Perhaps one should have a valid excuse, in the company of intended readers of Arbitration Commentaries, to re-open the well-worn subject of compromise outcomes on damages in international arbitration – “triangulation,” in the parlance of some eloquent and perceptive commentators (e.g., M. Kantor, Avoiding Triangulations and Chimeras Alike, Global Arbitration Review (July 31, 2012))*; but here identified by its colloquial name: “baby-splitting.”  I claim to have such an excuse, having recently been permitted to participate as a speaker in a program about damages before a knowledgeable audience, and for that purpose having tried to compose some thoughts on the matter. A few of those thoughts, falling short (as these essays usually do) of being a definitive treatment, are set forth here:

1. “Institutional/environmental” factors often weigh against baby-splitting (at least overt forms of it). Let’s first consider investor-State arbitration. Investment arbitration awards, unless made confidential by agreement or order, are published in accessible online sources. They are studied and discussed by practitioners in the field and scholars in academia. The transparency factor is one element that should encourage investment arbitrators to be thorough and objective in their approach to damages. The relatively concentrated nature of the investment arbitration bar, and its well-developed communication networks, also serve to place investment arbitrators under a microscope. The prospect of annulment proceedings in ICSID cases is perhaps a factor – but high professionalism may be the best explanation – that motivates investment law arbitrators to display in their awards painstakingly detailed and thorough exposition of the parties’ contentions and equally painstaking Tribunal analysis on both liability and quantum. This would seem to be not particularly out of fear of an actual annulment, but for two reasons: first, to inhibit the prospects of and the costs associated with annulment proceedings, and second, to avoid the negative peer review (with full transparency to the investment arbitration community) that could appear in an annulment committee’s decision even if the award is sustained. Let’s now consider commercial arbitrations, with lesser degree of institutionalized transparency. In ICC arbitrations and others where there is similar “peer review” of draft awards (members of the ICC Court who scrutinize awards being viewed as peers of the arbitrators for this purpose), the incentives to resolve quantum issues analytically are also present. Many arbitrators approach damages analytically mainly because this is what arbitrators consider that they are duty-bound to do. Whether subjective choices of damages amounts are more prevalent where the awards are less scrutinized and less transparent is difficult to say. I know many arbitrators who consider themselves duty-bound to tackle difficult quantum issues as objectively and thoroughly as the evidence and circumstances permit, without regard to transparency factors. At the same time, we know that wrestling with complex quantum issues demands great discipline, stamina, and time, and presiding arbitrators are sometimes selected for reasons having little to do with their willingness or ability or availability to make the required effort. Some of them will compensate by delegation, whether to another member of the Tribunal, or to a Tribunal assistant, who claims to have quantitative skills and a consequent ability to decipher and analyze the evidence about damages.
2. Are Disappointed Parties Propagators of the Myth of Baby-Splitting?: I have no survey data to support this hypothesis. But is seems entirely plausible to suppose that some of what is perceived as “baby-splitting” by arbitration participants is a speculative attempt to ascribe a subjective motive to the arbitrators’ rejection or partial rejection of the party’s position on damages. When arbitrators have latitude to omit detailed statements of their reasons – as they do in many settings other than investment law cases, the arbitrators may have specific reasons for omitting their reasons. For example, an award that is highly critical of the analysis or the credibility of an expert to whom a party has presumably paid considerable sums in professional fees may strain relationships. Arbitrators may prefer to leave a gap in the reasoning, seeing reticence as the lesser evil. In such a case, the perception of baby-splitting may be justified, but the reality may be otherwise. Conversely, arbitrators may state detailed reasons for having adopted particular assumptions or discredited particular elements of the Claimant’s position on damages. And yet the Claimant and its counsel may remain convinced that this rejection was subjectively not analytically motivated, the award’s stated reasons being seen to operate as an arbitrary tool to make a subjective outcome appear rational. These kinds of reactions are understandable byproducts of an adversary process that entails substantial financial and emotional investments by the parties and their professionals. Consider this example. In a recent investment arbitration case, Claimant claimed that the expropriated assets had a 40-year expected life, while the Respondent State contended for 25 years. Each party submitted extensive expert evidence on this specific question. Opting for the 25-year term, the Tribunal provided detailed assessments of the reliability and credibility of each expert’s submissions. This choice had a 35 percent reduction impact on valuation under the discounted cash flow (DCF) methodology. Will the Claimant or its professionals admit, in any public forum or private survey, that Respondent had the better of the argument? Perhaps not. But if the award is the objective evidence, and the arbitrators’ motives and stated conclusions are presumed to be sincere, the case for baby-splitting is difficult to make.
