The death or health-related resignation of an arbitrator during the course of the proceedings is a vexing problem that admits of no easy or fully satisfactory solution. If proceedings have been extensive in a complex case, the substitute arbitrator may never fully “catch up,” and may never fully gain the parties’ confidence that he or she understands the case. Yet starting the case over, or recycling to an early stage, may be a sacrifice of time and cost that one or both parties find unacceptable.

A recent federal district court case in New York (In re Ins. Co. of North America v. Public Serv. Mut. Ins. Co., 2009 U. S. Dist. LEXIS 55271 (S. D. N. Y. June 29, 2009)) addressed a special wrinkle on this problem: what to do when the resigned party-appoonted arbitrator, not yet replaced, returns to health and is able to resume duties.

Before I discuss the INA case, a short survey of international rules is in order. The issue of appointing a repacement is rarely difficult, with most rules providing for replacement according to the original agreed selection method. The more troublesome issue is what becomes of the prior proceedings. The perceived collision of two core values in international arbitration — party equality and procedural efficiency — have led to a variety of approaches.

ICDR Rule 11(2) provides that the reconstituted tribunal will decided in its sole discretion what if any proceedings shall be repeated. The UNCITRAL rules provide, in Article 14, that “if the sole or presiding arbitrator is replaced, any hearings held previously shall be repeated; if any other arbitrator is replaced, such prior hearings may be repeated at the discretion of the arbitral tribunal.” The UNCITRAL approach is followed, for example, in the Singapore and Kuala Lumpur rules. But several institutions have found the UNCITRAL approach inadequate.The Hong Kong International Arbitration Centre in its recently-enacted Rules for Administered Arbitration provides that “if an arbitrator is replaced, the proceedings shall resume at the stage where the arbitrator who was replaced ceased to perform his/her functions, unless the arbitral tribunal decides otherwise. ”
The arbitration rules of the ICC, Stockholm Chamber of Commerce, and World Intellectual Property Organization (WIPO), provide that in case any arbitrator is replaced, the reconstituted Tribunal will decide whether and to what extent proceedings shall be repeated.

United States law, notably in the federal Second Circuit Court of Appeals in New York, contains a “general rule” of long standing that upon the death of a party-appointed member of a three-member tribunal, the entire arbitration must be repeated before a new panel, save for any issue already finally decided in an interim or partial award.

In INA, the arbitration was conducted before a three-member tribunal under insurance industry rules that did not address the issue of replacement. The Respondent’s party-appointed arbitrator resigned with a grave illness just after the Tribunal had issued a unanimous decision granting summary judgment against Respondent on several issues including its principal legal defense. Under the applicable arbitration rules, that decision was non-final, and Respondent moved for reconsideration just prior to its arbitrator’s announcement of his need to resign.

Following the resignation, Respondent moved in court for a permanent stay of proceedings before the original panel, and to vacate the interim award granting partial summary judgment The Court initially granted the stay motion, invoking the “general rule” applicable upon death of a party-appointed arbitrator — unaware that, even before oral argument on the stay motion, the resigned arbitrator had sufficiently recovered to begin seeking new appointments (a fact known to Respondent’s counsel and not disclosed to the Court). When Claimant’s counsel learned of the resigned arbitrator’s return to health, it moved the Court to vacate its order staying the arbitration and to exercise its powers of appointment under Section 5 of the Federal Arbitration Act to reinstate the resigned arbitrator to the panel. Reliance was placed on Federal Rule of Civil Procedure 60(b)(2), permitting relief from a judgment order, upon presentation of new evidence that could not have been presented at the time of the original proceedings.

In the INA decision, the motion to vacate the Court’s original order staying the arbitration was granted. In practical terms, the parties were directed to resume where the arbitration had left off, before the reinstated original Tribunal.

