The rights and obligations of non-signatories to the arbitration clause has been a frequent topic in Arbitration Commentaries since its inception. In American arbitration law, the subject is a difficult one for several reasons. First¸ important distinctions exist in the law, depending on whether the non-signatory seeks to compel arbitration with a signatory or is on the receiving end of a demand for arbitration from a signatory. Those distinctions can become blurred, even without the assistance of advocates who have an interest in a particular result. Second, the non-signatories issue is often entangled with the American version of the compétence-compétence principle — i.e. the power of the arbitrator to rule on her own jurisdiction – and that principle is itself somewhat less than a model of clarity. Third, there is a complex interaction between initial decisions on arbitrability of claims by or against non-signatories, by arbitrators or federal district judges, and review of those initial decisions by federal district courts or courts of appeal.
Into this simmering stew there was added last week a new decision by the US Fifth Circuit Court of Appeals, which – reversing the decision of the district court – held that substantial money damages awards against two non-signatories had to vacated as exceeding the powers of the arbitrator (FAA Section 10(a)(4)), because the arbitrator had no jurisdiction over the non-signatories. (DK Joint Venture 1 v. Weyand, 2011 WL 3342270 (5th Cir. Aug. 4, 2011)).
The main theme of this Commentary is how arbitrators and judges might help the parties, in such situations, to avoid the extra effort and cost that may well be involved if the parties, following a judicial determination of non-arbitrability made only upon review of the final award on the merits, must begin anew to litigate the merits in a state or federal court. But first a brief description of the new Fifth Circuit case is in order.
Claimants were investors in oil and gas ventures, and had signed subscription agreements that provided for arbitration under AAA commercial arbitration rules. Claiming breach of contract and fraud, and unable to proceed against the signatory enterprise because of its intervening bankruptcy, they demanded arbitration against the CEO and CFO who as agents of the enterprise but not as individuals had signed the subscription agreements. In addition , claimants commenced suit in a Texas court to obtain an order compelling arbitration, and after the defendants removed that suit to the federal court, the court made an order compelling arbitration. The individual defendants renewed their objection to arbitral jurisdiction before the arbitrator, and the arbitrator (evidently considering the matter de novo despite the order of the federal district court), held that the tribunal had jurisdiction over the individual CEO and CFO even though they had not signed the subscription agreements except as representatives of the enterprise. The arbitration then proceeded to a final award, which was against each of the individuals in the sums of $13 million and $700,000 respectively. The same district court judge who had earlier granted the order compelling arbitration then was assigned the new case seeking confirmation of the award, and predictably entered judgment on the award, rejecting the non-signatories’ position that the award should be vacated because the tribunal had lacked jurisdiction over them. Their appeal to the Fifth Circuit ensued, and the Fifth Circuit held that, under agency principles, there was no basis for the signatory investors to enforce the arbitration clause against the non-signatory agents of the enterprise and, as a subsidiary matter, there was no basis for the court to give deference to the arbitral determination of jurisdiction, because the non-signatories disputed whether they had ever agreed to arbitrate any issues. (Most federal courts accept that an agreement to arbitrate under arbitration rules that give the arbitrators power to rule on their own jurisdiction is sufficient “clear and unmistakable evidence” of an agreement to arbitrate arbitrability that the scope of review of the arbitrator’s arbitrability decision is the same deferential FAA review that applies to other issues the arbitrator determines. But that principle is inapposite, as the Fifth Circuit correctly held in this case, where the party contesting the arbitrator’s arbitrability decision takes the position that the party never agreed to arbitrate any matter.)
The Federal Arbitration Act (“FAA”) of course gave the non-signatories no option to appeal, before the conclusion of the arbitration, from the district court’s initial decision granting the motion to compel arbitration. But here the arbitrator evidently considered that the AAA commercial rules required the arbitrator to decide that issue de novo if it was raised, as it was. The Fifth Circuit’s decision leaves unexplained the procedural details of the arbitrator’s handling of the jurisdiction issue. But what should have happened (and perhaps did) is that the arbitrator would enter an interim or partial final award on jurisdiction, paving the way for an immediate submission of a motion to vacate that award in the federal district court.
To my knowledge no federal court of appeals has decided whether a partial final award on jurisdiction is an award within the meaning of the FAA, i.e. an arbitral decision subject to confirmation or vacatur under FAA standards and within FAA time limits. But it is fairly arguable that any arbitral ruling that decides, without room for modification later on, whether all claims against a party shall be dismissed, and decides that issue without leaving room for modification, should be regarded as an award under the FAA. Obviously if an award on jurisdiction found no jurisdiction, and thus ended the entire case, it is a final award for FAA purposes. The fact that a partial award on jurisdiction finds that jurisdiction exists, and therefore leads to further proceedings on the merits, should not as a matter of FAA law lead to a different status of the partial award in regard to confirmation or vacatur. On this view of the law, the aggrieved non-signatories in DK Ventures could have and perhaps should have (i) moved immediately in the district court to vacate the jurisdiction partial award (although we do not know if there was one, as there should have been), (ii) consented to entry of judgment by the district court denying their motion to vacate the partial award (in accordance with the court’s earlier order compelling arbitration, which in effect collaterally estopped the non-signatories on the motion to vacate), and then (iii) immediately appealed the district court judgment denying vacatur to the Fifth Circuit. The arbitral tribunal, in the meantime, if it did not view with favor a complete stay of the arbitration pending the vacatur appeal to the Fifth Circuit, might have sought consent of the parties to carry forward initially only those proceedings that would have had to occur even if the case were ultimately litigated – i.e. document discovery – and then, if the Fifth Circuit’s decision was still awaited, might have revisited the question of whether to stay proceedings based on the projected timetable in the Fifth Circuit.
