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Litigation Conduct Waivers and the New York Convention

Wednesday, October 3rd, 2018

Today’s post concerns waiver of the right to arbitrate by an ambivalent plaintiff in a US District Court, and under what conditions it might be appropriate for a US District Court, applying the New York Convention and FAA Section 206 (governing motions to compel arbitration under arbitration agreements covered by the Convention), to decide that such a waiver by virtue of the litigation conduct of the plaintiff renders an arbitration agreement “null and void” (or “inoperative”) under Article II (3) of the Convention*. Every sermon needs its text, and today our text is a recent case from Silicon Valley: Hebei Hengbo New Materials Technology Ltd. v. Apple, Inc., 2018 WL 4635635 (N.D. Cal. Sept. 26, 2018) (hereinafter, “Hengbo v. Apple”). But before we go to the West Coast, I share a brief personal and historical note.

In 1999, my American client had an expropriation claim, against an imploding Central European State in the throes of a civil war, and the claim fell within the framework of an ICC arbitration clause in the client’s asset purchase contract with a State-owned seller. The client for reasons mainly political wanted to commence a lawsuit against the State in the U.S. District Court in Washington D.C. without losing the possibility of reverting to an arbitral forum. We drafted a “without prejudice” reservation footnote, filed the Complaint with the footnote included, issued a press release, struggled to make sufficient service of process under the FSIA (as NATO’s munitions rained down upon the State’s capital) … and proceeded rather swiftly to withdraw the lawsuit and file the ICC arbitration. No waiver issue arose, although obviously one could have arisen if we had remained in court for a longer period.

The Chinese manufacturing company plaintiff in Hengbo v. Apple — a producer of glass destined for the screen of your iPad — was not so lucky. Hengbo filed its lawsuit in the federal court in San Jose in January 2018 without mentioning the arbitration clause (but annexing the contract containing it), seeking inter alia rescission of the aforesaid contract. On a stipulated date in April, Apple moved to dismiss for failure to state claim (FYI foreign readers: a merits-based motion). Four days later the parties filed a joint case management statement, required by the Court’s rules of practice, in which they reported, in pertinent part, that both parties were contemplating but had not yet decided whether to move to compel arbitration, and in which Hengbo expressly reserved the right to move to compel arbitration. The Court then fixed a deadline for Hengbo to declare its intent to move to compel arbitration. Hengbo complied by filing a notice of intent by the deadline. The Court fixed a deadline for Hengbo to file its motion to compel arbitration. Hengbo complied by filing its motion to compel arbitration by the deadline so fixed. On parallel track, the parties briefed Apple’s motion to dismiss, and Hengbo voluntarily dismissed one of its causes of action after considering Apple’s motion.

The District Court, taking the fully-briefed motions on submission without oral argument, denied the arbitration motion on the basis that Hengbo had waived the right to arbitrate, and granted in part Apple’s motion to dismiss.

Putting aside any lamentations about the possible responsibility of counsel, the judge, and the court’s case management process, for the parallel tracking of arbitrability and merits motions, let us focus on the most striking element of the decision for the US jurisprudence of international arbitration: the New York Convention was nearly ignored; only waiver cases in the context of domestic FAA arbitration were cited; and mention of the Convention was confined to a footnote stating that the parties disputed its applicability (Hengbo yes, Apple no) and that there was no need for the Court to resolve that dispute because it had no bearing on the outcome. That is a curious position, indeed, as the arbitration clause in this commercial contract provided for arbitration under the ICC Rules in San Francisco between Chinese and US companies. If that looks to you like a potential  “nondomestic” Convention arbitration under FAA Chapter Two, I agree. It seems the Court gave no attention to the possibly distinct attributes of litigation conduct waiver under the Convention and FAA Chapter Two because Hengbo in its submissions appeared to concede that “waiver” is a ground recognized by US courts for finding an arbitration agreement to be “null and void” under Convention Article II (3). And there are cases that say this in some fashion. But the case law, the Convention, and the scholarship of Article II (3), deserve a closer look.

For nearly 40 years, federal courts have repeated one another in agreeing that the “null and void” exception and the exceptions in Article II(3) generally should be “narrowly construed,” and that Article II(3)’s exception clause supports refusal to compel arbitration “only (1) when it  [the arbitration agreement] is subject to internationally recognized defenses such as duress, mistake, fraud, or waiver… or (2) when it contravenes fundamental policies of the forum state.” (emphasis supplied). When the US Fourth Circuit Court of Appeals concluded in 1981 “that Article II (3) contemplates the possibility of waiver of the arbitration agreement by the one or both of the parties,” (I.T.A.D. Assocs. v. Podar Bros., 636 F.2d 75), the Convention as American law was still pre-adolescent, there was no US case law on the point that the Court could cite, and there was no drafting history or secondary literature about Article II that the Court did cite. Still, it is instructive that the Fourth Circuit in Podar: (1) reversed the District Court order denying the motion to compel arbitration and remanded with directions to grant the motion, (2) held that Article II (3) should be applied through “adoption of standards which can be uniformly applied on an international scale,” (emphasis supplied), and (3) held that Section 206 of the FAA does not confer discretion on the District Courts to determine whether conduct amounting to waiver bars enforcement of the arbitration agreement. (For a sampling of judicial “likes” for Podar, see, e.g., Sedco, 767 F.2d 1140 (5th Cir. 1985) (“liking” the no discretion holding); Riley, 969 F.2d 953 (10th Cir. 1992) (“liking” the narrowly construed holding indirectly via Rhone Mediterranee, 712 F.2d 50 (3d Cir. 1983) which broadly embraced Podar; Bautista, 396 F.3d 1289 (11th Cir. 2005) and Lindo, 652 F.3d 1257 (11th Cir. 2011), each taking the “internationally recognized defenses” notion to another level, i.e. “standard breach-of-contract defenses [that] can be applied neutrally on an international scale”).

I have searched (curiously not thoroughly) for other US federal case authority addressing the status of litigation conduct waiver as a basis for judicial refusal to enforce the arbitration agreement under the Convention and FAA Section 206, and found rather little. Apple, in the Hengbo case, seems to have fared no better : in support of the proposition  that litigation conduct waiver analysis in an FAA Chapter 2/Section 206 case is identical to what it would be under FAA Chapter 1/Section 3, Apple cited just one case, from a US District Court in Nevada. (Fomostar, LLC v. Florentius, 2012 WL 2885119 at *9 (D. Nev. July 13, 2012)) (not reviewed in the 9th Circuit). In the Fomostar case there is no analysis of the question and no indication that the parties even joined issue on whether the traditional analysis of  waiver by litigation conduct in the context of domestic arbitration  is proper under the Convention.

The District Judge in Hengbo accepted the position that the analysis is the same as under FAA Section 3, but evidently did so not on the strength of the cited District of Nevada case but because Hengbo more or less conceded the point. Apple might have also cited Khan v Parsons Global, 480 F.Supp.2d 327 (D.D.C. 2007), where the Court applied a traditional litigation conduct waiver analysis in a Convention arbitration agreement enforcement context — and found no waiver — and made such analysis without directly addressing whether litigation conduct waiver as a defense to enforcement is consistent with Convention Article II. Perhaps Apple identified and shied away from Khan because the case nevertheless raises the troublesome question raised in this post. The District Court in Khan held that “unconscionability” should not be recognized as a ground for finding an arbitration agreement “null and void” under Article II (3) because unconscionability is not a hard and fast rule capable of being applied uniformly in a non-discretionary way on an international scale. Said the Court in Khan:

[T]he federal case law is clear that, while public policy and discretion of the courts may be a predominant characteristic of domestic arbitration, international arbitration requires certainty to ensure unified standards by which agreements to arbitrate are observed ….

