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July 31, 2012

Revisiting Second Circuit Arbitrability Jurisprudence: A Midsummer Night’s Dream?

Some segments of the international arbitration community (particularly those spending their summer holidays in the Blogosphere), are abuzz with speculation that the US Second Circuit Court of Appeals may reconsider its jurisprudence concerning the arbitrability of arbitrability in a case called Thai-Lao Lignite (Thailand) Co. Ltd. v. Gov’t of the Lao People’s Democratic Republic, 2012 WL 2866275 (2d Cir. July 13, 2012) (summary order affirming district court order granting confirmation petition and denying motion to vacate award). A petition for rehearing en banc has been filed by the appellant Government of Laos, challenging the Court’s position that the parties’ agreement to arbitrate under UNCITRAL Rules was “clear and unmistakable evidence” that they had agreed to arbitrate arbitrability and had thereby foreclose de novo judicial consideration of objections to the arbitral tribunal’s jurisdiction. [Foreign readers take note: U.S. federal appellate decisions are made by panels of three judges. An en banc petition asks the full roster of appellate judges in that Circuit to participate in reconsideration.]

The lead-off premise of the en banc petition is that the District Court ignored established Second Circuit law that the district court, when asked to vacate a Convention award’s jurisdiction rulings, must review the arbitrator’s jurisdiction rulings “de novo,i.e. as a new matter without treating the tribunal’s decisions with same deference accorded its decisions on the merits. In support of that position, they cite a decision written by Circuit Judge Lynch when he was on the district court, and the fact that the judgment resulting from that decision, confirming an award and denying a cross-motion to vacate, was affirmed by the Second Circuit. (Telenor Mobile Communications AS v. Storm LLC, 524 F. Supp.2d 332 (S.D.N.Y. 2007), aff’d, 584 F.3d 396 (2d Cir. 2009)).

The Telenor case involved a dispute over arbitrability of a shareholder agreement between Norwegian and Ukrainian shareholders of a Ukraine telecom. In the New York arbitration under the 1976 UNCITRAL Rules, the tribunal rejected the Ukraine shareholder’s jurisdiction objection, which was based on the alleged lack of authority of the representative who signed the agreement containing the arbitration clause. In the district court confirmation/vacatur proceeding, Judge Lynch rejected the appellant’s argument that, by virtue of the agreement to arbitrate under the 1976 UNCITRAL Rules which empowered arbitrators to rule on objections to jurisdiction, there was “clear and unmistakable evidence” of an agreement to arbitrate arbitrability. Judge Lynch acknowledged that prior decisions gave such presumption-rebutting effect to the competence-competence rules of the ICC and ICDR. But he considered the 1976 UNCITRAL Rule to be narrower because it authorized the tribunal not to “rule on jurisdiction” but only to rule on “objections to jurisdiction.” Nothing in Judge Lynch’s decision suggested that, if the presumption had been rebutted, in an award confirmation/vacatur proceeding the court would nevertheless review the arbitral decision on jurisdiction de novo. Judge Lynch proceeded with de novo examination of the arbitrability issue, and determined that there was an arbitrable dispute.

The Second Circuit in Telenor discussed the “review of arbitrability questions.” The Court wrote that the presumption that arbitrability is “to be decided by the courts, not the arbitrators themselves,” is rebutted “only by ‘clear and unmistakable evidence…that the parties intended that the question of arbitrability shall be decided by the arbitrator.'” But the Second Circuit did not address whether Judge Lynch was correct in finding that the parties’ agreement to arbitrate under the 1976 UNCITRAL Rules was not such “clear and unmistakable evidence.” The affirmance of the District Court’s decision, insofar as it pertained to the arbitral determination of arbitrability, was that appellant, the Ukraine company on the losing side, had failed to present evidence to the arbitral tribunal that would have justified a de novo trial on arbitrability in the district court. Had there been such evidence, then the Second Circuit would have had to decide whether Judge Lynch was correct that the presumption of judicial hegemony over arbitrability had not been overcome. But that was not the case. The Second Circuit appears to have assumed, without deciding, that de novo review of the arbitrability issue by the district court was proper.

