Archive for April, 2015

Bifurcated Arbitration and Interlocutory Review: Once More to the Well

Thursday, April 2nd, 2015

Dear Readers, if you turned to these pages to learn about recent decisions in big, impactful international investment disputes over (lawful) expropriation of maritime assets in Venezuela or (alleged) denial of justice to American energy titans in Ecuador, you may be disappointed. (But see “Nice Try Venezuela”, below). This post is inspired by a gritty quotidian domestic dispute, between a Miami limousine service and one of its drivers — the cherubic talkative type who might ferry an eminent international arbitrator to Miami International Airport for an early morning flight to Washington.

But seriously. We need to talk — about the eligibility of interlocutory awards for confirmation or vacatur under the Federal Arbitration Act. Perhaps there will be readers on the U.S. Court of Appeals for the Eleventh Circuit, whose three-judge panel decided Schatt v. Avventura Limousine & Transp. Service, Inc., 2015 WL 1134910 (11th Cir. Mar. 16, 2015).

The Avventura arbitration, under AAA Commercial Rules, involved claims under the Fair Labor Standards Act (FLSA) asserting that the Claimant was an employee protected by the FLSA and had been compensated less fairly than the Act requires. The position of Respondent (the  putative employer) was that Claimant was not an employee but only an independent contractor to whom the FLSA did not apply. This liability issue, i.e. whether the FLSA applied at all, was bifurcated, evidently by agreement of the parties and with consent of the arbitrator. In an “Interim Award on Liability,” the arbitrator decided that Claimant was an employee, and she set in motion a damages phase of the case. Thereafter, the U.S. District Court in Miami granted a motion to disqualify Claimant’s counsel based on improper contacts with Respondent during the arbitration, contacts found to have been calculated to undermine the effectiveness of Respondent’s counsel. The District Court also received Respondent’s motion to vacate the Interim Award on Liability, and ruled that (1) the award was sufficiently final to be subject to review under the FAA, and (2) based on the same circumstances that warranted disqualification of counsel, the award had been “procured by fraud, corruption, or undue means” (FAA § 10 (a) (1)) and therefore should be vacated. In Avventura, the Eleventh Circuit reversed on the basis that the Interim Award was non-final and therefore the District Court lacked power to apply the FAA grounds for vacatur.

At least in part because Respondent did not submit a brief, the Eleventh Circuit in Avventura did not consider case law from other Circuits that permits FAA review of arbitration awards that do not end the arbitration in at least three circumstances:

1) an award of provisional relief, where judicial enforcement of the award is necessary for the provisional measures to be effective,

2) an award that fully resolves a separate and independent claim within the arbitration,

3) an award that finally determines liability, where the parties have agreed to the bifurcation of the arbitration into liability and damages phases.

The Avventura award appears to have qualified for FAA review under Category 3.  But the Court did not evidently find that  case law in its own research, and adopted what we may call the Anti-Schubert Rule: no Unfinished Symphonies.  The Court treated “final[ity]” in the FAA as a literal concept, and held that an award is not final when “the arbitrator’s work [is] not complete.”

The Eleventh Circuit will undo its Anti-Schubert Rule in due course, we may reasonably predict. My concern is, more broadly, with Category 3, concerning bifurcated arbitrations, and why it is (or is not) necessary for there to be an express agreement of the parties to bifurcate, made during the arbitration, as a precondition of FAA review of a partial award on liability.

The reason given by courts for assigning importance to the parties’ agreement to bifurcate (as originally stated by the Second Circuit in the Trade & Transport case in 1991, and repeated by the First Circuit in the Hart Surgical case in 2001) was that such agreement provided assurance to the courts that the parties and arbitrators understood during the arbitration that the award on the bifurcated issue (usually liability) would be final and binding and that the arbitrator would be functus officio with respect thereto. But if the rules of arbitration adopted by the parties provide for partial and interim as well as final awards, and provide that all such awards shall be final and binding on the parties, and provide that awards may only be modified by arbitrators to correct clerical errors, isn’t is fair to say that the power of the arbitrator to make a partial award that has sufficient finality to be judicially reviewable is built into the agreement to arbitrate? (The final and binding status of any award the tribunal might issue is clear in, for example, the arbitration rules of the ICDR, ICC, and UNCITRAL, and in the 2010 JAMS Comprehensive Arbitration Rules; the AAA Commercial Rules are less clear but the same conclusion is inferrable). Arguably, the existence or not of an explicit bifurcation agreement made during the arbitration should only matter if the rules governing the arbitration leave uncertainty about the ability of the arbitrator to reconsider, and reverse or modify substantively, an interlocutory decision called an “award.”

