Article (V)(1)(e) of the New York Convention provides that a Court asked to confirm a Convention award may refuse to do so on the ground that the award has been or may be set aside by a competent court of the country in which, or under the law of which, the award was made. While it is sometimes said that the Convention does not concern itself with vacatur of awards but only with grounds for a court to refuse to confirm an award, Article (V)(1)(e) is widely understood to have the effect of incorporating domestic law vacatur standards at the seat of arbitration when they are applied by courts at that arbitral seat in a proceeding brought to obtain vacatur.

The US Third Circuit Court of Appeals last week joined the neighboring Second Circuit (and others it did not cite) in adopting this view of Article V(1)(e) with regard to Convention awards made at a seat of arbitration in the United States. Ario v. Underwriting Members of Syndicate 53 at Lloyd’s, 2010 U.S. App. LEXIS 17195 (3d Cir. Aug.18, 2010). The Second Circuit was the first of the federal appellate courts to expound this position, in Yusuf Ahmed Alghanim v. Toys “R” Us, Inc., 126 F.3d 15 (1997).

In another aspect of the Third Circuit case that will be of broad interest to practitioners, the Court held that the parties had not clearly agreed to substitute the grounds for vacatur provided by state law, in place of the Federal Arbitration Act grounds, by providing in their agreement that the arbitration would be governed by the Pennsylvania Uniform Arbitration Act. How parties may accomplish by agreement an “opting out” of federal vacatur standards in favor of state law standards has been a subject of considerable attention since the Hall Street decision, in which the U.S. Supreme Court remarked that one way the parties may successfully vary the federal regime of grounds to vacate an award is simply to agree that state law vacatur standards will control.

For international arbitrators and international arbitration counsel, however, this Third Circuit case is more memorable for its affirmation of the widely-accepted view of the relationship between the Convention and US federal law standards for vacating an award. Thus, district courts in both the Second and Third Circuits must follow the rule that when an international arbitration takes place in the United States, the resulting award may be (i) refused confirmation for a reason stated in the Convention, and/or (ii) vacated, modified, or corrected according to the standards stated in Chapter 1 of the Federal Arbitration Act.

This position is now relatively free from controversy in the United States, and may be expected to be applied by federal district courts in major centers of international arbitration activity. The Fifth Circuit Court of Appeals embraced this view of the relationship of the Convention and the FAA in Gulf Petro Trading v. Nigerian Nat’l Petroleum Corp., 512 F.3d 742 (2008).The Sixth Circuit concurred in Jacada, Ltd. v. Int’l Marketing Strategies, Inc., 401 F.3d 701 (2005). An Eleventh Circuit decision might appear to suggest the contrary, but in that case the Court simply equated certain arguments for vacatur made under FAA Chapter 1 with grounds to refuse confirmation under the Convention and Chapter 2. Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (1998). It is reasonable to expect that in a suitable case the Eleventh Circuit would line up with the others herein mentioned.

For foreign arbitrators sitting in the United States, it is therefore useful to have a working knowledge of the FAA Chapter 1 grounds for vacating, modifying or correcting an award, found in Sections 10 and 11 of the FAA. For example the U.S. case law on “evident partiality” of the arbitrator as a ground to vacate the award is well developed as to the circumstances that may give rise to a reasonable impression of arbitrator bias. This is in contrast to the Convention, which in Article V makes no specific reference to arbitrator corruption, bias, or lack of independence, but rather more generally permits an award to be refused confirmation if “the arbitral procedure was not in accordance with the agreement of the parties,or, failing such agreement, was not in accordance with the law of the country where the arbitration took place.”

As the debate rages on concerning the potential use of 28 USC 1782 to secure non-party discovery for use in international commercial arbitrations, rather little attention is paid to the fact that judicial assistance under section 1782 is a matter of discretion not of right, and that federal judges may not wish to interfere with the arbitral tribunal’s control over the proceedings.

Such reluctance to interfere figured prominently last week in the decision of a federal district judge in Washington to deny section 1782 relief, sought by the American claimant in an ICSID bilateral investment treaty (“BIT”) arbitration against the Republic of Kazakhstan. (In re Caratube Int’l Oil Co., 2010 U.S. Dist. LEXIS 81512 (D.D.C. Aug. 11, 2010)).

The Court devoted nearly no attention to the question of whether a tribunal constituted under the ICSID Rules, per the investor-1782 petitioner’s decision under the US-Kazakhstan BIT to have ICSID-administered rather than UNCITRAL Rules ad hoc arbitration, is a “foreign or international tribunal” under section 1782. The court proceeded directly to what it viewed as the critical questions: What had the parties agreed upon concerning discovery? And what was the position of the arbitral tribunal concerning the scope of discovery and where discovery fit into the procedural flow of the case?

