Arbitration Commentaries has written on more than one occasion on the question, not consistently decided in the US courts, of whether the Federal Arbitration Act (“FAA”) provides authority for a federal court to enjoin a pending arbitration. In a significant recent decision, the US Second Circuit Court of Appeals affirmed a District Court’s order enjoining an arbitration, but did so based on analysis that clearly stops short of saying that an action to enjoin arbitration is an implied cause of action conferred by the FAA. (In Re American Express Financial Advisors Securities Litigation, 2011 WL 5222784 (2d Cir. Nov. 3, 2011)).

There is certainly clear logic to the position that if arbitration is a matter of contract, the federal courts should have authority to enforce the arbitration agreement where it exists, is valid, and covers the dispute, and also the power to prevent an illegitimate arbitration where the agreement does not exist, or is invalid, or does not cover the dispute.   

But if an implied cause of action to enjoin arbitration is to be found in the FAA – that is to say if the FAA is to be the source of judicial power to enjoin arbitration — courts should be fully satisfied that Congress’s intent to encourage arbitration as an alternative to litigation will be advanced by recognizing such a right of action. But it is arguably true that in the situations in which injunctive relief to stay a pending arbitration would be most often sought, there might indeed be more interference with arbitration than advancement of it, if such a cause of action based on the FAA were recognized.

Consider first a domestic arbitration between two New York companies, commenced through the New York office of the AAA.  Respondent claims the arbitration clause was revoked when the parties signed another contract with no arbitration clause. Respondent brings an action in New York state court to enjoin the arbitration, and obtains an ex parte temporary restraining order, which the Respondent then serves on the AAA together with a letter asking the AAA to suspend the arbitrator selection process. (The TRO is sought on the basis of the FAA, not New York arbitration law. New York’s CPLR Article 7503 authorizes an action to stay arbitration but only on the ground that no valid arbitration agreement was made, or that the cause of action is time-barred.  Thus in our hypothesis an injunction under CPLR 7503 is not available).  The AAA elects to respect the Court’s order. The Movant asks the New York judge for discovery in advance of an evidentiary hearing. The request is granted; the hearing is held; and seven weeks after the hearing the Court issues its decision denying the injunction motion. Four months have elapsed from the filing of the Request for Arbitration.

Consider next how an arbitrability contest in an international dispute might play out, if the party disputing arbitrability could rely on the FAA as a basis to ask a court to enjoin a newly-filed arbitration. Korean company X files an ICC arbitration against New York company Y. The arbitration clause relied upon provides for ICC arbitration in New York. Respondent contends that it is a successor to the signatory of the contract and that it never agreed to arbitration. Respondent files an action to enjoin arbitration in the Southern District of New York and obtains a TRO. The ICC declines to halt the case; Respondent files its Answer and names an arbitrator; the ICC appoints a Chair; and the Respondent in the first procedural conference asks the Tribunal to stay the case until the New York court decides arbitrability. The Tribunal reluctantly agrees. Respondent moves in the Southern District to have claimant held in contempt for violating the the TRO. After discovery and an evidentiary hearing, the Court dissolves the TRO, denies the injunction, and denies the contempt motion. The arbitration is delayed four months.

In both situations, Respondent had two other options to contest arbitrability. Respondent could have raised a jurisdiction objection in the arbitral proceedings, at the case-intake stage with the administering institution and thereafter with the tribunal. The applicable rules in each case provided that the tribunal has power to decide issues of its own jurisdiction. Respondent, in addition or alternatively, could have filed a state or federal court complaint seeking relief on the merits of the dispute, forcing Claimant to respond with a motion to compel arbitration.  Both of these options promote the arbitration system effectively while permitting an arbitrability challenge to be resolved well before the arbitration reaches the merits. If the injunction option based only on the FAA is unavailable, Respondents will often be reluctant to invest the effort required to present a merits lawsuit to a court. Respondents’ objectives often will be to scuttle the Claimant’s arbitration claim, not to force the merits dispute into a judicial forum. On balance, then, by declining to find an implied power to enjoin arbitration in the FAA itself, courts would promote the doctrine of compétence-compétence, because tactical considerations will motivate Respondents more often than not to lodge jurisdictional objections within the arbitral process.

