June was a fertile month for arbitration jurisprudence at the Supreme Court of the United States, and most of you know already that: 1) the Court held, 8-0, that class action arbitration is OK if the arbitrator is even arguably construing the arbitration clause when ruling that the case may proceed as a class action (Oxford Health Plans, LLC v. Sutter, No. 12-135 (Jun. 10, 2013)), (2) the Court held, 5-3, that class arbitration is not OK when the agreement expressly forbids it, even if the consequence is to make pursuit of a federal statutory treble damages claim hopelessly uneconomical – because the clause does not actually prevent a claimant for pursuing the claim, but only from winning it (American Express Co. v. Italian Colors Restaurant, No. 12-133 (Jun. 20, 2013)), and (3) the Court granted certiorari in BG Group PLC v. Republic of Argentina, where the question presented in Petitioner’s application for cert. was “In disputes involving a multi-staged dispute resolution process, does a court or instead the arbitrator determine whether a precondition to arbitration has been satisfied?“

It is the third of these developments that motivates today’s post. The Court by granting the writ of certiorari has agreed to review on the merits the decision in Republic of Argentina v. BG Group PLC issued by the federal appeals court in Washington. (665 F.3d 1363 (D.C. Cir. 2012)). In that decision, the three-judge appellate panel unanimously vacated a 2007 Final Award, also unanimous, which had been issued in favor of BG Group, a UK investor, against the Republic of Argentina, in an ad hoc arbitration under the UNCITRAL Rules pursuant to the UK-Argentina bilateral investment treaty.

The UK-Argentina BIT required Investors to bring their claims to the competent courts of the Host State, and not to file arbitration until the earlier of 18 months after the court filing or an unsatisfactory final adjudication. BG Group, having concluded that Argentina had made judicial recourse untenable, bypassed the Argentine courts and commenced arbitration. The Tribunal, claiming to be engaged in treaty interpretation, held that enforcement of the litigation clause in the circumstances would be an absurd and unreasonable result, and held that it had jurisdiction over BG Group’s claim. The U.S. District Court in Washington (Washington having been selected by BG Group and Argentina as the arbitral seat) confirmed the Award (on the merits, more than $185 million in damages), but the D.C. Circuit reversed. For the D.C. Circuit, the case was not difficult: Courts should review arbitrability decisions of arbitrators de novo — absent clear and unmistakable evidence of an agreement to arbitrate arbitrability, which evidence was not present — and on a de novo review the Tribunal’s purported interpretation was in clear contradiction of the treaty’s text. For the D.C. Circuit, there was no clear evidence of an agreement to arbitrate arbitrability because the treaty itself required the Investor to file a court case and the UNCITRAL Rules and their compétence-compétence provision would not become operative until the litigation pre-condition was satisfied.

The purpose of this post is not to tell you how the Supreme Court will decide the case. (Arbitration Commentaries’ crystal ball is on holiday until 8 July). The mission here is reconciliation. And here is why: The D.C. Circuit implicitly accepts the Second Circuit position that an agreement to arbitrate under rules that contain a compétence-compétence rule constitutes the required clear and unmistakable evidence of an agreement to arbitrate arbitrability. (Herein, the “Incorpration Rule”). And thus the BG Group case might, or might appear to, turn on whether the Supreme Court accepts the D.C. Circuit’s holding (so-called “temporal limitation”) that the UNCITRAL Rules did not become operative between BG Group and Argentina under the UK-Argentina BIT because there was no agreement to arbitrate until the litigation precondition was met.  And yet the widely-admired Rapporteur of the Restatement (Third) of International Arbitration Law of the United States, Professor George Bermann, has told the Supreme Court (i) as co-counsel for a recent unsuccessful certiorari applicant in a commercial arbitration case, the Government of Thailand, that the Incorporation Rule should be rejected, at least in the context of judicial review of an arbitrator’s jurisdiction ruling (cert. denial at Docket No. 12-878 (Feb. 25, 2013); Petition for Writ of Certiorari, dated Jan. 14, 2013, at www.lettersblogatory.com); and (ii) as co-counsel in BG Group v. Argentina for an amicus group of leading practitioners and scholars supporting BG Group, that the Supreme Court should accept certiorari (mission accomplished), reverse the D.C. Circuit, and reinstate the Award. (Find all the briefs and decisions at www.italaw.com).

In a footnote to Argentina’s reply brief opposing certiorari, Professor Bermann was accused of playing both inside and outside of the Incorporation Rule sandbox. Is this so? (Answer below: No). Or can Professor Bermann’s positions be reconciled? (Answer below: Yes).  This is the reconciliation mission of this post.

One possibly satisfying way to reconcile the positions is to recognize that formation of the agreement to arbitrate in the investment treaty context is different, and that the behavioral assumptions about parties entering into arbitration agreements in commercial contracts, made by Justice Breyer in his opinion for the unanimous Court in First Options of Chicago, Inc. v. Kaplan (514 U.S. 938 (1995)) may not, probably do not, apply to an investor invoking the offer to arbitrate made by the State Parties to a BIT. (“[T]he ‘who (primarily) should decide arbitrability question [] is rather arcane. A party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers.” 514 U.S. at 945). First Options tells us that courts, in deciding whether the parties agreed to arbitrate a certain matter, “generally…should apply ordinary [state law] principles that govern the formation of contracts.” 514 U.S. at 944. But the equation in the BIT context is not so simple. A court or arbitral tribunal, asked to decide whether a particular dispute in arbitrable under the BIT, or whether the investor has satisfied or must satisfy any pre-conditions to arbitration stated in the BIT, must apply (i) the text of the treaty, and/or (ii) customary international law, and/or (iii) international law instruments and principles concerning treaty interpretation, notably the Vienna Convention of the Law of Treaties.