The Second Ciricuit’s “general rule” that the death of a party-appointed arbitrator requires a new start with a new tribunal has its roots in the U. S. domestic tradition of partisan party-appointed arbitrators. But the rule has never been stated by the courts as one that applies only when the party-appointed arbitrators are not impartial. It has been explained as being necessary “to avoid forcing a party to proceed over its objection before a panel where its own arbitrator would not have the full benefit of participating in the hearings.” (In re Pemex – Refinancion v. Tblisi Shipping Co., 2004 U. S. Dist. LEXIS 17478 (S. D. N. Y. Aug. 29, 2004)). But the rule has been applied even where no evidentiary hearings have occurred, and so the influence of the party-appointed arbitrator’s advocacy role is evident. As the Court stated in the Pemex case: “Given the
crucial role that arbitrators play, from assessing the credibility of witnesses to serving as advocates for the respective appoint[ers] (sic), it makes sense that it is only in instances where a panel is completely without power to revisit an issue that the Court has approved the appointment of a replacement.” Id. at *19.
A much-cited decision from the early 1970s, in justifying the rule, refers to the party-appointee’s role as “an amalgam of judge and advocate.” (Cia de Navegacion Omsil, S. A. v. Hugo Neu Corp., 359 F. Supp. 898 (S. D. N. Y. 1973)).

And yet the rule has been applied by courts without explicit reference to the appointee’s impartiality or lack of it.

In the INA decision, no mention is made of whether the party-appointees were, by agreement, not impartial. One suspects that this was the case, as otherwise Claimant could be expected to have argued that the impartiality of the party-appointees should be a “special circumstance” justifying an exception to the “general rule.”

For the past five years since the revision of the ABA/AAA Code of Ethics, even in domestic arbitrations the party-appointees must be independent and impartial unless there is an express agreement that they shall not be. And so it is useful to underscore the provenance of the Second Circuit’s “general rule,” so that the courts may consider in future cases whether impartiality of the party-appointed arbitrators may lead to a different outcome in many cases.

The international rules mentioned above reflect a widely accepted norm that, at least within a Tribunal of impartial arbitrators, the discontinuity of having to replace a party-appointed arbitrator is not such a significant disadvantage in every case that a per se or presumptive start-over rule is warranted.

Further, even where the party-appointed arbitrators are by agreement partisan advocates, the Second Circuit’s “general rule” is arguably obsolete. The duration of the typical contemporary complex commercial arbitration is measured in years, making a start-over rule antithetical to arbitration’s aspirations to be a more efficient than court adjudication. Even in cases where an arbitrator dies after hearing testimony, in a non-routine case with multi-day hearings there will typically be a transcript if not also a video record. Parties appearing before arbitrators of a certain age or frailty have the ability to manage the risk of death or resignation by preserving the testimonial record. And where a partisan arbitrator has resigned, but months or years of further proceedings are likely, the replacement arbitrator can assume the advocacy mantle and the appointing party will not ordinarily face the prospect of deliberations on key issues without the benefit of effective advocacy within the Tribunal.

One might expect, or ar least hope, that when the Second Circuit is called upon to re-assess its start-over “general rule,” it will take these factors into account and adopt a more pragmatic case-by-case approach.

The US Fifth Circuit Court of Appeals, acting in a long-running contract dispute between an American shipbuilder and the Republic of Venezuela, has held that the Federal Arbitration Act (“FAA”) might permit a District Court, in proper circumstances and with sufficient statement of justification, to compel arbitration at a place of arbitration other than the one established in the contract, or to deny enforcement of the arbitration clause entirely based on political conditions at the agreed place of arbitration. Northrop Grumman Ship Systems Inc. v. Ministry of Defense of the Republic of Venezuela, 2009 U. S. App. LEXIS 15260 (5th Cir. July 9, 2009).

Whereas the outcome in Northrop Grumman was to remand the question of the place of arbitration to the District Court, and whereas the District Court at an earlier stage had compelled arbitration in its own federal judicial district in State of Mississippi, some comments on the principles that should guide the District Court are in order.

The Fifth Circuit, in stating the “general principles” that should guide the District Court, curiously omitted any reference to the New York Convention or Chapter Two of the FAA. The Court referred to its holding in Nat’l Iranian Oil Co. v Ashland Oil Co., 817 F. 2d 326 (5th Cir. 1987) that “a forum selection clause establishing the situs of the arbitration must be enforced unless it conflicts with an explicit provision of the Federal Arbitration Act.” 817 F. 2d at 332.

