Archive for August, 2016

Null But Not Void

Wednesday, August 3rd, 2016

One may read several times over the long-awaited decision of the US Second Circuit Court of Appeals upholding the confirmation under the Panama Convention of a $300 million commercial arbitration award against Mexico that had been annulled by a Mexican court at its Mexican seat, searching upon each fresh reading for some hint of a more generous opening for US enforcement of annulled foreign awards than the very restrictive case of an annulment that offends fundamental principles of US public policy. The repeated readings are not likely to bear fruit; the Second Circuit evidently is willing to go only this far and no farther.  (Corporacion Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. Pemex-Exploracion Y Producion, No. 13-4022, 2016 WL 4087215 (2d Cir. Aug. 2, 2016)). But at least we now know that such an annulled foreign award still is considered to exist such that US judicial discretion may be brought to bear upon it. That much is implicit in the basic architecture of the Court’s opinion, which is that the judicial discretion to enforce an annulled foreign award is not expressly limited by the Panama or New York Conventions, but is impliedly limited by principles of comity applicable to foreign judicial judgments including judgments annulling arbitration awards.

So, foreign sovereign readers, you may ask how you might get into trouble with the US courts and have your judicial judgments concerning arbitral awards forfeit the warm blanket of comity among nations in the courts of the United States. Well, start out with an organic law governing the affairs of a state-owned enterprise that expressly authorizes the company to put an arbitration clause in a contract. Add to that a law that says if the counterparty breaches the contract, the state owned company can rescind the contract. Then, when a dispute breaks out, and the counterparty wants payment, and the state owned company declares a rescission, and an arbitration begins, and the arbitral tribunal rules that it has jurisdiction, go to work on the legislative front. Pass a law that says rescission of a contract by a state-owned company is a sovereign act that cannot be arbitrated but only challenged in court. Pass a law that says the judicial challenge to such a sovereign act can only be brought in a particular court, and only within 45 days of the accrual of the cause of action.  And for good measure, seize the counterparty’s 94 percent-complete work product and forcibly banish its personnel from its work sites.

If, dear sovereigns, you follow this formula with care, you will learn, as did PEMEX the state-owned petroleum enterprise of Mexico, that un-waiving sovereign jurisdiction in the courts of the State) collides with the American conception of the rule of law: “Giving effect to [PEMEX’s] twelfth-hour invocation of sovereign immunity shatters [Plaintiff]’s investment-backed expectations in contracting, thereby impairing one of the core aims of contract law.” You too, dear sovereign, may hear from another US court, quoting this one, that “[r]etroactive legislation that cancels existing contract rights is repugnant to United States law.”  You too may hear from a US court that expropriation without payment of compensation violates US domestic policy not to mention many international trade treaties including the NAFTA. And you too may hear that American jurists tend to regard the meaningful availability of some forum to resolve a claim as a fundamental principle “firmly embedded in legal doctrine.” (Of course you may also read, in other chat rooms, that Uruguay recently convinced two non-American international arbitrators, but not the American-Born dissenting arbitrator, that effective denial to a foreign investor of a judicial forum to resolve vis-à-vis the Host State conflicting rulings from different domestic courts was not a denial of justice in violation of an investment treaty’s guarantee of fair and equitable treatment. Nice work Uruguay. But at least in that case the forum stalemate was an anomalous result of an ordinary allocation of judicial power, and not the foreordained outcome of a post-dispute gerrymandering as was done by Mexico).

But take heart, foreign sovereigns, this ruling from the US Second Circuit professes to be an exceptional response to an exceptionally egregious violation of the above series of related bedrock principles bundled into the American conception of the rule of law. The decision does not move the US in the direction of French doctrine in viewing foreign arbitral awards as having a tenuous link to the legal order of the arbitral seat. And the decision does not even hint that State court judgments annulling awards against that State are generally subject to an enhanced level of scrutiny as compared to other award annulment judgments.  One can detect here nearly no movement in US jurisprudence, but only a set of circumstances without precedent in the limited body of US case law concerning enforcement of annulled foreign awards.


Bluster in the Windy City

Wednesday, August 3rd, 2016

Dear Readers, I do like Chicago. It’s my kind of town. The Friendly Confines. The Tarzan Pool.  The Tribune Tower. And of course, not to be missed, the US Seventh Circuit Court of Appeals, usually friendly confines for arbitration awards.

But sometimes even the best of friends can be cranky and difficult. They have bad hair days. And today, here in the friendly confines of my New York summer office, I submit to you that the eminent Seventh Circuit jurist Richard Posner had such a day in Bankers Life & Casualty Co. v. CBRE Inc., 2016 WL 4056400 (7th Cir. July 29, 2016), in which, joined by only one of his two panel colleagues, he held that a three-member arbitral tribunal of retired Illinois judges exceeded their authority and that their award rejecting a breach a contract claim had to be vacated for that reason.

