That class arbitration in a commercial context remains viable after, and perhaps despite, the Supreme Court’s 2010 decision in Stolt-Nielsen S.A. v. Animalfeeds Int’l, Inc. (130 S.Ct. 1758), was demonstrated again last week in a decision of the US Third Circuit Court of Appeals. The Third Circuit affirmed a district court ruling that denied vacatur of an arbitrator’s award permitting class arbitration between the Oxford managed care network and a class of doctors on whose behalf the Claimant brought the case under his individual reimbursement contract with Oxford. (Sutter v. Oxford Health Plans LLC, 2012 WL 1088887. (3d Cir. April 3, 2012)). Both the district court and the Third Circuit rejected Oxford’s position that Stolt-Nielsen required the conclusion that the arbitrator had exceeded his powers by allowing class arbitration.

The Oxford dispute resolution clause stated:

“No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and any and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the Rules of the American Arbitration Association with one arbitrator.”

The arbitrator construed this clause as authorizing class actions, in a procedural order in 2003 later incorporated in a clause construction award. The arbitrator considered that the class action the Claimant had commenced in New Jersey Superior Court was “a civil action concerning” a dispute arising under the Agreement. He then reasoned that whereas the clause stated that  “any and all such disputes”  should go to arbitration, the parties evidently intended to arbitrate any action which, but for the arbitration clause, could be commenced in court. This necessarily included a class actios.

This construction of the clause was not inevitable, and was perhaps not even the one most logically derived from the text. The prohibition on court proceedings could have been read as broader than the submission to arbitration. The clause does not unambiguously send to arbitration that which it forbids in court: i.e. “any civil action concerning any dispute arising under this Agreement.” The signatory doctor was required to arbitrate only “such disputes,” not “such civil actions.”

The arbitrator might have found that a dispute between Oxford and another physician who signed a similar contract does not “aris[e] under this Agreement,” but under another agreement. But that interpretation would have imposed a class action waiver, and under the canon of construction that a waiver should be set forth in explicit terms, it was quit. justifiable to reject that interpretation — at least if the text could plausibly support another. And indeed such a broader interpretation was possible, as “this Agreement,” did not necessarily mean only the agreement between Oxford and this particular doctor, but could plausibly embrace the identical reimbursement agreements between Oxford and hundreds or thousands of other doctors.

For the Third Circuit panel, the case fell comfortably within settled FAA jurisprudence that an arbitrator acts within his or her powers when the award purports to construe the contract, even if the arbitrator’s construction is at the outer limits of plausibility. Stolt-Nielsen was seen by the Court as neither changing this doctrine nor requiring the rejection of class arbitration in this case.

In Stolt-Nielsen the parties had stipulated that the arbitration clause was “silent” concerning class actions, i.e. that they had made no agreement about class actions. That stipulation, the Supreme Court reasoned, precluded any arbitral finding that the parties intended to permit class arbitration, and left the arbitrators only one way to find that class arbitration was permitted — by resort to the law applicable to the arbitration clause. The Supreme Court held that whereas the arbitrators did not apply such law, but relied instead on other arbitral awards that found class arbitration appropriate when the clause did not preclude class arbitration, the tribunal exceeded its powers.

The Third Circuit was unpersuaded by Oxford’s arguments that Stolt-Nielsen prohibited class arbitration in this case.

The arbitrator having purported to interpret the langauge of the arbitration clause to discern the parties’ intent, and having had before him no stipulation of “silence” about class arbitration, Stolt-Nielsen was inapposite. The arbitrator’s ascertainment of the  parties’ intent based on the words of the clause was procedurally proper, and so the merits of that interpretive exercise were not open to review on a motion to vacate the award based on FAA Section 10(a)(4) for having exceeded the powers conferred on the tribunal by the parties.

The Oxford case should add vitality to the view that Stolt-Nielsen did not signal the end of all class arbitration in commercial cases, especially those that involve neither consumers nor employees. Oxford reminds us that Stolt-Nielsen was fundamentally a case about contract interpretation, and not a policy polemic against class arbitration from the conservative wing of the US Supreme Court. Oxford also reminds us that Stolt-Nielsen will frequently not control the outcome of a contested class arbitration clause construction dispute before an arbitral tribunal, as claimants will avoid making the type of stipulation, concerning the “silence” of the clause,  that in Stolt-Nielsen foreclosed further analysis of the text as a source of the intent of the parties.

Indeed, as more decisions like Oxford emerge from the federal courts of appeals, the class arbitration analytical roadmap for arbitrators should become well-understood. A tribunal not constrained by any explicit class action waiver nor by a Stolt-Nielsen type stipulation regarding the “silence” of the clause, will parse the text and syntax of the clause, in the context of the parties’ overall contract, as a first step to ascertaining their intent. If ambiguity exists, resort may be had to parol evidence.

