One may read several times over the long-awaited decision of the US Second Circuit Court of Appeals upholding the confirmation under the Panama Convention of a $300 million commercial arbitration award against Mexico that had been annulled by a Mexican court at its Mexican seat, searching upon each fresh reading for some hint of a more generous opening for US enforcement of annulled foreign awards than the very restrictive case of an annulment that offends fundamental principles of US public policy. The repeated readings are not likely to bear fruit; the Second Circuit evidently is willing to go only this far and no farther.  (Corporacion Mexicana De Mantenimiento Integral, S. De R.L. De C.V. v. Pemex-Exploracion Y Producion, No. 13-4022, 2016 WL 4087215 (2d Cir. Aug. 2, 2016)). But at least we now know that such an annulled foreign award still is considered to exist such that US judicial discretion may be brought to bear upon it. That much is implicit in the basic architecture of the Court’s opinion, which is that the judicial discretion to enforce an annulled foreign award is not expressly limited by the Panama or New York Conventions, but is impliedly limited by principles of comity applicable to foreign judicial judgments including judgments annulling arbitration awards.

So, foreign sovereign readers, you may ask how you might get into trouble with the US courts and have your judicial judgments concerning arbitral awards forfeit the warm blanket of comity among nations in the courts of the United States. Well, start out with an organic law governing the affairs of a state-owned enterprise that expressly authorizes the company to put an arbitration clause in a contract. Add to that a law that says if the counterparty breaches the contract, the state owned company can rescind the contract. Then, when a dispute breaks out, and the counterparty wants payment, and the state owned company declares a rescission, and an arbitration begins, and the arbitral tribunal rules that it has jurisdiction, go to work on the legislative front. Pass a law that says rescission of a contract by a state-owned company is a sovereign act that cannot be arbitrated but only challenged in court. Pass a law that says the judicial challenge to such a sovereign act can only be brought in a particular court, and only within 45 days of the accrual of the cause of action.  And for good measure, seize the counterparty’s 94 percent-complete work product and forcibly banish its personnel from its work sites.

If, dear sovereigns, you follow this formula with care, you will learn, as did PEMEX the state-owned petroleum enterprise of Mexico, that un-waiving sovereign jurisdiction in the courts of the State) collides with the American conception of the rule of law: “Giving effect to [PEMEX’s] twelfth-hour invocation of sovereign immunity shatters [Plaintiff]’s investment-backed expectations in contracting, thereby impairing one of the core aims of contract law.” You too, dear sovereign, may hear from another US court, quoting this one, that “[r]etroactive legislation that cancels existing contract rights is repugnant to United States law.”  You too may hear from a US court that expropriation without payment of compensation violates US domestic policy not to mention many international trade treaties including the NAFTA. And you too may hear that American jurists tend to regard the meaningful availability of some forum to resolve a claim as a fundamental principle “firmly embedded in legal doctrine.” (Of course you may also read, in other chat rooms, that Uruguay recently convinced two non-American international arbitrators, but not the American-Born dissenting arbitrator, that effective denial to a foreign investor of a judicial forum to resolve vis-à-vis the Host State conflicting rulings from different domestic courts was not a denial of justice in violation of an investment treaty’s guarantee of fair and equitable treatment. Nice work Uruguay. But at least in that case the forum stalemate was an anomalous result of an ordinary allocation of judicial power, and not the foreordained outcome of a post-dispute gerrymandering as was done by Mexico).

But take heart, foreign sovereigns, this ruling from the US Second Circuit professes to be an exceptional response to an exceptionally egregious violation of the above series of related bedrock principles bundled into the American conception of the rule of law. The decision does not move the US in the direction of French doctrine in viewing foreign arbitral awards as having a tenuous link to the legal order of the arbitral seat. And the decision does not even hint that State court judgments annulling awards against that State are generally subject to an enhanced level of scrutiny as compared to other award annulment judgments.  One can detect here nearly no movement in US jurisprudence, but only a set of circumstances without precedent in the limited body of US case law concerning enforcement of annulled foreign awards.

Dear Readers, I do like Chicago. It’s my kind of town. The Friendly Confines. The Tarzan Pool.  The Tribune Tower. And of course, not to be missed, the US Seventh Circuit Court of Appeals, usually friendly confines for arbitration awards.

