Marcel Engholm to speak at Georgetown Brazilian Arbitration Day

Where Advocacy Meets Business

Marcel Engholm to speak at Georgetown Brazilian Arbitration Day

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January 2024—Chaffetz Lindsey’s Marcel Engholm will speak at Georgetown Brazilian Arbitration Day on Wednesday, January 24th. Marcel will join Pedro Maciel (Lefosse Advogados), Mauricio Gomm Santos (GST) and Erica Franzetti (King & Spalding) for the panel “Considerations about the Seat of Arbitration.” The discussion will be moderated by Gustavo Ramos (Georgetown).

The event will be held at Freshfields Bruckhaus Deringer LLP in Washington D.C. and is organized by the Georgetown Brazilian Law Association and the Georgetown International Arbitration Society.

Learn more and register here.

Arbitration in the Courts, December 2023
(Vol. 12)

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Southern District of New York twice finds that, under the McCarran Ferguson Act, Louisiana statute barring arbitration of insurance disputes reverse-preempts the New York Convention:

Arbitration agreements were not “forum selection clauses” exempted from Louisiana statute’s proscription on arbitrating insurance disputes.

Certain Underwriters at Lloyds, London et al v. Mpire Properties, LLC, No. 22-CV-9607, 2023 WL 6318034 (S.D.N.Y. Sept. 28, 2023).

Certain Underwriters at Lloyds, London et al. v. 3131 Veterans Blvd LLC, No. 22-CV-9849, 2023 WL 5237514 (S.D.N.Y. Aug. 15, 2023).

Under the Supremacy Clause of the U.S. Constitution, the Federal Arbitration Act (“FAA”) and the New York Convention (codified in Chapter 2 of the FAA) generally preempt state laws invalidating arbitration agreements.  However, the McCarren-Ferguson Act (MFA), another federal statute, provides that “the business of insurance” is “subject to the laws of the several States,” and that “no Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance[.]”  In other words, the MFA “reverse-preempts” federal laws that conflict with state laws regulating insurance, unless the federal law is specifically addressed to the business of insurance.

Several states have enacted statutes declaring that insurance disputes are not arbitrable.  Courts have held that, under the MFA, these state laws invalidate domestic arbitration agreements governed by FAA Chapter 1.  But there is a circuit split over whether MFA reverse-preemption applies where state laws purport to invalidate international arbitration agreements governed by the New York Convention.  On the one hand, the First, Fourth, Fifth, and Ninth Circuits have held that the MFA does not reverse preempt the Convention, and therefore state laws prohibiting the arbitration of insurance disputes are inapplicable to arbitration clauses in policies issued by foreign insurers.  See, e.g. Green Enterprises, LLC v. Hiscox Syndicates Limited at Lloyd’s of London, 68 F.4th 662, 668 (1st Cir. 2023); ESAB Group, Inc. v. Zurich Ins. PLC, 685 F.3d 376, 385 (4th 2012); Safety Nat. Cas Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714, 725 (5th Cir. 2009); CLMS Management Services Limited Partnership v. Amwins Brokerage of Georgia, LLC, 8 F.4th 1007, 1012 (9th Cir. 2021).  The Second Circuit, however, has held that state insurance laws do reverse-preempt the New York Convention, because the Convention is not self-executing, but rather it is incorporated into domestic law by Chapter 2 of the FAA, which is an “Act of Congress” under the MFA.  See Stephens v. American Intern. Ins. Co., 66 F.3d 41, 45 (2d Cir. 1995).

This circuit split was on display in two recent decisions from the SDNY, which held that Louisiana Revised Statute § 22:868, which invalidates arbitration clauses in insurance policies, reverse-preempts the FAA and the New York Convention, and therefore precludes the arbitration of insurance disputes under policies issued in Louisiana by foreign insurers.

The two cases, Mpire and 3131 Veterans Boulevard, arose from essentially the same basic facts.  In each case, a Louisiana policyholder disputed its insurers coverage determinations regarding property damage caused by Hurricane Ida.  Both policies were issued by a combination of foreign and domestic insurers, and each contained an arbitration provision.  The policyholder in each case sued only its domestic insurers in Louisiana state court (waiving its claims against the foreign insurers’ share of the policy).

In both cases, the insurers petitioned the SDNY to enjoin the Louisiana actions and compel arbitration.  In opposing the motions, the policyholders argued that Louisiana Revised Statute § 22:868, which invalidates any policy provision “depriving the courts of this state of the jurisdiction or venue of action against the insurer,” rendered the arbitration provisions unenforceable.