Whereas the tools of interpretation applicable to the arbitrability issue in the investment treaty context are within the special competence of highly specialized international arbitrators, not national court judges, and whereas this fact is well understood by the State Parties to the treaty, and probably also by most investors bringing BIT claims by the time they accept investment treaty arbitration by filing claims, the presumption in the treaty arbitration context arguably should be the opposition of the presumption in the commercial arbitration context, i.e. that the parties to a BIT arbitration intend to arbitrate arbitrability unless there is clear evidence that they did not so intend. Stated another way, these contextual elements associated with arbitrability decisions under investment treaties normally should provide the “clear and unmistakable evidence” required by First Options of an agreement to arbitrate arbitrability. And that evidence is entirely separate from the compétence-compétence rules in, for example, the UNCITRAL Rules. The fact that an investment treaty arbitration is to take place under those Rules is, in terms of the “clear and unmistakable evidence” of agreement to arbitrate arbitrability, at most an embellishment.

Thus, the existence of an agreement to arbitrate arbitrability under an investment treaty arguably does not at all depend on the presence of a compétence-compétence provision in the selected arbitration rules. And if that is so, then the Supreme Court could sensibly, as urged by Professor Bermann, both (i) reject the Incorporation Rule, i.e., the Second Circuit position in cases like Contec and Schneider and Chevron v. Ecuador, and Thai-Lao Lignite, but still also (ii) reject the D.C. Circuit position in BG Group, and reinstate the Final Award and its arbitral determination of arbitrability.

* * *

This is of course not the only basis to distinguish the positions of the successful certiorari applicant BG Group and the unsuccessful one, Government of Thailand. Nor is it necessarily the theme mainly invoked by BG Group. In its petition for certiorari, BG Group largely dodged differentiation of investment and commercial arbitration. The headline of the Petitioner’s application for certiorari in BG Group is that this is a “procedural arbitrability”/”gateway question” case governed by the Court’s decision in Howsam v. Dean Witter Reynolds, Inc. (537 U.S. 79 (2002)). But when the case is argued on the merits, its classification as a “procedural arbitrability” case may emerge as problematical – because in the BIT’s dispute resolution clause, the 18 month litigation requirement is arguably not merely the pre-condition to commencing arbitration but to the existence of an arbitration agreement. The different a priori assumptions made by treaty parties and investors invoking rights under those treaties, as compared to parties to commercial contracts that have arbitration clauses, may well emerge as a vital element of the Court’s decision – and should emerge even now as a full vindication of the conceptual consistency of Professor Bermann’s advocacy at the Court.

Modern institutional arbitration rules encourage international arbitrators to address complex disputes surgically, by issuing partial and interim awards to prioritize solving the most difficult and contentious issues.  But American arbitration law offers arbitrators little helpful guidance about when their non-final awards may be confirmed or vacated.  And counsel in arbitrations seated in the US must do some educated guesswork as they try to fashion effective arbitration strategies with an eye toward judicial review . This is especially so as regards interim measures of protection, as the option of obtaining relief from the arbitral tribunal may be unattractive if the measures obtained cannot be judicially enforced.

The courts have identified three categories of non-final awards that are reviewable. Only one of the categories has the imprimatur of the US Supreme Court — and that in an unusual fashion  This might be termed the “procedural hardship exception,” and it is a by-product of the US Supreme Court decision in the Stolt-Nielsen case. In that case the arbitral tribunal made a “Partial Final Clause Construction Award,” finding that class arbitration was not prohibited by the arbitration clause, and in proceedings in the District Court and Second Circuit, no argument was raised that the Award was not eligible for judicial review under the FAA. That argument also was not raised as an objection to the granting of certiorari, but Justice Ginsburg in the dissenting opinion asserted that certiorari had been improvidently granted because the Award was not “ripe” for review. Whereas Justice Ginsburg’s dissent then surveyed the various approaches of lower federal courts to reviewability of non-final awards under the FAA, the question raised by the dissent apparently was one of statutory interpretation: i.e. what non-final dispositions by arbitrators are FAA awards? But Justice Alito for the majority treated the dissent as having questioned “ripeness” in the constitutional sense (i.e. the requirement of a “case or controversy” as a requirement for the exercise of the federal judicial power), and held that in the constitutional sense the matter was “ripe,” based largely on the procedural hardship imposed by the class arbitration process if a court might ultimately hold that the arbitrators lacked power to impose it.  The majority did not answer the statutory definition question. Nevertheless, after Stolt-Nielsen, courts have frequently cited its ” ripeness footnote”  to support the position that interlocutory class arbitration clause construction awards are reviewable under the FAA.

A second category, narrow and not as controversial, covers cases where the parties have stipulated to bifurcation of liability and damages and agreed that a partial award on liability should be made. (E.g. Global Gold Min. LLC v. Caldera Resources, Inc., 2013 WL 1655994 (S.D.N.Y. Apr. 15, 2013)).

The third category embraces what the courts have termed “separate and independent claims.” Stated in simple terms, if the matter resolved by the tribunal could have been a complete arbitration by itself, if the Claimant had elected not to advance the other claims, then a “separate and independent claim” has been resolved and the fact that other claims remain unresolved should not preclude courts from exercising jurisdiction to confirm or annul the partial award.  But this category has spawned definitional difficulties, as the distinction between an “issue” and a “claim” may be drawn liberally or restrictively depending on the court’s perception of the utility of judicial action in relation to the ongoing arbitration proceedings. To take some recent examples:

1) In a dispute over a contract to build a luxury passenger craft, the tribunal in the course of a multi-year arbitration concerning a contract with ongoing performance, issued several partial awards on merits issues. The one presented to the District Court for annulment held that the customer had not established grounds for termination of the contract based on cosmetic defects unrelated to regulations governing seaworthiness and passenger safety, and also had failed to establish that a contractual cap on liquidated damages was unconscionable. The District Court, seeing these as dispositions of issues within the overall claim for breach of contract, held that the separate and independent claim test was not met. (Pearl Sea Cruises LLC v. Irving Shipbuilding, Inc., 2011 WL 577333 (D.Conn. Feb. 9, 2011)).