And if the clause, so construed, permits conflicting inferences about intent, resort may be had to the governing law concerning principles of interpretation, burdens of proof, etc. 

 

 

 

 

 

 

 

With this post, Arbitration Commentaries begins a new initiative to bring its readers reports on noteworthy arbitration law and practice developments in important jurisdictions outside the United States. In this commentary, Barry Leon, Chair of the International Arbitration Practice Group at Perley, Robertson, Hill & McDougall LLP in Ottawa, Canada (www.perlaw.ca ), and John Siwiec, an associate in that Group, report on a significant recent case from the British Columbia Court of Appeal on the importance of arbitration being expeditious and providing finality — an important appellate court policy pronouncement at a time when users of arbitration, arbitral institutions and arbitration practitioners are focused on the importance of controlling the cost and reducing the length of arbitration. Barry Leon and John Siwiec may be reached via the e mail links found on the Perley, Robertson website (linked above).

 

 

Recently, a unanimous British Columbia Court of Appeal upheld a lower court decision precluding a party from appealing a domestic arbitral award where the appeal would be based on an argument inconsistent with one it advanced before its arbitral tribunal. In doing so, the Court stated that the arbitration process is meant to be expeditious and provide finality.

 

In VIH Aviation Group Ltd. v. CHC Helicopter LLC, 2012 BCCA 125, the B.C. Court of Appeal held that:

 

Where parties have chosen arbitration as the method of resolving disputes under a contract, they are expected to present their cases fully before the arbitration panel. Allowing a party to change its position on appeal can be subversive of the arbitration process.[1]

 

In seeking leave to appeal the arbitral award, VIH Aviation Group Ltd. and Cougar Helicopters Inc. (“Cougar”) changed its position on the method that should be used to interpret the parties’ contract. The B.C. Court of Appeal upheld the lower court’s denial of leave to appeal on discretionary grounds under B.C.’s Commercial Arbitration Act, RSBC 1996, c 55 (“CAA”).

 

Legislative Framework

The CAA applies to domestic arbitration and is to be distinguished from B.C.’s International Commercial Arbitration Act, RSBC 1996, c 233 (“ICAA”), which incorporates the 1985 UNCITRAL Model Law on International Commercial Arbitration (“Model Law”).

 

One of the distinguishing features of the CAA compared to the ICAA is that arbitral awards can be appealed to B.C.’s Supreme Court (the trial level court) on questions of law. In contrast, the only recourse against an arbitral award under the ICAA is the prescribed grounds in Model Law Articles 34 and 36, which do not include errors of law.

 

At the center of the B.C. Court of Appeal’s ruling was the extent of the B.C. Supreme Court’s discretionary power in granting or refusing leave to appeal from an arbitral award under the CAA. Section 31(2) of the CAA states:

 

In an application for leave … the court may grant leave if it determines that

(a)  the importance of the result of the arbitration to the parties justifies the intervention of the court and the determination of the point of law may prevent a miscarriage of justice,

(b) the point of law is of importance to some class or body of persons of which the applicant is a member, or

(c)  the point of law is of general or public importance.

[emphasis added]

 

The applicant must demonstrate that the appeal will be on a question of law.

 

The Dispute

The dispute arose out of a joint venture agreement between Cougar and CHC Helicopter International Inc. (“CHC International”) under which the two companies would provide helicopter services to offshore oilfields in Newfoundland. At the time the agreement was made, CHC International directly owned substantial assets that would be used in the helicopter operations. However, following a restructuring, Cougar asserted its right to terminate the agreement alleging that CHC International had transferred substantially all of its assets.

 

CHC International’s corporate successor, CHC Helicopter LLC, referred the matter to arbitration seated in Vancouver under the CAA. The arbitral tribunal held that Cougar’s purported termination was invalid and that the joint venture agreement remained in force.

 

The Parties’ Positions in the Arbitration

The main issue in the arbitration was whether CHC International’s restructuring triggered the termination clause in the joint venture agreement that provided a party the option to terminate the agreement in the event the other party “sold or transferred all or substantially all of its assets”.

 

The parties differed in their interpretation of “all or substantially all” in the clause although they agreed that the words required a purposive interpretive approach, which included both a quantitative and qualitative analysis of the corporate restructuring. The parties differed on the qualitative effects of the restructuring.

 

The tribunal found in favour of CHC Helicopter LLC, finding that the restructuring was not qualitatively significant.

 

Leave to Appeal

In seeking leave to appeal the arbitral award before the B.C. Supreme Court, Cougar’s main assertion was that the tribunal erred in law in failing to interpret the termination clause in the joint venture agreement in accordance with its plain and ordinary meaning – that CHC International’s restructuring led to a “transfer of all or substantially all of the assets” within the plain and ordinary meaning of the words – as opposed to interpreting it using a purposive approach.

