Archive for the ‘Uncategorized’ Category

Looking for Law in All the Right Places

Monday, April 2nd, 2018

Reproduced below are the Power Point slides that accompanied an oral presentation by Mr. Goldstein to the International Arbitration Club of New York on March 19, 2018. A transcript of the presentation is expected to be available in the week of April 9 and will be uploaded to a revision of this post.

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1/21

Looking for Law In All the Right Places: A Modern Spin on Jura Novit Arbiter

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2/21

JNC – US & CANADA JUDICIAL POSITION

“The concept of jura novit curia is not directly part of the law of Canada and a search of the usual Canadian legal databases for that phrase turns up no court case in any province ever referring to ‘jura novit curia’, let alone ‘jura novit arbiter’.” J. Brian Casey

US situation evidently is much the same as in Canada (as we shall see…)

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3/21

JNC —  A Canadian Judicial Perspective

It is generally accepted that judges can conduct research beyond the materials provided by counsel. One cannot argue, for instance, that we are limited to case precedents submitted by counsel or that we cannot conduct our own legal research.”

Hon. Wayne K. Gorman, Judge of the Provincial Court of Newfoundland and Labrador

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4/21

JNC – U.S. Judicial Position

FRCP 44.1 – “In determining foreign law, the court may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence.”

CPLR 4511(b): “Every court may take judicial notice without request…[of] the laws of foreign countries or their political subdivisions.”

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5/21

JNC – U.S. Judicial Position

  • “There is no requirement that the court give formal notice to the parties of its intention to engage in its own research … Ordinarily the court should inform the parties of material it has found diverging substantially from the material which they have presented… To require, however, that the court give formal notice from time to time as it proceeds with its study of the foreign law would add an element of undesirable rigidity to the procedure….”

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6/21

JNC – U.S. Judicial Position

Kamen v. Kemper Fin. Servs., 500 U.S. 90, 99 (1991)

“T]he court is not limited to the particular legal theories advanced by the parties, but rather retains the independent power to identify and apply the proper construction of the governing law.”

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7/21

JNC – U.S. Judicial Position

Hampton v. Wyatt, 296 F. 3d 560 (7th Cir. 2002) (Easterbrook, J.) :

“That the judges did some research beyond the boundaries set by the briefs shows industry rather than the sort of indolence that might deprive the parties of a fair hearing. … [I]t is the sleepwalking judge, not the diligent one, who deprives the litigant of the personal right to careful, individual consideration.

Any time a judge does independent research there is a risk of error, but judges  with some initiative probably err at lower rates than judges who naively believe that the briefs cover everything worth considering. Courts frequently decide cases on lines of reasoning that can’t be found in the briefs. There is no federal entitlement to have a case decided strictly on the basis of precedent cited to the tribunal.”

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8/21

JNC – U.S. Judicial Position

Rowe v. Gibson, 798 F.3d 622, 628 (7th Cir. 2015) (Posner, J.):

“[J]udges and their law clerks often conduct research on cases, and it is not always research confined to pure issues of law, without disclosure to the parties. We are not like the English judges of yore, who under the rule of ‘orality’ were not permitted to have law clerks or other staff, or libraries, or even to deliberate ….”

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9/21

Risk of Non-Recognition or Set Aside of Award?

  • US & Canada: No case law directly on point. To determine whether and when an award may be set aside or refused recognition because of Tribunal initiatives on the content of law, one must extend/transpose principles developed in other contexts concerning: (1) preventing party from having fair presentation opportunity, (2) violation of public policy, (3) exceeding powers.
  • Should sustainability of the award be the relevant conduct standard?
  • Or something else? “Legitimacy” of arbitration process in eyes of users?

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10/21

Placing the JNC/JNA Issue in Perspective

  • Five Variants
  • 1) Tribunal awards on non-pleaded cause of action
  • 2) Tribunal awards on non-pleaded remedy or remedial formula
  • 3) Tribunal awards under law other than agreed governing law
  • 4) Tribunal awards on point of law not raised by partie
  • 5) Tribunal awards on same point of law but different precedents/authorities

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11/21

Variant #1: Award on Non-Pleaded Cause of Action (or Defense)

For the experienced and impartial US Arbitrator…

  • 1) violates autonomy of parties
  • 2) suggests Tribunal bias (in providing recourse where pleaded claims would fail)
  • 3) therefore, not a genuine, recurring, or controversial issue.

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12/21

Variant #2: Non-Pleaded Remedy or Remedial Formula

For the experienced and impartial US Arbitrator…

  • 1) seen as violation of party autonomy
  • 2) suggests Tribunal bias (in providing remedy more favorable to party than what is pleaded)
  • 3) unless broad “notwithstanding” remedial authority found in contract or Rules
  • 4) in exceptional “unless” “notwithstanding” case
  • would ask parties to comment on power of Tribunal to award on non-pleaded remedy,
  • if such power found after full hearing on that question, then provide for full hearing on the Tribunal-conceived potential remedy

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13/21

Variant #3: Award Under Law Other Than Governing Law

For the experienced and impartial US Arbitrator…

1)Will not be done expressly… exceeds powers conferred

2)Controversial Question: arbitrator technique for applying the governing law (##3-5 below)

3)“Cross check” of CAL law against NY law via Tribunal research where Tribunal has one or more NY admitted arbitrators?

4)“Cross check” of UK law against NY law, via Tribunal research, where Tribunal has one or more NY admitted arbitrators?

5) GKK view expressed … and controverted.   No harm/no foul??

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14/21

Variant #4: Award on Point of Law Not Raised

Hypothetical Award:

  • “While Claimant’s breach of contract claim is fatally deficient by reason of Claimant’s own non-performance, the Tribunal finds that on the evidence presented a valid and sufficient claim for breach of fiduciary duty exists. While Claimant asserts no such claim, our duty to apply New York law to the facts before us compels us, in our view, to enter an award in Claimant’s favor on this basis.”

For the experienced and impartial US Arbitrator…

1)Violates party autonomy (adversarial process)

2)Promotes an impression of bias even if there is no actual bias

3)A party-appointed arbitrator who suggests in deliberations an unpleaded theory of liability or defense favoring the party that appointed her is seen as biased by her colleagues.

4)For these reasons, this possibility does not arise, unless perhaps in exceptional case of manifest injustice if all relief were denied to Claimant…

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15/21

Variant #5:  Tribunal Finds And Cites Authorities Not Cited by Parties

For the experienced and impartial US Arbitrator:

1)Prevailing view that this is OK, but permit party comment if authorities found are not merely corroborative of those cited

2)Alternative view sometimes expressed that Tribunal’s application of governing law is bounded by parties’ submissions  (canard??)

3)Controversial points concerning equality of parties:

  1. a) Does Tribunal unfairly aid a party with less competent counsel if it does research that clearly should have been done and was not done?
  2. b) Does Tribunal unfairly aid a party that evidently elects to raise and issue but not address it thoroughly?

4) Reluctance to independently research non-US law (risk of error, language barriers, cultural barrier re civil law)

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16/21

JNA When the Seat is in Civil Law Jurisdiction

Switzerland as Example:

  • JNA not formally codified in Swiss arbitration law
  • JNC however is well established in Swiss courts
  • JNA accepted in Swiss courts’ arbitration jurisprudence — by analogy to JNC in courts — subject to overarching norms of due process: equal treatment and right to be heard. JNA may to some extent trump hearing rights if Tribunal conclusions were foreseeable.
  • JNA (like JNC) sometimes seen in Swiss jurisprudence/commentary as duty to ascertain the content of applicable law, not merely power to do so. But this is controversial.
  • JNA/JNC meaning: Legal consequences of presented facts are for arbitrators to decide, notwithstanding limits of what is pleaded.

