An excellent article in the most recent issue of Arbitration International (Vol. 25, No. 4) discusses the challenges facing all participants in international arbitrations (and indeed all arbitrations) to rein in costs. The article, entitled “Inside Out: A User’s Perspective on Challenges in International Arbitration” is written by Jean-Claude Najar, General Counsel France for General Electric.

I take a quote from Mr. Najar’s article as the theme for this Commentary: ”

“(A)rbitral tribunals should be assessed on the robustness of their cost-saving procedures.
While the parties do exercise a fair amount of control over an arbitral proceeding, arbitrators should play a key role in containing the proceedings. Arbitrators need to feel that they are expected and empowered to act forcefully, using their discretion as a neutral party to keep proceedings as efficient as possible.”

Briefly I will comment here on some efforts within my own recent experience to rein in costs while still providing a thorough and fundamentally fair
process to the parties.

1. Hearing and Partial Award on a Separable Merits Issue:

Some years ago I was counsel in a China-related case arbitrated in Singapore. The tribunal elected to hold an evidentiary hearing, and to issue a partial award, on a critical separable mixed issue of law and fact: whether an amendment to the contract that disproportionately favored one side had been induced by economic duress, and should therefore be declared unenforceable. In the event, the tribunal did indeed hold that the amendment should be nullified. While a variety of other factors thereafter caused delays in reaching a final outcome, the partial award was the key determinant in bringing about a resolution by settlement prior to the scheduled hearing on remaining issues.

Drawing upon this experience in a recent case, a tribunal in which I was presiding (by the grace of my very experienced co-arbitrators) held hearings and issued a partial award on a severable, and seemingly essential, mixed issue of law and fact. The issue was not unlike the one in the above-mentioned Singapore case: here, whether a family trust was invalid because the settlor had been the victim of undue influence by other family members.
Following the partial award, which rejected the claim of indue influence, none of the parties requested further proceedings.

2. Resolving Claims As a Matter of Law Without Evidentiary Hearing:

It may occasionally appear that a claim may be sustained, or rejected, as a matter of law, even if all the material facts are assumed to as alleged by the party that would be aggrieved by the outcome.

To some extent this approach collides with parties’ expectation that in arbitration, whatever the issues may be, there will be some opportunity to present oral testimony to the tribunal and to cross-examine the main witness or witnesses for the opposing side.

Yet particularly in international arbitrations, and increasingly in U.S. domestic arbitrations influenced by arbitrators’ exposure to international practice, there is the opportunity through written witness statements to define with reasonable precision each party’s case-in-chief.

On that platform, the tribunal may assess whether the outcome does not at all depend on the veracity of a party’s contentions of fact that are disputed. If so, it may be desirable to move toward an award without hearing redundant testimony on direct or cross-examination.

Most rules however imply that some form of oral hearing shall be held, while also declaring the tribunal’s power to limit proceedings and exclude cumulative or redundant evidence. The solution often will be to conduct an oral hearing to hear legal arguments as to the proposed disposition without oral testimony.

3. Restricting Written Submissions on Disclosure Disputes

The simple expedient of requiring any procedural dispute to be introduced via conference call with the sole arbitrator or chairperson will discourage and limit the scope of disagreement. Counsel are invariably more willing to say precisely what it is they want when required to do so orally. Written submissions are more broadly phrased, often to avoid some admission or waiver.

4. Limitations on Obtaining Information By Subpoena from Non-Parties

It is useful to ask pointed questions about the reasons a particular subpoena is sought by a party. This may be advisable even if the non-requesting party raises no objection (as that party may be silent because it is drafting subpoenas of its own). Has the legal sufficiency of the claim to which the evidence pertains been established prima facie? Is it established that the evidence is relevant, material and non-cumulative? In the procedural timetable, it may make sense to schedule presentation of subpoena requests are exhibits and written testimony of the parties have been submitted — and then to require a specific showing that the evidence is needed to fill gaps in the parties’ proofs .
* * * *

Arbitrators should never lose sight of the principle that the arbitration “belongs to the parties.”
But the discretion of the arbitrators to regulate the proceedings is an essential part of what was bargained for. And ultimately the objectives of the parties, in a case destined for resolution by an award, are to win or to accept defeat only after exhausting all avenues to postpone final determination and impose high process costs on the likely winner. Efficiency gains in arbitration are therefore primarily in the domain of the arbitrators, and the artful arbitrator will implement measures more or less with the support of the parties whenever possible.

