The Supreme Court of the United States today held that arbitrators exceed their powers under the Federal Arbitration Act when they impose class arbitration on parties that have not expressly agreed to class arbitration. The Court reversed a decision of the U.S. Court of Appeals for the Second Circuit, which held that the parties’ agreement to class action arbitration may be Inferred when their agreement is silent on the matter. Such inference, the Court held today, is “fundamentally at war with the foundational FAA principle that arbitration is a matter of consent. The Court divided 5-3. Justice Alito wrote the majority opinion, joined by Justices Kennedy, Scalia, Thomas and Chief Justice Roberts. Justice Ginsburg wrote a dissent, joined by Justices Breyer and Stevens. Justice Sotomayor took no part. A more detailed analysis of the Court’s decision will follow in the coming days.
Former Lehman Brothers CEO Richard Fuld last week failed to convince a federal district judge in New York to enjoin a FINRA arbitration against him arising from a Lehman bond sale in 2006. In this latest of several court decisions concerning arbitrability of pending FINRA arbitrations, Lehman’s erstwhile leader moved to enjoin the arbitration after the panel had denied his motion to dismiss. As to six of the seven claims, the court denied the motion to enjoin the arbitration — but only after accepting that the question was properly one for judicial determination. (Fuld v. Booth Foundation, Inc., 2010 U.S. Dist. LEXIS 38881 (S.D.N.Y. April 20, 2010)).
Do this and other recent mid-stream judicial “interventions” to address arbitrability in FINRA cases indicate that the doctrine of “competence-competence” is in disrepair in the United States? I think not.
U.S. courts of course require, since the First Options case in 1995, “clear and unmistakable evidence” that the parties intended to arbitrate arbitrability, and absent such evidence some questions, including whether a particular individual is bound to arbitrate under a valid arbitration agreement, are for courts to decide, either in the first instance, or without deference to an arbitrator’s prior decision on the same question.
Courts have held frequently that an agreement to arbitrate under rules, such as ICDR or ICC Rules, that invest arbitrators with power to rule upon their own jurisdiction, provides the requisite clear evidence of an agreement to “arb itrate arbitrability.”
But FINRA’s arbitration rules are viewed differently in some situations. FINRA arbitration, when requested by a member firm’s customer, is imposed upon FINRA member firms and certain persons associated with such firms, as a condition of FINRA membership, even if the customer and the firm never expressly agreed with one another directly in a signed bilateral arbitration agreement. In any FINRA arbitration, FINRA Rule 12413 confers authority on FINRA arbitrators “to interpret and determine the applicability of all provisions under the Code” — including those Code provisions that specify the scope of arbitrable disputes.
But when the arbitration arises from a request to arbitrate from a member firm’s customer that the member firm must honor only by reason of its FINRA membership, rather than from a bilateral agreement, the required “clear and unmistakable evidence” has been held not to be present. (John Hancock Life Ins. Co. v. Wilson, 254 F.3d 48 (2d Cir. 2001)).
Does it make sense that the FINRA member’s mere membership, combined with FINRA’s rules imposing arbitration on members (and associated persons) is sufficient “consent” to require arbitration of the merits of a dispute when requested by a customer, but is not sufficient “consent” to require arbitral determinations of arbitrability despite FINRA Rule 12413? Probably not. The sophisticated and well-represented member firms of FINRA understand its rules and, but for the state of the case law, could not fairly say (in the words of the Supreme Court in First Options) that “they reasonably would have thought a judge, not an arbitrator, would decide” arbitrability. The Second Circuit in the John Hancock case justified its holding by saying it was echoing the First Options court’s concern that parties would too often be forced to arbitrate threshold issues they reasonably expected would be decided by a judge.
But that concern dates from another era in the evolution of arbitration theory and practice. The holding in John Hancock appears to be an anomalous rule that in due course will be overtaken by a more contemporary view of the nature of consent in the FINRA arbitration context. In the meantime, the non-arbitrability of arbitrability issues, in FINRA arbitrations, is probably better viewed as a singular exception rather than as a symptom of US judicial disregard for the “competence-competence” principle.
Ecuador’s violation of what I have called the “Effective Means” Clause of the US-Ecuador BIT (Art. II(7)) meant that Chevron-Texaco was entitled to recover the damages, if any, proximately caused by the non-adjudication of its breach of contract claims in the courts of Ecuador for an unreasonably long period of time.
The teams of American counsel squared off against one another could readily agree that the venerable Chorzow Factory case provided the classical formulation of the measure of damages for breach of an obligation imposed by international law: in a phrase, “restitutio in integrum.”