2) In a dispute over termination of a distribution contract, Claimant obtained an Emergency Arbitrator’s award directing the return of certain records, needed urgently by Claimant to comply with statutory reporting requirements. While the relief was secured from an Emergency Arbitrator under the AAA’s Commercial Arbitration Rules, this appears not to have been an instance of provisional relief, but partial final relief, as the contract specifically called for return of the records upon contract termination, and the only remaining claims were for money damages. The District Court granted confirmation — except for the portion of the Emergency Interim Award that concerned attorneys’ fees and arbitration costs. But here the Court considered that it was no longer sufficient merely to find that there was a separate and independent claim. The Sixth Circuit in two decisions in a class arbitration case, one before and one after Stolt-Nielsen, had applied “ripeness” analysis to the FAA reviewability issue, and the District Court here considered that it was now the law in the Sixth Circuit that a “ripeness” analysis of whether the Court should exercise FAA jurisdiction is required in any FAA confirmation or annulment case involving an award that does not complete the arbitration. (Draeger Safety Diagnostics, Inc. v. New Horizon Interlock, Inc., 2011 WL 653651 (E.D. Mich. Feb. 14, 2011)).

3) In a dispute over termination of a health services contract, Claimant obtained a preliminary injunction from an AAA Emergency Arbitrator requiring continued performance during the pendency of the arbitration — a traditional grant of arbitral interim relief. The District Court held that such provisional relief fell squarely within the “separate and independent claim” exception, as it addressed an issue separate from the ultimate merits of the dispute as to whether the contract should continue to be performed during the arbitration. And while this case emanated from the same federal judicial district as the Draeger case discussed above, this decision — correctly, I believe — did not consider that a “ripeness” approach was required in addition to analysis of whether there was a separate and independent claim. (Blue Cross Blue Shield of Michigan v. Medimpact, 2010 WL 2595340 (E.D. Mich. June 24, 2010).

The last-mentioned case notwithstanding, until recently there has been little coherence to the case law concerning enforceability of an arbitrator’s interim award granting provisional relief that does not finally resolve any aspect of the merits. But in a recent opinion that may gain wide acceptance, a judge of the Southern District of New York held that an interim award granting a Mareva-type freezing order against assets of the Respondent, as security for the sums claimed as damages by the Claimant, was “separable from the merits,” — thus apparently satisfying the “separate and independent claim” exception, although this formulation is not expressly mentioned — and so this arbitral Mareva relief granted under Article 21 of the AAA International Arbitration Rules was entitled to recognition and enforcement under the New York Convention and FAA Chapter Two. (CE International Resources Holdings LLC v. S.A. Minerals Ltd., Index No. 12CV8087 (S.D.N.Y), ECF Docket Document No. 23 (Dec. 10, 2012)).  As if to add an exclamation point to this holding, the same court in the same case entered judgment six weeks later against the non-compliant Respondent for civil contempt, imposing daily-accruing civil fines and a civil commitment order. (CE International Resources Holdings LLC v. S.A. Minerals Ltd., 2013 WL 324061 (S.D.N.Y. Jan. 24, 2013)).

Whereas the enforceability judicially of arbitral interim measures is important to the efficacy of international arbitration, the Court’s focus on separability from the merits is helpful, and deserves to be enshrined at the appellate level in an appropriate case. In many situations where a party seeks interim relief from the tribunal, it is not seeking any portion of the final relief. And the granting of interim relief will not necessarily entail a final adjudication of any claim or even any issue. The earlier nomenclature of “separate and independent claim” does not come from the interim measures context, and if applied too inflexibly courts might insist on “claim” attributes that the applicant for enforcement of arbitral interim relief cannot honestly say are present. A request for security or Mareva relief, for example, entails final resolution of the applicant’s claim that there is a substantial risk of dissipation of assets. But as to the merits of the Claimant’s underlying requests for final relief and theories of recovery, the Tribunal will usually make no decision and only satisfy itself that the Claimant’s claims have some degree of legitimacy. The theme of separability from the merits usefully puts the focus on a special breed of finality: that the tribunal will not, indeed cannot, modify the allowed interim relief at any time prior to the Final Award.

Further, while it is not a principle stated explicitly in the recent S.A. Minerals decision, one can find in the leading Second Circuit case cited therein (Banco de Seguros del Estado v. Mutual Marine Offices, Inc., 344 F.3d 255 (2d Cir. 2003)) what might be termed a “principle of effectiveness” that should inform the statutory construction issue of whether a non-final arbitral decision is an FAA “award.” Unless an arbitrator’s interim award is entitled to confirmation, it lacks effectiveness because the arbitrators cannot harness the police power of the state to secure compliance.  If the powers conferred on the arbitrators by agreement of the parties — notably the power to grant any interim relief the arbitrators are persuaded is necessary — would be substantially eviscerated if interlocutory judicial review is not available, then there may be substantial reason to treat the interlocutory decision as an award under the FAA.

This writer is counsel for the Claimant in the S.A. Minerals case and the underlying arbitration.

One of the larger waves crashing on the shores of international arbitration as the result of the Restatement (Third) of the Law of International Arbitration is the position — clearly restating existing law — that the grounds stated in Article V of the New York Convention for refusal of recognition of an award should be the exclusive grounds for U.S. judicial annulment of an award made in the U.S. — notably to the exclusion of the doctrine of manifest disregard of the law, and, for that matter, all of the grounds in FAA Section 10. (This is Section 4-11 of the Restatement, Council Draft No. 3, approved by the American Law Institute on December 23, 2011).

Professor George Bermann in a 2011 article provided the general outline of the argument in favor of applying the Convention grounds for refusal of recognition and enforcement as the exclusive grounds for annulment of a Convention award made in the United States (“Domesticating” the New York Convention: The Impact of the Federal Arbitration Act, 2 J. Disp. Settlement, no. 2, 317-32  (2011)): that the United States in ratifying the Convention elected to treat as awards governed by the Convention those awards made in the United States but involving some substantial relationship with a foreign State, that in Convention terms such awards are “not considered as domestic” and therefore should be considered as “foreign,” or as if they were “foreign”; and therefore annulment proceedings in U.S. Courts with regard to such awards should proceed, analytically, as if they were enforcement proceedings with regard to foreign awards, i.e. exclusively according to the grounds in the Convention for refusal of recognition and enforcement.

