Significant foreign judgments concerning arbitration statutes based upon the UNCITRAL Model Law capture limited attention in the US, because the US is not at the federal level or under the laws of 44 of the 50 states a “Model Law jurisdiction.” But in some of the six states that have adopted international arbitration statutes based on the Model Law (California, Connecticut, Florida, Georgia, Illinois, Texas), the number of locally-seated international arbitrations is said to be on the rise (and there is at least anecdotal evidence that this is so; see, for example, last month’s post: “International Arbitration in the California Style”). Courts and arbitral panels functioning on international arbitrations seated in those states will perhaps have occasions to become more aware of a body of quasi-precedent found in the judicial decisions of foreign States where iterations of the Model Law are in force.

A decision of the Ontario Superior Court in Toronto (a first instance court of the Ontario province) dated April 13, in connection with a Toronto-seated, Yukos-related, Energy Charter Treaty (ECT) arbitration, is a useful case in point. (The Russian Federation v. Luxtona  Ltd., 2018 ONSC 1419, accessible on www.italaw.com). This decision concerns what American litigators would classify as a motion in limine, seeking to limit the evidence presentable to the Court concerning several critical issues of arbitral jurisdiction. Indeed one of those jurisdiction issues under the ECT figured prominently in the more celebrated Yukos arbitration conducted in the Netherlands:  whether the ECT’s clause for “provisional application” of the ECT to Russia, which signed but has not ratified the ECT, permits the Arbitral Tribunal to hear the case at all, or limits the claims that might be heard, based on considerations of Russian law. In this Luxtona arbitration, the Tribunal in March 2017 made a preliminary-issue ruling in the form of a partial award that it does have jurisdiction – the text of which is not to my knowledge available publicly — and this has triggered Russia’s resort to the Toronto court to hear that issue under the Ontario version of Art. 16(3) of the Model Law.  (Russia’s application asks the Court to vacate the partial award containing the Tribunal’s ruling, and thus invokes Art. 34 of the Model Law. Art. 34 adopts the New York Convention’s grounds for refusal of recognition and enforcement as the grounds upon which a court at the arbitral seat in a Model Law State may annul an award. Our focus here, however, is upon Art. 16(3), as we are concerned with the contributions made by its text toward answering the question of what deference is due to the Tribunal’s decision on an issue of Tribunal jurisdiction. Faithful Toronto readers will consider me remiss if I fail to observe that Ontario, as part of its International Commercial Arbitration Act, 2017, not only incorporated the 2006 version of the Model Law, but also for the first time formally incorporated the New York Convention into the statute. The incorporation of the latter, however, is not implicated in the instant Luxtona matter, as potential annulment of an award in a Toronto-seated arbitration is addressed in the Model Law).

Model Law Art. 16(3) provides:

“The arbitral tribunal may rule on a plea [that the Arbitral tribunal does not have jurisdiction] either as a preliminary question or in an award on the merits. If the arbitral Tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in Article 6 to decide the matter, which decision shall be subject to no appeal.”

The six US state versions of the Model Law contain essentially this formulation, and in addition specify that failure to make the request within the 30-day period shall be a waiver.

In its essence, the Ontario court’s decision on this motion to limit evidence turned on the question on what degree of deference is to be accorded to the Tribunal’s preliminary-issue partial award ruling that it has jurisdiction to adjudicate ECT claims against Russia. We are well-advised to avoid framing this issue as “scope of review” because, at least upon the view taken by the Ontario first instance court, the hearing specified by Art. 16(3) of the Model Law “is not an appeal.” Instead according to the court it is what American lawyers would regard as a de novo proceeding — although the Ontario court is somewhat reluctant in using that phrase: “Whether or not described as a hearing ‘de novo’, such a hearing cannot be confined in advance to the record before the tribunal whose ruling in jurisdiction has been challenged.”

On a “true question of jurisdiction,” the Ontario court tells us, the ruling of the Arbitral Tribunal is to be assessed for its “correctness.” The Court draws our attention back to the Ontario Court of Appeal decision in Mexico v. Cargill, Inc. (2011 ONCA 622, available on www.italaw.com), a case that involved an application under Art. 34 of the Model Law to annul a final award in a Toronto-seated NAFTA Chapter 11 case. In Cargill the Tribunal had awarded lost profits damages in two categories held to have resulted from Mexico’s unfair and inequitable treatment of Cargill’s investment in Mexico: lost profits on corn syrup sales of a Cargill Mexican subsidiary to customers in Mexico, and lost profits of Cargill in the US on corn syrup sales to the Cargill Mexican subsidiary.

Whether the latter category of damages was properly awarded based on NAFTA Chapter 11 provisions that permitted an investor to recover only for injury to the investor’s investment caused by actions taken by the State in regard to the investment was not “a true question of jurisdiction”, but an integral element of the merits, held the Ontario appeal court in Cargill. On that question, said the court,  the Tribunal’s award was entitled to deference, but had the question been, for example, whether an investor admitting to UK nationality could bring a claim under NAFTA Chapter 11, that would have presented a “true question of jurisdiction” on which the Tribunal’s decision would have had to be assessed for its correctness. The Cargill court in this regard had invoked the much-discussed and then rather recent decision of the UK Supreme Court in the Dallah v Pakistan case (Dallah Real Estate and Tourism Holding Co. v. Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46], available at www.supremecouurt.uk] where it had been held that whether an arbitration agreement engaged by the religious affairs ministry of the Pakistani State bound the sovereign to arbitrate was indeed a question of jurisdiction to be determined by the Court without deference — “de novo” in US scope of review terms — even in the posture of deciding whether the UK should recognize and enforce the award made in a Paris-seated arbitration.

The Ontario court in Luxtona, invoking Cargill, Dallah, and similar authorities in such Model Law States as New Zealand, Australia, Ireland, and Hong Kong, held that whether and to what extent Russia was bound to arbitrate ECT claims under the Treaty’s “provisional application” clause is such as “true question of jurisdiction,” and, no deference being due on this question to the Tribunal’s determination, it followed that the factual record (in terms of expert opinion evidence) pertinent to the issue should not be limited to the materials the parties had presented to the Tribunal. Model Law Article 16(3), said the court, “can[not] be construed as constraining the court to the four corners of the evidentiary record before the Tribunal still less the findings of fact regarding foreign law made by the Tribunal. The court is directed [by Art. 16(3)] to ‘decide the matter’ and not merely to review the decision of a tribunal whose very existence may or may not have been authorized.” (emphasis supplied).

Commentators have lamented that US arbitration case law has produced a version of the doctrine of compétence-compétence that, in regard to ultimate judicial control over the exercise of jurisdiction by arbitrators, is quite excessive in comparison to foreign counterparts. Our jurisprudence accepts that the delegation of jurisdiction-deciding power to arbitrators, resulting from the parties’ contractual adoption of arbitration rules conferring such power, is — at least where countervailing considerations are absent— permanent and absolute, putting arbitral decisions on arbitral jurisdiction on the same footing as other arbitral decisions of fact and law that are accorded only limited and deferential judicial review. The lamentation may be said to have two essential components: first, that US courts in their overbroad use of the phrase “arbitrability” have obscured important distinctions that ought to be made among discrete jurisdiction issues that might or might not warrant deference to arbitral determinations (distinctions that are to some extent captured by the Canadian concept of a “true question of jurisdiction”), and, second, that parties’ intentions to delegate essentially final authority over jurisdiction issues to arbitrators are rather tenuously and debatably inferred from the mere incorporation into an arbitration agreement  — especially one whose existence or validity is at issue – of provider rules giving arbitrators power to rule on objections to their jurisdiction.  (See, e.g., G.A. Bermann, Arbitrability Trouble, 23 Am. Rev. Int’l Arb. 367, 374-78 (2012), and for a recent example of the persistence of such “arbitrability trouble” in US case law, see Sygenta Crop Protection LLC v. Insurance Co. of North America, 2018 WL 1587601 at *5 (S.D.N.Y. Mar. 29, 2018) (incorporation into arbitration agreement of AAA Commercial Arbitration Rules “provide[s] an unmistakable delegation to the arbitrator to decide arbitrability”)).

