Arbitration in the Courts

October 2022 | Vol. 8
Where Advocacy Meets Business

Arbitration in the Courts, October 2022
(Vol. 8)

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Ninth Circuit Holds Federal Court Can Enforce Arbitrator’s Subpoena.

Court has jurisdiction to compel compliance with arbitrator’s subpoena so long as it relates to an underlying arbitration agreement governed by the New York Convention.

Day v. Orrick, 42 F.4th 1131 (9th Cir. 2022).

Chapter 2 of the Federal Arbitration Act (FAA) provides that federal courts have subject matter jurisdiction over “actions and proceeding[s] falling under the [New York] Convention.”  In Day v. Orrick, the Ninth Circuit Court of Appeals held, as a matter of first impression, that this includes jurisdiction to enforce an arbitrator’s subpoena to non-parties.

The case arose out of an arbitration between law firm Jones Day and a former partner who left Jones Day’s Paris office to join the firm of Orrick, Herrington & Sutcliffe.  The arbitration was before a single arbitrator and was seated in Washington, D.C.  Because the former partner was a German national and Jones Day is based in the U.S., the New York Convention governed the arbitration.  At Jones Day’s request, the arbitrator issued a subpoena to Orrick summoning it to appear before the arbitrator in Washington D.C. to produce documents.  Following Orrick’s failure to comply, the Superior Court for the District of Columbia denied Jones Day’s petition to enforce the subpoena, finding both that it lacked personal jurisdiction over Orrick and that Section 7 of the Federal Arbitration Act (FAA) required such petitions to be brought in federal district court.

At Jones Day’s request, the arbitrator issued a second subpoena summoning Orrick to appear at a hearing to be held in Northern California, where Orrick maintained its principal place of business.  When Orrick refused to comply, Jones Day filed a petition in the United States District Court for the Northern District of California seeking to compel its compliance.  The District Court held that the Northern District of California was an improper venue because Section 7 of the FAA only permitted courts at the seat—here Washington D.C.—to compel compliance with arbitral subpoenas.  The District Court therefore did not address Orrick’s arguments that the federal court lacked subject matter jurisdiction over the petition.

On appeal, the Ninth Circuit reversed, finding that the District Court had jurisdiction to enforce the arbitral subpoena, and venue in the Northern District of California was proper.

As to jurisdiction, the court held that Section 203 of the FAA conferred jurisdiction on federal district courts to enforce arbitral subpoenas in proceedings governed by the Convention.  Orrick argued that an action or proceeding to enforce an arbitral summons was not an action “fall[ing] under the Convention,” because the Convention authorizes only three types of actions, namely those seeking to compel arbitration, appoint arbitrators in accordance with the arbitration agreement, and enforce final arbitral awards.

The Ninth Circuit disagreed, finding that the purpose of Chapter 2 of the FAA is to “encourage arbitration and to authorize district courts to take actions necessary to ensure that the parties’ underlying controversy is successfully resolved through arbitration.”  In light of this legislative purpose, the federal courts’ jurisdiction over actions “falling under” the Convention extends to all “proceedings necessary to complete the arbitration process.”  The federal courts therefore have jurisdiction if: (i) there is an underlying arbitration agreement or award that falls under the Convention; and (ii) the action or proceeding relates to that arbitration agreement or award in the sense that it “could conceivably affect the outcome of the plaintiff’s case.”  Petitions to compel compliance with arbitral subpoenas meet this standard because they “are necessary ancillary proceedings that ensure the proper functioning of the underlying arbitration.”

As respects venue, the court found that the relevant statutory provision was not FAA § 7, but rather Section 204, which provides that where an arbitration agreement falling under the Convention designates a “place of arbitration” in the United States, an action or proceeding “may be brought” in the district embracing the place of arbitration.  But, the court held, “[n]othing in the text of [FAA § 204] indicates that Congress intended the FAA venue provision to be exclusive or restrictively applied.”  Rather, Congress’s use of the permissive “may” indicates the intent that venue under Section 204 is “non-exclusive.”  The general federal venue provisions found in 28 U.S.C. § 1391 provide that venue over any civil action is proper if brought in a district designated in Section 1391, “unless otherwise provided by law.”  Given that Section 204 is non-exclusive, Section 1391 also governs venue for actions falling under the Convention.  Under Section 1391, the Northern District of California was a proper venue because it is Orrick’s principal place of business.

Interestingly, the court did not merely remand the decision to the district court to consider the petition to enforce the subpoena, but rather remanded with instructions to the district court to enforce the subpeona and order Orrick to comply.

Read the court’s full decision here.


Second Circuit holds that incorporation of the ICC Rules is not always clear and unmistakable agreement to delegate arbitrability determinations to the arbitrators.

Where contract carved out certain disputes from arbitration clause, whether claims at issue fell within the carve-out was a question for the court.

Lavvan, Inc. v. Amyris, Inc., No. 21-1819 (2d Cir. Sept. 15, 2022).

It is well-settled under U.S. arbitration law that questions of arbitrability, i.e., the existence and scope of arbitrators’ jurisdiction, are presumptively for courts, not arbitrators.  However, where there is “clear and unmistakable” evidence that the parties agreed to delegate arbitrability determinations to the arbitrators, courts will enforce that agreement (referred to as a delegation clause) to the same extent as any other arbitration agreement.  Courts have consistently held that such a delegation can be found where a broad arbitration agreement governing all disputes between the parties designates institutional rules that grant the arbitrators authority to rule on their own jurisdiction.  But, in Lavvan, the Second Circuit recognized the limits of incorporating institutional rules as a means of delegating arbitrability determinations to the arbitrators.

Lavvan, Inc. brought suit against Amyris, Inc. claiming trade secret misappropriation and patent infringement.  Amyris moved to compel arbitration of these claims under the parties’ license agreement, which contained two relevant provisions regarding dispute resolution.  First, the agreement provided that “all disputes that cannot be resolved by the management of both parties” shall be resolved in arbitration under International Chamber of Commerce (ICC) rules.  However, the agreement further provided that “if a dispute arises with respect to the scope, ownership, validity, enforceability, revocation or infringement of any Intellectual Property … such dispute will not be submitted to arbitration and either Party may initiate litigation.”

Amyris argued that the agreement’s incorporation of the ICC rules, which provide that the arbitrators have jurisdiction to determine their own jurisdiction, provided “clear and unmistakable” evidence that the parties intended to arbitrate disputes as to arbitrability, including disputes over whether claims fell within the carve-out for intellectual property matters.  The district court disagreed, and the Second Circuit affirmed.

The court explained, “it is true that the incorporation of procedural rules that empower an arbitrator to decide arbitrability can in some circumstances serve as ‘clear and unmistakable’ evidence of an intent to arbitrate arbitrability, but not where, as here, ‘other aspects of the contract create ambiguity as to the parties’ intent.’”  The “other aspect” of the contract was the provision stating that disputes regarding intellectual property would not be subject to arbitration.

The parties’ contract incorporated the ICC rules only into the section requiring the arbitration of some disputes, and not the section providing for litigation of intellectual property rights.  This, the court held, “suggests the parties intended for the ICC rules to apply only to those disputes that the parties agreed to arbitrate, which excludes [intellectual property] disputes.”  Accordingly, applying “ordinary contract principles,” the court found that the “evidence that the parties intended to litigate a particular category of disputes” demonstrated there was no agreement to arbitrate the arbitrability of such disputes.

Amyris next argued that even if the parties did not delegate arbitrability determinations to the arbitrators, the district court erred in finding that Lavvan’s claims were not otherwise subject to arbitration under the parties’ agreement.  The court acknowledged the general rule that “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.”  However, although this “presumption of arbitrability may tip the scale if an agreement is truly ambiguous, … it does not alter the controlling question:  is the agreement best construed to encompass the dispute?”

Here, the court held it was not.  Lavvan’s claims plainly concerned enforcement of certain specified trade secrets and patents, which were “clearly disputes of the sort exempted from arbitration” by the parties’ agreement.  The court therefore rejected Amyris’s argument that these claims had to be arbitrated because they were intertwined with other contractual issues the parties had submitted to arbitration.  By requiring the arbitration of some disputes and litigation of others, the parties’ agreement clearly contemplated that different aspects of their dispute could proceed separately in different fora.  Arbitration is a matter of contract, and “federal law requires piecemeal litigation when necessary to give effect to an arbitration agreement.”

Read the court’s full decision here.


Federal district court holds that so-called arbitration delegation clause did not encompass inquiry into whether nonsignatory could invoke arbitration agreement.

But once court held nonsignatory was entitled to enforce arbitration agreement, the delegation clause required that arbitrators decided other defenses to arbitrability.

The Chickasaw Nation v. Caremark PHC, LLC, Case No. CIV-20-00488-PRW (E.D. Okla. Sept. 30, 2022).

Arbitration is matter of contract.  As just discussed, the parties to a contract may not only agree to arbitrate certain substantive disputes, but also to arbitrate whether claims fall within the scope of the arbitration clause, if their intent to do so is “clearly and unmistakably” evidenced.  But does such a clause cover questions concerning the rights of nonsignatories to invoke an arbitration agreement?  In Chickasaw, the United States District Court for the Eastern District of Oklahoma held it does not.  Rather, whether a non-signatory may invoke an arbitration clause is for the court in the first instance.  However, if the court determines that the nonsignatory may invoke an arbitration agreement that contains a delegation clause, questions concerning other defenses to arbitrability are for the arbitrators.

Chickasaw involved claims by the Chickasaw Nation against certain health insurers for reimbursement of medication costs for tribal members under pharmaceutical benefits plans.  As relevant here, one group of defendants were certain United Healthcare affiliated entities (the United Entities), who the Nation claimed were directly or indirectly responsible for administering the Pharmacy Network Agreement (PNA) between the Nation and United Healthcare’s captive plan manager.  The Nation filed a lawsuit in federal court and claimed that these entities’ denial of benefits violated the Indian Health Care Improvement Act (aka the Recovery Act).

In response, the United Entities sought to compel arbitration of the Nation’s claims.  The PNA contained an arbitration clause providing for the arbitration of any dispute, “including, but not limited to all questions of arbitrability, the existence, validity, scope, interpretation or termination of the agreement or any term thereof.”  Because only the Nation and the plan manager were signatories to the arbitration agreement, the Nation argued that the non-signatory United Entities could not invoke arbitration and that the Nation’s claims should therefore proceed in court.

The United Entities, however, argued that they were entitled to invoke the arbitration agreement because the Nation’s claims were inextricably intertwined with the PNA, and that under controlling California law the Nation was therefore estopped from litigating, rather than arbitrating, its claims.

The court found that although the PNA’s arbitration clause “contains clear-cut language showing an intent to arbitrate threshold issues of arbitrability between the PNA signatories,” there was no “clear and unmistakable evidence that the Nation agreed to arbitrate arbitrability with nonsignatories.”  Accordingly, it ruled, the “Court—rather than the arbitrator(s)—will decide whether the nonsignatories may enforce the arbitration clause of the PNAs.”

The court concluded that the United Entities could enforce the arbitration clause, because the Nation alleged that the nonsignatories acted in concert with their captive plan manager to deny benefits due under the PNA.  Those allegations estopped the Nation from avoiding its obligation to arbitrate disputes arising under that same agreement, even where the dispute was with nonsignatories.  However, while the Nation also advanced two additional defenses to its obligation to arbitrate, including sovereign immunity, the court did not reach those issues.  Having concluded that the United Entities could enforce the arbitration agreement, that agreement’s delegation clause clearly reserved those additional questions for the arbitrators.

Read the court’s full decision here.


Federal courts have circumscribed role in enforcing ICSID awards.

An enforcing court must generally do no more than examine the decision’s authenticity and enforce the obligations imposed by the award.

Valores Mundiales v. Venezuela, No. 19-cv-46-FYP-RMM (D.D.C. Aug. 3, 2022).

The enforcement of international arbitration awards is generally governed by either the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) or the Inter-American Convention on International Commercial Arbitration (the Panama Convention).  These conventions are codified in Chapters 2 and 3 of the Federal Arbitration Act (FAA), and each provides explicit grounds on which a court may refuse enforcement of an award.  In contrast, the enforcement of awards in investor-state arbitrations falling under the International Convention on the Settlement of Investment Disputes (ICSID Convention), is codified in 22 U.S.C. §1650, not the FAA.  Section 1650 does not provide grounds for refusing enforcement of such awards.  The case of Mundiales v. Venezuela concerned the comparatively limited role of U.S. courts in enforcing awards issued in ICSID arbitrations.

The dispute in Valores Mundiales arose in the context of Venezuela’s 2019 constitutional crisis, when over 50 countries, including the U.S., refused to recognize the Maduro government, and instead recognized the alternative government in exile led by Juan Guaidó. At that time, Venezuela, through the Guaidó government, appeared in a 2019 case before the United States District Court for the District of Columbia to resist enforcement of an ICSID tribunal’s arbitral award in favor of two Spanish companies.  The Maduro government had previously initiated annulment proceedings before an ICSID committee, and the Guaidó government sought to substitute itself in that proceeding as Venezuela’s rightful representative.

However, the committee denied the application, finding that the Guaidó government “had not proven its legitimacy to represent Venezuela.”  The Maduro regime therefore continued to represent Venezuela in the annulment proceedings, and the ICSID committee ultimately denied the annulment application and affirmed the award.

Thereafter, the Guaidó government argued to the D.C. District Court that it should deny enforcement of the award, because the ICSID committee’s refusal to allow the Guaido government to prosecute the annulment proceedings amounted to a denial of due process.