Recently, this position seems to have gained some momentum in federal courts in America’s heartland. In March, we had the decision of the U.S. Seventh Circuit Court of Appeals in Johnson Controls, Inc. v. Edman Controls, Inc., 712 F.3d 1021, authored by Circuit Judge Diane Wood (an ALI Council member). Without citing the Restatement but with citation to Professor Bermann’s 2011 article, Judge Wood observed in dictum in Johnson Controls:

“Chapters 2 and 3 of the FAA state that a Convention award may be vacated only on the grounds specified in the applicable Convention. … This could be important in some cases, because the Convention grounds for vacatur are slightly different from those in Chapter 1 of the FAA…. It is not clear whether a party may bring an action under Chapter 1 to vacate an award issued by an arbitrator in a U.S. jurisdiction, but governed by the Convention.  If it made any difference to our case, we would need to decide whether the district court erred by allowing this action to proceed under Chapter 1 of the FAA, or if the party who might have been advantaged by analysis under the proper Convention might have waived its arguments.“

Johnson Controls was then followed (essentially in haec verba, but once again in dicta) only two weeks ago, in the decision of a federal district judge sitting amidst the corn silos of central Illinois, in Archer-Daniels-Midland Co. v. Paillardon, 2013 WL 1892675 (C.D. Ill. May 3, 2013), in which the Court rejected a motion to vacate a $35 million award that was made against the hometown agricultural giant by a famous arbitrator of Mexican nationality. Said the district court: “Chapter Two of the FAA states that a Convention award may be vacated only on the grounds specified in the New York Convention…. The Seventh Circuit has recognized that it is not clear whether a party may bring an action under Chapter 1 of the FAA to vacate an award issued in a U.S. jurisdiction, but governed by the New York Convention.” The Court then proceeded to find the proffered vacatur grounds insufficient even under FAA Section 10, so that it was not necessary to decide the question raised but not decided in Johnson Controls.

The textual purists among you might say Judge Wood had it wrong, and has inspired error in the lower courts, by daring to state that Chapters Two and Three of the FAA provide standards applicable to vacatur. In fact those Chapters say literally nothing, or nothing literally, about vacatur.  But I will venture the suggestion that Judge Wood very deliberately, and with evident persuasive force,  conflated vacatur and refusal of recognition — under the protective cover of dictum — — in service of advancing the Restatement position.

Let us consider further the basis for the Restatement position, and how the courts might implement it without demanding handstands and cartwheels from the statutory texts.

In the comments under the heading “Policy Considerations,” the Restatement drafters assert that Section 10 of the FAA only applies to domestic arbitration awards, i.e. those that do not involve any foreign element. But this perspective seems to be incomplete.  “Commerce” as described in FAA Section 1 includes commerce with foreign nations. And so Chapter One of the FAA provided a vehicle for the confirmation or vacatur of at least some international arbitration awards before 1970, i.e. those that involved foreign commerce of the United States.  Thus, if in 1965 there had been an international arbitration between a U. S. supplier and a foreign distributor concerning the distribution of U.S.-sourced goods in a foreign nation, Chapter One potentially provided jurisdiction (if the diversity statute was satisfied) for a U.S. court at the seat of the arbitration to confirm the award or to vacate it. The gap in coverage as to vacatur, if any, concerned awards made in the United States that involved commerce between non-U.S. parties over commerce that had no U.S. connection other than the chosen seat of arbitration.  With regard to international arbitration awards made in the United States that involved foreign commerce of the United States, the principal innovation of FAA Chapter Two was to allow agreements and awards to be enforced in the federal courts without an independent basis for subject matter jurisdiction.

As to the category of international arbitrations held at a U.S. seat to which Chapter One grounds for vacatur applied before 1970 — that is, cases involving foreign commerce of the United States —  it does not seem correct to conclude that Chapter Two’s enactment rendered those grounds no longer available. Chapter Two itself is silent about vacatur. And there are evidently no indications in the legislative history of Chapter Two that Congress considered that the Convention Article V grounds for refusal of recognition and enforcement would supplant the Section 10 grounds when vacatur was sought. Since the right to request judicial action to vacate an award continued to reside exclusively in Chapter One, it has until now been reasonable to conclude that Chapter One’s stated grounds for vacatur would apply. That conclusion is also reinforced by the fact that the subject matter jurisdiction created by Chapter Two of the FAA was not stated to be exclusive, i.e., Chapter Two does not preclude a party who could satisfy the diversity of citizenship requirement for federal subject matter jurisdiction from moving for confirmation or vacatur of an award under Chapter One.  Neither did Congress amend Chapter One to provide that when such proceedings involved foreign commerce of the United States, the permitted grounds for vacatur would be the Convention grounds for refusal of recognition and enforcement rather than the grounds in FAA Section 10.

With regard to U.S.-seated international arbitrations that involve only the commerce of foreign nations, not the foreign commerce of the United States, the analysis would seem to be quite different, and the position of the Restatement (or at least the result of that position) seems more compelling.  Parties involved in such U.S.-seated arbitrations have no express federal statutory basis for vacating an award. From a Chapter One perspective, they fail to satisfy the commerce requirement and fail to satisfy diversity of citizenship as a basis for jurisdiction when there are no U.S.-domiciled parties involved. Such parties are not aided by the “residual application” of Chapter One under Section 208 of the FAA. Section 208 provides for application of Chapter One to “actions and proceedings brought under this Chapter” but does not provide that actions and proceedings available only under Chapter One may be brought also under Chapter Two. Chapter Two does not provide for any action or proceeding to vacate an award, and thus there is no Chapter Two action or proceeding to which Section 10’s vacatur standards could, residually, apply. Such a party that initiates a proceeding for vacatur under Chapter Two of the FAA should have the proceeding dismissed under Federal Civil Procedure Rule 12(b)(6), for failure to state a claim upon which relief may be granted.