By its very nature, the defense of unconscionability seeks to promote those very tenets that are contrary to a finding of certainty, namely: policy, fairness, and appeals to a court’s discretion outside of the letter of the law. Therefore, in light of this foundation, this Court finds that unconscionability is not — and indeed cannot be — a recognized defense to the enforceability of arbitration agreements under the N.Y. Convention

If unconscionability can never be within the Article II(3) exceptions clause, for the reasons stated in Khan, should we perhaps conclude that waiver is only sometimes within the Article II(3) exceptions clause, and that it depends on what evidence the court must evaluate to determine if there has been a waiver?

Of course, contemporary judicial analysis of this question should be informed by the scholarship that now exists concerning the appropriate meaning of the Article II(3) exceptions clause – there being effectively no drafting history of the clause. (I do here in a limited way, so as not to exhaust your attention, or my resources). Scholars of international arbitration benefit from bringing to bear on the question the developed judicial practice in the courts of many Convention States.

The ICCA Guide to the New York Convention (2011) tells us that Article II (3) is intended to establish the “presumptive validity” of the arbitration agreement, and that the “unless” clause concerns situations where the validity presumption is rebutted. The ICCA Guide notes that the Convention takes no position on the time for asking a court in a pending dispute to refer to the dispute to arbitration, that this question is left to national arbitration or procedural law, and that “[i]f a party fails to raise the request in a timely manner, it may be considered that it has waived the right to arbitrate and that the arbitration agreement becomes inoperative.” Here already is an indication that US courts have gone astray in treating litigation conduct waiver under “null and void,” and this is reinforced by the ICCA Guide’s further comment that “null and void” “can be interpreted as referring to cases in which the arbitration agreement is affected by some invalidity from the outset.” According to the ICCA Guide, “[a]n inoperative Agreement for purposes of Article II(3) is an arbitration agreement that was at one time valid but that has ceased to have effect” and that this category “typically includes cases of waiver, revocation, repudiation, or termination of the arbitration agreement. Similarly, the arbitration agreement should be deemed inoperative if the same dispute between the same parties has already been decided before a court or arbitral tribunal.

Interesting. If the guidance stopped before the last sentence concerning res judicata, one might think “inoperative” does not include the non-applicability/suspension of the arbitration agreement only with regard to a particular dispute. Evidently scholars think it does, or can, apply with regard to a particular dispute, but that the main purpose of the “inoperative” phrase is to deny enforcement of arbitration agreements that the parties have consigned to the dust bin.

But perhaps the res judicata illustration in the ICCA Guide does not justify the conclusion that litigation conduct waiver is always a proper question for a US court to decide under Article II(3) and FAA Section 206. To take the ICCA Guide’s res judicata example one step further, it’s notable that the current (non-final) draft of portions of the Restatement of the US Law of International Commercial and Investment Arbitration concerning res judicata in an arbitration agreement enforcement setting take a hybrid position on this point: if it’s not seriously disputable that the same dispute (or issue) was decided between the same parties in a prior arbitral award, a US Court should deny a motion to compel arbitration, but if the res judicata (or issue-preclusive) effect of the prior adjudication is contestable and involves serious factual issues, the motion to compel arbitration should be granted and the preclusion issue should be decided by the Tribunal. Further, the Restatement drafters view the issue of waiver as a “non-gateway” issue, like Statute of Limitations, that ordinarily should be resolved by arbitrators. (Restatement Section 2-12 and comments to same, in Preliminary Draft No. 11, August 20, 2018, not yet presented for approval by ALI).

Should we perhaps conclude, similarly, that the waiver of an arbitration agreement with regard to a specific dispute should need to be clear and unambiguous for that waiver to fall within Article II(3), and that a fact-intensive, discretion-laden assessment of waiver by litigation conduct should also be seen as outside Article II (3) and more suitable for arbitral determination as a contract-based defense, under the law the arbitrators find to be applicable to the enforceability of the arbitration agreement? That approach would conform to Professor van den Berg’s less-generous-than-the ICCA Guide view of “inoperative”: that it “can be said to cover those cases where the arbitration agreement has ceased to have effect, such as revocation by the parties.” (A.J. van den Berg, The New York Convention of 1958: An Overview).

Coming back to the US case law, the consistent theme since 1981 in the appellate decisions that support treating “waiver” as a Convention matter under Article II (3) and FAA Section 206 is that the Article II (3) exceptions should be capable of application on an international scale — which would seem to mean that they can be expected to be treated in a uniform way by the courts of most important Contracting States — and that they should not involve the exercise of discretion.

If that is the standard, then perhaps only an objectively determinable waiver should render the arbitration agreement unenforceable under the Convention. Example: In the first pleading, the Plaintiff acknowledges the existence and validity of the arbitration agreement, and declares that it elects not to seek its enforcement. Such a basis for waiver may be expected to yield the same outcome in most Contracting States, and finding waiver involves no exercise of judicial discretion. At the opposite extreme, suppose the initial pleading contains a reservation by plaintiff of the right to shift gears and proceed to arbitrate, or is silent about arbitration; the plaintiff participates in case management activities in compliance with the court’s rules of practice (necessarily entailing discussion but not action on such matters as trial and summary judgment and discovery); plaintiff does not object to defendant making a merits-based motion to dismiss or to the full briefing of this motion before the arbitration issue is resolved; plaintiff indeed participates in that motion to dismiss activity, but at the same time plaintiff complies with directions from the Court concerning the time to give notice of intention to move to compel arbitration; and plaintiff files that motion by the deadline set by the Court.

That is the Hengbo v Apple situation in a nutshell. The District Court’s finding of litigation conduct waiver on such facts is plainly an exercise of discretion. And it may be doubted that the situation is likely to be uniformly treated by the courts of other Contracting States: not only do they have different laws and procedures that might prevent such a confluence of circumstances from arising, but those courts might have a quite different view of the same facts as a matter of discretion. They might for instance consider that the costs associated with the litigation before the plaintiff made up its mind to arbitrate are better addressed by a costs order. Indeed some foreign courts (and even some of you readers, in the US and elsewhere) might see the US approach as manifested in the Hengbo v. Apple case as evidence of a lingering hostility to arbitration: according to this exercise of judicial discretion, the right to arbitrate seems to lack robustness, appears to be entangled with notions of respect for the judicial process and the local court’s own rules of practice, and with judicial hostility toward forum shopping. These are attitudes that arguably impel judges, more than arbitrators who are as not as invested in compliance with the court’s rules and customs, to view the right to arbitrate as capable of being forfeited by any meaningful hesitation to invoke it in the course of a litigation.