The court (acting through a Magistrate), rejected this claim.  Relying on Article 54(1) of the ICSID Convention and the codifying statute (§ 1650), the court reasoned that, unlike under the New York and Panama Conventions, a denial of due process was not a recognized ground for refusing to enforce an ICSID award.  Rather, the convention and the enabling legislation were clear that “[t]he pecuniary obligations imposed by [an ICSID] award [] shall be enforced and shall be given the same full faith and credit as if the award were a final judgment of a court of general jurisdiction of one of several States.”  In the ICSID award context, this means that “if the Centre would treat one of its awards as binding, that award is binding in a United States federal court.”  Accordingly, “[t]he role of the courts in this scheme is largely limited to enforcing ICSID awards,” and “an enforcing court must generally do no more than examine the judgment’s authenticity and enforce the obligations imposed by the award.”

In applying the full faith and credit standard under Section 1650, a U.S. court may review the rendering jurisdiction’s procedures to ensure a “constitutional floor” of due process, but “federal courts do not impose their own rules or laws designed to ensure due process in federal court onto other tribunals.”  Instead, they “accept the rules chosen by the [s]tate from which the judgment is taken,” in part because “no single model of procedural fairness, let alone a particular form of procedure, is dictated by the Due Process Clause.”

ICSID’s “robust internal mechanisms” ensure awards “are rendered consistent with core principles of due process,” because parties must be represented by counsel, arbitral awards must be in writing and reasoned, annulment proceedings are available, and no ICSID proceeding is possible absent the State’s consent in the ICSID Convention.  In sum, the court held, U.S. courts will enforce an ICSID award “except in the most extraordinary of circumstances,” none of which were present there.

Venezuela also challenged enforcement of the award to the extent it imposed a post-award interest rate of Libor + 2%.  Venezuela argued for the lower rate set in 28 U.S.C. 1961, which governs interest on “any money judgment in a civil case recovered in district court.”  The court rejected Venezuela’s objection, finding that Section 1961 did not govern judgments recognizing ICSID awards.  Section 1961 governs only federal judgments, but Section 1650 requires that ICSID awards be treated as “a final judgment of a court of general jurisdiction of one of the several [U.S.] [s]tates.”  Because payment of interest under an ICSID award is a “pecuniary obligation” under Section 1650, the court has no choice but to enforce that portion of the award as drafted.  This again contrasts with the treatment of New York and Panama Convention awards.  Those Conventions are codified in the FAA, which provides in Section 13 that a judicially confirmed award be treated “as if” the award was a federal court judgment, governed by Section 1961.

Read the court’s full decision here.

Arbitration in the Courts, June 2022
(Vol. 7)

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Let’s not make a federal case out of it.

Absent diversity of citizenship, federal courts lack jurisdiction over petitions to confirm or vacate domestic arbitration awards, even where the underlying claims arise under federal law.

Badgerow v. Walters, No. 20-1143 (U.S. March 31, 2022).

U.S. Federal courts are courts of limited jurisdiction, which Congress and the Constitution have defined to include two main categories: “diversity” jurisdiction (suits between citizens of different states or between U.S. and foreign citizens) and “federal question” jurisdiction (suits involving claims based on federal law). In turn, while the Federal Arbitration Act (the “FAA”) authorizes a party to an arbitration agreement to petition for various forms of relief, it does not itself create the subject-matter jurisdiction necessary for a federal court to resolve them.  Rather, the federal court must have an independent jurisdictional basis to do so, or the petition must be brought in state court.

In Vaden v. Discover Bank, 556 U. S. 49 (2009), the Supreme Court held that for petitions to compel arbitration under Section 4 of the FAA, federal question jurisdiction is determined by “looking through” the petition to the underlying claim sought to be arbitrated.  If that claim would, save for the arbitration clause, be subject to federal jurisdiction, the federal court has jurisdiction over the petition to compel.  This approach is required by the express terms of Section 4, which allows a petition to compel arbitration in a “United States district court which, save for agreement, would have jurisdiction,” meaning the statute requires courts to assume the absence of the arbitration agreement in determining whether they have jurisdiction over petitions to compel.  Thus, in actions to compel arbitration, federal jurisdiction depends on the nature of the underlying claim.  Absent diversity of citizenship, a petition to compel may be brought in federal court if the claim sought to be arbitrated raises a federal question.

In Badgerow, the Supreme Court considered whether the same “look through” approach applies in determining federal jurisdiction over an action to confirm or vacate an award under FAA Sections 9 and 10.

Badgerow arose out of an employment arbitration in which Petitioner-employee Denise Badgerow alleged that she had been unlawfully terminated by Walters, her employer.  After the arbitrators issued an award in Walters’s favor, Badgerow filed suit in state court in Louisiana to vacate the award on the basis of fraud in the arbitral proceedings.  Walters removed the case to federal court and applied for confirmation of the award.  Badgerow sought to remand the case to state court arguing that the federal court lacked jurisdiction over the parties’ respective requests to confirm or vacate the award.  The district court, applying the Vaden “look through” approach, found that it had jurisdiction because Badgerow had raised federal law claims in the arbitration.  Finding no fraud in the arbitral proceedings, the district court granted Walters’s application to confirm, and denied Badgerow’s application to vacate the award.  On appeal, the Fifth Circuit affirmed.

The Supreme Court reversed, holding that the “look through” approach does not apply to petitions to confirm or vacate awards under FAA Sections 9 and 10, which “contain none of the statutory language on which Vaden relied.”  In particular, “those provisions do not have Section 4’s ‘save for’ clause[,]” and do not mention the court’s subject-matter jurisdiction at all.  For the Court, Congress’s inclusion of particular language in one portion of a statute and its omission in another is presumed deliberate, and courts are not at liberty to “pull[] look through jurisdiction out of thin air[.]”  The FAA’s statutory plan makes Sections 9 and 10 petitions “conform to the normal—and sensible—judicial division of labor: The applications go to state, rather than federal, courts when they raise claims between non-diverse parties involving state law.”  Although the FAA provides the standard for vacatur or confirmation, petitions under Sections 9 and 10 principally concern contractual rights provided in the arbitration agreement, which generally belong in state court.  The Court reasoned, Congress deliberately created an exception for Section 4 petitions to compel because the preeminent purpose of the FAA (adopted in 1925) was to overcome some judges’ reluctance to enforce arbitration agreements, whereas no such concern existed with respect to the courts’ willingness to enforce arbitral awards.

The upshot of Bagerow is to largely relegate actions to confirm or vacate awards under the FAA to state courts, absent diversity of citizenship.  It is important to note, however, that Badgerow governs only enforcement actions concerning domestic awards.  The FAA separately provides an independent basis for federal jurisdiction over enforcement actions for international arbitration awards governed by the New York or Panama Conventions, and when such petitions are brought in state court, it permits them to be removed to federal court. See 9 U.S.C. §§ 203 and 302.

Read the court’s full decision here.


There is no special waiver rule in the arbitration context.

As with other contractual rights, waiver occurs when a party evinces an intent to relinquish the right to arbitrate, regardless of whether there is prejudice to the other party. 

Morgan v. Sundance, Inc., No. 21-326 (U.S. May 23, 2022).

Arbitration is a matter of contract.  Like any other contractual right, a party may waive the right to arbitration.  A waiver is “the intentional relinquishment or abandonment of a known right.”  Under federal law, the focus of the waiver inquiry is generally on the conduct of the party asserting the right, without regard to the impact on the opposing party.  However, in the context of the right to arbitrate, nine federal appellate circuit courts have imposed an additional requirement of prejudice to the opposing party.  These courts have cited the strong federal policy favoring arbitration as justification for this added protection against the waiver of the right to arbitrate.  In Morgan, the Supreme Court clarified that under federal law, ordinary waiver rules, which require no showing of prejudice, apply in determining whether a party has waived its right to arbitrate.

In Morgan, the plaintiff had brought a nationwide collective action against a Taco Bell franchisee, alleging violations of the Fair Labor Standards Act, principally concerning the failure to pay employees earned overtime.  The lead plaintiff had signed an arbitration agreement, agreeing to “use confidential arbitration, instead of going to court.”  Nevertheless, Sundance originally defended against the action as if no arbitration agreement existed.  It filed a motion to dismiss, arguing that Morgan had to either join an existing class action brought by other Taco Bell employees, or refile her claim on an individual basis.  When the district court denied that motion, Sundance answered, asserting 14 affirmative defenses, none of which invoked the arbitration agreement.  The defendant then participated in a joint mediation with the named plaintiffs in both class actions.  Nearly eight months after Morgan filed the complaint, when settlement talks proved unsuccessful, Sundance moved to stay the litigation and compel arbitration.

Morgan opposed the motion, arguing that Sundance waived the right to arbitrate by participating in the litigation.  The district court, applying Eighth Circuit precedent, found that a special waiver rule applied to the right to arbitrate, which required a showing of prejudice to the party resisting arbitration.  The court found that such prejudice existed, and denied the motion to compel.  On appeal, the Eight Circuit reversed, finding that Morgan was not prejudiced by Sundance’s delay in asserting its right to arbitrate, because the parties had not begun formal discovery or litigated any matters going to the merits of the claims.

The Supreme Court reversed, holding that there is no prejudice requirement when applying the doctrine of waiver to the right to arbitrate, because “a federal court assessing waiver does not generally ask about prejudice.”  Rather, the “court focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party,” and the same rule should apply, the Court said, when the right at issue is one to arbitrate.  The strong federal “‘policy favoring arbitration’ does not authorize federal courts to invent special, arbitration-preferring procedural rules.”  The policy derives from the historical judicial hostility to agreements to arbitrate and is intended to “make ‘arbitration agreements as enforceable as other contracts, but not more so.’”   Thus, while a court must hold a party to its agreement to arbitrate as it would any other contract, it “may not devise novel rules to favor arbitration over litigation.”  As with any other contractual right, if a party, through its actions, evinces an intent to relinquish the right to arbitrate, the right is waived. Once waived, it may not be later invoked, regardless of whether the change of course prejudices the other side.

It is important to note that the Court only addressed waiver under federal law.  The parties “disagreed about the role state law might play in resolving when a party’s litigation conduct results in the loss of a contractual right to arbitrate,” the courts below treated the question as one of federal law, and the Court “assumed without deciding” that they were right to do so.  Thus, it remains to be seen whether and in what context questions of waiver or other procedural bars to enforcing the right to arbitrate should be decided under state law, and whether the application of a specific state’s law might yield a different result.

Read the court’s full decision here.


Whether arbitration agreement contains a “fork-in the-road” clause is a gateway procedural issue for the arbitrators to decide.

A fork-in-the-road clause concerns when, not whether, the contractual duty to arbitrate arises.

Olin Holdings Limited v. State of Libya, Case No. 21-cv-4150 (S.D.N.Y. March 22, 2022).

Some investment treaties contain so-called “fork-in-the-road” clauses, which require an investor to choose between litigating its claims in the host State’s domestic courts or before an international arbitral tribunal.  As the name suggests, once the investor chooses one forum, that decision is final and the other forum is no longer available.  The United States District Court for the Southern District of New York, in Olin Holdings, had to determine who between courts and the arbitrators decide whether an arbitration provision contains a fork-in-the-road clause and, if so, whether the investor had made the election depriving the arbitrators of jurisdiction.

Cypriot company Olin had leased a tract of land in Libya’s capital, Tripoli, to construct a dairy factory.  After receiving the required licenses from the Libyan authorities, Olin constructed the factory.  In October 2006, shortly after the factory was completed and was set to begin operations, Olin received an eviction notice requiring it to vacate the premises.  Unbeknownst to Olin, a Libyan authority had expropriated a large area that included Olin’s factory.  After having sought exemptions from the expropriation order, to no avail, it filed an action in the Tripoli Court of Appeal challenging the expropriation.  The Tripoli court held that the expropriation was procedurally improper and cancelled the expropriation order.  Shortly thereafter, Olin received a second eviction notice, and commenced new proceedings in the Tripoli court seeking compensation for the harm resulting from the expropriation.  The Tripoli court denied Olin relief, finding that Olin failed to prove the harm it suffered.

Olin then commenced arbitration against Libya before the International Chamber of Commerce (“ICC”), claiming that Libya’s expropriation and failure to award just compensation violated the Cyprus-Libya Investment Treaty.  Olin invoked the arbitration provision in Article 9.2 of the Treaty, which provides that in the event of a dispute between a contracting state and an investor of the other state, the dispute “would be submitted, at the choice of the investor concerned to: (a) the competent court of the Contracting Party in whose territory the investment was made; or (b) the Arbitral Tribunal of the International Chamber of Commerce.”

Libya objected to the tribunal’s jurisdiction, arguing that Article 9.2 constituted a “fork-in-the-road” clause, and that Olin’s decision to commence proceedings in the Tripoli Court precluded it from later commencing arbitration.  The parties submitted this question to the arbitrators, who issued an 88-page jurisdictional award concluding that Article 9.2 did not contain a “fork-in-the-road” clause because it lacked language present in other investment treaties such as “definitive, irrevocable, or any other words suggesting that the choice of one forum would preclude the use of another.”

The parties then arbitrated the merits, and the tribunal ultimately issued a final award finding that Libya had breached several treaty provisions and awarding Olin approximately €20 million, plus interest.

Olin filed a petition with the U.S. District Court for the Southern District of New York to confirm the award.  Libya opposed enforcement under Article V(1)(c) of the New York Convention, arguing that Article 9.2 of the Treaty was a “fork-in-the-road” clause, and Olin’s commencement of proceedings first in Libyan courts deprived the tribunal of jurisdiction.  In the alternative, Libya moved to dismiss the petition on forum non conveniens grounds.

The court rejected Libya’s argument that the tribunal lacked jurisdiction.  Whether Article 9.2 contained a fork-in-the-road clause was a “gateway” procedural question, rather than one of arbitrability.  Whereas arbitrability questions concern whether the parties are bound by a given arbitration clause or whether such clause covers a particular type of controversy, “gateway” issues merely concern the meaning and application of particular procedural preconditions for the use of arbitration, such as waiver, laches, notice requirements, or time-limits.  These procedural preconditions, “determine[ ] when the contractual duty to arbitrate arises, not whether there is a contractual duty to arbitrate at all.”