In the future courts may wish to consider whether an agreement of the parties to bifurcate liability and damages, or to bifurcate the arbitration in some other fashion that entails multiple awards, ought to be the necessary predicate for a court to decide that a partial or interim award is reviewable.  “Finality” under the FAA is not defined precisely, and so it should be determined pragmatically. Absent other indications of what the parties intended, or expected, core principles underlying the FAA would suggest that the finality of an award that leaves some issues still open should be determined according to (1) the arbitrator’s indicated intention that the decision resolves a matter permanently and irreversibly, not temporarily or provisionally, (2) the importance of immediate review to the effectiveness of the arbitral decision, and (3) whether review is more likely to advance the completion of the arbitration or, at the opposite pole, disrupt the case with piecemeal review.

If the parties did not agree to bifurcation, but instead had bifurcation imposed by the arbitrator(s), the absence of agreement should not necessarily determine that a partial award on liability lacks jurisdictional eligibility to be confirmed or vacated. This circumstance instead requires courts to make record- and context- specific pragmatic judgments about the virtue or vice of interlocutory review.  Suppose the arbitration is conducted under a provider’s rules that permit (as nearly all do) partial and interim awards and contain no limits on arbitrator discretion to bifurcate. Bifurcation of liability and damages is sought by Claimant, opposed by Respondent, and granted by the arbitrators in an early procedural order that states expressly the Tribunal’s intention that the liability phase will culminate in a partial award on liability that finally determines liability and leaves the Tribunal functus officio as to liability, and will be, as far as the Tribunal is concerned, subject to judicial review. Suppose further that the prospective virtue or vice of interlocutory review was clearly argued to the Tribunal in the motion to bifurcate. If the Tribunal after hearing the liability phase of the case follows through with a partial award on liability, the Tribunal’s judgment that interlocutory review provides more virtue than vice should be respected by the court absent some compelling countervailing consideration relating to the arbitral process.

The Strange Career of the Reasoned Award

Thursday, April 2nd, 2015

The Yankees win!! The….Yankees…..WIN!!!

New Yorkers of a certain sporting obsession will recognize this as the triumphal incantation that concludes their radio baseball broadcasts, on the not-so-frequent occasions when the Yankees do, as they once did prodigiously, win.

New York arbitration lawyers will also recognize this as the form of a “Standard Award” in domestic commercial arbitration. Declare a winner, and sign off.

Those of you seeking a primer or a refresher course in the architecture of American arbitration awards would, by reading Tully Construction Co. v. Canam Steel Corp., 2015 WL 906128 (S.D.N.Y. Mar. 2, 2015), be informed, or reminded, that here in the USA we have : (1) the Standard Award (“The Yankees win!“) (2) the Reasoned Award (perhaps not more than “The weight of the credible evidence shows that, after nine innings, the Yankees have four runs and the Red Sox only two!“), and (3) Findings of Fact and Conclusions of Law (wherein the arbitrator must actually think and act like a judge). As an historical matter, there have been relatively few domestic arbitrations wherein the parties demanded an Award in form of Findings of Fact and Conclusions of Law as understood in the litigation process. Americans, as a rule, like their arbitration outcomes raw and lean. (And besides, as one reader has pointed out, it was thought that if the courts could not ascertain the basis for the decision, it would be more difficult for them to disagree with it).

The Tully case involved a dispute over steel components supplied to repair New York’s Bronx-Whitestone Bridge (a viable route to Yankee Stadium from Queens and Long Island). The parties opted to tear up their AAA arbitration agreement in favor of a non-administered process before a designated sole arbitrator using AAA Rules for Complex Construction Cases. Those Rules provided, concerning the form of the Award, for (1) “a concise financial breakdown of any monetary awards,” and (2) unless otherwise agreed by the parties, “a reasoned award.”  The arbitrator, for his Award, provided the prescribed breakdown (by categories) of the monetary relief, and declared “Tully Wins!”  When asked by losing side to withdraw this Award and provide a reasoned award, the arbitrator ruled that the awards was reasoned under all applicable state and federal law.

