Marc J. Goldstein Arbitrator & Mediator NYC
October 03, 2018

Litigation Conduct Waivers and the New York Convention

Today’s post concerns waiver of the right to arbitrate by an ambivalent plaintiff in a US District Court, and under what conditions it might be appropriate for a US District Court, applying the New York Convention and FAA Section 206 (governing motions to compel arbitration under arbitration agreements covered by the Convention), to decide that such a waiver by virtue of the litigation conduct of the plaintiff renders an arbitration agreement “null and void” (or “inoperative”) under Article II (3) of the Convention*. Every sermon needs its text, and today our text is a recent case from Silicon Valley: Hebei Hengbo New Materials Technology Ltd. v. Apple, Inc., 2018 WL 4635635 (N.D. Cal. Sept. 26, 2018) (hereinafter, “Hengbo v. Apple”). But before we go to the West Coast, I share a brief personal and historical note.

In 1999, my American client had an expropriation claim, against an imploding Central European State in the throes of a civil war, and the claim fell within the framework of an ICC arbitration clause in the client’s asset purchase contract with a State-owned seller. The client for reasons mainly political wanted to commence a lawsuit against the State in the U.S. District Court in Washington D.C. without losing the possibility of reverting to an arbitral forum. We drafted a “without prejudice” reservation footnote, filed the Complaint with the footnote included, issued a press release, struggled to make sufficient service of process under the FSIA (as NATO’s munitions rained down upon the State’s capital) … and proceeded rather swiftly to withdraw the lawsuit and file the ICC arbitration. No waiver issue arose, although obviously one could have arisen if we had remained in court for a longer period.

The Chinese manufacturing company plaintiff in Hengbo v. Apple — a producer of glass destined for the screen of your iPad — was not so lucky. Hengbo filed its lawsuit in the federal court in San Jose in January 2018 without mentioning the arbitration clause (but annexing the contract containing it), seeking inter alia rescission of the aforesaid contract. On a stipulated date in April, Apple moved to dismiss for failure to state claim (FYI foreign readers: a merits-based motion). Four days later the parties filed a joint case management statement, required by the Court’s rules of practice, in which they reported, in pertinent part, that both parties were contemplating but had not yet decided whether to move to compel arbitration, and in which Hengbo expressly reserved the right to move to compel arbitration. The Court then fixed a deadline for Hengbo to declare its intent to move to compel arbitration. Hengbo complied by filing a notice of intent by the deadline. The Court fixed a deadline for Hengbo to file its motion to compel arbitration. Hengbo complied by filing its motion to compel arbitration by the deadline so fixed. On parallel track, the parties briefed Apple’s motion to dismiss, and Hengbo voluntarily dismissed one of its causes of action after considering Apple’s motion.

The District Court, taking the fully-briefed motions on submission without oral argument, denied the arbitration motion on the basis that Hengbo had waived the right to arbitrate, and granted in part Apple’s motion to dismiss.

Putting aside any lamentations about the possible responsibility of counsel, the judge, and the court’s case management process, for the parallel tracking of arbitrability and merits motions, let us focus on the most striking element of the decision for the US jurisprudence of international arbitration: the New York Convention was nearly ignored; only waiver cases in the context of domestic FAA arbitration were cited; and mention of the Convention was confined to a footnote stating that the parties disputed its applicability (Hengbo yes, Apple no) and that there was no need for the Court to resolve that dispute because it had no bearing on the outcome. That is a curious position, indeed, as the arbitration clause in this commercial contract provided for arbitration under the ICC Rules in San Francisco between Chinese and US companies. If that looks to you like a potential  “nondomestic” Convention arbitration under FAA Chapter Two, I agree. It seems the Court gave no attention to the possibly distinct attributes of litigation conduct waiver under the Convention and FAA Chapter Two because Hengbo in its submissions appeared to concede that “waiver” is a ground recognized by US courts for finding an arbitration agreement to be “null and void” under Convention Article II (3). And there are cases that say this in some fashion. But the case law, the Convention, and the scholarship of Article II (3), deserve a closer look.

