Marc J. Goldstein Arbitrator & Mediator NYC
August 08, 2012

Where Shall Arbitration Be Compelled If the Agreement Is Unclear: Searching for a Better Solution

Poorly drafted international arbitration clauses often challenge US courts to find pro-arbitration solutions that meet the needs of the parties and are practicable within the bounds of the New York Convention and the FAA. That struggle was on display again recently in a case decided by the US Third Circuit Court of Appeals (Control Screening LLC v. Technological Application & Production Co., 2012 WL 3037824 (3d Cir. July 26, 2012).  Here a “pathological” arbitration clause identified a non-existent European arbitration institution, and the Court’s solution was to require arbitration in New Jersey, home turf of one of the parties, even though the other party had already commenced arbitration in Europe. The mission of this post is to explore whether a more optimal solution was available under Chapter Two of the FAA implementing the New York Convention.

The contract in Control Screening was for sale and distribution of goods from a New Jersey seller to a Vietnamese buyer.  The arbitration clause provided for arbitration “at” an institution that did not exist, i.e.: “at the International Center for Arbitration of the European Countries for claim in the suing party’s country under the rules of the Center.” The Vietnamese distributor commenced arbitration in Belgium “under the Belgium Judicial Code” (according to the Third Circuit) and the US company responded by filing a petition to compel a New Jersey arbitration in the US District Court for New Jersey.  The US company also asked the District Court to appoint the arbitrator and to enjoin its Vietnamese counterpart from proceeding with the arbitration filed in Belgium.  The District Court in an unreported decision evidently found meaning only in the contract’s words “in the suing party’s country,” and ordered that arbitration proceed in New Jersey on the basis that the movant was the “suing party” — even though the US movant had not commenced an arbitration, but had only declared that it would do so and was evidently hoping the court would appoint an arbitrator who would then proceed ad hoc.   The Third Circuit affirmed the District Court’s order compelling arbitration in New Jersey, but without adopting the District Court’s interpretation the arbitration clause (under which it would have been equally plausible to compel arbitration in Vietnam). The Third Circuit’s affirmance was solely on the basis that Section 4 of the FAA permits a District Court to order arbitration only in its own district, and that the District Court’s power to compel arbitration includes and depends upon its ability to designate its own district as the place of arbitration in a Convention-FAA Chapter Two case, if the parties have not clearly provided for a place of arbitration in the contract.

As the arbitration clause in Control Screening did nevertheless indicate an intention of the parties to arbitrate in Europe or under the auspices of a European institution, it is useful to consider if another solution was possible. The Court treated the designation of a non-existent “International Center for Arbitration of the European Countries” as null and void, and as severable from the agreement to arbitrate. But Europe is a place, and an order compelling arbitration in Europe would have complied with Section 206, even if it might not have been specific enough to dispatch the parties to arbitration without further judicial relief.  The reference in the contract to a non-existent arbitral institution could have been severed, but without severance and nullification of the geographic designation. If such an order, compelling arbitration in Europe, proved ineffective to launch the arbitration because the parties thereafter could not agree on a particular forum, lex arbitri, or administering body, they could return to the US District Court under FAA Section 5 for appointment of an arbitrator.

This solution would have had the practical advantage of sending the parties to a neutral venue rather than the home turf of the US party. It would also have avoided what was an arguable mis-application of FAA Section 4. Section 4 permits a party “aggrieved by the alleged failure, neglect, or refusal of another to arbitrate” to petition a US district court for an order directing the recalcitrant party to proceed to arbitration. Section 4 has been held to apply in Convention cases, with the exception that its jurisdictional clause — a requirement that the court would have had subject matter jurisdiction of the merits, under the Judiciary Code, but for the arbitration clause — does not apply because Chapter 2 grants original subject matter jurisdiction in Convention cases.

In Control Screening, it is unclear from the Third Circuit decision whether the US party petitioned under Section 4 or Section 206, or both.  But it is even less clear that this could have been a proper Section 4 petition, because the Vietnamese party had already commenced arbitration in Belgium, while Section 4 allows a petition to compel arbitration only where the non-movant had “fail[ed], refus[ed], or “neglect[ed]” to proceed with arbitration under the agreement. The US movant’s  application sought not only to compel arbitration in New Jersey but also to enjoin the arbitration in Belgium. The gravamen of the application was not to compel arbitration, but to obtain a favorable forum and to enjoin arbitration in a perceived unfavorable forum.

Given the ambiguity of the arbitration clause, the Belgian arbitration initiative appears to have been a good faith effort by the Vietnamese party to proceed in accordance with the agreement.  There was some logic to attempting to proceed under the arbitration clause by going to the capital of the European Union. Certainly there was no failure or refusal to arbitrate per se, nor was there a refusal to arbitrate according to the method clearly mandated by the agreement (which some US courts have held to qualify as “failure” and “refusal”). The Third Circuit did not address whether the US party did resort to Section 4, or could validly have resorted to Section 4 in the circumstances. Rather, the Court proceeded to apply only Section 4’s provision that arbitration shall take place in the district where the Section 4 petition is filed. The Third Circuit apparently assumed it was proper to refer to Section 4 for a place of arbitration gap-filler, when relief to compel arbitration is sought in a Convention case under Section 206 but the agreement does not provide for a place of arbitration. But that does not seem to be a correct use of Section 4, as Section 206 forecloses the option of compelling arbitration at a place not provided for in the agreement.  As the Third Circuit rejected interpretation of the arbitration clause as providing for arbitration in New Jersey, it should have considered whether movant fully qualified for relief under Section 4. Instead the Third Circuit simply lifted the place of arbitration clause from Section 4, and applied it without regard to the balance of Section 4. [fn.  In the domestic context, Section 4’s requirement that arbitration shall be in the district where the motion to compel is filed does not operate to enable a choice of forum contrary to the agreement of the parties.  If a party filed a motion to compel in New York under an agreement providing for arbitration in Seattle, the non-movant could seek to have the New York court dismiss the proceeding for improper venue, such that it would be re-filed in Seattle and if it did not do so, the non-movant would be deemed to have consented to a change in the agreed place of arbitration.]