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17/21

JNA in Your Next Geneva Arbitration

  • Swiss-seated Tribunal that adopts/proposes unpleaded legal solutions takes rather less risk than in USA that annulment court views this as evidence of bias.
  • But note: unpleaded legal solution does mean unpleaded claim – award on the latter violates basic principles.
  • US arbitrators should understand the difference
  • US arbitrators might wish to alert Tribunal (e.g. Swiss chair) to manage the possible misperceptions of US/common law counsel.
  • No impediments to Tribunal research to verify or modify legal conclusions based on party submissions.
  • Suggestion to invite comments from parties on potential unpleaded legal solutions – even foreseeable solutions — likely to be taken seriously by Swiss co-arbitrators.

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18/21

JNA In Your Next London-Seated Arbitration

  • EAA Article 34(2)(g): The Arbitral Tribunal shall decide “whether and to what extent the tribunal should itself take the initiative in ascertaining the facts and the law.”
  • Article 22.1(iii) of LCIA Rules: Article 22.1(iii) gives Tribunal the power (but not the duty) “upon its own initiative, but … only after giving the parties a reasonable opportunity to state their views and upon such terms (as to costs and otherwise) as the Arbitral tribunal may decide,”… to “conduct such enquiries as may appear to the Arbitral Tribunal to be necessary or expedient, including whether and to what extent the Arbitral Tribunal should itself take the initiative in identifying relevant issues and ascertaining relevant facts and the law(s) or rule of law applicable to the Arbitration Agreement, the arbitration and the merits of the parties’ dispute.”

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19/21

JNA in Your Next New York-Seated Arbitration

  • No applicable arbitration law, rules, or norms counsel arbitrators sitting at a US seat not to conduct corroborative legal research (as US judges would do, directly or via their law clerks or both).
  • Sometimes expressed view that the governing law should be or must be derived from the parties’ submissions exclusively appears to be a canard, propagated by a minority (?) of arbitrators who cannot, or prefer not to, conduct legal research. “Jura Novit Arbiter Sine Lexis”
  • A suitable role for Tribunal Secretary where all Tribunal members lack skills or resources or inclination to conduct legal research ? — Probably yes, with full transparency.
  • Read the ILA 2008 Recommendations in 26(2) Arbitration International (2010)

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20/21

ILA Recommendations

15 recommendations, of which two are critical takeaways today:

  • #7: “Arbitrators are not confined to the parties’ submissions about the contents of the applicable law. Subject to Recommendation 8, arbitrators may question the parties about legal issues the parties have raised … and review sources not invoked by the parties relating to those legal issues and may, in a transparent manner, rely on their own knowledge as to the applicable law as it relates to those legal issues.”
  • #10: “If arbitrators intend to rely on sources not invoked by the parties, they should bring those sources to the attention of the parties and invite their comments, at least if those sources go meaningfully beyond the sources the parties have already invoked and might significantly affect the outcome of the case.”

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21/21

THANK YOU

Interim Measures: Another Plea for the International Standards

Monday, April 2nd, 2018

This post is the text Mr. Goldstein has prepared for an oral presentation in a panel program on provisional relief in aid of arbitration on April 5, 2018 in Washington, D.C. at the annual conference of the American Bar Association’s Section of Dispute Resolution. Mr. Goldstein’s co-panelists are the Hon. Faith Hochberg (Ret.) and the Hon. Bruce E. Meyerson (Ret.).

 

These remarks about interim measures in international commercial arbitration were prepared for listeners and readers, perhaps many of you, who have become arbitrators in international cases as a rather new phase of an illustrious career spent mainly within US legal borders.

Even the phrase “interim measures” may have a rather alien ring to it, as it did for me when I first sought such relief in an international arbitration, 27 years ago. (The motion was granted).

Now a new international case arrives in your e-mail, and the Demand for Arbitration is accompanied by an “urgent” Application for Interim Measures that has already been gathering dust for several weeks during the process forming the Tribunal. And it is a US Claimant based in NY, against a Japanese company based in Japan, and the seat of arbitration is NY and the governing law is NY, and the application asks that the Japanese company should be required to continue performance while the case proceeds. And you ask yourself: “well isn’t this just another preliminary injunction motion under NY law (?), and why should the fact that it’s an international case make any difference?” And then you get an e-mail from one of your co-arbitrators, the one appointed by the Japanese party, represented by a NY law firm, and she is a recently-retired federal district court judge from Pennsylvania — not New Jersey!! — and she asks exactly that question!

Now, those of you who fit into the illustrious career profile that I announced at the start, raise your hands — because with my magic wand I will now transform you. Presto! Your nationality remains American, but you now come to this arbitration from a different career track, after a 30+ year career as an advocate in Investor-State arbitrations, and now that you are a full-time arbitrator this commercial case is rather an anomaly in your docket of mainly treaty-based disputes. (To be clear,  such is not the profile of this speaker and blogger).

So what is your answer, in your transformed condition, to your retired PA (not NJ) retired US federal judge-colleague who poses this  seasonally-appropriate question? (“Why is this injunction motion different from all the others?”) You take up your i-phone and you begin to draft an e-mail.

“My Dear Esteemed Colleague

The question you raise is a serious one, and it is not adequately answered in a few words so please excuse the length of this first communication between us, although I will strive to be succinct:

1) First: Like a court we must always consider first whether we have jurisdiction. But unlike many cases in court, to solve an objection to our jurisdiction might be a very complex case-within-the-case. If a State contended that an Investor was not in fact duly qualified or legally classified as such, that issue alone could in fairness consume months of proceedings. US courts might insist on expedited discovery and build an adequate record about a contested issue of subject matter or personal jurisdiction in a few weeks. That solution is scarcely possible here. And here too we have such a case-within-the-case, as the Respondent claims it did not sign the contract and resists all contentions that it is bound to arbitrate. Our escape from this conundrum is the doctrine of prima facie jurisdiction, a decades-old concept first developed by international courts. It allows us here to decide simply if Claimant makes a non-frivolous assertion of arbitral jurisdiction. And then to move on. How otherwise could we effectively handle an application like this, much less function as emergency arbitrators in comparable cases, as you may have already been called upon to do?

2) Second: The question of what legal standards govern the disposition of the application still divides our community or at least a portion of it. From an investment law vantage point, this has always been a matter of trans-national principles. In contrast, the notion that an international arbitral tribunal in a contract dispute governed by New York law and seated in New York should necessarily apply the preliminary injunction criteria of New York’s state and federal courts has a remarkable but quite unwarranted durability. In international tribunals, there appears to be no trace of a notion that where an interim measure is sought against the Host State by a foreign investor, the application should be governed by the provisional remedies procedures of the courts of that Host State.  Whether or not a US state’s law would regard its courts’ interim relief standards as “substantive” or “procedural” for choice-of-law purposes, the jurisprudence, scholarship, and foundational documents  in the world of international arbitration seem quite universally to treat the matter as a question of arbitral procedure. The best evidence of this is the standards, more or less vague or precise, that appear in major international instruments like the ICSID Convention and ICSID Arbitration Rules, the UNCITRAL Model Law and UNCITRAL Arbitration Rules, and in the rules of all major provider organizations. It follows that parties who elect to arbitrate international disputes elect to treat interim measures standards as matter of arbitral procedure, and from that premise it follows that a generic governing law clause in a contract selecting the laws of NY or PA ought to be construed as excluding the state’s standards concerning provisional relief, just as much as such clauses are routinely construed to exclude the state’s civil procedure law generally.