A new federal district court decision from Dallas embraces the position of the U.S. Second and Third Circuit Courts of Appeals that the U.S. Federal Arbitration Act (“FAA”) does not permit non-party subpoenas for pre-hearing document discovery, but only permits such subpoenas if they require the non-party to appear at an arbitration hearing and to bring the documents to the hearing. In those earlier cases, the courts concluded that this result was required by the clear language of FAA Section 7. (The Second Circuit’s decision in the Life Receivables case was discussed in an Arbitration Commentaries posting on January 15, 2009, which may be found in the Archives section of this site.) Noveposting Here, the Court “declines to read greater powers in to the text of Section 7 despite policy preferences favoring arbitration efficiency, because the court’s policy preferences cannot override the clear text of the statute.” (Empire Financial Group, Inc. v. Penson Financial Services, Inc., 2010 U.S. Dist. LEXIS 18782 (N.D. Tex. Mar. 3, 2010))

In a practical demonstration of how rigorous are the standards under New York law for compelling a non-signatory to arbitrate under the “estoppel” and “alter ego” doctrines, the Chief Judge of the U.S. District Court in Manhattan has issued a decision denying a motion to compel Deutsche Bank AG (“DB”) to arbitrate before a FINRA panel claims relating to the marketing of Auction Rate Securities (“ARS”). (Oppenheimer & Co. v. Deutsche Bank AG, 2010 U.S. Dist. LEXIS 19655 (S.D.N.Y. Mar. 2, 2010).

The case is one of many that arose in the wake of the collapse of the ARS market. Here, US Airways brought its claims in arbitration against Oppenheimer & Co., for damages resulting from sale of ARS to US Air allegedly in violation of the company’s investment policies. Oppenheimer asserted third-party claims in the same arbitration against DB and its affiliate Deutsche Bank Securities, Inc., a FINRA member firm that was required, by reason of such membership, to arbitrate the dispute.

First analyzing estoppel as a basis for requiring DB to arbitrate , the court noted that New York law requires that the party knowing accepted the benefits of an agreement with an arbitration clause, and those benefits must “flow[] directly from the agreement.” Here, the question was whether to view DB’s benefits from the FINRA membership of its securities broker-dealer affiliate as “direct” or “indirect.” Whereas DB did not avail itself of any rights created by the agreement, but rather benefitted mainly from the client relationships established by its affiliate, the benefits were viewed as “indirect,” and so estoppel did not furnish a basis to require DB to arbitrate.

The direct/indirect distinction may appear to be somewhat artificial, and difficult to apply, but what the courts do in such cases turns on the perceived legitimacy of boundaries internally created among separate business units in multi-tiered, multi-national corporation. Reliance on separate entities will be ignored when one entity enters into a contract essentially as a proxy for its parent or one or more other affiliates.

Turning to the contention that DB and its U.S. securities broker-dealer affiliate — an indirect subsidiary — were “alter egos” and that their “corporate veil” should be “pierced,” the Court held that mere ownership control and direction of policies and management was insufficient to justify compelling arbitration under these theories. Lacking was proof of “actual domination” in the affiliate’s affairs, any indication that the affiliate was undercapitalized, or evidence that the parent entity disregarded corporate formalities or made improper use of the affiliate’s funds.

A judge in the U.S. District Court in Manhattan has vacated a reinsurance arbitration award on grounds of evident partiality of the presiding arbitrator and one party-appointed co-arbitrator. The award was signed by these two arbitrators, with the third arbitrator registering dissent. During the course of the proceedings, the two arbitrators who ultimately signed the award had been appointed to sit together on a second case. Their disclosures about the new appointments failed to mention that parties in the two cases were affiliates, that there was a common witness whose testimony had already been heard and evaluated in the second case, and that an issue in common to both cases was addressed by that testimony.
The Court applied the legal standard stated by the U.S. Second Circuit Court of Appeals in Applied Industrial Materials Corp. v. Olvalar Makine Ticaret Ve Sanalyli A.S., 492 F.3d 132 (2d Cir. 2007): “An arbitrator who knows of a material relationship with a party and fails to disclose it meets [the] evident partiality standard: A reasonable person would have to conclude that an arbitrator who failed to disclose under such circumstances was partial to one side.” Here, the Court rejected the argument that a different standard should apply to relationships with co-arbitrators and witnesses, as opposed to parties, stating that it is the materiality of the relationship that is dispositive, not the arbitration participant with whom the relationship exists. (Scandinavian Reinsurance Co. v. St. Paul Fire & Marine Ins. Co., 2010 U.S. Dist. LEXIS 15952 (S.D.N.Y. Feb. 23, 2010)).