The premise has evolved in the Second Circuit case law, and elsewhere, is that an agreement to arbitrate, to be enforceable under the Convention and FAA Chapter Two, must provide for arbitration in the territory of a Convention Contracting State.  Whereas the Second Circuit has affirmed District Court orders compelling arbitration in New York under FAA Chapter Two where the agreement was silent as to the place of arbitration, it appears that such an agreement is deemed to “provide for” arbitration in New York, and thus in the territory of a Member State, if a motion to compel arbitration is made in a New York federal court. The other dimension of the supposed requirement of a Convention State place of arbitration is that the U.S. in ratifying the Convention agreed to apply the Convention on the basis of reciprocity only to the enforcement of awards made in the territory of another Contracting State, a reservation authorized by Art. I (3). But even though neither Art. I (3) nor the US accession declaration mentions enforcement of agreements to arbitrate, as opposed to awards, the notion that arbitration will not be compelled in the territory of a non-Contracting State has endured, based on judicial construction of the reciprocity declaration as evidence of broader Congressional intent. (See, e.g., DaPuzzo v. Globalvest Mgmt. Co., 263 F. Supp.2d 714, 726 (S.D.N.Y. 2003), citing National Iranian Oil Co. v. Ashland Oil, Inc., 817 F.2d 326, 331 (5th Cir.), cert. denied, 484 U.S. 943 (1987)).

But this case law does not foreclose the solution suggested here, that the court, instead of turning to Section 4 and ordering arbitration in its own district, may compel arbitration initially without reference to a place of arbitration, while reserving the ability to take measures calculated to ensure that the place of arbitration will be in a Convention State. The court’s order might further provide that if the parties have not agreed a place of arbitration or method for arbitrator selection within 21 days, either party may apply to the Court for appointment of an arbitrator under FAA Section 5. And the ensuing appointment order could provide that order the order shall be vacated in case the arbitrator selects a place of arbitration in the territory of a State that is not a signatory of the Convention.

The Third Circuit in Control Screening did not analyze whether the reference to a mis-identified European arbitral institution “provided for” a European place of arbitration (at least for purposes of case administration) even though no such place was identified specifically.  The few courts to have addressed this question have also not considered this. The Seventh Circuit in Jain v. de Méré, 51 F.3d 686 (7th Cir. 1995), for example, assumed without discussion that “provided for” in Section 206 meant “identified.” The arbitration clause in that case required that disputes be presented to “an arbitrary commission applying French laws.”  Clearly no arbitral situs was “identified.” And so the Seventh Circuit held that it was proper to resort to Section 4 and to compel arbitration in the District where the motion to compel arbitration had been filed, i.e. in Chicago (the Northern District of Illinois). But could the court have interpreted the clause to “provide for” arbitration in France? There being no other clues to the parties’ intent, the Court could reasonably have concluded that by providing for “French laws,” the parties intention liberally construed to give effect to the words they selected, was to provide for French substantive and procedural law, and in turn, logically, for a French situs. Would that not have been a solution more attuned to promoting an efficient arbitral process than forcing the parties to arbitrate in Chicago or at least with Chicago as the formal seat? Even if the parties in the Chicago-seated arbitration chose a tribunal of French arbitrators and agreed to a physical venue in Paris, there would likely be costs arising from having French arbitrators apply US lex arbitri, and the US District Court in Chicago would become the forum for any proceedings to vacate an award made under French law.

It is also curious that courts have not paused to consider whether Section 206 must necessarily be interpreted to condition the court’s power to compel arbitration under that Section on the parties’  having provided for a place of arbitration. That interpretation seems to be at odds with the Convention itself, which in Article II(3) requires the courts of Contracting States to refer the parties to arbitration upon finding merely that there is a written agreement to arbitrate.  The Convention does not require that a place of arbitration be identified in order to have an enforceable agreement to arbitrate. It seems plausible in view of the Convention to interpret the Section 206 language “at any place therein provided for…” simply to confirm (i) that arbitration shall not be compelled at a place that is not a place provided for in the agreement, and (ii) in case of the designation in the contract of a foreign place of arbitration, the US court does not lack power to enforce fully the agreement of the parties.

And if this interpretation of Section 206 were accepted, the gap-filling rationale for reading Section 4 as a source of power to compel arbitration in the district where the motion to compel is filed would not exist. And, moroever, taking this approach would permit the Courts to recognize a conflict between Section 206 and Section 4 that has been overlooked. Compelling arbitration in a US venue not provided for in the agreement is at odds with the command of Section 206 to compel arbitration in a particular place only if it is a place provided for in the agreement.

The concern will be raised that an order to compel arbitration which does not name a place of arbitration and where the agreement does not specify rules of arbitration is incomplete and inefficacious. But the problem does not lie with the gap in providing for a place.  The problem is the lack of a method to appoint arbitrators, which will normally be addressed in the law of the place.

The solution in the FAA is Section 5, which permits the court to appoint an arbitrator where (inter alia) the agreement provides no appointment method. In the Jain v. de Méré scenario, had the Court ordered arbitration without naming a place, and the parties could not find a solution, upon application the Court could have appointed a French arbitrator and left the matter of place of arbitration to be decided by the arbitrator. She would do so after hearing the parties on that question. This solution seems considerably more attuned to the principle of party autonomy than the imposition of a US place of arbitration.

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