Third: If there is one fundamental difference between US judicial practice and international arbitral practice in regard to interim relief, it concerns the applicant’s burden in regard to likely success in securing the ultimate final relief. International courts and treaty tribunals have reduced this to nearly a non-factor. They tell us the applicant should have a right, relating to the interim relief sought, that is valid prima facie — which is to say, she has a non-frivolous claim to the right that she seeks to protect. Let’s illustrate that. In a significant number of investment arbitrations, the measures sought related to the Host State’s parallel pursuit of criminal proceedings against the Investor or her agents and affiliates. The right of the Investor to fundamentally effective arbitral proceedings is a cognizable and vital procedural right, and tribunals need not and do not require more concerning the merits of an underlying substantive claim of expropriation, or unfair and inequitable treatment, before turning full attention to whether it is urgent and necessary to prevent the extradition or incarceration of the Claimant so that she might effectively testify and assist her counsel. Some common law arbitrators will take up the words of the UNCITRAL Model Law — “reasonable possibility” of success on the merits, and will say this is more or less a diluted but still workable version of the American judicial rule of probability. But to read it that way gives inadequate weight to the principle, going back decades in international tribunals, that there should be no prejudgment of the merits at the stage of interim relief. To give effect to that principle, the focus of interpretation of the UNCITRAL standard should be on the choice of the word “possibility” in lieu of prospect or probability or likelihood. Credible allegations with basic documentary support ought normally to suffice. But I fear, dear Colleague, that the party opposing provisional relief, the international party here, from Japan, but represented by NY counsel and having appointed such a distinguished PA jurist as yourself, will insist so long as it may that it is appropriate to apply the NY judicial probability of success standard, because that gives its client the best chance to win at this stage.  If I have persuaded you to the international standard, might we perhaps enter a procedural order about the applicable standards, and relieve the parties and ourselves of the uncertainty and burden and cost of a cumbersome evidentiary proceeding at this interim measures stage?

Fourth: When I read the interim measures orders from investment tribunals and I see the convergence around a three-part test of necessity, urgency, and proportionality, I am inclined to wonder why this test, properly understood by commercial arbitrators of common law orientation, ought not to be warmly embraced by them. Necessity, after all, captures the common law notion of irreparable injury, while not exactly replicating it. The adequacy of money damages may disprove necessity, and many investment tribunals have so stated. But an international arbitral award for money damages and a judicial judgment for the same relief against a domestic defendant sometimes cannot be directly equated because recognition and enforcement of an arbitral award remains a process fraught with idiosyncratic uncertainties, risks, and obstacles, especially in regard to prospective award debtors that are State agencies, State affiliates, or otherwise under the influence of State actors.  Also, we do well to consider that arbitration more than litigation is a process for conflict management not merely conflict resolution — and this notion is reflected in another long-standing international principle that interim measures may properly serve to prevent aggravation of the dispute — which is to say (inter alia) proliferation of the issues and sums involved by virtue of a party’s unilateral action while the case is pending. This is a more powerful principle than the common law equity notion of “preserving the status quo.”  It might justify a certain type of interim measure to prevent a one billion dollar dispute with two thorny valuation issues from becoming a $25 billion dispute with ten such valuation issues, even though in common law terms of irreparable harm the compensability of each injury by a sum of money differs only in regard to the sum. When we read the UNCITRAL formulation “not adequately reparable” by an award of money damages, we ought to have these notions in mind.

Fifth: As this e-mail is already too long, Dear Colleague, I invite you to consider that “urgency” and “proportionality” as the internationalists’ phrasing goes, are quite in synch with common law judicial principles concerning the imminence of irreparable injury and the so-called balance of hardship or balance of convenience. But it is useful for us as commercial arbitrators to understand that in the context of disputes with States, whether the claims are treaty-based or contractual, the State may be engaged in a prolonged and multi-layered process of implementing some aspect of State policy or sovereignty — and the example of a criminal investigation, mentioned earlier, is a useful one. If the State seeks the extradition of the arbitration Claimant to face criminal charges in the State, but must overcome three administrative hurdles even prior to a hearing on extradition in the requested State, the interim measure sought by Claimant to enjoin the State from pursuing her extradition may not satisfy the test of urgency and might be denied without prejudice.  If the Claimant seeks an order directing the State entirely to suspend its criminal investigation relating to the Claimant and her affiliates that are domiciled in the State, she risks denial of relief because the sovereign interest in enforcement of the State’s criminal laws is so fundamental that the relief sought may be seen as disproportionate to the potential harm. For this reason increasingly we see that sophisticated counsel are inviting Tribunals to order one a variety of proposed interim measures within a broad range of potential palliative steps. And the process of selecting which if any of the measures satisfies the standard of “proportionality” invites us as arbitrators to hearken back to our days studying US Constitutional Law, and to think about “least restrictive means” analysis, as applied to regulations that inhibit the exercise of fundamental individual rights in service to other legitimate policy objectives of the State. (Williams-Yulee v. Florida Bar, 135 S.Ct. 1656, 1670 (2015)).

In closing, dear Colleague, I invite you to draw the conclusion that this process is not so very different from the preliminary injunction practice you have experienced so often in the US courts, save as it is rather fine-tuned to the arbitral tradition of our keeping open minds and open hearts concerning the merits of the case, at least in the perceptions of the parties, and thereby acting in service of the norms of party consent, party autonomy, and party equality, for the duration of the proceedings. That very much explains in one concept the differences of the international arbitral approach from what you were accustomed to in a U.S. district court. And I hope you will embrace it warmly.

cc: Our Other Esteemed Colleague

All typographical errors are entirely the fault of this i-phone and not its user.”

 

 

THIRD PARTY FUNDING DISCLOSURE ISSUES – AN ARBITRATOR PERSPECTIVE

Thursday, March 1st, 2018

Remarks presented by Marc J. Goldstein in the lecture program of AAA/ICDR practice moot in New York on February 23, 2018. 

 Introduction

The CEO of a third-party funding firm in New York is an exceptionally capable attorney who was a colleague of mine at my former law firm. He was not just another colleague; we worked together on major international arbitration cases. One of them, as it happens, was a very early instance of the use of third-party funding — used by our client, and negotiated with the funder by a funding neophyte named Marc Goldstein, for a sizeable claim against a state-owned entity — in that instance, a Singapore-seated arbitration against a ministry of the People’s Republic of China. Having a client funded by a funder, in a large firm disputes practice circa 2000, was déclassé to put it mildly. It implied that your practice, and your firm, were going down-market in search of business, in search of a firmer foothold in the world of    international  arbitration. How the world has changed.

Today, if my former colleague’s funding firm is providing funding for the Claimant in an arbitration in which I am appointed as an arbitrator – and especially if I am the Claimant’s party-appointed arbitrator – this is a fact that all parties might wish to know and have the opportunity to consider at an early stage, from the standpoint of whether the my appointment might be challenged, and whether the award might be in jeopardy if the matter goes undisclosed and is uncovered, say, by investigators for the award loser. It follows that the funding facts are facts that the arbitrator might prefer to know, and to consider for potential disclosure, so that there should be no serious question raised later on about the arbitrator’s independence and impartiality.

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Role of IBA Guidelines

Students involved in the Moot will surely have read carefully and considered the relevant sections of the IBA Guidelines on Conflict of Interest in International Arbitration 2014. The arbitrators present in the room surely are familiar with them, but perhaps only a fraction of them have had to consider applying the guidelines to their own disclosures in an arbitration, or to a party’s application to the Tribunal for disclosures by the adverse party, when the applicant expressed a concern that the adversary’s case is funded by a Funder.

If a funded party volunteers a disclosure that it is funded, the arbitrators can take guidance from the IBA Guidelines —in essence analyze potential disclosures in regard to the Funder as if the Funder were a party —make suitable disclosures, make suitable follow-up inquiries to the disclosing party to enable the arbitrator to conduct due diligence. An ICC Guidance Note issued in 2016 is to similar effect. The problem of course is that voluntary disclosure of funding is not universal and probably is not even common; it is not mandated by institutional rules, or by industry self-regulatory measures, or, in all but a handful of important host jurisdictions for international arbitrations, by applicable law. Notably there is a mandate for disclosure in the arbitration provisions of the new Canada-EU Trade Agreement. And if you happen to have an investment arbitration under the Singapore Centre’s 2017 investment arbitration rules, it is explicitly stated in those rules that the Tribunal has power to order such disclosure by a party. But as to mandatory disclosure, Singapore in amending its arbitration law to permit third party funding  did not enact a mandate broadly — but did enact such a mandate as a Rule of Professional Conduct for Singapore attorneys.