Until now, this problematic US case law does not include (to my knowledge) any instances where the contracting parties’ delegation of jurisdiction-deciding power to international arbitrators was made in an agreement that provided for international arbitration seated in one of our six Model Law-adopting states. And more generally speaking, the US case law on delegation of jurisdiction issues to arbitrators appears not to have had to address what inferences about the parties’ delegation intentions are inferable from the provisions of state arbitration law – such as the six state versions of the Model Law — that apply by virtue of the designation in the arbitration agreement of the seat of arbitration. Perhaps in the Toronto court’s current encounter with Russia’s position on the ECT we are witnessing the precursor of an eventual development in US law, whereby in an international arbitration seated for example in California or Texas or Florida the courts’ conclusions about what the parties intended will be that they delegated jurisdiction issues to the arbitrators as an initial matter — as a matter of facilitating an effective arbitral process — but reserved the right to have non-deferential de novo judicial consideration of arbitral rulings on certain “true questions of jurisdiction” in the framework of a motion to vacate the award.  Further, such decisions might be a sort of first wave of a broader reconsideration of the question of how the parties’ delegation of jurisdiction issues to the arbitrator affects the judicial deference due to the arbitrator’s decision of those issues.

 

The decision of one party or group of parties to an international arbitration, more often than not the Respondent(s), to decline to advance their share of the deposits required for the fees and expenses of the arbitrators, has become so common that it may almost be said to be a standard feature of international arbitrations. And this is not necessarily or primarily a function of impecuniousness of the non-paying party. It is more often rather a business decision.  This is less often the case of course when the Respondents assert counterclaims against the Claimants, or cross-claims against one another, for significant monetary amounts, and under the applicable arbitration rules would be deemed to have withdrawn such claims, or by order would be prevented from prosecuting them, if the proportionate share of deposits were not paid. Such non-payment decisions introduce significant inefficiencies, particularly when Tribunals are required to or consider it prudent to suspend proceedings until full payment of requested deposits has been made. Case managers in provider organizations, not to mention depository/payment agents designated solely for that purpose in ad hoc arbitrations, face the challenging task of explaining to the parties how the rules operate, what their obligations are and what recourse they may have, while not crossing a line to furnish legal advice to either the paying party or the non-paying party. These conditions motivated your Commentator to spend a recent afternoon considering what a Guidance Note to parties on this subject might contain.

Two caveats before we begin:  First, this Post is not endorsed by or encouraged by any provider organization or any group seeking to influence a provider organization. It is not written in parallel to any known endeavor of any provider organization to promulgate any such Note. And it is not based on any interviewing of provider organization personnel to determine if the perceptions reflected in this draft are on the mark.  Second, this Post is written with reference to the practices of those provider organizations that strive to withhold from the arbitral tribunals the identity of the paying and non-paying parties in case payments have not been made equally. The ICC obviously is the exception to this, as its publication of Financial Tables to the Tribunal provides full transparency at all stages as to the respective contributions of the parties.

The imagined Guidance Note now follows:

“Dear Parties: This Guidance Note concerns an important element of arbitration under the XYZ Rules: the parties’ duty to submit deposits to the XYZ that will be used to pay the fees and expenses of the Arbitral Tribunal. The Rules provide that it is the joint responsibility of the Claimant (or Claimants as a group) and the Respondent (or Respondents as a group) to pay in equal shares the deposits requested by the XYZ — unless of course the agreement to arbitrate provides for a different allocation. When the Claimant(s) and Respondent(s) each timely comply with these requests — which are based on the Tribunal’s estimates of fees and expenses for the entire arbitration or one or more phases of it, as reviewed and approved by the XYZ — this goes far to secure the efficient progress of the arbitration. The refusal of a party to meet its obligation to pay its share of the deposits is strongly discouraged. However, this occurs with considerable frequency, and so the consequences of such a refusal should be understood. These consequences are stated concisely in Rule __ , but experience indicates that the Rule leaves room for misunderstanding, which this Guidance Notes seeks to remedy.”

“Once the case manager has determined that a party will not pay its share of a requested deposit, the case manager will notify the other party of this circumstance and invite that party to pay the non-paying party’s share. This is an invitation, not a direction, but it is important that the consequences of a party’s refusal to bear the opposing party’s share of deposits, when invited to do so, should be understood. First, if the non-paying party is the Respondent, as is most often the case, any counterclaim (or cross-claim) asserted by the Respondent [is to be deemed withdrawn] [is subject to being dismissed on application by the Tribunal] by reason of the non-payment. This is so whether or not the Claimant elects to pay the Respondent’s share of the requested deposits.”

“To effectuate the counterclaim’s withdrawal, under a rule that provides for such treatment, it will be necessary for the case manager to notify the Tribunal of the non-payment by Respondent whether or not Claimant elects to pay Respondent’s share.”

“A Respondent’s non-payment does not entail any other limitation upon the ability of the Respondent to defend and otherwise participate in the arbitration. Rather, if the Claimant declines the invitation to pay the Respondent’s share of requested deposits as well as its own share, it is the Claimant who bears procedural risk: specifically, that the Tribunal, notified by the case manager of an unresolved non-payment situation, may suspend the case and, if the non-payment situation is not resolved after a stated period of time after the suspension, may terminate the case. The consequences of such a termination may depend upon the arbitration law at the seat of the arbitration; however, there is no provision in the Rules that would render such termination to be equivalent to a dismissal with prejudice. Subject to any mandatory provision of law to the contrary at the seat of the arbitration, the XYZ regards such termination as having no consequences in regard to the merits. We do however consider that the Tribunal has completed its mandate upon such a termination, and that if the same claim were re-asserted in another arbitration, a new process of selecting a Tribunal would be undertaken.”

“Further, a Claimant that is considering whether to accept the termination of the case may wish to consider whether under the applicable law one or more claims may be time-barred if and when they are raised in a new arbitration. The Rules take no position on such time limitation questions.”

“In our experience a Claimant placed in the position of having to bear the Respondent’s share of deposits in order for the case to proceed, and then to have the case proceed with no adverse procedural consequence of the non-payment for the Respondent, often finds this situation to be inequitable. The Rules do provide discretion to the Tribunal to allocate costs including the fees and expenses of the Tribunal in the Final Award, and it has been our experience that Tribunals often rectify the disproportionate bearing of Tribunal compensation by one party in the determination of costs in the Final Award.”

“The XYZ cannot properly discuss with a party its legal options in relation to the other party’s refusal to pay in the context of a specific case, as to do so would arguably entail providing legal advice to the party and is not consistent with the XYZ’s position as a neutral administrator. We also can offer no opinion on whether a Tribunal constituted under and conducting an arbitration governed our Rules would be affected, in any of its decisions, by an aggrieved party making submissions that draw attention to the non-payment of the opposing party. The XYZ takes no position on what a Tribunal should do in such circumstances and would not offer advice to or seek to influence a Tribunal’s discretion.”

