A commentary on the US Second Circuit Court of Appeals’s recent denial of panel rehearing in the Kiobel case appears on my general website, www.lexmarc.us.  This three-judge Second Circuit panel held in 2010 that the US Alien Tort Statute does not provide for causes of action against corporations, on the grounds that corporate liability for international human rights violations has not achieved the status of a generally-accepted principle of customary international law.

n  Breaking no new ground, but adding rich fertilizer to the garden of  US compétence-compétence jurisprudence, a recent decision by the Chief Judge of the U.S. District Court in Manhattan, nominally applying New York contract law but with the substantial influence of federal arbitral “common law,” held that the arbitrator, not a court, should decide whether particular disputes are within the scope of an admittedly valid arbitration clause, when (1) the language of the clause is very broad, encompassing “any and all disputes” or “any controversy” or similar language, and (2) the parties have agreed to arbitrate under rules that empower arbitrators to resolve issues of their own jurisdiction. Indeed the opinion suggest that either (1) or (2) is probably sufficient as “clear and unmistakable evidence” of the parties’ intent to have arbitral determination of arbitrability issues involving the scope of arbitrable disputes under an admittedly valid clause.  (Rafferty v. Xinhua Finance Ltd., 2011 U.S. Dist. LEXIS 9628 (S.D.N.Y. Jan. 31, 2011).

n  Usefully reminding arbitration lawyers that the “public policy” defense to award enforcement under New York Convention occupies a very narrow plot, a U.S. district judge in Manhattan rejected the position that an award enforcing a contract that allegedly violated U.S. economic sanctions against Iran should be refused enforcement.  While the Iran sanctions certainly reflected U.S. foreign policy, the court stated, this was a far cry from the “’[United States’] basic notions of morality and justice.’” (Ameropa AG v. Havi Ocean Co., 2011 U.S. Dist. LEXIS 15803 (S.D.N.Y. Feb. 16, 2011, quoting from the landmark case of U.S. jurisprudence on the “public policy” defense, Parsons & Whittemore Overseas Co. v. Sociéte Générale De L’Industrie Du Papier, 508 F.2d 969 (2d Cir. 1974)).  

n  U.S. lawyers invoking the New York Convention for any purpose generally consider that the grass is greener in the federal courtyard, and seek removal of cases filed in the courts of the 50 individual states.  The scope of the removal provision for Convention cases, Section 205 of the Federal Arbitration Act, is therefore a matter of considerable interest for U.S. lawyers while it often strikes foreign practitioners as rather arcane.  Section 205 provides that an action or proceeding in a state court may be removed to federal district court if it “relates to” an agreement or award falling under the Convention.  “Relates to” has been construed broadly to encompass any case in which the outcome is conceivably affected by a Convention agreement or award. But the US Ninth Circuit Court of Appeals decision in Infuturia Global Ltd. v. Sequus Pharmaceuticals, Inc., 2011 U.S. App. LEXIS 2337 (9^th Cir. Feb. 7, 2011) takes this broad construction a step beyond where it has gone before.   The defendant in a California state court tortious interference pharma licensing case invoked removal under Section 205 in order to have the federal district court decide the merits of the dispute by holding that a prior arbitration award collaterally estopped the plaintiff. Defendant did not remove for the purpose of seeking recognition or enforcement of either the arbitration award or an arbitration agreement. The plaintiff’s claim was admittedly not arbitrable.  Had removal been sought under the general removal statute, there would have been remand to the state court, because the presence of foreign entities on both sides at the time of removal would have defeated diversity jurisdiction.  But the Ninth Circuit, agreeing with a district court judge in San Francisco, held that removal was proper under Section 205 notwithstanding, and that the voluntary dismissal thereafter of the claims against the non-diverse foreign defendant created diversity jurisdiction that enabled the district court to adjudicate the merits and to dismiss the plaintiff’s claim based on the collateral estoppel effect of the prior Convention award.   Is this a correct interpretation?  I am not entirely convinced.  Should not the term “relates to” in Section 205 be construed in light of the overall purpose of Chapter Two of the FAA, stated in Section 201, to “implement [the New York Convention] in accordance with this Chapter”?  The Convention is concerned with the enforcement of arbitration agreements and the recognition and enforcement of awards. It does not speak directly to the preclusive effect of a Convention award in proceedings involving one or more parties who are not bound by the same contract and the same arbitration clause. The Convention leaves the res judicata and collateral estoppel effect of arbitral awards, and judgments entered upon such awards, to the law of the State where the award or judgment is relied upon.   The Convention deals with the risk that a Member State’s courts might fail to give proper preclusive effect to a Convention award by ensuring that the award may be converted into a domestic judgment, whereupon no court could lawfully discriminate in applying claim preclusion rules between that judgment and any other judgment.  Perhaps the Ninth Circuit has taken broad construction of broad statutory language one step too far.

