The Working Group on Arbitration of the United Nations Commission on International Trade Law (UNCITRAL) will convene for its 51st session in Vienna, Austria, from September 14-18, 2009. For the past two years, the Working Group has been engaged in developing a proposed revised draft of the UNCITRAL Arbitration Rules (“Rules”). When completed, this will be the first wholesale revision of the Rules since their initial adoption in 1976.

I will attend the Working Group session as a member of the observer delegation of the Association of the Bar of the City of New York.

In this post and ensuing posts, I will discuss some of the salient proposed changes in the Rules that will be considered at the upcoming Working Group session.

These posts do not purport to make a comprehensive review, even of the changes in a single Rule. The purpose here is to distill some highlights. Complete reports on the Working Group’s work can be read and downloaded at the UNCITRAL website.

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Power of Tribunal to Rule on Its Jurisdiction

Article 21 (1) of the Rules concerns the power of the arbitral tribunal to make decisions about its jurisdiction. The present text of Article 21 (1) states: “The arbitral tribunal shall have the power to rule on objections that it has no jurisdiction, including any objections with respect to the existence or validity of the arbitration clause or of the separate arbitration agreement.” The proposed amended Article 21(1) first sentence would state: “The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.” The Working Group’s comment states that there was sentiment in favor of re-drafting the rule along the lines of Section 16(1) of the Model Law — whose phrasing corresponds to the above-quoted passage from the proposed revised rule.

The Working Group’s March 2009 report on its June 2008 session states that the purpose of the re-drafted text is “to clarify that the arbitral tribunal had the power to raise and decide upon issues regarding the existence and scope of its own jurisdiction.”

In certain circumstances an arbitral tribunal may wish to rule on its own jurisdiction even if there has not been an objection made by a party. For example, a party might express its views on the tribunal’s jurisdiction by refusing to appear in the proceedings. Parties might also raise no objection to jurisdiction until after the final award, and then in a friendly home court (one that might not apply a waiver doctrine), raise the tribunal’s lack of jurisdiction as a ground for denying recognition and enforcement. The arbitral tribunal, anticipating such tactics, may wish to enhance the enforceability of its award by providing a reasoned ruling on its jurisdiction. The absence of an “objection” should not prevent it from doing so. Thus the proposed amendment is very desirable.

A new commentary on this subject is posted under Legal Developments at my general website.
Click-through on the link under “Links and Resources” at the left margin, for Marc J. Goldstein Litigation and Arbitration Chambers (www.lexmarc.us).

The Seventh Circuit U. S. Court of Appeals has addressed one of the difficult issues arising from the mid-stream replacement of a party-appointed arbitrator. The Court held that the Federal Arbitration Act (“FAA”) generally requires that a party who contests its opponent’s appointment of a replacement party-arbitrator, on the ground that the substitution is not within the agreement if the parties, must do so by an application to the Court at the time of the substitution, or else the objection will be forfeited. WellPoint, Inc. v. John Hancock Life Ins. Co., 2009 U.S. App. LEXIS 17841 (7th Cir. Aug. 7, 2009).

The basis for the Court’s holding in WellPoint is Section 5 of the FAA. That Section — fully applicable to international arbitrations held in the U. S. — provides in pertinent part that the Court may appoint an arbitrator to fill a vacancy if for any reason there is a failure of the parties to do so by agreement.

In WellPoint, the Claimant had asked its own party-appointee to resign, several years into the case but before any hearings on the merits. Respondent John Hancock objected, but while maintaining its objection Hancock proposed a method to break the impasse on naming a replacement. After the method Hancock proposed was adopted and used by WellPoint, the case went forward before the re-constituted panel, and resulted in an award against Hancock. Hancock then moved to vacate, arguing that the re-constituted panel was not properly constituted in accordance with the arbitration agreement, and therefore lacked power to render the award.

Efficiency considerations, the Court held, preclude a construction of the FAA that would permit a losing party to forego using Section 5 to obtain an interlocutory court selection of a replacement arbitrator in lieu of the opposing party’s attempted unilateral selection, proceed to award before the contested re-constituted panel, and formally raise the issue of the winning party’s appointment of a replacement arbitrator for the first time only in a motion to vacate the award.

By finding waiver/estoppel-type principles dispositive, the Court avoided having to decide whether an agreed-upon methodology for replacment of a party-appointed arbitrator was implicit in an arbitration clause that, on its face, only addressed the procedure for initial appointments.

Also, the Court was able to dodge the issue of whether any or all proceedings need to be repeated when a party-appointed arbitrator is replaced. In dicta, however, the Court condemned the so-called federal “general rule” — requiring proceedings to begin anew — as an ill-advised waste of resources.