For nearly 40 years, federal courts have repeated one another in agreeing that the “null and void” exception and the exceptions in Article II(3) generally should be “narrowly construed,” and that Article II(3)’s exception clause supports refusal to compel arbitration “only (1) when it  [the arbitration agreement] is subject to internationally recognized defenses such as duress, mistake, fraud, or waiver… or (2) when it contravenes fundamental policies of the forum state.” (emphasis supplied). When the US Fourth Circuit Court of Appeals concluded in 1981 “that Article II (3) contemplates the possibility of waiver of the arbitration agreement by the one or both of the parties,” (I.T.A.D. Assocs. v. Podar Bros., 636 F.2d 75), the Convention as American law was still pre-adolescent, there was no US case law on the point that the Court could cite, and there was no drafting history or secondary literature about Article II that the Court did cite. Still, it is instructive that the Fourth Circuit in Podar: (1) reversed the District Court order denying the motion to compel arbitration and remanded with directions to grant the motion, (2) held that Article II (3) should be applied through “adoption of standards which can be uniformly applied on an international scale,” (emphasis supplied), and (3) held that Section 206 of the FAA does not confer discretion on the District Courts to determine whether conduct amounting to waiver bars enforcement of the arbitration agreement. (For a sampling of judicial “likes” for Podar, see, e.g., Sedco, 767 F.2d 1140 (5th Cir. 1985) (“liking” the no discretion holding); Riley, 969 F.2d 953 (10th Cir. 1992) (“liking” the narrowly construed holding indirectly via Rhone Mediterranee, 712 F.2d 50 (3d Cir. 1983) which broadly embraced Podar; Bautista, 396 F.3d 1289 (11th Cir. 2005) and Lindo, 652 F.3d 1257 (11th Cir. 2011), each taking the “internationally recognized defenses” notion to another level, i.e. “standard breach-of-contract defenses [that] can be applied neutrally on an international scale”).

I have searched (curiously not thoroughly) for other US federal case authority addressing the status of litigation conduct waiver as a basis for judicial refusal to enforce the arbitration agreement under the Convention and FAA Section 206, and found rather little. Apple, in the Hengbo case, seems to have fared no better : in support of the proposition  that litigation conduct waiver analysis in an FAA Chapter 2/Section 206 case is identical to what it would be under FAA Chapter 1/Section 3, Apple cited just one case, from a US District Court in Nevada. (Fomostar, LLC v. Florentius, 2012 WL 2885119 at *9 (D. Nev. July 13, 2012)) (not reviewed in the 9th Circuit). In the Fomostar case there is no analysis of the question and no indication that the parties even joined issue on whether the traditional analysis of  waiver by litigation conduct in the context of domestic arbitration  is proper under the Convention.

The District Judge in Hengbo accepted the position that the analysis is the same as under FAA Section 3, but evidently did so not on the strength of the cited District of Nevada case but because Hengbo more or less conceded the point. Apple might have also cited Khan v Parsons Global, 480 F.Supp.2d 327 (D.D.C. 2007), where the Court applied a traditional litigation conduct waiver analysis in a Convention arbitration agreement enforcement context — and found no waiver — and made such analysis without directly addressing whether litigation conduct waiver as a defense to enforcement is consistent with Convention Article II. Perhaps Apple identified and shied away from Khan because the case nevertheless raises the troublesome question raised in this post. The District Court in Khan held that “unconscionability” should not be recognized as a ground for finding an arbitration agreement “null and void” under Article II (3) because unconscionability is not a hard and fast rule capable of being applied uniformly in a non-discretionary way on an international scale. Said the Court in Khan:

[T]he federal case law is clear that, while public policy and discretion of the courts may be a predominant characteristic of domestic arbitration, international arbitration requires certainty to ensure unified standards by which agreements to arbitrate are observed ….