But sometimes even the best of friends can be cranky and difficult. They have bad hair days. And today, here in the friendly confines of my New York summer office, I submit to you that the eminent Seventh Circuit jurist Richard Posner had such a day in Bankers Life & Casualty Co. v. CBRE Inc., 2016 WL 4056400 (7^th Cir. July 29, 2016), in which, joined by only one of his two panel colleagues, he held that a three-member arbitral tribunal of retired Illinois judges exceeded their authority and that their award rejecting a breach a contract claim had to be vacated for that reason.

This was a commercial real estate case between a tenant (Bankers) and broker (CBRE).  CBRE knew that another tenant in the building (Groupon) needed more space, and that Bankers could make do with smaller and cheaper space elsewhere. So Bankers contracted with CBRE to sublease its space, presumably to Groupon, and the contract provided that CBRE would answer Bankers’ questions about the potential sublease. Bankers had its eyes on suitable space in another building and asked CBRE: “What would be our net savings if we move to the new place and sublease to Groupon?”  As its answer, CBRE provided a written cost-benefit analysis that answered the question this way: “$7 million estimated, as indicated by this cost-benefit analysis, but we disclaim any responsibility for errors in this estimate.” CBRE made a big mistake: The $7 million did not account for a $3.1 million tenant improvement allowance that Bankers had offered to Groupon and that CBRE knew had been offered by Bankers to Groupon. Bankers did not notice CBRE’s mistake until it was too late, relied on the $7 million net savings estimate, closed the real estate deals, discovered the mistake later on, and brought an arbitration claim under JAMS Rules.

The panel issued an award rejecting all three of Bankers’ claims (breach  of contract, negligent misrepresentation, and an Illinois statutory claim). Our focus is on the breach of contract claim because that is the claim whose resolution was, per Judge Posner and one colleague, in excess of the panel’s authority. The panel, interpreting the contract, and not overlooking the “answer our questions,” provision but instead quoting it in haec verba, held that there was no express promise in the contract to provide an accurate representation of net savings from subleasing and moving, and that the “entire agreement” clause in the contract precluded implying such a term. CBRE moved for reconsideration, and the panel, evidently not alerted to the fact that the JAMS Comprehensive Arbitration Rules do not provide for reconsideration but only for correction of arithmetic or typographical or clerical errors in an award (Rule 24(j)), issued a procedural order denying Bankers’ reconsideration motion based on its lack of merit. In that order, the panel specifically addressed the argument that the “answer our questions” provision necessarily implied a duty to provide accurate answers and that the duty was breached by providing an inaccurate answer. The panel stated that the “answer our questions” duty was fulfilled by providing the cost-benefit analysis that included the disclaimer of responsibility for errors, and that CBRE’s position about the “answer our questions” clause furnished no reason to reconsider and alter the award’s outcome on the breach of contract claim.

The District Court confirmed the award, and reasoned that whether the panel’s interpretation of the contract was right or wrong, it was an interpretation of the contract and so the Court was required to confirm the award under the Illinois Uniform Arbitration Act which in substance and application is not materially different from the FAA. (The transcript of the hearing at which the District Court’s order was announced is available in the docket on the Northern District of Illinois website. I have downloaded it.)

But for Judge Posner the matter looked different. First, he treated the order denying reconsideration as an award, and subjected its reasoning to review according to the legal standards applicable to an award. He proceeded to analyze the panel’s position regarding the “answer your questions” provision, and concluded that the contractual duty to answer questions accurately could not be excused by the disclaimer in CBRE’s cost-benefit analysis because the disclaimer was not contractual but instead was a unilateral term inserted by CBRE in the cost-benefit analysis. In effect, per Judge Posner, the arbitration panel gave contractual effect to a non-contractual term and by doing so exceeded its powers which were, in relevant respect, confined to interpreting the contract as written.

It is a technical objection, I suppose, but I think a correct technical objection, to state that the Seventh Circuit ought to have treated the reasoning in the panel’s procedural order denying reconsideration of the award as a nullity because the proper ground for denial of reconsideration, under the JAMS Rules, should have been that the panel lacked power to entertain the reconsideration motion. As to the merits, the panel was functus officio save for potential correction of clerical or typographical or arithmetic errors appearing on the face of the award, and so the panel’s observations in the procedural order denying reconsideration about the disclaimer in the cost-benefit analysis and its relationship to the “answer your questions” obligation ought to have been treated as statements having no legal effect, and certainly not as an additional award. (The parties had stipulated that the initial award, denominated “Final Award,” should be re-named “Interim Award,” but this was because the panel had not yet dealt with cost-shifting . The re-naming did re-open the award, either for changes in result or for embellishment of its rationale.)