Whether a partial final award on jurisdiction may be confirmed or vacated under the FAA — that is to say whether federal courts will regard such a decision as an award under the FAA — is an open issue. Case law directly on point is sparse. In A.G.K. SARL v. A.M. Todd Co., 2009 WL 2526432 (E.D. Pa. Aug. 18, 2009), the question was presented but not decided. The arbitrator in that case (not identified in the decision), which involved an international sale of goods contract, bifurcated the arbitration into jurisdiction and merits phases, and entered a “partial final award” on jurisdiction “made at New York, New York.” Evidently the arbitrator intended that confirmation or vacatur could be sought before the merits phase of the arbitration went forward to completion.
In the A.G.K. case, a federal district judge in New York denied vacatur of the jurisdiction award on the view that the judge in Philadelphia who had heard the motion to compel arbitration should decide the vacatur motion, but went on to say in dictum that the partial final award was “interlocutory” despite its nomenclature of finality. But the federal district judge in Philadelphia, in the decision cited in this paragraph, neither agreed nor disagreed with the position that the award was “interlocutory.” Denying the motion to vacate without prejudice to renewal, the Court stated that it preferred (implying that the Court was not necessarily required) to await the final award on the merits before considering vacatur or confirmation of the partial final award on jurisdiction.
In the US jurisprudence concerning the ripeness of arbitral awards for FAA review, finality is the touchstone for whether an award (whether or not so denominated by the tribunal) is subject to confirmation or vacatur. Whereas under the FAA a motion to vacate an award must be made within 90 days of the award’s delivery, this issue sometimes arises in the context of whether the arbitral decision did or did not trigger the running of the 90-day limitations period. The cases often use phrases like “separate, independent claim” to describe what issues an arbitral decision must resolve to be considered as an award eligible under the FAA for confirmation or vacatur. And the courts have found little reason to approach the question differently depending on whether a domestic or Convention award is involved — the term “award” not being defined in FAA Chapters 1, 2 or 3, or in the New York and Panama Conventions.
The issuance of a “final” award, whether or not it is also “partial” or “interim” connotes that the tribunal by its own declaration has expended all of its power to adjudicate on the matter decided, is functus officio in regard to that matter (both in common law terms, and under arbitral rules or statutes limiting arbitrators’ ability to modify awards), and that any revisiting of that decision in the course of ongoing proceedings would violate the functus officio doctrine and would be subject to vacatur as exceeding the tribunal’s powers. From this perspective, there should be no reason to conclude that the FAA prohibits confirmation or vacatur of a partial final award on jurisdiction. Of course the court retains discretion to postpone a decision on confirmation or vacatur until the arbitration is completed. The FAA governs the timing of a petition to confirm or vacate, and the grounds for vacatur, but it does not prescribe timing of the court’s decision. In international cases, FAA Chapter Two implements inter alia Article (V)(1)(e) of the New York Convention allowing for a discretionary stay of confirmation proceedings pending a challenge to the award in a court at the seat of the arbitration. But there will be instances — and the recent Fifth Circuit case may have been one — when immediate access to the federal court for confirmation or vacatur of a just-issued partial final award dealing only with jurisdiction will promote efficient arbitration, avoid potential duplication in courts of jurisdictionally-deficient arbitral proceedings, and promote settlement among parties who know with certainty before reaching the merits that the tribunal’s award cannot be attacked on jurisdictional grounds.
Further, by adopting the position that the FAA does not prohibit confirmation or vacatur of partial final awards on jurisdiction, the federal courts would close a significant loophole in US arbitrability jurisprudence. Our law maintains that a party cannot be compelled to arbitrate with parties or as to subject matter when it did not agree to do so, and that absent clear and unmistakable evidence of an agreement to arbitrate arbitrability, this matter should be decided by a court. But whereas the FAA does not provide expressly a cause of action to enjoin arbitration, and many courts have declined to imply one, parties objecting to arbitration on jurisdictional grounds often lack pre-award judicial recourse unless, by ignoring an arbitration demand, they can induce the claimant to petition the court to compel arbitration. That solution, requiring action by the adverse party, is far from satisfactory, as under many sets of arbitration rules an award on the merits may be made against a party that fails to appear, provided that the absent party has had adequate notice of the proceedings and the opportunity to participate in them. It will often be the best-advised course for the party objecting to arbitral jurisdiction to participate in the arbitration and to raise the jurisdiction objection initially in that setting. But if neither party can obtain judicial review of the award on jurisdiction without first arbitrating the merits to the end, the supposed promise of US law that courts shall be the primary arbiters of the existence of consent to arbitration is not fulfilled in a satisfactory way.