Adhering to well-settled principles concerning the separability of the arbitration clause, the U.S. Sixth Circuit Court of Appeals reversed an order that had denied a motion to compel arbitration, and held that the lower court improperly relied upon allegations of fraud in the inducement of the entire contract and that there were no sufficient allegations of fraud pertaining specifically to the agreement to arbitrate. The Court also rejected Appellee’s attempt to characterize the dispute as one involving the existence, rather than the validity, of the entire contract, and held that where the position taken is that the signatory to the contract breached fiduciary duties by entering into it, the challenge was to the validity of the contract and thus it was for the arbitrator to resolve in the first instance. (Moran v. Svete, 2010 U.S. App. LEXIS 3812 (6th Cir. Feb. 24, 2010).

Readers of these Commentaries will have been exposed recently to Second Circuit decision in January 2010 concerning the powers of an international arbitrator to reconsider and change the outcome under the rubric of correcting “clerical” and “typographical” errors. (T. Co. Metals LLC v. Dempsey Pipe & Supply, Inc., 2010 U.S. App. LEXIS 893 (2d Cir. Jan. 14, 2010)).

On the heels of that decision — which sustained the powers of the arbitrator to change the award, as a consequence of the deference due to the arbitrator’s interpretation of the ICDR’s “clerical error” rule — comes a decision of the British Columbia Court of Appeal holding that an arbitrator exceeded his powers by issuing a corrected award in which the arbitrator (i) admitted that there was error in his reliance upon certain evidence, and (ii) provided an alternative rationale for reaching the same result as in the original award. (Westnav Container Services Ltd. v. Freeport Properties Ltd., 2010 BCCA 33 (Jan. 25, 2010)).

Here the arbitration was conducted pursuant to British Columbia’s Commercial Arbitration Act (“BC Act”), not (as in Dempsey) under institutional arbitration rules adopted by the parties in their agreement. The BC Act provided, much like the ICDR Rule 30.1 implicated in the Dempsey case, that an arbitrator was empowered to correct “a clerical or typographical error”, an “arithmetical error” or “an accidental error, slip, omission or other similar mistake.”

In Westnav, the arbitrator was asked to determine the fair market rent for a certain property. In the original award, he relied upon the rent for a certain property as being comparable to the property to be valued. He erred in interpreting the evidence, using a rental value for that comparable property that he attributed solely to the buildings on the parcel, when in fact that figure represented the rental value of the building and underlying land. When the error was called to the arbitrator’s attention, he issued a corrected award that excluded any reliance on that property as a comparable, and furnished different reasons for reaching the same conclusion as to value as had been stated in the original award.

This, the Court of Appeal held, exceeded the arbitrator’s powers, as viewed through the lens of a legal standard (in Canadian and U.K. law) that permits corrections to express accurately the arbitrator’s “first thoughts” but not to have “second thoughts.”

The Dempsey and Westnav cases have much in common. In each case, after issuance of the original award, the aggrieved party asserted that the arbitrator had misinterpreted evidence, and in consequence had misplaced reliance on that evidence. In each case, the arbitrator agreed. In Dempsey, the arbitrator’s response was to disclaim reliance on that evidence, reassess the remaining evidence, and change the outcome. In Westnav, the response was to disclaim reliance on that evidence, and to furnish different reasons for the original outcome.

Each case presents a clear instance of the arbitrator having “second thoughts.” So what explains the divergent results — the arbitrator in Dempsey having had power to change the outcome sustained, while the Westnav arbitrator was denied power to change the rationale of the original result?

The most evident difference is the role of the State — and hence the State’s courts — in controlling the arbitration. In Dempsey, the correction rule was an aspect of the private system of rules, created by the ICDR and adopted by the parties with the understanding the arbitrator would interpret those rules. In Westnav, the arbitration was pursuant to the BC Act, and the correction rule appeared in the BC Act, and it is implicit in the Westnav Court’s decision that in interpreting the BC Act, the Court owes no particular deference to the arbitrator.

Is this a sufficient justification for the different outcomes? The ICDR’s rule on correction of awards, like the correction provision of the BC Act, lies curiously at the boundaries of arbitral power and public policy concerning the finality of arbitral decisions. But the ICDR rule, having no explicit connection to any national law regulating arbitration — despite its provenance in national laws (including the UNCITRAL Model Law) governing arbitration — is, under United States law, to be primarily construed by the arbitrator unless there is egregious abuse. So long as the United States remains a jurisdiction that elects not to adopt the UNCITRAL Model Law or otherwise to establish uniform standards for the conduct of international arbitrations, there will be significant potential for arbitrators to interpret and apply institutional rules of arbitration in ways that would not be sustained under parallel provisions of national arbitration laws.