But the Fifth Circuit in National Iranian Oil had analyzed the issue under Chapter One of the FAA because Iran was not then a party to the New York Convention. The Court in Northrop Grumman does not mention that Venezuela, even at the time of the contract, was a member state of the New York Convention. And so the Fifth Circuit here neglects to refer to the Convention and FAA Chapter Two as sources of principles governing the enforceability of the parties’ contractual choice of Caracas as the seat of arbitration.

Article II (3) of the Convention states that “(t)he court of a contracting state, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the agreement is null and void, inoperative, or incapable of being performed. ”

The text of Article II (3) raises several issues that arise when, as in Northrop Grumman, a foreign party’s motion to compel arbitration is opposed on the basis that the agreed seat of arbitration is an unreasonable forum in view of political instability.

First, the plain meaning of Article II (3) would appear to permit a court to deny a motion to compel arbitration only if it may find that the agreement to arbitrate, and not merely the agreement on the seat of arbitration, is “null and void” or “incapable of being performed.” The answer to that question may depend on whether the agreement on the seat is viewed as separate and severable from, or completely integral to, the agreement to arbitrate. And the answer to that question cannot be ascertained until a court first decides what law is applicable to interpretation of the arbitration/forum selection clause.

The contract at issue in Northrop Grumman, between a US company and an instrumentality of Venezuelan Government, providing for arbitration in Caracas and (one may infer) application of Venezuelan law to the merits of disputes, seems an unlikely candidate for application of American contract law principles to determine the validity of the agreement to arbitrate. Yet the Fifth Circuit’s decision appears to assume that American contract law principles govern the question of whether the clause may be denied enforcement in whole or in part. Under potentially applicable transnational principles, the nearest analogs to common law doctrines of “impossibility” and “commercial impracticability” might not lead to the same conclusions as would be reached if American law were applied.

A second evident limitation on the power of a District Court is Section 206 of the FAA. That section provides: “A court having jurisdiction under this chapter may direct that arbitration be held in accordance with the agreement at any place therein provided for . . . .” The plain meaning of this provision would seem to negate the possibility of a District Court acting, in a Convention case, to compel arbitration at a place other than the agreed place, or to compel arbitration without reference to any place of arbitration if a place has been designated in the contract.

If these provisions, and the law applicable to interpret the arbitration/forum clause, lead to the conclusion that the clause must be enforced as written, is the aggrieved party without recourse? Not necessarily. If the forum clause is severable, the arbitral tribunal will have jurisdiction to interpret it. And the arbitral tribunal could hear and determine a preliminary contention that the place of arbitration designated in the contract has ceased to exist as a result of dramatically changed political conditions. If that determination is made, the agreement would stand, in its “reformed” state, as if no place of arbitration had ever been selected, and the authority competent to select a place of arbitration in the absence of agreement could select a seat.

Arbitration practitioners should watch with interest to see if the federal district court in Mississippi, on remand in the Northrop Grumman case, takes into account the relevant provisions of the Convention and Chapter Two of the FAA.

The U. S. Court of Appeals for the Eleventh Circuit has held that an arbitration agreement between a foreign seaman and his U.S. employer, proving for arbitration outside the U.S. under foreign law, was null and void becuase it prospectively waived the seaman’s rights under the federal Seamen’s Wage Act. Thomas v. Carnival Corp., 2009 U. S. App. LEXIS 14406 (11th Cir. July 1, 2009).

In Thomas, the court of appeals relied centrally on the much-discussed footnote dictum of the U. S. Supreme Court in Mitsubishi Motor Corp. v. Soler Chrysler-Plymouth, 473 U. S. 614 (1985). The Mitsubishi footnote states that, in case an arbitration clause and a contractual choice of non-U.S. law operate in tandem as a prospective waiver of the right to seek federal statutory remedies for antitrust violations, the Court would not hesitate to declare such an arbitration agreement null and void under the New York Convention, based on violation of U.S. public policy.

