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May 13, 2009

Arbitration Clause Held Null and Void Due to Conduct Waiver

Federal district courts have ample power to dissolve a stay of proceedings pending arbitration, and order the parties to proceed with the litigation, where the party that initially invoked arbitration thereafter acts systematically to prevent the arbitration from taking place. A recent federal district court decision makes these powers clear.
In Apple & Eve, LLC v. Yantai North Andre Juice Co., 2009 U.S. Dist. LEXIS 32548 (E.D.N.Y. April 27, 2009), the defendant was a commercial entity domiciled in the People’s Republic of China. After plaintiff commenced suit in a New York State Court, defendant removed the action to federal court and successfully moved to compel arbitration even though the arbitration agreement did not specify an arbitral institution in China that would administer the case. Thereafter, defendant (1) refused to arbitrate under the auspices of the Hong Kong International Arbitration Centre, insisting that it was only bound to arbitrate in Mainland China, and (2) without disclosure to the plaintiff or the Court, filed an action in a People’s Court in the PRC seeking to declare the arbitration agreement null and void.
Invoking the “null and void” exception under Article II of the New York Convention and Section 201 of the Federal Arbitration Act, the Court held that waiver by conduct is a suitable ground to determine that an arbitration clause has become null and void, and that there was a clear waiver here. Further, the Court held, the question of waiver was for the court not the arbitrator to decide, where a litigation–conduct waiver was involved –taking the view that judicial determination of the waiver issue was part of the court’s inherent power to regulate the litigation practices of the parties in a pending case.
Further, defendant’s waiver of arbitration justified the conclusion that it was “in default in proceeding with [the] arbitration” – i.e. that the standard in FAA Section 3 for denying a stay of an apparently arbitrable dispute had been satisfied.