Where does Article V(1)(e) of the Convention fit into this scenario? (If you have read this far, you were about to ask).  Article V(1)(e) provides that recognition and enforcement may be (shall be) refused if the award has been set aside by a competent authority of the place at which, or under the law of which, the award was made. From the text, it can be inferred that Article V(1)(e) contemplates that the Convention Member State may have, but need not have, a legal regime for the annulment of awards. It is open to the United States, consistent with the Convention, to decline to provide any action or proceeding for the annulment of a certain category of Convention awards. And it is perfectly sensible to conclude that this was the course of action taken by the United States, in the enactment of FAA Chapter Two, with regard to Convention awards made in the United States that do not involve foreign commerce of the United States. Thus, if the arbitration winner, in a case involving only foreign foreign commerce,  seeks confirmation in a federal court at the U.S. seat, the loser may invoke the Convention grounds for refusal of recognition. But if the arbitration loser prevails in having recognition refused, the consequence is only the non-recognition of the award in the United States, and possibly some issue-preclusive effect against the arbitration winner if further confirmation proceedings are commenced in the courts of another State.  But the Award does not cease to exist, because there is no availability of vacatur (annulment) as a remedy under FAA Chapter Two (or Three).

Let us now consider briefly how the leading cases mentioned in the Comments of the Restatement would fare under this standard. Stolt-Nielsen involved foreign commerce of the United States, so consideration of vacatur according to Section 10 standards was appropriate. The same is true of Toys R Us v. Yusuf Alghanim in the Second Circuit and the Ario case in the Third Circuit. The Eleventh Circuit’s decision in Industrial Risk Insurers is wrongly decided, because the Court embraced a false dichotomy between Chapter One as governing “domestic arbitral proceedings” and Chapter Two as governing “international arbitral proceedings.” That shorthand gave short shrift to the U.S. foreign commerce dimension of Chapter One. Thus none of the leading cases is a correct outcome under existing law that would require a change of position under the approach proposed here. (The Eleventh Circuit will need to mend its error in a proper case).

From a policy perspective, this approach accomplishes some of what the Restatement drafters aspire to achieve. For foreign parties with foreign disputes (what I have called “foreign foreign commerce”) who have chosen the U.S. as a seat of arbitration only for its perceived advantages as a juridical seat, their hopes and expectations of being in a New York Convention jurisdiction without an overlay of idiosyncratic domestic arbitration law will be nourished. And this can be done without asking courts to stretch statutory language or legislative history to accomplish the policy goals of arbitration scholars (the Restatement drafters) and blogosphere pundits (your author).  For those who select a U.S. seat but are involved in foreign commerce of the United States, Chapter 1 vacatur remains possible if there is a basis for federal subject matter jurisdiction other than the Convention.  The jurisdiction requirement will eliminate a certain number of cases —  the motion to vacate an award in a contract dispute between Canadian and Mexican joint venture partners over a land development in the U.S. would satisfy the commerce requirement of Chapter One, but statutory diversity of citizenship would be lacking.  The motion to vacate in that case would be dismissed under Chapter One for lack of jurisdiction and under Chapter Two/Three for failure to state a claim.   This would leave the Restatement’s mission unachieved as to the category of cases that satisfy Chapter One in regard to both the commerce requirement and subject matter jurisdiction, because vacatur in such cases would remain proper under FAA Section 10 standards rather than New York Convention Article V standards.  But if the “problem” can be re-defined this narrowly, then perhaps legislative reform would be possible. Or perhaps the residual “problem” would be perceived — especially in light of the rarity of actual vacatur judgments for manifest disregard or exceeding powers in international arbitrations — as one that is no longer sufficiently widespread to justify the attention that is has recently attracted.

Sometimes obscured in the conversation over whether Section 1782 of the U.S. Judiciary Law even applies to private international commercial arbitration is the question of whether such judicially-enabled discovery offends core values of international arbitration —  intruding upon the arbitrators’ control over the proceedings, and tilting an initially level evidence-gathering playing field in favor of the party that benefits most from evidence located in the United States.

A successful ex parte Section 1782 application before a New Jersey U.S. District Court in November 2012 provides a useful point of entry to examine this question. (In re Mesa Power Group, LLC, 2012 WL 6060941 (D.N.J. Nov. 20, 2012). See also, in the same court regarding the same arbitration but a different non-party witness, In re Mesa Power Group, LLC, 2013 WL 1890222  (D.N.J. April 19, 2013). The latter opinion is too recent to have attracted published responsive comment from the Arbitral Tribunal). The order was made in relation to a nascent NAFTA Chapter 11 arbitration between a U.S. investor and the Government of Canada — the latter defending alleged NAFTA violations by the Province of Ontario. Whereas the pleadings, submissions, and procedural orders in the NAFTA are) publicly-available (e.g., www.italaw.com), we who enjoy these sporting events as spectators when not players or referees have rather choice seats from which to consider the 1782 case in its precise arbitral procedural context.

Claimant’s business is generating electric power from wind farms, and it maintained such facilities in Ontario. One of its competitors, a Samsung company, signed a major supply contract with Ontario, and as an element of the deal was granted transmission capacity on Ontario’s power grid.  Ontario declined to buy electricity from Claimant, which then filed a Notice of Arbitration claiming inter alia breach of the duty to provide fair and equitable treatment. The damages are alleged to exceed $775 million USD.

Claimant obtained Section 1782 discovery orders from the New Jersey federal court on an ex parte basis, as Section 1782 allows. (In fairness to the federal judge involved and a balanced presentation, the decision was without prejudice to being revisited in the context of a motion to quash the subpoena). Neither Samsung nor Canada had notice of the application. And since no arbitral tribunal had been formed at the time of the application, there was initially no tribunal to notify. And it is inferrable from a recent procedural order in the arbitration that the Tribunal, after it was constituted in June 2012, did not learn of the application until some time after the Court entered its order granting relief in November.