The panel’s actual award, as opposed to the procedural order that the Seventh Circuit majority erroneously treats as an award, did not even mention the disclaimer in the cost-benefit analysis, and so the vacatur of that original award based only on the supposed excess of power in referring to the disclaimer in a post-award order denying reconsideration seems quite dubious. The case was already decided without reference to the disclaimer, and so the Seventh Circuit majority has reverse-engineered the reasoning of the subsequent order into the award in order to come up with an excess of authority outcome.

But let’s suppose that the panel’s reasoning in the subsequent order had in fact appeared in the original award. What then?  Wasn’t the panel entitled to consider that the question Bankers had asked CBRE was “what do you estimate to be the net savings we can reasonably expect to achieve by moving and subleasing”? And wasn’t the panel entitled to to interpret the “answer your questions” provision as containing no implied prohibition against including a disclaimer of responsibility for errors affecting an estimate in the answer to a question that called for the making of such an estimate? One can certainly disagree with this interpretation of the contract, but it is not a “wacky” interpretation or a failure to give any interpretation.

Like the dissenting judge on the Seventh Circuit panel, Arbitration Commentaries dissents, and offers its fearless forecast that this case if it is even long remembered will be viewed more as a bad hair day for Judge Posner than as a significant precedent concerning judicial review of arbitration awards.

Arbitration lawyers follow Tom Brady’s case as they would track a Patriots game while in dutiful attendance at a painfully mis-scheduled wedding of an in-law’s niece on an otherwise perfect October Sunday. At obsessively frequent intervals, they check the Internet for score updates and game highlights. You are reading this, so how can you disagree? Arbitration Commentaries is your nfl.com.

You should know by now that the most popular Ted in Boston is not a Williams, not a Kennedy, but an Olson, as in Theodore C. Olson, the ex-Solicitor General now enlisted by the Brady team for the en banc initiative to rescue victory from the nearly-clenched jaws of defeat in the US Second Circuit Court of Appeals.  (Dear Non-US Readers, en banc is a discretionary reconsideration process in the federal courts of appeals whereby the full contingent of that judicial circuit’s appellate judges might hear anew a case decided by a three-judge panel. Brady is a practitioner of American professional football. Williams is a venerated practitioner of American professional baseball, who toiled for the Boston team from 1939 to 1960 with two wartime interludes as a fighter pilot).

This post is your first quarter update on the en banc contest.

The Brady en banc brief sounds two main themes. Your commentator thinks one could be a winner, the other maybe not. The first theme (the “maybe not”) is that the arbitration agreement didn’t give the NFL Commissioner power — when he acts in an arbitral capacity to hear an appeal of a disciplinary action taken by the League against a player —  to uphold the discipline based on new factual findings resulting from evidence introduced in the appeal hearing, i.e. findings of fact that were not made by the employer at the time the discipline was imposed. The Brady Brief seizes on language in the Second Circuit majority’s decision that nothing in Article 46 of the NFL Labor Agreement “purports to limit” the Commissioner’s authority in this respect. And, says the Brady Brief, this is wrong because arbitral authority must be based on an affirmative delegation in the arbitration agreement, not an inference of arbitral power derived from silence (the absence of a limitation) in the arbitration agreement, as the latter is the type of approach to arbitral power that the Supreme Court’s majority condemned in Stolt-Nielsen.   I say “maybe not” to this position because the Second Circuit majority, in the very next sentence, said that the agreement does expressly authorize the Commissioner to hold a hearing and to receive evidence, and that it is a reasonable construction of that express authorization that the result of the evidentiary hearing could be an outcome based on the evidence presented at the hearing that was not available to be considered at the time of the initial disciplinary decision.

The second theme is that for an arbitrator’s decision to “draw its essence” from the contract, the arbitrator’s award must reflect that the arbitrator actually has given consideration to portions of the contract that arguably bear upon the outcome. Here the Brady Brief perhaps gives #12 more hope, because the argument concerns the arbitrator’s decision process rather than the outcome. Process is entitled to less deference than outcome. At issue is whether the Labor Agreement’s provisions concerning discipline for “equipment/uniform violations” should have been explicitly considered by the NFL Commissioner in his award. The Second Circuit majority doesn’t address the Commissioner’s failure to reference those portions of the Labor Agreement in the award. Its approach instead is to show that, if the Commissioner had analyzed those provisions, he readily could have construed them (and perhaps did) as permitting suspension for four NFL regular season games as a sanction for a first offense.

