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March 02, 2015

Finding Mareva in Alligator Alley

You remember Jacksonville. Situated 480 miles north of Havana, and just south of the Georgia border, it is a place where prominent international arbitrators take afternoon naps at 37,000 feet after downing a glass or two of passable champagne in their capacious first class seats between Miami and New York. It is home to two U.S. Navy bases, a dreadful professional football team, and at least one very meticulous federal district judge who, in what was perhaps her first foray into the thicket of international arbitration after eight years on the federal bench, properly granted an anti-suit injunction against vexatious collateral proceedings in Libya wherein the movant sought pre-Award security for — or, one might say, pre-Award satisfaction of — a money damages claim that said Libyan movant had interposed against a local Jacksonville company in an ICC arbitration seated in Jacksonville. APR Energy LLC v. First Investment Group, 2015 WL 736275 (M.D. Fla. Feb. 20, 2015).

Arbitration Commentaries dares not try to entertain you with a second-hand account of a most faithful application of settled legal principles governing the issuance of foreign anti-suit injunctions in support of pending arbitrations seated in the US. I will, however, take issue with one dimension of the Court’s decision which, while obiter dicta, might tempt an arbitral tribunal or a reviewing court to go astray. This concerns the availability of asset freezing orders (“Mareva” orders) as pre-Award security measures in international arbitrations at a US seat.

The contract in APR Energy — for consulting services to be furnished by a Libyan firm in aid of the construction by a Jacksonville firm of an electric power plant in Libya for the State-owned electric utility — provided that it was governed by Florida law, and that any arbitration required would be held in Jacksonville under ICC Rules. It followed, so this Judge decided, that Florida law concerning pre-judgment remedies applied — by implication, whether the remedies were sought in Libya, in a Florida court, or from the arbitral tribunal. Under Florida civil procedure law, a Florida court may not, in a case pending before the court, grant provisional relief in the nature of a freezing order or asset seizure as security for an eventual judgment that the court might render on a claim for money damages only. (One of the conceptual hurdles for courts is that rules that may fairly be characterized as rules of civil procedures appear in statutes that are not necessarily called “civil procedure” and may at first blush look like rules of substantive law that the contract means to make applicable. Florida’s statute on pre-judgment remedies is a good example).

The arbitration clause carved out permission for a party to seek a preliminary injunction if such relief were necessary to protect the applicant’s rights during the arbitration and if the application did not require the court to resolve any aspect of the merits. On the question whether the Libyan proceeding was within the carve-out, such that the provisional relief request was not required to be arbitrated, the Court readily concluded that it was not exempted from arbitration. In justifying this position, the Court ought to have stopped at the simple proposition that the Arbitral Tribunal could order security under the ICC Rules and that there was no showing of imminent dissipation of assets. But the Court went a step further, and here fell into a regrettable common trap, stating that the relief sought did not need to be sought from the Libyan court, rather than the arbitral tribunal, because the arbitral tribunal could provide the relief under the conditions specified in Florida law on pre-judgment remedies.

The correct analysis, I suggest — and a federal district court in New York was persuaded of this — is that arbitrator’s power to grant such provisional relief is determined by the arbitration agreement and in turn usually by the arbitration rules agreed by the parties. Such rules (e.g. ICC Rules Art. 28) grant arbitrators power to issue any provisional relief they consider to be necessary and appropriate, and such rules do not typically confine the limits of such powers according to limitations on judicial provisional relief at the seat of the arbitration. The Federal Arbitration Act requires enforcement of the parties’ agreement upon the scope of such powers.  Of course, the parties might by agreement confine the arbitrator’s provisional relief powers to the comparable powers exercisable by a judge in the Florida courts in a plenary proceeding before her. But an agreement that Jacksonville shall be the seat of an ICC arbitration, without more, requires the arbitrator only to observe any mandatory limits on her powers specified in Florida’s statute governing international arbitrations. There is indeed such a statute, it is patterned on the UNCITRAL Model Law, and with respect to provisional relief obtainable from arbitrators it does not incorporate limitations on pre-judgment security remedies pertinent to cases brought in the courts of the State.

The difference between arbitral power and judicial power to grant an asset seizure or freezing order as a provisional remedy is evident in the Florida International Arbitration Act. Section 684.0018 of the Act entitled “Power of arbitral tribunal to order interim measures” states in pertinent part:

Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, grant interim measures.  An interim measure is any temporary measure, whether in the form of an award or in another form, by which, at any time before the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party to:

(3) Provide a means of preserving assets out of which a subsequent award may be satisfied…

This section stands in contrast to Section 684.0028 of the same Act, entitled “Court-ordered interim measures,” which provides:

A court has the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether the arbitration proceedings are held in this state, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures and in consideration of the specific features of international arbitration.