If a party in an arbitration suspects or knows that its adversary is funded, as is the case in the Moot Problem this year, the IBA Guidelines, if adopted as guidelines by the Tribunal as is so commonly the case, give the arbitrators guidance on what the Tribunal may require – by a procedural order, for example — in terms of disclosure from the party that is, or is suspected to be, funded by a Funder. But that useful function of the Guidelines does not assist participants in the arbitration in sorting out the possible relationships between an arbitrator and a Funder, and the bearing of those relationships on the arbitrator’s eligibility to serve, at the critical early stage of nomination and appointment. In our Moot Problem this year, the problem surfaces very early on in the proceedings, but after the Tribunal has been constituted.  An urgent question that still troubles our community, and on which no consensus of approach has emerged, is how shall we tackle this problem at the earliest stage, when the administering institution, or perhaps an appointing authority in an ad hoc case, is collecting information relevant to the arbitrator’s eligibility to serve and sharing that information with the parties.

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Framework for a Institutional Mandatory Disclosure Rule

In the few minutes I have before you return to battle, I would like to do three things. First, let’s try to list some relationship concerns an arbitrator may have about Funders – concerns that the parties may have about the arbitrator. Second, let’s look at the some of the key reasons why Funders (and maybe their funded clients) push back against the idea of mandatory initial disclosure. Third, let’s look at what the basic elements of a mandatory initial disclosure scheme might look like.

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 1.  Concerns About Arbitrator Relationship With Funders

  1. Funder role in arbitrator’s selection?
  2. Arbitrator’s affiliation with Funder. (“Investment Adviser”)?
  3. Fellow arbitrator affiliation with Funder (Sitting as chair nominated by …)
  4. Funder is/was funding the cases arbitrator is or was handling as counsel
  5. Arbitrator’s prior appointments by other parties funded by same Funder (to extent known)
  6. Funder funding cases being handled by other lawyers in arbitrator’s firm
  7. Funder is providing “portfolio finance” to arbitrator’s (present or former) firm
  8. Arbitrator’s  former colleague now employed by Funder
  9. Arbitrator pitched case(s) to Funder & was turned down.
  10. Possible arbitrator relationships with the Funder’s funders (e.g. hedge funds, venture capitalists, )
  11. Arbitrator’s knowledge of Funder’s reputation for exacting due diligence
  12. Arbitrator’s knowledge of Funder’s reputation as newcomer eager

2.    Objections Voiced Against Mandatory Disclosure

One main objection voiced by some Funder spokespersons against mandatory disclosure is that the terms of the funding arrangement are confidential between the parties and irrelevant to the arbitration. To this objection I would say that the terms of the arrangement may or may not be relevant at some stage of the arbitration, such as when a motion is made for security for costs. But at the initial stage when the objective is to enable the arbitrator to unearth and disclose to an appropriate degree her connections to the Funder, the terms of the funding arrangement should not usually be of consequence. Why not limit disclosure to the fact of funding and possibly the identity of the Funder, and see where that goes? There seems to be a consensus gathering around such limitation —indicated in ICCA-Queen Mary Task Force comment draft issued September 2017.

A second objection of some Funder-affiliated persons to mandatory initial disclosure is that such disclosure raises a suspicion if not an assumption, at least for the adverse party, that the funded party is impecunious and not financially capable on its own of satisfying an eventual, possible, award for costs should the non-funded party prevail. The stated concern is that arbitrations will then be routinely encumbered with costly and contentious motions for security for costs, and also with an ever greater number of vexatious challenges against arbitrators. These concerns are genuine. But they should be manageable. The solution of addressing them by suppressing the very fact of funding and identity of the Funder seems quite overbroad. Funders systematically do, and will continue to, publicize the fact that many of their clients are not impecunious but are very solvent entities that opt for funding as a cash management and risk management tool. And funded parties who must face down security for costs applications will continue to advocate the emergent rule that mere impecuniousness of the party is not alone a sufficient basis for a security for costs order unless there is other evidence of the party’ s unwillingness to satisfy such obligations and its avoidance of such obligations on other occasions. And institutions will readily adopt efficiency measures as needed to process arbitrator challenges relating to third-party funding.

A third objection, voiced by certain prominent Funder spokespersons, is that no disclosure mandate should be imposed on Funders who are in what may be called the private equity model, while omitting other Funders, such as insurers and direct equity investors in or commercial lenders to the funded party.  Failure to be inclusive would be discriminatory, it has been claimed. Perhaps the strategy of this objection is to fend off mandatory disclosure for as long as possible by prolonging debate on definitions. Or perhaps the nub of this objection is that traditional insurance has not been thought of as raising a potential conflict of interest situation for the arbitrator, and that the private equity mode of Funder should be seen in the same way. But if you look at the list of concerns reviewed above, I submit that the range and seriousness of concerns about arbitrator independence and impartiality does not arise nearly as often when the Claimant or Respondent merely has insurance coverage. The ICCA-Queen Mary Task Force Report, at least in the 2017 comment draft, seeks to address the objection by including insurers in the proposed disclosure standard. Perhaps that is the solution providers should adopt — it means more due diligence work and more disclosure and perhaps more unmeritorious challenges. But if that is the price to be paid for broader market acceptance of a disclosure rule covering the Funders we are mainly concerned about from a conflict perspective, then the wider definition of Funder seems a price worth paying.

I will ask you now to permit me to speculate on what may be a key but unarticulated source of the Funders’ reluctance toward a rule of mandatory disclosure. I would speculate that the more prominent is a Funder, the larger its investments in cases and potential returns, the more the Funder is staffed by highly skilled disputes lawyers with extensive international arbitration experience, then the greater will be the influence of the Funder in the selection of arbitrators. This influence may be more pronounced when the funded party has engaged counsel who are not regular players in international arbitration and who may not be particularly well-informed about the community of arbitrators and the relevant selection criteria.  I would speculate that Funders have preferred arbitrator lists just as law firms do. And over time perhaps the firms that maintain such lists may conform their lists to those of the Funders that fund them. And I would speculate, in turn, that such preferred arbitrators would more often face resistance to their service, by a non-funded party, if it emerged that, while the arbitrator has had no other cases in recent years for either the Claimant or the Claimant’s law firm, he or she is currently sitting in seven cases funded by the Funder.

The logic of the Funding business would tell us that this should be the case, because the selection of the arbitrator should logically be for the Funder, as it usually is for the Party, one of the most if not the single most critical arbitration planning decision. For the party that decision is framed as how to proceed. For the Funder it will affect whether to proceed at all. Confidentiality among Funders, parties, and law firms makes it difficult to measure objectively the scope of Funder influence in arbitrator selection.

So there may well be a giant Elephant In The Room — Funder influence over arbitrator selection — whenever we discuss third party funding in an open forum like this, even when a Funder representative is not on the program. And perhaps the presence of that Elephant explains why, with some of the exceptions earlier noted, initiatives for mandatory disclosure has failed to gain traction within the institutional framework of international arbitration. Repeat appointments of arbitrators by the same law firm are a well-known issue. Systematic repeat appointments of the same arbitrator by the same Funder probably could not long survive in a mandatory disclosure environment.

3.    A Possible Mandatory Disclosure Rule in Operation

Whether there should be mandatory disclosure of the identity of the Funder is perhaps a question that deserves more attention. Funders have market identities, and they burnish them. Some of them engage prominent arbitrators and retired judges as “investment advisers.” Some of them boast of how selective they are in identifying cases to be funded (although this is somewhat diminished as larger Funders move to a portfolio finance model). If the Funder’s identity potentially carries with it a sort of endorsement of the funded party’s claim (or defense), arguably the identity of the Funder is information the arbitrators should receive only on a need-to-know basis. But there is a price to be paid: to determine if the arbitrator needs to know the identity of the Funder, the arbitrator would need to make disclosure, to the institution, of a complete list of Funders with whom she or her firm have connections. The institution could then determine if there is a “match,” and often there would not be, and the conflict check process would end there, with the identity of the Funder protected. But the arbitrator, especially the arbitrator affiliated with a large firm, will have done quite a bit of information gathering. This is a cost-benefit calculus that would need to be made, in promulgating a mandatory disclosure protocol in institutional rules.