The in terrorem effect on Claimants of temporary restraining orders provides another reason to disfavor the position that the FAA authorizes an order enjoining arbitration. A Claimant with a good faith belief that it has an arbitrable claim should not be forced to stand down from its claim temporarily or risk a citation for civil contempt. Faced with that calculus, even Claimants who are likely to succeed on arbitrability will usually err on the side of caution to avoid contempt of court. Permitting injunction orders under the FAA therefore would tend, on balance, to inject significant delay into proceedings that ultimately will be resolved in arbitration. The quantum of properly avoided arbitral proceedings, on the other hand, is not likely to be much greater under a regime of judicial injunctions, rather than a regime where Respondent must either pursue the objection in the arbitration or file a merits lawsuit.

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This brings us to a discussion of what the Second Circuit Court of Appeals decided, and did not decide, in the American Express case earlier this month.  The procedural posture was far from the prototype scenarios described above. The District Court had overseen a class action by investors in Amex-affiliated managed funds, who claimed fraudulent and negligent investment advice and breach of fiduciary duty. The Court had approved a class action settlement. An Illinois couple, class members, had heeded bad advice, from their local Amex-affiliated investment manager, to ignore the notice of class action settlement they received, refrain from signing an opt-out as was their right, and instead file a FINRA arbitration. The District Court granted Amex’s request for a declaration that all of the Illinois couple’s FINRA arbitration claims were covered by the class action settlement and had been released. And to implement that determination, the District Court granted Amex’s request to enjoin the further prosecution of the arbitration.

The Second Circuit affirmed as to all but one of the claims asserted in the FINRA arbitration. Only its analysis upholding the Distirct Court’s injunction against prosecuting the other claims in the FINRA arbitration concerns us in this Commentary.

The Court framed the question to be whether the FAA “(or any other authority)” furnished the District Court with “remedial power” to enjoin the arbitration. The Court cited a number of earlier Second Circuit and Southern District of New  York decisions that “suggested” the FAA authorizes such relief. But the Court did not adopt the holdings of those cases as the governing rule in this case; it is important to distinguish between the Court’s approval of the outcomes in those cases, and its ultimate adoption of a narrow non-FAA rationale for sustaining the district court’s injunction in this case. The case most centrally relied upon was a First Circuit case from the 1980s, authored by then-Circuit Judge Stephen Breyer, which held that an order enjoining arbitration where the matter is not arbitrable is a “concomitant” power with the power to compel arbitration and is not inconsistent with the FAA — but that case did not hold that the FAA was the source of the Court’s power to issue the injunction.  Instead, the Court held that there was adequate authority under Massachusetts law to enjoin the arbitration, and that such law was not in conflict with the FAA.

In the Amex case, the Second Circuit did not find it necessary to rely upon the FAA alone as a source of judicial remedial power to enjoin the pending arbitration FINRA arbitration between the Illinois couple and American Express. It found such power by implication from the combination of the FAA, the FINRA Arbitration Rules, and, critically, the class action settlement agreement to which the Illinois couple were parties, an agreement which provided expressly for the district court’s retention of jurisdiction to enforce the settlement agreement. In a footnote, the Court proceeded to discuss a provision of the federal judicial code known as the All-Writs Act (28 U.S.C. § 1651), noting that several courts have had occasion to rely upon that Act as the basis for judicial power to enjoin a pending arbitration where such an injunction is necessary to protect the jurisdiction of the federal court. The Court indicated that in some cases reliance upon the All-Writs Act to enjoin arbitration would be appropriate, but such reliance was not necessary in this case because of the class action settlement agreement.