“Our comments to this point have focused on non-payment by a Respondent. Non-payment by a Claimant occurs less often. But the XYZ will follow the practice of inviting the Respondent to pay the Claimant’s share of requested deposits once it has been determined that Claimant will not pay. This invitation has different implications however as compared to when the invitation is extended to the Claimant. If the Respondent has made one or more Counterclaims and wishes to proceed thereon, Respondent faces the same conundrum more usually faced by a Claimant: the potential for suspension or termination of the case if the substitute payment of Claimant’s share is not made. If Respondent on the other hand is strictly in the posture of defending against a Claimant’s claim, the Respondent will often have no reason to make the substitute payment for Claimant because the non-payment redounds to Respondent’s benefit: Claimant’s claim, as the Rules provide, shall be deemed withdrawn or is subject to dismissal without prejudice upon application to the Tribunal.”

“An important subject related to the foregoing rules and practices concerns communications among the parties, the XYZ, and the Tribunal concerning deposits for arbitrator compensation.  It is the practice of the XYZ to avoid to the maximum possible extent notifying the Tribunal as to which of the parties has failed to make a required payment. Although the identity of the non-payor may be evident from a party’s communications to the Tribunal or from other circumstances, XYZ as a neutral administrator seeks to avoid the risk of pre-disposing a Tribunal against a non-payor by avoiding whenever possible to identify the non-payor to the Tribunal. Thus when a Tribunal is invited to consider whether a case should be suspended and eventually terminated, the Tribunal will be notified of the fact of non-payment but not the identity of the non-payor, unless identifying the non-payor is in the circumstances important to the Tribunal’s exercise of discretion as to suspension and/or termination.”

“This brings us to the important and sensitive subject of the parties’ communications to the Tribunal about a party’s failure to pay its share. Underlying the XYZ practice of communicating the identity of the non-payor to the Tribunal only rarely, and in the circumstance of perceived necessity, is our expectation that arbitrators will maintain the same degree of impartiality without regard to whether a party has or has not paid its share. This implies that the parties also should refrain from communications to the Tribunal that identify an opponent as a non-payor, where the objective is mainly or entirely to cast that party in a negative light. This may be seen by a Tribunal as improper argument of the merits, as our Tribunals understand that they are bound to decide cases based upon the facts and the law, and not upon the basis of any subjective judgments about the worthiness of a party based upon its payment or non-payment of advances for arbitrator compensation.”

“Further, whereas the Rules are rather specific on what procedural steps a Tribunal may take in response to a non-payment, a party’s argument that the non-payor should be denied some procedural relief it has requested based in part on its failure to pay, or that the requested relief should only be granted on condition that the non-payment be rectified, invites the Tribunal to take measures the Rules do not authorize. This does not exclude the possibility, however, that a party may properly seek certain relief resulting from a non-payment and may necessarily have to identify the non-payor.”

It is our hope that parties will be mindful of this Guidance Note and that, by acting in conformity with it, fewer delays will be encountered based on temporary suspensions of proceedings. In a regrettably high percentage of cases, a party that is willing in case of necessity to bear the full cost of the proceedings, subject to re-allocation later on, only fully appreciates the situation of necessity after suffering a suspension, whereupon the rescheduling of hearings and pre-hearing deadlines may bring about delays that could have been avoided.”

If you have no desire to participate in international arbitrations seated in California; if you systematically shun cases involving the life sciences industry; if you dodge arbitrations that raise persistent and difficult issues about U.S.-style pre-hearing discovery and state arbitration law; then this post is not for you.  Everyone else, please read on.

To summarize: A New York State trial court judge last week enforced a deposition subpoena issued by a New York attorney based upon a California Superior Court commission to take the New York non-party witness deposition, where the California court had issued the commission upon an application made by a party to the California-seated arbitration after securing express permission from the arbitral tribunal. Matter of Roche Molecular Systems, Inc., 2018 WL 1938327 (NY Supreme Court, Westchester County, April 24, 2018). [Foreign readers: a “commission” as between US state judiciaries serves the same function as a letter rogatory internationally. But whereas the laws of most states permit attorneys to issue subpoenas as “officers of the court” without prior judicial action, the courts generally only become involved if there is an objection from the witness].

Relentless readers of Arbitration Commentaries will understand why the deposition-seeking party, Roche Molecular, sought a New York deposition based on a California Superior Court commission. The arbitral subpoena power under the Federal Arbitration Act (FAA) Section 7, as construed by the US Courts of Appeals in the Ninth Circuit (where the arbitration is seated) and in the Second Circuit (where the witness resides) have held that Section 7 does not permit enforcement of an arbitral subpoena for a pre-hearing deposition (or pre-hearing document production) but only allows a subpoena to compel an appearance of a non-party witness to give testimony (and bring along records) in the presence of one or more of the arbitrators. For a party like Roche Molecular, who is eager to take a discovery deposition of a key former employee of the adverse party, and to pick and choose what excerpts of the deposition transcript to enter in the arbitration record, the arbitral subpoena permitted by FAA Section 7 just will not do.

Readers already clamoring to know how the New York trial judge analyzed the issue of potential FAA pre-emption of California law, please forebear. We must cover a bit more procedural background.

First, the arbitral tribunal’s permission, and the California Superior Court commission, were obtained upon the authority of a provision of the California Code of Civil Procedure (CCP) expressly applicable to California-seated international arbitrations. This is CCP § 1297.271: “The arbitral tribunal, or a party with the approval of the arbitral tribunal, may request from the superior court assistance in taking evidence and the court may execute the request within its competence and according to its rules on taking evidence.”

Second, California law, CCP §2026.010 authorizes that a commission to take an out-of-state deposition may be issued by the clerk of the court, or, if the foreign jurisdiction requires it, by order of the court. New York evidently did not require a judicial order, so the proponent was able to fill out a one-page form and have it signed and sealed by the Clerk of the California Superior Court. Thus, there was no judicial proceeding in California before issuance of the commission – a proceeding in which, had it been required, the adverse party (assuming it opposed the discovery, which is unclear) might have argued (1) that “taking evidence” under CCP § 1297.271 does not pertain to discovery, and (2) that “taking evidence” and “within its competence” should be construed to exclude the out-of-state procurement via the commission process. (What say you, Californians?) In such a proceeding, the adverse party might also have argued that CCP § 1297.271 is pre-empted by the FAA to the extent it empowers a party to the arbitration to gather information in ways that an arbitrator may not employ under FAA Section 7. (On this question, there is no definitive answer, but the New York trial court has given one for purposes of this case).

Third, New York has adopted in § 3119 of its Civil Practice Law & Rules (CPLR) a version of the Uniform Interstate Depositions and Discovery Act  (“UIDDA”)– essentially a procedural vehicle to enforce in New York exactly the kind of out-of-state discovery commission received from California in this case. This was critical, because in order for this bypass of the FAA arbitral subpoena power to work, there needed to be two states’ judicial systems willing to tango. We learn in the course of the New York court’s opinion that Roche Molecular could not use the same process to get pre-hearing document discovery from a non-party witness in Massachusetts, because Massachusetts had not signed on to the UIDDA or its equivalent. So for the Massachusetts witness an arbitral subpoena was obtained – perhaps upon informing the arbitrators that the US First Circuit Court of Appeals unlike the Ninth and Second Circuits has not committed to a position on pre-hearing discovery under FAA Section 7. But the Massachusetts state court in which the enforcement issue was presented adopted the Ninth/Second Circuit view, and denied enforcement.