3. Survey Evidence Disputes Baby-Splitting as Mostly Myth: Evidence that arbitrators do not systematically gravitate toward moderation in damages outcomes comes from some sources even more authoritative than your Commentator. A 2015 study by the American Arbitration Association covering 2,384 AAA domestic and international commercial arbitration awards in cases where monetary relief was claimed found that 41 percent of the cases resulted in awards of 80 percent or more of the amount claimed, 31 percent resulted in claims denied, and only 28 percent resulted in awards of less than 80 percent of the amount claimed. (“AAA/ICDR Awards Do Not Split the Baby: Countering Counsel Perception in Commercial B2B Arbitration Cases,” a 2016 AAA report that may be found at www.sacarbitration.com; for apparently technical reasons owing to changes in the AAA’s website, this AAA whitepaper is not currently posted there). A broader study in 2014 that canvassed multiple empirical analyses concluded: “Practically all the research under consideration came to the conclusion that arbitral tribunals very often grant claimant or respondent the full or almost the full amount claimed; awards in the mid-range are the exception and not the rule.” (A.C. Weber, C.A. Pascuzzo & G. De Siqueria Pastore, Challenging the “Splitting the Baby” Myth in International Arbitration, 31(6) Journal of International Arbitration 719-734 at 733 (2014)). Such surveys have their own limitations of course. A survey of all AAA/ICDR awards in a given year may include a large number of cases where the amount of the award, if there is liability, is relatively well-defined by contract. A more selective sampling of business valuation and lost profits cases would probably yield different results.
4. Salvation of the Baby-Splitters?: Even if there is no consensus about how prevalent baby-splitting may be, we may all agree that it would be desirable to take concrete steps to reduce the arbitrator’s temptation. Here there is shared responsibility of advocates and arbitrators. Suppose, as is wont to happen in some cases, the Claimant submits a thorough DCF analysis with a specific outcome, and Respondent’s expert submits an “attack” report that questions Claimant’s experts’ assumptions, methodology, data accuracy, etc., but does not make a counter valuation or even a sensitivity analysis on key variables (or, mainly for rhetorical purposes, opines that there are no damages, that the value of the property taken is zero or negative, etc). Responses of arbitrators in such situations may in part be cultural. For American arbitrators, especially in a case with American counsel, the norm of party autonomy translates into a strong momentum toward allowing the parties to present their cases as they wish. If this leaves the Tribunal at the deliberation stage with less guidance on quantum than might be desirable, at least the dysfunction is a byproduct of the parties’ choices. But even American arbitrators do find ways to manage the problem. One approach, suitable for a case where quantum stands to be a complex valuation or lost profits endeavor with foreseeably conflicting expert testimony and substantial potential variations based on data and assumption choices, is to encourage the Respondent, even at the preliminary conference stage, to respond to Claimant’s quantum evidence with a quantified counter-position. Another possibility is to await receipt of both sides’ expert submissions, and if Respondent has made an attack report only, to invite this to be supplemented with a counter-calculation. (More commonly, but perhaps less effectively, the Claimant submits a reply expert report purporting to show that Respondent’s criticisms have been taken into account, resulting in modest adjustments).  Another strategy is for the parties’ experts to share their damages models with the Tribunal, or to develop jointly a serviceable model for the Tribunal’s own use. (This phenomenon can be observed in the reading of a recent investment arbitration award, see Burlington Resources v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Reconsideration and Award dated Feb. 7, 2017, published on italaw.com)). This solution raises further issues about the Tribunal’s ability to manipulate the model, the possible need for a Tribunal-appointed expert, and the possibility of ongoing dialogue with the party experts beyond the confines of a merits hearing.