In a variation on the theme of Hall Street Associates v. Mattel, Inc., the US Ninth Circuit Court of Appeals held in a recent case that the Federal Arbitration Act forbids an agreement of the parties to bypass initial judicial review of the award by a federal district court in favor of first instance review in the Court of Appeals.  (Johnson v. Wells Fargo Home Mortgage, Inc., 2011 U.S. App. LEXIS 2908 (9^th Cir. Feb. 15, 2011).

The parties in Johnson made their agreement to arbitrate in the later stages of a prolonged federal lawsuit alleging unfair credit practices by the Wells Fargo Bank. The agreement, so-ordered as a stipulation by the district court in which the case was pending, provided for “binding arbitration with appeal rights” to which the Federal Arbitration Act would apply.  When Plaintiff asked the district court to confirm the award, and Wells Fargo cross-moved to vacate the award, the district court interpreted the agreement of the parties to require “rubber stamp” confirmation of the award. While the district court as a formal matter did confirm the award and deny the motion to vacate (so that the matter was properly before the Court of Appeals from a jurisdiction perspective), the district court entered judgment without having considered the merits of the motion to vacate, and thus as a practical matter initial judicial review of the award was lodged in to the Ninth Circuit by the district court’s interpretation of the parties’ agreement.

The Ninth Circuit panel disagreed with the district court’s interpretation of the agreement – as did Wells Fargo, which had asked the district court to hear the merits of its motion to vacate. But the Ninth Circuit did not rest its decision on the premise that the district court misinterpreted the agreement, but rather on the ground that the structure of judicial review of arbitration awards prescribed by the Federal Arbitration Act may not be overridden by private agreement. The FAA in Section 9 provides, the Court observed, that the district court shall confirm an award unless it is vacated on a ground provided in Section 10 of the Act, and this implies not only that confirmation must be sought initially in the district court but also that the district court must decide on the merits any motion to vacate that is interposed in response to the prevailing party’s motion to confirm the award.     

The Court did also refer to the possibility – which had been mentioned by the Supreme Court in Hall Street – that the parties might agree to some form of arbitration in a federal district court case management order that provides for entry of judgment by the district court in accordance with the arbitrator’s decision. But the Court found that this was not the sort of court-annexed arbitration the parties had selected; instead they had expressly subjected their arbitration to the FAA and had not opted for a form of quasi-arbitration more akin to proceedings before a court-appointed special master. 

Rarely may an arbitrator serve in consecutive arbitrations involving the same issues under the same contracts, as one party or another will object that the arbitrator who has once decided an issue cannot re-decide the same issue impartially in a second case.

But sometimes, notably but not exclusively in U.S. domestic arbitration, it is agreed that the party-appointed arbitrators in a three-member tribunal will not be impartial. That may change materially the analysis of whether the arbitrator may serve in consecutive related arbitrations upon appointment by the same party.

A new decision of the U.S. Seventh Circuit Court of Appeals deals with this issue, and holds that where the agreement of the parties provided that the co-arbitrators would be merely “disinterested” and not impartial, the re-appointed co-arbitrator in a second arbitration between the same parties could not be disqualified based on his knowledge of the prior proceedings. (Trustmark, Inc. v. John Hancock Life Ins. Co., 2011 U.S. App. LEXIS 1931 (7th Cir. Jan. 31, 2011)).

Complicating the analysis for the Seventh Circuit was a confidentiality agreement from the first arbitration, which the arbitrators had joined counsel and the parties in signing. Trustmark did not object to Hancock’s re-appointment of its co-arbitrator in the second case (the first having ended in an award in Hancock’s favor), but then the second case tribunal, with two new members, construed the confidentiality agreement to permit disclosure to the new panelists of the proceedings, evidence, and award in the first case.  Trustmark, contending that the deliberations over the confidentiality agreement entailed not only misconduct by the re-appointed arbitrator but also the arbitration of a non-arbitrable subject (the confidentiality agreement had no arbitration clause), moved in federal district court to enjoin the second arbitration for so long as the re-appointed Hancock arbitrator remained on the panel. The District Court obliged and enjoined the parties from continuing the arbitration.