By its very nature, the defense of unconscionability seeks to promote those very tenets that are contrary to a finding of certainty, namely: policy, fairness, and appeals to a court’s discretion outside of the letter of the law. Therefore, in light of this foundation, this Court finds that unconscionability is not — and indeed cannot be — a recognized defense to the enforceability of arbitration agreements under the N.Y. Convention

If unconscionability can never be within the Article II(3) exceptions clause, for the reasons stated in Khan, should we perhaps conclude that waiver is only sometimes within the Article II(3) exceptions clause, and that it depends on what evidence the court must evaluate to determine if there has been a waiver?

Of course, contemporary judicial analysis of this question should be informed by the scholarship that now exists concerning the appropriate meaning of the Article II(3) exceptions clause – there being effectively no drafting history of the clause. (I do here in a limited way, so as not to exhaust your attention, or my resources). Scholars of international arbitration benefit from bringing to bear on the question the developed judicial practice in the courts of many Convention States.

The ICCA Guide to the New York Convention (2011) tells us that Article II (3) is intended to establish the “presumptive validity” of the arbitration agreement, and that the “unless” clause concerns situations where the validity presumption is rebutted. The ICCA Guide notes that the Convention takes no position on the time for asking a court in a pending dispute to refer to the dispute to arbitration, that this question is left to national arbitration or procedural law, and that “[i]f a party fails to raise the request in a timely manner, it may be considered that it has waived the right to arbitrate and that the arbitration agreement becomes inoperative.” Here already is an indication that US courts have gone astray in treating litigation conduct waiver under “null and void,” and this is reinforced by the ICCA Guide’s further comment that “null and void” “can be interpreted as referring to cases in which the arbitration agreement is affected by some invalidity from the outset.” According to the ICCA Guide, “[a]n inoperative Agreement for purposes of Article II(3) is an arbitration agreement that was at one time valid but that has ceased to have effect” and that this category “typically includes cases of waiver, revocation, repudiation, or termination of the arbitration agreement. Similarly, the arbitration agreement should be deemed inoperative if the same dispute between the same parties has already been decided before a court or arbitral tribunal.

Interesting. If the guidance stopped before the last sentence concerning res judicata, one might think “inoperative” does not include the non-applicability/suspension of the arbitration agreement only with regard to a particular dispute. Evidently scholars think it does, or can, apply with regard to a particular dispute, but that the main purpose of the “inoperative” phrase is to deny enforcement of arbitration agreements that the parties have consigned to the dust bin.

But perhaps the res judicata illustration in the ICCA Guide does not justify the conclusion that litigation conduct waiver is always a proper question for a US court to decide under Article II(3) and FAA Section 206. To take the ICCA Guide’s res judicata example one step further, it’s notable that the current (non-final) draft of portions of the Restatement of the US Law of International Commercial and Investment Arbitration concerning res judicata in an arbitration agreement enforcement setting take a hybrid position on this point: if it’s not seriously disputable that the same dispute (or issue) was decided between the same parties in a prior arbitral award, a US Court should deny a motion to compel arbitration, but if the res judicata (or issue-preclusive) effect of the prior adjudication is contestable and involves serious factual issues, the motion to compel arbitration should be granted and the preclusion issue should be decided by the Tribunal. Further, the Restatement drafters view the issue of waiver as a “non-gateway” issue, like Statute of Limitations, that ordinarily should be resolved by arbitrators. (Restatement Section 2-12 and comments to same, in Preliminary Draft No. 11, August 20, 2018, not yet presented for approval by ALI).

Should we perhaps conclude, similarly, that the waiver of an arbitration agreement with regard to a specific dispute should need to be clear and unambiguous for that waiver to fall within Article II(3), and that a fact-intensive, discretion-laden assessment of waiver by litigation conduct should also be seen as outside Article II (3) and more suitable for arbitral determination as a contract-based defense, under the law the arbitrators find to be applicable to the enforceability of the arbitration agreement? That approach would conform to Professor van den Berg’s less-generous-than-the ICCA Guide view of “inoperative”: that it “can be said to cover those cases where the arbitration agreement has ceased to have effect, such as revocation by the parties.” (A.J. van den Berg, The New York Convention of 1958: An Overview).