So, insofar as the Thai-Lao Lignite en banc petition cites Judge Lynch’s Telenor opinion in the district court as Second Circuit law, because the district court’s judgment was affirmed, there is an evident flaw, because the affirmance in Telenor appears to have been “on other grounds” — i.e. not on the ground that district courts must (always or at least in arbitrations under the 1976 UNCITRAL Rules ) review arbitral arbitrability rulings de novo.

The next premise of the en banc petition is that, before July 2012, all the federal appellate decisions favoring deferential review of arbitral arbitrability rulings pursuant to arbitral compétence-compétence rules arose in cases where the district court had made a decision about the arbitrability of arbitrability before the arbitrators decided the question. The Second Circuit cases said to fall in that category  — Chevron and Contec, discussed below — Laos argues, are not controlling when the initial federal judicial decision on whether arbitrability was arbitrable occurs at the award confirmation/vacatur stage.

Of primary significance is the Second Circuit’s decision in Republic of Ecuador v. Chevron Corp., 638 F.3d 384 (2d Cir. 2011). The case reached the Second Circuit, exceptionally, while the BIT-based arbitration between Chevron and Ecuador was ongoing and there had been no arbitral decision on jurisdiction. This was so because in the district court the Republic of Ecuador joined with the so-called Lago-Agrio plaintiffs (individual citizens claiming environmental damages) in asking for an anti-arbitration injunction to stop Chevron from pursuing the BIT case. Immediate appealability was based on the denial of injunctive relief.

Ecuador’s position was that Chevron ceased to be eligible to invoke arbitration under the US-Ecuador BIT when it agreed to litigate in Ecuador with the Lago-Agrio plaintiffs as a condition for forum non conveniens dismissal of the plaintiffs’ claims in a US court. The Chevron Second Circuit panel — with Judge Lynch, now elevated to the appellate bench, as author of the opinion — stated the law in terms nearly identical to the Telenor opinion, i.e. that arbitrability issues “should be decided by the courts unless ‘there is clear and unmistakable evidence from the arbitration agreement …that the parties intended that [they] be decided by the arbitrator.'”

Judge Lynch’s Chevron opinion holds that Ecuador by agreeing in the BIT to resolve investment disputes under the UNCITRAL Rules (1976 version), “consented to sending challenges to the ‘validity’ of the arbitration agreement to the arbitral panel.” The opinion continues, on this point: “Because Ecuador’s waiver and estoppel claims go to the validity of the arbitration agreement, Article 21 of the UNCITRAL Rules requires that they be decided by the arbitral panel in the first instance.”

The words “in the first instance” are the fuel nourishing the Laotian Government’s en banc engine. The phrase should be understood, Laos argues, to mean that the compétence-compétence rule incorporated in an arbitration agreement gives the arbitrator the right without judicial obstruction to decide jurisdiction and move forward with the merits if appropriate, but leaves the final say on arbitrability to the courts in post-award de novo review.

But the interpretive clues within the Chevron opinion do not support this.

The first such clue is the Court’s citation, after its introduction of the phrase “in the first instance,” to a particular passage in a 2002 Second Circuit case, Bell v. Cendant Corp., 293 F.3d 563, 566. The cited passage in Bell quotes the Supreme Court in First Options, stating that “the parties to an arbitration agreement ‘may provide that the arbitrator, not the court, shall determine whether an issue is arbitrable.” Thus, Bell read First Options to mean that when the presumption of judicial hegemony is rebutted, the arbitrator decides arbitrability as an arbitrable issue like any other, meaning with the same limited scope for post-award review. Nothing in Bell or the quoted language of First Options suggests that this is only a “first bite at the apple” rule.

The second clue in Chevron about the import of the phrase “in the first instance” lies in the Court’s discussion of its opinion in Contec Corp. v. Remote Solution Corp., 398 F.3d 205 (2d Cir. 2005).  The Chevron court stated: “We concluded [in Contec] that [AAA Commercial] Rule 7’s language ’empower[ed] an arbitrator to decide issues of arbitrbility…. [and] served[d] as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator.'”

