Evidently undaunted by the Second Circuit’s dismissal of an award confirmation case on grounds of forum non conveniens (Figueiredo Ferraz E Engharia de Projeta Ltda. v. Republic of Peru, 665 F.3d 384 (2d Cir. 2011)) — or at least convinced of the Figueiredo panel majority’s idiosyncratic take on the “public interest” factor in forum non analysis — a federal district judge in New York recently denied a forum non conveniens motion to dismiss a confirmation action between Antiguan parties on both sides, arising from an arbitration that took place in Puerto Rico. (Leeward Constr.  Co. v. American Univ. of Antigua,  2013 WL 1245549 (S.D.N.Y. Mar. 26, 2013)).

But what may be most significant to award confirmation jurisprudence in the Leeward case is that the Court granted the motion to dismiss the confirmation petition, without prejudice, made by a non-party to the arbitration, and non-signatory to the arbitration agreement, against whom confirmation was sought via piercing of the corporate veil. Citing a Second Circuit decision from 1963 — predating the US accession to the New York Convention — the Court held that an award confirmation action against the award debtor is not the proper time to raise, for the first time, whether a putative alter ego of the award debtor is also legally responsible to satisfy the award. The Court then hastened to add that the award creditor was free to bring a “separate plenary action” to enforce the award against the putative alter ego.

The Court did not refer to any of the grounds for refusal of recognition in Article V of the New York Convention as a basis for this decision. But if Judge Kaplan considered (as he presumably did) that no such ground was needed, he would appear to have been fully justified. This decision should be classified not as a refusal to recognize the award, but as only a docket-management decision reflecting the application of a sound procedural principle: if confirmation depends upon an initial determination that the defendant consented to arbitrate and did indeed participate in the arbitration (because, as a matter of law, it is one entity with the nominal award debtor), that issue must be litigated in a separate case. The pro-arbitration logic of such a principle is that confirmation proceedings are intended to be “summary,” which is to say resolvable quickly by motion practice without discovery or trial, while issues of consent to arbitrate (such as veil piercing) may well require discovery and trial and therefore should be handled separately. It would seem that such a rule is a “rule of procedure” within the meaning of New York Convention Article III which requires that awards be recognized and enforced “in accordance with the rules of procedure of the territory where the award is relied upon.”

Aficionados of Figueiredo and its main antecedent, the Monde Re case (In the Matter of Arbitration between Monegasque de Reassurances S.A.M.(Monde Re) v. NAK Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002)), will see the close parallel between the Leeward case and Monde Re — where, in the confirmation action,  the award creditor sought conformation against the Republic of Ukraine as alleged alter ego of the award state agency Naftogaz. The solution endorsed by the Second Circuit in Monde Re was to dismiss the entire confirmation action on forum non grounds because the law and fact questions raised by the alter ego claim were better suited to resolution in a court in the Ukraine.

Perhaps the Second Circuit will soon have occasion to endorse Judge Kaplan’s approach in Leeward, which should render Monde Re if not overruled then at least recognized as less helpful solution to the tensions injected into confirmation cases when they are brought against defendants who were not participants in the arbitration.

What then should a court do when, in a separate “plenary action” like the one invited by Judge Kaplan, against only the non-signatory/non-party/alleged alter ego, forum non conveniens is raised as a basis to ship the case abroad? Here it may be useful to view the “plenary action” as a hybrid. It is in its main part an action to recognize an agreement to arbitrate, and as such is governed by Article II of the New York Convention. Article II commands that Contracting States “shall recognize” an arbitration agreement, and lacks the “rules of procedure” language of Article III that the Second Circuit relied upon in Monde Re and Figueiredo to apply forum non conveniens.  It seems correct therefore to suppose that the Court has a categorical duty under the Convention, as a treaty of the United States, to decide whether the non-party is bound by the arbitration agreement even if this involves issues of foreign law, depends on evidence located abroad, and perhaps even implicates issues of public policy of the foreign State.

