Dear Readers:

It is not often I have the opportunity to write about my own cases. But today I do.

The Second Circuit yesterday decided a case called T. Co. Metals LLC v. Dempsey Pipe. It is found on 2d Cir. website, where you may read/download.

The portion of the decision that I hope is of interest involves the arbitrator’s issuance of an amended award altering the outcome on the merits, based on the arbitrator’s construction of ICDR Rule 30(1) permitting correction of “clerical” errors. Reversing the District Court, the Second Circuit holds that the arbitrator’s construction of the Rule was entitled to deference — and vacates the order confirming the original award, and remands for the amended award to be confirmed.

I invite your comments, as I am troubled by the decision for reasons that I think go beyond the disappointment of having my client on the losing side on this issue.

I argued that there had to be a limit to deference here, because there is no ground for the original award to be vacated. If the arbitrator may construe the clerical error rule, given judicial deference, to permit substantive chsnges in the outcome, there can be two enforceable awards with different outcomes (not to mention evisceration of the rules, like ICDR 30(1), limited changes to clerical,typographical and calculation errors.

The Court solves that problem by vacating the original award. But as I see it, there is no basis in the NY Convention (assuming it is a Convention award) to refuse confirmation of the original award, nor any such basis in FAA Chapter 1 if it is a domestic award. An appellate order vacating confirmation
strikes me as equivalent of district court order refusong confirmsation, and must be subject to the same FAA/Convention limits.

Is the vacatur of the order confirming orginal award is improper? I welcome your views on that!

Thanks.

Marc

While the arbitration community awaits the Supreme Court’s decision in the Stolt-Nielsen case, US courts and commercial arbitrators continue to wrestle with the suitability of the arbitral forum for class action litigation.

In a recent case, the district judge who decided Stolt-Nielsen in the first instance upheld an arbitrator’s clause construction award in a proposed Title VII class action. The award held that the relevant arbitration clause did not prohibit class actions, and, as this was an adhesion contract between an employer and employees, the employer’s failure to include an express prohibition was dispositive in construing the clause to allow class actions. The court rejected arguments that this decision by the arbitrator either exceeded her powers or constituted manifest disregard of the law. Jock v. Sterling Jewelers, Inc., 2009 U.S. Dist. LEXIS 120782 (S.D.N.Y. Dec. 28, 2009).

Consider how the Court’s initial decision to permit an arbitrator to construe the arbitration clause impacts the outcome. The clause says nothing about class arbitration, but if the arbitrator’s decision is viewed as a construction of the clause, even a “barely colorable justification” will be enough to sustain the decision.

But this characterization of the arbitrator’s decision is not particularly appropriate — even though, under the AAA’s special rules concerning class actions, it is denominated a “clause construction award.” An arbitrator’s decision that the contract is one of adhesion, and that this results in a default rule favoring the plaintiff’s position (e.g. to proceed by class action) unless the defendant, normally a corporation, has excluded that position by specific language, is in reality a policy judgment about access to justice, effective enforcement of the federal statutes (like Title VII) under which class claims typically are brought, and the ability of arbitrators to manage large complex cases.

It is inevitable that the law will evolve to permit class actions to enforce federal statutory rights and to prevent corporations from drafting arbitration clauses to prevent even a judicial class action by forcing all potential plaintiffs into individual arbitrations. Solution of the problem should not continue to be a burden for courts and arbitrators on a case by case basis.

A simple amendment to the Federal Arbitration Act could usefully provide: “Where the claim in arbitration can meet the requirements of Rule 23 of the Federal Rules of Civil Procedure to proceed as a class action, as determined by the arbitrator(s), the arbitration clause upon which the claim is based shall not be construed to prohibit such an action.”

Following such an amendment, one would expect arbitral instutions to develop specific rules governing arbitral class actions. And one would expect that corporations that have hoped to use arbitration as a vehicle avoid class actions, whether arbitral or juidicial, to opt into or out of arbitral class actions based on the efficicacy of the competing judicial and arbitral class dispute procedures.

A decision from the Southern District of New York reminds us that an agreement to arbitrate under arbitration rules that give the arbitrator power to rule on her own jurisdiction will be “clear and unmistakable evidence” that the parties intended the arbitrator, not a court, to resolve all issues concerning the existence, validity and scope of the arbitration agreement. Here a publisher brought suit for copyright infringement, against the same infringer it had sued in a still-pending arbitration. The publisher claimed the actions concerned infringement in different time periods, one covered by the arbitration clause, the other not. As the clause called for arbitration under the AAA Commercial Rules, which clearly confer power on arbitrators to decide issues concerning their own jurisdiction, the court stayed the action pending arbitration. Argus Media, Ltd. v. Tradition Financial Services, Inc, 2009 U. S. Dist. LEXIS 120866 (S.D.N.Y. Dec. 29, 2009).