The Seventh Circuit reversed. The Court rejected the notion that arbitration over an issue the panel considered arbitrable but the movant did not — the meaning of the confidentiality agreement — constituted irreparable harm justifying an injunction. The remedy in such circumstances, the Court held, is a motion to vacate the award.

(Had the Court upheld the injunction, it would have effectively sanctioned an interlocutory appeal to the District Court from an arbitral determination of arbitrability that the arbitrators had jurisdiction to make. This would have been quite odd, given that under the Federal Arbitration Act a judicial decision compelling arbitration is not appealable except in the context of a motion to vacate the final award).

Turning then to the conduct of the re-appointed co-arbitrator, the Court held that his participation in the second panel’s deliberations over the meaning of the confidentiality agreement could not be viewed as a breach of that agreement or as misconduct warranting disqualification. Further, the fact that the re-appointed co-arbitrator had knowledge of the prior proceedings and had joined in issuing the first award was not disqualifying where the parties’ agreement provided for co-arbitrators who are disinterested (that is, having no economic stake in the result) but not also impartial.

Thus the Seventh Circuit’s decision is not, as some have feared, an aberrational general endorsement of arbitral service in consecutive related cases. It pertains to a very narrow context, which includes much but not all reinsurance arbitration, in which the party-appointed arbitrators are presumed to be effectively members of the parties’ legal teams. Its holding as to the arbitrator’s conduct has virtually no relevance where impartiality is required by the law or arbitral rules or the parties’ agreement.

The decision may be viewed as strongly supportive of arbitral competence to decide arbitrability issues properly presented to them — as it effectively instructs district courts not to review such rulings under the rubric of enjoining arbitration. This view of the decision is valid, but within limits. The construction of the confidentiality agreement by the second panel was viewed by the Seventh Circuit as the type of procedural issue ancillary to the merits that is within the arbitral domain under settled federal case law. Whether that Court would take as forceful a position against judicial intervention where the arbitral ruling concerns the type of merits disputes within the ambit of a clause, or the validity of the clause, cannot be entirely predicted based on this decision.

In another blow to the misconceptions of  foreign arbitration lawyers about U.S. arbitration jurisprudence, a U.S. federal judge in Washington, in a searching scholarly opinion, has systematically dismantled, and summarily rejected, all arguments advanced for applying “manifest disregard of the law” to refuse confirmation of an arbitration award under the New York Convention.

That doctrine, the Court held, if it survives and in whatever conception it survives, is no more than a ground permitting vacatur of an award that a U.S. Court may lawfully vacate, i.e. one that is made in or under the arbitral law of the United States. It has no role to play in proceedings to confirm a Convention award, the Court held, as it has “no grounding in the treaty.” (International Trading & Industrial Investment Co. v. Dyncorp Aerospace Technology, 2011 U.S. Dist. LEXIS 5954 (D.D.C. Jan. 21, 2011)).

First among the arguments dissected by the Court in DynCorp was the notion that Article V(1)(C) of the Convention is in substance co-extensive with FAA Section 10(a)(4), and permits refusal of confirmation on any ground that would comprise “exceeding powers” of the arbitrator under Section 10(a)(4).  But Article V(1)(C) reaches only situations where the arbitrator decided matters beyond the submission to arbitration, and thus deals with only one of many  potential scenarios in which the arbitrator may be said to have exceeded her powers.

The Convention enumerates quite precisely and exclusively stated grounds for refusing confirmation, and by negative implication excludes all other possible grounds, the Court held. “Such a narrow reading of the New York Convention comports with the context in which the Convention was enacted, as a broad construction of the Convention would do nothing more than erect additional hurdles to confirmation of arbitral awards, which in turn would contravene the ‘principal purpose’ of the Convention, i.e., ‘to encourage the recognition and enforcement of commercial arbitration agreements in international contracts.'”

Article V(1)(e) of the New York Convention has withstood another attempted assault in the U.S. court system.   A federal district judge in Washington, D.C. last week rejected the proposition that a court of the country whose substantive contract law but not its arbitral procedural law applied to the arbitration could, by the consent or stipulation of the parties, become a “competent authority” whose purported vacatur of an award may furnish a basis for a judicial refusal to grant recognition and enforcement of an award under Article V(1)(e).  (International Trading and Industrial Investment Co. v. DynCorp Aerospace Technology, 2011 U.S. Dist. LEXIS 5954 (D.D.C. Jan. 21, 2011). 