 

The judge accepted that Cougar’s proposed appeal raised an issue of law, and cited B.C case law for the proposition that a failure to apply proper principles of interpretation to the construction of a contract is an error of law. He also found that the criteria for granting leave under Section 31(2)(a) of the CAA, noted above, were met.

 

Although the statutory criteria had been satisfied, the judge declined to exercise his discretion in favour of granting leave. The judge’s primary motivating factor in refusing leave was that Cougar’s proposed argument on appeal would be inconsistent with the argument it advanced in the arbitration.

 

Cougar appealed the trial judge’s refusal of leave to appeal to the B.C. Court of Appeal. Cougar contended that its position regarding the interpretation of the joint venture agreement was not inconsistent but a refinement of its previous position.

 

Potential Subversion of Goals of Arbitration as Ground for Refusing Leave to Appeal

The B.C. Court of Appeal agreed with the judge of first instance that Cougar’s proposed argument on appeal conflicted with its argument before the arbitral tribunal. The Court then considered whether the trial judge erred in treating the change of position as a proper basis on which to refuse leave to appeal.

 

After reviewing the goals of arbitration, the Court of Appeal found that the trial judge did not err and held that “allowing a party to change positions too readily on an arbitration appeal risks subverting the goals of the arbitration process, which is designed to be expeditious and provide finality.” (VIH Aviation Group Ltd. v. CHC Helicopter LLC, 2012 BCCA 125, at para. 48.)

 

 

The affirmation by the B.C. Court of Appeal of the importance of arbitration being expeditious and providing finality is a welcome appellate court policy pronouncement at a time when users of arbitration, arbitral institutions and arbitration practitioners are focused on the importance of controlling the cost and reducing the length of arbitration.

 

 

 

 

 

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Exchanges rates and interest rates are interesting, and important, especially in high-value cases.

So one might suppose that a (nominally) Nigerian company involved in a high-stakes London-based arbitration against the Government of Nigeria, and anticipating that it might seek recognition and enforcement of the award elsewhere than in Nigeria, would have given attention during the arbitration to (i) the proper currency of the award, (ii) the convertibility of the award currency into the currency of the enforcing jurisdiction upon entry of judgment confirming the award, (iii) the relevant reference date for currency conversion and (iv) the applicability of the interest rate utilized in the award to the calculation of post-award/pre-judgment interest.

But that did not occur in the arbitration underlying the latest in a series of decisions from a federal district court in Washington concerning US enforcement of the award. (Continental Transfert Technique Ltd. v. Government of Nigeria, 2012 WL 1005203 (D.D.C. Mar. 27, 2012)).

It appears Claimant did not consider the difficulty in having a US judgment awarding Nigerian currency — equivalent to US $250 million at the award-date exchange rate — until after the US judgment had been entered. Claimant’s problem touched off a dispute over the power of the federal court to provide a solution, either as a clerical correction or substantive amendment of the judgment.

 

The award creditor who has obtained a confirming US judgment may discover only in its dealings with the execution authorities — the US Marshal’s office in the district where assets may be found —   that the Marshal is unwilling or unable to execute the judgment except in the strictest compliance with its terms. The Marshal’s Office is not in the business of making calculations, conversions, or interpretations.  Further, when one arrives at the Marshal’s office with a judgment confirming an arbitral award, the award itself is quite useless. The Marshal is interested only in what the Judgment provides.

In this case the Claimant, presumably upon discovering that the Marshal would not convert Nigerian currency to dollars and select an exchange rate, asked the Court to rectify the matter as correction of a “clerical error” in the Judgment. The Court denied this relief, ruling that at least the reference date for conversion, if not convertibility itself, was a matter of substantive rights not yet adjudicated,  and any change in the Judgment would therefore need to meet the stiffer legal standard for substantively amending it as opposed to clerically correcting it. The Court left open whether amendment could be possible an invited another round of briefs.

One approach used by arbitral tribunals in addressing the conversion issue is to secure to the creditor the amount in the creditor’s national currency that it would have had if the debtor had fully performed its commercial obligation. (See H. Smit, Substance and Procedure in International Arbitration, 65 Tul. L. Rev. 1309 (1991), republished at www.translex.org/128900). One might also suppose that tribunals, extending this practice, would sometimes give their award in a currency in which the debtor ordinarily holds its cash reserves, even if not its own national currency.