Courts presume that parties intend for the arbitrators to decide such procedural matters, and therefore accord the arbitrators’ decisions on such matters “considerable deference.”  Thus, the court would uphold the tribunal’s interpretation of Article 9.2 so long as the arbitrators “explain[ed] their conclusions in terms that offer even a barely colorable justification for the outcome reached.”  The court found that the tribunal’s 88-page jurisdictional ruling giving careful attention to the treaty language and comparing it to language in other treaties met this standard.

Notably, the court further held that, were the fork-in-the-road question one of arbitrability, it would have nonetheless accorded the same degree of deference to the arbitrators’ decision.  Ordinarily, courts presume that the parties intend courts, not arbitrators, to decide questions of arbitrability, generally reviewing such questions de novo, granting no deference to arbitrators’ jurisdictional determinations.  However, where there is “clear and unmistakable evidence” that the parties agreed to arbitrate questions of arbitrability, the courts afford significant deference to the arbitrators’ jurisdictional determinations.

Courts commonly find a clear and unmistakable agreement to arbitrate arbitrability when the parties’ agreement calls for arbitration under institutional rules, such as the ICC Rules, that give arbitrators authority to rule on their own jurisdiction.  However, here, the court went a step further and found that the parties had also agreed to arbitrate arbitrability after the arbitration commenced, by including the jurisdictional question in the Terms of Reference, which not only provided that the ICC Rules would apply, but specifically provided that the arbitrators would decide Libya’s objection based on the putative fork-in-the-road language.  Having thus found an agreement to arbitrate arbitrability, if the fork-in-the-road issue were a question of arbitrability rather than procedure, the court would still accord the tribunal’s jurisdictional ruling the same considerable deference.

The court also denied Libya’s forum non conveniens argument.  Under the doctrine, the court may dismiss an action, despite having jurisdiction, if there is an alternative forum to try the case and maintaining the case would be unduly burdensome to either the parties or the court.

Here, because the petitioner was a foreign party, its choice of forum was entitled to little weight.  Moreover, even if the Libyan courts might be biased, France, as the seat of the arbitration, provided an adequate alternative forum.  Nevertheless, the court found that Libya had not demonstrated that any private or public interests weighed against the court maintaining the case.  Confirmation proceedings are summary in nature, and therefore do not require any substantial expenditure of public resources.  Nor is there in any significant private burden, as there is no need for overseas discovery or securing foreign witness testimony.  Under these circumstances, the mere fact that neither the parties nor the dispute had any substantial connection to the United States was insufficient to warrant the court declining to exercise its jurisdiction over the petition to confirm the award.

Read the court’s full decision here.


War in Ukraine requires action to enforce $50 billion Yukos award against the Russian Federation to move forward.

Collectability concerns due to mounting sanctions and other uncertainty from war in Ukraine warranted lifting of five-plus year stay of action to enforce award against the Russian Federation.

Hulley Enterprises Ltd., et al. v. The Russian Federation, Civil Action No. 14-1996 (D.D.C. April 13, 2022).

Under Article VI of the New York Convention, one ground for refusing enforcement of an award is that it has been set aside or vacated by the courts at the seat. U.S. courts generally defer to such foreign judgments absent extraordinary circumstances.  Federal courts have inherent discretion to stay actions to enforce foreign arbitral awards, which they often exercise when proceedings to set aside the award are pending before the courts of the seat.  After all, entering judgment while such foreign actions are pending could mean having to reopen the matter if the award is later set aside.  But, as Hulley shows, sometimes extraordinary circumstances require pressing forward in parallel with foreign set-aside proceedings.

In Hulley, the award creditors had initiated proceedings in 2014 before the U.S. District Court for the District of Columbia to enforce their $50 billion award issued by a Netherlands-seated tribunal against the Russian Federation.  In 2016, after the parties had fully briefed Russia’s motion to dismiss on sovereign immunity grounds, a lower court in the Hague vacated the award, finding that the tribunal had lacked jurisdiction.  This prompted the D.C. trial court to grant the award creditors’ motion to stay the proceedings pending their appeal in the Netherlands.  The D.C. court extended the stay multiple times before, in November 2021, the Dutch Supreme Court reversed the lower court’s set-aside decision, finding that the arbitral tribunal did have jurisdiction to issue the award.  While the Dutch Supreme Court’s decision resulted in the automatic lifting of the stay of the D.C. enforcement action, it did not bring the Dutch set-aside proceedings to a close.  Rather, the Dutch Supreme Court remanded the case to the lower court to decide the Russian Federation’s claim that the award had been procured by fraud.  The Russian Federation therefore petitioned the D.C. court to extend the stay of the U.S. enforcement action.

The court first rejected Russia’s contention that the same reasons for a stay remained as in 2016 because the march of time alters the equities, and the hardship to the award creditors, who prevailed in a decade-long arbitration in 2014, only increases with each passing year.  Arbitration’s aims of expeditious dispute resolution and avoidance of protracted litigation militated against another stay because eight years after the award creditors filed the enforcement action, the very first step in the litigation – resolution of Russia’s sovereign immunity defense – remained pending.

As the Russian Federation’s motion to dismiss on sovereign immunity grounds was fully briefed and ripe for resolution, the court found that lifting the stay imposed a de minimis burden, which was far outweighed by the hardship a further stay would impose on the award creditors, particularly in light of recent developments following Russia’s invasion of Ukraine.  While a Dutch judgment setting aside the award for fraud might provide a defense to recognition and enforcement, the court, citing recent D.C. Circuit precedent, noted that the “the validity or enforceability of an arbitral award is a merits question,” and the district courts “need not determine the validity of the arbitral award as part of [their] jurisdictional inquiry.”  This meant that, “at a minimum, assessment of this Court’s jurisdiction is independent of any Dutch court ruling to set-aside—or not—the award.”

The court further found that the fact-intensive nature of Russia’s fraud allegations suggested that the remaining Dutch proceedings would likely take longer than the prior proceedings, and extending the stay for several additional years was unjustifiable.

Finally, the court reasoned that economic sanctions and other penalties imposed by the international community in the wake of Russia’s invasion of Ukraine militated in favor of the action moving forward, as such actions were likely to impair the award creditors’ ultimate ability to locate and execute on Russian assets.

Under these circumstances, it was appropriate to lift the stay and proceed to resolve the Russian Federation’s jurisdictional motion.  Under federal law, the court’s decision on Russia’s motion to dismiss will be immediately appealable.  If the appellate court rules that the district court has jurisdiction over the petitioners’ enforcement action before the Dutch proceedings conclude, it remains to be seen whether the D.C. court would move forward with the merits phase of the case, or further stay the proceedings.

Read the court’s full decision here.

Practical Law The Journal Publishes “Functus Officio Doctrine” Article by Andrew Poplinger, Yasmine Lahlou & Silvia Marroquin

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March 2022 — Practical Law The Journal’s Winter 2022 issue featured a spotlight article by Chaffetz Lindsey’s Andrew Poplinger, Yasmine Lahlou and Silvia Marroquin titled “The Functus Officio Doctrine: Arbitrators’ Authority to Reconsider and Modify Awards.”  This article originally appeared in Practical Law in October 2020, and the republication emphasizes the practicality and relevance of the functus officio doctrine.

The common law doctrine of functus officio provides that once arbitrators issue an award, their authority as arbitrators is exhausted and they no longer have the power to re-examine that award. While the doctrine recognizes the importance of upholding the integrity and finality of arbitration awards, it limits the ability of arbitrators to rectify mistakes in or otherwise modify a final award, even where a serious substantive error has been made. Counsel involved in arbitration should be aware of the parameters of the functus officio doctrine and the recognized exceptions to effectively address issues when bifurcating their cases and after the tribunal renders an award.

Read the complete article here.

Filed Under: Uncategorized

Arbitration in the Courts, July 2021
(Vol. 6)

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Eleventh Circuit Affirms Dismissal of Motion to Vacate Arbitral Award as Untimely.

Serving motion to vacate by email does not constitute proper service within three months, as required by FAA, § 12, absent receiving party’s express consent to email service.

O’Neal Constructors, LLC v. DRT America, LLC, 991 F.3d 1376, 1378 (11th Cir. 2021).

The Federal Arbitration Act (FAA) imposes strict procedural requirements on motions to vacate an arbitral award.  Among them is the requirement in 9 U.S.C. § 12 that a motion to vacate “must be served upon the adverse party or his attorney within three months after the award is filed or delivered.”  O’Neal is a reminder that failure to adhere strictly to the FAA’s service requirements is fatal to a motion to vacate.

In 2019, an arbitration panel constituted under the American Arbitration Association (AAA) Construction Rules issued an award ordering DRT to pay O’Neal $765,102.62 in damages and $650,090.49 in attorney’s fees.  Although DRT voluntarily paid the damages awarded, it refused to pay the attorney’s fees, prompting O’Neal file an action to confirm and enforce the award in Georgia state court.  DRT later removed that case to the United States District Court for the Northern District of Georgia.

With the three-month limitations period in § 12 of the FAA set to expire on April 8, DRT filed a motion to vacate the attorney’s fees portion of the award in federal court on April 5, 2019.  Importantly, DRT did not formally serve the motion to vacate on April 5.  Rather, DRT’s counsel emailed O’Neal’s counsel a “courtesy copy” of DRT’s memorandum in support of the motion to vacate, but did not provide a copy of the motion itself.  On April 30, DRT formally served its motion to vacate on O’Neal through the United States Marshals Service.

With O’Neal’s motion to confirm also pending before the Northern District of Georgia, the two cases were consolidated.  The court denied DRT’s motion to vacate and confirmed the award.  In denying the motion to vacate, the court held that DRT had failed to serve the motion within three months of the issuance of the award, as required by FAA, § 12.  The Eleventh Circuit Court of Appeals, which has jurisdiction over appeals from federal courts sitting in Georgia, affirmed the dismissal of the motion to vacate.

The Eleventh Circuit first noted that Section 12 requires a motion to vacate to be served “as prescribed by law for service of a notice of motion in an action in the same court.”  Federal Rule of Civil Procedure 5 therefore provides the relevant service requirements.  Because DRT’s April 30 service via the U.S. Marshall’s service was untimely, the question was whether DRT’s email of a courtesy copy of its brief on O’Neal’s counsel satisfied the requirements of Rule 5.  The court held it did not.

Rule 5(b)(2)(E) does permit service “by other electronic means that the person consented to in writing.”  But that consent must be express.  Because O’Neal did not expressly consent to service by email, DRT’s emailing of a “courtesy copy” did not comply with Rule 5.  Accordingly, DRT failed to effect service within three months, as required by FAA, § 12.

Importantly, the Court rejected DRT’s argument that O’Neal had consented to service by email by agreeing to arbitrate under the AAA Construction Rules.  The Court assumed, without deciding, that “the arbitration agreement can and does make the AAA Construction Rules applicable to post-arbitration proceedings like a motion to vacate.”  Nevertheless, the Court found that DRT faced an “insurmountable problem:”  AAA Construction Rule 44(b) permits service by email for “the notices required by these rules,” but “notice of the filing of a motion to vacate is not required by the AAA Construction Rules.  It is, instead, required by § 12 of the Federal Arbitration Act.”

Read the court’s full decision here.

 

Ninth Circuit Compels Arbitration with Non-Signatory When Claims Were “Intertwined” with Contract Containing Arbitration Clause.

Nurse’s statutory claims against non-signatory hospital were intertwined with her contracts with staffing agency.

Franklin v. Cmty. Reg’l Med. Ctr., No. 19-17570, 2021 WL 2024516 (9th Cir. May 21, 2021).

Arbitration agreements generally only bind their signatories.  But Franklin is a reminder that there are exceptions to this rule, and a signatory to an arbitration agreement may be bound to arbitrate claims against a non-signatory “under the FAA if the relevant state contract law allows the [non-signatory] to enforce the agreement.”

In Franklin, the Ninth Circuit Court of Appeals applied California principles of equitable estoppel to permit a hospital to compel arbitration of a nurse’s wage and hour claims, even though the hospital was not a signatory to the arbitration agreement between the nurse and the staffing agency that actually employed her.  This was a case, the court said, “where a party to an arbitration agreement attempts to avoid that agreement by suing a ‘related party with which it has no arbitration agreement, in the hope that the claim against the other party will be adjudicated first and have preclusive effect in the arbitration.’” It concluded, “[s]uch a maneuver should not be allowed to succeed ….’”

The plaintiff nurse, Isabelle Franklin, was employed by a staffing agency (USSI), with whom she had signed an agreement to arbitrate “all disputes that may arise out of or be related to [her] employment, including but not limited to the termination of [her] employment and [her] compensation.”  In 2017, the staffing agency assigned Franklin to work at the Community Regional Medical Center hospital in California.  As noted, the hospital was not a signatory to the arbitration agreement between Franklin and USSI.  In fact, the hospital had no direct contractual relationship with Franklin at all.

Franklin brought a class and collective action against the hospital, alleging that the hospital made nurses work during meal breaks and off the clock without pay, and failed to provide accurate wage statements or reimburse for travel expenses, in violation of the federal Fair Labor Standards Act and California labor laws.  Her complaint made no mention of the staffing agency.

In December 2019, the district court compelled Franklin to arbitrate with the hospital, finding her claims against the hospital were intertwined with her staffing agency contract, which provided for the resolution of disputes by arbitration.  Franklin appealed.