On the first question — what had the parties agreed — the Court took note of the simple fact that the investor had opted for ICSID arbitration and therefore for dispute resolution in a forum where the “‘set[ting] (of) procedural rules for the arbitrators to follow,” is part of the “parties’ bargained-for expectations concerning the arbitration process.”

The court also noted that the petition was ill-timed, having been filed long after a discovery timetable had been fixed by the tribunal and, indeed, after the tribunal had resolved discovery disputes and ordered completion of discovery in four weeks.

The court further noted that ICSID Rule 43 puts the scope of disclosure in the control of the tribunal, and that the parties had additionally agreed that the IBA Rules of Evidence would serve as a guidelines for the discovery process. The court quoted at length Rule 3.8 of the IBA Rules (1999 version) which indicates that an application should be made to the tribunal to determine whether and how disclosure may be sought from a non-party. The court also read ICSID Rule 44 — vesting discretion in the Tribunal on all procedural matters not otherwise specifically addressed in the rules or by agreement of the parties — to have the same effect.

Thus the court concluded that while the section 1782 petition did not violate any judicial “exhaustion” rule, the ICSID and IBA Rules required or at least weighed heavily in favor of a request for permission of the tribunal to proceed under section 1782, and the investor “side-stepped these guidelines” by proceeding unilaterally.

***

Investment treaty arbitration is a fertile ground for the judicious use by investors and States of the discovery opportunities afforded by section 1782. It is rather well-accepted that an ICSID tribunal is effectively a creature of an inter-governmental agreement and therefore is the kind of “tribunal” contemplated by section 1782. But whereas the arbitral body exists because the State parties, to the Washington Convention or a particular BIT or both, have ceded a part of the sovereign judicial function, it makes good sense and good policy that discovery should be the exclusive domain of the tribunal except as the parties may agree. One should expect to find investment arbitration parties making 1782 discovery a well-defined aspect of a proposed discovery program in the earliest stages of

The recent decision of a US court in New York confirming, under the New York Convention, an ICDR Panel award in favor of Hoffmann La Roche (HLR), and its US subsidiary and customer, comes a good news for at least two important reasons. One concerns arbitration rights of non-signatories; the other, the recovery of legal costs by prevailing parties of foreign and US citizenship in an international arbitration with a seat in New York and New York law applicable to the merits. F. Hoffmann La Roche Ltd. v. Qiagen Gaithersburg, 2010 U.S. Dist. LEXIS 81374 (SDNY Aug. 11, 2010)

The case involved a cross-license agreement originally between predecessors in interest of Claimant and HLR. A US wholly-owned HLR subsidiary used the licensed rights to develop diagnostic devices which it sold to a third party (also of US nationality). Claimant claimed that those sales violated the license.

The Tribunal granted HLR’s customer, which had no contract with Claimant, the right to join as a party to the arbitration. In this decision, the Court upholds that joinder. It reviews US jurisprudence concerning the doctrine of estoppel as a basis for permitting non-signatories to the agreement to participate in the arbitration. It holds that those principles permit a non-signatory, whose rights are closely intertwined with the disputed provisions of the contract that contains the arbitration clause, to compel the signatory party that contests its rights to arbitrate their dispute.

This decision also upholds the decision of the Tribunal to award legal costs including attorneys’ fees to HLR and its US subsidiary ($3.1 million!) and customer ($2.9 million!), based on Article 31 of the ICDR Rules, even though the place of arbitration was New York and the contract provided that the governing law was New York law. The court noted that the Panel correctly decided that the parties’ agreement on New York law was to be construed as a choice of law concerning the merits , and not concerning the allocation of legal costs, especially where the parties had agreed to arbitrate under ICDR Rules and ICDR Rule 31 is explicit in giving the arbitrators discretion in making allocation of legal costs between the parties.

The court also noted that the Tribunal in making the award of legal costs took note of the fact that the Claimant had itself repeatedly requested an award of legal costs in its favor.

***

Marc J. Goldstein Litigation & Arbitration Chambers frequently represents non-U.S. companies in arbitrations, and in litigations including those related to arbitrations, in the United States.

The firm’s principal Marc J. Goldstein was recently named to Best Lawyers in America 2011, in the specialty of international arbitration, a distinction that has been conferred on him in each year since he founded this firm in 2007.

This opinion by Seventh Circuit Chief Judge Frank Easterbrook skips rather lightly over some important distinctions between judicial and arbitral power. A closer look at the premises of the decision therefore seems appropriate.

A few distinctive features of the case put it in context. First, the arbitrator was a non-lawyer — a specialist in valuation of intellectual property rights, here patents on chemical formulas licensed for use in a cancer drug. Second, the license agreement provided for arbitration if the licensor believed the royalty rate was unduly low because the licensee was selling the drug in related-party deals rather than at arm’s length. Thus, the license provided for a serial arbitrations on the same issue, based on changed circumstances over time. Third, the arbitration evidently was not conducted under AAA or other rules, or under relevant state arbitration law, any of which might have addressed the ability of parties to request, or the arbitrator to grant, reconsideration.