In all events there are potentially arbitrable issues of fact regarding the timing of currency conversion, and the creditor who fails to present the issue to the arbitral tribunal bears risk that an enforcing court will only convert the currency as of the date of the judgment confirming the award. (See, in this regard, a brief discussion of exchange rate issues in an article by Noel Matthews, James Nicholson, and Alexandre Riviere of FTI Consulting, titled “Calculating Pre-Judgment Interest,” in Global Arbitration Review’s The European & Middle Eastern Arbitration Review 2012. The authors observe: [F]luctuations in exchange rates may mean that it may make a significant difference to the final sum claimed whether the damages are translated into hard currency at the date of breach, at the then-prevailing exchange rate, at the date of the hearing or award, or periodically as lost cash flows would have been realized.  The determination of which method is appropriate may require a tribunal to take a position on whether the claimant would have translated its losses into hard currency at an earlier or later date.”)

The award creditor in Continental v Nigeria also did not obtain a clear ruling from the arbitral tribunal on the rate applicable to post-award, pre-judgment interest. The stakes are significant, as the tribunal gave pre-award interest at 18 percent, and there have been nearly four years of post-award proceedings in the UK and US courts with more to come.  In the latest decision, the federal court in Washington rejects the notion that its judgment might be “clerically corrected” to apply the pre-award interest rate to the post-award, pre-judgment period.

Arbitration counsel are wise to specify in their submissions to the tribunal that the desired rate of pre-award interest should apply up to the date the award is satisfied. If so stated, a judgment confirming the award, in order to carry out its terms, should provide for pre-judgment interest at the pre-award rate specified by the tribunal.

 

 

The persistent problem of what may be called the “party-disabled arbitrator”  and the resulting “truncated tribunal,” especially in arbitrations involving States, surfaced this month in a federal district court decision from New Orleans.  The party-disabled arbitrator begins the proceedings as the party-appointed arbitrator, but at some point the party determines that its interests are best served by attempting to obstruct the functioning of the tribunal by interfering with the ability of its party-appointee to continue to carry out his or her mandate.  (For a long historical view of the problem, see Judge Stephen Schwebel’s treatment in the 1994 Lord Goff lecture, “The Validity of an Arbitral Award Rendered by a Truncated Tribunal,” reprinted in S. Schwebel, Justice In International Law: Further Selected Writings (Cambridge University Press 2011)).  In First Investment Corp. of the Marshall Islands v. Fujian Mawei Shipbuilding, Ltd., 2012 WL 831536 (E.D. La. Mar. 12, 2012), the US court never reached the merits of the truncated tribunal issue, finding instead that it lacked personal jurisdiction over the Chinese corporate award debtors, and lacked subject matter jurisdiction over the People’s Republic of China. But the court’s opinion provides the background of that issue in considerable detail, and reveals that it was the decision of a PRC court, refusing to confirm the award on the basis that a truncated tribunal lacked power to issue it, that led to this failed effort to have the award confirmed in the US.

The underlying dispute involved a shipbuilding contract between a Marshall Islands entity and two Chinese companies, the first wholly-owned by the PRC, the second wholly-owned by the first. Arbitration was to (and did) take place in London before a three-member tribunal under English law and the arbitration rules of the London Maritime Arbitrators Association (LMAA). Each side appointed an arbitrator — Respondents appointed a PRC national — and the party-appointees jointly selected Professor Martin Hunter to preside.

After the closing of the proceedings and deliberations by e mail, including issuance of a deliberations memorandum by the Respondents’ party-appointee, Professor Hunter circulated a draft award. Respondents’ arbitrator then provided written comments and a draft dissenting opinion. Professor Hunter proposed a deliberations session in London to work out the points of disagreement, and the Respondents’ arbitrator agreed to attend while also stating that he was willing to complete deliberations by e mail. Before the scheduled London session, PRC authorities detained the arbitrator, preventing his attendance and his further participation.  (A case comment on the PRC Court’s decision on the website of a PRC law firm asserts that the detention was for reasons unrelated to the arbitration. See www. Internationallawoffice.com/newsletters/detail.aspx?g=d207afa3). But the US court decision appears to accept the premise that the detention was specifically intended to prevent the arbitrator from participating in the remaining deliberations and issuance of the award.) When it was evident the Respondents’ arbitrator could not participate further, and could neither receive the revised draft of the award nor attend a deliberations session in London, the final award was issued, signed only by Professor Hunter and Claimants’ appointee, and including the detained arbitrator’s dissenting opinion as provided in draft form prior to his detention. Concurrently, the Tribunal acting by majority issued a procedural order explaining its reasons for believing it was empowered to proceed with issuance of the final award, including mention of the fact that the detained arbitrator had expressed willingness to have the award issued without further deliberations if his dissenting opinion were included.