Each court rejected the insurers’ argument that § 22:868 permitted arbitration in these cases under an exception permitting “a forum or venue selection clause” in surplus lines policies.  As the policies at issue were surplus lines policies, the insurers argued that the arbitration agreements were enforceable because they were a form of “forum-selection clause.”  In each case, the court disagreed, holding that, under Louisiana law, an arbitration agreement is not a form of forum-selection clause, because a forum-selection clause, unlike an arbitration clause, does not “have the effect of excluding judicial remedies.”

The insurers next argued that, even if the statute applied to arbitration clauses in surplus lines policies, MFA reverse-preemption was inapplicable because the arbitration agreements fell under the New York Convention.  Here the insurers argued that under a doctrine known as Grigson estoppel, the arbitration agreements fell under the Convention, notwithstanding the policyholders’ decision to proceed only against the domestic insurer-signatories, because its signatories included foreign insurers. (For a discussion of Grigson estoppel see Port Cargo Serv., LLC v. Certain Underwriters at Lloyd’s, 2018 WL 4042874 (E.D. La. 2018).)

In each case the court rejected this argument.  Assuming, but not deciding, that the Convention applied, the court held that it was bound by Second Circuit precedent holding that state insurance laws reverse-preempt the Convention under the MFA.  Accordingly, § 22:868 would invalidate the policies’ arbitration provisions, even if they fell within the Convention.

These decisions are now on appeal to the Second Circuit, which will have the opportunity to reconsider its prior holding that the MFA reverse-preempts the New York Convention.  If the Second Circuit affirms its prior holding and preserves the circuit-split on this important question, the issue could come before the Supreme Court.

Read the court’s full decisions here and here.


Don’t I know you?

Eleventh Circuit refuses to vacate award based on arbitrators’ non-disclosure of professional experience with co-arbitrators and counsel.

Grupo Unidos por el Canal, S.A. v. Autoridad del Canal de Panama, 78 F.4th 1252 (11th Cir. 2023).

Federal Arbitration Act (FAA) § 10 provides that arbitral awards issued in the US may be vacated “where there was evident partiality or corruption in the arbitrators.”  A movant may prove evident partiality by showing either (1) an arbitrator has an actual conflict of interest or (2) an arbitrator failed to disclose information that would lead a reasonable person to believe that a conflict exists.  Like all grounds for vacating an award, the evident partiality prong is strictly construed.  To warrant vacatur, the “alleged partiality must be direct, definite and capable of demonstration rather than remote, uncertain and speculative.”  Challenges based on evident partiality rarely succeed.

Certain international arbitrators are in such high demand that they may serve together as co-arbitrators, and experienced counsel may appear before them in more than one case.  In some cases, parties have argued that an arbitrator’s failure to disclose such relations warrants vacatur of an award for arbitrator bias.  This was the case in Grupo Unidos, where the Eleventh Circuit Court of Appeals confirmed that the failure to disclose such professional contacts, without more, does not demonstrate evident partiality warranting vacatur of an award.

The dispute in Grupo Unidos arose from a five-year arbitration between Grupo Unidos por el Canal, a consortium of European companies hired to design and construct a new set of locks to expand the Panama Canal, and the Canal’s operator, Autoridad del Canal de Panama.  After extensive proceedings – which included over 3,500 pages of pleadings, 78 fact witnesses, 63 expert witnesses, over 3,500 exhibits, a 20-day merits hearing, and 1,290 pages of post-hearing briefing – the three-arbitrator panel issued a partial award of more than $238 million in favor of the Autoridad.

Following the partial award, Grupo Unidos sought a series of additional disclosures from the arbitrators.  After the arbitrators made the additional disclosures and issued a Final Award, Grupo Unidos moved to vacate the award for evident partiality based on four of these disclosures: (i) a co-arbitrator’s nomination of the tribunal’s president to serve as president of another tribunal in an unrelated arbitration while the Panama Canal arbitration was pending; (ii) an arbitrator’s service as co-arbitrator with counsel for the Autoridad in an unrelated arbitration while the Panama Canal arbitration was pending; (iii) an arbitrator’s service on a tribunal with one of the Autoridad’s counsel in an unrelated arbitration that ended before the Panama Canal arbitration commenced; and (iv) an arbitrator’s service on the tribunal in an unrelated case where one of the Autoridad’s counsel represented a party.