But the critical premise of the Supreme Court’s “prospective waiver” footnote in Mitsubishi was not the mere existence of federal statutory remedies, but rather that those remedies under the federal antitrust laws in particular were a fundamental feature of U. S. federal regulation of all private economic activity, and thus were a matter of fundamental American public policy. The Court in Mitsubishi noted that the basis of the pre-Mitsubishi doctrine of non-arbitrability of antitrust
claims was “the fundamental importance to American democratic capitalism of the regime of the antitrust laws. ” The Mitsubishi court quoted with approval the First Circuit Court of Appeals’ statement in Mitsubishi that “‘ a claim under the antitrust laws is not merely a private matter. The Sherman Act is designed to promote the national interest in a competitive economy; thus, the plaintiff asserting his rights under the Act has been likened to a private attorney general who protects the public’s interest. ” And the Supreme Court in Mitsubishi continued: “The treble-damages provision wielded by the private litigant is a chief tool in the antitrust enforcement scheme, posing a crucial deterrent to potential violators. ”

The “prospective waiver” Mitsubishi footnote is to be undertstood in this context, of a fundamental national public policy, and not merely a federally-conferred private remedy for a private wrong. This wouild seem to be clear from the complete text of the essential sentence in the Mitsubishi footnote: “(I)n the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy. ” 473 U.S. at 638 n.19.

In the past decade, the Supreme Court has referred to the scope of the “prospective waiver” doctrine only once, declaring in dictum earlier this year, in 14 Penn Plaza LLC v. Pyett, 129 S. Ct. 1456 (U. S. Apr. 1, 2009) that “a substantive waiver of federally- protected civil rights will not be upheld. . . .” That statement was made in the context of upholding the arbitration clause of a collective bargaining agreement that required arbitration of employment disputes.

The Eleventh Circuit’s decision in Thomas does not proceed on the basis that rights under the federal Seamen’s Wage Act are a matter of fundamental public policy. The principal right provided in that Act is that a seaman shall receive his wages on the earlier of 24 hours after the ship discharges its cargo or four days after discharge of the seaman from employment. This right, while an important economic protection for maritime laborers, lacks the broad social-ordering stature of the federal antitrust and civil rights laws.

The Eleventh Circuit attached no significance to this fundamental public-policy dimension of Mitsubishi, and in quoting its famed prospective waiver footnote, omitted by ellipsis the words “for antitrust violations” — leaving the impression that Mitsubishi broadly prohibits enforcement of a combined choice of forum and choice of law agreement that operates as a waiver of the right to pursue any federally-created statutory remedies.

That ellipsis was evidently inherited by the Eleventh Circuit in Thomas from the Supreme Court’s decision in Vimar Seguros v. M/V Sky Reefer, 515 U. S. 528 (2004). In Vimar, the Supreme Court held that a choice of law/choice of forum agreement to resolve maritime cargo disputes by arbitration in Japan under Japanese law was not unenforceable as a prospective waiver of provisions of the Carriage of Goods by Sea Act (COGSA) that restrict a carrier’s ability to limit liability. But the Supreme Court’s omission of the words “for antitrust violations” in Vimar was only meant to connote that the prospective waiver doctrine is not confined to the antitrust context. The Court gave no indication of an intent to extend the doctrine to all federal statutory remedies.

The Eleventh Circuit’s effort in Thomas to distinguish Vimar is also questionable in other respects. The Eleventh Circuit noted that in Vimar the Supreme Court considered the waiver claim premature because it remained possible that the arbitral tribunal in Japan would apply COGSA or provide equivalent protection under Japanese law. The seaman’s employment agreement in Thomas provided for the application of Panamanian law, and so the Eleventh Circuit was on firm ground in stating that an arbitral tribunal would not apply American law. But the court of appeals did not consider whether Panama law might be capable of affording remedies comparable to those offered by the Seamen’s Wage Act. Further, the Eleventh Circuit did not persuasively address an important element of the Supreme Court’s analysis in Vimar: the possibility of a “subsequent opportunity for (judicial) review” after completion of the arbitration. 515 U. S. at 540. That is to say, if a federal court might protect
statutory rights by refusing recognition of a foreign award that purports to impair them, then the court should be reluctant to deny enforcment of the arbitration agreement. The Eleventh Circuit considered that there would be no such opportunity later on if plaintiff did not obtain an award it its favor for some relief. 2009 U. S. App. LEXIS 14406 at *28-29. But it would seem evident that plaintiff could, after the arbitration, commence a separate action to assert a Seaman’s Wage Act claim in federal court, and the court would have the ability to deny res judicata effect to the award and to vacate in part its earlier order sending the claim to arbitration.

