Institutional rules governing international commercial arbitration permit (and thereby to some extent encourage) arbitrators to render partial final awards when appropriate. And those rules, institutional guidelines, and published commentaries suggest or recommend (i) the structuring of complex arbitral proceedings by issue, and (ii) the early determination of some key issues whose resolution might advance the prospects of settlement on remaining contentious issues. Parties might assume that if an arbitral tribunal issues its final determination of a particular issue in the form of an award, in a fashion that complies with applicable arbitral rules about the form and content of awards, and in terms that reflect the arbitrators’ understanding that they give up any power to adjudicate that issue further, then the award should have the same status as an award terminating the entire case, in regard to confirmation or vacatur by a federal district court under the Federal Arbitration Act (FAA). But US law on when partial awards may be presented for confirmation or vacatur – awards which are final in terms of the issues decided, but non-final in relation to the universe of issues submitted for determination — has not kept pace with arbitral practice.
If one takes at face value a decision last week from a federal district court in Connecticut (Pearl Seas Cruises, LLC v. Irving Shipbuilding, Inc., 2011 WL 3475469 (D. Conn. Aug. 9, 2011)), the law in the Second Circuit on FAA confirmation and vacatur of partial final awards is quite rigid. According to this court’s reading of Second Circuit law, an award that does not terminate the arbitration may be presented for confirmation or vacatur in only two narrow circumstances: (1) when the award finally decides a separate independent claim, and (2) where the parties jointly asked the tribunal in the course of the arbitration to bifurcate the issues of liability and damages on a claim and to enter a partial final award on liability.
If that is indeed all that Second Circuit law permits, a modernization of the law is in order, to bring judicial practice into harmony with arbitral practice. A reading of the relevant case law suggests that this modernizing process can be achieved as a logical progression from the existing principles. It is not a problem of the law having taken an unsuitably narrow approach to partial final awards, but rather a case of the law having developed only to address the particular circumstances presented, without serious effort to anticipate the range of situations and issues on which arbitrators might render partial final awards.
A Preliminary Issue: Does the Stolt-Nielsen Case Imply That All or Most Partial Final Awards are FAA-Reviewable?
Some readers will surely wonder whether the law in this area was clarified by the Supreme Court’s decision last year in the Stolt-Nielsen case. After all, the arbitral award reviewed by the District Court, the Second Circuit, and the Supreme Court was a “clause construction award,” a quintessentially “partial final” award that resolved only the issue of whether the arbitration clause in the parties’ contract permitted class proceedings in the arbitration. In Stolt-Nielsen, the AAA’s Rule 3 of its Supplementary Rules for Class Arbitrations provided in pertinent part that the arbitrator “shall stay all proceedings” for at least 30 days to permit any party to move a court of competent jurisdiction to confirm or vacate the Clause Construction Award. Thus the drafters of the AAA class arbitration rules evidently thought there was no non-finality obstacle to FAA review.
When the Stolt-Nielsen clause construction award reached the District Court, non-finality was not raised by any party or sua sponte by the Court. The Second Circuit was equally silent on the point. In the US Supreme Court, the majority and dissenting opinions sparred over whether the case was ripe for review in the Supreme Court. But the majority did not squarely address whether the FAA permitted judicial review in the District Court. Rather, the majority in a footnote addressed the constitutional doctrine of “ripeness,” and concluded that the hardship faced by the respondent, forced to endure “class determination proceedings,” coupled with the fact that if respondent failed to proceed in the arbitration it would most likely face an FAA Section 4 petition to compel arbitration, satisfied the constitutional test for ripeness of a non-final adjudication. Justice Ginsburg’s dissent questioned “judicial intervention so early in the game,” (emphasis supplied) but had very little to say about what the FAA requires or permits, offering only a cursory review of the positions of federal courts of appeals on the question of confirmation or vacatur of awards resolving fewer than all submitted issues.
