December 14, 2011

Choosing the Unchosen Seat of Arbitration: Coping With FAA Dysfunctionality

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.   

 

 

 

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