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.

1999 was not so very long ago. And over the last dozen years some areas of the law have necessarily moved rapidly to keep pace with developments in technology and their impact on how business is conducted.  That has not necessarily been the case in every corner of the law of international commercial arbitration.

 Until a few weeks ago, counsel looking for guidance in US law on the “agreement in writing” requirement of the New York Convention could read, unhelpfully, a 1999 decision of the US Second Circuit Court of Appeals in Kahn Lucas Lancaster, Inc. v. Lark International, Ltd., 186 F.3d 210 (2d Cir. 1999). That case dated from an era in which international contracting often involved use of the fax machine – e mail was mostly with us, but transmission of sizeable documents via e mail in digitally compressed scanned electronic files was not.

The Court in Kahn Lucas held that the phrase “signed by the parties or contained in an exchange of letters or telegrams” (Convention Art. II) stated a condition for an enforceable agreement to arbitrate under the Convention, whether the agreement was based on (in the Convention’s words) “an arbitral clause in a contract” or a separate “arbitration agreement.” There was no enforceable agreement to arbitrate, the Kahn Lucas court held, because the arbitration clause in the buyer’s purchase order was not signed by the seller nor was it adopted by the seller in an exchange of letters or telegrams – notwithstanding that the parties did enter into a contract for the sale of goods.

But until this year, there was little guidance to the application of  the “agreement in writing” requirement to the contracting methods characteristic of contemporary international goods and commodities procurement – typically involving innumerable e mail exchanges, PDFs of contracts, e-mailed expressions of assent in lieu of signatures,  e-mailed amendments and counteroffers, and – notably in both cases discussed below – sellers’ “General Terms and Conditions” that, because they contain formal legal detail rather than commercial terms, often receive little or no direct attention in the e mail exchanges. 

Glencore Ltd. v. Degussa Engineered Carbons L.P., 2012 WL 223240 (S.D.N.Y. Jan. 24, 2012)

In Glencore v Degussa, the contract, made by email, was for sale and delivery of feedstock oil at the buyer’s Texas and Louisiana chemical plants. The buyer and its insurer brought suit in a Texas court claiming damages resulting for oil deliveries that did not meet specifications. Seller Glencore (a Swiss company) commenced arbitration on the same claims, against the buyer and insurer, relying on a provision in its “General Terms and Conditions” for AAA arbitration in New York.  Buyer and insurer refused to participate in the arbitration or to withdraw the court action, and Glencore petitioned to compel arbitration.

The question presented was whether the Glencore General Terms and Conditions (“GTCs”), seen by buyer only in late stages of the negotiations and received without comment, nevertheless were part of an “agreement in writing” between the Parties by virtue of the sequence and content of their e mail exchanges. The Court held that this was indeed the case, and granted the motion to compel arbitration.

Glencore had sent its standard sales contract by e mail. It did not include the GTCs but rather only a reference to them. The contract stated that the GTCs would govern, and that if this was contrary to buyer’s understanding then buyer should respond immediately by fax with specific points of disagreement. Buyer did not so, but instead two weeks later after Christmas-New Year holidays replied by e mail asking Glencore for only one change: to state its corporate name accurately. In ensuing e mail exchanges, Buyer asked for and received the GTCs, and did not comment.

Additional contracts were made for feedstock oil supply for ensuing calendar quarters. The contract process followed the same pattern: after delivery of seller’s standard contract, buyer requested minor changes, none of which referenced the GTCs.

The District Court considered that there were two separate analytical steps concerning formation of the arbitration agreement. First, there needs to be contract formation “under ordinary state law contract principles.” (The quotation comes from First Options v Kaplan, a domestic arbitration case, and so in its original context it refers to the applicable law of a state of the United States. But if the parties have different nationalities, this could readily mean the applicable contract law of a foreign State). Second, if there is an arbitration contract, it must in addition satisfy the “agreement in writing” requirement of the New York Convention.