These procedural provisions of California and New York law enabled a New York subpoena to be issued by a New York attorney and served on the New York witness without prior judicial involvement. The matter came before the court when the witness moved to quash the subpoena on grounds, among others, that the FAA pre-empted the California-New York process used here. The New York court rejected the pre-emption argument, citing Southland Corp. v. Keating, 465 U.S. 1 (1974) – which was perhaps the first, but far from the only, pronouncement of the U.S. Supreme Court on FAA pre-emption of state law. Said the New York court about Southland: “[W]hile the substantive rules of the FAA apply in state court as well as federal court, [in Southland] the U.S. Supreme Court explained that the purpose of the pre-emption of state substantive rules regarding arbitration was ‘to foreclose state legislative attempts to undercut the enforceability of arbitration agreements…but it went on to clarify that it did not intend such pre-emption to extend to state rules of civil procedure that are applicable in state proceedings.”

This distinction between “substantive” and arguably “procedural” elements of the FAA figures prominently in discussions within the US arbitration community about the pre-emptive force, if any, of FAA Section 7 concerning arbitral subpoenas. On one view, with many adherents including a notable contingent in California, state courts are only obligated to apply those portions of FAA Chapter One that the Supreme Court has held to constitute the “substantive” provisions, and this has been stated by the Supreme Court with certainty only as to Section 2 – requiring the enforcement of agreements to arbitrate save upon such grounds as exist at law or in equity for the revocation of any contract.  On another view, also having many adherents, state courts are obligated by the Supremacy Clause in the US Constitution to give effect to the FAA over conflicting provisions of state law if the application of state law would meaningfully interfere with the purposes and objectives of Congress as reflected in the FAA. But even under this second view, giving pre-emptive effect to FAA Section 7 concerning arbitral subpoenas is controversial. Is that Section best viewed as giving arbitrators a useful evidence-gathering tool, but one which may be supplemented by the arbitration law of the state? Or do the limitations on evidence-gathering under Section 7 reflect a fundamental federal policy to circumscribe the participation of non-parties in a private commercial dispute that the parties have agreed to remove from the judicial system?

We cannot say with confidence whether the New York court’s answer in Roche Molecular Systems is the correct one. It will be championed in some quarters, decried in others.

Two further comments are in order, one legal (and mainly for New Yorkers) and one practical (and perhaps mainly for Californians).

• The New York judge devoted more attention in her opinion to an issue that was not necessary to the outcome, although it had been argued: i.e. what is the correct position on whether FAA Section 7 allows an arbitral discovery subpoena? The New York court takes note of a New York appellate decision in 2005 called ImClone in which the Court adopted the view expressed by the US Fourth Circuit Court of Appeals nearly 20 years ago that FAA Section 7 permits a discovery subpoena, exceptionally, in case of special need or hardship. The New York court states that it considers itself bound by ImClone notwithstanding the intervening decision of the US Second Circuit Court of Appeals in 2008 in the Life Receivables case, and that on the facts of this Roche Molecular Systems case it would find the special need condition to be satisfied. Discovery proponents in the arbitration advocacy community will take note of the favorable reception they may get in New York state courts.
• California aspires to be a growth market for hosting international arbitrations, and it may achieve a measure of success without moving its state international arbitration law toward the international standard of more limited pre-hearing evidence gathering. The tremendous economic power of California’s info-tech and bio-tech sectors may enable California shamelessly to export a very “American,” litigation-like, brand of international arbitration, even while other international arbitration centers like New York and Miami trumpet their arbitration laws’ and their arbitrators’ alleged sensitivity to international norms.

 

Reproduced below are the Power Point slides that accompanied an oral presentation by Mr. Goldstein to the International Arbitration Club of New York on March 19, 2018. A transcript of the presentation is expected to be available in the week of April 9 and will be uploaded to a revision of this post.

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1/21

Looking for Law In All the Right Places: A Modern Spin on Jura Novit Arbiter

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2/21

JNC – US & CANADA JUDICIAL POSITION

“The concept of jura novit curia is not directly part of the law of Canada and a search of the usual Canadian legal databases for that phrase turns up no court case in any province ever referring to ‘jura novit curia’, let alone ‘jura novit arbiter’.” J. Brian Casey

US situation evidently is much the same as in Canada (as we shall see…)

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3/21

JNC —  A Canadian Judicial Perspective

It is generally accepted that judges can conduct research beyond the materials provided by counsel. One cannot argue, for instance, that we are limited to case precedents submitted by counsel or that we cannot conduct our own legal research.”

Hon. Wayne K. Gorman, Judge of the Provincial Court of Newfoundland and Labrador

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4/21

JNC – U.S. Judicial Position

FRCP 44.1 – “In determining foreign law, the court may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence.”

CPLR 4511(b): “Every court may take judicial notice without request…[of] the laws of foreign countries or their political subdivisions.”

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5/21

JNC – U.S. Judicial Position

• “There is no requirement that the court give formal notice to the parties of its intention to engage in its own research … Ordinarily the court should inform the parties of material it has found diverging substantially from the material which they have presented… To require, however, that the court give formal notice from time to time as it proceeds with its study of the foreign law would add an element of undesirable rigidity to the procedure….”

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6/21

JNC – U.S. Judicial Position

Kamen v. Kemper Fin. Servs., 500 U.S. 90, 99 (1991)

“T]he court is not limited to the particular legal theories advanced by the parties, but rather retains the independent power to identify and apply the proper construction of the governing law.”

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7/21

JNC – U.S. Judicial Position

Hampton v. Wyatt, 296 F. 3d 560 (7th Cir. 2002) (Easterbrook, J.) :

“That the judges did some research beyond the boundaries set by the briefs shows industry rather than the sort of indolence that might deprive the parties of a fair hearing. … [I]t is the sleepwalking judge, not the diligent one, who deprives the litigant of the personal right to careful, individual consideration.

Any time a judge does independent research there is a risk of error, but judges  with some initiative probably err at lower rates than judges who naively believe that the briefs cover everything worth considering. Courts frequently decide cases on lines of reasoning that can’t be found in the briefs. There is no federal entitlement to have a case decided strictly on the basis of precedent cited to the tribunal.”

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8/21

JNC – U.S. Judicial Position

Rowe v. Gibson, 798 F.3d 622, 628 (7th Cir. 2015) (Posner, J.):

“[J]udges and their law clerks often conduct research on cases, and it is not always research confined to pure issues of law, without disclosure to the parties. We are not like the English judges of yore, who under the rule of ‘orality’ were not permitted to have law clerks or other staff, or libraries, or even to deliberate ….”

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9/21

Risk of Non-Recognition or Set Aside of Award?

• US & Canada: No case law directly on point. To determine whether and when an award may be set aside or refused recognition because of Tribunal initiatives on the content of law, one must extend/transpose principles developed in other contexts concerning: (1) preventing party from having fair presentation opportunity, (2) violation of public policy, (3) exceeding powers.
• Should sustainability of the award be the relevant conduct standard?
• Or something else? “Legitimacy” of arbitration process in eyes of users?