The Second Circuit’s decision prudently respects the border between what the FAA permits (by not prohibiting), and what the FAA mandates. It may be hoped that other courts will follow the Second Circuit’s lead and develop a consistent legal approach to judicial power to enjoin arbitration. That power is not found in the FAA, although there is consistency between the contractual basis for enforcement and non-enforcement of arbitration agreements under the FAA and the power to enjoin arbitration that may be found in other sources. Those sources include an agreement of the parties, state arbitration law that may expressly permit a cause of action for a stay of arbitration (such as New York’s CPLR 7503), and potentially the All-Writs Act. A well-developed understanding in the courts and the bar that these are the proper sources of power to enjoin arbitration will serve to discourage undesirable judicial intervention in newly-filed arbitrations and the disruptive use of injunction applications by Respondents who seek tactical advantage through collateral litigation.

Today’s topic is the power of the international arbitrator, or lack of it, to issue an anti-suit/anti-arbitration injunction in a final award.  Assume the parties have a commercial contract, and that an arbitrable dispute has arisen over whether Party A may as a remedy for a default foreclose upon common shares owned by Party B. Party B commences the arbitration to block the foreclosure.

In the years leading up to the arbitration, Party B had also sought related provisional and final relief from courts in the US and abroad and in some cases had pursued appeals when relief was denied. Party A, claiming harassment, asks the arbitrators, as a species of final relief, to broadly enjoin Party B and its officers and directors and shareholders from bringing any more proceedings against Party B, in any forum, relating to the contracts between A and B. The Tribunal grants the requested relief to the extent of enjoining prosecution of any such proceedings by any such persons until the monetary portion of the award (substantial attorney and arbitrator fees) is satisfied by Party B.  (The enjoining of non-parties to the arbitration is a separate issue not treated in this Commentary).

There could be three principal sources of power, potentially, for the arbitrators to issue this anti-proceedings injunction. One would be the agreement of the parties. Another, the rules of arbitration that govern the proceedings. A third, possibly, the arbitration law at the seat, i.e. a statutory mandate. Or, finally, judge-made arbitration law at the seat recognizing the powers of arbitrators to sanction party misconduct.

Assume the agreement of the parties and the arbitration rules permit arbitrators to grant any appropriate form of equitable relief. Is that sufficient power for the permanent anti-proceedings injunction described here?  I submit it is not. It seems right that an arbitral tribunal should have power during the course of its proceedings to protect the jurisdiction conferred upon it by the parties. Thus an arbitral antisuit injunction against parallel litigation between the same parties on the issues before the tribunal should be a perfectly legitimate interim measure.

But the injunction here described does not fit this model. First, it purports to enjoin the commencement of new arbitrations under the arbitration agreement. Thus it is a partial abrogation of the parties’ arbitration agreement. At a seat where national arbitration law provides that arbitration agreements shall be enforced, abrogation of the agreement by an arbitral tribunal other than on grounds provided in the lex arbitri exceeds the powers of the tribunal. Under the Federal Arbitration Act, the agreement to arbitrate must be enforced save upon such grounds as exist for the revocation of any contract. Under the New York Convention, the agreement must be enforced unless it is null and void, inoperative, or incapable of being performed. Overzealous litigation does not fit within any of these categories.   Further, the rules of arbitration adopted by the parties, and/or the lex arbitri, will typically provide that it is not inconsistent with the agreement to arbitrate for a party to seek a judicial provisional measure in an arbitrable dispute. This anti-proceedings injunction abrogates the parties’ arbitration agreement in this respect as well.

What about the “inherent” power of the tribunal to regulate the conduct of the parties appearing before them? While the existence of such power is widely recognized, the injunction described here begins to take effect only after issuance of the final award. Of course, a “sanction” in the form of a cost allocation in the final award is perfectly acceptable. But that is justified  because the rules or lex arbitri or the contract empower the tribunal to allocate costs.  This injunction has no conduct-regulatory purpose even as to future arbitrations. Its purpose is to induce compliance with the award, as demonstrated by its temporal scope, i.e. until payment of the monetary portion of the award. It is an enforcement tool, and it therefore raises squarely the question whether arbitral tribunals may include in a final award provisions calculated to make their awards self-enforcing.