As to the first, “state law,” contract inquiry, the Court found an agreement to arbitrate on two different theories — each under Texas’s version of the Uniform Commercial Code (“UCC”), which it found applicable based on a traditional grouping of contacts choice of law approach. Under the UCC, the buyer had objectively manifested its assent to the seller’s contract including the General Terms. Alternatively, under UCC §2-207(2) which concerns proposed additional terms to an existing contract between merchants, the arbitration clause became part of the contract because it did not “materially alter” the commercial agreement — under a legal standard that treats as a “material alteration” a term that would “impose surprise or hardship” were it included in the contract without having been specifically discussed.

Turning next to the question whether the Convention’s “agreement in writing” requirement was satisfied, the Court first observed that this requirement imposes a more stringent test that the UCC standards of contract formation. To illustrate this point, the Court noted that incorporation of additional terms under UCC 2-207(2) is essentially presumptive absent special circumstances, and that the presumptive inclusion does not satisfy the Convention’s alternative criteria of signature of “an exchange of letters of telegrams.”

Here, the Court held, the “exchange” requirement of the Convention was satisfied because the arbitration clause was incorporated by reference in the contract when it was sent, the buyer replied asking for other changes but not mentioning the GTCs, the buyer further confirmed that the seller’s contract was the agreement by referring to it as such in e mail communications about its parent company’s payment guaranty, and, finally, there was a specific request for delivery of the GTCs and delivery of same followed by no comment and contract discussions for new contracts in subsequent calendar quarters.

Copape Produtos de Petroleo Ltda. v. Glencore Ltd., 2012 WL 398596 (S.D.N.Y. Feb. 8, 2012)

Copape v Glencore involved some different twists in the contract negotiations, and ultimately some differences in the Court’s approach (which notably included no reference to the Glencore-Degussa decision). Here the buyer was a Brazilian company that contracted with Glencore in Brazil through a Glencore affilate in Brazil.  The contract at issue was the fifth between the parties, and in each of the four prior contract negotiations by e mail Glencore had sent it standard contract referencing the Glencore GTCs, without buyer ever requesting a copy. The fifth contract’s negotiation began with an indicative offer by Glencore that referenced its standard contract.  The buyer replied that the contract would be governed only by the Glencore GTCs insofar as buyer specifically approved them. As the exchange of e mails t progressed, Glencore eventually sent the standard contract that referenced its GTCs. But buyer never requested a copy of the GTCs, and in the final exChange of e mails Glencore wrote “Other terms and conditions remain unchanged” and buyer replied “OK.”

After buyer allegedly breached the contract, buyer commenced suit in Brazil. Glencore commenced an ICDR arbitration, buyer moved in federal court in New York to enjoin the arbitration, and Glencore cross-moved to compel arbitration.

In contrast to the two-level approach taken in Glencore-DeGussa, the distrIct court in Glencore-Copape considered that, even though jurisdiction was based on the New York Convention,  the court was presented with only “a single question — whether Copape ever became bound by the arbitration clause…” and that the law governing this question was “the federal law of arbitrability,” law which the court said includes “general principles of contract law including the Uniform Commercial Code.”

This brought into play, as in Glencore-Degussa, Section 2-207(2) of the UCC.

As we have seen, the approach of that Section is to avoid having an acceptance that contains proposed additional terms operate as a counter-offer only. And it further provides for presumptive incorporation of the proposed additional terms unless the party who made the original offer shows that one of three situations exist: the offer strictly prohibited additional terms, or the additional terms make a material alteration, or objection to the added terms is made within a reasonable time.

Thus an arbitration clause could readily become binding under the UCC without either the signature or the “exchange of letters or telegrams” required by the New York Convention. If the clause is contained in a set of proposed additional terms, and no timely objection is made in response, the UCC recognizes the silence as acquiescence, while the Convention evidently does not.