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10/21

Placing the JNC/JNA Issue in Perspective

• Five Variants
• 1) Tribunal awards on non-pleaded cause of action
• 2) Tribunal awards on non-pleaded remedy or remedial formula
• 3) Tribunal awards under law other than agreed governing law
• 4) Tribunal awards on point of law not raised by partie
• 5) Tribunal awards on same point of law but different precedents/authorities

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11/21

Variant #1: Award on Non-Pleaded Cause of Action (or Defense)

For the experienced and impartial US Arbitrator…

• 1) violates autonomy of parties
• 2) suggests Tribunal bias (in providing recourse where pleaded claims would fail)
• 3) therefore, not a genuine, recurring, or controversial issue.

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12/21

Variant #2: Non-Pleaded Remedy or Remedial Formula

For the experienced and impartial US Arbitrator…

• 1) seen as violation of party autonomy
• 2) suggests Tribunal bias (in providing remedy more favorable to party than what is pleaded)
• 3) unless broad “notwithstanding” remedial authority found in contract or Rules
• 4) in exceptional “unless” “notwithstanding” case
• would ask parties to comment on power of Tribunal to award on non-pleaded remedy,
• if such power found after full hearing on that question, then provide for full hearing on the Tribunal-conceived potential remedy

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13/21

Variant #3: Award Under Law Other Than Governing Law

For the experienced and impartial US Arbitrator…

1)Will not be done expressly… exceeds powers conferred

2)Controversial Question: arbitrator technique for applying the governing law (##3-5 below)

3)“Cross check” of CAL law against NY law via Tribunal research where Tribunal has one or more NY admitted arbitrators?

4)“Cross check” of UK law against NY law, via Tribunal research, where Tribunal has one or more NY admitted arbitrators?

5) GKK view expressed … and controverted.   No harm/no foul??

***

14/21

Variant #4: Award on Point of Law Not Raised

Hypothetical Award:

• “While Claimant’s breach of contract claim is fatally deficient by reason of Claimant’s own non-performance, the Tribunal finds that on the evidence presented a valid and sufficient claim for breach of fiduciary duty exists. While Claimant asserts no such claim, our duty to apply New York law to the facts before us compels us, in our view, to enter an award in Claimant’s favor on this basis.”

For the experienced and impartial US Arbitrator…

1)Violates party autonomy (adversarial process)

2)Promotes an impression of bias even if there is no actual bias

3)A party-appointed arbitrator who suggests in deliberations an unpleaded theory of liability or defense favoring the party that appointed her is seen as biased by her colleagues.

4)For these reasons, this possibility does not arise, unless perhaps in exceptional case of manifest injustice if all relief were denied to Claimant…

***

15/21

Variant #5:  Tribunal Finds And Cites Authorities Not Cited by Parties

For the experienced and impartial US Arbitrator:

1)Prevailing view that this is OK, but permit party comment if authorities found are not merely corroborative of those cited

2)Alternative view sometimes expressed that Tribunal’s application of governing law is bounded by parties’ submissions  (canard??)

3)Controversial points concerning equality of parties:

1. a) Does Tribunal unfairly aid a party with less competent counsel if it does research that clearly should have been done and was not done?
2. b) Does Tribunal unfairly aid a party that evidently elects to raise and issue but not address it thoroughly?

4) Reluctance to independently research non-US law (risk of error, language barriers, cultural barrier re civil law)

***

16/21

JNA When the Seat is in Civil Law Jurisdiction

Switzerland as Example:

• JNA not formally codified in Swiss arbitration law
• JNC however is well established in Swiss courts
• JNA accepted in Swiss courts’ arbitration jurisprudence — by analogy to JNC in courts — subject to overarching norms of due process: equal treatment and right to be heard. JNA may to some extent trump hearing rights if Tribunal conclusions were foreseeable.
• JNA (like JNC) sometimes seen in Swiss jurisprudence/commentary as duty to ascertain the content of applicable law, not merely power to do so. But this is controversial.
• JNA/JNC meaning: Legal consequences of presented facts are for arbitrators to decide, notwithstanding limits of what is pleaded.

***

17/21

JNA in Your Next Geneva Arbitration

• Swiss-seated Tribunal that adopts/proposes unpleaded legal solutions takes rather less risk than in USA that annulment court views this as evidence of bias.
• But note: unpleaded legal solution does mean unpleaded claim – award on the latter violates basic principles.
• US arbitrators should understand the difference
• US arbitrators might wish to alert Tribunal (e.g. Swiss chair) to manage the possible misperceptions of US/common law counsel.
• No impediments to Tribunal research to verify or modify legal conclusions based on party submissions.
• Suggestion to invite comments from parties on potential unpleaded legal solutions – even foreseeable solutions — likely to be taken seriously by Swiss co-arbitrators.

***

18/21

JNA In Your Next London-Seated Arbitration

• EAA Article 34(2)(g): The Arbitral Tribunal shall decide “whether and to what extent the tribunal should itself take the initiative in ascertaining the facts and the law.”
• Article 22.1(iii) of LCIA Rules: Article 22.1(iii) gives Tribunal the power (but not the duty) “upon its own initiative, but … only after giving the parties a reasonable opportunity to state their views and upon such terms (as to costs and otherwise) as the Arbitral tribunal may decide,”… to “conduct such enquiries as may appear to the Arbitral Tribunal to be necessary or expedient, including whether and to what extent the Arbitral Tribunal should itself take the initiative in identifying relevant issues and ascertaining relevant facts and the law(s) or rule of law applicable to the Arbitration Agreement, the arbitration and the merits of the parties’ dispute.”

***

19/21

JNA in Your Next New York-Seated Arbitration

• No applicable arbitration law, rules, or norms counsel arbitrators sitting at a US seat not to conduct corroborative legal research (as US judges would do, directly or via their law clerks or both).
• Sometimes expressed view that the governing law should be or must be derived from the parties’ submissions exclusively appears to be a canard, propagated by a minority (?) of arbitrators who cannot, or prefer not to, conduct legal research. “Jura Novit Arbiter Sine Lexis”
• A suitable role for Tribunal Secretary where all Tribunal members lack skills or resources or inclination to conduct legal research ? — Probably yes, with full transparency.
• Read the ILA 2008 Recommendations in 26(2) Arbitration International (2010)

***

20/21

ILA Recommendations

15 recommendations, of which two are critical takeaways today:

• #7: “Arbitrators are not confined to the parties’ submissions about the contents of the applicable law. Subject to Recommendation 8, arbitrators may question the parties about legal issues the parties have raised … and review sources not invoked by the parties relating to those legal issues and may, in a transparent manner, rely on their own knowledge as to the applicable law as it relates to those legal issues.”
• #10: “If arbitrators intend to rely on sources not invoked by the parties, they should bring those sources to the attention of the parties and invite their comments, at least if those sources go meaningfully beyond the sources the parties have already invoked and might significantly affect the outcome of the case.”

***

21/21

THANK YOU

This post is the text Mr. Goldstein has prepared for an oral presentation in a panel program on provisional relief in aid of arbitration on April 5, 2018 in Washington, D.C. at the annual conference of the American Bar Association’s Section of Dispute Resolution. Mr. Goldstein’s co-panelists are the Hon. Faith Hochberg (Ret.) and the Hon. Bruce E. Meyerson (Ret.).

 

These remarks about interim measures in international commercial arbitration were prepared for listeners and readers, perhaps many of you, who have become arbitrators in international cases as a rather new phase of an illustrious career spent mainly within US legal borders.

Even the phrase “interim measures” may have a rather alien ring to it, as it did for me when I first sought such relief in an international arbitration, 27 years ago. (The motion was granted).

