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October 31, 2014

Coping With The Party Boycott

An occasionally encountered problem in international commercial arbitration is the Party Boycott. I will use that term here to refer to the situation where a Respondent in a pending arbitration registers its objection to arbitral jurisdiction systematically through a two-pronged strategy: (1) seeking an anti-arbitration injunction in a friendly court, and (2) refusing any participation in the arbitration itself.

Formation of the Tribunal

When the Tribunal is to be formed according to a list procedure by the administering institution, the Boycotting Party’s refusal to strike-and-rank the listed candidates typically entails that the institution will select the arbitrator or arbitrators. (As a preliminary matter the Boycotter may well argue to the institution that the arbitration should not proceed, but if the institution is satisfied prima facie of the existence of an arbitration agreement providing for arbitration administered by that institution, this effort ordinarily should fail). In the strike-and-rank scenario, the Boycotter succeeds in depriving the Claimant of input into the selection of the Tribunal. If the parties’ agreement provides for party-appointed arbitrators, then the Boycotter’s refusal to appoint entails that the appointing authority will make an appointment the Boycotter’s co-arbitrator, and that the Claimant’s party appointee and the co-arbitrator who has been administratively appointed will seek to reach agreement on a chair. Two of the three members of the Tribunal have been selected without input from the Boycotter.

Boycotter Requests Stay of the Arbitration

Invited to join a conference call to discuss a procedural timetable, the Boycotter may decline to confirm a date for such a proceeding, object to its “unilateral” scheduling, and request the Tribunal to stay proceedings at least for a time sufficient to allow the Boycotter to apply to a friendly court for an anti-arbitration injunction. The Boycotter proposes to invoke judicial authority of a court that is not at the seat of the arbitration, and whose arbitral procedural law does not apply to the arbitration. The Boycotter might for instance assert that it is a company in liquidation and that the liquidation court’s jurisdiction ousts that of the arbitral tribunal.  Whatever may be the merit, or lack of it, of that contention, from the perspective of arbitration procedure the question of the effect of the liquidation on arbitral jurisdiction should be addressed by the Tribunal and/or by a court at the seat of the arbitration unless the arbitration law of the seat, exceptionally, were to recognize the competence of the liquidation court to decide the issue.

Ordinarily, therefore, a motion to stay the arbitration in deference to a prospective jurisdiction-related decision from a court lacking competence on the jurisdiction issue ought to be denied.

Procedural Timetable and Time Limits for the Award

The first procedural conference is convened by telephone, with only the Claimant’s counsel appearing, the Boycotter and its litigation counsel (who requested the stay) having been duly notified. If the Claimant consents to bear the cost for a transcript, a court reporter records the proceedings, and Boycotter’s litigation counsel receives a copy.

Suppose a provision in the arbitration agreement requires a final award within a very stringent time limit measured from the formation of the Tribunal? Claimant cannot reasonably prepare complete written submissions on the merits and appear at a hearing within the time limit. Of course Claimant is willing to extend the time limit. But the Boycotter’s actual consent is not obtainable due to the Boycott, and neither the Tribunal nor the Claimant relishes the prospect that an Award made after the deadline might be denied enforcement on the ground that the Tribunal became functus officio at the time limit.

One solution is for the Tribunal to construe the time limit provision in the form of an Interim Award, deciding the issue of whether strict compliance with the time limit is required. If the Tribunal decides that strict compliance is not required, and the Boycotter has declined to take a position in the proceedings on this question, the Boycotter may find it difficult later on to deny the effectiveness of a Final Award on the basis that the time limit should be enforced strictly and the Tribunal ceased to have power before the Final Award was delivered.

Boycotter Obtains Anti-Arbitration Injunction From Friendly Court

The liquidation court in Boycotter’s home jurisdiction (not the arbitral seat) finds for the Boycotter on its application to enjoin the arbitration. The order operates in personam against Claimant, directing Claimant to proceed no further with the arbitration save to ask the Tribunal to stay the proceedings while Claimant pursues appellate remedies to vacate the injunction.