Indeed, the posture of the WellPoint case at the time the original party-arbitrator for Welloint resigned would have been an attractive one for declining to apply that “general rule.” The parties had conducted extensive discovery, and the panel had ruled on numerous discovery disputes. But there had not yet been any interim awards, nor even hearings for the taking of testimony. Further, the resignation was not occasioned by death or disability of the arbitrator. WellPoint had asked its arbitrator to resign shortly after Hancock amended its counterclaim to increase the alleged damages ten-fold. WellPoint had also engaged new counsel at that point. It is inferable that WellPoint, advised by new counsel, was simply second-guessing its original selection.

As discussed in a July 28, 2009 posting on this site (“Judicial Replacement of the Deceased or Disabled Arbitrator”), the so-called federal “general rule,” that all proceedings must be repeated after replacement of a party-appointed arbitrator, is out of step with contemporary practice globally. The general trend is to vest the panel or the sponsoring arbitral body with discretion to decide which if any proceedings should be repeated. The Seventh Circuit’s decision is a welcome indication the American law may be moving into harmony with contemporary practice.

The Fifth Circuit U. S. Court of Appeals last week reaffirmed its position that 28 U. S. C. 1782, which provides for federal assistance in obtaining discovery for use in foreign and international tribunals, does not apply to private commercial arbitration tribunals. El Paso Corp. v. La Comision Ejecutiva Hidroelectrica del Rio Lempa, 2009 U. S. App. LEXIS 17596 (5th Cir. Aug. 6, 2009). The Fifth Circuit had adopted that position ten years ago in Republic of Kazakhstan v. Biedermann Int’l, 168 F. 3d 880 (5th Cir. 1999). In that case, the court examined the legislative history of the 1964 amendments to section 1782 — which substituted “foreign or international tribunals” for “foreign courts” — and concluded that the expansion was intended to cover international government-sanctioned tribunals but not private international commercial arbitral tribunals.

The Fifth Circuit in El Paso rejects the notion that its position is in conflict with the interpretation of Section 1782 given by the Supreme Court of the United States in Intel Corp. v. Advanced Micro Devices, Inc., 542 U. S. 241 (2004). The El Paso panel notes that the status of private arbitral tribunals under Section 1782 was not a question presented to or addressed by the Intel Court. The panel also parts ways with those judges and commentators who have believed the Intel Court, in dicta, had accepted the view that private arbitral tribumals were within the coverage of Section 1782.

The Fifth Circuit’s decision in El Paso appears to be the first occasion since Intel that a federal appellate court addressed the issue of whether a private arbitral tribunal is within the coverage of Section 1782. At present there is no conflict in the circuits; only the Fifth and Second Circuits have addressed the issue, and their positions are the same.

Decisions of federal district courts have been sharply divided. Only two days before the El Paso decision, a federal district judge in Florida held that an arbitral tribunal constituted under the auspices of the ICC Court of International Arbitration is not within the coverage of Section 1782. (In re: Application of Operadora DB Mexico, S. A. de C. V. , 2009 U. S. Dist. LEXIS 68091 (M. D. Fla. Aug. 4, 2009). (Indeed the Florida district court’s decision is a particularly thorough and elegant exposition of the position that Section 1782 does not apply to private tribunals, and it may well become the model for future decisions).

A great deal has been written about whether more U.S.-style discovery in international arbitration is a good idea when it is imposed by federal judges who may ignore the wishes of the arbitrators and the discoverability of the information under the law governing the arbitration. Only one of the points in that debate will be noted here: that if Section 1782 applied to private arbitral tribunals sitting outside the United States, the rights of international arbitration litigants to obtain discovery from non-parties would be greater in an a foreign arbitration than in an international arbitration taking place in the United States. In the latter case, non-parties may only be subpoenaed to testify at a hearing and to bring documents with them to the hearing. Among the salutary effects of excluding private arbitral panels from Section 1782 is to avoid an odd inconsistency in the U. S. approach to non-party witness participation in international arbitrations.

Dear Readers:
A recent commentary by Dr. Georg von Segesser of Schnellenburg Wittmer, Zurich, posted on the Kluwer Arbitration Blog (www.kluwerarbitrationblog.com) discusses a recent Swiss Federal Supreme Court case in which the Court denied a motion to vacate an award based on new evidence presented to the Court on an issue of fact determined by the Arbitral Tribunal. I posted on the Kluwer Blog a comment concerning how the same issue might be addressed by an American federal court. That comment is republished here.