The district court purported to apply faithfully the “discretionary factors” enumerated by the Supreme Court in the Intel case. And when it came to applying the factor of whether the arbitration process would be advanced by granting 1782 discovery, the Court’s position was that there was no evidence or argument before the Court that the discovery would not advance the arbitration. Of course, since the matter was before the Court ex parte, there was no representation in the proceedings for the view that perhaps the discovery would detract from the NAFTA arbitration proceedings more than it might enhance them.

One might suppose that the Government of Canada, had it had notice of the application, might have informed the Court:

(1) That proceeding ex parte was not justified as the documents sought from Samsung were mainly communications with Ontario that were in Ontario’s possession, and were not at risk for destruction or concealment.

(2) That production of documents exchanged between Samsung and Ontario should proceed under control of the Tribunal.

(3) That internal documents of Samsung, i.e. those not exchanged with Ontario, were sufficiently less likely to have probative value that the Tribunal’s views should be heard by the Court before granting the discovery.

(4) That the seat of the arbitration had not yet been determined, leaving two potentially important questions: Would the seat be in the U.S. such that the Tribunal might issue its own subpoena? And is a tribunal seated in the U.S. an “international tribunal” under Section 1782 notwithstanding, because constituted under authority of the NAFTA and the UNCITRAL Rules of Arbitration?

The views of this Tribunal in regard to the actual and potential use of Section 1782 might usefully be considered by U.S. courts in future cases, when they are asked to use a crystal ball to divine the attitude of an absent, silent, distant, and perhaps not-yet-constituted, arbitral tribunal:

1) Among the reasons expressed by the Tribunal in its February 26, 2013 Procedural Order in Mesa v. Canada for preferring a U.S. seat of arbitration was the power of a U.S.-seated Tribunal to subpoena evidence under FAA Section 7. While the Tribunal in this context did not directly address the relative merit of using Section 1782 to gather evidence for use in an arbitration seated outside the U.S., it is inferrable that the Tribunal considered that FAA Section 7 provides the Tribunal with more control over the gathering and use of evidence.

2) The Tribunal in opting for a seat in Miami rather than New York referred to Second Circuit case law that could be read to prohibit a New York-seated Tribunal from issuing enforceable subpoenas for witnesses beyond the subpoena power of a federal district court in New York. (Dynegy Midstream Services v. Trammochem, 451 F.3d 89 (2d Cir. 2006)). The Eleventh Circuit having as yet not imposed such a territorial limitation nor excluded the possibility that a Tribunal’s FAA subpoena power is a function of its physical not its juridical seat, Miami (amidst its other attractions) held out the greater possibility for the Tribunal to subpoena evidence from sources in Texas and California.

3) While rejecting Canada’s request for wholesale exclusion of documents gathered through the Section 1782 applications by Claimant, the Tribunal did direct that “further efforts by the Claimant to obtain evidence on Section 1782 be pursued exclusively under the supervision of the Tribunal,”  and, specifically, ordered periodic reporting on the status of ongoing 1782 proceedings and that the parties obtain authorization in advance from the Tribunal for any new 1782 application.

Imagine also how a federal district judge might react, when challenged to anticipate the views of the Tribunal, if she were told that in the Caratube v Kazakhstan case (Procedural Order No. 3, May 26, 2010, found at www.italaw.com ) the Tribunal had remarked that “the Tribunal might have been minded to find that its prior consent should have been sought by Claimant before the presentation of it Section 1782 petition,” and that “the existence of such a petition to domestic courts cannot interfere with the Tribunal’s maintenance of its authority over the arbitral procedure…” Judges in future cases might well respond as did the U.S. District Court judge in Washington D.C. who denied Caratube’s Section 1782 petition a few months later (opinion also found at www.italaw.com), finding among other things that granting the petition in an ICSID arbitration, a process selected by Claimant as one of the dispute resolution options under the U.S.-Kazakhstan BIT, would undermine the parties’ bargained-for expectations about the Tribunal’s involvement in evidence-gathering. And the Court also cited Rule 3.8 of the IBA Rules of Evidence, which Rules Claimant itself had proposed that the Tribunal adopt as guidelines in the proceedings, and which Rule 3.8 specifically directs that third-party evidence Ggathering is a matter for the Tribunal to decide and to implement.

Given the evident differences in outcome and judicial attitude between the ruling on an ex parte application in Mesa v. Canada, and the better-informed position of the Court in Caratube v. Kazakhstan, it is predictable that more Claimants seeking the benefits of Section 1782 will try to do so ex parte whenever possible and also as early in the arbitration process as possible including before any proceedings are filed. The organized arbitration bar might make a constructive contribution by developing a checklist of questions which U.S. District Court judges might pose to applicants:

• What extreme circumstances justify ex parte relief?

• Has the Request for Arbitration been filed?

• Has the Tribunal been constituted?

• Have the parties agreed that the Tribunal shall refer, for guidance, to the IBA Rules of Evidence?

• Has a procedural timetable been fixed?

• Has the seat of arbitration been selected, and if not, does it remain possible that a U.S. seat will be selected?

• Is the information sought mainly not available from the parties to the arbitration, and as to such information what is its probative value?

• Have members of the Tribunal and especially the presiding arbitrator issued prior decisions or written commentaries on the relative roles of arbitral tribunals and domestic courts in the evidence-gathering process?

• Has the administering institution agreed upon by the parties, if any, adopted a position concerning Section 1782 applications?

Armed with such questions, federal judges stand to be better equipped to make the discretionary analysis called for by the Supreme Court in Intel, and to exercise such discretion with an informed sensitivity to many aspects of the arbitral process that the Claimant in pursuit of evidence would not necessarily illuminate.