Now the arbitration is at a crossroads, and several factors are in play:

1) The Claimant submits to the Tribunal that while it disagrees with the injunction on the merits and as the Boycotter-friendly non-seat court’s power to impose it, the Claimant is loathe to risk a contempt judgment and therefore seeks to proceed no further with the arbitration on the merits until it can secure an order vacating the injunction.

2) A court with no supervisory power over the arbitration derived from the arbitration agreement or any national arbitration law has determined in an impactful way — via its own contempt powers exercisable over the Claimant — the competence of the Arbitral Tribunal,

3) Claimant assuredly would ask the Tribunal to rule on the jurisdiction issue were it not constrained by the injunction and by the fear of contempt penalties,

4) If the Tribunal accedes to Claimant’s request for a stay, without doing anything more, it gives legitimacy to the illegitimate (even if it were substantively correct) injunction of the liquidation court, in effect allowing contempt powers to trump all applicable arbitration rules and law.

5) Yet if the Tribunal insists that the case go forward — on the agreed accelerated timetable — it forces Claimant to a difficult  election: risk contempt penalties and trust in the appellate process to reverse the injunction and the contempt, violate the Tribunal’s order to proceed, or withdraw the arbitration.

Shall The Tribunal Retreat Into Cold Storage?

What is a Tribunal to do? In the case that inspires this post, the Tribunal (seated in London) elected to make an award on the issue of whether the liquidation proceeding divested the arbitral tribunal of jurisdiction. Having in the first procedural order directed both parties to provide copies to the Tribunal of all submissions made the Boycotter-friendly non-seat court relating to the arbitration, and all orders of that court relating to the arbitration, the Tribunal was fortunate to secure Claimant’s compliance with that direction notwithstanding the anti-arbitration injunction.

Armed with the same factual and legal record made by the parties in the liquidation court, the fact that Respondent and Claimant were for different reasons (derived from the same injunction) unwilling to brief the issue to the Tribunal was not seen as a deterrent to a decision. The Tribunal proceeded to a Partial Award finding that its jurisdiction was intact. And having given that award, the Tribunal rather than grant the Claimant’s request for a stay, instead amended the procedural timetable to defer the merits hearing and pre-hearing submissions for a time sufficient for Claimant to pursue a first-level appeal against the injunction.

The Tribunal in such circumstances is rightfully uneasy at the prospect of granting either a proceedings stay of indefinite duration, or, what would eventually amount to the same thing, seriatim adjustments of the hearing timetable as each previously-fixed set of submission and hearing dates approaches and the illegitimate judicial anti-arbitration injunction remains in force while appellate challenge proceeds at a pace that seems to reflect the appellate court’s indifference to the Tribunal’s desire to proceed on the timetable it has established.

It would seem that a decent respect for the arbitration law that the Tribunal has a mandate to apply should bring into play a self-imposed obligation of the Tribunal to express in every appropriate way its refusal to be governed by the illegitimate injunction. But to insist that the enjoined Claimant defy the injunction and risk contempt of the enjoining court seems untenable: It would be an abuse of arbitral power to insist that a party bear this risk or, if it should refuse to bear it, have its claim determined against it on the merits based on its refusal to proceed with the hearing.

The solution decided upon in the case that inspires this post was for the Tribunal to end is mandate without reaching the merits. Claimant was not put to the choice of proceeding to the merits or not, but instead was given the choice of proceeding to the merits or withdrawing the arbitration without prejudice. The Claimant’s claim and its right to arbitrate that claim were preserved.