If the power of arbitrators to secure the enforcement of their own awards were widely recognized, we would routinely see final awards that impose an accumulating monetary sanction for each day of non-payment of a damages award.  But those awards do not exist, to this writer’s knowledge.

Why? First, usually it will be clear that the parties agreed to arbitrate their disputes, but not to arbtrate the implementation of the outcome of the disputes. This is most explicit where the arbitration clause provides in terms that the award may be enforced in a court of competent jurisdiction. The parties have made a clear allocation of power: arbitrators resolve disputes; courts implement the solutions. Second, national arbitration laws like the FAA, and international agreements like the New York and Panama Conventions, implement the same allocation of powers. They provide that the award shall upon recognition become a judgment, and then shall be enforced as would a judgment. In US  federal courts, money judgments are to be enforced in accordance with the judgment enforcement law of the State where the Court sits. New York’s money judgment enforcement statute (CPLR Art. 52) does not provide for anti-proceedings injunctions to coerce compliance with money judgments.

An arbitral injunction having this scope was actually entered in a case in New York in which this author now has post-award, post-confirmation involvement — certainly not to relitigate the issue under discussion. But the exercise of power in this instance results in part from a conflation of judicial and arbitral power, a conflation all too prone to occur when parties select experienced courtroom advocates and jurists with relatively little grounding in arbitration law and practice to sit as arbitrators. Parties who select arbitrators without due regard for their expertise concerning the allocation of power between courts and arbitrators risk obtaining anomalous results like this one. 

Numerous federal district courts and a handful of federal courts of appeals have played a part in the ongoing investment treaty arbitration between Chevron Corporation and the Republic of Ecuador. They have entertained and for the most part have granted discovery applications addressed to non-parties residing in the United States, made pursuant to 28 U.S.C. Section 1782. (For the latest installment known to this writer, see In re Applications of the Republic of Ecuador, 2011 WL 4434816 (N.D. Cal. Sept. 23, 2011)). This surfeit of judicial decisions from different district courts in different parts of the country, but involving the same statute and relating to the same international arbitration, warrants some examination to see if a distinctive jurisprudence has evolved whose principles are identifiable and transferable beyond the context of the Chevron-Ecuador case. Based on a review of many but certainly not all the decisions, it appears that for the most part the review of the applications is mechanical and proceeds much in the same fashion as a motion in domestic litigation to enforce a subpoena against a non-party – with a focus on the statutory criteria, first, and then on relevance of the information sought and the burden on the non-party.  But at least a few principles unique to, or more prominent because of, the international arbitration context, can be derived and deserve mention:

1.     The scope of permissible discovery will not be more restrictive than what U.S. courts permit in U.S. litigation merely because the evidence is sought for use in an international arbitral tribunal. Arguments that arbitral tribunals generally permit more narrow document production will not find favor.

2.     Claims of interference with the arbitral tribunal’s control over the discovery process will not receive a warm reception unless there has been an expression of position by the arbitral tribunal. If the arbitral tribunal has not issued any orders that clearly stake out its position concerning the procurement of evidence from non-parties, courts are likely to regard such claims of interference with arbitral control as speculative.

3.     “Bad faith,” even though not expressly identified by the U.S. Supreme Court as one of the discretionary factors to be considered by the courts, will indeed be so considered. Courts will be sensitive to claims that the discovery is sought for tactical reasons to harass non-parties in order to exert pressure on a party to the arbitration, and will examine closely the applicant’s claims that the requested material is indeed relevant to the issues framed in the arbitration.