Today this scenario is widely regulated by rule, in the 2010 UNCITRAL Rules and those most major arbitral institutions. But there are considerable variations in conditions and methods, reflecting a lack of consensus on this very delicate issue involving an ostensible collision of fundamental arbitral values. The issue is removed from the discretion of the other two arbitrators by UNCITRAL Rule 14(2)(b) (appointing authority decides), ICC Article 15(5) (ICC Court decides), and Stockholm Chamber of Commerce Article 17(2) (Board of the Arbitration Centre decides).  At the other end of the spectrum, the decision whether to proceed is left to the sole discretion of the other members of the tribunal by ICDR Article 11 and LCIA Article 12.  And the latter rules permit a decision to proceed as a truncated tribunal if the third arbitrator’s failure to participate occurs at any stage – as does the Stockholm Rule – whereas the UNCITRAL and ICC Rule permit authorization for a truncated tribunal to be considered only when the difficulty arises after the closure of the proceedings.   The Singapore International Arbitration Centre rules contain no provision for a truncated tribunal, and instead provide in Article 13.2 that an arbitrator who fails to participate or is prevented from participating shall be challenged, and if the challenge is accepted shall be replaced.

But in the First Investment case, the LMAA arbitration rules had no provision for a truncated tribunal, and the English Arbitration Act of 1996 (as the lex arbitri of this London-venued case) does not address the question. The LMAA Rule reading most closely on the situation stated that “After the appointment of the third arbitrator decisions, orders or awards shall be made by all or a majority of the arbitrators.”   That is to say, neither the rules nor the lex arbitri directly addressed the power of the tribunal to proceed when the participation of a party-appointed arbitrator was evidently interfered with at the behest of the appointing party after the closure of the proceedings but prior to issuance of the award.

Measured against the array of different approaches taken by the leading arbitration rules, and against disparate judicial decisions in different national courts, the decision of the PRC court in the First Investment case, applying the New York Convention to refuse to confirm the +$30 million award on the ground that the procedure had been not in accordance with the agreement of the parties, should not necessarily be seen as an outlier or as a partisan application of the New York Convention in favor of PRC-affiliated entities.

For example, the Swiss Supreme Court in a decision in January 2011 stated the governing principle of Swiss federal law to be that unless the parties have so agreed, upon the (even unjustified) resignation of one member of a three-member tribunal, the remaining two arbitrators have no power to proceed further with the case absent agreement of the parties that they may do so. The Swiss Supreme Court in that case stated however that the rule is different where the arbitrator appointed by a party does not resign but instead without justification refuses to participate, especially in deliberations.  In such case, said the Swiss Supreme Court, the Tribunal remains properly constituted and may proceed to an award, if necessary circulating the draft to the recalcitrant arbitrator to make clear the continued opportunity for that arbitrator to participate. (See Swiss Supreme Court decision of Jan 3, 2011 in Belmonte v. World Anti-Doping Agency et al, English translation published at www.praetor.ch. See also, N. Voser & S. Stark Traber, “Swiss Supreme Court Holds That the Principle of Ne Bis Idem Forms Part of Public Policy,” www.arbitration.practicallaw.com/9-504-9921 (Mar. 2, 2011)) Gary Born in his treatise records that the “predominant response” of international tribunals in cases involving State parties has been to recognize an obligation of the remaining two arbitrators to proceed (G. Born, International Commercial Arbitration (Kluwer 2009), Vol. 1 at 1590) — this however being more an arbitral view of the problem than a consensus view of national courts asked to enforce the awards of such tribunals when they are subject to judicial confirmation. In a 2010 decision, Russia’s highest commercial court set aside award in favor of a Moscow real estate corporation, reasoning that award rendered by two arbitrators more than two months after death of the third constituted breach of the principle of equal treatment of the parties and equal representation in the arbitral tribunal. (See Philipp Peters, “Arbitration Decisions by Truncated Tribunals — An All Time Favorite,” www.Kj-legalcom, Dec. 27, 2010).  But the case of a deceased arbitrator is perhaps distinguishable and not indicative of how that court would have ruled in a case involving unjustified non-participation by an arbitrator that was apparently procured by the appointing party.

The element of the PRC court’s decision in First Investment that may be debated is its interpretation of the factual record. What that court viewed as the election of Professor Hunter and the Claimant’s appointee to proceed with final deliberations as a truncated tribunal, could quite plausibly be viewed as a unexceptional final award by majority issued after completion of deliberations by the full tribunal.  Indeed the procedure followed by the majority after the detention of the Chinese party’s appointed arbitrator hued quite closely to the formula recommended in the Fouchard Gaillard Goldman treatise:

The two remaining arbitrators can circumvent the passivity or obstruction of the first arbitrator and deliberate validly by putting questions to the first arbitrator in writing and by forwarding him or her a draft of the award.  By considering the first arbitrator’s silence to constitute a negative response or disagreement, the award can be made by a majority decision of the two remaining arbitrators, without infringing the requirement for collegial deliberation.