Applying the standard of putting the Claimant in the economic position it would have enjoyed but for the violation, argued Chevron, involved no particular conceptual difficulty. The Tribunal was simply required to determine the breach of contract damages recoverable in Ecuador courts under the law of Ecuador — properly and fairly applied — and award those damages to Chevron.
Not so, said Ecuador. What Claimant lost by reason of the BIT violation, they argued, was not the breach of contract damages, but the chance — the prospect, however uncertain — of the claimed damages recovery. The measure of damages should the amount recoverable if the contract claims were sustained, times the probability of success on those claims (including collection) in the Ecuador courts.
Ecuador’s argument followed the logic of economic analysis of claims. If the BIT violation is equated with a wrongful taking, and what was taken was the unliquidated claim, then the value of what was taken is the value of the unliquidated claim. That value, Ecuador said, must be found in the normal way by applying a risk-based discount rate to the best-case revenue stream.
But the Tribunal rejected this and sided with Chevron. Assuming the Tribunal could find, as it did, that Chevron would have prevailed on its contract claims in Ecuador’s courts if those courts had functioned “effectively,” then what is lost by reason of the treaty violation (or denial of justice) is not the claim, but the judgment. To bring the uncertainty of victory back into the case as a risk discount against damages, the Tribunal reasoned (at least implicitly), would take away the benefit of the Tribunal’s determination, as a proxy for a normally-functioning Ecuiador court, that Chevron would have prevailed.
In the Tribunal’s own words: “Respondent cannot simultaneously maintain both (1) that a claimant be required to prove that it would more likely than not have prevailed in the domestic courts, and (2) that a claim be discounted to reflect the probability of success. To apply both propositions would lead to an aporoach that would necessarily and systematically undercompensate claimants in cases that allege misconduct by a State’s judiciary.”
Whereas future Claimants in denial of justice cases will surely rely upon Chevron v. Ecuador as the benchmark for the measurement of damages, it would have been gratifying had the Tribunal’s analysis on this point been more elaborated. “Systematically undercompensate” looks more like a conclusion than a reason. But the reason is fully apparent: once the international tribunal has decided the state court claim as a surrogate state court, in order to measure damages for the BIT violation or denial of justice, the Claimant’s loss is not the chance to prevail on the claim in the domestic court but the value of a victory in that court.
Dear Readers
My general website carries a commentary on an important new decision of the federal district court in Manhattan permitting attachment and execution against funds of the Argentine Central Bank at the New York Federal Reserve Bank, to satisfy bondholders’ judgments against the Republic of Argentina.
Click through to my general website at the bottom of this window.
Kind regards.
Marc Goldstein
Readers of Arbitration Commentaries may generally rely upon its principal author to read cases from beginning to end before reporting upon them in this corner of Cyberspace.
But whereas the Arbitral Tribunal in Chevron-Texaco v. Republic of Ecuador has seen fit to deliver a Partial Award on the Merits that runs to 265 pages, it is hoped that you will gratefully receive this interim report (based upon reading up to page 134 of the Partial Award) together with a promise that there will be more to come.( Here is a link to the full text of the Partial Award: http://ita.law.uvic.ca/documents/ChevronTexacoEcuadorPartialAward.PDF)
Chevron-Texaco brought claims under the 1997 U.S.- Ecuador Bilateral Investment Treaty, seeking redress for the fact that seven breach of contract claims against Ecuador for substantial sums were intractably snarled in the Ecuador judicial system. In general, the contract disputes related to allocation of energy production between the domestic market at domestic prices, and what Chevron-Texaco and its predecessors in interest would retain to sell in the world market at much higher prices.
The broad thematic basis of the claim in arbitration was denial of justice (”DOJ”) under customary international law, consisting of DOJ resulting from alleged unreasonable delay in the adjudication of the contract cases, and DOJ resulting from alleged manifestly unjust decisions by the Ecuador courts.
As alternative and additional theories of relief, Chevron-Texaco asserted violations of several provisions of the BIT: notably those that require “fair and equitable treatment,” “full protection and security,” avoidance of “arbitrary and discriminatory measures,” and, of particular importance to the outcome, Article II (7) of the BIT which required Ecuador to provide the investor with “effective means” of asserting claims (hereinafter, the “Effective Means Clause”).