4.     A request for “reciprocal discovery,” lodged against the Section 1782 applicant by the non-applicant party, will not be routinely accepted on the basis of fairness or proportionality, but will instead itself have to face scrutiny according to the mandatory and discretionary factors governing a Section 1782 application.  Thus, such a request for reciprocity may fail simply because the discovery sought is indeed obtainable in the arbitration.

5.     An application for Section 1782 discovery will not be seen to be in conflict with the rules the arbitral tribunal might apply, notably Rule 3.9 of the IBA Rules of Evidence, concerning recourse for assistance from the tribunal to gather non-party evidence that a party cannot obtain “on its own.” The phrase “on its own” in the IBA Rule is seen as referring to a judicial process such as Section 1782 that permits a party to obtain non-party evidence without necessarily having the support of the arbitral tribunal, and so Section 1782 discovery is not in conflict.

It is worthwhile also to be reminded that the availability of Section 1782 in connection with private commercial arbitrations remains uncertain.  The courts have little difficulty, on the other hand, concluding that an arbitral tribunal constituted pursuant to an international agreement like a bilateral investment treaty is a “foreign or international tribunal” under Section 1782, a conclusion reinforced, in the view of some judges, by a BIT tribunal’s use of the UNCITRAL (United Nations) arbitration rules.  

It is the first day of the new hockey season in North America, a suitable occasion for Arbitration Commentaries to bring you content inspired by our neighbors in the Great White North.

By now the news will probably have reached you that the highest appellate court of the province of Ontario, the Ontario Court of Appeal, earlier this week affirmed a first instance court’s ruling that denied a motion to vacate in part a NAFTA arbitral tribunal’s award against the Government of Mexico and in favor of the US multinational Cargill, Inc. (Mexico v. Cargill, Inc., 2011 ONCA 622 (Oct. 3, 2011)). In case you are learning about the case for this first time here, I report very briefly: Mexico established trade barriers to protect its cane sugar industry from competition from Cargill and other US suppliers of high fructose corn syrup. In Cargill’s NAFTA arbitration case under the UNCITRAL Rules, Cargill claimed and was awarded damages in two categories: lost profits of its Mexican affiliate, and lost profits on trans-border sales from Cargill in the US to the Cargill Mexican affiliate. The Tribunal rejected Mexico’s position that the second category of damages were not sustained by Cargill as an investor in relation to its investment; the Ontario Supreme Court (first instance) agreed with the Tribunal, and in this decision the Ontario Court of Appeal also agreed. Because the arbitration took place in Toronto under the UNCITRAL Rules, rather than under the ICSID Convention as NAFTA also permits, there was the opportunity for a motion to vacate under Ontario’s version of the UNCTIRAL Model Law on International Commercial Arbitration. Mexico took the position that the award of damages for Cargill’s lost US sales from the US to its Mexico affiliate were “beyond the scope of the submission to arbitration” (Model Law Article 34(2)(a)(iii)).

The issue to which the Court of Appeal devotes the most time and energy, and which will be of greatest transnational interest, is: what is the scope of review in a national court, applying the Model Law, when presented with a motion to vacate the award on jurisdiction of an UNCITRAL Rules investment treaty arbitral tribunal? The Ontario Court of Appeal held that the scope of review is “correctness” but precisely what this means and what it transnational implications are is open to debate and is the subject of this commentary.

Under American arbitration law, an arbitral tribunal’s decision concerning its own jurisdiction is reviewed de novo, without deference, unless the parties clearly and unmistakably agreed to submit the jurisdiction issues to arbitration. These American law rules are grounded in the notion that arbitration agreements are simple bilateral contracts between commercial parties, and that their existence and validity are suitable for courts to decide independently (without deference) because the decisions involve ordinary state law contract principles that courts apply every day. Equally, issues of the scope of disputes that are arbitrable fall normally within the province of courts to resolve independently, albeit with the benefit of a presumption based on the “pro-arbitration policy” that the US Supreme Court has engrafted on the FAA. But one reason for permitting courts to decide scope issues independently, even on review of an award, is that construing an arbitration clause normally should not be that different from construing other contract language, and with the benefit of contract interpretation jurisprudence this exercise usually will be well within the judicial “wheelhouse.”