It has been nearly 45 years since the Supreme Court of the United States decided the Commonwealth Coatings case (Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145 (1968)) and addressed for the only time in its history the meaning of the term “evident partiality,” which appears in Chapter One of the FAA as a ground for setting aside an Award. No single opinion or rationale commanded a majority of the Justices in that case, and the legacy of the case has been generally associated with the concurring opinion of Justice White, who was able to support the affirmance of the judgment on the basis that the record supported a finding of actual bias while he rejected the notion, articulated in the plurality opinion authored by Justice Hugo Black, that arbitrators should be held to the same ethical standards as judges and therefore their awards should be exposed to vacatur if the record supports merely an appearance of possible bias.

Earlier this month the US Court of Appeals for the Third Circuit had occasion to visit the Commonwealth Coatings opinions in an appeal involving allegations of bias baed on the sole arbitrator’s failure to have disclosed election campaign contributions received from the parent company of the victorious Respondent. But in this case there had also been campaign contributions to the arbitrator (who ran for election to the Supreme Court of Pennsylvania) in a much larger amount from the law firm that represented the disappointed claimant-appellant. And the contributions were all reported publicly on a Website maintained by the State.  The Third Circuit, adhering to the “actual bias” view of “evident partiality,” found no merit in the position that the award should be vacated. (Freeman v. Pittsburgh Glass Works LLC, 2013 WL 811884 (3d Cir. Mar. 6, 2013)).

The Third Circuit also took this occasion to warn its readers that judges should not hesitate to award sanctions for frivolous vacatur motions and frivolous appeals, as a measure to protect the efficacy of arbitration (although no sanctions were imposed in this case).

It is useful to take note of the utility of the “actual bias” approach to “evident partiality” in discouraging frivolous appeals from arbitral awards. While arbitrators are justifiably criticized for failing to err on the side of caution by disclosing relevant but non-disqualifying information (like the receipt of judicial election campaign funds, publicly-disclosed, from persons connected to both sides), it is another matter to invoke “evident partiality” in service of a retroactive review of pre-award arbitrator disclosure where the proceedings have been fundamentally fair and bear no trace of partisanship in either the outcome or the procedure. Actual bias being both more difficult to prove and more dependent than appearance of bias on the objective elements of the arbitral record (the Award, the procedural orders, the transcript of the hearing), there should in principle be an inhibition of speculative appeals and on efforts to support such speculation with post-award “detective work” to unearth some conceivable basis to impugn an arbitrator’s neutrality. But in practice such litigation remains an epidemic, linked one would suppose to the reluctance of judges to impose sanctions and the unwillingness of Congress to adopt statutory fee-shifting for FAA cases.

Perhaps the Third Circuit’s admonition will gain traction in the district courts, and post-award litigation will gradually become a risky strategy that counsel for losing parties will be more reluctant to recommend.

Some rules and principles relating to enforcement of international arbitration awards are essentially matters of common sense.  Foremost among them are rules relating to the currency of judgments enforcing awards, and post-award interest. But as they are not often the subjects of reasoned judicial decisions, it is useful to take note when well-reasoned decisions come along. Today’s text is from a federal district court in Washington D.C., which addressed currency conversion and interest issues associated with a judgment enforcing a large arbitration award, made in London and rendered in British pounds and Nigerian niara, against the Federal Government of Nigeria. (Continental Transfert Technique Ltd. v. Federal Government of Nigeria, 2013 WL 1201380 (D.D.C. Mar. 26, 2013)).

Common sense rule number one: An award denominated in a foreign currency ordinarily should be converted into a U.S. judgment in U.S. dollars unless the award creditor asks for judgment in the non-dollar currency of the award. One might suppose there could be another exception: where the agreement of the parties provides that the parties shall bear the risk of currency fluctuations even after a breach of termination of their contract.

