Marc J. Goldstein Arbitrator & Mediator NYC
October 15, 2013

Protecting Arbitral Jurisdiction of The Merits With a Foreign Anti-suit Injunction

The pro-arbitration foreign anti-suit injunction is not mentioned in the text of the New York Convention or the U.S. Arbitration Act (FAA). But its importance to the enforcement of agreements to arbitrate transnational disputes is considerable. To be reminded of this, read a recent New York federal district court decision granting such an injunction: Bailey Shipping Ltd. v. American Bureau of Shipping, 2013 WL 5312540 (S.D.N.Y. Sept. 23, 2013). Or continue reading this Commentary.

A definitional note is a useful place to begin. This brand of injunction is “pro-arbitration” because it is granted to protect the jurisdiction of the arbitral tribunal over a dispute that has been lodged with such a tribunal, or that the court has required to be so lodged. It is “foreign anti-suit” because its purpose is to coerce the plaintiff in a pending foreign litigation, who is required to arbitrate, to cease and desist from its prosecution.

Bailey Shipping is such a case. The enjoined party here was was the plaintiff, a sea freight agent that rented cargo space on Greek-flag ships for its customers, and relied on certifications of seaworthiness given by a Greek inspector. Denying any duty to arbitrate, plaintiff — seeking to shift a cargo damage loss — brought suit in a Greek court on several theories including negligent misrepresentation, violation of certain international treaties, and a Greek consumer protection law. Plaintiff then commenced the U.S. federal action to enjoin defendant from pursuing arbitration of any of these claims, and defendant cross-moved to compel arbitration. The latter motion was granted early on, setting the stage for the dispute over whether Plaintiff should be enjoined from pursuing the Greek lawsuit.

Here in the U.S. Second Circuit (the appellate judicial district embracing New York), when attention turns to foreign anti-suit injunctions, the judges turn to a leading Second Circuit case, known in shorthand as China Trade (China Trade & Dev. Corp. v. M.V. Choong Yong, 837 F.2d 33 (2d Cir.1987)). That case provides a multi-factor equation for solving anti-suit injunction issues, and usually the focus is on “comity” — balancing an important U.S. policy served by the U.S. litigation with the sovereign interests of the foreign forum. Usually the dueling lawsuits are essentially in lockstep: the parties are the same and the claims are the same, so the focus shifts quickly to “comity.” But here in Bailey Shipping only one of the several Greek litigation causes of action had been held to be arbitrable — the negligent misrepresentation claim —  and so the scope of the anti-suit injunction turned on whether and to what extent the arbitral award would be dispositive of the Greek litigation.

The remarkably difficult issue presented by this case was whether the U.S. Action (more precisely, the arbitration compelled by the Court in the U.S. Action) would be “dispositive” of the Greek Action. Claimant/Plaintiff, evidently keen on resisting arbitration or at least exerting maximum pressure by fighting a two- front battle in a foreign court and in arbitration, did what claimant will predictably do: fathom causes of action under foreign law that can be said to arise from a source other than the contract containing the arbitration agreement. In this case, the clearly arbitrable cause of action was for negligent misrepresentation. This was based on the defendant’s duty to certify the seaworthiness of the vessel, and the Plaintiff/Claimant’s allegation that the certification had been negligently made (leading to reliance on the certification, and leading ultimately to cargo damage in an accident involving the allegedly unseaworthy vessel). But in the Greek court litigation the Plaintiff also asserted causes of action for alleged violations of Greek consumer protection laws and certain international treaties.

This District Court judge, having no specific federal appellate guidance, adopted a functional approach, seeking to determine which elements of the causes of action pleaded in the Greek Action would necessarily be determined by the arbitral tribunal when it would eventually decide the negligent misrepresentation claim.  The Court did not dwell on the theme of the pro-arbitration “policy” in federal arbitration jurisprudence, but in this approach it was evident that the Court was striving to protect the exclusivity of the arbitrators’ jurisdiction over factual issues involved in the misrepresentation claim. The consequence of the Court’s functional analysis in this case was that prosecution of the treaty-based causes of action in the Greek litigation was enjoined, as those causes of action embraced essentially the same legal and factual elements as the arbitrable negligence claim — the existence and breach of a duty to act with reasonable care and diligence in providing a certification of the seaworthiness of the ship. But the cause of action under the Greek consumer protection law, found to be essentially a strict liability statute dependent only on the falsity of the statement and the status of the claimant as a “consumer,” was held to be in a different category. Whereas the arbitral tribunal would not have occasion to address the status issues involved in consumer protection claim, the arbitration was deemed not dispositive of that claim, and its prosecution was not enjoined.

Given the shortage of definitive appellate guidance, this painstaking District Court decision is likely to be an important reference point in future pro-arbitration anti-suit injunction litigation. We may also expect to see heightened complexity in such disputes, with conflicting expert opinions on foreign law submitted to persuade the U.S. court concerning the essential elements of foreign law causes of action in a foreign court. We may also look forward to such issues arising before arbitral tribunal, with the tribunal invited to issue its own anti-suit injunction as a provisional measure in the form of a partial final award that could be immediately confirmed by a court (perhaps indeed the court in which the foreign litigation is pending). Thus it is a good thing for U.S. and non-U.S. arbitrators who sit on U.S.-seated tribunals to be familiar with the China Trade anti-suit injunction jurisprudence.

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