But how would or should these rules apply when and if the Government of Mexico comes before a US court to vacate the award of a NAFTA arbitral tribunal in favor of a Canadian investor, on the ground that the damages awarded did not involve the investor’s investment in Mexico, and therefore were outside the jurisdiction of the tribunal?

What is immediately apparent — but the Ontario Court of Appeal does not confront directly — is that the NAFTA arbitral tribunal has an enormous comparative advantage over a national court in regard to the skills and knowledge applicable to deciding this “jurisdiction” question. The question is not remotely comparable to what passes for an arbitral jurisdiction issue in commercial arbitration. It involves fundamental issues of investment law, as to which depth of knowledge is presumably a main criterion for selection of the arbitrators (both in the treaty partners’ fashioning of their rosters, and in the parties’ case-specific choices). The Ontario decision reflects that the Tribunal’s decision on the jurisdiction issue brought into play NAFTA’s text, drafting history, and subsequent practice and understanding among the treaty parties; the Vienna Convention on the Law of Treaties; NAFTA arbitral case law dealing with similar issues of the territoriality vel non of claimed investor losses; principles of international law; and fact-intensive consideration of how Cargill structured its operations to sell high fructose corn syrup to food and beverage producers in Mexico. As appears often to be the case in investment arbitration, what is called jurisdiction is actually the heart of the matter — “the merits” — because the main issue is not what happened, nor whether the investor was harmed, but whether there is redress under the investment treaty for the harm that occurred as a result of the measures taken by the host State.

Why, then, would the Ontario court opt for a standard of review (“correctness”) that treats the NAFTA tribunal’s decision of a jurisdiction issue with any less deference than it would treat that tribunal’s award “on the merits”? The Ontario court’s opinion devotes considerable space to quotation of the UK Supreme Court’s decision in Dallah v Ministry of  Religious Affairs of the Government of Pakistan, wherein that Court maintained that an international arbitral tribunal (at least when it is a private tribunal in a commercial case) is normally entitled to no deference in its own determination of its own jurisdiction to adjudicate.  But Dallah was a commercial arbitration case, and the jurisdiction issue was a relatively straightforward one of whether the Pakistani ministry as a non-signatory of the agreement was bound to arbitrate. That is the kind of contract-agency law issue on which parties normally would expect judicial control of arbitral jurisdiction.

The Ontario Court of Appeal holds that the proper standard of review of the tribunal’s determination is “correctness,” and not (as proposed by Cargill) “reasonableness.” But to this reader/writer — a Canadian in spirit but not in Bar admission — there is less than satisfying clarity on what “correctness” means. The Court says that a court hearing a motion to vacate under the Model Law must be careful to determine if it is reviewing “a true question of jurisdiction,” because “courts are expected to intervene only in rare circumstances where there is a true question of jurisdiction.” But that does not seem to meaningfully limit the kinds of complicated questions involved in jurisdiction decisions of investment tribunals.

The Court gives as a hypothetical example of a jurisdiction ruling in a NAFTA case that could be vacated as incorrect a purported award to a Brazilian citizen, one who is manifestly not eligible to arbitrate as she is not a citizen of any of the treaty parties. But whereas the tribunal’s decision that Cargill’s lost US sales to its Mexican affiliate were within the tribunal’s jurisdiction to award was upheld as “correct,” does this not perhaps imply that an opposite decision by the tribunal would have been incorrect? The Ontario court does not appear to intend that we should understand its decision in this way. It rejects “reasonableness” as a standard of review, but one gets the clear sense that if the tribunal had ruled that Cargill’s distribution arrangements did not suffice to bring its lost US sales to its Mexican affiliate within NAFTA’s coverage, that outcome also would not have been set aside.