If, as the analysis here suggests,  Article II (3) does not provide a platform for the type of discretionary determination of a “waffling waiver” that was made in Hengbo v Apple, then what about FAA Section 3, as applied under FAA Chapter Two via Section 208**? Section 3 provides for a stay of judicial proceedings pending arbitration of an arbitrable dispute, and conditions the availability of such relief on the movant being “not in default in proceeding with the arbitration.” But if the Convention and FAA Chapter Two do not allow a litigation conduct waiver analysis by the Court where the assessment would involve discretion, then a discretionary analysis under Section 3 is in conflict with the Convention and Chapter 2 and has no place in an proceeding to enforce an arbitration agreement under Section 206.

Whether US courts will eventually adopt this line of analysis is anyone’s guess. The judicial prerogative to assess arbitration waiver by litigation conduct is so deeply ingrained in American jurisprudence that it seems difficult to foster momentum against it in the District Courts without clear direction from appellate courts.  But perhaps we will see these serious questions confronted more systematically by judges in future cases, with outcomes that reflect less reflexive assumptions about the symmetry of practice with regard to domestic and international arbitration agreements.

*Article II (3) states:  “The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”

** Section 208 provides that FAA Chapter 1 will apply in actions and proceedings under Chapter Two “to the extent that chapter is not in conflict with this chapter or the Convention as ratified by the United States.”



New US Law Uncertainty About Nonsignatories

Tuesday, September 11th, 2018

The New York Convention mandates that an “agreement in writing,” as defined in Article II (2), shall be recognized by Contracting States, and that the court of a Contracting State shall refer the parties to arbitration when there is an action before the Court as to which such an agreement has been made. (Article II, subsections (1) and (3)). But if a US District Court has subject matter jurisdiction based on FAA Chapter Two (implementing the Convention), is an “agreement in writing” as defined in Article II the only form of arbitration agreement the Court may enforce?  A decision at the end of August of the US Eleventh Circuit Court Appeals answers “yes,” apparently at odds with what was decided, or assumed, in the decisions of other federal appeals courts over the last 20 years. (Outokumpu Stainless USA v. Converteam SAS, 2018 WL 4122807 (11th Cir. Aug. 30, 2018).

This may seem like a rather technical point, but imagine this: You chair a Miami-seated Tribunal in an ICC Rules construction case commenced against an “owner” (who signed an arbitration agreement with the general contractor) by a non-signatory subcontractor that claims it is entitled to arbitrate based on theories of estoppel and third-party beneficiary. Respondent moves to dismiss, both sides agree that the issue is properly for the Tribunal in the first instance, and Respondent urges that under the Outokumpu case an international dispute cannot be arbitrated unless there is an agreement in writing, as defined in Article II, between the parties to the arbitration. Your Tribunal rejects this argument and applies what it considers to be the correct position under US arbitration law, permitting non-signatories to enforce agreements to arbitrate against signatories based on estoppel, agency, third-party beneficiary status, alter ego, assignment and successorship, etc. But if the Respondent moves to vacate your Interim Award on Jurisdiction in the Federal District Court in Miami, will the Tribunal he found to have manifestly disregarded this new controlling law as pronounced in the Outokumpu case?

So … let’s consider what happened in Outokumpu. A German steelmaker contracted through its US subsidiary with a US general contractor (GC) to have steel mills built in Alabama, and the contract (with an ICC arbitration clause that called for a Dusseldorf-seated arbitration under German law) defined the GC broadly to include all subcontractors the GC might engage. The GC then engaged a subcontractor in France (GE Energy) to build motors, the motors failed, and the steelmaker brought suit against GE Energy in a court of the State of Alabama. GE Energy removed the action to the federal district court based on the New York Convention*, and moved to compel arbitration. Its motion was granted in the District Court.**

For the unanimous Eleventh Circuit panel, the legal analysis “start[ed] and end[ed]” with Convention Article II: without a signature on the arbitration agreement by the party seeking to compel arbitration, no order to compel arbitration is available under FAA Chapter 2 (Section 206). GE Energy could not compel arbitration based on estoppel or third-party beneficiary, the Court held, because “the Convention, as codified in Chapter 2 of the FAA, only allows the enforcement of agreements in writing signed by the parties and Congress has specified that the Convention trumps Chapter 1 of the FAA where the two are in conflict. … Although parties can compel arbitration through estoppel under Chapter 1… estoppel is only available under Chapter 1 because Chapter 1 does not expressly restrict arbitration to the specific parties to the agreement….But the Convention imposes precisely such a restriction.

The decision cites no case law precedent for this position, and does not discuss any authorities taking a different view.

As a matter of textual analysis, the Article II (1) of the Convention reads as a mandate for Contracting State enforcement of an arbitration agreement in a particular form — but not as a prohibition of the enforcement of an agreement having another form. “Each Contracting State shall recognize an agreement in writing ….” The United States in the implementing legislation might have opted to enforce only such agreements where international commerce was concerned, but the text of FAA Chapter Two gives no indication that this was done. Subject-matter jurisdiction was defined by reference to the commercial nature of the arbitration agreement and its internationality, not its form (Section 202), and no reference to a form requirement is made in the section authorizing a court to compel arbitration (Section 206). It appears that neither the Convention nor Chapter Two prohibits enforcement of an arbitration agreement that lacks the signature of the one of the parties. And the position that FAA Chapter 2 is exclusively concerned with giving effect to the Convention’s mandates, no less and no more, is answered by Section 208 declaring that Chapter 1 “applies to actions and proceedings brought under this chapter to the extent that Chapter is not in conflict with this chapter or the Convention….

Whereas over many decades case law under Chapter 1 has established the enforceability of arbitration agreements by or against non-signatories under certain conditions, what is the conflict with the Convention or Chapter Two that prevents such enforceability when subject-matter jurisdiction is based on Chapter Two? I see none. And the Eleventh Circuit panel in Outokumpu finds such a conflict only by construing Article II (1) of the Convention, against its plain meaning, as an exhaustive description of the arbitration agreements a US court is allowed to enforce when its jurisdiction is based on the Convention and Chapter Two.

Other US appellate case law, none of it cited in Outokumpu, supports the position taken here. In the Second Circuit’s Smith/Enron Cogeneration decision of 1999 (198 F.3d 88), the grant of a petition to compel arbitration under Chapter Two Section 206 was affirmed where arbitration was sought by non-signatory assignees of the written agreement to arbitrate and the signatory was estopped based on its conduct. In the Fifth Circuit’s Bridas/Turkmenistan decision of 2003 (345 F.3d 347), where jurisdiction to enforce the award was (necessarily but not expressly) based on the Convention and Chapter Two, the Court reviewed de novo the Tribunal’s determination that non-signatory Government of Turkmenistan was a proper party to the arbitration, and stated that “federal courts have held that so long as there is some written agreement to arbitrate, a third party may be bound to submit to arbitration.” In the First Circuit’s InterGen case from 2003 (344 F.3d 134), the Court held that in a case before the Court based on the Convention and FAA Chapter Two, it would decide whether the written agreement was binding on a nonsignatory by applying federal common law principles of estoppel, agency, third-party beneficiary, and alter ego. (And see also the First Circuit’s Sourcing Unlimited case from 2008, 526 F.3d 38). In the Fourth Circuit’s International Paper decision from 2000 (206 F.3d 411) the Court expressly rejected the proposition, adopted by the Eleventh Circuit in Outokumpu, that Convention Article II(1) precludes enforcement by or against nonsignatories (206 F.3d at 418 n. 7). In the Fifth Circuit’s Steamship Mutual case of 2010 (601 F.3d 329), the Court expressly held that in a case under the Convention, just as in a case under Chapter 1, the district courts should “rel[y] on the same common law contract and agency principles to determine whether  nonsignatories must arbitrate.” (Id. at 334).

