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Choice of Law Governing Arbitrability: A US Court Faces a Perennial Conundrum

The question of what law is to be applied to determine the existence, validity, or scope of a purported agreement to arbitrate between parties from different nations (and subsidiarily, how the answer might depend on whether the question is presented to a court or an arbitral tribunal) has long attracted considerable attention in the scholarly literature of international arbitration. But American doctrine on the subject is hard to find, there being rather few judicial decisions addressing the question in a systematic way.  So a decision on this question from a US Circuit Court of Appeals (Cape Flattery Ltd. v. Titan Maritime, LLC, 647 F.3d 914 (9th Cir. 2011)) presents a rare chance to take the measure of US law, and to assess its conformity with or divergence from doctrine and commentary elsewhere.

In Cape Flattery, the contract was between a shipowner and a salvage company, for the salvage of a vessel that had run aground on a Hawaiian coral reef. The contract provided for arbitration of disputes “arising under” the contract in London, in accordance with the English Arbitration Act and “English law and practice.” (The phrase “arising under” has generally been viewed in US law as a narrow designation for arbitration of only those disputes that involve the interpretation and performance of the contract itself, and not other disputes more or less derivative of rather than strictly within the contract).  

During the salvage operation, oil spilled from the vessel. The shipowner became liable for cleanup of the spill under US environmental regulatory law, and brought suit in federal court in Hawaii against the salvage company, for contribution and indemnity in regard to the cleanup costs imposed upon it by federal law.  The salvage company moved to compel arbitration, urged that the agreement required arbitrability to be decided according to English arbitrability law, and argued that the dispute was arbitrable under such law.

The Ninth Circuit, affirming the district court’s decision, held that US federal arbitrability law not English law applied to decide whether the indemnity dispute was within the scope of the agreement to arbitrate. The Court first considered whether under the FAA and the “federal substantive law of arbitrability” that (per Supreme Court decisions) it has created, a US court is even at liberty to enforce an agreement of the parties, if one exists, to have arbitrability decided under law other than the FAA.  Finding no clear indication in the Supreme Court’s arbitrability decisions that parties may not elect to have arbitrability decided under non-federal law, the Court concluded that, given the contractual nature of arbitration, logic dictates that they may so agree. Turning then to how a court should decide whether such an agreement has indeed been made, the Court identified two potential approaches: (i) apply state contract law and simply determine if the parties have objectively manifested a common intention to have non-federal arbitrability law apply, or (ii) for reasons relating to federal arbitration law and policy, require  particularly clear evidence in the contractual language that the parties had chosen non-federal arbitrability law.

The Court decided upon the latter approach, reasoning by analogy to the Supreme Court’s First Options decision that choice of arbitrability law is an arcane matter that contracting parties will rarely consider specifically, so that silence or ambiguity about this choice of law, if construed in favor of non-federal law, might to often result in the application of law the parties did not expect would apply. Therefore, the Court held, there should be “clear and unmistakable evidence” that the parties wished to have non-federal arbitrability law apply.

I question whether this the best methodology, and suggest that it invokes a presumption in favor of the lex fori that has no persuasive theoretical foundation when the forum and the seat of arbitration are not one and the same. Once the Ninth Circuit had concluded that application of US federal arbitrability law based on the FAA was not mandatory by command of the law itself, it was faced with a choice of law issue in a contract case. Had the Court looked within the FAA for guidance — to the New York Convention — it would have seen that Article V(1)(a) provides that enforcement of an award may be refused if the arbitration agreement was not valid under the law to which the parties had subjected the arbitration agreement, or failing any indication thereon, under the law of the place where the award was made. And while the issue in the Cape Flattery case was not validity of the agreement to arbitration but rather the scope of arbitrable issues, the choice of law rule embodied in Article V(1)(a) of the Convention would seem to be a good indication of the choice of law rule that would apply to a post-award challenge to arbitrability based on the scope of the clause under Article V(1)(c). No persuasive reason appears for deciding arbitrability differently on a motion to compel arbitration than in an award confirmation setting. Further, Article V(1)(a) essentially embodies a choice of law rule common to many jurisdictions and arguably having the status of a general principle of international law: that the law applicable to a contract dispute is the law agreed by the parties, and if not agreed then the law of the pace having the closest connection to the dispute.

Broad consensus is said to exist in the world of international arbitration that the place with the closest connection to a dispute over an arbitration contract is the place where that contract — viewed separately from the main contract in which it is placed — is to be performed: at the seat of the arbitration.  (With apologies for oversimplification, see, e.g., K.P. Berger, Re-Examining the Arbitration Agreement: Applicable Law – Consensus or Confusion?, from A.J. van den Berg (ed.), International Arbitration 2006: Back to Basics? ICCA Congress Series 2006 Montreal 13 (Kluwer 2007) pp. 301-334). And while it is written, notably in French commentary, that the seat may be a relatively weak link chosen by the parties for reasons of convenience or chosen by an institution in the absence of party choice, in the Cape Flattery case the parties had subjected disputes under the salvage contract to a venue and legal system thousands of miles away from the Oahu coral reef where the contracted services to salvage the grounded vessel were to be performed. Morever, the parties’ arbitration clause stated expressly that the arbitral proceedings should be governed by the English Arbitration Act, whose Section 30 broadly enshrines the compétence-compétence principle. The Ninth Circuit could have endorsed the widely-held US law view that an agreement to arbitrate under rules that enshrine compétence-compétence is clear evidence of an agreement to arbitrate arbitrability (e.g. Republic of Ecuador v. Chevron Corp., 638 F.3d 384 (2d Cir. 2011); Qualcomm Inc. v. Nokia Corp., 466 F.3d 1366 (Fed. Cir. 2006); Terminix Int’l Co. v. Palmer Ranch Ltd., 432 F.3d 1327 (11th Cir. 2005); Contec Corp. v. Remote Solution Co., 398 F.2d 205 (2d Cir. 2005)), and could have compelled arbitration on this basis without breaking any new jurisprudential ground.

Perhaps the Cape Flattery case is not predictive of how other US courts would address, in the setting of a motion to compel arbitration, the question of what law applies to determine arbitrability. But in the international arbitration context, the path to a correct solution is clearly identifiable in US law. If the parties have agreed to arbitrate under arbitration rules or a national arbitration law that enshrines compétence-compétence, there is an agreement to arbitrate arbitrabillity and the court should compel arbitration and thereby leave the choice of arbitrability law issue to the arbitrator.    If there is no such agreement to arbitrate arbitrability, the arbitrability law choice should be guided by Article V(1)(a) of the New York Convention, there being no sound reason why pre-arbitral and post-award determinations of arbitrability of the same dispute should be governed by different law (and there usually should be no reason to distinguish, for choice of law purposes, between a dispute over validity of the clause and a dispute over scope). These solutions admittedly leave a small gap: cases where the parties have neither agreed on arbitrability law nor selected an arbitral seat. In such cases choice of law principles should suffice to reach the correct solution, and the facts leading one of the parties to bring suit in a US court should often justify the conclusion under choice of law principles that US federal arbitrability law controls.

 

 

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