Rather, what “correctness” appears to mean is that the award will only be set aside if the error is plain on the face of the award in relation to the plain meaning of the NAFTA. It is akin to the “clerical or computational error” correction rules of most international arbitral institutions and national statutes: If the award adds two and two and gets to five not four, that outcome is entitled to no deference and may be changed by a competent court.

The reason such a rule makes sense is that it makes vacatur for jurisdictional error depend on criteria that a national court is no less competent than a NAFTA tribunal to apply. And so we may, without taking too much liberty, conclude that the transnational lesson of the Cargill decision from Ontario is that jurisdiction determinations of investment treaty tribunals, when they are subject to vacatur under an arbitration statute based on the UNCITRAL Model Law, shall not be vacated if the jurisdiction decision was based on criteria within the core competence of an investment treaty tribunal. The Ontario court says that the question whether lost capacity in Cargill’s US plants constituted damages by reason of Mexico’s breaches of treaty obligations “is a quintessential question for the expertise of the tribunal, rather than an issue of jurisdiction.” But one could equally say that the question was whether the damage was sustained by an investor in relation to its investment and so it was indeed an issue of jurisdiction. The key element is that this issue was in the tribunal’s “wheelhouse”! It is unhelpful to tack on an ill-defined dichotomy between jurisdiction and the merits in the context of investment arbitration.

In the US, perhaps happily, such a “core competence” principle would not be needed, because we have the First Options-derived rule that when parties agree to arbitrate according to rules that permit arbitrators to decide upon their own jurisdiction, then judicial review in the context of a vacatur motion of the award on jurisdiction is as limited as review of any other issue decided in an award. The UNCITRAL arbitration rules of course give arbitrators such power and US courts (notably the Second Circuit in the Chevron-Ecuador saga) have treated BIT-based arbitration under those rules as an agreement to “arbitrate arbitrability.”  The ICSID Additional Facility Arbitration Rules confer similar power. So any investment treaty arbitration award on jurisdiction that one could reasonably imagine being the subject of a motion to vacate in a US court would fall within the limited scope of review rule of First Options and its progeny.  Nevertheless, it is helpful to US practitioners, as well as those abroad, to take away from the Cargill case the useful lesson that jurisdiction determinations of investment treaty tribunals that involve issues within the core competency of the tribunal shall be vacated only where it can be said that the error is one that the reviewing court has equivalent competency to detect and correct.

Today Arbitration Commentaries briefly notes a new decision from a respected federal district judge in Houston, Texas, holding that a sale of goods contract that was between two US companies, but which provided for discharge of the shipped goods in a foreign port to be designated by the buyer created a sufficient international nexus to make the New York Convention applicable to the contract’s arbitration clause. (Tricon Energy, Ltd. v. Vinmar International, Ltd., 2011 WL 4424802 (S.D. Tex. Sept. 21, 2011).

The issue is litigated from time to time, especially when one party sees a tactical advantage to holding award confirmation or vacatur proceedings in a state court, and federal jurisdiction based on diversity of citizenship would not exist.

Curiously the Convention itself does not directly address when an award between domiciliaries of the same Convention State is governed by the Convention. This is expressly left to domestic law by Article I(1): “[The Convention] shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.” Chapter Two of the Federal Arbitration Act (FAA) in Section 202 provides that an agreement or award entirely between US citizens “shall  be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.”

The Court in Tricon, calling the Section 202 standard “expansive,” had no difficulty in concluding that where the entire contracted product volume was to be delivered abroad, the award was a Convention award.