Under U.S. Supreme Court precedent, a non-signatory to an arbitration agreement may compel arbitration if allowed under applicable state contract law.  Under California law, a signatory to an arbitration agreement is equitably estopped from avoiding arbitration where: (1) its claims are “intimately founded in and intertwined with the underlying contract obligations;” and (2) the claims fall within the scope of the contract’s arbitration clause.  Here, the Ninth Circuit held both elements were met.  First, Franklin’s claim for unpaid wages was “intertwined with the employment relationship with the staffing agency,” and “Franklin cannot avoid arbitration simply because she has sued only the hospital and not [the staffing agency].”  The staffing agency was responsible for compensating Franklin for missed breaks and making her available for the time she alleged was off the clock, and it was the staffing agency, not the hospital, that was responsible for paying Franklin and setting her regular and overtime pay rates.  Second, the arbitration agreement was broadly worded to encompass “all disputes,” including those “based on … statute.”  Accordingly, Franklin was estopped from avoiding arbitration of her claims against the hospital, notwithstanding that the hospital was not a signatory to the arbitration agreement.

Read the court’s full decision here.

Tenth Circuit Holds That Grounds to Vacate Under Section 10 of the Federal Arbitration Act Apply To Nondomestic U.S.-Seated Arbitration.

But court affirms confirmation because Mexican court was not “competent authority” to set aside award for purposes of non-recognition under Article 5(1)(e) of the Panama Convention where arbitration was seated in Denver and governed by U.S. arbitration law.

Goldgroup Resources, Inc. v. DynaResource de Mexico, S.A. de C.V., 2021 WL 1432953 (10th Cir. Apr. 16, 2021).

In Goldgroup, the Tenth Circuit joined the Second, Third, Fifth and Sixth Circuits in holding that the grounds for vacatur under Section 10 of the FAA applied to international arbitration awards rendered in the United States or under U.S. arbitration law.  However, as explained below, the Court nevertheless held that the respondent failed to establish any of the narrow grounds for vacatur, and confirmed the award.

In 2006, Goldgroup and DynaResource, both non-US companies, entered into an option agreement, under which Goldgroup had the right to acquire a 50% equity interest in Mexican mining company, DynaMexico (the Option Agreement).  The Option Agreement contained a broad arbitration clause providing for the arbitration of “[a]ll questions or matters in dispute under this Agreement” under the rules of the American Arbitration Association (AAA) in Denver, Colorado.  The Option Agreement further provided that venue and jurisdiction for any dispute thereunder would be in Denver, although Mexican law applied “in respect to the shares of DynaMexico and the acquisition thereof.”

After Goldgroup exercised its option, the parties’ relationship quickly soured, and litigation in various fora, including Texas, Colorado and Mexico ensued.  As relevant here, in 2013, after DynaResource convened a secret shareholders’ meeting to issue additional shares in DynaMexico to itself, Goldgroup commenced an action in Mexico to invalidate that share issuance.

In March 2014, Goldgroup demanded arbitration and asserted several contract and tort claims under the Option Agreement against DynaResource.  DynaResource then commenced an action in Mexico City against Goldgroup and the AAA seeking an injunction on the basis that Goldgroup had waived its right to arbitrate by commencing the prior Mexican action concerning the share issuance.  The Mexico City court agreed and ruled that Goldberg had waived its right to arbitrate and the arbitration agreement was unenforceable.

Although the arbitrator rejected DynaResource’s application to terminate the arbitration based on the Mexico City court’s decision, DynaResource nonetheless ceased its participation. The arbitrator then issued a default award in which he ruled that: (i) the arbitration agreement was valid and enforceable; (ii) Goldgroup had not waived its right to arbitrate; and (iii) DynaResource had breached the Option Agreement.

Goldgroup moved to confirm the award in federal district court in Colorado.  DynaResource, in turn, sought to vacate the award under Section 10 of the Federal Arbitration Act (FAA), on the ground that the arbitrator had exceeded the scope of his authority by ruling on whether Goldgroup had waived is right to arbitrate.  Alternatively, DynaResource sought non-recognition of the award under Section 5(1)(e) of the Panama Convention (identical to Section V(1)(e) of the New York Convention).  Section 5(1)(e) permits an enforcing court to deny recognition to an award that “has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.”  Relying on the Mexican choice of law provision, DynaResource argued that, the Mexico City court’s ruling that Goldgroup had waived its right to arbitrate prospectively annulled the subsequent award.  The district court rejected DynaResource’s motions for non-recognition or vacatur and confirmed the award and the Tenth Circuit Court of Appeals affirmed.

The Tenth Circuit first addressed Goldgroup’s threshold argument that, because this was a “nondomestic” arbitration, the grounds for vacatur under the FAA Section 10(a)(4) did not apply, and that the Panama Convention provided the exclusive grounds for refusing enforcement.  The court rejected this argument.

It concluded that through Article 5(1)(e), the Panama Convention “expressly contemplates that U.S. courts may apply U.S. arbitral law to awards rendered in or under the law of the United States.”  Because the arbitration was seated in Denver, DynaResource could seek vacatur under Section 10 of the FAA.

On the merits, however, the Court held that the arbitrator had not exceeded his authority under FAA, §10(a)(4).  By incorporating the AAA rules into their arbitration agreement, the parties “clearly and unmistakably” agreed to arbitrate arbitrability issues, which included waiver.

The court next rejected DynaResources’s argument under Article 5(1)(e) of the Panama Convention that the Mexico City court’s decision finding the arbitration agreement unenforceable effectively annulled the subsequent award.  The court held that the Mexico City court was not a “competent authority” to annul the award, because the arbitration was seated in Denver, Colorado and governed by U.S. arbitral law.  Relatedly, the court held, even if the Mexico City court was competent to annul the award, it applied the wrong law.  Article 5(1)(e) requires application of the law of the state in which the award was made, which means “the regimen or scheme of arbitral procedural law under which the arbitration was conducted, and not the substantive law of contract which was applied to the case.”  Here, that was U.S. law because the arbitration was seated in Denver.

Read the court’s full decision here.

Illinois Federal Court Upholds $54 Million Default Award Against Party who Abandoned Arbitration on Eve of Evidentiary Hearing. 

Party who voluntarily abandons arbitration is not denied fair hearing when tribunal proceeds in his absence. 

Bartlit Beck LLP v. Okada, No. 19-CV-08508, 2021 WL 949980 (N.D. Ill. Mar. 12, 2021).

This case is a reminder that parties that refuse to participate in properly noticed arbitration hearings before duly constituted tribunals do so at their own peril.

Japanese billionaire Kazuo Okada had retained Bartlit Beck in 2017 to represent him and his gaming company, Universal Entertainment Company, in a dispute with Wynn Resorts Ltd., a developer and operator of hotels and casinos.  Under the terms of the engagement letter, Okada would pay Bartlit Beck a success fee bonus of one-third of any recovery, up to $50 million.  The parties agreed that any fee disputes would be resolved in arbitration under the International Institute for Conflict Prevention and Resolution Rules for Administered Arbitration (the CPR Rules).  In 2018, Okada settled with Wynn Resorts for $700 million, thereby triggering the success bonus.  Okada failed to pay, and Bartlit Beck initiated arbitration proceedings.

For eight months, Okada fully participated in the arbitration, during which the parties exchanged extensive briefing and discovery.  In February 2019, the tribunal scheduled a seven-day evidentiary hearing set to begin on October 22, 2019.  At no point up until the eve of the hearing did Okada object to the arbitral process.

On the Friday evening before the Monday on which the evidentiary hearing was scheduled to begin, Okada’s counsel wrote to the panel, explaining that its client “recently informed me [counsel] that he is not attending the scheduled arbitration,” and requesting instructions from the panel on how it wished to proceed.  The panel responded that it would “certainly go forward on Monday with or without” Okada, and that his “failure to show up for a duly and long noticed hearing [was] material[ ] and may result in the Panel finding him in default.”  The panel also noted that CPR Rule 16 provided that, in the event Okada refused to participate, the “Tribunal may impose a remedy it deems just, including an award on default.”

Okada then responded by email that the agreement with Bartlit Beck was “invalid and therefore unenforceable.”  He also claimed that he had “become ill” and, “even if I were to agree to participate in the proposed arbitration, I am unable to do so due to my health.”  On Saturday morning, the panel asked the parties to prepare for argument as to the “appropriate remedy” for Okada’s nonattendance.  Okada’s counsel responded that Okada did not authorize them to attend that argument “because he rejects the validity of the engagement agreement and objects to the proceeding.”

The tribunal therefore refused to accept any new papers from Okada, finding he had forfeited his right to present any defenses, and stated that it would base its award on whether Bartlit Beck had met its burden of proof.  After the panel agreed to accept written submissions in lieu of a live hearing, Bartlit Beck submitted its final brief on Friday, November 1.  On Monday November 4, Okada’s counsel emailed the tribunal, requesting that the tribunal reschedule the hearing in the event counsel could convince Okada to commit to a date certain for a rescheduled hearing.  The tribunal rejected the request, finding “no good cause to do so,” given that Okada withdrew from the proceeding.  The tribunal subsequently issued a 59-page award, which considered Okada’s previously submitted defenses, and awarded Bartlit Beck $54 million in principal and interest.  The award also found that Okada’s “health is a transparently false excuse,” and his instruction to counsel not to attend “even before the Panel had decided whether they could present his defense in his absence, proves he had no intention of participating.”

Bartlit Beck moved to confirm the award in the United States District Court for the Northern District of Illinois.  Okada cross-moved to vacate, arguing that the arbitration panel had denied him a fair hearing under Article V(1)(b) of the New York Convention and Section 10(a)(3) of the Federal Arbitration Act (FAA) by (1) refusing to postpone the hearing despite Okada’s disclosure of a medical condition; and (2) refusing to hear Okada’s defenses as part of its written submission process.

As a preliminary matter, the court declined to consider whether a party may invoke Section 10 of the FAA to vacate an award governed by the New York Convention, because the outcome would be the same in both systems.  On the merits, the court denied Okada’s motion and confirmed the award.  First, the court found that Okada was not denied a fair hearing.  It noted that to vacate an award under either the New York Convention or the FAA, the movant must demonstrate that misconduct by the tribunal “amounted to a denial of a fair hearing,” and that the “court will not intervene in the Panel’s decision to proceed with the hearing if any reasonable basis for it exists.”  The court concluded that “the Panel responded reasonably when faced with Respondent’s last-minute antics.”

Nor did the tribunal’s refusal to consider Okada’s new evidence render the default award fundamentally unfair.  Rather, the tribunal’s decision was consistent with the CPR Rules, which provided for a default in the event the tribunal finds a party fails to comply with its orders “in a manner deemed material by the Tribunal.”  Here, the tribunal “reasonably concluded that Respondent voluntarily refused to participate in the arbitration and that Respondent’s proffered excuse was pretextual.”  Therefore, “because Respondent voluntarily walked away from the arbitration, he was not deprived of a fundamentally fair hearing when the Panel then resolved the case without Respondent’s input.”

The case is currently on appeal before the U.S. Court of Appeals for the Seventh Circuit.

Read the court’s full decision here.

Insurance/Reinsurance Report, June 2021
(Vol. 10)

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Reservations Required: Nevada Supreme Court Allows Insurer To Recover Defense Costs Paid Subject to a Reservation of Rights

Nautilus Ins. Co. v. Access Medical, LLC, No. 79130, 2021 WL 936076 (Nev. Mar. 11, 2021).

Liability insurers frequently defend claims against their policyholders subject to a reservation of rights, while simultaneously litigating with the policyholder whether a defense is required at all.  But what if the insurer wins the coverage litigation?  Courts are split as to whether the reinsurer may not only stop defending the claim, but also seek reimbursement of defense costs it has already paid.  The Nevada Supreme Court has now joined the majority of courts holding that insurers can seek reimbursement of defense costs – at least where the insurer has specifically reserved that right in writing.  Importantly, the court rested that conclusion on its application of the law of restitution and not on the language of the insurance policy.

The case arose out of an insurance policy issued by Nautilus to Access Medical covering liability for damages because of personal or advertising injury “arising out of . . . oral or written publication, in any manner, of material that slanders or libels a person or organization.”  Access Medical sought coverage for a suit brought by a former business partner for, inter alia, interference with prospective economic advantage.  The complaint, however, did not allege a false statement that would support a claim for slander or libel.

Nautilus initially declined to defend.  It then reversed course and provided a defense under a written reservation of its rights to disclaim coverage, withdraw from the defense, and obtain reimbursement of defense costs.  Nautilus then commenced a coverage action in federal court seeking a declaration that it had no duty to defend.

The trial court agreed that Nautilus had no duty to defend, but denied Nautilus’s motion for reimbursement of the defense costs it had already incurred.  The Ninth Circuit, however, certified the question of whether Nautilus could seek such relief to the Nevada Supreme Court.

The Nevada Supreme Court held that Nautilus was entitled to reimbursement under a theory of unjust enrichment.  The court noted that an insurer risks unbounded liability if it refuses to defend its insured, but then loses a coverage dispute.  As a result, it makes sense to allow the insurer to defend first and determine coverage later.  The Court therefore held that where a court ultimately determines that an insurer never had a duty to defend, and the insurer clearly reserved its right to seek reimbursement of defense costs, the equities allow the insurer to seek restitution from the insured.

Notably, the court declined to follow the rule adopted by the recent Restatement of the Law of Liability Insurance.  Under Section 21 of the Restatement, an insurer may not obtain reimbursement of defense costs “[u]nless otherwise stated in the insurance policy or agreed to by the insured ….”  Rest. § 21.  The court held that it should not matter whether the policy expressly allows the insurer to recover defense costs.  It reasoned that, “when a court holds that there never was a duty to defend, it is holding that the claims were never even potentially covered by the policy.”  As a result, said the court, “there is no reason [the insurer] cannot reserve a right it has, not pursuant to the contract, but pursuant to the law of restitution.”  In other words, the insurer’s right to reimbursement is not contractual.

Read the court’s full decision here.


