International Arbitration 2007
Gregory P. Joseph*
International arbitration proceedings are subject to judicial scrutiny and action under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, implemented at 9 U.S.C. § 201, and the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (‛FAA“). The provisions of the FAA apply to proceedings brought under the Convention so long as the statute does not conflict with the Convention. If there is a conflict, the Convention prevails. Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys "R" Us, Inc., 126 F.3d 15, 20 (2d Cir. 1997). Decisions this year reflect the interplay between the Convention and the FAA.
‛Agreement in Writing“ to Arbitrate. The Convention requires an ‛agreement in writing“ before arbitration may be compelled (Article II, § 1). The question in Interested Underwriters at Lloyd's v. M/T San Sebastian, 2007 U.S. Dist. LEXIS 24817 (N.D. Ga. April 3, 2007), was whether that requirement was satisfied an agreement to arbitrate that was incorporated by reference in another agreement between two other parties. Held, it was.
The plaintiff (Lloyd's) was the subrogated insurance carrier for the purchaser of cargo that was to be delivered on a ship. The delivery was to be made pursuant to an agreement between the charterer of the ship and the seller of the product (called a sub-Charter Party agreement). The only agreement in writing to arbitrate was the Charter Party agreement between the owner of the ship and the charterer. Neither the seller nor the purchaser of the cargo was a party to the Charter Party agreement. However, the sub-Charter Party agreement executed by Lloyd's insured incorporated by reference the Charter Party agreement containing the arbitration clause. Indeed, the Charter Party agreement dictated the terms of the sub-Charter Party agreement. Lloyd's sought to compel arbitration of its claims against the owner of the ship, even though Lloyd's insured was not a party to any agreement with the owner. The M/T San Sebastian Court held that Lloyd's insured was an intended third party beneficiary of the Charter Party Agreement, and that the Court was, as a result, empowered to compel arbitration between Lloyd's and the owner of the ship.
Situs of Arbitration. The second question in M/T San Sebastian was where the prospective arbitration would be held. The locus of arbitration is an issue on which the FAA and Convention conflict. Under the FAA, 9 U.S.C. § 4, the court may order arbitration only ‛within the district in which the petition for an order directing such arbitration is filed.“ (In M/T San Sebastian, that was New York. The Judge writing the opinion, however, sat in Atlanta.) The Convention, in contrast, permits a court to ‛direct that arbitration he held in accordance with the agreement at any place therein provided for, whether that place is within or without the United States“ (9 U.S.C. § 206). Because the Convention prevails in the event of conflict, the M/T San Sebastian Court held that it possessed the power to order arbitration anywhere, including New York.
Vacatur of Award. The New York Convention applies different standards of judicial review for arbitral awards, depending on where, and under what law, they are rendered. The country in which, or under the law of which, an award is made, is free to vacate or modify an award in accordance with its domestic arbitral law (Article V(1)(e)). In contrast, when an action for enforcement is brought in another country, that country may refuse to enforce the award only on the grounds explicitly set forth in Article V of the Convention. Yusuf Ahmed Alghanim, 126 F.3d at 23.
Validity of Foreign Judgment Vacating or Enforcing Award. Under the Convention, if an international arbitration award is judicially vacated or enforced by the country in which the award was made, or whose law was governing, every other contracting state is obligated to recognize and enforce the award (or vacatur) as determined by that country’s courts. Thus, in May 2007, the D.C. Circuit held itself bound to respect a judgment of a Colombian court (the Consejo de Estado) vacating an arbitral award made in Colombia and governed by Colombian law ‛because there is nothing in the record here indicating that the proceedings before the Consejo de Estado were tainted or that the judgment of that court is other than authentic.“ Termorio S.A. E.S.P. v. Electranta S.P., 2007 U.S. App. LEXIS 12201 (D.D.C. May 25, 2007).