Now a new international case arrives in your e-mail, and the Demand for Arbitration is accompanied by an “urgent” Application for Interim Measures that has already been gathering dust for several weeks during the process forming the Tribunal. And it is a US Claimant based in NY, against a Japanese company based in Japan, and the seat of arbitration is NY and the governing law is NY, and the application asks that the Japanese company should be required to continue performance while the case proceeds. And you ask yourself: “well isn’t this just another preliminary injunction motion under NY law (?), and why should the fact that it’s an international case make any difference?” And then you get an e-mail from one of your co-arbitrators, the one appointed by the Japanese party, represented by a NY law firm, and she is a recently-retired federal district court judge from Pennsylvania — not New Jersey!! — and she asks exactly that question!

Now, those of you who fit into the illustrious career profile that I announced at the start, raise your hands — because with my magic wand I will now transform you. Presto! Your nationality remains American, but you now come to this arbitration from a different career track, after a 30+ year career as an advocate in Investor-State arbitrations, and now that you are a full-time arbitrator this commercial case is rather an anomaly in your docket of mainly treaty-based disputes. (To be clear,  such is not the profile of this speaker and blogger).

So what is your answer, in your transformed condition, to your retired PA (not NJ) retired US federal judge-colleague who poses this  seasonally-appropriate question? (“Why is this injunction motion different from all the others?”) You take up your i-phone and you begin to draft an e-mail.

“My Dear Esteemed Colleague

The question you raise is a serious one, and it is not adequately answered in a few words so please excuse the length of this first communication between us, although I will strive to be succinct:

1) First: Like a court we must always consider first whether we have jurisdiction. But unlike many cases in court, to solve an objection to our jurisdiction might be a very complex case-within-the-case. If a State contended that an Investor was not in fact duly qualified or legally classified as such, that issue alone could in fairness consume months of proceedings. US courts might insist on expedited discovery and build an adequate record about a contested issue of subject matter or personal jurisdiction in a few weeks. That solution is scarcely possible here. And here too we have such a case-within-the-case, as the Respondent claims it did not sign the contract and resists all contentions that it is bound to arbitrate. Our escape from this conundrum is the doctrine of prima facie jurisdiction, a decades-old concept first developed by international courts. It allows us here to decide simply if Claimant makes a non-frivolous assertion of arbitral jurisdiction. And then to move on. How otherwise could we effectively handle an application like this, much less function as emergency arbitrators in comparable cases, as you may have already been called upon to do?

2) Second: The question of what legal standards govern the disposition of the application still divides our community or at least a portion of it. From an investment law vantage point, this has always been a matter of trans-national principles. In contrast, the notion that an international arbitral tribunal in a contract dispute governed by New York law and seated in New York should necessarily apply the preliminary injunction criteria of New York’s state and federal courts has a remarkable but quite unwarranted durability. In international tribunals, there appears to be no trace of a notion that where an interim measure is sought against the Host State by a foreign investor, the application should be governed by the provisional remedies procedures of the courts of that Host State.  Whether or not a US state’s law would regard its courts’ interim relief standards as “substantive” or “procedural” for choice-of-law purposes, the jurisprudence, scholarship, and foundational documents  in the world of international arbitration seem quite universally to treat the matter as a question of arbitral procedure. The best evidence of this is the standards, more or less vague or precise, that appear in major international instruments like the ICSID Convention and ICSID Arbitration Rules, the UNCITRAL Model Law and UNCITRAL Arbitration Rules, and in the rules of all major provider organizations. It follows that parties who elect to arbitrate international disputes elect to treat interim measures standards as matter of arbitral procedure, and from that premise it follows that a generic governing law clause in a contract selecting the laws of NY or PA ought to be construed as excluding the state’s standards concerning provisional relief, just as much as such clauses are routinely construed to exclude the state’s civil procedure law generally.

Third: If there is one fundamental difference between US judicial practice and international arbitral practice in regard to interim relief, it concerns the applicant’s burden in regard to likely success in securing the ultimate final relief. International courts and treaty tribunals have reduced this to nearly a non-factor. They tell us the applicant should have a right, relating to the interim relief sought, that is valid prima facie — which is to say, she has a non-frivolous claim to the right that she seeks to protect. Let’s illustrate that. In a significant number of investment arbitrations, the measures sought related to the Host State’s parallel pursuit of criminal proceedings against the Investor or her agents and affiliates. The right of the Investor to fundamentally effective arbitral proceedings is a cognizable and vital procedural right, and tribunals need not and do not require more concerning the merits of an underlying substantive claim of expropriation, or unfair and inequitable treatment, before turning full attention to whether it is urgent and necessary to prevent the extradition or incarceration of the Claimant so that she might effectively testify and assist her counsel. Some common law arbitrators will take up the words of the UNCITRAL Model Law — “reasonable possibility” of success on the merits, and will say this is more or less a diluted but still workable version of the American judicial rule of probability. But to read it that way gives inadequate weight to the principle, going back decades in international tribunals, that there should be no prejudgment of the merits at the stage of interim relief. To give effect to that principle, the focus of interpretation of the UNCITRAL standard should be on the choice of the word “possibility” in lieu of prospect or probability or likelihood. Credible allegations with basic documentary support ought normally to suffice. But I fear, dear Colleague, that the party opposing provisional relief, the international party here, from Japan, but represented by NY counsel and having appointed such a distinguished PA jurist as yourself, will insist so long as it may that it is appropriate to apply the NY judicial probability of success standard, because that gives its client the best chance to win at this stage.  If I have persuaded you to the international standard, might we perhaps enter a procedural order about the applicable standards, and relieve the parties and ourselves of the uncertainty and burden and cost of a cumbersome evidentiary proceeding at this interim measures stage?

Fourth: When I read the interim measures orders from investment tribunals and I see the convergence around a three-part test of necessity, urgency, and proportionality, I am inclined to wonder why this test, properly understood by commercial arbitrators of common law orientation, ought not to be warmly embraced by them. Necessity, after all, captures the common law notion of irreparable injury, while not exactly replicating it. The adequacy of money damages may disprove necessity, and many investment tribunals have so stated. But an international arbitral award for money damages and a judicial judgment for the same relief against a domestic defendant sometimes cannot be directly equated because recognition and enforcement of an arbitral award remains a process fraught with idiosyncratic uncertainties, risks, and obstacles, especially in regard to prospective award debtors that are State agencies, State affiliates, or otherwise under the influence of State actors.  Also, we do well to consider that arbitration more than litigation is a process for conflict management not merely conflict resolution — and this notion is reflected in another long-standing international principle that interim measures may properly serve to prevent aggravation of the dispute — which is to say (inter alia) proliferation of the issues and sums involved by virtue of a party’s unilateral action while the case is pending. This is a more powerful principle than the common law equity notion of “preserving the status quo.”  It might justify a certain type of interim measure to prevent a one billion dollar dispute with two thorny valuation issues from becoming a $25 billion dispute with ten such valuation issues, even though in common law terms of irreparable harm the compensability of each injury by a sum of money differs only in regard to the sum. When we read the UNCITRAL formulation “not adequately reparable” by an award of money damages, we ought to have these notions in mind.