Judge Easterbrook equates the arbitrator’s reservation of a right to reconsider based on new evidence with the right to such relief in a judicial proceeding conferred in Rule 60(b) of the Federal Rules of Civil Procedure. He suggests that the arbitrator may make such a reservation (where applicable arbitration rules, law, or the agreement of the parties don’t forbid it), without thereby rendering the decision non-final, subject to the 90-day limit FAA Section 12 for a motion in federal court under FAA Section 11 to modify or correct an award. And he cast aside the parties’ submissions regarding the “functus officio” doctrine as technical arcana of no use in deciding the case.

This approach takes some needless liberties with the FAA and arbitral common law principles. Before this case, we have understood Section 12 of the FAA to concern only a petition to a federal district court, not to an arbitrator, to modify (or correct) an award. And while it is correct to say that the passage of the 90 days without asking the arbitrator to modify the award means the award stands because a court must then confirm it without change, it is wrong to imply, as the decision does, that Section 12 directly permits a request to the arbitrator to modify or correct an award within 90 days after issuance. The FAA does not address that, and it disconcerting that a federal court of appeals would suggest that it does.

Second, the only permitted grounds for a federal judge to grant a petition to modify an award are those stated in FAA Section 11 — e.g., a material miscalculation of figures, or a material misdescription of a person, thing, or property in the award. FAA Section 11 does not provide for changing an award based on new evidence.

Third, federal appellate courts including the Seventh Circuit have recognized the “functus officio” doctrine as a federal common law principle that is read into the FAA as a limit on arbitral power. Thus, it is well-settled that an arbitrator is without power to act once she issues a final award, except to correct a mistake that clearly appears on the face of the award. A different sort of change — i.e. merits reconsideration — unless allowed by agreement, exceeds the arbitrator’s powers, and the purported amended award is be subject to vacatur under FAA Section 10(a)(5).

In this case, a non-lawyer arbitrator presumably not immersed in these nuances of arbitration law issued a decision that was contradictory — “final” and yet subject to revision based on new evidence, and with no stated time limit for presenting new evidence. The question the Court should have addressed was whether this was an award or an interlocutory order. If there was ambiguity about that, ample authority permitted remand to the arbitrator for clarification. The Seventh Circuit concluded that it was an award — or that it became an award 90 days after issuance — by superimposing on the purported arbitral reservation of power to reconsider the 90-day temporal limit of FAA Section 12. But this was an erroneous extension of FAA Section 12 beyond its judicial domain. Two possible approaches would have been more satisfactory. One would have been to remand to the arbitrator with directions to resolve the ambiguity. The other would have been to construe the arbitrator’s reservation of power simply as a recognition that under this license agreement, an award concerning the royalty rate was “final,” for the time being, but that the parties could re-open the issue, in a new arbitration whose outcome would have only prospective effect, based on changed circumstances in the future.

****

Not all readers of Arbitration Commentaries outside the United States will be aware that Chief Judge Easterbrook is widely regarded as one of the country’s most brilliant jurists. But as the opinion in this case illustrates, even the most brilling legal minds can produce troublesome applications of federal arbitration law when distinctions between judicial and arbitral power, reflected in the FAA and in evolved case law, are subordinated to reasoning that applies statutes and rules loosely and by analogy to advance what the court believes to be a sensible outcome.

The US Seventh Circuit Court of Appeals has held in a new decision that the question whether a contract containing an arbitration clause ever existed should be decided by a federal district court when it is asked to compel arbitration, and not by the arbitrator in the first instance, unless the arbitration clause indicates that the parties delegated that specific issue of contract formation to the arbitrator. (Janiga v. Questar Capital Corp., 2010 U.S. App. LEXIS 15983 (7th Cir. Aug. 2, 2010)). The Court observed that any doubt on this question appears to have been resolved recently by the Supreme Court of the United States in Granite Rock Co. v. International Brotherhood of Teamsters, 130 S.Ct. 2847 (2010), where the Supreme Court said “[i]t is similarly well settled that where the dispute at issue concerns contract formation, the dispute is generally for the courts to decide.” Whether the issue concerns contract formation, for a court to decide, or rather concerns contract validity, for the arbitrator to decide, of course depends on what grounds are asserted, by the party opposing arbitration, for saying that no contract exists. In Janiga, that party had admittedly signed the agreement, but asserted that he lacked sufficient fluency in English to have appreciated the legal significance of the document he signed. This was, in the Seventh Circuit’s view, a queston of contract formation that was properly within the province of the district court judge.

Call it the “Comma Clause” of the New York Convention. 