Whereas the court in Glencore-Copape did not discuss the potential divergence between UCC and Convention criteria for a binding agreement to arbitrate, it is helpful to note that the further e mails dispatched by Copape with reference to Glencore’s GTCs would appear to satisfy the “exchange” requirement of the Convention. Critically: (i) Copape raised objections to certain other provisions of the Glencore standard contract but did not object to the provision incorporating by reference the GTCs; (ii) when Glencore e mailed what were intended at the time as final commercial terms, it wrote “other terms and conditions remain unchanged” and asked Copape to “reconfirm by return,” and (iii) Copape replied “OK.”.  And while the court states that this would have been sufficient to find a duty to arbitrate, the court then noted that after further exchanges about business terms and timing, Glencore revised and re-sent the standard contract and Copape confirmed acceptance of it (presumably be e mail).

Although the Glencore-Copape decision, unlike Glencore-DeGussa, fails to take note of the Convention’s “agreement in writing” requirement as a separate and distinct prerequisite to finding an enforceable agreement to arbitrate in a case falling under the New York Convention, Copape does not in the final analysis stretch the limits of “exchange of letters or telegrams” to include the kind of silent acquiescence/contract by estoppel that is permitted by UCC 2-207(2).  This is simply a case of incorporation of the arbitration clause by reference to General Terms and Conditions, with a responsive e mail expressly accepting the contract that references the General Terms, among which is the agreement to arbitrate that the buyer could have, but elected not to, become specifically aware of.

Concluding Remarks

It is evident from the two decisions that the Convention’s requirement that the arbitration agreement be “contained in” a written exchange, as understood in New York federal courts, does not require that arbitration be mentioned in the communications, but only that arbitration be part of the documentation referenced in the communication. What is however troublesome in the Glencore-Copape decision is that it may be read to imply that in a US federal court the “agreement in writing” requirement presents an issue of federal common law of contracts derived from uniform state law, i.e. the UCC. That should not be the case. The Convention’s “agreement in writing” requirement, and the term “contained in an exchange of letters or telegrams,” as treaty language, should have a uniform  whas applied to particular facts, using established principles of treaty interpretation, and taking into consideration decisions of foreign and international tribunals, the opinions of leading commentators, and transnational sources of commercial principles.

An examination of the “agreement in writing” requirement under such transnational principles is beyond the modest scope of the post.  But US courts should not fail to consider them. There is no indication in the New York Convention that Contracting States are meant to reference only their own domestic law of contractual consent when deciding whether an “agreement in writing” to arbitrate exists in proceedings to compel arbitration.

A tale from the Second Circuit: Two reinsurance executives regularly sitting as arbitrators were appointed, respectively, as party-appointed arbitrator and “umpire” (presiding arbitrator) in a reinsurance arbitration. While the case was pending but before the hearing, the same individuals were appointed, again as party-appointed arbitrator and umpire, in a second arbitration that bore certain relationships to the first. There was a similar but not identical issue of contract interpretation. There was a common witness whose testimony was important in each case. And there was a business connection, essentially successorship, between Claimant in Arbitration 1 and Respondent in Arbitration 2. These arbitrators elected not to disclose their appointments in Arbitration 2 to the parties in Arbitration 1.

After the Award in Arbitration 1, the loser learned of Arbitration 2, moved to vacate the award in a New York federal district court based on “evident partiality,” (FAA Section 10(a)(2)), and obtained the vacatur order. But last week, the US Second Circuit Court of Appeals reversed, holding that “evident partiality” depends upon objective evidence of bias, and that there no such evidence on the facts of this case. (Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 2012 WL 335772 (2d Cir. Feb. 3, 2012)).

The Second Circuit declined to adopt any particular criteria by which to evaluate allegations of bias. But the Court did find “useful,” but not “mandatory, exclusive, or dispositive” considerations such as

(1) the extent and character of the personal interest,pecuniary or otherwise, of the arbitrator in the proceedings; (2) the directness of the relationship between the arbitrator and the party he is alleged to favor; (3) the connection of that relationship to the arbitrator; and (4) the proximity in time between the relationship and the arbitration proceeding.”

