Archive for December, 2011

What Basis for Judicial Power Over Counsel Ethics in Arbitration ?

Thursday, December 22nd, 2011

The point of departure for today’s discussion is a pair of decisions by a respected federal district judge in New York, one granting a motion to disqualify counsel in a pending arbitration and the other denying reconsideration of the first decision. The misconduct involved was rather troubling: in a reinsurance arbitration apparently under AAA Commercial and ARIAS Rules, a party-appointed arbitrator resigned in ostensible protest of bias on the part of the other party-appointed, and then proceeded to share covertly with his appointing party’s counsel nearly 200 emails among members of the Tribunal, with the intent of helping that party challenge the other party-appointee for bias. The receiving counsel willingly accepted the delivery of these e mails and used them, at first covertly but later openly, in seeking to challenge the other party-appointed.  The federal court held that the court was the proper forum to address attorney disqualification, and granted disqualification. (Northwestern Nat’l Ins. Co. v. Insco, Ltd., 2011 WL 4552997 (SDNY Oct. 3, 2011), reconsideration denied, 2011 WL 6074205 (SDNY Dec. 6, 2011)).

As the Court’s explanation of the rationale for judicial power here was not on its face persuasive, it occurred to me to examine the authorities cited by the Court in support of its position that the court could properly decide the issue. The first case cited was Bidermann Indus. Licensing v. Amvar N.V., 173 A.D.2d 401 (NY Appellate Division, First Dep’t 1991). In Bidermann, the appellate court affirmed an order of Supreme Court that granted the motion to stay arbitration of the issue of whether petitioner’s attorneys should be disqualified as counsel in the arbitration, and granted leave to apply to the court for a ruling on the merits of the disqualification issue. The Bidermann Court stated that arbitration of the disqualification issue was properly stayed “as such matter is intertwined with overriding policy considerations.” But the lead case cited in Bidermann in support of that proposition was a 1968 New York Court of Appeals case holding that enforcement of New York state antitrust statute “should not be left within the purview of commercial arbitration.” Clearly that precedent was overruled by the Supreme Court’s Mitsubishi decision in 1985.

The Bidermann court reasoned that because attorney disqualification involves interpreting and applying the Code of Professional Responsibility, such issues “cannot be left to the determination of arbitrators selected by the parties themselves for their expertise in the particular industries engaged in.” This seems to be a discredited rationale for withdrawing a particular issue from arbitration in favor of judicial determination. There is no a priori reason to assume that arbitrators as a matter of public policy cannot handle attorney discipline issues related to the proceedings before them. Whether they may address the issues, however, depends on whether the parties have agreed that they should do so.

The next case cited in Northwestern was a more recent Southern District of New York case, in which the Court concluded that attorney disqualification was a “gateway question,” — as that term was used by the Supreme Court in the Howsam case, and thus was “appropriately decided by the Court.” (Employers Ins. Co. of Wausau v. Munich Re, 2011 WL 1873123 (S.D.N.Y. May 16, 2011). In Howsam, the Supreme Court reasoned that certain “gateway” issues, like arbitrability, are normally not considered by parties when drafting arbitration agreements and thus are presumptively issues the parties wish to have courts resolve unless there is clear evidence they want the arbitrators to resolve them. But attorney disqualification, unlike arbitrabiity, is not a contract dispute between the parties. Judicial power to resolve contract disputes is well-established. But New York’s Code of Professional Responsibility does not create a civil cause of action for attorney disqualification.

And even if the parties did wish to have the Court decide the disqualification issue, the question remains: what is the source of the Court’s power to decide disqualification in relation to a proceeding in any other forum but its own? If the Court may entertain a cause of action relating to disqualification to appear before an arbitral tribunal, logically it should also be able to entertain a cause of action to disqualify counsel from appearing before a foreign or international court, or before a domestic, foreign, or transnational administrative or regulatory body. But most of us would be stunned to read a Southern District decision purporting to disqualify a Canadian law firm from representing a client in a NAFTA arbitration in New York, or even to disqualify a New York law firm from appearing before an ICC arbitral tribunal with its seat in Geneva. 