*“Triangulation” in social science terminology refers to the use of multiple methods in a study in order the cross-check the validity of the results. In the arbitration context the term initially had reference to an arbitral tribunal’s examination of possibly three different quantum outcomes based on possibly three different valuation methods  — income-based (DCF), market-based (comparables) and asset-based (net asset value).  See C. Amirfar, The Role of Damages Calculations in the Legitimacy of International Investment Arbitration, in A. Rovine, ed., CONTEMPORARY ISSUES IN INTERNATIONAL ARBITRATION AND MEDIATION: THE FORDHAM PAPERS 2015, Chapter 7 at 108, 110 & nn. 10, 11, citing to M. Kantor, supra.)

Perhaps it is an indication that the rehabilitation of air conditioning systems in certain US Courthouses has proceeded apace, an unheralded early accomplishment of the current US Administration’s vaunted infrastructure program, that this summer has so far produced an impressive output of federal appellate decisions concerning international arbitration. Whereas a beach-and-boat reading guide is something of a mid-summer tradition at Arbitration Commentaries, here, dutifully, are reviews and recommendations:

Non-Enforcement of Annulled Awards — Decisions last month in the US Courts of Appeals for the Second and District of Columbia Circuits further entrenched the US position that enforcement under the New York Convention of an award judicially annulled at the seat of the arbitration may only be obtained if the annulment is offensive under the same very restrictive US public policy standards that govern denial of the recognition and enforcement of a New York Convention award made at a foreign seat of arbitration. (Thai-Lao Lignite (Thailand) Co. v. Government of the Lao People’s Democratic Republic, 2017 WL 3081817 (2d Cir. July 20, 2017); Getma International v. Republic of Guinea, 862 F.3d 45 (D.C. Cir. July 7, 2017)). In holding that considerations of “comity” should normally lead to denial of enforcement of the annulled award unless such denial would be “repugnant to fundamental notions of what is decent and just,” the courts acknowledge that they have embraced a test adopted from the Restatement (Second) of Conflict of Laws concerning recognition and enforcement in the United States of valid judgments of the courts of foreign nations (§117, comment c). Thus the US law position on how the discretion lodged by the New York Convention to refuse, or not, confirmation of an award that has been set aside at the arbitral seat is that the annulment judgment should be regarded, in terms of its convertibility to a US judgment, in essentially the same fashion as foreign judgments generally, and should not be treated with reference to any distinctive attributes of the judgment owing to its status as an intervention overruling the adjudication of an international arbitral tribunal. This short post is not the setting for a debate on the wisdom of such a categorical approach. It is worthy of note however that the source of this governing principle is not the New York Convention itself, and the motive for its adoption is not to implement the perceived purposes of the drafters of the Convention or those of the Congress that implemented the Convention by enacting FAA Chapter 2. This approach instead appears to be an expression of American jurisprudence in the realm of foreign relations more generally — that comity among nations calls for foreign arbitral annulment judgments to be treated on par with other foreign judgments. The New York Convention itself takes no position on what should be the position of a Contracting State as to enforcement of a vacated award, and expressly leaves open the possibility that different Contracting States may take more or less liberal enforcement positions: “The provisions of the present Convention shall not … deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon.” (Art. VII(1)). Note is taken here, but without much further discussion, that the Thai-Lao Lignite case also involves additional considerations under US civil procedure law (FRCP 60(b)(5)) because, owing to the delays in the annulment proceedings in Malaysia, a judgment confirming this award had already been entered in a US District Court in New York. The procedural posture of this appeal was that the District Court had entered a post-annulment judgment vacating its pre-annulment confirmation judgment. That may be expected to be the exceptional circumstance, the more usual situations being either that annulment is obtained before confirmation is sought, or confirmation is postponed under the Convention, by the court petitioned to confirm the award, on the basis of a pending annulment proceeding (Art. VI).

Arbitral Determination of the Seat of Arbitration — The US Eleventh Circuit Court of Appeals held (perhaps without entirely realizing it was doing so) that in a US-seated international arbitration, an arbitrator’s interpretation of the arbitration clause in regard to the proper seat of arbitration for counterclaims lodged by the Respondent was entitled to deference, as it was a procedural matter primarily for arbitral determination, not a “gateway” question primarily for a court to decide or re-decide independently. (Bamberger Rosenheim, Ltd. v. OA Development, Inc., 2017 WL 3014354 (11th Cir. July 17, 2017)). Here the arbitration agreement between companies of US and Israeli nationality provided for ICC arbitration and that the “venue” of the arbitration would be in the home country of the party against whom the “dispute” was “submitted.” The Israeli company submitted a dispute to the ICC, thus triggering an Atlanta-seated arbitration. When the US company submitted a counterclaim, the Israeli firm asserted that the Tribunal lacked jurisdiction and that in all events the counterclaim had to be arbitrated at a Tel Aviv “venue.” The ICC Court of Arbitration invited the arbitrator to decide whether the parties had an agreement on the seat of arbitration for counterclaims (see Art. 18(1) of the ICC Rules). The arbitrator ruled in a partial final award, in effect, that the parties had agreed that counterclaims would be heard at the same “venue” as that established by their agreement for the Claimant’s claim. The ICC Court treated this under Art. 18 (1) as dispositive of the question whether the parties had an agreement on the seat, and the arbitration proceeded to final award as an Atlanta-seated arbitration. Both the US district court judge in Atlanta and the Eleventh Circuit treated the question, parroting the wording of the arbitration clause, as one of “venue” – seeming to assume that this term had no potentially distinctive aspects in international arbitration — and decided the case on the basis that under FAA domestic case law, disputes about the hearing “venue” are procedural matters that parties are presumed to want arbitrators rather than courts to decide with only the very limited judicial review associated with awards on the merits. But in fact this was a question about the arbitral seat, and neither the arbitrator’s award, the District Court decision, nor the Eleventh Circuit affirmance, addresses the issue from the perspective that the fundamental issue was what arbitral legal regime would apply to a claim made against a party, and whether the meaning of the “venue” provision was that each party intended that it would only be required to defend a claim under the arbitral legal regime of its home country. Some might say that this is a sufficiently fundamental issue about the legal complexion of the arbitration that the parties, if they had given the matter thought, presumptively would have wanted a court not an arbitrator to decide. After all, if US arbitration law regards the enforceability of a New York Convention award as primarily subject to the judicial power of courts at the seat of the arbitration — see note above re recent cases — is it not more consistent with that view to treat a dispute about whether the seat was agreed to be in Country A or Country B as a “gateway” question of (or closely akin to) “arbitrability”? The courts in this case evidently were not guided to consider the issue in these terms.