 

(P. Fouchard, E. Gaillard, B. Goldman, International Commercial Arbitration (Gaillard & Savage, eds.) (Kluwer 1999), § 1136 at 616).

An arbitral tribunal that follows this prescription should not often be condemning the prevailing party to an enforcement morass. Indeed the Respondents in the case under discussion apparently were sufficiently confident that Professor Hunter’s chosen course would be sustained by the UK courts that they elected not to seek vacatur of the award. Of course a tribunal would be wise first to elicit the comments of the parties — and the US federal court decision in First Investment indicates that Professor Hunter and his colleague did so. The party comments so elicited might in some cases reveal that the party expecting to prevail would prefer the appointment of a replacement arbitrator even considering the attendant delay and cost. Such a response might be forthcoming especially where the applicable rules or governing arbitration law provide (i) for institutional- or appointing authority-appointment of the replacement arbitrator, and (ii) for the reconstituted tribunal to have discretion to move forward without repeating proceedings.

Should a US court ever face this issue in an enforcement or vacatur context, perhaps a rather straightforward common law contract analysis could lead to a satisfactory solution. Each arbitrator is contractually bound to the parties and to the appointing institution or authority to serve and participate fully in the work of the tribunal up to the issuance of the final award. The failure to do so, whether by resignation or by failure of participation, unless legally justified, is a breach of contract. The breach being one that causes irreparable injury, i.e. injury that cannot be measured or adequately remedied by money damages, it should be the subject of an equitable remedy. Specifically the purported resignation or non-participation should not be recognized as a lawful withdrawal from the Tribunal, and the further actions of the Tribunal taken by majority — provided that the applicable rules permit decisions, awards, and orders by majority — should be seen as actions of the full tribunal deciding by majority vote, not actions of a truncated tribunal, unless the recalcitrant arbitrator is deprived of the opportunity to participate in those actions by the procedures adopted by the majority.

Sound reasons of policy and principles of international law support this approach, but the contractual approach has the advantage of avoiding judicial adoption of a rule of decision based on sources that may themselves generate controversy in a US judicial forum. In regard to policy, I refer to Judge Schwebel’s report of the position taken by the ICC Court of Arbitration in Case No. 5017 (1987), Ivan Milutinovic PIM v. Deutsche Babcock AG. (See S. Schwebel, “The Authority of a Truncated Tribunal,” reprinted in S. Schwebel, Justice in International Law: Further Selected Writings (Cambridge University Press 2011)).  When a party-appointed arbitrator in that case withdrew at a late stage of the hearings, the ICC Court refused to accept the purported resignation and declared that the withdrawing arbitrator was obliged to continue. The final award in that case, which included fully reasoned support for the conclusion that the tribunal had power to adjudicate, was accepted by the ICC Court. Notably, the award expressed that it is “‘more and more accepted that in international commercial arbitration the possibility of delaying tactics is a serious concern and the elimination of these effects a primary task of all involved.'” The Swiss Federal Tribunal ultimately sustained vacatur of the award — an outcome Judge Schwebel terms “calamitous” and “inconsonant with the principle that a party may not invoke its own wrong — or a wrong that it adopts as its own — to deprive another party of its rights.”  As we have seen above, the Swiss Supreme Court in 2011 identified the distinction in earlier Swiss case law between the resignation of the arbitrator (requiring replacement) and the willful unjustified nonparticipation (permitting the remaining arbitrators to proceed).

It may be inferred that under Swiss contract law it was deemed not possible or not appropriate to treat the arbitrator’s purported resignation as ineffective to terminate his or her mandate and to de-constitute the tribunal.   But under the common law of contracts of most US states and “federal common law,” there is ample support for the view that the purported termination of a contract without just cause is legally ineffective if there would be no adequate remedy at law for the contractual breach. More ambitiously, US courts might derive from international arbitral case law (notably decisions of the Iran-United States Claims Tribunal, and the seminal award in Himpurna California Energy Ltd. v. Republic of Indonesia, Final Award of Oct. 16, 1999 reprinted in 15 Mealey’s International Arbitration Report (Feb. 2000)) a rule of customary international law that a party that has consented to an international adjudicatory proceeding cannot take actions calculated to frustrate the agreed process, and if it does so by preventing its own party-appointing arbitrator from functioning, may not be heard to complain that the award rendered by the remaining arbitrators is not in accordance with the agreement of the parties.  And that rule might translate into a New York Convention rule of “unclean hands,” preventing the offending party from invoking an Article V defense to enforcement of the award where the opportunity for the defense to be asserted arises from the invoking party’s own unlawful conduct. The difficulty with such a rule in practice, however, is that its application should not occur except upon detailed findings of fact, upon a full evidentiary record, concerning the culpability of the party in the interference with its appointed arbitrator.  The contractual approach both absolves the US court of the need to make judgments about the conduct of parties who often will be, or will be owned or controlled by, foreign States, and permits the US court to conduct a streamlined summary confirmation proceeding in accordance with the intent of Congress in the enactment of the implementing legislation for the New York Convention.  