In the protocol outline that follows, I will assume that the calculus is made in favor of shielding the arbitrators from the identity of the Funder unless there is a need to know:

  1. Filing party informs institution whether it is funded and if so identifies to the institution the Funder and Funder’s material investors.
  2. In a funded case, the institution will submit to the arbitrators a questionnaire calling upon the arbitrators to disclose to the institution the identity of the Funders (i) in past or pending cases as arbitrator where the Funder was identified, (ii) in past or pending cases of arbitrator’s firm as counsel, (iii) from which arbitrator’s firm sought or maintained funding in last X number of years, (iv) with whom the arbitrator has or in last X years had other relationships with Funder such as Board member or consultant, and (v) with whom the arbitrator has present or meaningful past professional or personal relationships with officers/employees of Funders.
  3.  If no match, then the parties would be informed that the arbitrator’s responses to the questionnaire reveal no matters for potential disclosure, and therefore the identity of Funder will not be disclosed to Tribunal as there is no need.
  4. If there is a match, the arbitrators would be notified of the identity of the Funder and invited to make disclosures as they deem appropriate. The parties would be notified that the Funder has been identified to the arbitrators. This conveys to the parties only the bare fact of some connection between one or more of the arbitrators and the Funder, and leaves to the arbitrator the discretion to determine in the first instance whether the connection amounts to a matter for which disclosure ought to be made.

***

Having now outlined this proposal let me conclude by telling you why this may not work, why institutions that administer international arbitrations  could be loathe to adopt it. The providers obviously are in competition for cases, and any one of them considering to be a pioneer in mandating disclosure risks having major law firms flee from their rules at the urging of their Funders. Maybe, then, Singapore is on the right track in making a disclosure mandate into a rule of professional conduct for lawyers. Perhaps we will see lawyer disciplinary bodies around the world being urged to follow Singapore’s lead in the years to come.

Any Interest in Compounding?

Monday, February 5th, 2018

Reflecting recently on the fact that the question of interest compounding has received essentially no attention in the submissions of the parties in nearly all of my recent cases, I set out to search the online universe for recent scholarship on the issue, and found rather little. Seminal treatments of the question, such as those by Professors Gotanda and Mann , date back more than a decade and in some instances much longer. Instances of commentaries from the investment arbitration community are the exception rather than the rule it seems (see for example Judge Brower’s article in collaboration with Jeremy Sharpe in Transnational Dispute Management in 2006), perhaps because the prominent exponents of the position that the right to compound interest should be recognized as a more or less general principle prefer to confine their advocacy of the position to their awards.

Here it is not my purpose to review the literature or the case law, but mainly to provide some thoughts on why this matter should be so persistently overlooked in the submissions of parties in commercial arbitrations involving relatively large amounts in dispute. But for the reader who would like a nudge in the direction of some cases and contemporary literature on the subject, a very partial list of  respectable sources that support the position that awarding compound interest should be the norm in an international arbitration absent a prohibition in the agreement, treaty, or governing law would include: the awards of ICSID tribunals in the LG&E v. Argentina case and the BG Group v. Argentina case of 2007; the Yukos v. Russian Federation case of 2014 (but only as to Post-Award Interest); and, notably, a comprehensive scholarly treatment by Enrik Haxhirexha, Awarding Interest In Investment Arbitration (CTEI Working Paper 2014) at pp. 33-45, where the reader will find citations to additional relevant investment treaty awards and to many if not most of the leading scholarly treatments on the subject dating back at least to F.A. Mann’s seminal treatment in 1986 (remembered fondly by this commentator who was an eyewitness to the submission of Professor Mann’s expert opinion on this subject in the Starrett Housing v. Iran case, an opinion that in turn was cited by Judge Holtzmann in his dissenting opinion in that case). [* The citations here are a shorthand, sufficing to allow the reader to locate online the complete citation and full text].

A first level of challenge for the Arbitral Tribunal in a commercial case is likely to be that the question of compounding interest, indeed the question of interest generally, may have received little to no attention in the submissions of the parties. This is true even in cases with substantial sums in dispute. The lawyers and arbitrators who have been exposed to the issue are mainly those who have been involved in investment arbitrations with claimed damages in the billions of dollars and interest accrual periods that run a decade or more. When parties engage US counsel who mainly litigate rather than arbitrate, their counsel may assume that the historical reluctance of common law courts to award compound interest will carry over to arbitral tribunals, and for this reason opt not to raise the issue on a Claimant’s behalf. And among those arbitrators who sit in cases governed by New York substantive law, we suppose that Claimants seeking the nine percent rate prescribed in the New York Civil Practice Law and Rules (whose mandatory applicability in arbitration is doubtful) reason that the rate is so far beyond the market or the client’s borrowing costs that a request for compounding would not only appear to the Tribunal to be unduly voracious but might attract attention to the interest rate question from an adversary who might otherwise not be moved to comment.

Consider the following fact patterns from recent cases in which this commentator sat as an arbitrator, each involving substantial claims for damages beginning at accrual dates some years prior to the arbitration hearing, but in which no demand for an award of compound interest was made:

  1. Claim for lost royalties due to distributor’s alleged failure to market the product effectively. Alleged continuing breach beginning four years prior to the arbitration hearing.
  2. Claim for failure to pay contingent additional consideration in buy-sell agreement, where the parties disputed whether the condition precedent for the payments had been fulfilled. Accrual date 2.5 years prior to the arbitration hearing.
  3. Claim for value-diminution damages upon buyer’s re-sale at a loss of a product delivered by the seller with an allegedly latent defective condition. Accrual date three years prior to the arbitration hearing.

Each case presented a legitimate scenario for the awarding of compound interest, assuming liability and damages could be established. By saying this, I mean to convey that the following conditions were met: (1) neither the parties’ agreement nor the applicable law prohibited compound interest;  (2) neither the agreement nor the applicable law fixed a rate of interest, so there was not a situation where a prescribed above-market rate furnished an alternative approach to full compensation, (3) none of the Tribunal members came from legal cultures known to be formally opposed or informally hostile to compound interest; and (4) the jurisdiction of potential award enforcement in each instance was the US, so that the Tribunal need not have been concerned about a public policy obstacle to enforcement. Further, each Claimant was a significant corporate entity that presumably was active in financial markets, at least from time to time, as a borrower paying interest on a compound basis and as an investor deploying disposable cash in instruments that accrue compound interest.

So, on the basis that the trend in the law and outlook toward compound interest that is evident in investment arbitration should in principle influence commercial arbitrators in the same direction, I would ask two questions for the sake of discussion: (1) why are Claimants not claiming compound interest in suitable commercial cases as a matter of course, and (2) what should Tribunals do about this, if anything?

On the first question, I suppose that many advocates are simply not prepared for the issue, or, if they are advocating for the New York CPLR rate of nine percent or another above-market rate mandated by the law of the relevant jurisdiction, recognize that this rate on a simple interest basis may provide compensation exceeding that which might be calculated using the Claimant’s actual borrowing costs on a compound basis. Also, the Claimant’s counsel who knows of the legal uncertainty about the applicability of the CPLR nine percent rate in arbitrations might place an educated wager on the adversary’s and/or the Tribunal’s unawareness of this uncertainty —  by deliberately not making a request in the alternative for a compounded market-based interest rate.

Perhaps this is a dynamic peculiar to arbitrations, whether international or domestic, governed by New York law. But at least two other factors come into play that are not a function of an idiosyncratic interest rate environment. One is the ancient pull of the common law against compound interest, based in jurisprudence originating in a long-ago period when there was pervasive economic imbalance between debtors and creditors, lenders and borrowers, and compound interest came to be seen as a form of oppression. This legacy is well-described and annotated in the literature.  A second dynamic is that the advocate who knows she must persuade the Tribunal that her client’s aggressive position on damages should be seen as “conservative” may be reluctant to advance any position on the subject of interest that risks being seen as aggressive — even though, in the case of compound v. simple interest, the position is no more than a pragmatic combination of modern finance theory and practice, and principles of full compensation. The day has not quite yet come when the advocate for compounding of interest can be seen as simply invoking an accepted international standard.