Is there a possibility for reconsideration by the Panel or en banc in the Eleventh Circuit? Whereas none of the above-mentioned cases is cited in the Court’s opinion, there is reason to think the Outokumpu case was not adequately briefed and argued. (This comment is made without having taken initiative to read those briefs). There are serious practical consequences to such a flat proscriptive rule against enforcement in FAA Chapter Two Cases by or against nonsignatories. For example, would it not harm the core objectives of the Convention and Chapter Two if arbitration could be avoided by a signatory by bringing a lawsuit against collateral nonsignatories like officers or employees or agents of the signatory party? That gambit, often attempted, has been repeatedly foiled by courts judiciously invoking applicable common law principles to require arbitration with nonsignatories in suitable circumstances.

The Outokumpu case is one to be watched, and worried over, as applicable time limits for reconsideration or certiorari approach.



*US proceduralists may wonder why this was an appealable order before the arbitration took place, as the FAA generally does not permit this. The opinion does not explain. But let’s assume there was appellate jurisdiction, perhaps based on a certified question from the district court concerning whether the arbitrability issue was sufficiently “related to” the arbitration agreement between the signatories to have permitted removal of the case from the Alabama court. The removability issue, resolved in favor of the removal in this decision, is not the subject of this post.


**US proceduralists will also note that removal was based, alternatively, on diversity of citizenship, with GE Energy arguing that Outokumpu had fraudulently joined US insurance carriers as defendants in the Alabama state court action, to defeat diversity-based removal to the federal court. But GE Energy did not press the matter of diversity of citizenship, nor did it advance the argument that if there was diversity, it could move to compel arbitration under FAA Chapter 1 and invoke US law as to non-signatory arbitrability without regard to the Convention’s “agreement in writing” provision.


Our “Notions of Morality and Justice”: How “Basic” Must They Be?

Thursday, July 5th, 2018

Imagine with me, readers:

A sovereign foreign State — India, for the sake of discussion — attracts the interest of a US enterprise to conduct a search for offshore hydrocarbon deposits and, if any are located, to determine their commercial viability. The State cedes aspects of its sovereignty contractually, in a number of ways. First, it gives the exploration outfit rights of occupancy for exploration purposes on a defined block of the State’s offshore waters. Second, it extends the period of the concessionaire’s right to be physically present on the block for an agreed period after hydrocarbon discovery in order to determine commercial viability — two years for oil, five years for natural gas. Third, it agrees to submit disputes under the contract to international arbitration before a three-member Tribunal having its seat in Malaysia. Other voluntary incursions upon the State’s sovereignty— the exploration firm’s right to profit-share, for example — are presumably explicit or implicit in the contract. Among those that are implicit in the arbitration agreement, in tandem with India’s accession to the New York Convention, are the ceding of control of the arbitration process and the legal validity of the Award to the arbitrators and to the courts and arbitration laws of Malaysia, and the acceptance of the enforceability of the Award in the courts of those New York Convention Contracting States in which India is not immune from a suit brought for that enforcement purpose – – in the United States for example.

Readers who have already read Hardy Exploration & Production (India), Inc. v. Government of India, 2018 WL 2758220 (D.D.C. June 7, 2018), know how this not very unusual contractual compromise between State sovereignty and natural resource extraction plays out. Hydrocarbons are found. The State claims it is oil, which if true triggers merely a two-year commercial assessment term. The concessionaire believes its discovery to be natural gas, triggering a five-year period for assessment. The State, after two years, revokes the concessionaire’s right to operate on the block. Effectively, there is a physical as well as commercial ouster. The concessionaire files an arbitration, and wins a Final Award – from three retired Justices of the Supreme Court of India – that includes most notably a decree of specific performance ordering India to allow the concessionaire back on the block for the five-year assessment term associated with a natural gas discovery. But when enforcement of the Award is sought in the United States under the New York Convention, a federal district judge holds that enforcement should be refused because it would violate the US public policy of showing respect for a foreign State’s sovereignty in regard to the State’s control over its own “territorial integrity.” (In the same decision, the court also refuses on the basis of the public policy exception in Convention Article V(2)(b) to enforce an award of interest.  Discussion of that portion of the Award is reserved for another day and another post).

Given the rather richly-developed jurisprudence of the New York Convention’s public policy exception in US courts, we would reasonably expect such an exceptional refusal of enforcement to be grounded in that case law. But such is not the case. Instead the main premise of the Court’s decision is the principle of foreign sovereign immunity as embodied in the Foreign Sovereign Immunity Act, in sections of the FSIA other than the “arbitration exception.”

While the decision acknowledges the FSIA’s exception for enforcement of foreign arbitral awards, the court asserts that whereas that FSIA arbitration exception does not address in specific terms the recognition and enforcement of an arbitral award of specific performance against a State, the arbitration exception is not the sole or even the decisive articulation of the US public policy that is germane to the case. The decision purports to find its rationale for denying confirmation of the Award’s specific performance decree in two sources: (1) judicial decisions expressing reluctance to grant extraterritorial injunctions in plenary actions in US courts, and (2) the FSIA’s limitation of attachments against the assets of a foreign State to the State’s property located in the United States and used for the State’s commercial activity. Said the Court: “[T]he spirit of the United States policy preference against specific performance is clear from the exclusion from the statutory text [of the FSIA] of any mention of specific performance or extraterritorial enforcement, apart from the terrorism and expropriation exceptions.”

But the district court does not explain why this supposed “policy preference” rises to the level of a “most basic notion[] of morality and justice” — the enduring phrase coined 44 years ago by the Second Circuit to capture the notion that refusal of award enforcement under the Convention’s public policy exception should be justified only when the enforcement would offend a universal and fundamental legal or societal norm. (Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie du Papier, 508 F.2d 969, 974 (2d Cir. 1974)). And the fact, noted prominently in the decision, that certain US federal statutes as construed by the courts generally prohibit a contract claim for injunctive relief or specific performance against the US government, does not convincingly advance the position that enforcement of a foreign arbitral award of specific performance against a foreign State violates a bedrock US legal norm. The foreign State’s consent by contract to broad remedial powers of the Arbitral Tribunal, coupled with its accession to the New York Convention, would seem to be a crucial distinction. That the US has not consented to be a defendant in contract litigation seeking specific performance or an injunction would not appear to furnish evidence of a fundamental US legal norm opposed to enforcing an arbitral specific performance award, when that award is the outcome of a legal process (including the enforcement process) to which a foreign State has expressly and voluntarily submitted.

The district court in Hardy Exploration was legitimately concerned about the international unseemliness of a US court policing the compliance of a non-hostile foreign State with a US judgment for specific performance for commercial activity in its offshore waters. But this pragmatic comity concern could be assessed if necessary in regard to enforcement of the judgment, as when the court might be asked to impose a civil contempt sanction for India’s potential non-compliance.