 

Each time a US court declines to entertain a petition to confirm a foreign arbitration award, there are at least two questions that we as practitioners in the field should ask: (1) Was the Court’s decision correct?; and (2) What lessons can we learn from the experiences of the parties that we can use as arbitrators or as counsel?  Last week a Federal District Court in New Orleans denied the petition of a group of American companies to obtain confirmation of an award made in consolidated London arbitration proceedings against a shipbuilding firm domiciled in China.  The Court held that it lacked personal jurisdiction over the Chinese Respondent.  [In re Arbitration Act of 1996 (Covington Marine Corp. v.  Xiamen Shipbuilding Industry Co.), 2012 WL 876240 (E.D. La. Mar. 14, 2012)]

It is no longer controversial that a US court must have personal jurisdiction over the award debtor as a pre-condition to recognition and enforcement of an award under the New York Convention and FAA Chapter Two.  (See in this regard Section 4-27 of the Restatement (Third) of the  US Law of  International Commercial Arbitration and the Reporters’ Notes to that Section). In this case, the award creditor named the People’s Republic of China (PRC) as a Respondent in the confirmation case, although the PRC had not been a party to the underlying arbitration (or the merits appeal of the initial award to the High Court in London, or the proceedings on remand before the arbitral tribunal after the High Court rejected the original award’s merits conclusions), and alleged that the award debtor was an agency and instrumentality of the PRC.  Had this argument succeeded, personal jurisdiction over the award creditor itself would have become irrelevant, as US decisions hold that foreign States are not “persons” entitled to the protections of due process clauses of the US Constitution.

But in an order preceding this decision, the federal district court  in New Orleans had held that the allegations that the PRC dominated and controlled the award debtor such that it was an agency of the PRC had not been established, and dismissed the action as against the PRC.  The award creditor was left to establish personal jurisdiction based only on the award debtor’s contacts with the forum (or at least with the United States), and was unable to establish any – including offering no evidence to support its pleaded allegation that the award debtor had or would in the future have property in the jurisdiction of the district court.

The lessons to be learned from this?  One wonders what was the intended enforcement strategy of the Claimants at the time they commenced the arbitrations.  The Respondent was a shipbuilding company in the PRC, and on the surface would seem to have been unlikely to have significant assets outside the PRC.  Would it not have been preferable to name the PRC as a Respondent in the arbitration – while reserving the position that it while the arbitral tribunal could provisionally decide upon its jurisdiction over then non-signatory, it would ultimately be for an enforcing court to decide that matter? Alternatively, would it not have been useful to take advantage of Article 32 of the UK Arbitration Act of 1996 – which allows a party to obtain a court adjudication of a preliminary point of jurisdiction in a pending arbitration, either upon agreement of the parties, or with permission of the arbitral tribunal and the Court if it is satisfied that substantial time and costs could be saved in the arbitration by making the preliminary ruling? 

By seeking determination of the PRC’s status from the arbitral tribunal or from a court at the seat as a preliminary matter, one would think Claimants chances of having a more fulsome factual inquiry into the Respondent’s relationships with the PRC would have been enhanced. There is no indication in the US court’s decision that the Claimants as award creditors sought discovery on the question of whether Respondent was indeed a PRC state-controlled entity. But a confirmation proceeding in a US court is intended to be a summary proceeding, and a federal district judge may be understandably reluctant to transform what should be a routine confirmation case into a jurisdiction mini-trial, and to order a foreign-based award debtor, with no evident connections to the forum, to produce evidence in a foreign language, with the necessary costly translations, concerning its alleged relationship with the foreign Sovereign. (The burdens of making such an inquiry moved the Second Circuit in the much-discussed Monegasque case to sustain dismissal of a confirmation case based on forum non conveniens so that a court in the Ukraine would determine the relationship between the award debtor and the Government of Ukraine. In that case also, the State’s liability to satisfy the award was raised for the first time at the confirmation stage).

And what might an arbitral institutions and tribunals do to manage this problem? One might hope that the issue of joinder of additional parties would be systematically raised by the administering institutions in communications with the parties prior to the formation of the arbitral tribunal – perhaps with appropriate mention of the difficulties that might attend the joinder of parties after formation of the tribunal in view of their non-participation in the selection of the tribunal. Arbitral tribunals might also systematically raise the additional party joinder issue in preliminary conference hearings, while being mindful that the applicable rules or arbitration law may confine or eliminate the power of the tribunal to join new parties absent consent of all the existing parties.