How then do we fit Stolt-Nielsen into the jurisprudence on reviewability of interim and partial awards? One’s view depends in part on whether the amenability of an award to FAA confirmation or vacatur is a question of “ripeness” or “justiciability” that a court may raise sua sponte, or whether the absence of an “award” as FAA common law defines that term means the petition may be dismissed for failure to state a claim. If the latter, then a party may waive the failure to state a claim defense. I believe the latter concept is more fitting. The absence of an FAA “award” bars a vacatur action under the FAA in the same way that the absence of a “security” bars an action under Section 10(b) of the Exchange Act — an essential legal element of the statutory cause of action is missing, and so there is a failure to state a claim under the statute creating a cause of action. That is a failure of legal substance. Some courts use the term “non-justiciable” to refer to an arbitration award that is not final enough to be an FAA “award.” But “justiciability” as it relates to issues presented to courts for initial decision refers to a series of judicially-developed doctrines relating to the suitability of exercising judicial power – the case-or-controversy requirement, the political question doctrine, the Act of State doctrine. These are concerns the courts can and do raise sua sponte. Whether an arbitral decision styled an “award” by the arbitral tribunal, and complying with the requirements for form and content of an award prescribed by the rules or laws under which the arbitration took place, is also an “award” to which the FAA applies is strictly a question of statutory construction. If the petitioner seeks confirmation or vacatur and claims the arbitral decision involved is an FAA award, and the respondent does not disagree, the non-finality issue is waived, and the court must address the merits provided it has jurisdiction. This, I submit, is the best way to explain FAA review in Stolt-Nielsen: the non-finality issue was waived in the District Court and the Second Circuit. And if that view is taken, Stolt-Nielsen offers very little assistance in a case where the alleged interlocutory character of an award is raised by a party as a statutory bar to confirmation or vacatur.
Indeed, as the federal appellate cases mentioned in the Stolt-Nielsen take various positions on when an arbitrator’s partial award is an FAA award, it is useful to consider on what basis the courts have decided that question, and whether their approaches are justified as an exercise in statutory construction. I will take the Second Circuit as a case study.
Second Circuit Law of FAA Review of Partial Final Awards
Taking as the first of the “modern” Second Circuit cases on the issue Michaels v. Mariforum Shipping S.A., 624 F.2d 411 (2d Cir. 1980), we find that the Court there held that an FAA motion to vacate an interim award on liability, where damages issues had been reserved, was “premature.” The Court in Michaels stated that under the FAA “a district court does not have the power to review an interlocutory ruling by an arbitration panel.” But the 1957 Second Circuit case cited in support of this proposition involved proposed review of evidence rulings in an ongoing arbitration, scarcely a solid basis to conclude that the statute bars a petition to vacate a final determination of liability issues. But the Michaels court also rested its decision on “policy considerations, no less than the language of the Act and precedent construing it.” The Court cited the potential inefficiency in the arbitral process that could result from piecemeal review. But whereas Michaels holds that such policy considerations are relevant to whether a given award is eligible for confirmation or vacatur, the decision implies that there could be some situations where pro-arbitration policy considerations would weigh in favor of FAA review of an interim or partial award.
A significant advance in the Second Circuit’s thinking about partial final awards took place in Trade & Transport, Inc. v. National Petroleum Charterers, Inc., 933 F.2d 191 (2d Cir. 1991). The question in Trade & Transport was not finality for purposes of confirmation or vacatur strictly speaking, but finality sufficient to avoid re-hearing of the issues decided in a partial final award when one member of the tribunal thereafter died and had to be replaced. The Court reasoned that whereas the parties had specifically stipulated that the tribunal should enter a partial final award finally deciding some but not all of the issues submitted to arbitration, the tribunal upon rendering such award was functus officio on the submitted issues, and therefore the proceedings on those issues did not need to be repeated before the re-constituted tribunal.