An arguably aberrant decision such as this one may also be seen as a by-product of the common law development of American jurisprudence concerning the New York Convention. We have an elegant catch-phrase handed down through the ages from the Parsons-Whittemore case — “our most basic notions of morality and justice.” We have a series of procedural guidelines for decisions about the Convention’s Article V exceptions: that they are to be construed narrowly, that the Respondent bears a heavy burden, that the pro-arbitration policies of the Convention and the Federal Arbitration Act are entitled to considerable weight. And with regard to the public policy exception specifically courts are instructed that the public policy serving as a basis for refusal of enforcement should be “explicit,” also “well defined and dominant,” and based on “laws and legal precedents.” But synthesis conceptually of the large body of case law dealing with the “public policy exception” appears to be a task US judges have been reluctant to undertake.

Obviously such a synthesis, systematically done, is too ambitious a task for the format of these Commentaries and your patience as readers. But upon a review of the leading appellate decisions and a representative sampling of district court cases, the following observations are offered.  First, the offended public policy must be more dominant, more enduring, more fundamental to the American conception of the rule of law than the public policy favoring international arbitration. Second, the offended public policy should be, or be closely akin to, a foundational principle of the American legal order such as individual liberty, private property, or non-discriminatory application of well-defined rules of law (what might also be considered principles of “natural justice” that are widely adopted in developed nations). Third, perhaps best understood as a corollary of the preceding, federal legislative policies concerned with the regulation of commerce or with diplomatic relations ordinarily, and save in those rare cases where the first two criteria stated above are clearly met, are not matters of “public policy” under Article V(2)(b), even if they are commonly understood as matters of public policy in political discourse.

Under these standards, there is a serious question as to whether the Hardy Exploration case has been correctly decided in the district court on the basis that enforcement (in the Convention sense of converting a foreign arbitral award to a domestic judgment) of an arbitral award of specific performance granting what amounts to a limited commercial easement in the territory of a foreign State is an unacceptable intrusion by the United States upon the sovereignty of that State. The State created the easement in a commercial contract and submitted disputes about the scope and duration of the easement to international arbitration. Specific performance here evidently entails no intrusion on the political and diplomatic autonomy of the foreign State: the Award does not exclude India from the concessionaire’s offshore exploration block for purposes relating to India’s national defense or security, or for any other national purpose that is not in conflict with the concessionaire’s ability to evaluate the commercial viability of the hydrocarbon reserves lying beneath the waters.

A Notice of Appeal has been filed. The case deserves to be watched closely for an important ruling on the New York Convention’s public policy exception from the US Court of Appeals for the District of Columbia Circuit.





Importing Arbitration Law from Canada Without Tariffs

Friday, June 1st, 2018

Significant foreign judgments concerning arbitration statutes based upon the UNCITRAL Model Law capture limited attention in the US, because the US is not at the federal level or under the laws of 44 of the 50 states a “Model Law jurisdiction.” But in some of the six states that have adopted international arbitration statutes based on the Model Law (California, Connecticut, Florida, Georgia, Illinois, Texas), the number of locally-seated international arbitrations is said to be on the rise (and there is at least anecdotal evidence that this is so; see, for example, last month’s post: “International Arbitration in the California Style”). Courts and arbitral panels functioning on international arbitrations seated in those states will perhaps have occasions to become more aware of a body of quasi-precedent found in the judicial decisions of foreign States where iterations of the Model Law are in force.

A decision of the Ontario Superior Court in Toronto (a first instance court of the Ontario province) dated April 13, in connection with a Toronto-seated, Yukos-related, Energy Charter Treaty (ECT) arbitration, is a useful case in point. (The Russian Federation v. Luxtona  Ltd., 2018 ONSC 1419, accessible on This decision concerns what American litigators would classify as a motion in limine, seeking to limit the evidence presentable to the Court concerning several critical issues of arbitral jurisdiction. Indeed one of those jurisdiction issues under the ECT figured prominently in the more celebrated Yukos arbitration conducted in the Netherlands:  whether the ECT’s clause for “provisional application” of the ECT to Russia, which signed but has not ratified the ECT, permits the Arbitral Tribunal to hear the case at all, or limits the claims that might be heard, based on considerations of Russian law. In this Luxtona arbitration, the Tribunal in March 2017 made a preliminary-issue ruling in the form of a partial award that it does have jurisdiction – the text of which is not to my knowledge available publicly — and this has triggered Russia’s resort to the Toronto court to hear that issue under the Ontario version of Art. 16(3) of the Model Law.  (Russia’s application asks the Court to vacate the partial award containing the Tribunal’s ruling, and thus invokes Art. 34 of the Model Law. Art. 34 adopts the New York Convention’s grounds for refusal of recognition and enforcement as the grounds upon which a court at the arbitral seat in a Model Law State may annul an award. Our focus here, however, is upon Art. 16(3), as we are concerned with the contributions made by its text toward answering the question of what deference is due to the Tribunal’s decision on an issue of Tribunal jurisdiction. Faithful Toronto readers will consider me remiss if I fail to observe that Ontario, as part of its International Commercial Arbitration Act, 2017, not only incorporated the 2006 version of the Model Law, but also for the first time formally incorporated the New York Convention into the statute. The incorporation of the latter, however, is not implicated in the instant Luxtona matter, as potential annulment of an award in a Toronto-seated arbitration is addressed in the Model Law).

Model Law Art. 16(3) provides:

“The arbitral tribunal may rule on a plea [that the Arbitral tribunal does not have jurisdiction] either as a preliminary question or in an award on the merits. If the arbitral Tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in Article 6 to decide the matter, which decision shall be subject to no appeal.”

The six US state versions of the Model Law contain essentially this formulation, and in addition specify that failure to make the request within the 30-day period shall be a waiver.

In its essence, the Ontario court’s decision on this motion to limit evidence turned on the question on what degree of deference is to be accorded to the Tribunal’s preliminary-issue partial award ruling that it has jurisdiction to adjudicate ECT claims against Russia. We are well-advised to avoid framing this issue as “scope of review” because, at least upon the view taken by the Ontario first instance court, the hearing specified by Art. 16(3) of the Model Law “is not an appeal.” Instead according to the court it is what American lawyers would regard as a de novo proceeding — although the Ontario court is somewhat reluctant in using that phrase: “Whether or not described as a hearing ‘de novo’, such a hearing cannot be confined in advance to the record before the tribunal whose ruling in jurisdiction has been challenged.

On a “true question of jurisdiction,” the Ontario court tells us, the ruling of the Arbitral Tribunal is to be assessed for its “correctness.” The Court draws our attention back to the Ontario Court of Appeal decision in Mexico v. Cargill, Inc. (2011 ONCA 622, available on, a case that involved an application under Art. 34 of the Model Law to annul a final award in a Toronto-seated NAFTA Chapter 11 case. In Cargill the Tribunal had awarded lost profits damages in two categories held to have resulted from Mexico’s unfair and inequitable treatment of Cargill’s investment in Mexico: lost profits on corn syrup sales of a Cargill Mexican subsidiary to customers in Mexico, and lost profits of Cargill in the US on corn syrup sales to the Cargill Mexican subsidiary.