Business Interruption and Covid-19: SDNY Joins Courts Finding No Physical Loss or Damage

Food for Thought Caterers Corp. v. Sentinel Ins. Co., 20-cv-3418 (JGK), 2021 WL 860345 (S.D.N.Y. Mar. 6, 2021).

The Covid-19 pandemic has triggered a flood of claims for business interruption coverage typically provided under commercial property policies.  Most trial courts to consider such claims have found that there was no coverage because the virus does not cause physical loss or damage to property.  In Food for Thought, the federal court for the Southern District of New York followed that trend.

Food for Thought, a catering service in New York City, was forced to suspend its business in order to comply with executive orders issued by the Governor and the Mayor.  Pursuant to a policy issued by Sentinel Insurance Company, Food for Thought sought coverage for:  (i) loss of “Business Income;” (ii) “Extra Expense;” and (iii) losses falling under the policy’s “Civil Authority” provision.  The court, however, granted Sentinel’s motion to dismiss.

Both the Business Income and Extra Expense provisions premised coverage on “direct physical loss of or physical damage to property.”  Food for Thought argued that it had sustained a “direct physical loss” to its premises because it had lost the use of its premises.  The court, however, held loss of use is not physical loss or damage.  It noted that in Covid-19 business interruption cases, “the great majority of courts … have held that a complaint which only alleges loss of use of the insured property fails to satisfy the requirements for physical damage.”

The Court also rejected Food for Thought’s suggestion it has sustained “physical damage” because COVID-19 was “likely present” on its property.  For one thing, these allegations were mere speculation.  Moreover, even if the virus was present on the property, there was still no loss or damage “because the virus’s presence can be eliminated by ‘routine cleaning and disinfecting,’ ….”

Civil Authority coverage under the policy was triggered only if (i) access to the premises was “specifically prohibited by order of a civil authority” and (ii) that the order was a direct result of “risk of direct physical loss” to the surrounding area.  The court held that this coverage was not triggered for three reasons.  First, the executive orders did not “specifically prohibit” Food for Thought from accessing its premises.  Second, the complaint failed to allege the “gist” of Civil Authority coverage:  “that physical harm to someone else’s premises has caused the civil authorities to prohibit access to the insured’s premises.”  Finally, Food for Thought did not allege any physical damage to property in the surrounding area.

Food for Thought is representative of most trial court decisions to consider similar Covid-19 business interruption claims.  The question now is whether the trend will continue at the appellate level.

Read the court’s full decision here.


Ninth Circuit Rules That Intentional Acts Are Not Insured “Occurrences”

Hartford Fire Ins. Co. v. Turner/Devcon, No. 20-15418, 2021 WL 1174592 (9th Cir. Mar. 29, 2021).

Liability insurance generally covers “accidents” or “occurrences” rather than intentional acts.  In Hartford, the Ninth Circuit ruled that the building of a football stadium could not be considered an occurrence – even where it had the unintended effect of violating the Americans with Disability Act.

Litigation began when a plaintiff commenced a class action against the San Francisco 49ers alleging that the team’s new stadium lacked accommodations such as accessible seating.  The 49ers, in turn, sued the stadium’s builder, Turner/Devcon, for equitable and contractual indemnification.  Turner/Devcon then sought a defense from its insurers.

The U.S. District Court for the Northern District of California held, and the Ninth Circuit affirmed, that Turner/Devcon was owed no coverage.  The Court noted that the construction of a building in a particular manner is considered a deliberate or intentional act under California law.  As such, the construction of the stadium did not fall within the definition of “occurrence” in the operative insurance contracts.

Nor did it matter that the alleged violations of applicable accessibility laws were unintentional.  As the Ninth Circuit explained, “an insured’s intentional acts does not become an accident simply because it had the unintended effect of violating federal and state accessibility laws.”  Accordingly, because Turner/Devcon’s design and construction of the stadium were intentional, its insurers had no duty to defend.

Read the court’s full decision here.


Minnesota Federal Court Holds That Cost of Reissuing Credit Cards Is Not “Property Damage” Covered by CGL Policy

Target Corp. v. ACE Am. Ins. Co., Case No. 19-cv-2916, 2021 WL 424468 (D. Minn. Feb. 8, 2021).

The Target case arose out of a well-publicized data breach in which a hacker stole credit card and other personal customer information stored in Target’s computer system.  Following the breach, the banks that had issued the compromised credit and debit cards had to cancel them and reissue new cards to their customers.  The card companies then sued Target for the resulting costs, and Target settled.

Target sought coverage for its settlement payments under commercial general liability policies issued by ACE American Insurance Company and Ace Property & Casualty Insurance Company (collectively, “ACE”).  ACE denied coverage under the policies, and Target filed suit.  The parties eventually brought cross-motions for summary judgment.

The key issue was whether Target’s settlement payments – based on the banks’ cost of replacing the compromised credit and debit cards – were for “property damage” covered by the policies.  The policies defined “property damage” to include the “‘[l]oss of use of tangible property that is not physically injured.”  Because the cards were not “physically injured,” the question boiled down to whether the damages paid by Target could be characterized as for “loss of use” of the cards.

Target argued that, because the cards lost their use following the data breach, and the banks would not have sued Target otherwise, Target’s settlement payments necessarily constituted loss-of-use damages.  The court characterized this as “a but-for theory of loss-of-use damages.”  For its part, ACE contended that there was no nexus between the settlement payments and the value attributable to the loss of the use of the cards.  Rather, the settlements payments were based on the cost of replacing the cards.

The court sided with ACE.  It explained that Minnesota law requires loss-of-use damages to be “‘based on’ the alleged loss of use.”  As a result, loss-of-use damages must “have some connection to the value of the use of the now-damaged property when it previously was unimpaired.”  One measure of such damages, for example, might be reasonable rental value.  Here, however, Target did not provide any evidence of the value of the cards’ use, much less of the loss of their use.  The court therefore concluded that Target had not established that its settlement payments constituted loss-of-use damages.

Read the court’s full decision here.

Chaffetz Lindsey Sponsors the ARIAS Virtual Spring Conference

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May 2021 – Chaffetz Lindsey was a proud sponsor of the ARIAS U.S. 2021 Virtual Spring Conference.

The ARIAS’ Women’s Resource Committee kicked-off the conference on May 5th with a virtual chocolate tasting, sampling a variety of chocolates from Dallmann Confections. On Thursday May 6th, Cia Moss moderated a panel discussion titled “Reinsurance of COVID-19 Claims: The More Things Change, the More They Stay the Same.” The panel discussed the reinsurance disputes that could arise from the pandemic and examined how industry precedent might guide resolution of such disputes.  And on Friday, May 7th, Steven Schwartz, who is Chair of the ARIAS Board of Directors, delivered the closing remarks.

Chaffetz Lindsey is an active ARIAS participant—Steve is Chairman of the ARIAS Board of Directors and Cia is a member of the organization’s Strategic Planning, Law, and Women’s Resource Committees.

ARIAS-US is a nonprofit corporation dedicated to improving the insurance and reinsurance arbitration process for the international and domestic markets. The organization hosts a Spring and Fall Conference to provide training and continuing education in the skills necessary to serve on an insurance/reinsurance arbitration panel.

Arbitration in the Courts, March 2021
(Vol. 5)

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Delaware Supreme Court holds that under the FAA courts have jurisdiction to enjoin a second arbitration that collaterally attacks a prior arbitration award.

Second arbitration seeking to recoup amounts awarded in prior arbitration was an impermissible attempt to circumvent the Federal Arbitration Act’s exclusive framework for challenging arbitral awards.

Gulf LNG Energy LLC v. Eni USA Gas Marketing LLC, No. 22-2020, ___ A.2d ___ (Del. Nov. 17, 2020).

In Gulf LNG, the Delaware Supreme Court held that a second arbitration, which seeks to recover amounts paid under a prior arbitral award or to redress alleged irregularities in the prior arbitration, constitutes an impermissible collateral attack on the prior award.  Under those circumstances, the second arbitration circumvents the Federal Arbitration Act’s (FAA) time limits and procedures, which provide the exclusive means for vacating, modifying or correcting an arbitral award.  The Delaware Supreme court therefore upheld the Chancery Court’s jurisdiction to enjoin the second arbitration and expanded the scope of the injunction granted by the lower court.

Gulf LNG Energy, LLC (Gulf) owns and operates a liquefied natural gas terminal in Pascagoula, Mississippi.  Gulf entered into a Terminal Use Agreement (TUA) with Eni USA Gas Marketing LLC (Eni), under which Eni agreed to pay Gulf LNG certain fees to receive, store, regasify and deliver Eni USA’s imported liquefied natural gas to its downstream customers.  The TUA included an arbitration clause requiring the parties to arbitrate any disputes arising out of or related to the TUA.

In March 2016, Eni filed for arbitration (the First Arbitration) with the American Arbitration Association’s International Centre for Dispute Resolution (ICDR), seeking a declaration that the TUA was terminated because its purpose had been frustrated by the unforeseen increase in U.S. shale gas production, which made the importation of liquefied natural gas “economically irrational and unsustainable.”  Eni also argued that it was entitled to terminate the TUA because Gulf breached certain warranties that it would not engage in other liquefaction and distribution activities.  In June 2018, the tribunal (the First Tribunal) issued a Final Award finding that the principal purpose of the TUA had been frustrated.  In its award, the First Tribunal declared the TUA terminated as of March 1, 2016, and ordered Eni to pay Gulf in excess of $462 million as compensation for the value of Gulf’s partial performance of the TUA as of the termination date. The First Tribunal did not reach Eni’s breach of contract claims, on the ground that its frustration finding rendered those claims moot.  In February 2019, following Gulf’s and Eni’s cross-petitions for confirmation, the Delaware Chancery Court confirmed the First Award.

In June 2019, Eni commenced a second arbitration (the Second Arbitration) seeking two counts of declaratory relief and damages for Gulf’s alleged breach of the TUA based on Gulf’s same alleged liquefaction and export activities Eni had claimed in the First Arbitration constituted a violation of certain warranties in the TUA.  Eni also asserted a claim for negligent misrepresentation seeking declaratory and monetary relief “as a result of Gulf’s wrongful conduct” in the First Arbitration.

Gulf petitioned the Delaware Chancery Court to permanently enjoin the Second Arbitration.  Although the Federal Arbitration Act (FAA) does not expressly provide for such relief, the Chancery Court held that it had jurisdiction to enjoin the Second Arbitration to the extent it sought to collaterally attack the first arbitration outside the FAA’s exclusive review process for challenging an arbitral award.  The Chancery Court held that Eni’s negligent misrepresentation claim constituted such a collateral attack on the First Award, because it sought to “claw back” some of the damages awarded by the First Tribunal in its Final Award.  The Chancery Court, however, declined to enjoin Eni’s breach of contract claims in the Second Arbitration.  It held that these claims did not seek to collaterally attack the First Tribunal’s award, because that tribunal had declined to rule on these claims in light of its finding that the TUA had terminated for frustration of purpose.

On appeal, the Delaware Supreme Court affirmed the Chancery Court’s holding that it had jurisdiction to enjoin the Second Arbitration.  But the appellate court held that the Chancery Court should have enjoined the Second Arbitration in its entirety.

Eni argued that that question turned on principles of res judicata and collateral estoppel, and should therefore be left to the arbitrators in the Second Arbitration.  According to Eni, this was because the parties’ arbitration clause was broad, delegating issues of arbitrability to the arbitrators in the Second Arbitration.  The court agreed in principle that questions of res judicata and collateral estoppel are questions of arbitrability for the second tribunal.  But courts are nevertheless permitted to “intervene if the ‘ultimate objective . . . is to rectify the alleged harm’ a party suffered from an unfavorable arbitration award ‘by attempting to arbitrate [its] claims in a separate arbitration proceeding.’”  Thus, the court emphasized that the collateral attack doctrine does not “separately consider the question of arbitrability,” and its ruling did not conflict with the usual rule that it is for the arbitrators, and not the court, to determine preclusion issues such as res judicata or collateral estoppel.  Rather, it ruled only that allowing a second arbitration to seek redress for determinations made on the merits in a prior arbitration would allow the claimant to evade the FAA’s three-month “jurisdictional time limit for challenging the award” and “undermines the FAA’s goal of a prompt, limited, exclusive, and final means to review an arbitration award.”

In its notice of arbitration in the Second Arbitration, Eni had stated that it sought to recover “the amounts that Eni has had to pay to Gulf [under the First Tribunal’s award] for Gulf’s purported decommissioning of the Pascagoula Facility . . . .”  The court held, therefore, that both the negligent misrepresentation and the breach of contract claims “sought to recoup as damages the amount it paid in restitution” under the First Tribunal’s award, and therefore Eni’s “ultimate objective” was to “rectify the alleged harm [Eni] suffered in the first arbitration.”

The “fundamental reasons why courts redress collateral attacks on arbitration award [is] to prevent end runs around the exclusive FAA review process.”  “If [Eni] was dissatisfied with the result [in the First Arbitration], or was entitled to other relief, it could have sought review under the FAA.”

Read the court’s full decision here.

 

Courts’ jurisdiction over enforcement action under FSIA’s arbitration exception is distinct from questions concerning the arbitrators’ jurisdiction.

U.S. courts have jurisdiction to hear petition to confirm award against foreign sovereign even where arbitrability is disputed.

LLC SPC Stileks v. Republic of Moldova, No. 19-7106 (D.C. Cir. Jan. 15, 2021).

The successor to a Ukrainian company called Energoalliance commenced an action in federal district court in Washington D.C. to enforce an arbitration award for nearly $60 million against the Republic of Moldova.  The arbitration had been brought under the Energy Charter Treaty (ECT), a 1994 multilateral agreement signed by Moldova and Ukraine, among others.  The district court entered judgment enforcing the award.  Moldova appealed to the United States Court of Appeals for the District of Columbia Circuit, which affirmed the district court’s decision recognizing the award.