Georg, I believe a U. S. Court would have reached the same result given this procedural history, but that U. S. courts would be generally more flexible that the Swiss Federal Supreme Court in admitting “newly-discovered” evidence at the enforcement/vacatur stage.
Article V(2)(b) of the New York Convention does not on its face address what evidence may be offered in support of an objection to recognition and enforcement based on public policy. Neither does Section 10(a)(1) of the U.S. Arbitration Act, which would apply if a U. S. court had jurisdiction to set aside the award. That section provides that an award may be vacated if the award was “procured by corruption, fraud, or undue means.”
If this were a U. S. award, and the application were made to set it aside, our courts require “clear and convincing evidence” of the procurement by fraud, etc, and they further require proof that the improper conduct would not have been discoverable by the exercise of reasonable diligence (by the aggrieved party) during the arbitration.
Based on the Swiss Federal Court’s ruling in regard to the interim award, I gather the facts here would likely cause a U. S. court to rule that there was a lack of reasonable diligence, and so the award would stand.
Were the issue presented in a U. S. proceeding to enforce a foreign award, one may wonder whether bribery in a private commercial context, as opposed for example to a government procurement contract, would bring about application of the public policy ground for denying enforcement under Article V(2) (b). One would also expect the “due diligence” principle to be applied with regard to newly-discovered evidence, by analogy to the requirements under Section 10(a)(1).

Hall Street v. Mattel, and the Problem of Post-Award Litigation

By Marc J. Goldstein

Sixteen months after the Supreme Court’s decision in Hall Street Assocs. v. Mattel, Inc., 128 S. Ct. 1396 (2008), and despite the rivers of “ink” that have flowed in commentary on the implications of the decision, one may seriously ask whether the realm of post-Award judicial proceedings has really changed very much. And one may well ask, should that realm change more dramatically than it already has, and if so, how do we get from here to there?

For those who desire full-bore judicial review on the merits of the decisions of arbitrators, the Hall Street decision is of course a major disappointment. The holding of Hall Street is that in a case to which the Federal Arbitration Act applies, the parties may not by agreement invest the courts with broader powers of review than the FAA prescribes. But even within the four corners of the Court’s opinion, one finds something of a roadmap to expanded judicial review. The parties might agree, said the Court, that any motion to confirm, vacate, modify, or correct the award shall be brought only in the courts of a particular state and shall be determined according to the arbitration law of that state. Find a state whose arbitration law provides for expanded review on the merits, and subscribe. That option was of course widely understood before Hall Street, and I doubt that the decision has provoked a massive flight to state courts in the drafting of arbitration clauses.

Another alternative for expanded review, not discussed in the Hall Street opinion and little discussed in the commentaries, is drafting the arbitration clause to provide for an arbitral appeal panel with powers to review the “trial” arbitrator’s conclusions of law and findings of fact according to an agreed-upon standard.
This option, while legally possible, does require for effective implementation the thoughtful involvement of an arbitration lawyer before signing of the contract. If the parties are otherwise agreeing to arbitrate under a particular set of institutional rules, such as those of the AAA or CPR, to effectuate an agreement for appellate arbitration they must expressly opt out of the rules providing for the finality of the “trial” arbitrator’s award, and provide that such award shall not be final for purposes of any application for judicial relief in respect of the award until the agreed arbitral appellate process has been completed (or the time to invoke it has expired). But arbitral institutions have not leaped into the fray to offer services as administrators of appellate arbitration, or to promulgate rules of arbitral appellate procedure. One might infer from this that not very much of a market for appellate arbitration has emerged. Companies that covet the protection against error of appellate review will generally opt to litigate in the first instance before judicial tribunals.

And so Hall Street does not appear to have wrought any widespread and dramatic changes in the way arbitration clauses are written. But what it may well have done, I believe, is to reinforce a movement, if not a clear trend, away from arbitration and back to the judicial system.

Disgruntled users of arbitration perceive that arbitrators fail to keep control of proceedings, and that arbitral institutions fail to keep control of arbitrators. The result, too often, is a bloated hearing record, too unwieldy for the arbitrator(s) to readily digest, and final awards that are flawed or superficial because the arbitrators’ task is simply too daunting. Corporations that have spent millions in legal fees and arrived at such results are prone to say “never again.”

But so much for the “dark side” of Hall Street and the state of the arbitral process. Within the arbitral community — the group of providers who believe arbitration can and often does produce appropriate outcomes at reasonable cost — the pressing question is whether Hall Street is a step toward the overall reduction of post-award judicial proceedings.