The Tribunal examined the history of the Effective Means Clause in this BIT and related US BIT practice and found that it “was created as an independent treaty standard to address a lack of clarity in customary international law regarding denial of justice.” Per the Tribunal, the Effective Means Clause “constitutes lex specialis and not a mere restatement of the law on denial of justice,” and is a “distinct and potentially less demanding test” than DOJ under customary international law.
Here the Tribunal holds that one dimension of the duties arising from the Effective Means Clause is that the State must provide the Investor “with means of enforcing legitimate rights within a reasonable amount of time.” That treaty obligation was breached by Ecuador, the Tribunal holds, by reason of unreasonable delay in the adjudication of the seven breach of contract cases in the Ecuador courts, each of which had been pending at least 13 years and in some instances as long as 15 years, at the time of the Notice of Arbitration. Noting that the length of delay is not necessarily sufficient to reach a conclusion that the delay is unreasonable, the Tribunal cited “prolonged periods of inactivity” in nearly all the cases, especially prolonged periods of inactivity lasting many years after the close of evidentiary proceedings.
The Tribunal concludes that no adjudication of the other BIT claims — DOJ, fair and equitable treatment, full protection and security, arbitrary and discriminatory measures — is necessary, because no additional damages beyond those compensable for breach of the BIT’s Effective Means Clause were claimed by Chevron-Texaco.
… A further report will follow.
I briefly note here two recent cases in the federal district court in Washington, D.C., in which the judges refused to grant foreign governments stays of enforcement of awards against them, under Article VI of the New York Convention, based on proceedings pending in foreign courts to set aside the awards. (G.E. Transport S.P.A. v. Republic of Albania, 2010 U.S. Dist. LEXIS 24180 (D.D.C. Mar. 16, 2010); Continental Transfert Technique Ltd. v. Federal Government of Nigeria, 2010 U.S. Dist. LEXIS 27336 (D.D.C. Mar. 23, 2010).
Each decision relies upon the leading U.S. case elaborating standards governing the exercise of discretion to proceed with or suspend enforcement proceedings under the Convention: Europcar Italia, S.p.A. v. Maiellano Tours, 156 F.3d 310, 317 (2d Cir. 1998). The Second Circuit in Europcar provided a non-exhaustive list of six factors for consideration, with primary emphasis upon two of the six: the general objectives of arbitration (expeditious resolution of disputes), and the status and expected duration of the set-aside proceedings pending abroad.
In the Albania case, the government challenged the $20 million + award in favor of GE in a court at the arbitral seat — Rome, Italy — and lost its initial application in that court to enjoin GE from proceeding with enforcement. The Court relied on this preliminary negative assessment of Albania’s set-aside prospects, GE’s uncontested projection that the Rome court would not render a final judgment earlier than 2014, and the fact that Albania had been a full participant in three years of arbitral proceedings, in deciding to go forward with the enforcement action.
In the Nigeria case, the Court relied foremost upon negative inferences arising from Nigeria’s procedural conduct: having let pass the deadline for filing a motion to vacate in the Nigerian court, Nigeria then failed to appear in this enforcement case until the Claimant sought entry of a default judgment, then obtained a 45-day extension of time to respond to that motion, and filed its set aside case in Nigeria during the ensuing interval.
Further, the Court found that the set aside case in Nigeria was stalled, the presiding judge having retired and not been replaced, and was unpersuaded that the scope of review under Nigerian law would meaningfully less deferential that under the Convention as applied in US courts.
Dear Readers:
At my general website, I have introduced a new dimension entitled Counsel Culture Corner. There you will find current listings for the performing arts and artists’ exhibitions in leading arbitral venues — at this time New York, Paris, London, Hong Kong and Toronto. These pages also contain links to key arbitral resources of each jurisdiction –generally the governing arbitration statutes and the websites of the leading international arbitral institutions situated in those venues.
You are invited to visit Counsel Culture Corner…. and to submit your recommendations for updates to the listings!
Warm regards.
Marc Goldstein
Dear Readers:
At my general website, you will find commentaries on two recent federal court cases involving efforts by offshore hedge funds to use the arbitration mechanism of the Financial Institutions Regulatory Authority (FINRA) to recover losses sustained on credit default swaps. To reach the website, click on the link at the bottom of this window.
Warm wishes.