It will not be in every case where the Claimant desires a stay pending judicial appeals of the injunction that the Tribunal would opt for this solution. But the judgment made here was that the mission of an Arbitral Tribunal is to render an Award resolving the disputes presented by the parties, and if it has no reasonable prospect of being able to do so on a reasonable time horizon because of a judicial injunction that the Tribunal has determined to be procedurally and substantively illegitimate, then discontinuing the arbitration without impairment of the Claimant’s right to arbitrate the claim in a newly-filed case may usefully address several concerns. Already mentioned is the systemic reason: that the Tribunal should not be seen to be under the thumb of a judiciary that has no legitimate authority to supervise or regulate the arbitration. Another reason is that if the injunction is eventually dissolved, the arbitration should proceed as closely as possible as it would have proceeded had the injunction not be issued. The seated Tribunal cannot help but have been influenced, and certainly will be seen to have been influenced, unfavorably to the Boyoctter.  A new Tribunal should in principle have no such disposition, and, of course, if the agreement to arbitrate provides for party-appointees, and the appointees’ participation in selecting the chair, a Tribunal constituted with the full voluntary participation of both parties is desirable. An Award rendered by such a new Tribunal should face a smoother path to enforcement if it must be presented for enforcement in the courts of the same State that provided the injunction. Termination of the proceedings also eliminates the possibility that the fact of the pendency of the arbitration serves some secondary business purpose for the Claimant, making the Tribunal an unwitting facilitator. That is an inevitable by-product when a case is proceeding along a normal course, but is better avoided if the Tribunal cannot accomplish its core mission. Further, the monitoring of the judicial proceedings may affect the Tribunal’s disposition toward the Claimant and its counsel, as the Tribunal makes its own private assessments of the efficacy Claimant’s efforts to have the injunction lifted.

Of course there can be countervailing factors that militate in favor of the Tribunal being more patient in awaiting possible rectification in the enjoining State’s courts. One would be if the Tribunal has worked on the merits at significant cost to the parties before the anti-arbitration injunction is obtained. But it will be more usual that the Boycotting Party will invoke judicial authority early in the case, and that the Tribunal will not invest much time.

* * *

One potential avenue of recourse for the Claimant aggrieved by the Boycott is to seat an anti-suit injunction against the Boycotter. For a reminder that where UK arbitration law applies, a UK court may enjoin foreign litigation that would interfere with the arbitration, seeAntisuit injunctions: No arbitration? No worries” from the International Arbitration Newsletter of DLA Piper, 26 September 2013 (www.dlapiper.com/en/japan/insights/publications/2013/09/antisuit-injunctions-no-arbitration-no-worries).

Query how shall a Tribunal when asked by the enjoined Claimant for a stay of indefinite duration, pending appeals of the illegitimate injunction, take into account that party’s failure at an early stage to have availed itself of this opportunity in a UK court to enjoin the adverse party from pursuing an anti-arbitration injunction?

***

Query also, if the Tribunal makes a Partial Award in favor of its own jurisdiction, how shall the Tribunal take into account, when asked by the enjoined Claimant for an indefinite stay, the fact that the Claimant undertakes no proceedings for enforcement of that Award?  Is it a satisfactory answer that pursuing a proceeding for enforcement of the Award might motivate the Boycotter to apply for contempt sanctions?

***

Also, what degree of proof shall a Tribunal require that the enjoined Claimant will be subjected to a contempt sanction if it takes particular steps in the arbitration or related to the arbitration (such as award-enforcement or anti-suit injunction proceedings in a court at the seat)? Shall the Tribunal require some proof as to the severity of the potential sanction, the likelihood of its imposition, and its irreversibility even if the injunction is ultimately declared to have been unlawful? Not to be overlooked in this regard is the possibility for the Tribunal as a provisional measure to direct the Boycotter to refrain from taking contempt proceedings, as was done in the well-known SGS v Pakistan ICSID arbitration. (See E. Gaillard, Reflections on the Use of Anti-Suit Injunctions in International Arbitration, in L. Mistelis & J. Lew eds., Pervasive Problems in International Arbitration, pp. 203 et seq at p. 205 n.6 (2006)). But such an order against a non-State party in commercial arbitration may be toothless unless it can be enforced judicially in a jurisdiction where the Boycotter has assets.