Credit the creativity of U.S. counsel for the arbitration loser for affording the Court the opportunity for a resounding reaffirmation of first principles in the application of Article V(1)(e).  Their client, a U.S. military contractor, DynCorp, operating in Qatar, lost an ICC arbitration in Paris to its Qatari business partner, concerning the minimum duration of their contract and the right to terminate.   DynCorp took its case to the Qatari courts, and argued that the Arabic language version of the arbitration agreement did not provide that the arbitration would be final and binding, and therefore the Qatari courts could review de novo the arbitrator’s application of Qatari contract law.  At the appellate level in Qatar, DynCorp prevailed.  It then raised the Qatari vacatur in the U.S. court as a defense to the arbitration winner’s motion to confirm the award. And, seeking to bolster its position, DynCorp tried to have the courts in France, where the award had beenmade, give effect to the Qatari set aside judgment. The Paris Court of Appeal said “non.”

The U.S. judge rejected the proposition, advanced by DynCorp, that the Qatari court could become a “competent authority” under Article V(1)(e) by consent of the parties. (Consent in any event had not been explicit; DynCorp argued this based on its adversary’s participation on the merits in the Qatari courts.) The court reasoned that to decide an issue of U.S. federal arbitration law that depends upon whether a foreign court had subject matter jurisdiction, the court would apply the U.S. law principle that subject matter jurisdiction cannot be conferred by consent of the parties. (This choice of law solution is not very explicitly acknowledged as such in the opinion.)  The Court went on to reject DynCorp’s argument that the Qatari courts were competent because the award was non-final under the Arabic version of the arbitration clause, holding that the agreement to arbitrate under ICC Rules made the award final and binding by operation of those Rules.

It is so well understood in American arbitration law that Article V(1)(e) refers to vacatur orders issued either by the court at the seat, or, much less frequently, by a court in the place whose lex arbitri applied by agreement even though that place was not the seat, that judges do not any longer find it necessary to explain fully where that understanding originates. The phrase “or under the law of which, the award was made,” is not self-evidently limited to arbitral procedural law to the exclusion of the law applicable to the merits. Yet the court here writes that “the plain language of Article V(1)(e) is unambiguous” in referring to “the country in which, or under the [arbitral] law of which, that award was made.” But if the matter is unambiguous, why does the court insert the bracketed word “[arbitral]” in what appears to be an effort to compensate for the possible ambiguity?

The understanding reflected in that bracketed word “[arbitral]” can be traced back through U.S. jurisprudence to the original understanding of the drafters of the New York Convention. The U.S. Second Circuit Court of Appeals in Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys “R” Us, Inc., 126 F.3d 15 (2d Cir. 1997) “note[d] that Article V(1)(3) specifically contemplates the possibility that an award could be rendered in one State, and under the arbitral law of another state,” and cited in support of that interpretation Professor Van den Berg’s seminal 1981 work, The New York Arbitration Convention of 1958: Toward a Uniform Judicial Interpretation (at p. 355).  Seven years before Yusuf , a federal district judge in Manhattan was asked to decide specifically that “under the law of which” embraced the substantive law that applied.  In rejecting that position in favor an interpretation limited to the agreed lex arbitri, the district court in International Standard Electric Corp. v. Bridas Sociedad Anonima Petrolera, Industrial YT Comercial, 745 F. Supp. 172  (S.D.N.Y. 1990) also cited Professor Van den Berg’s 1981 treatise, and usefully quoted what he had to say there, i.e.

The phrase “or under the law of which“ the award was made refers to the theoretical case that on the basis of an agreement of the parties the award is governed by an arbitration law which is different from the arbitration law of the country in which the award is made.

The Bridas court also traced Professor van den Berg’s interpretation to the commentary of the Soviet delegate to the 1958 U.N. Conference who offered the amendment embracing the language at issue.  That comment can be found today in the Travaux Preparatoires of the Convention on the UNCITRAL website.  Even further, the Bridas court on this point had received an affidavit from Professor Bermann  discussing a series of foreign judicial decisions that had so construed the relevant language.

So there is indeed a rich jurisprudential history underlying the shorthand “under the [arbitral] law of which the award was made.” In the interest of clarity and consistency of outcomes, it would be useful for judges facing this issue to carry forward this legacy in specific and precise terms.