Common sense rule number two:  Conversion to judgment dollars of an arbitration award denominated in a foreign currency should be made as of a date, ordinarily the award date, that preserves the value of the award for the award creditor in case of intervening depreciation of the award currency.  While this is the approach commended by the Restatement of Foreign Relations Law, two U.S. Supreme Court cases from the 1920s indicated that courts should look to the law under which the cause of action arose and convert the foreign currency obligation to dollars as of the date of breach only if the plaintiff had a cause of action under American law as of that date. Fortunately the district court here was able to navigate this arguable conflict, and find that indeed there was a cause of action under U.S. law (to enforce the award under the New York Convention/FAA) as of the date of the award (that being the “date of breach” of an obligation to satisfy the award).

Common sense rule number three: The award creditor is presumptively entitled to post-award, pre-judgment interest, so long as the award does not negate the existence of this entitlement, although the entitlement remains in the Court’s discretion (so that it might be denied for instance of the creditor failed to proceed diligently with enforcement).

The final point of decision in this case was selection of the prejudgment interest rate, and the court concluded that the prime rate more properly comports with the compensatory rationale for such interest than does the Treasury Bill rate.  I hesitate to classify this as a “common sense rule,” however, because the decision to terminate the accrual of interest at the pre-award rate specified in the award is not intuitive and inevitable. Here the court gave short shrift to that question as the pre-award rate granted under Nigerian law was 18 percent based on prevailing interest rates in Nigeria during the relevant period, and the award creditor evidently did not present argument as to why the Court should continue this rate in effect post-award. But suppose the pre-award rate had been nine percent based the New York law having been the applicable law of the contract?  Although presumably that would be significantly above the award creditor’s cost of funds, in that instance the level of compensation for the time value of unpaid obligations has been bargained for, and the effect of shifting to the prime rate for post-award interest is to deprive the award creditor of the benefit of the bargain.

This commentator apologizes for his prolonged absence, explained largely in two words: provisional relief. In the representation of the Claimant in an ICDR arbitration seated in New York, there has been occasion to apply successfully for (i) judicial Mareva freezing orders in aid of arbitration in three foreign jurisdictions, (ii) an ICDR Emergency Arbitrator’s Partial Final Award directing access to the property in dispute; (iii) an arbitral Mareva freezing order and order for security for the amount in dispute, given as an Interim Award; (iv) judgments in the U.S. District Court and in the three foreign Mareva jurisdictions, confirming the Interim Award under the New York Convention; and (v) an order of the U.S. District Court in New York finding a Respondent in contempt of court for non-compliance with the Judgment enforcing the Interim Award, and imposing escalating fines and coercive civil commitment.

I will focus here on the challenges involved in the U.S. arbitral and judicial proceedings.

What law governs an application for provisional relief in an ICDR arbitration seated in New York, concerning a contract whose interpretation is agreed to be governed by New York law, between disputants from New York (the Claimant) and Asia (the Respondent)? Here the arbitrator was persuaded that the source of his power to act was Article 21 of the ICDR Rules, which permits the Tribunal to  grant any provisional relief it considers appropriate. The arbitrator was further persuaded that his power under Article 21 was not constrained by the New York and U.S. federal law position that courts lack power to grant provisional relief freezing assets of the Respondent, as security for the judgment in a money damages case (except where the criteria under state law for an order of attachment are satisfied).  By adopting that view, the arbitrator in effect held that ICDR Article 21 was not only the source of his power to act but the “law” governing the application, there being no mandatorily-applicable New York or U.S. federal law concerning the provisional measures powers of an arbitrator.  Readers will appreciate, however, that this correct but nuanced outcome was not inevitable, as considerable resources were expended by the Respondents’ counsel in support of simplistic propositions that New York law applies in a New York-seated international  arbitration.

The arbitrator having given provisional relief in the form of an Award as permitted by the ICDR Rules, the next question presented was whether a U.S. District Court would treat the arbitrator’s decision as an award under the New York Convention, and recognize and enforce it unless a defense under Article V of the Convention were available. While the enforceability of arbitral provisional measures has been a topic of discussion for many years, the number of judicial decisions directly addressing the subject remains quite small. Predictably, Respondents opposing confirmation attempt to distinguish the few cases that have granted enforcement, and courts accustomed to judicial notions of finality are tempted to classify arbitral provisional measures, even those denominated as awards, as non-final procedural orders that courts lack jurisdiction to enforce.