 Article II(1) of the Convention requires each Contracting State to recognize an “agreement in writing” for arbitration. And Article II(2) — the Comma Clause, for this discussion — states: “The term ‘agreement in writing’ shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.”

The interpretive significance of the comma in Article II (2) has divided US Circuit Courts of Appeals. The Second Circuit held in the Kahn Lucas case (186 F.3d 210 (2d Cir. 1999)) that the comma meant that the signature/letter exchange requirement applied to both an arbitration clause in a contract and independent agreement to arbitrate, as both are mentioned in the phrase preceding the comma. The Fifth Circuit in the Sphere Drake case (16 F.3d 666 (5^th Cir. 1994)) held that the signature/letter exchange requirement applies only to an independent agreement to arbitrate, not to an arbitration clause in a contract, viewing the comma as merely separating the words after the comma from the object immediately preceding it.  The Third Circuit — whose decisions bind federal district courts in New Jersey — has sided with the Second. (Std. Bent Glass Corp. v. Glassrobots Oy, 333 F.3d 440 (3d Cir. 2003)).

In a recent decision, a federal district judge in New Jersey refused to confirm an award made in China by an arbitration panel of the China International Economic and Trade Commission (“CIETAC”), ruling that an arbitration clause in a sales confirmation, which the buyer did not sign, failed to satisfy the “agreement in writing” requirement of the Convention. (Quanqing Cloth-Making Co. v. Pilgrim Worldwide Trading, Inc., 2010 U.S. Dist. LEXIS 64515 (D.N.J. June 29, 2010)).

In the Pilgrim case, the US buyer issued three purchase orders to a Korean trading company, and, after renegotiation of commercial terms, received a “Sales Confirmation” that “referred to” Quanqing, which the buyer understood to refer to a “subcontractor” from whom the Korean trader would obtain the goods. The Sales Confirmation — on its face between the Korean and Chinese parties — stated that it was signed by the Korean trader “on behalf of” and “for the account of” the US buyer. It provided for arbitration of disputes under CIETAC auspices. Upon receiving the Sales Confirmation, Buyer issued revised purchase orders in conformity with the commercial terms of the Sales Confirmation. The goods were shipped to buyer, and partial payments were made, some to the Korean trader and some directly to the manufacturer in China, Quanqing, as directed by the Korean intermediary.

A payment dispute arose; the Chinese producer Quanqing commenced CIETAC arbitration against the buyer; CIETAC sent a notice of the arbitration to the buyer which the buyer elected to ignore; and an award was made in favor of Quanqing.

The district court found that there was “no evidence” that the Korean trader was the US buyer’s agent or representative, and “thus there is no signed writing binding [buyer] to the Sales Confirmation or its arbitration clause.”

The district court rejected the Chinese award-holder’s argument that the US buyer was equitably estopped from denying an obligation to arbitrate.  While the buyer’s purchase order “reflects that it agreed to pay” for the goods, the buyer did not “consistently maintain that any provisions of the purported contract should be enforced.” Therefore, the court held, equitable estoppel furnished no basis to enforce the arbitration clause against the buyer.

Even apart from what appears to be a very stringent application of equitable estoppel principles, arguably at odds with the pro-arbitration policy of the FAA, this decision is a curious one.

The court did not discuss whether the sequence of a sales confirmation containing an arbitration clause followed by the buyer’s revised purchase order satisfied the Convention’s “exchange of letters or telegrams” condition.

In this regard, the district court made no reference to the Third Circuit decision in the Standard Bent Glass case, cited above. In that case, the Third Circuit held that an enforceable contract containing an arbitration clause was made even though the written sales agreement was never signed by both parties, because the combination of written exchanges and performance sufficiently indicated contract formation under the Uniform Commercial Code. Further, the Third Circuit held, the same exchanges satisfied the “exchange of letters of telegrams” requirement of Article II(2) of the Convention.

On the record as described in the district court opinion in Pilgrim, it would seem quite plausible to view the sales confirmation-purchase order sequence as satisfying the exchange of letters or telegrams requirement. The distinguishing factor is that the buyer’s purchase order was apparently sent only to the Korean intermediary, leaving ambiguity about whether the buyer intended to enter into a contractual relationship with the Chinese supplier of the goods.  But whereas the purchase order responded to a sales confirmation in which the Korean intermediary declared itself to be acting as agent for the US buyer in procuring goods from the Chinese supplier, common law agency principles would suggest that the Chinese party was entitled to rely on the Korean party’s apparent authority as agent for buyer after the buyer, by issuing the purchase order, appeared to ratify the agent’s dealings.  

 At the very least, these issues were not adequately explored in the district court’s opinion, and a CIETAC arbitration award was denied recognition under the Convention without the kind of painstaking analysis that one would expect in an ostensibly pro-arbitration forum.