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October 24, 2010

Another Look at Competence-Competence American Style

Under compétence-compétence, American style, nothing may be arbitrated if there never was a contract. We were reminded of this last week, when a federal judge in Manhattan (i) denied a motion to compel arbitration, and (ii) refused to stay its own proceedings pending the decision of an ICC arbitral tribunal in London on the contested issue of the existence of a contract containing an agreement to arbitrate.

(Dedon Gmbh v. Janus Et Cie, 2010 U.S. Dist. LEXIS 112131 (S.D.N.Y. Oct. 19, 2010).

 

In Dedon, the parties either did or did not enter into an exclusive distribution agreement. If they did, it unquestionably provided for arbitration of disputes — including disputes over the existence of the agreement — before an ICC arbitral tribunal in London. But it was common ground that the purported agreement had never been signed; the disputed issue was whether it had been adopted by performance.

 

The aggrieved terminated U.S. distributor, Janus, filed the ICC case, and Dedon responded by asking the ICC Court for a determination prima facie under ICC Rule 6(2) that an agreement to arbitrate did not exist (while expressly reserving the right to obtain a judicial determination of that issue) . The ICC Court instead found prima facie that an agreement to arbitrate might exist, and launched the case.

 

The U.S. court concluded that the text of Article II(3) of the New York Convention and U.S. Supreme Court precedent compel the federal judge to resolve the question of arbitrability presented when one party moves to compel arbitration and the other opposes that motion by contesting whether any contract between the parties ever came into being.

 

On the question of whether to stay proceedings and await the arbitral tribunal’s arbitrability ruling, the court concluded — with evident reluctance and hesitation — that awaiting the ICC tribunal’s ruling on that issue would only complicate matters, because the Court’s duty to decide the arbitrability issue de novo might then collide with its obligation under the New York Convention to recognize the award and any decision of a competent English court that might uphold that award. The court further justified its election not to defer to the arbitral tribunal on the ground that the plaintiff distributor in the New York action had sought urgent injunctive relief.

 

Should we regard this decision as a proper exercise of judicial control over the fundamental contractual basis for arbitration? Or was it a premature “intervention” in an ongoing ICC case?

 

As an initial matter, the notion that this was an “intervention” or “interference” by the judiciary in the arbitral process should be resisted. Within a three-week time frame, one party commenced proceedings ar the ICC, and the other filed the New York lawsuit. In the lawsuit, the ICC-filing party moved to compel arbitration. The New York Convention required the court to decide if the parties had made an arbitration agreement. Otherwise the motion to compel could not be addressed. The Court was not “interfering” or “intervening,” it was addressing a motion presented by the party seeking to pursue the ICC case.

 

Further, as no arbitral tribunal had yet been formed, in practical terms an arbitral decision on the arbitrability issue was several months off into the future. From a “comity” perspective, the intrusion into the province of an international tribunal was far less than if the tribunal had been seized of the case, and had already held a hearing on the jurisdiction question.

 

The fact that the ICC Rules make arbitrators competent to rule on their own jurisdiction should be of no consequence to a court asked to consider the arbitrability issue, when the arbitrability issue is whether the parties ever made a contract.  If they did not, no arbitral tribunal could legitimately claim power to apply the ICC Rules to a dispute. If the arbitral tribunal is the first to adjudicate this arbitrability issue, everything it decides, and all proceedings before that tribunal, have only provisional legitimacy until there is a judicial affirmation of the correctness of the arbitral decision on jurisdiction.

 

A stay of proceedings would be justified if the matter were ripe for arbitral decision, prompt judicial review of that decision could be had in the courts at the seat of arbitration, and the applicant for judicial relief on the merits would not suffer serious prejudice if required to await those rulings.

 

It remains to be seen how the ICC Tribunal will respond if the New York court rules that no contract ever existed. The Court’s denial of the motion to compel arbitration would be only an interlocutory order with no necessary binding effect on the arbitral tribunal. Of course the tribunal might elect to adhere to the New York court’s decision under collateral estoppel principles. Or the New York court might possibly accept an invitation to enter an anti-arbitration injunction — an order in personam against the party, directing the party not to pursue the arbitration, that could made into a judgment and enforced by a court at the seat of the arbitration.

 

Notably absent from the Court’s analysis is any discussion of whether an accelerated judicial determination of the arbitrability issue could be obtained from an English court. Indeed there is a provision  for such relief in Article 32 of the English Arbitration Act of 1996. It provides that the court may “determine any question as to the substantive jurisdiction of the tribunal.”  But it goes on to state that an application shall not be considered unless it is made with the agreement of all parties to the proceedings, or it is made with permission of the tribunal and the court is satisfied that judicial determination will likely produce substantial cost savings and there is otherwise “good reason why the matter should be decided by the court.” This may be the best solution for the New York court — which is scheduled to hold a conference October 27 to set procedure for a trial of the arbitrability issue. Should the court succeed in securing the mutual consent of the parties to submit the issue to an English court on an expedited basis, considerable savings in costs and avoidance of potentially inconsistent outcomes could be achieved.