Investment law proceduralists will find much room for debate in the recent decision of a divided ICSID Tribunal, denying the application of an American investor to join additional claims in a BIT arbitration against the former Soviet republic of Georgia. (Itera International Energy LLC and Itera Group NV v. Georgia, ICSID Case No. ARB/08/7, Decision on Admissibility of Ancillary Claims, Dec. 4, 2009)

In broadest terms, the dispute involved non-performance by Georgia under agreements for payment of unpaid bills for natural gas that the Claimant had supplied to state-owned entities. Under one agreement, Claimant purchased a 90% interest in a State-owned company, under a privatization plan; partial payment of the gas supply debt was to take the form of forgiveness of taxes owed by the newly-privatized acquired entity. But Georgia reacquired the 90% interest by official decree, giving rise to an expropriation claim by Claimant under the US-Georgia BIT. A second arrangement for part payment of the natural gas debt entailed a commitment by Georgia’s Energy Ministry, through a financial agent called Sistema, to pay Claimant $46 million in quarterly installments over seven years. When that agreement was breached, Claimant commenced a private commercial arbitration in Russia as provided in the agreement. But in its Request for Arbitration in the ICSID case, Claimant reserved the right to bring claims under the BIT relating to non-performance installment payment contract.

Claimant, motivated in part by Georgia’s objection to the jurisdiction of the commercial arbitration tribunal in Moscow, sought in its memorial on the merits in the BIT case to interject Treaty claims concerning non-performance of the installment payment plan. Claimant relied on Article 46 of the ICSID Convention and Article 40 of the ICSID Arbitration Rules, which in similar terms allow the assertion of “additional claims . . . arising directly out of the subject matter of the dispute.” In this case, the majority of the Tribunal took a restrictive view of “subject matter of the dispute,” following the official explanatory comment to ICSID Rule 40, to the effect that the claims must be so related that resolution of the claim first asserted would necessarily require resolution of the claim proposed to be added. Under this standard, the majority reasoned, the two claims were unrelated, even if they arose from the same “subject matter” of natural gas debt payment by Georgia to Claimant, and even if some procedural efficiencies would be achieved by joinder of the claims.

The dissenting panelist, Professor Francisco Orrega Vicuna, would have concluded instead that these were “two concurrent arrangements directed to reach the same objective of making the Claimant whole for the monies owed,” and that the factual connection of the two claims was “close enough as to require their simultaneous adjudication so that settlement of the dispute will be final.”

One of the dilatory tactics commonly employed by litigants in the arbitration process is the tactical request for adjournment of hearings. Many arbitrators, reluctant to invite a challenge to the award based on alleged procedural unfairness, will succumb to adjounment request even if it is transparently tactical and dilatory.

Arbitrators whose instincts are to resist such tactics will surely take comfort in a recent decision from the federal court in the Southern District of New York. (Bridgepointe Master Fund v. Biometrx, 2009 U. S. Dist. LEXIS 115678 (S.D.N.Y. Dec. 11, 2009)). Here, the Court rejected a motion to vacate the award based on the panel’s refusal to adjourn a hearing on the merits that was scheduled on two business days’ notice. The Court found that the movant had made “a tactical choice to absent itself from the arbitration” from the outset, and that its conduct had included: the CEO’s declaring his intention to file bankruptcy rather than defend the case; conscious refusal to participate in any aspect of the proceedings; failure to respond to the AAA’s request for an update on the plans for a bankruptcy filing; non-attendance at a pre-hearing procedural meeting; and failure to avail itself of the panel’s invitation to renew the request for adjournment on the first day of the merits hearings.

While this record of non-participation is more ample than what the arbitrator may confront in many cases, the Court held that the same legal standard applies — i.e. “barely
colorable justification” — to a motion to vacate based on refusal to postpone a hearing (FAA Section 10(a) (3)) as to motions to vacate based on other Section 10 grounds. Thus the arbitrator has substantial discretion to keep the hearings on schedule and the courts will show great deference.

What liberty of contract do State parties to a bilateral investment treaty have to define broadly the category of “investments” that may be the subject of arbitration between one Contracting State and an investor of the other? The arbitral tribunal in Romak S.A. v. Republic of Uzbekistan (PCA Case No. AA280, available at Permanent Court of Arbitration website, www.pca-cpa.org) appears to fix limitations on such freedom of contract in its award, issued November 26, 2009, dismissing the Claimant’s claims on the basis that an account receivable arising from the sale of tens of thousands of tons of grain was not an “investment” under the Switzerland-Uzbekistan BIT.

One may readily agree that a one-off sale of goods transaction fails to qualify under the ordinary meaning of the term “investment,” normally lacking the basic and well-understood attributes of an “investment”: an economic contribution by the investor, a certain duration of the contribution, and an element of economic risk.

But what should be the outcome when the BIT defines “investment” to be “every kind of assets, and particularly. . . claims to money or to any performance having an economic value” ?