So it is indeed true that if one were to ask a state or federal court in Florida to provide an asset freezing order as a provisional measure in aid of arbitration, there would be a valid objection that under Florida law (as is the case under New York law and federal common law announced by the U.S. Supreme Court in the Grupo Mexicano case in 1999), an order directing the defendant to freeze or deposit assets to secure an eventual judgment for money damages only is prohibited.

But in Florida, international arbitration is autonomous, and proceedings in the courts are indigenous. At least that is so by the barometer of how the state’s International Arbitration Act treats interim relief. The interim measures powers of international arbitrators are derived from the agreement of the parties and the mandatory international arbitration procedural law of the State.

But what about enforcement, you ask. On what basis shall a U.S. District Court in Florida confirm the Award of a tribunal granting an asset freezing order, when the issuance of such an order by the Court in the first instance would have been contrary to the (civil procedure) law of the state in which the court sits, and indeed contrary to the state’s International Arbitration Act itself?

Faithful long-time readers of Arbitration Commentaries (I hope there are some) will recall that nearly this precise issue was resolved in favor of judicial enforcement of an arbitral Mareva order in CE International Resources Holdings LLC v. S.A. Minerals, Ltd., 2012 WL 6178236 (S.D.N.Y. Dec. 12, 2012). (Although in that case the element of a relevant state statute concerning international arbitration was absent). In CE International, despite the fact that the contract provided that it should be construed and enforced in accordance with New York law, and that arbitral proceedings under the ICDR Rules should take place in New York, the arbitrator granted a Mareva freezing order against the Respondents, in the form of an Interim Award, to provide security for a potential eventual final award of money damages by preventing the dissipation or concealment of assets. The estimable federal district court judge, overcoming an initial temptation to find that the arbitrator had acted in “manifest disregard of the law” in view of the prohibition against judicial freezing orders in damages cases before the courts under New York and federal law, concluded that (i) the ICDR Rules were clear in permitting the arbitrator to grant “any” interim measure, (2) the arbitrator’s powers in regard to interim measures were defined by the agreement of the parties and not by New York case law concerning the powers of judges, and (3) the US public policy favoring enforcement of arbitration agreements — and thus here the parties’ agreement on broad arbitral interim relief powers by virtue of their adoption of the ICDR Rules — trumped any “policy” against pre-judgment security reflected in the law of New York and the United States concerning judicial pre-judgment relief.

This was in fact a rather complex sorting out by the New York federal judge of a multi-variable equation involving elements of choice of law, characterization of state law as substantive or procedural for purposes of applying the parties’ contractual choice of law, sorting of judicial and arbitral roles, and application of the oft-stated FAA-mandated “pro-arbitration policy” versus the “public policy” considerations that motivate certain rules of judicial procedure. But ultimately that equation can be condensed into the simpler proposition stated above: arbitration is autonomous while judicial proceedings are indigenous. “Autonomy” is routinely invoked in relation to arbitration, in theoretical discussion, but its practical applications remain challenging in many contexts. An agreement to arbitrate an international case against a Libyan party in Jacksonville or in New York renders the arbitration Floridian or Manhattanite only to the extent the parties make it so. The parties can reasonably be supposed to have agreed, by virtue of selecting a place of arbitration, to have their proceedings governed by the laws of the place of arbitration concerning the powers of arbitrators and the conduct of arbitral proceedings. They could make a special agreement that the arbitration should be governed by the rules of civil procedure of the state, or that the arbitrators’ powers should be co-extensive with the powers of judges in civil proceedings in the courts of the state. But if they have not done so, it is not reasonably possible to state a persuasive rationale for the mandatory application by arbitrators of such judicial rules and such limitations on judicial powers. This proposition turns out to be remarkably elusive in the real world of the federal courts, as demonstrated by the dicta in this new case from Jacksonville and the initial hesitation of the judge in the CE International case. The instinct of a judge that an arbitrator’s powers should generally be subsidiary to the powers of a judge is quite natural, and it falls to counsel advocating effectively for their clients to guide judges down the proper analytical path.

***

“Alligator Alley” is an affectionate Florida appellation for a section of Interstate Highway #75 between Miami and Tampa.It does not serve Jacksonville, but all federal courthouses along its path are, like the one in Jacksonville, in the federal judicial district known as the Middle District of Florida (M.D.Fla.).