This was a commercial real estate case between a tenant (Bankers) and broker (CBRE).  CBRE knew that another tenant in the building (Groupon) needed more space, and that Bankers could make do with smaller and cheaper space elsewhere. So Bankers contracted with CBRE to sublease its space, presumably to Groupon, and the contract provided that CBRE would answer Bankers’ questions about the potential sublease. Bankers had its eyes on suitable space in another building and asked CBRE: “What would be our net savings if we move to the new place and sublease to Groupon?”  As its answer, CBRE provided a written cost-benefit analysis that answered the question this way: “$7 million estimated, as indicated by this cost-benefit analysis, but we disclaim any responsibility for errors in this estimate.” CBRE made a big mistake: The $7 million did not account for a $3.1 million tenant improvement allowance that Bankers had offered to Groupon and that CBRE knew had been offered by Bankers to Groupon. Bankers did not notice CBRE’s mistake until it was too late, relied on the $7 million net savings estimate, closed the real estate deals, discovered the mistake later on, and brought an arbitration claim under JAMS Rules.

The panel issued an award rejecting all three of Bankers’ claims (breach  of contract, negligent misrepresentation, and an Illinois statutory claim). Our focus is on the breach of contract claim because that is the claim whose resolution was, per Judge Posner and one colleague, in excess of the panel’s authority. The panel, interpreting the contract, and not overlooking the “answer our questions,” provision but instead quoting it in haec verba, held that there was no express promise in the contract to provide an accurate representation of net savings from subleasing and moving, and that the “entire agreement” clause in the contract precluded implying such a term. CBRE moved for reconsideration, and the panel, evidently not alerted to the fact that the JAMS Comprehensive Arbitration Rules do not provide for reconsideration but only for correction of arithmetic or typographical or clerical errors in an award (Rule 24(j)), issued a procedural order denying Bankers’ reconsideration motion based on its lack of merit. In that order, the panel specifically addressed the argument that the “answer our questions” provision necessarily implied a duty to provide accurate answers and that the duty was breached by providing an inaccurate answer. The panel stated that the “answer our questions” duty was fulfilled by providing the cost-benefit analysis that included the disclaimer of responsibility for errors, and that CBRE’s position about the “answer our questions” clause furnished no reason to reconsider and alter the award’s outcome on the breach of contract claim.

The District Court confirmed the award, and reasoned that whether the panel’s interpretation of the contract was right or wrong, it was an interpretation of the contract and so the Court was required to confirm the award under the Illinois Uniform Arbitration Act which in substance and application is not materially different from the FAA. (The transcript of the hearing at which the District Court’s order was announced is available in the docket on the Northern District of Illinois website. I have downloaded it.)

But for Judge Posner the matter looked different. First, he treated the order denying reconsideration as an award, and subjected its reasoning to review according to the legal standards applicable to an award. He proceeded to analyze the panel’s position regarding the “answer your questions” provision, and concluded that the contractual duty to answer questions accurately could not be excused by the disclaimer in CBRE’s cost-benefit analysis because the disclaimer was not contractual but instead was a unilateral term inserted by CBRE in the cost-benefit analysis. In effect, per Judge Posner, the arbitration panel gave contractual effect to a non-contractual term and by doing so exceeded its powers which were, in relevant respect, confined to interpreting the contract as written.

It is a technical objection, I suppose, but I think a correct technical objection, to state that the Seventh Circuit ought to have treated the reasoning in the panel’s procedural order denying reconsideration of the award as a nullity because the proper ground for denial of reconsideration, under the JAMS Rules, should have been that the panel lacked power to entertain the reconsideration motion. As to the merits, the panel was functus officio save for potential correction of clerical or typographical or arithmetic errors appearing on the face of the award, and so the panel’s observations in the procedural order denying reconsideration about the disclaimer in the cost-benefit analysis and its relationship to the “answer your questions” obligation ought to have been treated as statements having no legal effect, and certainly not as an additional award. (The parties had stipulated that the initial award, denominated “Final Award,” should be re-named “Interim Award,” but this was because the panel had not yet dealt with cost-shifting . The re-naming did re-open the award, either for changes in result or for embellishment of its rationale.)

The panel’s actual award, as opposed to the procedural order that the Seventh Circuit majority erroneously treats as an award, did not even mention the disclaimer in the cost-benefit analysis, and so the vacatur of that original award based only on the supposed excess of power in referring to the disclaimer in a post-award order denying reconsideration seems quite dubious. The case was already decided without reference to the disclaimer, and so the Seventh Circuit majority has reverse-engineered the reasoning of the subsequent order into the award in order to come up with an excess of authority outcome.

But let’s suppose that the panel’s reasoning in the subsequent order had in fact appeared in the original award. What then?  Wasn’t the panel entitled to consider that the question Bankers had asked CBRE was “what do you estimate to be the net savings we can reasonably expect to achieve by moving and subleasing”? And wasn’t the panel entitled to to interpret the “answer your questions” provision as containing no implied prohibition against including a disclaimer of responsibility for errors affecting an estimate in the answer to a question that called for the making of such an estimate? One can certainly disagree with this interpretation of the contract, but it is not a “wacky” interpretation or a failure to give any interpretation.

Like the dissenting judge on the Seventh Circuit panel, Arbitration Commentaries dissents, and offers its fearless forecast that this case if it is even long remembered will be viewed more as a bad hair day for Judge Posner than as a significant precedent concerning judicial review of arbitration awards.