Archive for March, 2013

Can “Actual Bias” Approach to “Evident Partiality” Discourage Post-Award Litigation?

Sunday, March 31st, 2013

It has been nearly 45 years since the Supreme Court of the United States decided the Commonwealth Coatings case (Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968)) and addressed for the only time in its history the meaning of the term “evident partiality,” which appears in Chapter One of the FAA as a ground for setting aside an Award. No single opinion or rationale commanded a majority of the Justices in that case, and the legacy of the case has been generally associated with the concurring opinion of Justice White, who was able to support the affirmance of the judgment on the basis that the record supported a finding of actual bias while he rejected the notion, articulated in the plurality opinion authored by Justice Hugo Black, that arbitrators should be held to the same ethical standards as judges and therefore their awards should be exposed to vacatur if the record supports merely an appearance of possible bias.

Earlier this month the US Court of Appeals for the Third Circuit had occasion to visit the Commonwealth Coatings opinions in an appeal involving allegations of bias baed on the sole arbitrator’s failure to have disclosed election campaign contributions received from the parent company of the victorious Respondent. But in this case there had also been campaign contributions to the arbitrator (who ran for election to the Supreme Court of Pennsylvania) in a much larger amount from the law firm that represented the disappointed claimant-appellant. And the contributions were all reported publicly on a Website maintained by the State.  The Third Circuit, adhering to the “actual bias” view of “evident partiality,” found no merit in the position that the award should be vacated. (Freeman v. Pittsburgh Glass Works LLC, 2013 WL 811884 (3d Cir. Mar. 6, 2013)).

The Third Circuit also took this occasion to warn its readers that judges should not hesitate to award sanctions for frivolous vacatur motions and frivolous appeals, as a measure to protect the efficacy of arbitration (although no sanctions were imposed in this case).

It is useful to take note of the utility of the “actual bias” approach to “evident partiality” in discouraging frivolous appeals from arbitral awards. While arbitrators are justifiably criticized for failing to err on the side of caution by disclosing relevant but non-disqualifying information (like the receipt of judicial election campaign funds, publicly-disclosed, from persons connected to both sides), it is another matter to invoke “evident partiality” in service of a retroactive review of pre-award arbitrator disclosure where the proceedings have been fundamentally fair and bear no trace of partisanship in either the outcome or the procedure. Actual bias being both more difficult to prove and more dependent than appearance of bias on the objective elements of the arbitral record (the Award, the procedural orders, the transcript of the hearing), there should in principle be an inhibition of speculative appeals and on efforts to support such speculation with post-award “detective work” to unearth some conceivable basis to impugn an arbitrator’s neutrality. But in practice such litigation remains an epidemic, linked one would suppose to the reluctance of judges to impose sanctions and the unwillingness of Congress to adopt statutory fee-shifting for FAA cases.

Perhaps the Third Circuit’s admonition will gain traction in the district courts, and post-award litigation will gradually become a risky strategy that counsel for losing parties will be more reluctant to recommend.

Currency Conversion and Interest: Some Common Sense Award Enforcement Rules Articulated

Sunday, March 31st, 2013

Some rules and principles relating to enforcement of international arbitration awards are essentially matters of common sense.  Foremost among them are rules relating to the currency of judgments enforcing awards, and post-award interest. But as they are not often the subjects of reasoned judicial decisions, it is useful to take note when well-reasoned decisions come along. Today’s text is from a federal district court in Washington D.C., which addressed currency conversion and interest issues associated with a judgment enforcing a large arbitration award, made in London and rendered in British pounds and Nigerian niara, against the Federal Government of Nigeria. (Continental Transfert Technique Ltd. v. Federal Government of Nigeria, 2013 WL 1201380 (D.D.C. Mar. 26, 2013)).

Common sense rule number one: An award denominated in a foreign currency ordinarily should be converted into a U.S. judgment in U.S. dollars unless the award creditor asks for judgment in the non-dollar currency of the award. One might suppose there could be another exception: where the agreement of the parties provides that the parties shall bear the risk of currency fluctuations even after a breach of termination of their contract.

Common sense rule number two:  Conversion to judgment dollars of an arbitration award denominated in a foreign currency should be made as of a date, ordinarily the award date, that preserves the value of the award for the award creditor in case of intervening depreciation of the award currency.  While this is the approach commended by the Restatement of Foreign Relations Law, two U.S. Supreme Court cases from the 1920s indicated that courts should look to the law under which the cause of action arose and convert the foreign currency obligation to dollars as of the date of breach only if the plaintiff had a cause of action under American law as of that date. Fortunately the district court here was able to navigate this arguable conflict, and find that indeed there was a cause of action under U.S. law (to enforce the award under the New York Convention/FAA) as of the date of the award (that being the “date of breach” of an obligation to satisfy the award).

Common sense rule number three: The award creditor is presumptively entitled to post-award, pre-judgment interest, so long as the award does not negate the existence of this entitlement, although the entitlement remains in the Court’s discretion (so that it might be denied for instance of the creditor failed to proceed diligently with enforcement).

The final point of decision in this case was selection of the prejudgment interest rate, and the court concluded that the prime rate more properly comports with the compensatory rationale for such interest than does the Treasury Bill rate.  I hesitate to classify this as a “common sense rule,” however, because the decision to terminate the accrual of interest at the pre-award rate specified in the award is not intuitive and inevitable. Here the court gave short shrift to that question as the pre-award rate granted under Nigerian law was 18 percent based on prevailing interest rates in Nigeria during the relevant period, and the award creditor evidently did not present argument as to why the Court should continue this rate in effect post-award. But suppose the pre-award rate had been nine percent based the New York law having been the applicable law of the contract?  Although presumably that would be significantly above the award creditor’s cost of funds, in that instance the level of compensation for the time value of unpaid obligations has been bargained for, and the effect of shifting to the prime rate for post-award interest is to deprive the award creditor of the benefit of the bargain.