A quick tracking back in the case law to the underlying rationale for a federal district court to entertain a motion to disqualify shows that “the district court bears the responsibility for the supervision of the members of its bar.” (Hull v. Celanese Corp., 513 F.2d 568, 571 (2d Cir. 1975) (emphasis supplied). But an attorney acting in a commercial arbitration whose seat is in New York may or may not be a member of the Southern District’s bar, and in any event is not acting in that capacity, and does not affect the integrity of proceedings in the Court, when he or she acts in a purportedly unethical fashion in relation to the arbitration, pre-award. As there is nothing in the FAA or CPLR Article 75 that purports to confer on courts supervisory power over the ethical conduct of attorneys in New York-venued arbitrations, the Court’s conclusion in Northwestern that the court was empowered to decide the disqualification issue lacks a convincing rationale. It may be seen, indeed, as reflecting a well-intentioned but misguided belief that the entire arbitration process is subservient to judicial control in ways that are implied as well as express in the structure of judicial-arbitral relations derived from federal and state law.


The last few years have been marked by intense attention to questions of counsel ethics in arbitration, and notably to whether codes of conduct should be adopted. Somewhat left aside in the dialogue has been any systematic examination of the source and extent of judicial power to regulate attorney conduct before arbitrators. The recent New York federal decision rests mainly on the discredited premise that arbitrators lack competence to handle counsel ethics issues, and the non sequitur that such supposed incompetence necessarily lands the ethics issue in the courthouse. It is to be hoped that arbitral bodies will be more active in promoting a ethical regulatory procedure that is self-contained within the arbitral process and eliminates the power vacuum that judges are altogether too eager to fill.


The ‘New York Version’ of the New York Convention: Forum Non Conveniens Again Applied to Refuse Recogntion

Monday, December 19th, 2011

Arbitration Commentaries wrote several months ago that the US Second Circuit’s decision in the 2002 Monegasque case (Monegasque de Reassurances S.A.M. (Monde Re) v. NAK Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002)) — holding that the forum non conveniens (“FNC”) doctrine of discretionary dismissal applies to New York Convention summary confirmation proceedings — was a questionable precedent that is ripe for reconsideration.  (SeeDenial of Award Enforcement Under Article III ‘Rules of Procedure’: An Expanded Commentary on Zeevi Holdings v. Republic of Bulgaria, Arbitration Commentaries, Apr. 26, 2011).

It was argued here (by no means as a new idea) that Article V of the New York Convention provides the exclusive grounds for a US court to refuse recognition of a Convention award, and that the “rules of procedure” of the courts in Convention Member States, to which the Convention refers in Article III stating that awards shall be recognized in accordance with such rules, covers rules that facilitate the seeking of relief in court but not discretionary doctrines (such as abstention or FNC) that permit a court to refrain from exercising its properly-invoked jurisdiction. It was further observed (again not as a novel thought) in that Commentary that if this is the correct, or at least the more persuasive, construction of the Convention, then the US acts in breach of its international obligations under the Convention, i.e. violates international law, when one of its courts refuses to grant recognition and enforcement to a Convention award for a reason not contained in Article V.

 That position was endorsed last week by one judge on the US Second Circuit, but regrettably the endorsement came in the dissenting opinion of a 2-1 decision that resulted in dismissal of a Panama Convention award confirmation case based on FNC. The majority overturned the order of the district court, which had rejected FNC dismissal as uncalled for in the circumstances. (Figueiredo Ferraz v. Republic of Peru, 2011 WL 6188497 (2d Cir. Dec. 14, 2011)).

More will be written here and elsewhere about the Figueiredo case in the coming days, especially as informed speculation percolates about the potential for a rehearing en banc in which the full complement of judges of the Second Circuit might revisit the Monegasque ruling. And readers will be interested not only in this mixed question of treaty interpretation and federal arbitration policy, but also in the particular application of FNC made by the Second Circuit in this case.