Whether the latter category of damages was properly awarded based on NAFTA Chapter 11 provisions that permitted an investor to recover only for injury to the investor’s investment caused by actions taken by the State in regard to the investment was not “a true question of jurisdiction”, but an integral element of the merits, held the Ontario appeal court in Cargill. On that question, said the court,  the Tribunal’s award was entitled to deference, but had the question been, for example, whether an investor admitting to UK nationality could bring a claim under NAFTA Chapter 11, that would have presented a “true question of jurisdiction” on which the Tribunal’s decision would have had to be assessed for its correctness. The Cargill court in this regard had invoked the much-discussed and then rather recent decision of the UK Supreme Court in the Dallah v Pakistan case (Dallah Real Estate and Tourism Holding Co. v. Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46], available at] where it had been held that whether an arbitration agreement engaged by the religious affairs ministry of the Pakistani State bound the sovereign to arbitrate was indeed a question of jurisdiction to be determined by the Court without deference — “de novo” in US scope of review terms — even in the posture of deciding whether the UK should recognize and enforce the award made in a Paris-seated arbitration.

The Ontario court in Luxtona, invoking Cargill, Dallah, and similar authorities in such Model Law States as New Zealand, Australia, Ireland, and Hong Kong, held that whether and to what extent Russia was bound to arbitrate ECT claims under the Treaty’s “provisional application” clause is such as “true question of jurisdiction,” and, no deference being due on this question to the Tribunal’s determination, it followed that the factual record (in terms of expert opinion evidence) pertinent to the issue should not be limited to the materials the parties had presented to the Tribunal. Model Law Article 16(3), said the court, “can[not] be construed as constraining the court to the four corners of the evidentiary record before the Tribunal still less the findings of fact regarding foreign law made by the Tribunal. The court is directed [by Art. 16(3)] to ‘decide the matter’ and not merely to review the decision of a tribunal whose very existence may or may not have been authorized.” (emphasis supplied).

Commentators have lamented that US arbitration case law has produced a version of the doctrine of compétence-compétence that, in regard to ultimate judicial control over the exercise of jurisdiction by arbitrators, is quite excessive in comparison to foreign counterparts. Our jurisprudence accepts that the delegation of jurisdiction-deciding power to arbitrators, resulting from the parties’ contractual adoption of arbitration rules conferring such power, is — at least where countervailing considerations are absent— permanent and absolute, putting arbitral decisions on arbitral jurisdiction on the same footing as other arbitral decisions of fact and law that are accorded only limited and deferential judicial review. The lamentation may be said to have two essential components: first, that US courts in their overbroad use of the phrase “arbitrability” have obscured important distinctions that ought to be made among discrete jurisdiction issues that might or might not warrant deference to arbitral determinations (distinctions that are to some extent captured by the Canadian concept of a “true question of jurisdiction”), and, second, that parties’ intentions to delegate essentially final authority over jurisdiction issues to arbitrators are rather tenuously and debatably inferred from the mere incorporation into an arbitration agreement  — especially one whose existence or validity is at issue – of provider rules giving arbitrators power to rule on objections to their jurisdiction.  (See, e.g., G.A. Bermann, Arbitrability Trouble, 23 Am. Rev. Int’l Arb. 367, 374-78 (2012), and for a recent example of the persistence of such “arbitrability trouble” in US case law, see Sygenta Crop Protection LLC v. Insurance Co. of North America, 2018 WL 1587601 at *5 (S.D.N.Y. Mar. 29, 2018) (incorporation into arbitration agreement of AAA Commercial Arbitration Rules “provide[s] an unmistakable delegation to the arbitrator to decide arbitrability”)).

Until now, this problematic US case law does not include (to my knowledge) any instances where the contracting parties’ delegation of jurisdiction-deciding power to international arbitrators was made in an agreement that provided for international arbitration seated in one of our six Model Law-adopting states. And more generally speaking, the US case law on delegation of jurisdiction issues to arbitrators appears not to have had to address what inferences about the parties’ delegation intentions are inferable from the provisions of state arbitration law – such as the six state versions of the Model Law — that apply by virtue of the designation in the arbitration agreement of the seat of arbitration. Perhaps in the Toronto court’s current encounter with Russia’s position on the ECT we are witnessing the precursor of an eventual development in US law, whereby in an international arbitration seated for example in California or Texas or Florida the courts’ conclusions about what the parties intended will be that they delegated jurisdiction issues to the arbitrators as an initial matter — as a matter of facilitating an effective arbitral process — but reserved the right to have non-deferential de novo judicial consideration of arbitral rulings on certain “true questions of jurisdiction” in the framework of a motion to vacate the award.  Further, such decisions might be a sort of first wave of a broader reconsideration of the question of how the parties’ delegation of jurisdiction issues to the arbitrator affects the judicial deference due to the arbitrator’s decision of those issues.


The Delicate Diplomacy of Deposits for Arbitrators’ Fees

Wednesday, May 2nd, 2018

The decision of one party or group of parties to an international arbitration, more often than not the Respondent(s), to decline to advance their share of the deposits required for the fees and expenses of the arbitrators, has become so common that it may almost be said to be a standard feature of international arbitrations. And this is not necessarily or primarily a function of impecuniousness of the non-paying party. It is more often rather a business decision.  This is less often the case of course when the Respondents assert counterclaims against the Claimants, or cross-claims against one another, for significant monetary amounts, and under the applicable arbitration rules would be deemed to have withdrawn such claims, or by order would be prevented from prosecuting them, if the proportionate share of deposits were not paid. Such non-payment decisions introduce significant inefficiencies, particularly when Tribunals are required to or consider it prudent to suspend proceedings until full payment of requested deposits has been made. Case managers in provider organizations, not to mention depository/payment agents designated solely for that purpose in ad hoc arbitrations, face the challenging task of explaining to the parties how the rules operate, what their obligations are and what recourse they may have, while not crossing a line to furnish legal advice to either the paying party or the non-paying party. These conditions motivated your Commentator to spend a recent afternoon considering what a Guidance Note to parties on this subject might contain.

Two caveats before we begin:  First, this Post is not endorsed by or encouraged by any provider organization or any group seeking to influence a provider organization. It is not written in parallel to any known endeavor of any provider organization to promulgate any such Note. And it is not based on any interviewing of provider organization personnel to determine if the perceptions reflected in this draft are on the mark.  Second, this Post is written with reference to the practices of those provider organizations that strive to withhold from the arbitral tribunals the identity of the paying and non-paying parties in case payments have not been made equally. The ICC obviously is the exception to this, as its publication of Financial Tables to the Tribunal provides full transparency at all stages as to the respective contributions of the parties.

The imagined Guidance Note now follows:

“Dear Parties: This Guidance Note concerns an important element of arbitration under the XYZ Rules: the parties’ duty to submit deposits to the XYZ that will be used to pay the fees and expenses of the Arbitral Tribunal. The Rules provide that it is the joint responsibility of the Claimant (or Claimants as a group) and the Respondent (or Respondents as a group) to pay in equal shares the deposits requested by the XYZ — unless of course the agreement to arbitrate provides for a different allocation. When the Claimant(s) and Respondent(s) each timely comply with these requests — which are based on the Tribunal’s estimates of fees and expenses for the entire arbitration or one or more phases of it, as reviewed and approved by the XYZ — this goes far to secure the efficient progress of the arbitration. The refusal of a party to meet its obligation to pay its share of the deposits is strongly discouraged. However, this occurs with considerable frequency, and so the consequences of such a refusal should be understood. These consequences are stated concisely in Rule __ , but experience indicates that the Rule leaves room for misunderstanding, which this Guidance Notes seeks to remedy.”