Standards for Vacatur in U.S. Courts. In two cases in early 2007, the standards for review of an international arbitration award rendered in the United States were held to be matters governed by the FAA — the same standards that govern review of domestic U.S. arbitrations. Al-Haddad Commodities Corp. v. Toepfer Int’l Asia Pte., Ltd., 2007 U.S. Dist. LEXIS 29405 (E.D. Va. April 19, 2007), and Int’l Thunderbird Gaming Corp. v. United Mexican States, 2007 U.S. Dist. LEXIS 10070 (D.D.C. Feb. 14, 2007). These standards are essentially twofold:
First, grounds for vacatur of an award are set forth in § 10(a) of the FAA, which requires, inter alia, proof that an award was procured by fraud, corruption, or undue means, or resulted from an arbitrator's improper refusal to postpone a hearing or the arbitrator’s evident partiality or corruption, or the arbitrator’s refusal to hear relevant evidence, or ‛any other misbehavior by which the rights of any party have been prejudiced.“
Inclusion vs Exclusion; Time Limits. Arbitrators are vested with a degree of discretion, however, and the refusal to hear evidence must deprive a person of a fundamentally fair hearing before it will support vacatur of an award. UMWA v. Marrowbone Dev. Co., 232 F.3d 383, 385, 388 (4th Cir. 2000). Al-Haddad rejected a motion to vacate where the objected to behavior resulted in the inclusion, rather than the exclusion, of evidence, ‛and, as such, is plainly not a ‘refus[al] to hear evidence’ under § 10(a)(3).“ 2007 U.S. Dist. LEXIS 29405, at *15. In addition, the Court ‛refuse[d] to question the Panel's imposition of time limitations on the parties, which were applied equitably to both sides....“ Id. at *18.
Manifest Disregard. Second, courts may vacate an arbitral award that evinces a ‛manifest disregard“ of the law. The Second Circuit’s two part manifest-disregard standard, which widely applied, requires a showing that: (i) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (ii) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. DiRussa v. Dean Witter Reynolds, Inc., 121 F.3d 818, 821 (2d Cir. 1997); Int’l Thunderbird, 2007 U.S. Dist. LEXIS 10070, at *5.
The plaintiff in Int’l Thunderbird asserted that the arbitral tribunal acted in manifest disregard of the law by announcing a particular standard for burdens of proof and then failing to apply that standard. It is difficult to see how manifest-disregard standard could have been transgressed by an arbitration tribunal’s alleged failure to follow its own, articulated burden-of-proof standard. The Int’l Thunderbird Court, however, did not need to reach this issue directly because it found that the arbitrators had, in fact, applied the burden-of-proof standards that they had articulated, and, therefore, Thunderbird lost even assuming the validity of its analysis.
Judicial Relief in Aid of Arbitration. There is a split of authority as to whether a federal court possesses the authority to entertain a request for an order pendente lite sought by a party to an international arbitration when the arbitral tribunal has the power to grant similar relief. The disparate authorities are collected and analyzed in Bahrain Telecomm. Co. v. DiscoveryTel, Inc., 476 F. Supp. 2d 176 (D. Conn. 2007). Applying Second Circuit precedent, Bahrain holds that the federal courts have jurisdiction to entertain a motion for a prejudgment remedy (attachment) by a party to an international arbitration currently pending in the London Court of International Arbitration, whose rules, the Court noted, expressly contemplate that parties to pending arbitrations may seek provisional remedies from courts (LCIA Article 25.3).
Sovereign Immunity and Enforcement. A foreign sovereign may waive immunity from suit by agreeing to arbitrate a dispute. If, however, the sovereign agrees to arbitrate outside the United States, the question arises whether it has waived immunity to suit in the United States to enforce the resulting award. There is no such waiver, under the decision in Strategic Technologies PTE, Ltd. v. Republic of China (Taiwan), 2007 U.S. Dist. LEXIS 34258 (D.D.C. May 10, 2007), at least where the foreign sovereign is not a signatory to the Convention. The Strategic Technologies Court also rejected the argument that the commercial activity exception of the Foreign Sovereign Immunities Act, 28 U.S.C. § 1605(a)(2), was met because the underlying arbitration award arose from the sovereign’s commercial activity because that activity took place outside the United States. The Court reasoned that: ‛The commercial activity that provides the jurisdictional nexus must be the same activity on which the lawsuit is based.“ Id. at *14.
* Gregory P. Joseph Law Offices LLC, New York. Fellow, American College of Trial Lawyers; Chair, American Bar Association Section of Litigation (1997-98), and member, U.S. Judicial Conference Advisory Committee on the Federal Rules of Evidence (1993-99). Editorial Board, Moore’s Federal Practice (3d ed.). Author, Sanctions: The Federal Law of Litigation Abuse (3d ed. Supp. 2007); Civil RICO: A Definitive Guide (2d ed. 2000); Modern Visual Evidence (Supp. 2007).
© 2007 Gregory P. Joseph
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