On the question of what commercial arbitrators shall do about the all-too-common deficit of attention to the compounding issue, I have no clear solution but one principal discussion point. It is that we as arbitrators need to come to terms with whether the question of compounding is a special claim to be pleaded/requested at the risk that it will not otherwise be considered – a posture that gives a wide berth to a presumption of simple interest that does not seem to have a solid legal foundation. Arguably the question of simple v. compound interest is intrinsic to the Tribunal’s task once any request for an award of interest is made, even when made without specification that it should be compounded. Some arbitrators who will have already studied the literature and jurisprudence may be satisfied that the question of compounding interest is simply a component of the more general duty of the Tribunal recognized by the applicable law to provide “full compensation” to the Claimant.

But even where the arbitrators recognize that they have such a duty, the question of what to do when the Claimant is silent is not one that admits of a clear and easy answer. If the Tribunal detected a flaw in Claimant’s damages analysis whereby the Claimant’s plea for damages actually fell short of full compensation from the Tribunal’s perspective,  most Tribunals would refrain from taking the initiative to award more than the Claimant had demanded or to ask the Claimant to reconsider its request. The stated elements of the Claimant’s claim arguably form the upper boundary of the Claimant shall recover; the principle of full compensation mandates full compensation insofar as it is claimed in accordance with the applicable arbitral procedure. Should that position carry over to simple v. compound interest? Arguably not. If the Claimant fails to advocate for a particular interest rate, or an accrual date, still the Tribunal if asked to award interest must decide those issues. Should not the same be said of the compounding issue, i.e. that any request for an interest award necessarily puts before the Tribunal decisions concerning the conceptual elements of interest: accrual starting date, rate, simple or compounded, compounding period, and accrual ending date. This may strike some readers as an aggressive position on the arbitrator’s discretion to award compound interest where it has not been specifically requested nor specifically opposed. But if we accept that most applicable legal systems, and contemporary practice and principles, furnish no basis for a presumption that interest shall be awarded on a simple basis unless compound interest has been specially demanded, then it is legitimately a matter for arbitral discretion unless by agreement the parties have withdrawn that discretion.

 

US Declaratory Judgments and the New York Convention

Monday, February 5th, 2018

In a recent New York Convention award enforceability case in the federal district court in Washington D.C., the Court held that the interim Award of an Emergency Arbitrator in a Singapore-seated arbitration, to the extent it enjoined a party to the arbitration from speaking publicly or to American government authorities about the matters in dispute, was not subject to denial of recognition and enforcement in the United States under Article V(2)(b) of the Convention on the basis of its alleged conflict with the First Amendment of the US Constitution as an embodiment of fundamental US public policy. (Sharp Corp. v. Hisense USA Corp., 2017 WL 5448805 (D.D.C. Nov. 13, 2017), appeal filed, U.S. Court of Appeals for the D.C. Circuit, Nov. 16, 2017)). This post does not concern that ultimate holding. Instead, it examines the Court’s foundational determination that FAA Chapter 2, implementing the New York Convention, provided subject-matter jurisdiction to hear the Award loser’s petition based on the Declaratory Judgment Act for a declaration of the non-enforceability of the “gag order” portion of the Singapore Emergency Arbitrator’s Award in a case where the Award winner did not cross-move or separately move for US recognition and enforcement of that Award.

Hisense, the Award winner, was Sharp’s licensee for the manufacture and distribution of Sharp-branded televisions in the US market. The Singapore arbitration, evidently ongoing, concerns a dispute over license termination, and the Emergency Arbitrator made an essentially two-pronged ruling, directing, firstly, that Sharp should continue Hisense’s license in effect during the arbitration, and, secondly, that Sharp should refrain from disparagement of Hisense and more generally from discussing Hisense’s performance as licensee with the market participants or government authorities. The second ruling, the so-called “gag order,” was the subject of Sharp’s declaratory action to declare the unenforceability of the gag order in the United States. Hisense responded, inter alia, with a motion to dismiss the case for lack of subject-matter jurisdiction and took the position that FAA Chapter 2 did not confer jurisdiction over the case.

The decision on subject-matter jurisdiction attracts the attention of this commentator because there is evidently no authoritative precedent for US courts to invoke FAA Chapter 2 to consider granting this type of relief, and there appear to be reasons in the underlying philosophy of the Convention, not to mention its text and the text of FAA Chapter 2, to suppose that the Convention is understood internationally to be invocable at the election of Award winners seeking recognition and enforcement, and not invocable at the election of Award losers seeking pre-emptive determinations against recognition in the Courts of Contracting States other than the seat of the arbitration.

In support of the motion to dismiss, Hisense’s counsel evidently found rather little in the way of directly apposite precedent, and elected not to submit a broader discussion in its brief of the history and philosophy of the New York Convention.  Hisense also did not take up the theme, that might have been sounded, that FAA Chapter 2 unlike other federal statutes that provide private civil remedies, trumps the Declaratory Judgment Act because it specifically forecloses the type of declaration sought by Sharp here. Hisense’s main theme, instead, was that a declaratory relief application was like a motion to vacate the award, and therefore was barred because the US court had no jurisdiction to vacate an award made in Singapore under Singapore procedural law. This framework evidently led the District Court to analyze the issue as it was presented, i.e. in terms of whether and to what extent this application was or was not equivalent to a motion to vacate the Award. Arguably that was not the proper framework, as the ensuing discussion seeks to show.

Hisense cited a Southern District of New York case in which the Court, while accepting FAA Chapter 2 jurisdiction through removal under Section 205, observed that the request in the state court complaint for a declaration that the Award was unenforceable was the equivalent of a motion to vacate the Award. But in that case the Award had been made in the United States, so Convention/Chapter 2 jurisdiction to vacate the Award was perfectly proper. (Kolel, 863 F. Supp.2d 351). The District Court in Sharp v. Hisense distinguished Kolel on the basis that it involved a motion to invalidate the entire Award rather than only a portion of it.  But isn’t the relevant distinction simply that when the Award is made at a US seat, an application framed as being for declaratory relief that the Award is invalid is not different in legal terms from an FAA-sanctioned motion to vacate the Award?

Hisense also cited, as authority that there is no Convention/Chapter 2 jurisdiction for a declaration of partial unenforceability in the US, a District Court case in which the Award loser in a domestic arbitration had coupled a time-barred FAA motion to vacate with a request for a declaratory judgment seeking as judicial relief the commercial outcome rejected in the Award. (Stedman, 2007 WL 1040367). The District Court held that the declaratory claim was merely a different way to state the claim to vacate the Award, and was equally time-barred. But the fact that declaratory relief and a motion to vacate have the same legal effect, and face the same legal constraints, when the Court has FAA jurisdiction to vacate, does not make it appropriate to characterize a claim for declaratory relief as an impermissible motion to vacate when the Court has no jurisdiction to vacate. All that the Court in Sharp v. Hisense could really take away from Stedman is that the analogy between vacatur and a declaratory judgment of non-recognition/non-enforceability breaks down when the Court has no jurisdiction to vacate.

But a third case relied upon by Hisense was not so readily distinguishable. In that case, the plaintiff, having been the Award loser in an arbitration in Ireland, commenced suit in Chicago seeking “‘a declaration that the Awards issued by the arbitrator are invalid and not enforceable….’” The federal district court judge  held that “the Convention does not empower us to enter such an order, which would be akin to setting aside or vacating the Awards.” (Gemini Consulting Group v. Horan Keogan Ryan Ltd., No. 06 C 3032, unpublished Memorandum Opinion, US District Court for the Northern District of Illinois, May 30, 2007). In the Gemini Court’s view, the fact that the Award loser was being “proactive not reactive” was dispositive because the text of the Convention and FAA Chapter 2 appeared to envision the assertion of the defenses in Article V of the Convention only in response to the Award winner’s application for recognition and enforcement. The mere fact that the movant was “contesting” enforceability of a foreign award did not, in the Gemini Court’s opinion, bring its declaratory relief complaint within the Court’s jurisdiction under the Convention.