Indications from the decisions of federal appellate courts are that the rate of futile motions to vacate based on alleged manifest disregard of the law has not been affected to any significant degree. In the Second Circuit, the Court’s pre-Hall Street manifest disregard jurisprudence has been “reconceptualized as a judicial gloss” on Section 10(a)(4) of the Federal Arbitration Act. (Stolt-Nielsen SA v. Animalfeeds Int’l Corp., 548 F. 3d 85, 94 (2d Cir. 2008), cert. granted 2009 U. S. LEXIS 4345 (U. S., June 15, 2009)).That section provides that an award may be vacated if the arbitrators exceeded their powers, or so imperfectly executed them that no final and definite award was made. The Second Circuit, by reverse-engineering its manifest disregard jurisprudence into statutory form — taking to heart the Supreme Court’s musing that “maybe” the Court’s original use of the term “manifest disregard” was as a shorthand summary of the statutory criteria — has postponed any fresh judicial thinking within its domain about what “exceeding powers” actually means. In the Ninth Circuit, the position is that the manifest disregard doctrine was regarded, even before Hall Street, as a judicial construction of “exceeding powers,” so that no change in approach is required. So said the Court in the Comedy Club case (Comedy Club, Inc. v. ImprovWest Assocs., 553 F. 3d 1277 (9th Cir. Jan. 29, 2009)), upon remand for reconsideration in light of Hall Street.

An approach holding more potential for actual change in the legal landscape is that taken by the 5th Circuit in Citigroup Global Markets Inc. v. Bacon, 562 F. 3d 349 (5th Cir. 2009). The Court observed that, as a result of Hall Street, “the term itself [manifest disregard], as a legal term of art, is no longer useful in actions to vacate arbitration awards.” This approach strikes me as the most jurisprudentially sound, and also as the one most likely to force courts to develop “exceeding powers” jurisprudence systematically and on a case-by-case basis. It is jurisprudentially sound because it builds upon the Supreme Court’s most direct declarative statement in Hall Street about the Court’s original use, in Wilko v Swan, 346 U. S. 427 (1953) of the expression “manifest disregard.”. The Court said in Hall Street that, in its own jurisprudence, it has simply “taken the Wilko language as we found it, without embellishment.” (128 S. Ct. at 1404).

And if the Supreme Court has, for the moment at least, reduced “manifest disregard” to the status of a tantalizing phrase of undetermined meaning in a 56-year-old overruled decision, then lower courts are well-advised to approach “exceeding powers” challenges to arbitral awards without reference to a discredited body of non-statutory jurisprudence built up over five decades, from the humble(d) origins of that rhetorical flourish in Wilko.

The utility of discarding “manifest disregard” as a legal term of art should not be underestimated. Despite repeated judicial pronouncements limiting the doctrine, the words themselves have tempted generations of American litigators to seek judicial review of allegedly erroneous arbitral conclusions of law, conflating in their arguments “manifest” with “obvious” and “disregard” with “error.” This occurred despite the fact that, in its original incarnation in Wilko, “manifest disregard” was plainly used to refer to something that was not judicial review of arbitral awards for legal errors: ” [T]he interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation.” (Wilko, 346 U. S. at 436-37).

One might hope for the development of a nationally-consistent body of Section 10(a)(4) jurisprudence that arbitrators exceed their powers only when (1) their actions are not even arguably in furtherance of the contract that empowers them, (2) they purport to rule on the merits in a case over which they do not have jurisdiction, or (3) they purport to act at a time when they have exhausted their powers, and become functus officio, by rendering a final award in a case, or on an issue or issues in the case.

But even a well-developed and predictable body of law about when arbitrators exceed their powers, and the expulsion of “manifest disregard” from the legal lexicon, will not deal with the fundamental problem. That problem is that post-award judicial proceedings cost a great deal and take a long time, and there is no provision in the Federal Arbitration Act for recovery of costs and attorneys’ fees by the prevailing party in post-award litigation. In my view it is long past the time when the English Rule rather than the American Rule should govern in proceedings under the FAA. The access-to-justice rationale that provides the historical justification for the American Rule should not apply where the parties have agreed, or adopted rules of arbitration that provide, that the arbitration winner shall or may in the arbitrator’s discretion recover legal fees from the loser. The FAA should provide that the rule on fee-shifting in post-award proceedings shall be what the parties have agreed, or if the clause is silent, then the same fee-shifting agreement or rule that governed the arbitral proceedings pre-award shall also govern any litigation post-award.

Such an amendment to the Act offers the best prospect to contain the epidemic use of post-award proceedings by well-financed parties to leverage settlements for less than the sums awarded against them by the arbitrators.

Marc J. Goldstein is a litigator and arbitrator based in New York. He has practiced independently since 2007, after 27 years spent mainly in a large international law firm. He concentrates his practice on international commercial disputes. He is a Fellow-Elect of the College of Commercial Arbitrators and a Fellow of the Chartered Institute of Arbitrators, and is on the international arbitrator rosters of the ICDR, CPR, SIAC, WIPO and CIDRA. He is a member of the North American Arbitration Committee of the ICC. He is also on the mediation panel of the New York Supreme Court Commercial Division. His widely-read Arbitration Commentaries can be found at http://arbblog.lexmarc.us.