Marc Goldstein
Practitioners and arbitrators in both commercial and investment arbitrations may profit from studying the thorough and sensitive treatment of confidentiality found in a procedural order issued January 27, 2010 in an ICSID arbitration arising under the BIT between Italy and Argentina. (G Beccara et al v. Argentine Republic, ICSID Case No. ARB/07/5, Procedural Order of 1/27/10, published on ICSID website)
The order deals with confidentiality on several levels. The first and perhaps most generally applicable category concerns public discussion of the case during the course of the proceedings. Here the Tribunal’s approach implicitly recognizes a point to which experienced advocates on international arbitration will attest: clients seek to exploit the absence of clear legal rules imposing a confidentiality duty, to pursue extra-arbitral means of resolving the dispute through public exposure of embarrassing facts about the adverse party or its position.
Experience with this phenomenon surely is part of the motivation for approach taken by the Beccara Tribunal, concerning general public discussion of the ongoing proceedings. Thus the Tribunal orders that “[t]he Parties may engage in general discussion about the case in public, provided that any such public discussion is restricted to what is necessary, and is not used as an instrument to antagonize the Parties, exacerbate their differences, unduly pressure one of them, or render the resolution of the dispute potentially more difficult. . . .” This standard was adopted from substantially identical language used by another ICSID Tribunal, in the Biwater Gauff Ltd. v. Tanzania case (ARB/05/22, Proc. Order No. 3 of 9/22/06).
The balance struck between transparency and the integrity of the proceedings is constructive, and appears to reflect values widely shared among arbitrators acting in investment law cases as well as commercial cases.
For counsel in international arbitration, it is not unusual for a client, intent on using media or other public pressure to influence the adverse party to resolve the dispute, to ask counsel for assurance that no laws, rules, or agreements concerning the confidentiality of the arbitration will be violated by such activity. The answer often is that there are no such laws, rules, or agreements (and such was the case in the Beccara v Argentina case under discussion), but that the proposed actions risk antagonizing the Tribunal. It is sometimes difficult to articulate for a client why this may be so.
The orders adopted in Beccara andBiwater Gauff are indicative of a widely shared norm among international arbitrators that efforts to coerce the other party through publication of embarrassing facts may destabilize the arbitration, making the Tribunal’s task of managing the case and achieving a transparently fair process more difficult. (This is reflected in other elements of the Beccara confidentiality order, barring publication without mutual consent of pleadings, motions, and transcripts of proceedings, on the basis that “their uneven publication or distribution carry the risk of giving a moisleading impression….”) Thus the advice to the client may well be that while no law, rule, or agreement is violated by a proposed publicity campaign, the sensibilities of the arbitrators (or some of them) may be influenced quite negatively, because the actions tend to undermine the tribunal efforts to maintain order and a desirable level of courtesy and respect in the written and oral discourse.
Yesterday a federal judge in New York granted an anti-suit injunction, in aid of arbitration, barring Indian corporate entities from continuing litigation in India over arbitrable disputes with a U.S. company — litigation in which the Indian parties have already obtained ex parte orders enjoining the U.S. party from continuing with pending ICDR arbitration in New York. (Amaprop Ltd. v. Indiabulls Financial Servs. Ltd., 2010 U.S. Dist. LEXIS 27117 (S.D.N.Y. Mar. 23, 2010)).
The arbitration community should be encouraged by the swift and decisive support for international arbitration from the U.S. District Court in Manhattan. But the Court’s anti-suit injunction, combined with the Indian court’s ex parte anti-arbitration injunction, creates an difficult procedural standoff: the U.S. party risks contempt in the Indian court if the arbitration proceeds, while the Indian parties risk contempt in the U.S. court if the India litigation continues.
The New York federal judge, only beginning his analysis from the premise that the India anti-arbitration injunction violates the U.S. federal policy in favor of arbitration that applies with particular for in international cases, proceeded to discuss a variety of case-specific factors that indicated the vexatiousness of the India litigation and the extreme burdens it threatened for the U.S. party:
– that the Indian parties had initially appeared in the ICDR case, indicated their intention to participate and appoint an arbitrator, and obtained an extension of time to answer, while concealing their intention to obtain injunctive relief in India;
– that the Indian parties deliberately omitted critical words, in quoting the arbitration clause to the U.S. court, to create the misleading impression that the type of injunctive relief they had sought in India was permitted under the clause;
– that the proceedings in India were conducted entirely ex parte; even after obtaining that relief the underlying papers were not provided to the U.S. party, and no explanation for proceeding ex parte was provided to the U.S. court;
– that according to competent expert witness testimony of a retired India High Court judge, the average civil case in India’s courts takes at least 15 years to reach initial resolution, with appeals consuming 5 to 10 more years;
– that the pendency of parallel proceedings on the same disputes creates burdensome redundant costs, risks of inconsistent judgments, and potential for tactics to manipulate the timing of outcomes in each forum.