The Court in Sharp v. Hisense however saw a distinction: that the Gemini declaratory claim sought to declare the Ireland-made Awards “[in]valid worldwide,” (as characterized by the Sharp v. Hisense Court) whereas Sharp sought “to determine only whether the Emergency Order is enforceable in the United States.” But that is not a faithful account of Gemini; the Gemini Court’s opinion reflects that the movant did not seek a global injunction against enforcement of the Award and indeed expressly disclaimed that it was seeking an anti-suit injunction.  Gemini held that a US District Court could not declare a foreign award unenforceable under the Declaratory Judgment Act because its authority under the Convention/Chapter 2 is confined to “enforcing or refusing to enforce the Awards.” Stated differently, Gemini supports the view that FAA Chapter 2 is a jurisdiction-conferring federal statute that makes declaratory relief unavailable, and that the Declaratory Judgment Act, as the more general of the two federal statutes, cannot overcome the specific mandate in the FAA that it should be invoked in regard to recognition and enforcement of an Award,  other than at the seat, only by the Award winner seeking confirmation.  This latter feature seems to be what sets FAA Chapter 2 apart from the run-of-the-mill declaratory relief scenario, as there are few if any federal statutory private causes of action (or common law claims) where the statute (or the common law) provides expressly or by implication that the allegedly injured party shall be the plaintiff and the putative defendant may not initiate suit to establish non-liability.

The District Court in Sharp v. Hisense cited no precedent directly holding that the Convention in tandem with the Declaratory Judgment Act confers subject-matter jurisdiction of an Award loser’s petition to declare the US unforceability of a foreign award. Instead, the Court cited a 2013 decision of a US District Court, in which the Court granted declaratory and injunctive relief to declare the non-existence of any agreement between the parties for international arbitration under the ICC Rules and to enjoin the arbitration Claimant from proceeding against the injunction movant.  (Hospira, Inc. v. Therabel Pharma N.V., 2013 WL 3811488 (N.D. Ill. July 19, 2013)).  But the Declaratory Judgment Act was not a necessary element of the movant’s application in Hospira. The FAA would have sufficed. There was (and is) considerable federal appellate authority under the FAA that judicial power to enjoin arbitration, where no arbitration agreement exists, is an implicit corrollary of  the FAA’s grants of power to compel arbitration, under both Chapters 1 and 2. Also, in regard to the existence of a justiciable case-or-controversy, the Constitutional quid pro quo for a declaratory action, the existence of an ongoing ICC case that the arbitration Claimant was actively prosecuting against the movant would appear to confer on the declaratory relief action the necessary elements of a live case-or-controversy. But that scenario is quite different from what was presented in Hisense, i.e. an Emergency Arbitrator Award that the Award winner was not seeking to have recognized and enforced in the United States. Arguably, the case-or-controversy point should make it unnecessary for courts to reach the question, posed in the preceding paragraph, of whether FAA Chapter 2 and the Convention by their terms foreclose a declaratory action for non-recognition/non-enforcement. If the Award winner in such a case cross-moves for recognition and enforcement, the question is moot; if the Award winner does not so move, then shouldn’t there be a finding of no case-or-controversy?

The Hisense decision, as to FAA Chapter 2 subject-matter jurisdiction, does not come to terms with a key underlying premise the Convention, which is to ensure the international portability of a Convention Award. That is to say, the Convention envisions that an Award winner might take the Award for enforcement to several different jurisdictions, and that refusal of recognition in one jurisdiction will not preclude recognition in another, save as the Award may have been vacated by a court of the State in which or under the law of which the Award is made, in which case the Convention permits but does not require refusal of recognition and enforcement. If a US Court refused enforcement on the basis that the Tribunal decided issues outside the mandate of the arbitration agreement, a Canadian court in a subsequent enforcement proceeding might be persuaded or not by the US Court’s view. but in all events it would determine the scope issue de novo. The Convention’s architecture, however, appears to envision that the Award winner will need to persuade the court in Country B to reject the reasoning behind a Country A court’s refusal of recognition and enforcement only if the Award winner had earlier submitted the Award to the Country A court for recognition and enforcement. The marriage of the Convention with the Declaratory Judgment Act as envisioned by the District Court in Hisense allows the Award loser to obtain a US judicial view on enforceability when the Award winner may have no interest in obtaining US recognition, and the Award winner may indeed consider that a US decision amounting to an advisory opinion on recognition and enforcement might be an impediment to recognition elsewhere.  When US courts are confronted in future cases with the same subject-matter jurisdiction issue as was presented in Sharp v. Hisense, they may perhaps devote more systematic attention to this question and more fully explore both the international framework for recognition and enforcement that the Convention provides, and the material difference that arguably exists between the Declaratory Judgment Act, on the one hand,  and the FAA as compared to federal statutory civil causes of action generally, on the other.

Thinking About Arbitral ESI Retention Orders

Tuesday, January 9th, 2018

In the United States, federal and state trial courts recognize a legal duty of a litigant to retain documents, a duty that comes into existence upon coming into possession of facts providing the party with actual or constructive notice of the reasonable possibility of litigation. The scope of the duty, i.e. the documents to which the duty applies, are those documents that would be subject to production under the court’s discovery rules in response to a (properly-framed and timely-presented) document request made by the adverse party. Documents potentially shielded from the obligation to produce them because they are covered by an evidentiary privilege such as the attorney-client privilege are covered by this duty to retain, because the existence of the privilege might be overruled by the court, or the privilege might be waived, or — the privilege being qualified and not absolute — the court might determine that special circumstances require production of a privileged document.

Whereas federal and state civil procedure rules broadly define “documents” to include all manner of electronically-stored information (ESI), the duty to retain such information is not limited by the possibility that a court might eventually but as a matter of discretion limit the types of ESI that must be produced. Prudent litigating parties in US state and federal courts who wish to avoid making a very broad litigation hold at great internal cost, and also wish to avoid the risk that they would be charged with breach of the duty of retention, negotiate the scope of a litigation hold, and if agreement cannot be reached seek judicial resolution of the areas of disagreement so that the scope of retention matches what is prescribed in the court’s order. Less cautious parties who fail to establish agreed or ordered limits on retention run the risk that they will suffer the loss of data that is later deemed subject to production in discovery, and run the risk of court imposed sanctions ranging from monetary penalties to preclusion of certain positions to more sweeping, possibly case-dispositive, adverse inferences.

Let us assume that these rules, essentially common law extensions of discovery rules found in  codes of judicial civil procedure, are not generally applicable to an international arbitration at a US seat unless the parties, against expectations, have agreed that the arbitrators should apply judicial rules of procedure and evidence. With that assumption in mind, consider how these rules might or might not become implicated in an international commercial arbitration. First, suppose there is a dispute between a US and a foreign company, each represented by US lawyers admitted to the New York Bar, under a contract that provides that it is governed by New York law, but the seat of the arbitration is in Canada. As these are evidently rules of judicial procedure, the generic New York choice of law clause does not bring them into play in the arbitration. And whereas these rules are not classified as rules of professional conduct governing the conduct of attorneys generally, the fact that counsel for each party is New York-admitted does not logically lead an Arbitral Tribunal to adopt automatically rules governing retention of documents as rules governing the conduct of counsel in the arbitration. And it cannot be assumed that ethical constraints and ethical disciplinary risks in the attorney’s jurisdiction of admission will lead counsel to cause the client to retain documents to the same extent it would in a litigation. Further, even if one assumes that Canada’s provinces have relatively similar rules governing retention of documents that might be discoverable in judicial litigation, such rules have not been adopted into (for example) the international arbitration statutes as mandatory rules of arbitral procedure in Ontario, Quebec, or British Columbia.