However the Court did fashion a legal standard of sorts that will probably be cited often, stating: “[A] court must focus on the question of how strongly the relationship tends to indicate the possibility of bias in favor or against one party, and not how closely that relationship appears to relate to the facts of the arbitration.”

The Second Circuit framed the question presented as whether “the failure of two arbitrators to disclose their concurrent service as arbitrators in another, arguably similar, arbitration constitutes ‘evident partiality’ ….”, But the Court devoted relatively sparse attention to the implications of the commonalities between the cases. And one might have hoped for a more searching discussion of the ways in which pre-disposition to particular result, formed in an undisclosed second arbitration, might possibly constitute evidence of bias.

While essentially accepting the Distirct Court’s view of the relatedness of the two arbitrations, the Court observed that “the fact that one arbitration resembles another in some respects does not suggest to us that an arbitrator presiding in both is somehow therefore likely to be biased in favor of or against a party. And in support of this position the Court cites “Cf.” (i.e. by analogy) a remark of US Supreme Court Justice Anthony Kennedy to the effect that “the fact that the same judge presides over related cases ordinarily does not suggest that judge is biased.”

But the Court did not address or even acknowledge the imperfections in extending that analogy to commercial arbitration.

Suppose US District Judge X was presiding over multiple related but unconsolidated cases involving the same Ponzi scheme, and in each case was hearing claims of different investors, against the same investment manager, concerning that investment manager’s due diligence in regard to the same investment vehicle. Most observers would presumably agree there is no issue of judicial bias and no issue of procedural unfairness. The fact that the judge will, in each case before her, be influenced by evidence and legal argument in each of the cases is a known and assumed systemic risk of litigation. But that risk is offset by the public nature of federal court litigation, including full electronic access to the dockets in each case. Competent counsel may monitor the progress of each case and, indeed, by judicial process may obtain the evidence in the related cases, and have adequate opportunity to credit or discredit that evidence.

The privacy of related commercial arbitrations results in an entirely different dynamic. If not made aware of a pending related proceeding before the same arbitral tribunal, or one or more arbitrators in common to the two separate tribunals, a party is in no position even to assess the risk of that the arbitrators will develop a pre-disposition in the course of Arbitration 2 on issues central to resolution of Arbitration 1. 

Does this mean that the Second Circuit came to the wrong conclusion in Scandinavian Re? Not necessarily, especially under existing American law.

The American law concept of “evident partiality” is mainly albeit not exclusively focused on the relationships, personal and economic, between the arbitrator and the parties or their counsel. The Federal Arbitration Act does not distinguish, as international arbitration rules do, between “independence” and “impartiality.” Lack of impartiality, as it is widely understood under international arbitration rules, and in international arbitral practice, would include, for example, an arbitrator forming a judgment on crucial issues based upon her own fact investigation or her own legal research – especially if the results of such investigation or research are not disclosed to the parties during the proceedings so that they have an adequate opportunity for comments.

The arbitrator who fails to disclose her appointment in related Arbitration 2 to the parties in Arbitration 1 does not reveal any bias by the omission, but she does fail to alert the parties to the risk that an issue will be pre-judged by her and that she will seek to influence her fellow arbitrators in Arbitration 1 based on what she heard and read in Arbitration 2. Assuming Arbitration 2 is a private proceeding, the parties in Arbitration 1 proceed in ignorance of the fact that probative evidence and/or relevant legal argument is being presented to a member of the tribunal (or in the Scandinavian Re case, two members) in another case.  If the arbitrator, acting in an unbiased fashion in Arbitration 2, is persuaded by the evidence, legal argument, or witness credibility of a party positionally aligned with a party in Arbitration 1, the arbitrator has an undisclosed pre-disposition.  The election not to disclose the pre-disposition, prior to the award in Arbitration 1, implies that the arbitrator intends to deprive the party in Arbitration 1 who is disadvantaged by the pre-disposition of the ability to effectively persuade that arbitrator and the other members of the tribunal to adopt the opposite view. The arbitrator who in this fashion covertly subverts the what may be called the transparency of the arbitral decision process —  i.e. the  shared but often unstated assumptions that the tribunal will render its decision based on the record developed by the parties — may, on this view, be found to have been “evidently partial” if the undisclosed pre-disposition relates to a material matter.