Essential facts to know aboout the Figueiredo case are these: First, the losing party in the arbitration, suffering a $21 million award, was an agency of the Government of Peru.  Second, it was not disputed that Peruvian sovereign assets sufficient to satisfy the award were to be found in the US. Third, Peruvian internal law provided that government agencies would dedicate only 3 percent of their annual budgets to the satisfaction of awards and judgments — with the result in this case that Claimant, before commencing proceedings in the US, had been paid only about $1.5 million.

Leaving to another Commentary whether these facts lend support to an FNC dismissal if FNC remains an applicable doctrine, let us consider here only how the scenario of this particular cqase might inform the debate over whether FNC should be a ground for a US court to refuse recognition of a Panama or New York Convention award. (I note as does the dissent that the American Law Institute has sided against the panel majorities in Figueiredo and Monegasque, declaring in the forthcoming Restatement of the Law of International Commercial Arbitration that FNC does not apply in Convention award recognition proceedings).

First, the Conventions’ purpose to secure international enforceability of awards has particular resonance with regard to awards against sovereigns. One of main accomplishments of the Conventions is to overcome sovereign efforts to frustrate their creditors through the protective enactments of domestic law or the protective practices of domestic courts. This is accomplished by permitting a sovereign’s award creditor to pursue recognition and enforcement against the sovereign’s foreign-sited assets in the courts of any Convention Member State.

Second, FNC in this case operated not as a rule of procedure but as a rule of substantive law. Whereas Peru’s payment cap was conceded by Peru to be inapplicable to proceedings in the US if the US court exercised jurisdiction, the FNC dismissal was in practical effect a merits-based dismissal based on the Peruvian payment cap law.

Third, FNC dismissal of a Convention award confirmation proceeding leaves the award creditor at liberty, in principle, to seek confirmation in any Convention Member State, and in most such States there is no FNC doctrine. Effectively Convention awards are less enforceable in the US under the Conventions than they are elsewhere, as a matter of law. At the same time, given US capital markets’ prominence, both sovereign and non-sovereign award debtors as groups are probably more likely to have assets in the US than in virtually any Convention Member State other than their domiciles. The value of the rights Member States secured for their citizens by adopting the Conventions — that is to say the Conventions’ value to the global economy as instruments of international business law — is materially diminished by US law restricting access to its courts for award enforcement.


Choosing the Unchosen Seat of Arbitration: Coping With FAA Dysfunctionality

Wednesday, December 14th, 2011

Today Arbitration Commentaries writes in praise of a federal district judge in San Francisco, for rejecting a too-clever-by-half arbitration-avoidance argument: that a professed willingness to arbitrate, but only in a particular venue not specified in the contract, is not a “refusal” or “failure” to arbitrate under the Federal Arbitration Act. (Beauperthuy v. 24 Hour Fitness USA, Inc., 2011 WL 6014438 (N.D. Cal. Dec. 2, 2011).  The Court decided that this position was indeed a “failure” and “refusal” to arbitrate under Section 4 of the FAA — as it leads to paralysis rather than a launched arbitration. Accordingly, the court entered an order compelling arbitration to proceed in San Francisco — in the judicial district where the motion to compel arbitration had been filed.

This was a domestic arbitration involving former employee claims of unfair wage practices by a chain of fitness centers. But the issue of precisely where a federal court may direct that arbitration be held has significance for international arbitrations when the parties fail to provide in the contract for a seat of arbitration or a procedure for choosing a seat.  Chapter Two of the FAA implementing the New York Convention permits a federal district court to compel arbitration at any place provided for in the parties’ agreement, whether or not in the United States.  But what if the parties’ agreement does not provide for a seat, directly or indirectly?