The principal question on appeal was whether the district court had jurisdiction over petitioner’s claim under the Foreign Sovereign Immunities Act (FSIA).  The FSIA is a federal statute that provides the exclusive basis for obtaining jurisdiction over claims against foreign states in U.S. courts.  Under the FSIA, foreign states are generally entitled to sovereign immunity, unless one of the enumerated exceptions to immunity set forth in the FSIA applies.  Under the FSIA’s “arbitration exception,” foreign states are not entitled to immunity in any action to enforce an arbitration agreement or award if the “award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.”  To establish jurisdiction under the arbitration exception, the claimant need only demonstrate the existence of an arbitration agreement, an arbitration award and a treaty governing the award.

Here, the petitioner sought to enforce the award against Moldova under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), and asserted jurisdiction under the FSIA’s arbitration exception.  Moldova argued that the FSIA’s arbitration exception was inapplicable because Energoalliance’s particular claims were not covered by the ECT.  In particular, Moldova argued that the ECT and its arbitration provision only covered certain qualified investments, and Energoalliance’s had not made such an investment because it had not contracted directly with Moldtranselectro, the Moldovan state-owned entity.  Rather, it had entered into a series of agreements pursuant to which Ukrenegro, a Ukrainian state-owned utility, sold electricity to Energoalliance, who in turn sold it to a British Virgin Islands entity called Derimen.  It was Derimen that sold electricity to Moldtranselectro.  Energoalliance had structured its investment this way to avoid certain Ukrainian currency controls.  But Energoalliance assumed the risk of Moldtranselectro’s non-payment, and Derimen had assigned its claims for non-payment against Moldtranselectro to Energoalliance.  According to Moldova, because the direct seller, Derimen, was a BVI entity, the contract with Moldtranselectro was not a qualified investment under the ECT, and therefore the tribunal had lacked jurisdiction under the ECT to issue the award.  As the court put it, Moldova’s argument was that “[a]lthough the ECT may establish that Moldova agreed to arbitrate certain disputes, it does not prove that it agreed to arbitrate this particular dispute.”  In other words, Moldova argued that, because the dispute was not arbitrable under the ECT, the FSIA arbitration exception did not apply.

The court rejected this argument, reasoning that Moldova “conflates the jurisdictional standard of the FSIA with the standard for review under the New York Convention.”  Because the FSIA provides an exception to immunity whenever a claim concerns the enforcement of an award that “may be governed by a treaty” such as the New York Convention, “the arbitrability of a dispute is not a jurisdictional question under the FSIA.”  Moldova’s contention that the dispute was not arbitrable did not go to the court’s jurisdiction under the FSIA; it merely raised a substantive defense to enforcement under Article (1)(c) of the New York Convention, which the court had jurisdiction to decide.

Turning to the question of arbitrability, the critical question was whether the court should review the issue de novo or defer to the tribunal’s determination that the dispute was arbitrable, i.e., that they had jurisdiction over the dispute.  The court held the latter.  Although questions of arbitrability are presumptively for the courts, if the parties’ agreement “clearly and unmistakably” delegates arbitrability determinations to the arbitrators, “a court possesses no power to decide the arbitrability issue.”

The court held that Moldova, as a party to the ECT, had in fact “clearly and unmistakably” delegated the arbitrability question to the arbitrators because the ECT incorporated the UNCITRAL Rules, and Article 23 of those Rules provides that the “arbitral tribunal shall have the power to rule on its own jurisdiction.”  This, the court held, was “clear and unmistakable evidence that the parties agreed to arbitrate arbitrability.”  The court rejected Moldova’s contention that the ECT’s incorporation of the UNCITRAL Rules was not controlling because Energoalliance’s claim “does not fall within the ECT.”  “The tribunal’s jurisdictional grant derived from Moldova’s signature of the treaty itself, and – under our law – it is up to the tribunal to determine what the treaty means.”  The court therefore had “no authority to delve into the merits” and override the arbitrators’ determination that they had jurisdiction over the dispute.

Although the appellate court affirmed the district court’s judgment recognizing the award, the court remanded the matter to the district court to consider whether the judgment should have been denominated in Moldovan lei instead of U.S. dollars.  U.S. courts generally issue judgments denominated in U.S. dollars.  However, in this case, it was an open question whether Moldova had a reasonable expectation that the judgment would be denominated in Moldovan lei.

In the arbitration, petitioner had requested an award in Moldovan lei.  The petitioner had again requested a judgment in lei in its November 2014 petition to confirm the award.  The first time the petitioner requested a dollar-denominated award was in December 2018, “more than five years after its first request for an award in lei and more than four years after its second such request.”  Critically over that five-year period, the lei depreciated more than 30% against the dollar.  Had petitioner originally sought a dollar-denominated award, “Moldova might have been on notice and been able to hedge against the risk of a depreciating lei.”  Allowing petitioner’s belated request for a dollar-denominated award could “let[] an arbitration winner make a riskless bet on the foreign exchange market – always requesting the initial award in local currency and then, during the course of U.S. confirmation proceedings, seeking a dollar judgment if and only if the local currency suffers relative depreciation.”  Accordingly, on remand, the district court was to consider whether petitioner’s actions “created a settled expectation on Moldova’s part” that the judgment would be denominated in lei.

Read the court’s full decision here.

Eleventh Circuit holds that director bound himself to arbitrate by signing agreement on behalf of corporation.

Under governing Venezuela law, director signing agreement on behalf of corporation also became a signatory personally bound to arbitrate.

Guarino v. Productos Roche SA, No. 20-11420 (11th Cir. Dec. 15, 2020).

In many jurisdictions, within and outside the United States, directors, officers and other corporate agents who sign a contract containing an arbitration clause in their representative capacity on behalf of the corporation are not bound to arbitrate in their individual capacity.  Guarino is a reminder that commercial rules are not the same in all legal systems.

Gerardo Guarino, a resident of Florida, was a director of Iutum Services Corp., a now-dissolved Florida corporation.  Iutum entered into a contract with Productos Roche S.A. (Roche), a Venezuelan corporation, to sell 257 units of certain electronic equipment to Roche.  Guarino signed the agreement on behalf of Iutum.  It was undisputed that Guarino signed the agreement in a representative rather than an individual capacity.

The contract contained an arbitration clause requiring any disputes arising out of the agreement to be submitted to arbitration “in the city of Caracas and in accordance with Venezuelan law, in accordance with the provisions contained in the General Law of the Arbitration Center of the Caracas Chamber. . . .”

After Roche paid Iutum for all 257 units of equipment, Iutum delivered only 138 units.  In August 2017, Roche commenced an arbitration against Iutum and Guarino before the Arbitration Center of the Caracas Chamber (ACCC) seeking to hold both liable for Iutum’s breach of the agreement.  Guarino and Iutum failed to appear in the arbitration, and the arbitrators entered a default award in November 2018, finding Iutum and Guarino joint and severally liable for approximately $175,000, plus approximately $53,000 in costs and attorneys’ fees.  When Guarino and Iutum failed to satisfy the award, Roche filed a petition to confirm and enforce the award in federal district court in Florida.

Guarino opposed recognition of the award, which both Guarino and Roche agreed was governed by the Inter-American Convention on International Commercial Arbitration (the Panama Convention), which is codified in Chapter 3 of the Federal Arbitration Act.  The substantive provisions of the Panama Convention are in all material respects identical to the New York Convention.  Guarino argued that the award failed to satisfy the Convention’s “in-writing” requirement found in Article II, which requires contracting states to “recognize an agreement in writing under which the parties undertake to submit to arbitration.”  According to Guarino, the in-writing requirement was not satisfied with respect to him because he signed the contract in his representative capacity as a director of Iutum.

The district court disagreed.  The agreement was expressly governed by Venezuelan law, and the Venezuelan Commercial Code “personally binds those who contract in the name of companies established abroad and are not duly registered in Venezuela.”  The court therefore held that Guarino was bound to arbitrate in his individual capacity and the arbitrators properly held him jointly and severally liable for Iutum’s debt under the contract with Roche. The Eleventh Circuit Court of Appeals, which has jurisdiction over appeals from the judgments of federal courts located in Florida, affirmed on this basis.

The court also rejected Guarino’s argument that enforcement of the award against him in his personal capacity violated Article V(2)(b) of the Panama Convention, which, like the New York Convention, permits an enforcing court to refuse recognition to an award that violates the public policy of the enforcing state.  Guarino argued that enforcement of the Venezuelan award against him violated public policy because Florida law provides that in the absence of grounds to pierce the corporate veil, corporate representatives or shareholders were not personally liable for corporate debts under Florida law.  Therefore, according to Guarino, an award imposing personal liability on him under foreign law is contrary to public policy and should not be enforced.

The court rejected this argument.  The agreement Guarino signed “stated it was subject to Venezuelan law on behalf of Iutum.”  Guarino therefore could not argue that the agreement “that explicitly states it is subject to Venezuelan law should now be construed according to Florida law.”  Holding Guarino jointly and severally liable under Venezuelan law to which he agreed to be bound did not offend Florida or U.S. public policy.  Rather, accepting Guarino’s argument would be contrary to “something the [U.S.] Supreme Court has expressly rejected – that only the law of the United States is adequate to resolve international disputes.”

Read the court’s full decision here.

A Look Back on 2020 at Chaffetz Lindsey

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January 2021

Dear Friends:

In a year where a global pandemic has limited our ability to connect in person, we’d like to take this opportunity to wish you all the best for 2021 and to share some of our team’s highlights from 2020.

We began 2020 by adding key lateral partners Caline Mouawad and Alan Lipkin. Caline deepens our strength in international arbitration while Alan has brought us leading bankruptcy and restructuring expertise.

Perhaps because we started our firm in difficult times in 2009, we have remained optimistic in the face of the pandemic and its effects on the world and our city. Even as we went into lockdown and remote working, we took the decision to keep building with the hiring of associates Silvia Marroquin, Eli Meltz, and Alicia Yeo. They join our elite associate team that compares favorably to anyone’s in talent and exceeds most in enthusiasm and commitment to our clients.

We also had some big wins this year as summarized below in our “Practice Highlights.” Along the way, our caseload has grown to nearly $19.5 billion in dispute. We completed six plenary arbitration hearings, and briefed and argued a number of major, dispositive motions in court. Most importantly, we found new ways to keep our team connected and to communicate with our clients and community. We organized over 40 virtual internal and external events and published 24 articles.

We also all contributed – both as a firm and individually – to support those hardest hit by the pandemic. Our staff created and drove a “Donate Your Commute” campaign to funnel some of our saved travel costs to New York Lawyers for the Public Interest (NYLPI), a pro bono organization, and to City Harvest, which assists New Yorkers struggling with food insecurity. 100% of the Chaffetz Lindsey team contributed. We are also diverting a portion of our unused travel and entertainment budget to an organization that provides relief to displaced restaurant workers in New York.

We extend our deepest gratitude to our clients and friends who make our firm possible and our work meaningful. This has never meant more to us than it has over the past year. We hope 2021 brings good health and happiness to you and yours.

Cheers,

 

 

 

 

 

OUR NEW BANKRUPTCY PRACTICE

With the addition of Alan Lipkin, one of the city’s long-time leading practitioners, we now have a full-fledged bankruptcy capability and an active practice currently representing creditors in a range of chapter 11 cases (such as 24 Hour Fitness, Kings and Balducci’s Super Markets, and Arandell Corporation) as well as out of court debt restructurings. His experience with chapter 15 cases dovetails with our substantial cross-border litigation and arbitration practice.

COMMERCIAL LITIGATION

We proved this year that our litigation skills are transferable to new industries and new areas of the law. In a landmark ruling in August, the Court of International Trade held that the Department of Commerce’s denial of our client’s requests for exemptions from the Trump Administration’s Section 232 steel tariffs violated the Administrative Procedures Act.Following that ruling, we negotiated for more than $100 million in tariff refunds.

INSURANCE
In Utica Mutual v. Fireman’s Fund, we were hired the day after a jury returned a $64 million verdict against our client. Although there was a lengthy trial record, our review of the contract language convinced us that the trial court had erred in denying summary judgment. The Second Circuit agreed 3-0, reversing and directing entry of judgment for our client. While reversal of a jury verdict is rare and the scope for reinsurers to contest a loss cession is properly quite narrow, we predicted that the Second Circuit would follow its prior rulings enforcing the plain meaning of contractual terms.

INTERNATIONAL ARBITRATION
This has been an amazingly busy year for our international arbitration team. We recorded three notable wins in confidential arbitrations and two more in enforcement actions. In addition, we are awaiting results from six merits hearings completed this year. We are also thrilled to have deepened our bench with Caline and several new associates. Meanwhile, despite the pandemic, the team has remained fully engaged with thought-leadership and, for example, has been at the forefront of helping users and institutions adapt to remote arbitral hearings.

 

Insurance/Reinsurance Report, December 2020
(Vol. 9)

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Exhaustion of underlying policies vs. follow-the-settlements?  It comes down to policy language 

Reinsurer was bound by cedent’s settlement allocation based on pre-settlement exposure analysis.

Fireman’s Fund Ins. Co. v. OneBeacon Ins. Co., Case No. 1:14-cv-04718-PGG (S.D.N.Y. Oct. 19, 2020).

In its 2004 ruling in North River Ins. Co. v. ACE Am. Reins. Co., 361 F.3d 134, 139-40 (2d Cir. 2004), the Second Circuit held that a follow-the-settlements clause requires a reinsurer to follow not only the cedent’s settlement of a claim, but also its post-settlement allocation of a claim affecting multiple policies.  Specifically, the Second Circuit upheld the cedent’s use of a “rising bathtub” allocation, in which the settlement was allocated to lower layer policies before higher layer policies, despite a reinsurer’s contention that the allocation should have been in accordance with the cedent’s pre-settlement exposure analysis.