Last year Chevron, as judgment debtor for a $17.2 billion environmental damages judgment issued by an Ecuador court, convinced a US district judge in New York to issue a global anti-enforcement injunction preventing the Ecuadorean parties from seeking enforcement of that judgment anywhere.  Late last year the US Second Circuit Court of Appeals issued an order vacating that injunction, but its written opinion, explaining why the injunction was improper, was not issued until now.

As you will see

http://www.ca2.uscourts.gov/decisions/isysquery/83c7e33b-75ca-4735-acec-95593be09f03/2/doc/11-1150_op.pdf

, the Court states that New York’s statute providing for recognition of foreign country money judgments cannot be invoked affirmatively by the judgment debtor to prevent the foreign judgment creditor from seeking enforcement of the judgment, whether in New York or elsewhere.  The Court’s position is that, under New York’s statute, the judgment debtor may only raise issues of unfairness, lack of due process, fraud, corruption, etc., in regard to the judgment-issuing court, as a defense to enforcement in New York – if and when the judgment creditor seeks enforcement of the judgment in New York.

What will be the next chapter in the Chevron-Lago Agrio saga is unclear.  This opinion reports that on January 3, 2012, the intermediate appellate court in Ecuador rejected Chevron’s appeal of the judgment, that as a consequence the judgment is now enforceable, but that if Chevron elects to appeal to Ecuador’s highest court, that court could possibly grant a stay of enforcement, subject to the posting of a bond by Chevron.

Chevron presumably is considering whether a hospitable forum other than the US exists in which Chevron could obtain personal jurisdiction over some of the judgment creditor parties, and persuade the court to consider the enforceability of the judgment – and hence address the merits of Chevron’s attacks on the integrity of the Ecuador trial court proceedings – before any of the judgment creditors have initiated an enforcement case in that forum.  The findings of fact made by the US District Court concerning the unfairness of the Ecuador court proceedings have presumably lost any potential collateral estoppel effect in view of the entire vacatur of the district court’s judgment. Those findings were made in regard to the probablility-of-success branch of the US courts’ traditional preliminary injunction formula. But the Second Circuit has ruled that the district court had no legal basis to engage in such analysis, as injunctive relief was not in any case available under the foreign money judgments recognition statute of New York.  

Chevron presumably is also considering the relationship between potential enforcement proceedings and its pending BIT arbitration against Ecuador, in which Chevron claims that the judicial proceedings leading to the judgment violated (inter alia) its right to fair and equitable treatment. Chevron could take the position, in any court where recognition and enforcement is sought, that proceedings should be stayed for a period of time to permit the BIT arbitration to be concluded, and that the BIT arbitration is the most appropriate forum for an adjudication of the fairness of the Ecuadorean judicial process.

In that event, one would suppose Chevron would invite the court seised of the enforcement case to draw an analogy to Article V(1)(e) of the New York Convention, which permits a court to stay recognition and enforcement proceedings in regard to a foreign arbitration award if there are pending proceedings to set aside the award in a court at the seat of arbitration (or in the State whose arbitration procedural law governed).  The analogy is imperfect of course, as the Lago Agrio judgment creditors presumably would not be collaterally estopped by any conclusions drawn against Ecuador in the BIT case.   But if Chevron prevails in the BIT case, then under what US lawyers would regard as subrogation principles, Ecuador would in effect be the judgment debtor of the Lago Agrio plaintiffs.