Coming back to the US case law, the consistent theme since 1981 in the appellate decisions that support treating “waiver” as a Convention matter under Article II (3) and FAA Section 206 is that the Article II (3) exceptions should be capable of application on an international scale — which would seem to mean that they can be expected to be treated in a uniform way by the courts of most important Contracting States — and that they should not involve the exercise of discretion.

If that is the standard, then perhaps only an objectively determinable waiver should render the arbitration agreement unenforceable under the Convention. Example: In the first pleading, the Plaintiff acknowledges the existence and validity of the arbitration agreement, and declares that it elects not to seek its enforcement. Such a basis for waiver may be expected to yield the same outcome in most Contracting States, and finding waiver involves no exercise of judicial discretion. At the opposite extreme, suppose the initial pleading contains a reservation by plaintiff of the right to shift gears and proceed to arbitrate, or is silent about arbitration; the plaintiff participates in case management activities in compliance with the court’s rules of practice (necessarily entailing discussion but not action on such matters as trial and summary judgment and discovery); plaintiff does not object to defendant making a merits-based motion to dismiss or to the full briefing of this motion before the arbitration issue is resolved; plaintiff indeed participates in that motion to dismiss activity, but at the same time plaintiff complies with directions from the Court concerning the time to give notice of intention to move to compel arbitration; and plaintiff files that motion by the deadline set by the Court.

That is the Hengbo v Apple situation in a nutshell. The District Court’s finding of litigation conduct waiver on such facts is plainly an exercise of discretion. And it may be doubted that the situation is likely to be uniformly treated by the courts of other Contracting States: not only do they have different laws and procedures that might prevent such a confluence of circumstances from arising, but those courts might have a quite different view of the same facts as a matter of discretion. They might for instance consider that the costs associated with the litigation before the plaintiff made up its mind to arbitrate are better addressed by a costs order. Indeed some foreign courts (and even some of you readers, in the US and elsewhere) might see the US approach as manifested in the Hengbo v. Apple case as evidence of a lingering hostility to arbitration: according to this exercise of judicial discretion, the right to arbitrate seems to lack robustness, appears to be entangled with notions of respect for the judicial process and the local court’s own rules of practice, and with judicial hostility toward forum shopping. These are attitudes that arguably impel judges, more than arbitrators who are as not as invested in compliance with the court’s rules and customs, to view the right to arbitrate as capable of being forfeited by any meaningful hesitation to invoke it in the course of a litigation.

If, as the analysis here suggests,  Article II (3) does not provide a platform for the type of discretionary determination of a “waffling waiver” that was made in Hengbo v Apple, then what about FAA Section 3, as applied under FAA Chapter Two via Section 208**? Section 3 provides for a stay of judicial proceedings pending arbitration of an arbitrable dispute, and conditions the availability of such relief on the movant being “not in default in proceeding with the arbitration.” But if the Convention and FAA Chapter Two do not allow a litigation conduct waiver analysis by the Court where the assessment would involve discretion, then a discretionary analysis under Section 3 is in conflict with the Convention and Chapter 2 and has no place in an proceeding to enforce an arbitration agreement under Section 206.

Whether US courts will eventually adopt this line of analysis is anyone’s guess. The judicial prerogative to assess arbitration waiver by litigation conduct is so deeply ingrained in American jurisprudence that it seems difficult to foster momentum against it in the District Courts without clear direction from appellate courts.  But perhaps we will see these serious questions confronted more systematically by judges in future cases, with outcomes that reflect less reflexive assumptions about the symmetry of practice with regard to domestic and international arbitration agreements.

*Article II (3) states:  “The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”

** Section 208 provides that FAA Chapter 1 will apply in actions and proceedings under Chapter Two “to the extent that chapter is not in conflict with this chapter or the Convention as ratified by the United States.”



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