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On more sanguine note: The Eleventh Circuit, evidently having been alerted that its 1998 decision, holding that only FAA Chapter 2 and the New York Convention, and not FAA Chapter 1, provide vacatur standards applicable to a New York Convention award in a US-seated international commercial arbitration (Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1445-46 (11th Cir. 1998)), states in a footnote in the Bamberger decision that it assumes without deciding that FAA Section 10 (of FAA Chapter 1) applies. This is a welcome signal that the 1998 decision will be formally overruled on a suitable occasion, and that the Eleventh Circuit will join other federal judicial circuits that have adopted the position that in a US-seated international commercial arbitration the statutory grounds for vacatur of an award found in FAA Chapter 1 are applicable.

Enforcement of ICSID Convention Awards — The US Second Circuit Court of Appeals held that the 1976 Foreign Sovereign Immunities Act (FSIA) governs subject matter jurisdiction, personal jurisdiction, and procedure, in regard to the enforcement against a foreign sovereign of an ICSID Convention award. This ruling overrules a series of decisions in New York federal district courts that had construed the 1966 statute implementing the ICSID Convention (28 USC § 650a) as a source of subject matter jurisdiction over all ICSID Convention award debtors including foreign sovereigns, and as a source of power to engage state law procedures including ex parte procedures to seize foreign sovereign assets in the US for execution. Critical to the Court’s reasoning was the fact that the US Supreme Court has stated several times, beginning with the Amerada Hess case in 1987, that the FSIA is the exclusive basis for obtaining jurisdiction over a foreign sovereign in US courts. Finding no express conflict between the 1976 FSIA and the 1966 ICSID legislation, the Second Circuit concluded that the Supreme Court’s emphatic statements about FSIA’s exclusivity weigh in favor of finding that the FSIA prevails over the earlier-enacted ICSID Convention-specific statute. While there are several other federal judicial circuits where this question has not been definitively resolved, the practical consequences are significant, as foreign governments that expect to be ICSID Convention award debtors have even greater incentives than exist already to concentrate any US-based assets in New York institutions. (Mobil Cerro Negro, Ltd. v. Bolivarian Republic of Venezuela, 2017 WL 2945603 (2d Cir. July 11, 2017)).

Enforcement of Bifurcated Partial Final Award on Liability — The US First Circuit Court of Appeals held that an award on liability in an international arbitration bifurcated by agreement into liability and damages phases satisfies the New York Convention’s requirement that the Award shall have become “binding” on the parties, and thus may be confirmed under the Convention and FAA Chapter Two. This extends to Convention awards a rule of long standing in domestic FAA case law. A few years ago your Commentator, discussing that rule in this space, asked whether agreed bifurcation ought to be the outer limit for enforcement of awards that are intended to determine liability, or whether for example the arbitrator’s unilateral decision to bifurcate or her adoption of a contested party application to bifurcate might also suffice. This latest decision offers no hint of how that issue would be decided, but agreed bifurcation is clearly presented in this decision as a sufficient — but not necessarily necessary — condition for confirmation of a partial final award on liability in a case falling under the Convention. Also, you are encouraged read this case to admire the craft of Associate Justice (Ret.) of the US Supreme Court David Souter, proof that there is a robust judicial life to be had after leaving service on the Court. (University of Notre Dame (USA) in England v. TJAC Waterloo, LLC, 861 F.3d 287 (1st Cir. June 28, 2017)).