The Tribunal acknowledged that its mission, in observance of the Vienna Convention on the Law of Treaties Article 31(1), was to “resort to the ‘ordinary meaning’ of the terms of the BIT ‘in their context and in the light of its object and purpose.'” What seems curious in the reasoning of the Tribunal is that its point of departure was to seek out the ordinary meaning of “investment” — in the first instance, from Black’s Law Dictionary — notwithstanding that the Treaty established “investment” as a defined term, rather than turn immediately to the ordinary meaning of the words used in the definition. The central definitional phrase — “every kind of asset….” — appears to offer relatively clear guidance, albeit guidance that may be at loggerheads with evolving investment law conceptions of “investment,” and of what investment lawyers and arbitrators may regard as a sensible allocation of jurisdiction among State courts and BIT arbitral tribunals.

Just as provocative of debate is the Tribunal’s handling of the “object and purpose” and the “context” of the defined term “investment” in this BIT. The Tribunal refers to recitals in the preamble of the Treaty, wherein the parties declare that they are “[r]ecognizing the need to promote and protect foreign investments with the aim to foster economic prosperity of both States,” and “[d]esiring to intensify economic cooperation to the mutual benefit of both States.” The Tribunal thought it self-evident that these recitals contradict the notion that “every kind of asset” including a “claim for money” can sensibly include the account receivable arising from a large grain supply contract between a Swiss supplier and a State-owned Uzbek buyer. And the Tribunal took as guidance to the “context” of the BIT’s definition of “investment” the fact that, on the same day the BIT was signed, Switzerland and Uzbekistan also entered into an Agreement on Trade and Economic Cooperation. The Tribunal, making no specific findings, apart from the date of signature, as to whether, for purposes of Vienna Convention on the Law of Treaties Article 32((2), the Trade Agreement was an “agreement relating to the treaty which was made … in connection with the conclusion of the treaty,” nevertheless concluded that the two agreements, juxtaposed, raised an inference that sales of goods transactions were intended to be excluded from the BIT definition of “investments.”

The Tribunal also considered that it would be “manifestly absurd and unreasonable” (Vienna Treaties Convention Article 32(2)) to make a literal application of “every kind of asset” including a “claim for money,” as to do so would create a broad swath of concurrent jurisdiction, between domestic courts and international arbitral tribunals, over commercial transactions between private actors of one Contracting State and State entities of the other.
But the case stated for absurdity is not cast in terms of the Contracting States’ objectives — one can well understand why a developing country with an unstable judiciary might create such concurrent jurisdiction as an inducement to investment. Rather, the absurdity is said to lie in the prospect of a broad domain of concurrent jurisdiction over commercial matters — a conception that sales contracts “‘are not investment contracts, except in exceptional circumstances, and are to be kept separate and distinct for the sake of a stable legal order.'” (Award Par. 185, quoting from the ICSID Tribunal award in Joy Mining Machinery Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction, August 6, 20045, par. 58).

Perhaps more analytically convincing is the Tribunal’s reliance on the fact that the Swiss-Uzbek BIT adopted two arbitration alternatives from which the investor might choose: ad hoc UNCITRAL Arbitration and ICSID Arbitration. For that choice to be an effective one, the Tribunal reasoned, the “investments” qualifying for arbitration under either mechanism should be the same, and thus an interpretation should be avoided that would make “investments” eligible for UNCITRAL arbitration but not ICSID Arbitration. Correspondingly, ICSID jurisprudence was held to provide suitable inspiration and guidance (but not precedent in a stare decisis sense) for deciding the treaty interpretation issue here. Of course, here again there was at least one other way of looking at things: that ad hoc arbitration under the UNCITRAL Rules was included to ensure that disputes that would not jurisdictionally qualify for ICSID arbitration under the ICSID Convention conception of “investment,” but were intended to be arbitrable under the BIT, would find their way to an arbitral forum.

With these analytical premises in place, the Tribunal proceeded to rely on ICSID jurisprudence for its conclusion that “the term ‘investments’ under the BIT has an inherent meaning (irrespective of whether the investor resorts to ICSIDE or UNCITRAL arbitral proceedings) entailing a contribution that extends over a certain period of time and that involves some risk.” And the Tribunal took pains to insist that it was completely accepting of the notion that State parties to a BIT have freedom of contract to decide what scope to give to the term “investments” — but that the parties here had not, at least not in sufficiently plain terms, elected to treat sales of goods transactions as such. This latter declaration by the Tribunal might well have been included to anticipate that some readers would raise the concern stated in the first sentence of this commentary. And the reasoning in this award appears to underscore that, in the jurisprudence of arbitral jurisdiction under investment treaties, there is an unresolved tension for arbitrators between engaging in principled treaty interpretation and choreographing a “sensible” transnational system for the resolution of disputes.