Arbitration lawyers might justifiably have thought, before reading last week’s decision from the US Fifth Circuit Court of Appeals, that any uncertainty about the legal basis for a US court to issue an injunction in regard to a potentially arbitrable dispute had been favorably resolved many years ago. But in finding that a legal basis for such relief does exist even if the arbitrability of the dispute remains undecided and is sub judice at the time of the injunction order, the Fifth Circuit reminds us that the Federal Arbitration Act is a framework not a code, and that arbitration law in the United States is an evolving federal common law. (Janvey v. Alguire, 2011 WL 2937949 (5th Cir. July 22, 2011)).
The case involves a very large (but not Madoff-scale) Ponzi scheme by companies controlled by financier R. Allen Stanford. A court-appointed receiver of Stanford assets brought lawsuits against certain Stanford investors and former employees. The employees moved to compel arbitration, asserting that the receiver was bound by the arbitration clauses in their contracts with Stanford. The receiver sought injunctions to maintain asset freezes on funds held by the former employees.
In holding that the district court properly granted the injunctions without first deciding the issue of arbitrability, the Fifth Circuit found little if any precedent directly on point, and no useful guidance in Sections 3 and 4 of the FAA which instruct courts to refer parties to arbitration and stay or dismiss judicial proceedings once a determination of arbitrability has been made. The Court correctly perceived that the prospect of irreparable injury supports the exercise of judicial power, to avoid frustration of the arbitral or judicial process as the case may be.
But perhaps the most valuable contribution of this opinion to arbitration jurisprudence is the Court’s observation that it would be undesirable to force accelerated consideration of arbitrability issues whenever injunctive relief is sought. The Fifth Circuit makes this point in quite an understated way, but it is important and deserves more expansive attention. As the main objective of the FAA is to ensure enforcement of agreements to arbitrate, and the main role of the courts is to apply contract law for enforce, refuse to enforce, or at times invalidate, purported arbitration agreements, the process courts follow to decide contested arbitrability issues should be thorough and deliberate. Federal arbitration policy is therefore well served by a common law rule that a request for provisional relief in a possibly arbitrable dispute may be addressed without first deciding the arbitrability issue, and on the assumption that the arbitrability issue will be decided in favor of arbitration, where this is justified in light of the claimed urgency of the relief requested and the difficulty and complexity of the arbitrability issues presented.