Fifth: As this e-mail is already too long, Dear Colleague, I invite you to consider that “urgency” and “proportionality” as the internationalists’ phrasing goes, are quite in synch with common law judicial principles concerning the imminence of irreparable injury and the so-called balance of hardship or balance of convenience. But it is useful for us as commercial arbitrators to understand that in the context of disputes with States, whether the claims are treaty-based or contractual, the State may be engaged in a prolonged and multi-layered process of implementing some aspect of State policy or sovereignty — and the example of a criminal investigation, mentioned earlier, is a useful one. If the State seeks the extradition of the arbitration Claimant to face criminal charges in the State, but must overcome three administrative hurdles even prior to a hearing on extradition in the requested State, the interim measure sought by Claimant to enjoin the State from pursuing her extradition may not satisfy the test of urgency and might be denied without prejudice.  If the Claimant seeks an order directing the State entirely to suspend its criminal investigation relating to the Claimant and her affiliates that are domiciled in the State, she risks denial of relief because the sovereign interest in enforcement of the State’s criminal laws is so fundamental that the relief sought may be seen as disproportionate to the potential harm. For this reason increasingly we see that sophisticated counsel are inviting Tribunals to order one a variety of proposed interim measures within a broad range of potential palliative steps. And the process of selecting which if any of the measures satisfies the standard of “proportionality” invites us as arbitrators to hearken back to our days studying US Constitutional Law, and to think about “least restrictive means” analysis, as applied to regulations that inhibit the exercise of fundamental individual rights in service to other legitimate policy objectives of the State. (Williams-Yulee v. Florida Bar, 135 S.Ct. 1656, 1670 (2015)).

In closing, dear Colleague, I invite you to draw the conclusion that this process is not so very different from the preliminary injunction practice you have experienced so often in the US courts, save as it is rather fine-tuned to the arbitral tradition of our keeping open minds and open hearts concerning the merits of the case, at least in the perceptions of the parties, and thereby acting in service of the norms of party consent, party autonomy, and party equality, for the duration of the proceedings. That very much explains in one concept the differences of the international arbitral approach from what you were accustomed to in a U.S. district court. And I hope you will embrace it warmly.

cc: Our Other Esteemed Colleague

All typographical errors are entirely the fault of this i-phone and not its user.”

 

 

Remarks presented by Marc J. Goldstein in the lecture program of AAA/ICDR practice moot in New York on February 23, 2018. 

 Introduction

The CEO of a third-party funding firm in New York is an exceptionally capable attorney who was a colleague of mine at my former law firm. He was not just another colleague; we worked together on major international arbitration cases. One of them, as it happens, was a very early instance of the use of third-party funding — used by our client, and negotiated with the funder by a funding neophyte named Marc Goldstein, for a sizeable claim against a state-owned entity — in that instance, a Singapore-seated arbitration against a ministry of the People’s Republic of China. Having a client funded by a funder, in a large firm disputes practice circa 2000, was déclassé to put it mildly. It implied that your practice, and your firm, were going down-market in search of business, in search of a firmer foothold in the world of    international  arbitration. How the world has changed.

Today, if my former colleague’s funding firm is providing funding for the Claimant in an arbitration in which I am appointed as an arbitrator – and especially if I am the Claimant’s party-appointed arbitrator – this is a fact that all parties might wish to know and have the opportunity to consider at an early stage, from the standpoint of whether the my appointment might be challenged, and whether the award might be in jeopardy if the matter goes undisclosed and is uncovered, say, by investigators for the award loser. It follows that the funding facts are facts that the arbitrator might prefer to know, and to consider for potential disclosure, so that there should be no serious question raised later on about the arbitrator’s independence and impartiality.

***

Role of IBA Guidelines

Students involved in the Moot will surely have read carefully and considered the relevant sections of the IBA Guidelines on Conflict of Interest in International Arbitration 2014. The arbitrators present in the room surely are familiar with them, but perhaps only a fraction of them have had to consider applying the guidelines to their own disclosures in an arbitration, or to a party’s application to the Tribunal for disclosures by the adverse party, when the applicant expressed a concern that the adversary’s case is funded by a Funder.

If a funded party volunteers a disclosure that it is funded, the arbitrators can take guidance from the IBA Guidelines —in essence analyze potential disclosures in regard to the Funder as if the Funder were a party —make suitable disclosures, make suitable follow-up inquiries to the disclosing party to enable the arbitrator to conduct due diligence. An ICC Guidance Note issued in 2016 is to similar effect. The problem of course is that voluntary disclosure of funding is not universal and probably is not even common; it is not mandated by institutional rules, or by industry self-regulatory measures, or, in all but a handful of important host jurisdictions for international arbitrations, by applicable law. Notably there is a mandate for disclosure in the arbitration provisions of the new Canada-EU Trade Agreement. And if you happen to have an investment arbitration under the Singapore Centre’s 2017 investment arbitration rules, it is explicitly stated in those rules that the Tribunal has power to order such disclosure by a party. But as to mandatory disclosure, Singapore in amending its arbitration law to permit third party funding  did not enact a mandate broadly — but did enact such a mandate as a Rule of Professional Conduct for Singapore attorneys.

If a party in an arbitration suspects or knows that its adversary is funded, as is the case in the Moot Problem this year, the IBA Guidelines, if adopted as guidelines by the Tribunal as is so commonly the case, give the arbitrators guidance on what the Tribunal may require – by a procedural order, for example — in terms of disclosure from the party that is, or is suspected to be, funded by a Funder. But that useful function of the Guidelines does not assist participants in the arbitration in sorting out the possible relationships between an arbitrator and a Funder, and the bearing of those relationships on the arbitrator’s eligibility to serve, at the critical early stage of nomination and appointment. In our Moot Problem this year, the problem surfaces very early on in the proceedings, but after the Tribunal has been constituted.  An urgent question that still troubles our community, and on which no consensus of approach has emerged, is how shall we tackle this problem at the earliest stage, when the administering institution, or perhaps an appointing authority in an ad hoc case, is collecting information relevant to the arbitrator’s eligibility to serve and sharing that information with the parties.

***

Framework for a Institutional Mandatory Disclosure Rule

In the few minutes I have before you return to battle, I would like to do three things. First, let’s try to list some relationship concerns an arbitrator may have about Funders – concerns that the parties may have about the arbitrator. Second, let’s look at the some of the key reasons why Funders (and maybe their funded clients) push back against the idea of mandatory initial disclosure. Third, let’s look at what the basic elements of a mandatory initial disclosure scheme might look like.

***

 1.  Concerns About Arbitrator Relationship With Funders

1. Funder role in arbitrator’s selection?
2. Arbitrator’s affiliation with Funder. (“Investment Adviser”)?
3. Fellow arbitrator affiliation with Funder (Sitting as chair nominated by …)
4. Funder is/was funding the cases arbitrator is or was handling as counsel
5. Arbitrator’s prior appointments by other parties funded by same Funder (to extent known)
6. Funder funding cases being handled by other lawyers in arbitrator’s firm
7. Funder is providing “portfolio finance” to arbitrator’s (present or former) firm
8. Arbitrator’s  former colleague now employed by Funder
9. Arbitrator pitched case(s) to Funder & was turned down.
10. Possible arbitrator relationships with the Funder’s funders (e.g. hedge funds, venture capitalists, )
11. Arbitrator’s knowledge of Funder’s reputation for exacting due diligence
12. Arbitrator’s knowledge of Funder’s reputation as newcomer eager

2.    Objections Voiced Against Mandatory Disclosure

One main objection voiced by some Funder spokespersons against mandatory disclosure is that the terms of the funding arrangement are confidential between the parties and irrelevant to the arbitration. To this objection I would say that the terms of the arrangement may or may not be relevant at some stage of the arbitration, such as when a motion is made for security for costs. But at the initial stage when the objective is to enable the arbitrator to unearth and disclose to an appropriate degree her connections to the Funder, the terms of the funding arrangement should not usually be of consequence. Why not limit disclosure to the fact of funding and possibly the identity of the Funder, and see where that goes? There seems to be a consensus gathering around such limitation —indicated in ICCA-Queen Mary Task Force comment draft issued September 2017.