It seems trite to say that all participants in the arbitral process should work towards the eventual enforceability of the award, including its execution if necessary against property that legally should be subject to application for that purpose. But if the “where is the money?” question were systematically on the pre-arbitral agendas of all the players, perhaps disappointing outcomes (from a prevailing Claimants’ perspective) like the one in this recent case from New Orleans would more often be avoided.    

 

 

 

For those whose careers in international arbitration have origins connected to the Iran-US Claims Tribunal (Tribunal) — and I am one of many — yesterday’s decision by the federal court of appeals in Washington, allowing a US company to recover damages for expropriation from the Islamic Republic of Iran under the 1955 US-Iran Treaty of Amity, as interpreted under Iranian law, resonates like a fondly-remembered ballad from the American Songbook. (McKesson Corp. v. Islamic Republic of Iran, 2012 WL 615831 (D.C. Cir. Feb. 28, 2012)). I leave it to others to consider the potential for future US litigation against Iran under this venerable treaty, and for the bearing of a heavier jurisdictional burden by the Foreign Sovereign Immunities Act (FSIA), should Iran in the future take measures against US investors and investments. And I invite readers to read more elsewhere about the Court’s necessary and important preliminary holding that the “Act of State” doctrine did not shield Iran from US jurisdiction where its conduct, distinctly non-sovereign in the Court’s view, consisted of the takeover of the board of directors of a private company and the subsequent making of corporate governance decisions about dividends to the US shareholder.

Instead I will focus this post on the Court’s holding that the FSIA provides no basis for an implied cause of action based on violations of customary international law.

To summarize the case’s background very briefly: McKesson since 1960 had been in a joint venture with private parties in Iran in the dairy business. After the Islamic Revolution of 1979, the Islamic Republic took over the joint venture’s Board of Directors and effectively froze out McKesson. But in its claim in the Iran-US Claims Tribunal, the Tribunal held that the expropriation of McKesson’s property rights in the joint venture did not culminate until after the outside date (provided in the formative Algiers Accords) for actions taken by the Islamic Republic to be within the subject matter jurisdiction of the Tribunal. Thus McKesson achieved only a limited recovery in the Tribunal and, after the Tribunal’s final award, revived in federal court case against Iran. After more than 25 years of litigation since this revival of suit in 1986, and after four prior trips to the DC Circuit, McKesson obtained a final judgment from the district court for expropriation damages in excess of $43 million.

The important element of the DC Circuit’s decision that I highlight here is its ruling that no implied federal judicial cause of action for expropriation arises from customary international law or the FSIA.  The consequences of that ruling, which reverses the order of the district court, are considerable. Had the Court accepted the position of the district court that a right to sue for expropriation compensation is implicit in the certain exceptions to sovereign immunity under the FSIA, an area of international investment law essentially regulated by treaties and through arbitrations would have found a new domain in the federal court system.  This would have expanded the potential for investment claim litigation against foreign states with which the US does not have investment treaties.  Further, US investors with investment claims against State parties to investment treaties with the US that provide for arbitration might have brought lawsuits instead, thus raising the question of the exclusivity or arbitration under the treaties.

But it was not to be. The DC Circuit disagreed with the district court’s view that the FSIA was, like the Alien Tort Statute (ATS), not exclusively a jurisdiction-conferring statute but also one that provides a substantive cause of action for redress of a limited number of violations of customary international law.

In this regard the appellate court cited Supreme Court and federal circuit cases (its own and the 9th Circuit) for the position that the FSIA is “purely jurisdictional,” and found no evidence that Congress in enacting the commercial activity exception to sovereign immunity intended that the FSIA would also serve as a source of substantive rights. The ATS, the Court observed, was enacted against a very different practical backdrop — i.e. Congress’s desire to facilitate certain substantive causes of action such as tort claims by ambassadors — whereas the FSIA was enacted one year after the Supreme Court had (in Cort v. Ash) “signaled its reluctance to imply causes of action when faced with statutory silence.”

The Court also observed that given the substantial judicial discretion involved in fashioning common law causes of action from customary international law norms, it was strongly disinclined to allow the use of such discretion in regard to claims against foreign States — a matter in the Court’s view that is better left to Congress in view of the potential impact on foreign relations.

So expropriation and other international-law based property claims against foreign sovereigns will, for US investors, remain almost entirely in the domain of treaty-based arbitration. It is this road-not-taken, rather than the Court’s recognizing of a cause of action for the Plaintiff based on an old treaty interpreted under Iranian law, that should be of greatest interest to US foreign investors and their counsel.