision must resolve to be considered as an award eligible under the FAA for confirmation or vacatur. And the courts have found little reason to approach the question differently depending on whether a domestic or Convention award is involved — the term “award” not being defined in FAA Chapters 1, 2 or 3, or in the New York and Panama Conventions.

 The issuance of a “final” award, whether or not it is also “partial” or “interim” connotes that the tribunal by its own declaration has expended all of its power to adjudicate on the matter decided, is functus officio in regard to that matter (both in common law terms, and under arbitral rules or statutes limiting arbitrators’ ability to modify awards), and that any revisiting of that decision in the course of ongoing proceedings would violate the functus officio doctrine and would be subject to vacatur as exceeding the tribunal’s powers. From this perspective, there should be no reason to conclude that the FAA prohibits confirmation or vacatur of a partial final award on jurisdiction. Of course the court retains discretion to postpone a decision on confirmation or vacatur until the arbitration is completed. The FAA governs the timing of a petition to confirm or vacate, and the grounds for vacatur, but it does not prescribe timing of the court’s decision. In international cases, FAA Chapter Two implements inter alia Article (V)(1)(e) of the New York Convention allowing for a discretionary stay of confirmation proceedings pending a challenge to the award in a court at the seat of the arbitration. But there will be instances — and the recent Fifth Circuit case may have been one — when immediate access to the federal court for confirmation or vacatur of a just-issued partial final award dealing only with jurisdiction will promote efficient arbitration, avoid potential duplication in courts of jurisdictionally-deficient arbitral proceedings, and promote settlement among parties who know with certainty before reaching the merits that the tribunal’s award cannot be attacked on jurisdictional grounds.

Further, by adopting the position that the FAA does not prohibit confirmation or vacatur of partial final awards on jurisdiction, the federal courts would close a significant loophole in US arbitrability jurisprudence. Our law maintains that a party cannot be compelled to arbitrate with parties or as to subject matter when it did not agree to do so, and that absent clear and unmistakable evidence of an agreement to arbitrate arbitrability, this matter should be decided by a court. But whereas the FAA does not provide expressly a cause of action to enjoin arbitration, and many courts have declined to imply one, parties objecting to arbitration on jurisdictional grounds often lack pre-award judicial recourse unless, by ignoring an arbitration demand, they can induce the claimant to petition the court to compel arbitration. That solution, requiring action by the adverse party, is far from satisfactory, as under many sets of arbitration rules an award on the merits may be made against a party that fails to appear, provided that the absent party has had adequate notice of the proceedings and the opportunity to participate in them. It will often be the best-advised course for the party objecting to arbitral jurisdiction to participate in the arbitration and to raise the jurisdiction objection initially in that setting. But if neither party can obtain judicial review of the award on jurisdiction without first arbitrating the merits to the end, the supposed promise of US law that courts shall be the primary arbiters of the existence of consent to arbitration is not fulfilled in a satisfactory way.