In Fireman’s Fund, these roles were reversed.  The cedent allocated a settlement in accordance with its exposure analysis, while the reinsurer argued, in effect, that the cedent should have used the rising bathtub method.  The court, however, held that follow-the-settlements applied, and that the allocation was therefore binding on the reinsurer.  The case presented issues including both (i) the effect of North River, and (ii) whether the cedent’s lower layer policies could be deemed to have been exhausted by the settlement.

The policyholder, ASARCO, was in the business of mining and processing asbestos.  It faced thousands of claims arising from injuries resulting from asbestos exposure.  ASARCO had several layers of insurance in several years during which the underlying claimants had been exposed to asbestos.  ASARCO turned to its insurers to cover its losses.

Fireman’s Fund had issued three excess liability insurance policies to ASARCO.  Policy 1 was effective  during the 1982 underwriting year, and Policies 2 and 3 were effective during the 1983 year.  Policies 1 and 2 covered $20M excess $30M, while Policy 3 covered the higher $20M excess $75M layer.

Fireman’s Fund’s pre-settlement exposure analysis indicated that its total potential exposure was $50.3 million.  This estimate meant that all three policies were exposed.

Fireman’s Fund eventually settled ASARCO’s coverage claims for $35 million.  It then allocated the settlement amount across its three policies, assigning each a percentage of the settlement amount commensurate with its estimated exposure.  This resulted in an allocation of $8.1 million to Policy 3.

OneBeacon was a facultative reinsurer of Policy 3.  It denied Fireman’s Fund’s billing on two main grounds, arguing that:  (1) the $35M settlement could not have exhausted the two lower layer policies, whose total limits were $40M; and (2) the Second Circuit’s North River decision required Fireman’s Fund to adopt a rising bathtub allocation.  Fireman’s Fund filed suit.

OneBeacon’s first argument was based on the Payment of Loss provision in Policy 3.  The provision stated that “the insurance afforded under this policy shall apply only after all the underlying insurance has been exhausted.”  OneBeacon contended that this language unambiguously required that the full limits of the underlying policies be paid to ASARCO before coverage under the reinsured Policy 3 was triggered.  Fireman’s Fund argued that the term “exhausted” did not clearly require actual payment of the full underlying limits to ASARCO, but rather allowed exhaustion by settlement.  Further, Fireman’s Fund argued that follow-the-settlements gave it the discretion adopt this reasonable interpretation of the policy.

The court agreed with Fireman’s Fund on this point.  Its review of the case law showed that cases requiring actual exhaustion of underlying policies explicitly required exhaustion ‘“as a result of payment of losses thereunder,’” which the court noted “is not present here.”  In contrast, it noted, the exhaustion language in Policy 3 “does not ‘require collection of the primary policies as a condition to the right to recover excess insurance.’”  Absent that explicit requirement, it was at least arguable that the underlying policies could be exhausted by settlement, and reasonable for Fireman’s Fund to read them that way.  As a result, follow-the-fortunes made this reading binding on OneBeacon.

The court also rejected OneBeacon’s suggestion that the North River decision required Fireman’s Fund to adopt a rising bathtub allocation.  The court ruled that the decision had held only that such an allocation is permissible, not that “the ‘rising bathtub’ approach was mandated.”  Accordingly, the court held that OneBeacon was bound by Fireman’s Fund’s allocation based on its exposure analysis, and granted summary judgment to Fireman’s Fund.

Full disclosure:  Chaffetz Lindsey represented Fireman’s Fund before the S.D.N.Y.

Read the court’s full decision here.


Eight or Sixteen Corners?  Court Can Look Outside The Language Of Complaint To Find No Duty To Defend

Undisputed facts outside complaint against insured demonstrated that claim fell within policy’s pollution exclusion.

BBG Design Build, LLC v. S. Owners Ins. Co., 820 F. App’x 962 (11th Cir. 2020).

A liability insurer’s duty to defend is ordinarily determined by looking solely at the language within the four corners of the complaint and comparing it against the four corners of the policy.  Courts sometimes refer to this rule of contract application as the “eight corners rule.”  If the complaint can be read to allege a potentially covered claim, the duty to defend is triggered.  However, in certain circumstances, the court may look outside the operative complaint when assessing the duty to defend.  BBG Design presented such a case.

The insured, BBG Design, was a general contractor.  Patricia Armor was an employee at a recreational facility on which BBG was performing work. Armor was exposed to construction debris, and she filed a complaint against BBG in Florida court.  Armor’s First Amended Complaint alleged only that she had sustained “bodily injury” from “construction debris” at the site.

However, prior to filing suit, Armor’s attorney sent a pre-suit demand package to BBG’s insurer, Southern Owners, which included a letter alleging that she had been injured after being “exposed to hazardous fumes and dust” due to BBG’s construction activities, and medical records indicating that Armor suffered from bronchitis after being exposed to fiberglass.  In her original complaint, Armor alleged that she suffered respiratory illness after BBG’s failure to implement proper controls caused “dust and airborne fiberglass” to be released into the air.

BBG sought a defense from Southern Owners under its commercial general liability policy.  Southern Owners denied any duty to defend BBG, relying on the policy’s pollution exclusion for bodily injury “which would not have occurred in whole or party but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ at any time.”  The policy defined “pollutants” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”  BBG argued that the operative First Amended Complaint triggered Southern Owner’s duty to defend because it alleged only that Amber suffered bodily injury from construction debris, and therefore did not unequivocally plead facts that fit “solely and entirely” within the policy’s exclusion exception.

Southern Owners argued that that there was no coverage, applying an exception recognized by Florida courts to the general rule that the duty to defend depends only on the facts alleged in the four corners of the complaint.  Under this exception, the court may “consider extrinsic facts if those facts are undisputed, and, had they been pled in the complaint, they clearly would have placed the claims outside the scope of coverage.”  This is a judicially crafted “equitable remedy when it is manifestly obvious to all involved that the actual facts placed the claims outside the scope of coverage.”  The rule recognizes that “the right to an early resolution of a coverage issue should turn on the merits – on whether a policy exclusion applies and not on creative pleading.”

The district court agreed with Southern Owners and the Eleventh Circuit affirmed, holding that the undisputed facts set forth in Armor’s pre-suit demand package and her original complaint clearly demonstrated that the claim fell squarely within the unambiguous terms of the pollution exclusion, which “clearly encompasses the construction debris of the sort of which Armor complained.”  Accordingly, Armor’s First Amendment Complaint was “an attempt to plead into coverage despite the uncontroverted facts.”  Considering those undisputed facts, “Southern Owners did not breach its duty to defend BBG in the underlying lawsuit.”

Read the court’s full decision here.


Fifth Circuit Holds Insurer Had No Duty To Defend Criminal Complaint Against Insured For Environmental Contamination

Criminal complaint was not a “claim” under policy because it did not seek clean-up costs from insured.

Waste Mgmt., Inc. v. AIG Specialty Ins. Co., 974 F.3d 528 (5th Cir. 2020).

Following a series of heavy storms, a landfill in Hawaii owned by Waste Management, Inc. was flooded discharging contaminated water into the Pacific Ocean.  This resulted in two proceedings against Waste Management and related entities.  First, in January 2011, the EPA issued an Administrative Order on Consent (or AOC) requiring Waste Management to remediate the discharge.  Waste Management completed the remediation required by the Administrative Consent Order by August 2011.  Second, in 2014, two Waste Management employees and a subsidiary were indicted for criminal violations of the Clean Water Act.  The Waste Management parties entered into a plea and were sentenced to pay fines, restitution, and assessments.

AIG Specialty Insurance Company (ASIC) had issued a policy to Waste Management covering losses from “a Claim for Clean-Up Costs resulting from a Pollution Condition.”  The policy defined a “claim” as “a written demand … alleging liability or responsibility and seeking a remedy on the part of the Insured for Loss under” the clean-up cost coverage.  It also excluded “Claims or Loss . . . due to any criminal fines, criminal penalties or criminal assessment.”

Waste Management sought defense coverage for the criminal proceedings, arguing that the Administrative Consent Order constituted a clean-up claim that triggered ASIC’s duty to defend the related criminal proceedings.  Alternatively, Waste Management argued that the criminal indictment itself constitute a “claim” under the policy.  The Fifth Circuit affirmed the district court’s summary judgment in favor of ASIC, holding that, as a matter of law, ASIC owed no duty to defend.

First, the court found that, on their face, the Administrative Consent Order and the criminal complaints were independent.  The Administrative Consent Order issued months before the commencement of the grand jury proceedings, and Waste Management completed the required clean-up work nearly three years before the indictments were issued.  The court further held that the unambiguous policy language defeated Waste Management’s argument that the Administrative Consent Order and the criminal complaints were related based on federal enforcement guidelines.  The court pointed to the policy’s requirement that “[w]hen there is a claim for clean-up costs, ASIC has a duty to defend against ‘such claim,’” which it held was a “common-sense limit on ASIC’s duty to defend” to the specific claim for clean-up costs.  According to the court, accepting Waste Management’s argument “that the AOC, read in combination with the guidance documents, triggered a duty of ASIC to defend in all criminal or civil proceedings arising from the same pollution incidents, would effectively [read] this bargained-for restriction [on defense coverage] out of the contract.”  The court held it was “not at liberty to do so.”

In addition, the court held that the indictment itself did not meet the policy definition of a “claim,” because it did not seek a remedy from Waste Management.  The court rejected Waste Management’s argument that the lack of an explicit demand in the indictment introduced an ambiguity about whether there was a “claim,” because “clean-up costs were a potential outcome of the criminal proceedings.”  The court declined to “look outside the pleadings, or imagine factual scenarios that might trigger coverage.”  “Under the plain language of the contract,” “the indictment does not seek a remedy, so it did not trigger the duty to defend.”

Read the court’s full decision here.


In Case Of First Impression, California Law Rejects Tort Liability Of Reinsurer For Breach Of The Implied Covenant Of Good Faith

Reinsurance does not implicate the same policy concerns that warrant tort liability for certain direct insurers.

Cal. Capital Ins. Co. v. Maiden Reinsurance N. Am., Inc., Case 2:20-cv-01264-ODW-JPR (C.D. Cal. July 16, 2020)

In California Capital Insurance Company, the court resolved a question of first impression under California law – can a cedent recover tort damages for a reinsurer’s breach of the implied covenant of good faith and fair dealing?  The court predicted that the California Supreme Court would hold it could not.

From 2006 through 2016, Maiden Reinsurance North America, Inc. (MNRA) provided multi-line treaty reinsurance to California Capital Insurance and related entities (CIG).  CIG alleged that, after MNRA’s acquisition by a company in the business of purchasing failing reinsurance companies, MNRA “began fabricating reinsurance coverage disputes.”  CIG alleged that MNRA breached the implied covenant of good faith and fair dealing by, among other things, failing to pay previously accepted claims, failing to conduct appropriate investigations, seeking reimbursement for previously paid claims, and unreasonably delaying the payment of valid claims.  CIG sought tort damages for MNRA’s alleged bad faith, including attorneys’ fees and statutory penalties, arguing that reinsurance is a form of insurance, and therefore the same tort remedies available in some direct insurance cases should be available in the reinsurance context.

MRNA moved to dismiss CIG’s claim for breach of the implied covenant of good faith, arguing that reinsurers cannot be held liable in tort for breach of the implied covenant.  The court dismissed the claim to the extent it sought tort damages.

The court first found that, under California law, tort damages are generally not available for breach of contract.  While the California courts have recognized a narrow exception to this rule in certain insurance cases involving “elements of adhesion, public interest, and fiduciary responsibility,” that exception is itself narrow, as demonstrated by California decisions holding that tort damages are not even available in certain insurance contexts.

The court further held that reinsurance contracts do not implicate the same policy considerations applicable to certain direct insurance.  First, the district court determined that reinsurance contracts are not contracts of adhesion.  Second, because reinsurance contracts are intended to increase profits, rather than provide peace of mind or protect against calamity, reinsurance contracts do not implicate the same public interest concerns as some insurance contracts.  Finally, reinsurance contracts lack the elements of fiduciary responsibility present in some insurance contracts, such as liability policies that call upon insurers to defend third party claims on behalf of the insured.  Reinsurers “have no comparable duties to investigate or defend claims between third parties and the underlying liability insurers or their insureds, nor do they owe any duty of good faith and fair dealing to the original insureds, unless the reinsurance agreement somehow specifically so provides.”

Read the court’s full decision here.

Chaffetz Lindsey Speaker Events at the 2020 IBA Annual Conference

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November 2020 – Chaffetz Lindsey partners, Caline Mouawad and James Hosking, are speaking at the International Bar Association’s Annual Conference, which is being held virtually from November 2nd – 27th.

On Tuesday, November 17th at 5:00am EST, Caline Mouawad will speak on a panel about “Hot Topics in International Arbitration.” Panelists will debate the most topical issues of the moment in international arbitration. IBA conference attendees can learn more here.

On Monday, November 23rd at 7:00am EST, James Hosking will participate in a panel discussion about “Emergency Arbitration: Taking Stock and Exploring Opportunities for Change.” Panelists will survey the emergency arbitrator rules now provided for by many of the major institutions and identify decisions applying those rules and make proposals for improvement as informed by the experience to date. IBA conference attendees can learn more here.

Chaffetz Lindsey is an active IBA participant—Andreas Frischknecht is an Officer of the Litigation Committee and a number of our attorneys are members of the Litigation, Insurance, and International Arbitration Committees.  This year, our conference delegation includes Peter Chaffetz, Andreas Frischknecht, James Hosking, Caline Mouawad, Andrew Poplinger, Erin Valentine, Gretta Walters and Rainbow Willard.