Today’s topic is the power of a US District Court, if any, to reconsider its recognition and enforcement of a foreign arbitral award governed by the New York Convention when, after giving a judgment confirming the award here in the U.S., the award is vacated by a competent court at the foreign seat of the arbitration. And if such power exists, when should it be exercised?

To set the stage, suppose the award creditor seeks confirmation in the US, and the award debtor opts at that stage not to commence vacatur (annulment) proceedings at the seat and not to request adjournment of the confirmation case pending a vacatur action at the seat (NY Convention Art. VI), but instead initially devotes its energy to an ultimately unsuccessful effort to convince the US District Court to deny confirmation on the basis that the Tribunal lacked jurisdiction over a non-signatory claimant (an issue the US court declines to review de novo, giving deference to the Arbitral Tribunal’s award). The vacatur action at the arbitral seat’s court then unfolds as Round Two of the match, and there the award debtor obtains de novo review of the non-signatory claimant issue, and wins an adjudication vacating the award entirely. Now the award has ceased to exist in two places for opposite reasons: in the US, it is merged into the confirmation judgment; at the seat, it has been annulled.

In Round Three, award debtor asks the US Court to set aside its confirmation judgment, and enter a new judgment refusing confirmation, and says (i) the post-judgment timing and prior history should make no difference, and (ii) that the outcome should be the same as it would have been if the annulment of the award at the seat had preceded initial confirmation. (See Convention Article V(1)(e)).

Strictly speaking, the issue does not arise under the Convention or FAA Chapter Two, but only under the Federal Rules of Civil Procedure. The Convention speaks to the ability of a court to refuse recognition and enforcement, but says nothing directly about revoking recognition and enforcement once given. It might be said the Convention treats the matter indirectly as a question of local procedure because, under Art. III, awards are to be enforced “in accordance with rules of procedure of the territory where the award is relied upon.” Federal Rule of Civil Procedure 60(b) concerning setting aside a judgment would seem to be such a rule.

Rule 60(b) offers two conceivable approaches for this proposed reconsideration. Under Rule 60(b)(5), a party may be relieved from a final judgment that is “based on an earlier judgment that has been reversed or vacated” or because applying the judgment prospectively “is no longer equitable.” Under Rule 60(b)(6) relief from a judgment may be obtained for “any other reason that justifies” it. The latter is considered (in case law) to be “an extraordinary remedy which may be invoked only upon a showing of exceptional circumstances.“

The argument can be made that Article VI of the Convention, alone or in combination with Article V, resolves the issue. Article VI provides that a court “may, if it considers it proper, adjourn the decision on enforcement of the award” but only if an annulment application at the seat “has been made….” (emphasis supplied). It follows that an award debtor who is contemplating but has not yet filed an annulment case has no right to an Article VI stay and indeed a Court giving a stay in such circumstances would be ignoring clearly selected words in the Convention, words presumably chosen because the drafters considered it important to an efficient confirmation regime that unhappy award debtors should decide quickly whether to pursue annulment.

It follows that an applicant for an Article VI stay who submits only that annulment proceedings are being considered has no right to the relief. Article V(1)(e) permits refusal of confirmation only as to an award that has been annulled — not one that might be annulled. And the Convention identifies no circumstance — post-confirmation annulment or otherwise — in which a confirmation order or judgment might be reconsidered and revoked.

So how should a court address the potential Rule 60 grounds for relief from a confirmation judgment. Rule 60(b)(5) seems unpromising. It provides for relief from a judgment that is “based upon” an “earlier judgment” that has been vacated. This Rule language dates from 1937, so there is little reason to think that Congress meant for foreign arbitral awards or foreign judgments to be among the “earlier judgments” to which the 60(b)(5) would apply. Moreover, a quick look at case law regarding 60(b)(5) reveals that “based upon” means that the prior judgment was a necessary element of the judgment from which relief is sought, in the sense that it gave rise to the cause of action of defense upon which the challenged judgment is based. (Lowry Dev., L. L. C. v. Groves & Assocs., 690 F.3d 382, 386 (5th Cir. 2012). The judgment confirming an arbitral award is not “based upon” the award in this sense; the judgment flows from the existence of the award and not from any substantive element of the award.

But what about the 60(b)(6)? Is the post-confirmation foreign annulment an “exceptional circumstance”? Exceptionality would need to be based on giving effect to the mandate of the Convention that recognition should be refused to awards annulled by a court at the seat. But the more precise formulation of the Convention’s mandate is that (i) recognition should not be given to an award annulled at the seat prior to its recognition in a particular jurisdiction where recognition is sought, and (ii) recognition may in a court’s discretion be delayed if there is pending a proceeding in which such annulment might be obtained. Therefore the mandate of the Convention would seem to be that delay in commencing annulment proceedings carries with it the consequence that an annullable award will be confirmed and that the resulting judgment will be enforceable where rendered, and perhaps internationally, even if the underlying award loses its force and its direct enforceability elsewhere. And by extension no Rule 60(b)(6) exceptional circumstance exists unless the award debtor could not have timely commenced the annulment proceedings and requested the Article VI adjournment.

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At least a few readers will recognize that the issue discussed above is presented by a recent Rule 60(b) motion in a case in the Southern District of New York that has been a fertile ground for examination of international arbitration issues in recent years. See Thai-Lao Lignite (Thailand) Co. v. Government of the Lao People’s Democratic Republic, 2013 WL 1703873 (S.D.N.Y. April 19, 2013) (decision granting vacatur of post-judgment restraining notices against certain sovereign assets on sovereign immunity grounds). For readers interested in the motion, it can be found in the electronic docket for Case 10cv5256 at entry no. 203.