Several years later in Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 157 F.3d 174 (2d Cir. 1998), the Court cited Trade & Transport for the proposition that “an arbitration award, to be final, must resolve all the issues submitted to arbitration, and … it must resolve them definitively enough so that the rights and obligations of the two parties, with respect to the issues submitted, do not stand in need of further adjudication.” (emphasis in original). Rocket Jewelry could possibly be read as a step backwards – because Trade & Transport clearly involved an interim award that left unresolved many issues the parties had “submitted” in the sense that they were presented in the arbitral pleadings and proceedings for eventual arbitral determination. And whereas the argument made against finality of the award in Rocket Jewelry was that the parties had unresolved disputes that they had excluded entirely from arbitration and that had to be resolved in litigation, the Second Circuit had no occasion to delve more deeply into the question of when an award may be final even though issues remain for arbitral determination. But Rocket Jewelry did confirm Trade & Transport as good law, and so the term “submitted” as used by the Court is best read as a reference to the issues the parties have asked the tribunal to determine in an award, whether that requested award terminates the arbitration or leaves issues to be resolved in a further award.
The Second Circuit did not explain in Rocket Jewelry, and in case law since then has not explained, what elements of the procedure that led to the partial final award in Trade & Transport caused that award to be seen, through the prism of subsequent decisions, as an FAA-reviewable award. As a result, cases such as last week’s decision in the District Court in Connecticut cite Trade & Transport for the proposition that when the parties by stipulation have explicitly bifurcated liability and damages, the resulting award on liability is FAA-reviewable, as an “exception” to the “general rule” that FAA-reviewable award is one that resolves all issues. This regrettably elevates a description of what occurred in Trade & Transport into a purported rule of law. But neither the Trade & Transport decision nor the Rocket Jewelry decision suggests that only this precise procedural pattern will qualify for FAA review an award that finally resolves fewer than all issues. What if the “bifurcated” (or separated) issue were a jurisdiction objection, or liability and damages on one of several causes of action, or the cause of action against one respondent but not the others? What if the decision to issue a partial final award had been made by the tribunal, and had been announced in advance of the proceedings leading to it, over the objection of one party that urged the tribunal to decide all issues together in a single case-terminating award? Is that situation outside the “exception” of Trade & Transport because there was no stipulation of the parties?
On a careful reading of Trade & Transport, it is certainly clear that there is no subject matter limitation, i.e. a liability determination with damages issues reserved. The rationale of the Trade & Transport decision was the parties’ agreement that the tribunal should issue a partial final award vested the tribunal with the authority to do so. On this basis, district courts in the Second Circuit should have no hesitation to conclude that partial final awards addressing jurisdiction issues, or claims against fewer than all parties, or critical legal or factual threshold issues germane to a cause of action, may be the subjects of a partial final award that is immediately eligible for FAA confirmation or vacatur.
The question remains whether an interlocutory stipulation that there should be a partial final award is a necessary element. I suggest that this is not the case. The Second Circuit in Trade & Transport looked to the joint application for a partial award that was made in that case as the source of the tribunal’s authority to issue the partial final award. What was critical to the Court was that the partial final award was authorized by the parties, not that the authorization had to take the form of a joint request in the course of the proceedings. If I am correct in that regard, then whenever the parties have agreed to arbitrate under rules or arbitration laws that authorize tribunals to issue partial final awards, the tribunal’s authority to issue the partial final award is established — at least provided the parties have been given an opportunity to be heard on whether there should be a partial final award and were on notice that a certain phase of the proceedings would culminate in a partial final award on particular issues or claims.
One often finds the statement in decisions concerning FAA reviewability of a partial award that it is the content of the arbitral decision, not the label “award” or even “partial final award,” that determines whether judicial action under the FAA may be sought. The matter is not quite so black-and-white, as the arbitrators’ intentions may well be relevant. The content-trumps-label principle is sound insofar as it relates to the functus officio doctrine: if the arbitrators have expressly left open the possibility to modify an interim ruling, then they cannot trigger FAA review by mis-identifying their decision a “partial final award.” Equally, a tribunal cannot trigger FAA review of a purely procedural decision by calling the ruling, for example, a “partial final award on admissibility of evidence.” (See, e.g., Accenture LLP v. Spreng, 2011 WL 2090825 (2d Cir. May 27, 2011), holding that an arbitral order denying leave to amend the request for arbitration to add a fraud claim on the eve of the merits hearing, which did not prevent claimant from making that claim in a separate case, was not an “award” eligible for vacatur under the FAA). But where an interim award resolves in what appears to be a final way an issue of jurisdiction or the merits, then the tribunal’s declaration that it is a “partial final award” is a useful clue to the tribunal’s intentions and also should invite the district court to satisfy itself that the tribunal had authority, by rule, by law, or by agreement of the parties, to issue a partial final award.