Thus, Chevron reads Contec as holding that arbitral compétence-compétence rules incorporated in the arbitration agreement result in a “delegat[ion]” of the arbitrability issue to the arbitrator, which seems the antithesis of a principle that the arbitrator is only getting a “first bite at the [arbitrability] apple.” And neither Chevron nor Contec contains any suggestion that “delegation” occurs, and de novo review is foreclosed, only when the district court court opines on the arbitrability of arbitrability before the tribunal opines on arbitrability.  That happenstance of the procedural posture of Contec and Chevron does not appear to have affected the outcome. And Judge Lynch’s opinion in Telenor was not based on any such distinction, but only on a distinction between the UNCITRAL and AAA/ICC compétence-compétence rules which, in Chevron, he implicitly acknowledged to have been invalid.

Further, removing any doubt Telenor might have left about a distinction based on language variation between the AAA Rule and the 1976 version of UNCITRAL Art. 21, Judge Lynch in Chevron follows the Contec discussion immediately by stating that “Ecuador is now in the same situation” as the appellant in Contec.

With these elements in mind, one can readily understand why the district court in Thai-Lao Lignite responded to Laos’s reliance on Telenor by stating, in a footnote, that Telenor was “abrogated” by Chevron. That does appear to be the case, and if it is not, the perhaps Judge Lynch will lead the charge in rounding up votes on the Circuit to agree to review the Thai-Lao Lignite summary order en banc.

The en banc petition in Thai-Lao Lignite depiction of the state of the law in the Second Circuit may not be particularly convincing. But does this en banc petition have a broader agenda: to entice the Second Circuit to re-think its arbitrability-of-arbitrability jurisprudence? The Restatement Third of the Law of International Commercial Arbitration rejects the position of the case law (at least the majority of it) that treats adoption of arbitral compétence-compétence rules by the parties as clear and unmistakable evidence of an agreement to arbitrate arbitrability such that judicial review, where the US was the seat of arbitration, is essentially confined to the narrow FAA statutory grounds for vacatur (and more particularly to a generally- insurmountable “manifest disregard” standard for whether the arbitrator exceeded her powers). The position of the Restatement is that arbitral compétence-compétence rules do not, in general, speak to the scope of judicial review of arbitral jurisdiction rulings, and therefore the incorporation of such rules in an arbitration agreement, without more, should not be seen as clear and unmistakable evidence of the parties’ intention to have arbitrators decide arbitrability in a final and unreviewable fashion.

Surely the Restatement drafters have a point. When parties agree to “resolve” disputes under ICDR or ICC rules, their thoughts are often not focused on such fine points as jurisdiction. And those Restatement drafters — more voracious readers than this Commentator of foreign law sources on compétence-compétence (and not the least, recently, the UK Supreme Court decision in Dallah), will surely point out that scarcely any foreign jurisdictions with well-developed arbitration jurisprudence permit consensual foreclosure of meaningful judicial review of arbitral arbitrability rulings.

Perhaps the solution in US law could be a presumption that parties reserve the right of de novo judicial review of all arbitral jurisdiction rulings, and this presumption should require separate rebuttal by clear and unmistakable evidence. But the consequence of such a principle would be waves of litigation over the presumption-rebutting significance of arbitration clause language (“resolve”, “settle” , “finally resolve”, “shall be final and unreviewable” ? And what if the clause specifically refers “the scope of the agreement to arbitrate” to arbitration, but lacks “finality” language?). The alternative might be for US courts to adopt a rule that prevents parties from contracting to affect the scope of judicial review of arbitral jurisdiction rulings in cases falling under the New York Convention — in essence declaring that whether there exists an agreement to arbitrate underlying a Convention award presented for confirmation is a question committed to the courts by the Convention, and therefore by FAA Chapter Two, and so the parties may not by contract constrict the judicial role in deciding whether the tribunal had jurisdiction to issue all or any portion of its award.

The Thai-Lao-Lignite en banc petition may well have dim prospects. But readers should stay tuned for a certiorari petition in this case, which may tantalize the Supreme Court with an opportunity to write an important new chapter of the U.S. law on compétence-compétence.