But whether such a construction of the Labor Agreement’s provisions concerning “equipment/uniform violations” could have been given by the Commissioner seems besides the point: the question is whether the Commissioner’s decision fails to “draw its essence” from the contract if the Commissioner bypassed in the award an analytical step that was arguably necessary to an outward appearance of thorough consideration of the contract’s bearing upon the Commissioner’s range of disciplinary discretion in regard to the infraction in question. (Who said “Justice must not only be done but must be seen to be done“? Williams? Kennedy? Brady? It was a favorite expression of the late great Pierre Lalive, who was always more of a tennis guy than a football guy.) Here there is some vulnerability in the Second Circuit panel’s reasoning.

Another fourth quarter rally for the Patriots is not out of the question.  Stay tuned.

If you drafted this arbitration clause, ‘fess up: “In the event of any dispute and if the Parties cannot resolve the dispute through negotiation, the Parties agree first to try in good faith to settle the dispute by formal arbitration under the [ICC Rules] before submitting the matter to litigation….” Talk about a step clause to trip over. What is a district court judge to do?

The answer: Enforce the arbitration agreement as an agreement for binding arbitration, the only form of arbitration the ICC Rules permit. So held a judge of the US District Court in New York. Celltrace Communications Ltd v Acacia Research Corp., 2016 WL 3407848 (S.D.N.Y. June 16, 2016). Never mind any presumption in favor of arbitration, said the Court — finding correctly that there can be no such presumption where the question is whether an arbitration agreement even exists. The interpretation mandated by New York contract law principles (to give full meaning to all words of the contract, including the incorporated words of the ICC Rules, and construe them in harmony) is that the reference to litigation in this clause only contemplates post-award litigation for confirmation or vacatur of the award.

And what does it mean “first to try in good faith to settle by formal arbitration under ICC Rules”? Certainly not what the Plaintiff here did — to send an E mail to opposing counsel purporting to request arbitration. In the context of ICC arbitration, the good faith effort (the “old grandes écoles try”?) “requires, at a minimum, sending a request to the ICC Secretariat to initiate arbitration and continuing to act in good faith to complete the arbitration process.” (Best efforts buffs will find some interesting  research results here concerning what it means to “try in good faith” to accomplish a task).

Seriously, young and aspiring arbitration lawyers, do not draft a clause like this one, lest someone try in good faith to channel your legal career in another direction. For online guidance to stumble-free step clauses, see, e.g., AAA International Centre for Dispute Resolution, Guide to Drafting International Dispute Resolution Clauses, www.adr.org/aaa/ShowPDF?doc=ADRSTG_002539 (last visited July 1, 2016).

Get ready for the upcoming conference on Impecuniousness in Commercial Arbitration. No, not another session on third-party funding. Rather, our subject will be the law applicable to the inability of a party to pay its share of the arbitrators’ fees. And our main text will be a new (really) decision from the US Ninth Circuit Court of Appeals, holding that when an AAA commercial arbitration under the Commercial Rules has been terminated by the tribunal due to Claimant’s non-payment of deposits for arbitrator fees, and the reason for non-payment was genuine inability to pay, the federal district court should allow the Claimant’s case to proceed on the merits in court. (Tillman v. Tillman, 2016 WL 3343785 (9th Cir. June 15, 2016)).

I spare you the specifics of the case, save to note the Claimant did indeed try quite diligently to pursue the arbitration but simply ran out of money and could not pay, that Respondent declined to advance Claimant’s share of deposits, and that the arbitrator first suspended and ultimately terminated the case all as provided in AAA Commercial Rule R-57.

The case had originally been brought in court, but having been stayed pending arbitration under FAA Section 3 upon the granting of Respondent’s motion to compel arbitration. After the termination of the arbitration, Claimant sought to have the Section 3 stay vacated so that the case could proceed in the district court on the merits. Respondent sought to have the stay vacated so that the district court could enter an order of dismissal. The district court round went to the Respondent, with the district court finding that the FAA deprived the court of power to permit further litigation once a stay of proceedings pending arbitration had been granted. The Ninth Circuit rejected this conclusion in the narrow circumstances of this case where there was a clear evidentiary showing by the Claimant that she had attempted to participate in the arbitration in a fulsome way but was prevented by financial incapacity for proceeding to the stage of a merits hearing and a final award. On that foundation of facts, the Ninth Circuit drew two conclusions in applying the FAA’s text: first, that Section 3’s requirement that a stay pending arbitration endure until arbitration “has been had in accordance with the agreement” was satisfied where the arbitration had proceeded up to the point of a final order of termination under Commercial Rule R-53; second, there would no statutory basis for a renewed order compelling arbitration under Section 4, because there was no “failure, neglect, or refusal” to arbitrate.  Thus finding no basis in the FAA itself to penalize Claimant with summary dismissal of her court case under Federal Civil Procedure Rule 41(b) (involuntary dismissal for failure to comply with a court order), the Ninth Circuit held that such dismissal by the district court was erroneous,  a violation of the public policy-driven principle that “‘[d]istrict courts have an obligation and a duty to decided cases properly before them.'”