But U.S. Second Circuit case law does hold that an arbitral decision that does not resolve all matters but does finally resolve a “separate and independent claim” is an award that may be enforced. There are few decisions applying this principle in an interim measures context, and the conceptual “fit” is not optimal as provisional measures are generally collateral to the merits rather than one of several “claims.”  Further, the handful of Second Circuit decisions in which arbitral provisional measures have been enforced can be read as cases where the particular remedy granted by the arbitrator was specifically authorized by the parties’ contract. It was therefore rather uncharted territory in this case for the Court to decide, as it ultimately did, that the broad and categorical grant of arbitral power concerning provisional relief in ICDR Article 21 has the same contractual status, when the ICDR Rules are agreed upon in the contract, as a specific stipulation for a particular type of provisional measure.

Linked here is the Court’s decision granting recognition and enforcement.

Also linked here is a transcript of the hearing on the motion to confirm the award, in which you will read an initial decision of the Court denying confirmation, which was vacated by the end of the same hearing once the Court had given more consideration to the contractual status of ICDR Article 21.

mcmahon-confirmation-order

mcmahon-hearing-transcript

In a recent case, the removal of an action from state to federal court based on Chapter Two of the FAA (Section 205) and the New York Convention raised a question that puzzles this writer but evidently did not cause any hesitation for the US Second Circuit Court of Appeals. The question: does such removal confer subject matter jurisdiction on the federal district courts to decide issues having nothing to do with an arbitration agreement or award governed by the New York Convention. Per the Second Circuit, at least by implication, the answer is yes. (Bakoss v. Certain Underwriters at Lloyd’s of London, 2013 WL 238708 (2d Cir. Jan. 23, 2013).

Here the complaint filed in state court involved a dispute over disability insurance coverage. Defendant, a Lloyd’s underwriting syndicate, raised two defenses: (1) that the contested issue of whether plaintiff was permanently disabled was arbitrable, and (2) that plaintiff’s notice of claim was untimely. Upon removal, the Lloyd’s syndicate moved for summary judgment on the untimely notice issue, and in the alternative to compel arbitration on whether plaintiff was permanently disabled.

The District Court found that removal was proper based on the arbitration clause in the contract, then proceeded to grant summary judgment for defendant on the timeliness issue that neither party contended was arbitrable. The motion to compel arbitration was dismissed as moot. The Second Circuit affirmed, and the only issue discussed by the Court was whether state law or federal common law applied to decide whether the contractual process for having an independent physician decide whether plaintiff was disabled was “arbitration” under the FAA. The Court held that federal common law applies.

Evidently plaintiff did not raise the question of whether the Court had jurisdiction to decide the non-arbitrable issue of timeliness.  Congress presumably intended FAA Section 205 to provide for removal so that questions involving the interpretation and application of the New York Convention could be decided by a federal court, but whether Congress assume that principles of pendent jurisdiction would operate in a removed Convention case as they do in a case removed based on a different federal question is more uncertain. Congress used broad language in Section 205 : “Whenever the subject matter ….relates to an arbitration agreement or award falling under the Convention…” But it seems a doubtful reading of FAA Chapter Two to say that judicial power in a removed case has broader scope than in a case originally filed in federal court invoking Chapter Two as the sole source of subject matter jurisdiction – and in such a case the only relief a Court could grant is the relief expressly provided for in the FAA, together with such relief as is permitted by the Court’s inherent powers.