The International Bar Association (IBA) is the foremost organization for international legal practitioners, bar associations and law societies. The present membership is comprised of more than 80,000 individual international lawyers from 190 bar associations and 170 countries. The Annual Conference is the central event of the international legal community’s calendar, as it presents an unequalled opportunity to exchange knowledge and to create and renew a global network of colleagues and business contacts.

Arbitration in the Courts, October 2020
(Vol. 4)

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Illinois Federal Court Refuses to Enjoin Remote Arbitration Hearing:

Arbitrators, rather than court, should decide procedural question of whether to hold remote hearing due to Covid-19 pandemic.

Legaspy v. Fin. Indus. Regulatory Auth., Inc., No. 20 C 4700, 2020 WL 4696818 (N.D. Ill. Aug. 13, 2020).

Legaspy appears to be the first U.S. court case during the Covid-19 pandemic addressing an application to enjoin a remote arbitration hearing.  In February of 2019, two of Carlos Legaspy’s clients initiated an arbitration against him under the rules of the Financial Industry Regulatory Authority (FINRA) to recover nearly $3 million for brokerage account losses.  Pursuant to FINRA’s rules, the parties signed a uniform submission agreement which provided that “in the event a hearing is necessary, such hearing shall be held at a time and place as may be designated by the Director of FINRA” and that “the arbitration will be conducted in accordance with the FINRA Code of Arbitration Procedure.” An evidentiary hearing was originally set for August 17, 2020 in Boca Raton, Florida.  However, due to the COVID-19 pandemic, FINRA canceled the in-person hearing and the arbitral panel subsequently ordered that the hearing be conducted remotely via Zoom.  Legaspy objected, arguing that a Zoom hearing was unworkable because of the complexity of the issues, the large number of witnesses and documentary exhibits, and the claimants’ need for a translator.  After the tribunal overruled Legaspy’s objections, Legaspy filed suit in federal court to enjoin the virtual hearing on the grounds that it breached the parties’ uniform submission agreement and FINRA’s Code of Arbitration Procedure and denied Legaspy due process under the Fifth Amendment.  The court denied Legaspy’s motions for a temporary restraining order and preliminary injunction, allowing the virtual arbitration to proceed.

The court held that a preliminary injunction was unwarranted because neither Legaspy’s breach of contract claim nor his constitutional claim was likely to succeed on the merits.  The court held in the first instance that Legaspy could not state a claim against FINRA for breach of the uniform submission agreement because FINRA was not a party to that agreement.  The court further held that Legaspy could not succeed on his claim for breach of the submission agreement or the FINRA Code of Arbitration because, under the Federal Arbitration Act, procedural questions are committed to the arbitrator and “[w]hether FINRA can or should conduct a hearing remotely is a question of procedure that FINRA, not this court, must decide.”  Finally, the court determined that even if it could review the arbitral panel’s procedural ruling mid-arbitration, the FINRA Code of Arbitration permitted the panel to order a virtual hearing.

The court likewise found that Legaspy’s claim that a remote hearing would deny him due process was unlikely to succeed because the Fifth Amendment protects citizens from state action (i.e., government conduct) and FINRA is a private corporation, not a state actor.

Read the court’s full decision here.

 

Fifth Circuit Holds Award did not Violate Public Policy where Arbitrators had rejected claim that contract had been unlawfully obtained as part of the Lavo Jato bribery scandal:

Court must defer to arbitrators’ conclusion that alleged bribery did not invalidate the parties’ contract.

Vantage Deepwater Co. v. Petrobras Am., Inc., 966 F.3d 361 (5th Cir. 2020).

Article V(2)(b) of the Panama Convention, like its New York Convention counterpart, allows an enforcing court to refuse to recognize or enforce an award that “would be contrary to the public policy of that country.”  In Vantage Deepwater, the U.S. Court of Appeals for the Fifth Circuit addressed how the arbitrators’ determination regarding whether the underlying contract was procured through bribery impacts a challenge to the award on public policy grounds.  The court held that while the ultimate determination of whether an award violates public policy is for the enforcing court, the court must make its determination on the facts as found by the arbitrator.

In 2009, Vantage Deepwater entered into a contract with Petrobras—the Agreement for the Provision of Drilling Services (“DSA”)—to perform offshore drilling services for an eight-year term, which began in 2012.  In 2013, after a Brazilian magazine published an article alleging that a Vantage shareholder had paid a large bribe to secure the DSA, Petrobras opened an investigation into the matter.  Nevertheless, a few months later, the parties executed a novation and amendment of the DSA in which they reaffirmed that the contract was binding and enforceable.  The parties executed a similar novation and amendment in 2014.

In 2015, Petrobas terminated the DSA, claiming that Vantage had materially breached the contract and, additionally, that the DSA was invalid because it was procured through bribery.  By the time of Petrobras’s termination, Vantage’s agent in Brazil had pled guilty to bribery in connection with the DSA, which formed part of the larger Lava Jato bribery scandal, which concerned Petrobras executives allegedly accepting bribes in return for awarding contracts to construction firms at inflated prices.

Following a two-week evidentiary hearing, the tribunal, over a dissent, ruled that Petrobas had wrongfully terminated the DSA and awarded Vantage over $700 million in damages and interest. The tribunal found both that Petrobras had not proved that Vantage was guilty of bribery and that Petrobras had, in any event, ratified the DSA by executing the novations and amendments with knowledge of the alleged bribery.

In response to Vantage’s petition to confirm the award in the U.S. District Court for the Southern District of Texas, Petrobras argued, among other grounds, that enforcement of the award would violate United States public policy because it would require Petrobras to pay damages on a contract illegally procured through bribery.

The Fifth Circuit affirmed the district court’s holding that enforcing the award would not violate public policy because the tribunal had found that Petrobras had ratified the contract.  The Fifth Circuit explained that, although “courts are the ultimate arbiters of public policy, not arbitrators,” the court must “take the facts as found by the arbitrator” in reaching that legal conclusion.

The court noted that Petrobras was not arguing that the award itself violated public policy, because, for example, it was procured by fraud.  Rather, Petrobras was asking the court to determine whether the underlying contract, the DSA, violated public policy.  The court explained that the public policy exception cannot be used to question the merits of an award, especially where, as here, the parties’ arbitration agreement granted the arbitrators the authority to rule on the validity and enforceability of the DSA.  Whether the DSA should be voided because of bribery is a question of the contract’s validity.  Thus, while bribery does violate public policy, whether bribery provided a basis to deny enforcement of the contract at issue was a question for the arbitrators.  The arbitrators’ findings that Petrobras waived any bribery objection by ratifying the DSA and that Vantage was, in any event, not aware of the alleged bribery “were within the tribunal’s authority to rule on the DSA’s validity.  As such, the validity of the DSA was rightly a question for the arbitrators rather than the district court.”

Read the court’s full decision here.

SDNY Holds Section 1782 Available in Connection with Investor-State Arbitration:

Tribunal in arbitration between Russian investor and Republic of Lithuania is “foreign or international tribunal” under 28 U.S.C. § 1782.

In re Application of Fund for Prot. of Inv’r Rights in Foreign States pursuant to 28 U.S.C. § 1782 for an Order Granting Leave to Obtain Discovery for Use in a Foreign Proceeding, No. 19 MISC. 401 (AT), 2020 WL 5026586 (S.D.N.Y. Aug. 25, 2020).

28 U.S.C. § 1782 permits a federal court to grant discovery to be taken “for use in a proceeding in a foreign or international tribunal.”  A split has emerged among federal circuit courts of appeal over whether § 1782 discovery is available in aid of foreign commercial arbitration.  The Second and Fifth Circuits, joined last month by the Seventh Circuit, have held that § 1782 discovery is not available in connection with foreign private arbitrations because they are not proceedings before “a foreign or international tribunal,” as that term is used in the statute.  The Fourth and Sixth Circuits, on the other hand, have held that private arbitral tribunals are “tribunals” within the meaning of the statute. (See Volume 1 (Nov. 2019) reporting on Abdul Latif Jameel Transp. Co. v. FedEx Corp., 939 F.3d 710 (6th Cir. 2019)).  In this case, the Southern District of New York (SDNY) was called upon to decide whether a tribunal in an arbitration instituted against a state pursuant to a bilateral investment treaty constitutes “a foreign or international tribunal” under § 1782.

In 2019, the Fund for Protection of Investor Rights in Foreign States (the Fund), a Russian corporation, initiated arbitration against the Republic of Lithuania pursuant to the Lithuania-Russian Federation Bilateral Investment Treaty of 2004.  The Fund is the assignee of claims by the former controlling Russian shareholder of a Lithuanian bank nationalized by Lithuania.  The Fund applied under 28 U.S.C. § 1782 to take discovery from Simon Freakley, a former administrator of the bank appointed by the Lithuanian government, and his firm, AlixPartners LLP.  On July 8, 2020, the court granted the Fund’s application.

On the same day, the Second Circuit Court of Appeals, whose decisions bind federal courts in New York, decided In Re Guo, 965 F.3d 96, 100 (2d Cir. 2020), which reaffirmed its 20-year old decision in National Broadcasting Co. v. Bear Stearns & Co., 165 F.3d 184 (2d Cir. 1999) that § 1782 discovery is not available for private international commercial arbitrations.

In light of the Second Circuit’s ruling in Guo, Freakley and AlixPartners moved for reconsideration of the SDNY court’s decision.  The court denied the motion and upheld its prior decision permitting the discovery.  Following the Second Circuit’s recognition in National Broadcasting of the distinction between tribunals in commercial arbitrations from tribunals constituted pursuant to international treaties, the SDNY court sustained its conclusion that the investment treaty arbitration was taking place before a “foreign or international tribunal” within the meaning of § 1782.  Specifically, the court noted that the investor-state tribunal “does not ‘possess[] the functional attributes most commonly associated with private arbitration.”  This is because bilateral investment arbitration is “a tool of international relations, . . . the Tribunal derives its jurisdiction from the Treaty, and . . . the Arbitration is a means by which [the Fund is] bringing claims against the Republic of Lithuania in its capacity as a state.”

Read the court’s full decision here.

Fifth Circuit Rejects Claim against AAA and Arbitrators for Damages Following Vacatur of Arbitration Awards:

The FAA provides for vacatur of award as exclusive remedy for arbitrator bias.

Texas Brine Co., L.L.C. v. Am. Arbitration Ass’n, Inc., 955 F.3d 482 (5th Cir. 2020).

Plaintiff Texas Brine was a party to an arbitration administered by the American Arbitration Association (“AAA”) seated in New Orleans, Louisiana.  During the course of the arbitration, Texas Brine discovered that two of the three members of the arbitral panel had what it believed to be disqualifying conflicts of interest.  The AAA’s Administrative Review Council, however, summarily denied Texas Brine’s disqualification motions.  Shortly after that denial, the AAA removed one of the arbitrators on different grounds and the remaining two arbitrators resigned.

Texas Brine then moved in Louisiana state court to vacate the arbitral panel’s interim awards.  The state court vacated the panel’s rulings pursuant to 9 U.S.C. § 10(a)(2), the provision of the Federal Arbitration Act or FAA which permits a court to vacate an award for “evident partiality or corruption in the arbitrators.”

Following the vacatur ruling, Texas Brine filed a lawsuit against the AAA and the two allegedly compromised arbitrators seeking $12 million in damages and equitable relief.  The AAA removed the case to federal court.  The federal district court dismissed Texas Brine’s claims on two alternative grounds: (1) the defendants enjoyed arbitral immunity and (2) the Federal Arbitration Act provides the exclusive remedy for complaints concerning an arbitrator’s bias or other corrupt conduct.  The Fifth Circuit affirmed the district court’s decision that the FAA was the plaintiff’s exclusive-remedy and declined to “opine on the legitimacy of arbitral immunity.”

The Fifth Circuit held that Texas Brine’s lawsuit constituted an impermissible “collateral attack”—that is, a challenge to an award outside of the exclusive grounds provided in the FAA—on the now-vacated arbitration award.  The appellate court explained that there are limited statutory grounds on which a court may vacate a domestic arbitral award and that purportedly independent claims outside of these grounds are not a basis for challenge if they are “disguised collateral attacks on the arbitration award.”  To determine whether a plaintiff’s claims constitute a collateral attack, the court examines “the relationship between the alleged wrongdoing, purported harm, and arbitration award.”  Applying this test, the court first found that the alleged wrongdoing—the arbitrators’ conflicts of interest—could clearly be remedied by vacatur under Section 10 of the FAA.  Next, the court found that Texas Brine’s alleged harm—strategic disadvantage and a tainted arbitration—could likewise be remedied under Section 10.  Finally, the court held that Texas Brine’s requested relief for reimbursement of the fees and costs it paid in furtherance of the tainted arbitration were premised on the same infirmity in the proceedings, and therefore did not transform its challenge from a collateral attack into an independent claim.

Read the court’s full decision here.

Yasmine Lahlou, Andrew Poplinger and Silvia Marroquin Analyze Arbitrators’ Power to Reconsider and Modify Awards Under US Law

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October 2020 – Yasmine Lahlou, Andrew Poplinger and Silvia Marroquin recently published an article titled, “Arbitrators’ Authority to Reconsider and Modify Awards Under US Law: Functus Officio and Beyond” in Thomson Reuters Practical Law. The article examines:

  • The scope and rationale for the common law functus officio doctrine.
  • What constitutes a “final” award subject to the functus officio doctrine, including when interim or partial awards may be deemed final.
  • The recognized exceptions to the functus officio doctrine.
  • The impact of institutional rules adopted by the parties on the arbitrators’ authority to reconsider and modify their awards.
  • The arbitrators’ authority to modify awards following court remand.

Click here to view the entire article.

Thomson Reuters Practical Law is a legal know-how that provides practical guidance and wisdom from over 280 expert attorney-editors.

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