But suppose the contract had provided for a series of deliveries, most of which were to US ports? Suppose further, or alternatively, that the dispute arose over the deliveries scheduled for US rather than foreign ports? Perhaps the most critical words in Section 202 are “reasonable relation with one or more foreign states.” It is doubtful that Congress intended for the Convention’s coverage to extend to an entirely domestic dispute merely because a portion of the contract’s scope involves performance or property abroad. Nor is there any reason of arbitration policy why coverage should be so extended. If a contract involves a series of instances of performance, some of which have will occur abroad, it makes sense to look at the performance giving rise to the dispute as the relevant contract for purposes of the Convention’s coverage. (See,  e.g., Amato v. KPMG LLP, 433 F. Supp.2d 460 (M.D. Pa. 2006),  in which US investors contracts with a US affilate of Deutsche Bank to provide a. Certain iinvestment strategy, but execution of the strategy on each transaction at issue in the case involved significant elements of foreign performance including the purchase of foreign securities and a swap transaction with a foreign taxpayer).

The arbitration rules of America’s Financial Institutions Regulatory Authority (FINRA) present a special, and sui generis, but economically significant, species of arbitrability controversies. FINRA, as successor to the National Association of Securities Dealers (NASD) is the self-regulatory organization of the securities industry. Established pursuant to the federal securities laws, FINRA rules provide that member firms agree to resolve certain disputes by arbitration under FINRA’s arbitration rules.

Last week the US Second Circuit Court of Appeals ruled against the US arm of the Swiss investment banking giant UBS on a FINRA arbitrability issue, made complicated by the fact that the claims related to UBS’s role as a market maker in the market for Auction Rate Securities (ARS). (UBS Financial Servs. v. West Virginia University Hospitals, Inc., 2011 WL  4389991  (2d  Cir. Sept. 22, 2011)). The ARS market largely collapsed in 2008, forcing issuers of ARS debt obligations to pay penalty interest rates and to incur other unepxected costs. In this case, UBS had acted as underwriter in the initial placement of municipal bond issues structured as ARS for a West Virginia state university hospital, and, after the initial issuance, conducted the “Dutch auctions” in which the ARS were traded and their interest rates were reset according to market conditions.

FINRA’s arbitration rules provide that they may be invoked either where there is an agreement to arbitrate under those rules, or where the claimant is a customer of a FINRA Member Firm and the claim concerns business transactions of the Member Firm. Here UBS argued, inter alia, that even if Claimant was a “customer” for UBS’s  services as manager of the Dutch auctions (which itself was not conceded), the claims did not relate to the auctions but to the alleged nondisclosure of UBS’s role in the actions to induce the customer to issue ARS and engage UBS as underwriter for the initial issuance.

This argument, that FINRA arbitrability depends on a nexus between the Member-customer relationship and the transactions giving rise to the claim, found favor with the dissenting judge on the panel, who considered that such a nexus requirement is implicit in the FINRA scope of arbitration rule, and that the nexus was missing here because the fraud allegations related to the original issuance and underwriting as to which there was no customer relationship (UBS having purchased the ARS outright as part of the underwriting).

The majority, however, while equivocal as to whether the text of the rule compelled the conclusion that such a nexus must exist, concluded that the initial underwriting and the subsequent auctions were so closely related that any nexus requirement that might exist was fully satisfied.

One notable aspect of the case is simply the fact that UBS as a Member Firm of FINRA concluded as a business matter that it preferred litigation to arbitration before a panel, selected by the industry self-regulatory authority, that would normally include one or more members with considerable securities industry experience at a Member Firm. This may well be a function of recent large FINRA arbitration awards against Member Firms,  most notably the $400+ million award to ST Microelectronics against Credit Suisse.

Also notable is that the Second Circuit analyzed the arbitrability issue without reference to the pro-arbitration bias of federal arbitration jurisprudence. The reasons for this are understandable and sound. The Member Firm of FINRA, like a Member State of ICSID, makes a conditional offer to arbitrate, which may be accepted if the putative claimant meets certain conditions. In the FINRA Rule, those conditions are, at least, “customer” status of the claimant, and that the claim relates to business transactions of the Member Firm. Those two criteria must be satisfied before the Court may find that any agreement to arbitrate exists. In this context, arbitrability is simply a matter of contract law without an overlay of federal pro-arbitration presumptions.