While the Second Circuit has not issued a definitive interpretation of Section 205, other federal courts of appeals have held that removal is proper whenever a defense to the plaintiff’s claim may be based on Chapter Two and the Convention. But that principle does not answer the question of what the federal district court should do with non-Convention defenses asserted side-by-side with Convention defenses. Unlike federal subject matter jurisdiction under, for example, the antitrust or copyright statutes,  the grant of federal subject matter jurisdiction under Chapter Two of the FAA is not jurisdiction to adjudicate the merits of any dispute, but only to determine whether an arbitration agreement should be enforced or not, or whether an arbitration award should be enforced or not. If a motion to compel arbitration based on the Convention and Chapter Two is denied, Chapter Two does not confer subject matter jurisdiction on the federal district court to adjudicate the merits of the underlying dispute. It seems odd, therefore, that in a case where subject matter jurisdiction is based on Chapter Two, that the court would adjudicate any non-arbitration issues.  Pendent jurisdiction principles depend on notions of economy, such that the merits of related causes of action should not need to be divided between federal and state courts. But it seems doubtful that pendent jurisdiction should be extended to the realm of FAA Chapter Two, because the jurisdicition conferred is not to adjudicate the merits of any issue other than arbitrability and award confirmation. It seems consistent with the purpose of Chapter Two that the courts faced with a case like Bakoss should address the arbitration issues first, then remand the state law non-arbitration issues for decision by the state courts.

Add the US Fifth Circuit Court of Appeals to the roster of federal jurisdictions that, like the Second Circuit, hold that when an arbitration agreement adopts rules that empower arbitrators to resolve disputes over the scope of arbitrable issues, the arbitrators’ decision on that matter receives the same very high level of deference as arbitrators’ decisions about the merits of the dispute. (Morgan Keegan & Co. v. Garrett, 2012 WL 5209985 (5th Cir. Oct. 23, 2012).

Here the arbitration was brought by 18 investors in a mutual fund, each of whom had signed a client agreement providing for arbitration under the rules of a securities exchange or organization of which the mutual fund was a member. Based on that provision, claimants opted for FINRA arbitration, and, after the dispute had arisen, signed a written submission agreement for arbitration under FINRA’s Code of Arbitration Procedure (“FINRA Code”).

The FINRA Code provision giving arbitrators power to decide the scope of their jurisdiction is less explicit in this regard than most international arbitration rules. Notably the phrase “jurisdiction” is not present. Instead the FINRA Code provides that arbitrators will “ha[ve] the authority to interpret and determine the applicability of all provisions under the Code,”  and to do so in “final and binding” fashion.

One such FINRA Code provision states that the Code governs arbitrations between a FINRA member firm and a “customer.” The mutual fund contended that claimants’ claims were derivative not individual claims and therefore were not “customer” claims. The arbitration panel rejected this position, but the district court accepted it and vacated the award on the basis that the panel exceeded its powers by deciding non-“customer” claims.

The Fifth Circuit’s rejection of the district court’s approach is so categorical that the reader of this opinion learns nothing about the nature of the argument that the arbitrated claims were “derivative” or the basis for the district court’s conclusion that the panel had committed error. Drawing no distinctions between merits-related and jurisdiction-related fact-finding, the Fifth Circuit simply held that the district court had no power to review the panel’s award for error, even serious error.

Are there any meaningful limits to arbitral powers to extend their jurisdiction under such a test? Suppose the arbitrator finds that only one of six claims asserted by the FINRA arbitration claimant is in the capacity of “customer” but decides, citing neither any textual provision of the FINRA Code nor any interpretive guide issued by FINRA, that there is “ancillary jurisdiction” akin to that exercised by courts? At some point, arguably, the textual or contractual basis for the arbitral position on jurisdiction is so attenuated that it becomes, in the words of the Supreme Court in the Stolt-Nielsen case, the arbitrators’ “dispens[ing] their own brand of industrial justice.”

One would have to plumb the depths of the record in this most recent case to know if the panel’s decision was indeed close to or even over that line between “consensual” and “prudential” arbitration.  No purpose would be served by doing so. What seems most important is that the position of the Fifth and Second Circuits will continue to be applauded by some as a vindication of the autonomy of arbitration, and bemoaned by others as a dangerous license for arbitral omnipotence. District courts asked to vacate awards concerning the application of rules of the arbitral forum should remain willing to question seriously whether the arbitrator has merely applied or interpreted a rule, or has in fact extended it beyond the arguable bounds of what may be called interpretation.