And in response to the position of Respondent  (and maybe a few naysayers in the arbitration community) that this position is an affront to the “‘liberal federal policy favoring arbitration,'” the Ninth Circuit says NO: “Our decision that Tillman’s case may proceed does not mean that parties may refuse to arbitrate by choosing not to pay for arbitration…. Here… the district court found that Tillman had exhausted her funds and was ‘unable to pay for her share of arbitration.'” Accordingly, the Court’s judgment that the case should proceed on the merits before the district court “does not run afoul” of the pro-arbitration policy.

What should be the result on the same question an arbitration governed by FAA Chapter Two and the New York Convention? Article II(3) of the Convention provides that the Court of a Contracting State shall refer the parties to arbitration at the request of one of them but need not do so if the arbitration agreement is (inter alia) “incapable of being performed.” Section 206 of the FAA speaks in permissive terms, i.e. that “[a] court having jurisdiction under this chapter may direct that arbitration be held in accordance with the agreement…” Thus Chapter 2 presents no unique obstacle to a result similar to that achieved in Tillman. And FAA Sections 3 , the sections interpreted an applied in Tillman, applies with equal force to international cases under Chapter Two — as Chapter Two has no separate provision concerning stays of proceedings in the US District Courts.

On the theory that good law sometimes promotes bad behavior, it is worthwhile to consider some possible consequences. Perhaps even as this is written some creative 9th Circuit plaintiff’s lawyers are devising schemes to contrive a state of impecuniousness for their clients.  Defense lawyers keen to maintain the arbitral forum or at least to stymie efforts by Claimants to escape may demand discovery into the Claimants financial affairs, hoping to show that the position of impecuniousness is a ruse. Arbitrators suspecting a ruse may be reluctant to enter termination orders, and may conclude that indefinite suspension — putting the Claimant in limbo with no recourse to the courts — has more potential effect than the threat of termination to influence Claimants to come up with the necessary funds.  And what shall become of the AAA’s longstanding practice, in domestic and commercial cases, to withhold from the tribunal both the identity of the non-paying party and the circumstances of non-payment (even though this is usually self-evident, and in any event a party may bring the matter to the arbitrator’s attention, e.g. Rule R-57(a))? And what of the position that under a broad arbitration clause, the question of whether non-payment is a material breach of the agreement to arbitrate, or a non-performance excused by “impossibility” to perform, is an arbitrable issue that the tribunal should decide — presumably before entering a termination order?

All of this is surely wonderful fodder for our first annual Impecuniousness in Commercial Arbitration conference, appropriately to be convened at a sunny Ninth Circuit locale. Beverly Hills in February perhaps?

Rumors have reached Arbitration Commentaries concerning the recent professional activities and virtual invisibility of our founder and long-time supporter Marc J. Goldstein. It has been said that he is locked in a consuming legal battle on behalf of a European technology client against a once-mighty and still formidable American technology colossus, that the controversy is pending in a federal judicial forum in New York, and that there is as a consequence indeed a measure of truth to the “Litigation” within Marc J. Goldstein Litigation & Arbitration Chambers.   So intensive are the supposed demands of the dispute that Mr. Goldstein has reportedly declared that he must defer completion of a requested contribution to this space about the Yukos judicial annulment decision in the Netherlands,  a position we can readily understand given the demands of deciphering the Dutch jurists’ exhaust(ive)(ing) analysis of Russian law in the turgid English translation presently available. It is also reported that Mr. Goldstein’s name has been restored to the Mediator Roster of the U.S. District Court in Manhattan, a roster from which he had taken leave some 15 months ago to divert energies as a mediator away from disputes between afflicted citizens and the City of New York. But alas this Roster turns out to be an online resource where disputants interested in the skill sets of mediators can find good listings of their areas of specialization, even if rather few of the commercial cases on the docket of that Court, as compared to its staggering docket of  cases under federal civil rights statutes, are mediated through the Court’s ADR office.  If you would like to verify any of the foregoing, Arbitration Commentaries would be pleased to contact Mr. Goldstein on your behalf.

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