A separate strand of the Second Circuit’s award finality jurisprudence holds that “an award which finally and definitely disposes of a separate independent claim may be confirmed although it does not dispose of all the claims that were submitted to arbitration” A leading case is Metallgesellschaft A.G. v. M/V Capitan Constante, 790 F.2d 280 (2d Cir. 1986), where the Court affirmed confirmation of a partial final award for maritime freight charges that left still to be resolved certain issues of counterclaim and setoff.
The Second Circuit has had little occasion to shed more light on the “separate independent claim” formula. In Zeiler v. Deitsch, 500 F.3d 157 (2d Cir. 2007), the Court affirmed confirmation of a series of orders that required one joint owner of property to render accountings to the other and to transfer certain documents. The Court observed that these “accounting orders” were final awards for FAA purposes in part because they “require[d] specific action and [did] not serve as a preparation or a basis for further decisions by the arbitrators.” In a footnote, the Court distinguished the Michaels case, and stated that “the accounting orders in the pending case are not segments of a future conclusive award, nor are they determinations required for furtherance of arbitration.” But the Court went on to say that the “confirmable nature” of these accounting orders “stem[med] from the unique character of the arbitration,” whereby the parties had agreed to have the arbitrators “preside over the continuing process of sorting out the details of a commercial relationship.” Thus Zeiler may fairly be said to belong in the Trade & Transport strand of the jurisprudence which focuses not on the nature of what the tribunal decided in the partial final award but upon the authority conferred on the tribunal to decide in a final way at a non-final stage a subset of the issues submitted in the arbitration.
This state of the law in the Second Circuit leaves uncertain the position the Court would adopt concerning partial final awards that resolve questions of arbitral jurisdiction over a claim or a party. An objection lodged against a claim based on alleged non-arbitrability is not a “separate independent claim” but rather it is a defense to a claim positing that the tribunal lacks power to resolve the claim. If the “separate independent claim” requirement is literally applied, then a partial award on jurisdiction that does not qualify for FAA review based on the Trade & Transport vesting-of-authority principle would possibly fail to qualify for FAA confirmation or vacatur. Perhaps the issue will be treated by courts in the Second Circuit as a question of first impression to be decided based upon essential principles of FAA arbitrability law: especially that parties should not be required to arbitrate if they have not agreed to do so, and if they have agreed to arbitrate they should only be required to arbitrate those disputes they have elected to so submit.
That principle suggests that partial final awards on jurisdiction should be FAA-eligible for confirmation or vacatur at the time they are made. That is not to say that in every such instance the district should immediately decide the petition for confirmation or vacatur. There could be prudential reasons to await further arbitral proceedings. But equally there could be compelling reasons to decide a jurisdiction issue before the tribunal proceeds much further, as for example when the arbitrators’ jurisdiction decision appears prima facie to be contrary to settled arbitrability law and the costs to the parties that would result if the correction is made only after the arbitration is concluded would be unacceptably large. This approach would apply even to situations where the parties have agreed to “arbitrate arbitrability,” as the agreement of the parties to empower the arbitrators to resolve jurisdiction issues means only that the arbitrators’ jurisdiction decision is reviewed judicially as an award under the FAA and not de novo. The agreement to “arbitrate arbitrability” implies nothing about the timing of FAA review of the arbitrators’ arbitrability decision.
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It is trite to say that arbitrations are growing more complex, with more parties, more claims and defenses, and more issues of liability and damages. For better or worse, the FAA scheme for confirmation and vacatur dates from an earlier era when “award” had a universally understood meaning as the single decision by which an arbitrator would decide the entire dispute. But the courts appear to have accepted that the FAA concept of an “award” must be fluid and should keep pace with the parties’ legitimate expectations about how arbitration will serve their needs. It is to be hoped that future court decisions will incrementally expand the universe of FAA-eligible partial final awards in accordance with this view.