Not correct, held the U.S. District Court in Manhattan, granting a motion to vacate the award. From the Court’s decision, we are reminded that the “Standard” award, as a custom, evolved from early decisions holding that there is no federal common law principle requiring the arbitrator to state reasons for the result if the parties have not agreed that she should do so. We also learn that federal appeals courts have developed no uniform standard of what constitutes a reasoned award, and that district courts have allowed that it stands somewhere — and imprecisely so — between the Standard Award and Findings of Fact and Conclusions of Law. In practical terms the “somewhere” is a large domain — the courts evidently recognizing that judicial second-guessing of the arbitrator on the sufficiency of the exposition of reasons collides with the objectives of efficiency and finality. But Tully was a case about the absence of any exposition of reasons — and by issuing a purported final decision not in the form specified by the arbitration agreement, the arbitrator was held to have exceeded his powers. The case was remanded to the arbitrator for re-issuance of the award in compliant form.

Tully provides an important reminder about the domestic arbitration culture of the United States. The “Standard” arbitration award is a custom associated with domestic arbitration’s roots as a streamlined alternative to judicial process. But it is ironic that the standard award and the minimally-reasoned award retain popularity with arbitration users despite the inundation of domestic arbitration with pre-hearing and hearing process associated with courthouse litigation. In Tully, the arbitrator heard 17 days of testimony from nine fact witnesses and two experts, and admitted more than 800 exhibits. The demand for Arbitration had been filed December 30, 2009, and the hearing began November 6, 2012 —  so it is fair to assume there was an extensive discovery process. And yet the award took the form of a listing by categories of the amounts of monetary damages, essentially one page that mentioned no exhibits and cited no testimony. And still the arbitrator believed he had made a reasoned award.  Perhaps both parties expected more, but once the result was announced only the loser really cared.

Award-writing seems not to be a skill that is particularly valued in our domestic arbitration culture. The AAA’s Procedures for Large Complex Cases do not require a reasoned award, much less findings of fact and conclusions of law, unless the parties insist.  One rarely if ever sees, in the domestic setting, a provider-sponsored arbitrator training program focused on award-writing skills. The JAMS Arbitration Rules at least require, unless the parties agree otherwise, a “concise written statement” of the reasons for the award. One senses that JAMS’s instincts were toward more elaboration, but “concise” was adopted as an  acceptable limit beyond which JAMS could not go and expect to remain competitive with the AAA.  The CPR’s rules for domestic arbitration, administered and non-administered, say only that the award “shall state the reasoning” — a standard that seems more permissive than a “reasoned award” and surely does not push the envelope beyond the forgiving standards applied by reviewing courts.

And yet the provider institutions purport to be responding to user tendencies to prefer adjudication in the court systems, doing so notably by creating procedures for appellate arbitration. Perhaps the time is ripe for reconsideration of rules concerning the content of awards, especially for the type of large and complex case wherein parties would naturally expect the discipline of writing an opinion to be a primary line of defense against erroneous decision.  After all, how can the parties have confidence that the arbitrator has reached a correct result, or even that she paid sufficient attention to the massive record presented to her, if she has not completed the intellectual exercise of explaining her position in full written form?

Investment Arbitration Briefly Noted: Nice Try Venezuela!

Thursday, April 2nd, 2015

Readers who watch American sports television while preparing briefs to ICSID tribunals will be familiar with a feature called “C’MON MAN!”, showing sports celebrities caught out in acts or declarations of startling incredulity. Surely this feature could be extended on occasion to the arguments of Host States opposing Investor expropriation claims. A case in point is the recent Award in Tidewater v. Venezuela, ICSID Case No. ARB/10/5 (March 17, 2015) (published at finding an expropriation, albeit of the lawful variety (once compensation would be determined and paid), of a maritime oil services business that had operated in Venezuelan waters since 1958. The Bolivarian Republic conceded that it had seized a few boats, but insisted that Claimant remained in effective control of its enterprise and was continuing to do business. The Tribunal rejected this effective control position of the Respondent State, taking particular note of the fact that, after the date of the alleged assets seizure, employees of Claimant’s Venezuelan subsidiary who brought employment claims in Venezuelan courts were directed to serve their pleadings on the Attorney General of Venezuela and were informed that only such service would be deemed good and sufficient. The eminent Tribunal chaired by Professor Campbell McLachlan elaborated its findings in measured tones. But surely must have been thinking, with regard to Venezeula’s effective control position: “C’MON MAN!”