In its broader implications, Thai-Lao Lignite entailed the question whether a court reviews an arbitrator’s decision on her jurisdiction with deference (rather than de novo) when the parties agreed to arbitrate under rules such as the UNCITRAL Rules that give arbitrators power to rule on their own jurisdiction. The district court answered this question “yes, at least where the jurisdiction issue is raised by a signatory of the arbitration agreement who concedes its existence and questions only whether a particular non-signatory may invoke it.” The US Second Circuit affirmed that ruling in a summary order based on its decisions in Contec and Chevron, and on February 25, 2013 the Supreme Court of the United States denied certiorari. Whether that issue will eventually reach the Supreme Court will be much-watched, and in the meantime the wisdom and scope of application of the Second Circuit position will be much-debated.

Does an arbitrator exceed her powers when, as a remedy for fraud in the inducement of a limited-duration intellectual property license, she modifies the contract “as a matter of law” to provide the licensor with a perpetual royalty-free license? The U.S. Fifth Circuit Court of Appeals, reversing a Texas district court’s vacatur order, held that the arbitrator’s award should stand. (Timegate Studios, Inc. v. Southpeak Interactive, L.L.C., 2013 WL 1437710 (5th Cir. April 9, 2013)).

Even though the question presented was whether the arbitrator could rewrite the contract as a fraud remedy, the Court held that the relevant legal test under Section 10(a)(4) of the Federal Arbitration Act (permitting vacatur where an arbitrator exceeds her powers) is whether the award “draws its essence from the contract.”

So it is useful to understand where the “draws its essence” formula comes from. It source is in a very famous Supreme Court arbitration case: United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593 (1960). That case involved a labor arbitration under a collective bargaining agreement, and the Supreme Court, referring not to the FAA but to the need for finality in the resolution of labor disputes under collective bargaining agreements, stated: “The arbitrator … does not sit to dispense his own brand of industrial justice; he may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement.” 363 U.S. at 597.

The Supreme Court has not seen fit in 53 years to incorporate the “draws its essence” phrase into the lexicon of commercial arbitration and the FAA. Not a single instance of reference to the “draws its essence” phrase is found in any FAA case in the Supreme Court.  That might be due to some key differences between collective bargaining agreements and commercial contracts, and between disputes under the two types of agreements. Perhaps most significantly, when a dispute arises under the collective bargaining agreement, that agreement is in practical terms the applicable law.  In the particular dispute, the labor arbitrator decides the respective rights and duties of employee and employer under a collective agreement which is likely to be a lengthy and self-contained charter. Certainly the steel industry agreements circa 1960 fit that mold.

But the commercial agreement with an arbitration clause typically requires the arbitrator to apply the contract law of a particular geopolitical unit, and typically does not limit the remedies of either side to those enumerated in the contract but leaves the arbitrator free to impose the contract remedies permitted by the applicable law. In that context, judicial deference to an award whose remedy “draws its essence” from the contract risks becoming formula for the arbitrator and the deferential reviewing court to disregard the applicable law in service of a generous construction of the contract’s commercial terms. This strengthens but also possibly transforms the arbitral process, inviting the process to become less of an adjudication and more of a binding form of conciliation.

Does a “binding conciliation” vision of arbitral power explain the Fifth Circuit’s decision? Nothing explicit in the decision suggests this. The Court seems to have been less attentive to the implications for arbitral power, and mainly attuned to the injury sustained by this particular licensee. The Court’s opinion does not suggest that the applicable Texas law of contracts provided that a court or arbitrator may rewrite the parties’ agreement “as a matter of law.”  Indeed the Court’s opinion does not discuss Texas contract law. The sole reference to Texas law is the statement that where there is fraud in the inducement of the contract, the remedy granted may “void contract provisions.”  But here the Court cited only to a case where punitive damages for fraud were awarded in conjunction with declaring null and void a contract, induced by fraud, that forbade punitive damages as a breach of contract remedy.

By using the “draws its essence” test to uphold the award, the Court in effect holds that even a remedy not allowed by the applicable law is not an excess of arbitral power where it plausibly advances the original contractual objectives of the prevailing party. But doesn’t that approach dislodge the applicable law as a defining and confining source of arbitral power?

Another drawback of transposing the “draws its essence” formula to commercial arbitration jurisprudence is that the commercial arbitrator routinely is invited to resolve non-contractual causes of action, and yet the “draws its essence” formula is focused on the contract. The fraud claim in the Timegate case is typical.

When the arbitrator is alleged to have exceeded her powers in providing a re-written perpetual license as a remedy for fraudulent inducement of the negotiated license , it seems the proper question to ask, about the scope of arbitral power, is not whether that remedy “draws its essence from the contract,” but whether the remedy is permitted by the law applicable to the fraud claim that the arbitrator was required to apply (or possibly by a more specific agreement of the parties about remedies). If the remedy of contract revision is allowed by (suppose) Oklahoma law, but the contract specifies that the arbitrator shall apply Texas law and the arbitrator is informed that Texas law permits rescinding the contract entirely but not rewriting it, as a remedy for fraud in the inducement, and the arbitrator invokes Oklahoma law on the basis that it strikes her as a more desirable remedial scheme, the arbitrator exceeds her powers, as she was given no power in the contract to invoke any other than Texas law.

The Supreme Court in the 2010 Stolt-Nielsen case gave renewed vitality in “exceeds powers” jurisprudence to the phrase from the 1960 Steelworkers’ case that immediately adjoins the “draws its essence” language, i.e. that an arbitrator exceeds her powers when she dispenses her “own brand of industrial justice.” In Stolt-Nielsen, this label was pinned on an arbitral award that construed an arbitration clause to allow for class arbitration, doing so (according to Justice Alioto and the majority) without reference to any body of law arguably applicable to that clause, but instead by reference to other AAA clause construction awards that had allowed class arbitration.

Whether one agrees or not that this is what the arbitrators did in Stolt-Nielsen, the “own brand of industrial justice” phrase is a sensible practical shorthand for adjudication unhinged from the applicable law that the arbitrator is bound to apply. To sustain, as the Fifth Circuit did, an arbitral revision of the parties’ contract on the basis that the revision “draws its essence” from the contract, would seem to sanction the same unhinging as a legitimate exercise of arbitral power but without adequately justifying how the contract functions as a source for that power.