Enter Section 4 of the FAA, residually applicable in international cases to the extent it does not conflict with Chapter Two.  Under Section 4, the only possible solution if the parties’ agreement does not designate a place of arbitration is for the district court to order that the “hearings and proceedings” take place in the district where the court sits. Thus, in a 9th Circuit case from 1989, principally relied on by the district court in the recent Beauperthuy decision (and including on the panel Circuit Court Judge Anthony Kennedy, as he then was), arbitration between a Chinese party and an American party was ordered to proceed in Sacramento, California, where the motion to compel arbitration had been filed, as  the appellate court confirmed that the district court had no other option where the arbitration agreement did not specify any agreed situs. (Bauhinia Corp. v. China National Machinery & Equipment,  819 F.2d 247, 250 (9th Cir. 1989).

The limitations imposed by Congress on judicial power to select the place of arbitration would seem to be at odds with the contractual basis for arbitration. On matters where the parties have not made an agreement, they have a disagreement.  It seems strange that this particular disagreement would be resolved in effect unilaterally by the judicial forum chosen for the motion to compel arbitration by the party seeking that relief. A few district courts, notably in New York, have dodged the problem by treating a disagreement about the place of arbitration like any other dispute parties might agree to arbitrate under a broad arbitration clause extending to “any and all disputes,” and have referred the seat of arbitration dispute to the arbitrator. (E.g., National Network of Accountants Investment Advisors, Inc. v. Gray, 693 F. Supp.2d 200 (E.D.N.Y. 2010); Matter of U.S. Lines, Inc. and Liverpool & London Steamship Protections & Indem., 833 F.Supp. 350 (S.D.N.Y. 1993)). But that creative circumvention highlights a shortcoming of the FAA that Congress would do well to fix, if ever a thoughtful revision of the FAA rises to the top of the legislative agenda.

Until that occurs, however, perhaps another solution might be found.   It relates to interpretation of the phrase “hearing and proceedings,” in Section 4.  The “hearings and proceedings,” according to Section 4, must take place in the district of the court ordering the parties to arbitrate.  It seems arguable that when Section 4 applies in a case governed by the New York Convention and FAA Chapter 2, courts should not reverse engineer international arbitration concepts into Section 4. In particular, they should not import the concept of the seat of arbitration into the phrase “hearings and proceedings.” The notion that an international arbitration award may only be set aside by a court at the seat of the arbitration, or under the arbitral procedural law agreed upon by the parties, made its first tentative entry into American law with US accession to the New York Convention in 1970.  It was a tentative entry because it was only many years after 1970 that American jurisprudence developed the notion, derived from Article V(1)(e) of the Convention, that judicial power to vacate an international arbitration award resides exclusively in a court at the seat of the arbitration (or in the State whose lex arbitri applies by agreement of the parties).  The phrase “hearings and proceedings” in Section 4, on the other hand, most probably was included to ensure that the district court could not compel attendance at the arbitration by persons residing in another state who could not be compelled by judicial subpoena to appear before that court. Accordingly, Section 4 should not be seen by arbitrators as a limitation on arbitral power in a Convention case to fix the seat of the arbitration.  The parties might decide that the arbitral tribunal should not have this power – in effect adopting as the seat the place designated by the district court for “hearings and proceedings.”  But if the parties have agreed broadly that the arbitral tribunal may resolve all disputes between them arising out of or relating to the contract, the arbitrator may reasonably interpret the arbitration clause to enable her to resolve a dispute over the seat of the arbitration. This solution differs somewhat from the one adopted by New York federal district courts as mentioned above, particularly in being faithful to the statutory text of Section 4.  On this view, the court could not refer to the arbitrator the question of where to hold “hearings and proceedings.”  Section 4’s text, it would seem, clearly forecloses that solution.  But the arbitrator holding hearings and proceedings in New York, per the order compelling arbitration of a New York federal district judge, would retain the power under the arbitration clause to choose the lex arbitri of the dispute based on appropriate conflict of laws principles.