In summary, the Eleventh Circuit’s decision appears to extend the Supreme Court’s Mitsubishi public policy doctrine further than it has gone before and perhaps further than the Supreme Court has intended. The Thomas decision invites broader judicial intervention to block arbitration where U. S. parties have agreed to arbitrate under foreign substantive law, in potential derogation of their rights under federal statutes. This appears to be a undesirable retrenchment in the enforcement of agreements to arbitrate under the New York Convention.

With at least some United States district courts willing to consider discovery assistance to foreign arbitral tribunals, developments in the law concerning such discovery are of considerable interest.

Some recent U. S. cases deserve mention.

In Marubeni Am. Corp. v LBA Y.K., 2009 U.S. App. LEXIS 12953 (2d Cir. June 19, 2009), the federal appeals court in New York affirmed a district court’s order granting a request to obtain discovery from a non-party witness, made by a party to litigation pending in Japan. In Marubeni, the party opposing discovery argued that the district court had abused its discretion by granting the discovery, because that court allegedly did not consider whether the discovery request was a circumvention of evidence-gathering rules in the Japanese court. The appellate court rejected this contention, and said that even though the record did not reflect whether the information sought was discoverable in the Japanese system, the U. S. Supreme Court in the Intel case expressly declined impose a requirement of discoverability in the foreign jurisdiction. (Intel Corp. v. Advanced Micro Devices, 542 U. S. 241 (2004)).

It is interesting to compare the Marubeni outcome to the decision of a district court in Indiana, in In re Kutzer, 2009 U. S. Dist. LEXIS 29771 (N. D. Ind. Apr. 8, 2009). In Kutzer, the applicant was a defendant in a recently-filed patent infringement action in Germany, and was seeking discovery from the plaintiff in that case. Applying the Intel discretionary factors, the court denied discovery assistance, holding that the party appeared to be seeking to circumvent discovery procedures applicable in the German court. Clearly applicants for U.S. discovery assistance face a more difficult road when they seek discovery from a party to the foreign action. Here the district court judge pointed out that German civil procedure did provide for some discovery from the opposing party, although perhaps not as broadly as in the U.S. system. The court took exception to the applicant’s decision to seek discovery through the U.S. courts before even testing whether adequate information could be obtained through the procedures in the German court.

A third notable decision, Norfolk Southern Corp. v. Gen. Sec. Ins. Co., 2009 U. S. Dist. LEXIS 49827 (N. D. Ill June 15, 2009), is one of minority of federal district court decisions after Intel to hold that Section 1782 does not apply to arbitral tribunals created pursuant to a private contractual agreement. This federal district judge in Chicago read Intel to support the view that, for an administrative or arbitral body may be a “tribunal” under Section 1782, its decisions must be subject to judicial review — as were the decisions of the entity involved in the Intel case, the Directorate-General for Competition of the European Community.

Some readers of these Commentaries may find it useful to have ready access
to a profile of my international arbitration experience. I seek to provide
that here.

Representative International Arbitrations as Arbitrator

+ICDR case concerning interests in real estate trust. Parties US,
Netherlands, Israel. Chairperson of tribunal.

+ICDR case concerning investment banking compensation agreement. Parties US,
China. Sole arbitrator.

+ICDR case concerning breach of investment management agreement. Parties US,
Saudi.
Co-arbitrator.

+ICDR case concerning breach of industrial machinery contract. Parties: US,
Canada

Representative International Arbitrations as Counsel

+ ICDR case in New York re price determination in acquisition agreement.
Canadian client. New York law.

+ ICDR case in New York involving damages for delivery of defective steel
pipe from Chile. US client. Governing law New York Uniform Commmercial Code.

+ ICC case in London involving damages for breach of telecommunications
carrier agreement. US client. New York law.

+ SIAC case in Singapore concerning performing arts joint venture between
producer and Chinese state-owned entity. Austrian client. English law.