“Once the case manager has determined that a party will not pay its share of a requested deposit, the case manager will notify the other party of this circumstance and invite that party to pay the non-paying party’s share. This is an invitation, not a direction, but it is important that the consequences of a party’s refusal to bear the opposing party’s share of deposits, when invited to do so, should be understood. First, if the non-paying party is the Respondent, as is most often the case, any counterclaim (or cross-claim) asserted by the Respondent [is to be deemed withdrawn] [is subject to being dismissed on application by the Tribunal] by reason of the non-payment. This is so whether or not the Claimant elects to pay the Respondent’s share of the requested deposits.”

“To effectuate the counterclaim’s withdrawal, under a rule that provides for such treatment, it will be necessary for the case manager to notify the Tribunal of the non-payment by Respondent whether or not Claimant elects to pay Respondent’s share.”

“A Respondent’s non-payment does not entail any other limitation upon the ability of the Respondent to defend and otherwise participate in the arbitration. Rather, if the Claimant declines the invitation to pay the Respondent’s share of requested deposits as well as its own share, it is the Claimant who bears procedural risk: specifically, that the Tribunal, notified by the case manager of an unresolved non-payment situation, may suspend the case and, if the non-payment situation is not resolved after a stated period of time after the suspension, may terminate the case. The consequences of such a termination may depend upon the arbitration law at the seat of the arbitration; however, there is no provision in the Rules that would render such termination to be equivalent to a dismissal with prejudice. Subject to any mandatory provision of law to the contrary at the seat of the arbitration, the XYZ regards such termination as having no consequences in regard to the merits. We do however consider that the Tribunal has completed its mandate upon such a termination, and that if the same claim were re-asserted in another arbitration, a new process of selecting a Tribunal would be undertaken.”

“Further, a Claimant that is considering whether to accept the termination of the case may wish to consider whether under the applicable law one or more claims may be time-barred if and when they are raised in a new arbitration. The Rules take no position on such time limitation questions.”

“In our experience a Claimant placed in the position of having to bear the Respondent’s share of deposits in order for the case to proceed, and then to have the case proceed with no adverse procedural consequence of the non-payment for the Respondent, often finds this situation to be inequitable. The Rules do provide discretion to the Tribunal to allocate costs including the fees and expenses of the Tribunal in the Final Award, and it has been our experience that Tribunals often rectify the disproportionate bearing of Tribunal compensation by one party in the determination of costs in the Final Award.”

“The XYZ cannot properly discuss with a party its legal options in relation to the other party’s refusal to pay in the context of a specific case, as to do so would arguably entail providing legal advice to the party and is not consistent with the XYZ’s position as a neutral administrator. We also can offer no opinion on whether a Tribunal constituted under and conducting an arbitration governed our Rules would be affected, in any of its decisions, by an aggrieved party making submissions that draw attention to the non-payment of the opposing party. The XYZ takes no position on what a Tribunal should do in such circumstances and would not offer advice to or seek to influence a Tribunal’s discretion.”

“Our comments to this point have focused on non-payment by a Respondent. Non-payment by a Claimant occurs less often. But the XYZ will follow the practice of inviting the Respondent to pay the Claimant’s share of requested deposits once it has been determined that Claimant will not pay. This invitation has different implications however as compared to when the invitation is extended to the Claimant. If the Respondent has made one or more Counterclaims and wishes to proceed thereon, Respondent faces the same conundrum more usually faced by a Claimant: the potential for suspension or termination of the case if the substitute payment of Claimant’s share is not made. If Respondent on the other hand is strictly in the posture of defending against a Claimant’s claim, the Respondent will often have no reason to make the substitute payment for Claimant because the non-payment redounds to Respondent’s benefit: Claimant’s claim, as the Rules provide, shall be deemed withdrawn or is subject to dismissal without prejudice upon application to the Tribunal.”

“An important subject related to the foregoing rules and practices concerns communications among the parties, the XYZ, and the Tribunal concerning deposits for arbitrator compensation.  It is the practice of the XYZ to avoid to the maximum possible extent notifying the Tribunal as to which of the parties has failed to make a required payment. Although the identity of the non-payor may be evident from a party’s communications to the Tribunal or from other circumstances, XYZ as a neutral administrator seeks to avoid the risk of pre-disposing a Tribunal against a non-payor by avoiding whenever possible to identify the non-payor to the Tribunal. Thus when a Tribunal is invited to consider whether a case should be suspended and eventually terminated, the Tribunal will be notified of the fact of non-payment but not the identity of the non-payor, unless identifying the non-payor is in the circumstances important to the Tribunal’s exercise of discretion as to suspension and/or termination.”

“This brings us to the important and sensitive subject of the parties’ communications to the Tribunal about a party’s failure to pay its share. Underlying the XYZ practice of communicating the identity of the non-payor to the Tribunal only rarely, and in the circumstance of perceived necessity, is our expectation that arbitrators will maintain the same degree of impartiality without regard to whether a party has or has not paid its share. This implies that the parties also should refrain from communications to the Tribunal that identify an opponent as a non-payor, where the objective is mainly or entirely to cast that party in a negative light. This may be seen by a Tribunal as improper argument of the merits, as our Tribunals understand that they are bound to decide cases based upon the facts and the law, and not upon the basis of any subjective judgments about the worthiness of a party based upon its payment or non-payment of advances for arbitrator compensation.”

“Further, whereas the Rules are rather specific on what procedural steps a Tribunal may take in response to a non-payment, a party’s argument that the non-payor should be denied some procedural relief it has requested based in part on its failure to pay, or that the requested relief should only be granted on condition that the non-payment be rectified, invites the Tribunal to take measures the Rules do not authorize. This does not exclude the possibility, however, that a party may properly seek certain relief resulting from a non-payment and may necessarily have to identify the non-payor.”

It is our hope that parties will be mindful of this Guidance Note and that, by acting in conformity with it, fewer delays will be encountered based on temporary suspensions of proceedings. In a regrettably high percentage of cases, a party that is willing in case of necessity to bear the full cost of the proceedings, subject to re-allocation later on, only fully appreciates the situation of necessity after suffering a suspension, whereupon the rescheduling of hearings and pre-hearing deadlines may bring about delays that could have been avoided.”

International Arbitration in the California Style

Wednesday, May 2nd, 2018

If you have no desire to participate in international arbitrations seated in California; if you systematically shun cases involving the life sciences industry; if you dodge arbitrations that raise persistent and difficult issues about U.S.-style pre-hearing discovery and state arbitration law; then this post is not for you.  Everyone else, please read on.