But the rules that parties most often select to govern procedure in their international arbitrations contemplate that there will be some opportunity to obtain some documents possessed by the adverse party that are not merely the documents the adverse party wishes to present to advance its case. (The ICC Rules and those of a few arbitration centres in civil law European countries like Austria and Italy are actually exceptional in omitting express reference in their rules to the Tribunal’s power to order production of documents, and even in arbitrations under such rules the possibility of such document disclosure cannot be excluded because arbitrators have the power to conduct the proceedings as they consider appropriate). And the IBA Rules of Evidence, so widely and willingly adopted by mutual consent of parties and Tribunals, reflect a similar vision. Whereas neither these rules nor the arbitration statutes applicable in major arbitration venues provide very specific guidance about the scope of permitted inquiry into documents stored by the adverse party, the scope of any duty to retain documents cannot be linked, as it is in American courts, to a common expectation about what may need to be produced. This state of uncertainty would seem to serve as an invitation to parties and Tribunals to discuss the scope of document retention at an initial stage of the case. But in my own experience it seems that this is rarely done.

Several factors account for this, I believe. First, there are international arbitrations in which both sides are represented by litigators who are not arbitration specialists and bring along assumptions about the similarity of arbitration to litigation that are only challenged when a dispute arises. At the other extreme, where both counsel are specialist international arbitration practitioners, each may assume that the other will proceed upon a shared view that broad disclosure of ESI is antithetical to efficient arbitral process and will not become a contentious issue. Perhaps the main reason it is not done is that the Tribunal will not regard ESI retention as a primary item of its procedural agenda, being reluctant to initiate discussion on a subject that might imply that the Tribunal takes a liberal view of the scope of pre-hearing disclosure.

But in a few cases one or both parties will ask the Tribunal for the arbitral equivalent of what the American common law duty rule provides, and the question arises as to what the Tribunal ought to do. There is very little published guidance. The IBA Evidence Rules do not touch the question. In 2010, a working group of US practitioners under the auspices of the International Institute for Conflict Prevention (CPR) issued the CPR Protocol on Disclosure of Documents and Presentation of Witnesses in Commercial Arbitration, and this Protocol adopts the premise that “speed and efficiency” is at least one of the considerations affecting disclosure in arbitration and that “requests for information based on possible relevance are generally incompatible with these goals, [and] disclosure should be granted only as to items that are relevant and material and for which a party has a substantial, demonstrable need in order to present its position.” Section (d)(3) of the CPR Protocol entitles “Preservation of Electronic Information” provides:

In view of the high cost and burden of preserving documents, particularly in the form of electronic information, issues regarding the scope of the parties’ obligation to preserve documents for potential disclosure in the arbitration should be dealt with at an early scheduling conference, or as soon as possible thereafter. The parties’ preservation obligations should comport with the Schedule 2 mode of disclosure of information selected.” Schedule 2 of the CPR Protocol envisions that the parties ideally will agree upon one of the four “Modes” for disclosure of electronic information described in Schedule 2 — each involving more ESI than the preceding Mode, such that that retention duty stipulated would, logically, correspond to the disclosure protocol adopted.

Writing about e-discovery in arbitration nearly a decade ago, thoughtful commentators observed: “The ‘preservation’ of ‘relevant’ documents once litigation is anticipated or commenced also requires rethinking in light of the fact that electronic information is dispersed and dynamic throughout a company’s computers, rather than statically awaiting collection in a drawer.” (R. Smit & T. Robinson, E-Disclosure in International Arbitration, 24(1) Arbitration International 105 at 109 (2008)). Those commentators proposed the following as a general guideline to be applied by international arbitration Tribunals with regard to retention: “The obligation to preserve electronically stored information requires reasonable and good faith efforts to retain information that may be necessary for pending or threatened arbitration. It is unreasonable to expect parties to take every conceivable step to preserve all electronically stored information that may potentially be relevant and necessary in the arbitration.”  (Id. at 133, Proposed Guideline 19). And yet as we turn the calendar to 2018, such rethinking either has not taken place, or has occurred ad hoc in case-specific settings and has not crystallized into a set of published best practices concerning e-document retention for potential arbitration disclosure.

One of the major challenges is that even where counsel accept that an international standard of relevance and materiality applies and that document requests should be very specific, counsel cannot know at the outset whether the key communicators of the adverse party, in their communications internally and with third parties, mainly used desktop servers in their offices to send e-mails, or also used mobile devices without generating copies of the messages on the desktop server. The cannot know whether the key communicators used personal e-mail accounts, or text messaging, as the standard or more than occasional means of business communication. So there is a cost-benefit calculation to be made by the parties, with very imperfect information, if they are to commit to limitations on e-discovery at an early stage of the case. If the parties do not agree upon the scope of potential ESI disclosure, however, they are unlikely to agree to the scope of document retention measures. The Tribunal, if asked to enter a document retention order, risks inefficient imposition of the costs to the parties for broad document retention (e.g., directions that various persons must save or centrally deposit mobile device messages) if this later proves to have been unnecessary because the scope of what later must be produced is far more limited that what is initially ordered to be retained.  At the opposite extreme, the Tribunal that concludes perhaps prematurely that (for example) metadata, text messages, i phone e-mails, and voice mails need not be the targets of specific retention measures, or draws a narrow circle of persons required to take retention measures, risks sanctioning the disappearance of evidence to an extent it may later regret.

The excellent and comprehensive report of the ICC Commission on Arbitration and ADR entitled “Management of E-Document Production” sensibly states that if production of electronic documents is confined in accordance with the IBA Rules of Evidence to the same extent of production of paper documents, as the IBA Rules expressly envision, then most of the efficiency challenges associated with E-Discovery should be avoidable. But these guideposts often will be unhelpful to the Tribunal in a case with US counsel on both sides, particular where those counsel are litigators bringing their litigation instincts to bear in the arbitral forum. Even when one or both parties are represented by specialist arbitration practitioners, they may prefer to follow their litigator instincts for tactical reasons.  As soon as the Tribunal accommodates the parties’ professed mutual desire to work out disclosure matters by agreement without Tribunal involvement — a common posture at the preliminary conference stage — there is a recipe for trouble if disputes arise. Suppose, for example, that at a time just after the deadline for the parties to produce requested documents to one another — the Tribunal per the parties’ agreement on procedure having taken no active disclosure-management role up to this point — now receives an objection by one party that the other has produced the electronic equivalent of several hundred thousands of pages of documents in a format that is not keyword-searchable or otherwise searchable by use of search software, ostensibly forcing the objector into a costly page-by-page review of the producing party’s production. Possibly search software usable with the production exists, but neither the objector nor its counsel has acquired it nor has heretofore employed IT specialists capable of applying it. Possibly the document in searchable format still exist in some electronic data storage facility of the producing party but the retrieval costs are substantial. The objector might assert that the producing party should be made to bear this cost, as a penalty for having violated a duty (articulated in judicial but not arbitral e-disclosure rules) to preserve and produce in a readily searchable format.

What sort of initiative might become an operating standard for Tribunals? Perhaps some sort of e-disclosure questionnaire would suffice: (1) Do you envision e-disclosure by the adverse party of e-data from sources other than e-mail (and attachments) stored on corporate servers? If yes, what sources/devices, and why will this be sought? (2) Can the needed documents be obtained by searching the e-mails (and perhaps text messages) of a limited number of persons? (Each party is asked to reasonably investigate to determine the person most directly involved in the transactions at issue). (3) What is the relevant time period for production? Do auto-delete protocols based on message age make some portion of the data universe less readily accessible? Can the parties agree to do without data if that vintage, and if not, how should retrieval costs be borne? Has the auto-delete protocol been overridden, at least for relevant individuals, to prevent impediments to the gathering of relevant data? (4) What is the format in which production of electronic documents is expected to be made? Is this satisfactory the adverse party?

A questionnaire of this type does not appear to favor either party nor does it encourage e-discovery of a scope comparable to what might be permitted in a US court. It may indeed prompt parties to recognize and concede early on that disclosure in arbitration often is different and more limited unless both parties clearly want an arbitration that resembles a US litigation at least in its discovery phase. And the questionnaire seems reasonably calculated identify whether there is a need for some sort of retention order, and to lead to an order whose scope is tailored to the expected scope of e-disclosure.