+ Danish Arbitration Institute case in Copenhagen concerning damages for
delivery of defective industrial machinery. US client. CISG and Danish law.

+ ICC case in Paris re termination of medical technology distribution
contract. Israeli client. New York law.

+ ICC case in Paris re termination of luxury goods distribution contract. US
client. Swiss law.

+ ICC case in Geneva re expropriation of pharmaceuticals company by Central
European State. US client. Yugoslav and international law.

+ ICC arbitration in Geneva re termination of couture fashion distribution
agreement. US client. New York and Italian law.

+ ICDR case in Miami concerning breach of cable television franchise
agreement. Argentine client. Dominican law.

+ Iran-US Claims Tribunal case in The Hague re expropriation of real estate
investment. US client. International law.

Representative US Litigations Relating to International Arbitration

+Federal district court and Second Circuit review of award re arbitrator
power to correct award.

+Federal district court proceedings to enforce award against Chinese entity
under New York Convention. Related proceedings for attachment of US assets
of Canadian entity.

+ Federal district court proceedings for injunction in aid of arbitration —
merits governed by Swiss law.

+ Federal district court proceedings for interim measures in form of
attachment of assets – merits governed by Dominican law.

The Supreme Court of the United States today granted certiorari to review a decision of the U. S. Court of Appeals for the Second Circuit, Stolt-Nielsen Transp. Group Ltd. v. Animalfeeds International Corp., 543 F.3d 85 (2d Cir. 2008), in which the Court OF Appeals continued to recognize the existence of “manifest disregard of the law” as a possible basis to set aside an arbitration award, and did so after express consideration of the doubts raised by the Supreme Court’s decision in Hall Street Associates v. Mattel, Inc., 128 S. Ct. 4936.

But the question presented for Supreme Court review in Stolt-Nielsen concerns class arbitration — specifically, whether the Federal Arbitration Act bars class arbitration where the agreement to arbitrate is silent about class arbitration. The Supreme Court once before had granted certiorari to decide this issue, in Green Tree Financial Corp. v. Bazzle, 539 U. S. 444 (2003). But the Court did not reach that issue. Instead, five justices concluded an arbitrator should first decide, as a matter of interpretation, whether the contract indeed was silent about class arbitration.

Thus, the issue not resolved in Bazzle is the one the Court is asked to consider in Stolt-Nielsen — the arbitrator in Stolt-Nielsen having already given a partial award finding that the contract permits class arbitration. Whether the Supreme Court will address the post-Hall Street status of “manifest disregard of the law” is uncertain at this stage. This cannot be ruled out, but it is not the question directly presented for review in the Petition for Writ of Certiorari.

Stolt-Nielsen in its Petition frames the Bazzle issue mainly as one of arbitral power under the FAA. Its argument is that when an arbitrator permits class arbitration under a contract that is silent about class arbitration, the arbitrator does not construe the contract but instead modifies it. If that position is accepted, then clearly the arbitrator exceeds her powers by modifying a contract, and an award providing for such modification should be vacated under FAA Section 10(a)(4).

But what if the Court takes the view that the arbitrators here were construing the agreement? Has Stolt-Nielsen waived the argument that this construction was in “manifest disregard of the law?” Stolt-Nielsen appears to have left the door for such an argument just slightly ajar, stating in its Petition for Certiorari reply brief: “[A]rbitrators who… read contracts that are silent regarding class arbitration to permit class proceedings based on general principles or policies, rather than on express terms or other evidence of the parties’ actual intent, have either manifestly disregarded the limits of their commission … or ‘exceeded their powers’.”

That may not be enough to convince a majority of the Supreme Court justices that the “manifest disregard” issue decided in the Second Circuit is properly before the Court. The manifest disregard issue as framed by Stolt-Nielsen in the Second Circuit was that the arbitrators’ construction of the arbitration clause to allow for class arbitration was in manifest disregard of federal maritime law. The Petition for Certiorari clearly does not seek review of the Second Circuit’s rejection of that argument. Thus it seems relatively unlikely that the Court will take this case as an occasion to shed further light on the status of manifest disregard of the law after Hall Street.