To summarize: A New York State trial court judge last week enforced a deposition subpoena issued by a New York attorney based upon a California Superior Court commission to take the New York non-party witness deposition, where the California court had issued the commission upon an application made by a party to the California-seated arbitration after securing express permission from the arbitral tribunal. Matter of Roche Molecular Systems, Inc., 2018 WL 1938327 (NY Supreme Court, Westchester County, April 24, 2018). [Foreign readers: a “commission” as between US state judiciaries serves the same function as a letter rogatory internationally. But whereas the laws of most states permit attorneys to issue subpoenas as “officers of the court” without prior judicial action, the courts generally only become involved if there is an objection from the witness].

Relentless readers of Arbitration Commentaries will understand why the deposition-seeking party, Roche Molecular, sought a New York deposition based on a California Superior Court commission. The arbitral subpoena power under the Federal Arbitration Act (FAA) Section 7, as construed by the US Courts of Appeals in the Ninth Circuit (where the arbitration is seated) and in the Second Circuit (where the witness resides) have held that Section 7 does not permit enforcement of an arbitral subpoena for a pre-hearing deposition (or pre-hearing document production) but only allows a subpoena to compel an appearance of a non-party witness to give testimony (and bring along records) in the presence of one or more of the arbitrators. For a party like Roche Molecular, who is eager to take a discovery deposition of a key former employee of the adverse party, and to pick and choose what excerpts of the deposition transcript to enter in the arbitration record, the arbitral subpoena permitted by FAA Section 7 just will not do.

Readers already clamoring to know how the New York trial judge analyzed the issue of potential FAA pre-emption of California law, please forebear. We must cover a bit more procedural background.

First, the arbitral tribunal’s permission, and the California Superior Court commission, were obtained upon the authority of a provision of the California Code of Civil Procedure (CCP) expressly applicable to California-seated international arbitrations. This is CCP § 1297.271: “The arbitral tribunal, or a party with the approval of the arbitral tribunal, may request from the superior court assistance in taking evidence and the court may execute the request within its competence and according to its rules on taking evidence.

Second, California law, CCP §2026.010 authorizes that a commission to take an out-of-state deposition may be issued by the clerk of the court, or, if the foreign jurisdiction requires it, by order of the court. New York evidently did not require a judicial order, so the proponent was able to fill out a one-page form and have it signed and sealed by the Clerk of the California Superior Court. Thus, there was no judicial proceeding in California before issuance of the commission – a proceeding in which, had it been required, the adverse party (assuming it opposed the discovery, which is unclear) might have argued (1) that “taking evidence” under CCP § 1297.271 does not pertain to discovery, and (2) that “taking evidence” and “within its competence” should be construed to exclude the out-of-state procurement via the commission process. (What say you, Californians?) In such a proceeding, the adverse party might also have argued that CCP § 1297.271 is pre-empted by the FAA to the extent it empowers a party to the arbitration to gather information in ways that an arbitrator may not employ under FAA Section 7. (On this question, there is no definitive answer, but the New York trial court has given one for purposes of this case).

Third, New York has adopted in § 3119 of its Civil Practice Law & Rules (CPLR) a version of the Uniform Interstate Depositions and Discovery Act  (“UIDDA”)– essentially a procedural vehicle to enforce in New York exactly the kind of out-of-state discovery commission received from California in this case. This was critical, because in order for this bypass of the FAA arbitral subpoena power to work, there needed to be two states’ judicial systems willing to tango. We learn in the course of the New York court’s opinion that Roche Molecular could not use the same process to get pre-hearing document discovery from a non-party witness in Massachusetts, because Massachusetts had not signed on to the UIDDA or its equivalent. So for the Massachusetts witness an arbitral subpoena was obtained – perhaps upon informing the arbitrators that the US First Circuit Court of Appeals unlike the Ninth and Second Circuits has not committed to a position on pre-hearing discovery under FAA Section 7. But the Massachusetts state court in which the enforcement issue was presented adopted the Ninth/Second Circuit view, and denied enforcement.

These procedural provisions of California and New York law enabled a New York subpoena to be issued by a New York attorney and served on the New York witness without prior judicial involvement. The matter came before the court when the witness moved to quash the subpoena on grounds, among others, that the FAA pre-empted the California-New York process used here. The New York court rejected the pre-emption argument, citing Southland Corp. v. Keating, 465 U.S. 1 (1974) – which was perhaps the first, but far from the only, pronouncement of the U.S. Supreme Court on FAA pre-emption of state law. Said the New York court about Southland: “[W]hile the substantive rules of the FAA apply in state court as well as federal court, [in Southland] the U.S. Supreme Court explained that the purpose of the pre-emption of state substantive rules regarding arbitration was ‘to foreclose state legislative attempts to undercut the enforceability of arbitration agreements…but it went on to clarify that it did not intend such pre-emption to extend to state rules of civil procedure that are applicable in state proceedings.

This distinction between “substantive” and arguably “procedural” elements of the FAA figures prominently in discussions within the US arbitration community about the pre-emptive force, if any, of FAA Section 7 concerning arbitral subpoenas. On one view, with many adherents including a notable contingent in California, state courts are only obligated to apply those portions of FAA Chapter One that the Supreme Court has held to constitute the “substantive” provisions, and this has been stated by the Supreme Court with certainty only as to Section 2 – requiring the enforcement of agreements to arbitrate save upon such grounds as exist at law or in equity for the revocation of any contract.  On another view, also having many adherents, state courts are obligated by the Supremacy Clause in the US Constitution to give effect to the FAA over conflicting provisions of state law if the application of state law would meaningfully interfere with the purposes and objectives of Congress as reflected in the FAA. But even under this second view, giving pre-emptive effect to FAA Section 7 concerning arbitral subpoenas is controversial. Is that Section best viewed as giving arbitrators a useful evidence-gathering tool, but one which may be supplemented by the arbitration law of the state? Or do the limitations on evidence-gathering under Section 7 reflect a fundamental federal policy to circumscribe the participation of non-parties in a private commercial dispute that the parties have agreed to remove from the judicial system?

We cannot say with confidence whether the New York court’s answer in Roche Molecular Systems is the correct one. It will be championed in some quarters, decried in others.

Two further comments are in order, one legal (and mainly for New Yorkers) and one practical (and perhaps mainly for Californians).

  • The New York judge devoted more attention in her opinion to an issue that was not necessary to the outcome, although it had been argued: i.e. what is the correct position on whether FAA Section 7 allows an arbitral discovery subpoena? The New York court takes note of a New York appellate decision in 2005 called ImClone in which the Court adopted the view expressed by the US Fourth Circuit Court of Appeals nearly 20 years ago that FAA Section 7 permits a discovery subpoena, exceptionally, in case of special need or hardship. The New York court states that it considers itself bound by ImClone notwithstanding the intervening decision of the US Second Circuit Court of Appeals in 2008 in the Life Receivables case, and that on the facts of this Roche Molecular Systems case it would find the special need condition to be satisfied. Discovery proponents in the arbitration advocacy community will take note of the favorable reception they may get in New York state courts.
  • California aspires to be a growth market for hosting international arbitrations, and it may achieve a measure of success without moving its state international arbitration law toward the international standard of more limited pre-hearing evidence gathering. The tremendous economic power of California’s info-tech and bio-tech sectors may enable California shamelessly to export a very “American,” litigation-like, brand of international arbitration, even while other international arbitration centers like New York and Miami trumpet their arbitration laws’ and their arbitrators’ alleged sensitivity to international norms.