A second objection of some Funder-affiliated persons to mandatory initial disclosure is that such disclosure raises a suspicion if not an assumption, at least for the adverse party, that the funded party is impecunious and not financially capable on its own of satisfying an eventual, possible, award for costs should the non-funded party prevail. The stated concern is that arbitrations will then be routinely encumbered with costly and contentious motions for security for costs, and also with an ever greater number of vexatious challenges against arbitrators. These concerns are genuine. But they should be manageable. The solution of addressing them by suppressing the very fact of funding and identity of the Funder seems quite overbroad. Funders systematically do, and will continue to, publicize the fact that many of their clients are not impecunious but are very solvent entities that opt for funding as a cash management and risk management tool. And funded parties who must face down security for costs applications will continue to advocate the emergent rule that mere impecuniousness of the party is not alone a sufficient basis for a security for costs order unless there is other evidence of the party’ s unwillingness to satisfy such obligations and its avoidance of such obligations on other occasions. And institutions will readily adopt efficiency measures as needed to process arbitrator challenges relating to third-party funding.

A third objection, voiced by certain prominent Funder spokespersons, is that no disclosure mandate should be imposed on Funders who are in what may be called the private equity model, while omitting other Funders, such as insurers and direct equity investors in or commercial lenders to the funded party.  Failure to be inclusive would be discriminatory, it has been claimed. Perhaps the strategy of this objection is to fend off mandatory disclosure for as long as possible by prolonging debate on definitions. Or perhaps the nub of this objection is that traditional insurance has not been thought of as raising a potential conflict of interest situation for the arbitrator, and that the private equity mode of Funder should be seen in the same way. But if you look at the list of concerns reviewed above, I submit that the range and seriousness of concerns about arbitrator independence and impartiality does not arise nearly as often when the Claimant or Respondent merely has insurance coverage. The ICCA-Queen Mary Task Force Report, at least in the 2017 comment draft, seeks to address the objection by including insurers in the proposed disclosure standard. Perhaps that is the solution providers should adopt — it means more due diligence work and more disclosure and perhaps more unmeritorious challenges. But if that is the price to be paid for broader market acceptance of a disclosure rule covering the Funders we are mainly concerned about from a conflict perspective, then the wider definition of Funder seems a price worth paying.

I will ask you now to permit me to speculate on what may be a key but unarticulated source of the Funders’ reluctance toward a rule of mandatory disclosure. I would speculate that the more prominent is a Funder, the larger its investments in cases and potential returns, the more the Funder is staffed by highly skilled disputes lawyers with extensive international arbitration experience, then the greater will be the influence of the Funder in the selection of arbitrators. This influence may be more pronounced when the funded party has engaged counsel who are not regular players in international arbitration and who may not be particularly well-informed about the community of arbitrators and the relevant selection criteria.  I would speculate that Funders have preferred arbitrator lists just as law firms do. And over time perhaps the firms that maintain such lists may conform their lists to those of the Funders that fund them. And I would speculate, in turn, that such preferred arbitrators would more often face resistance to their service, by a non-funded party, if it emerged that, while the arbitrator has had no other cases in recent years for either the Claimant or the Claimant’s law firm, he or she is currently sitting in seven cases funded by the Funder.

The logic of the Funding business would tell us that this should be the case, because the selection of the arbitrator should logically be for the Funder, as it usually is for the Party, one of the most if not the single most critical arbitration planning decision. For the party that decision is framed as how to proceed. For the Funder it will affect whether to proceed at all. Confidentiality among Funders, parties, and law firms makes it difficult to measure objectively the scope of Funder influence in arbitrator selection.

So there may well be a giant Elephant In The Room — Funder influence over arbitrator selection — whenever we discuss third party funding in an open forum like this, even when a Funder representative is not on the program. And perhaps the presence of that Elephant explains why, with some of the exceptions earlier noted, initiatives for mandatory disclosure has failed to gain traction within the institutional framework of international arbitration. Repeat appointments of arbitrators by the same law firm are a well-known issue. Systematic repeat appointments of the same arbitrator by the same Funder probably could not long survive in a mandatory disclosure environment.

3.    A Possible Mandatory Disclosure Rule in Operation

Whether there should be mandatory disclosure of the identity of the Funder is perhaps a question that deserves more attention. Funders have market identities, and they burnish them. Some of them engage prominent arbitrators and retired judges as “investment advisers.” Some of them boast of how selective they are in identifying cases to be funded (although this is somewhat diminished as larger Funders move to a portfolio finance model). If the Funder’s identity potentially carries with it a sort of endorsement of the funded party’s claim (or defense), arguably the identity of the Funder is information the arbitrators should receive only on a need-to-know basis. But there is a price to be paid: to determine if the arbitrator needs to know the identity of the Funder, the arbitrator would need to make disclosure, to the institution, of a complete list of Funders with whom she or her firm have connections. The institution could then determine if there is a “match,” and often there would not be, and the conflict check process would end there, with the identity of the Funder protected. But the arbitrator, especially the arbitrator affiliated with a large firm, will have done quite a bit of information gathering. This is a cost-benefit calculus that would need to be made, in promulgating a mandatory disclosure protocol in institutional rules.

In the protocol outline that follows, I will assume that the calculus is made in favor of shielding the arbitrators from the identity of the Funder unless there is a need to know:

1. Filing party informs institution whether it is funded and if so identifies to the institution the Funder and Funder’s material investors.
2. In a funded case, the institution will submit to the arbitrators a questionnaire calling upon the arbitrators to disclose to the institution the identity of the Funders (i) in past or pending cases as arbitrator where the Funder was identified, (ii) in past or pending cases of arbitrator’s firm as counsel, (iii) from which arbitrator’s firm sought or maintained funding in last X number of years, (iv) with whom the arbitrator has or in last X years had other relationships with Funder such as Board member or consultant, and (v) with whom the arbitrator has present or meaningful past professional or personal relationships with officers/employees of Funders.
3.  If no match, then the parties would be informed that the arbitrator’s responses to the questionnaire reveal no matters for potential disclosure, and therefore the identity of Funder will not be disclosed to Tribunal as there is no need.
4. If there is a match, the arbitrators would be notified of the identity of the Funder and invited to make disclosures as they deem appropriate. The parties would be notified that the Funder has been identified to the arbitrators. This conveys to the parties only the bare fact of some connection between one or more of the arbitrators and the Funder, and leaves to the arbitrator the discretion to determine in the first instance whether the connection amounts to a matter for which disclosure ought to be made.

***

Having now outlined this proposal let me conclude by telling you why this may not work, why institutions that administer international arbitrations  could be loathe to adopt it. The providers obviously are in competition for cases, and any one of them considering to be a pioneer in mandating disclosure risks having major law firms flee from their rules at the urging of their Funders. Maybe, then, Singapore is on the right track in making a disclosure mandate into a rule of professional conduct for lawyers. Perhaps we will see lawyer disciplinary bodies around the world being urged to follow Singapore’s lead in the years to come.