The Eleventh Circuit refused to vacate the award based on these nondisclosures.  The court considered it “well-taken” that “arbitrators should err on the side of greater, not lesser, disclosure.”  But to vacate the award on these facts, the court “would need to hold, in essence, that mere indications of professional familiarity are reasonably indicative of possible bias.”

In the first three instances, the court held that a reasonable person would not suspect bias based on the non-disclosure of co-service on arbitral tribunals in unrelated proceedings, because there were sound and impartial reasons for the various appointments.  This included, among other things, these individuals’ extensive expertise and experience in resolving complex construction disputes.  The court concluded that “such familiarity due to confluent areas of expertise does not indicate bias.”

The court likewise held that the remaining failure to disclose that a party’s counsel’s appearance before one of the arbitrators in a prior, unrelated arbitration did not demonstrate evident partiality. According to the court, repeated appearances by experienced counsel before experienced arbitrators were common and anticipated, and such “repeated appearances establish only familiarity, and familiarity does not indicate bias.”

In sum, the court observed that it was “little wonder, and of little concern,” that leading arbitrators and counsel in a small professional community “would cross paths in their work.”

Read the court’s full decision here.


Southern District of New York Confirms Award Enjoining Parallel Arbitration:

Agreement and AAA Commercial Rules granted arbitrators broad authority to grant injunctive relief, including the power to enjoin parallel arbitrations seeking to circumvent the arbitration agreement and undermine the panel’s authority.

Telecom Business Solution, LLC v. Terra Towers Corp., et al., No. 22-CV-1761, 2023 WL 5748199 (S.D.N.Y. Sept. 6, 2023).

One way parties may attempt to circumvent an unfavorable award is by initiating parallel proceedings before a court or arbitral tribunal they expect will rule in their favor. The question then arises of whether arbitrators are empowered to enjoin parallel proceedings to thwart such gamesmanship and preserve the integrity of the arbitration. In Telecom Business Solution, the SDNY was asked to confirm an award ordering the respondents to terminate parallel arbitration proceedings directly aimed at undermining the ongoing arbitration.

The case arose from a dispute between the shareholders of Continental Towers LATAM Holdings Ltd. regarding the sale of the company.  Specifically, the minority shareholders alleged that the majority shareholders had prevented the sale of the company by wrongfully restricting the minority shareholders’ right to sell their shares.  They therefore invoked the arbitration clause in the shareholders’ agreement and initiated an arbitration in New York under the Commercial Rules of the American Arbitration Association, seeking an award requiring the sale of the company.  The tribunal ultimately issued a unanimous first partial final award ordering the sale of Continental Towers, which was later confirmed in the SDNY.  This was followed by a second partial final award that imposed sanctions on the majority shareholders, including staying their counterclaims until they complied with the tribunal’s order to complete the sale of Continental Towers.

Rather than comply with the awards, the majority shareholders took their fight abroad.  A few months following the second partial final award, wholly-owned subsidiaries of Continental Towers initiated arbitrations in Peru and Guatemala, asserting claims mirroring the majority shareholders’ stayed counterclaims in the New York arbitration.  The Guatemala tribunal even issued an injunction purporting to enjoin the minority shareholders from, among other things, undertaking “transactions that change the equity interests that [the majority shareholders] hold in certain of [Continental Towers’] subsidiaries,” directly conflicting with the New York tribunal’s ordering of the sale of Continental Towers.  The minority shareholders therefore moved for an anti-arbitration injunction from the New York tribunal to enjoin the South American arbitrations.

The New York tribunal found that, because the majority shareholders were the real parties in interest in all three arbitrations, the South American arbitrations were a transparent attempt to circumvent the New York tribunal’s orders.  The New York tribunal therefore issued a third partial final award ordering the majority shareholders to terminate the parallel arbitrations.

The minority shareholders then petitioned the SDNY for expedited confirmation of the third award. The majority shareholders cross-moved for vacatur.

The court rejected the majority shareholders’ vacatur motion, and confirmed the award.  The court rejected the respondents’ contention that the injunction exceeded the arbitrators’ authority, holding that the arbitrators had the authority to issue the anti-suit injunction.  The arbitrators’ scope of authority “generally depends on the intention of the parties to an arbitration, which is determined by the parties’ agreement.”  The shareholder agreement granted the tribunal broad authority to decide “any controversy, claim or dispute arising out of or in connection” with the shareholders’ agreement, and authorized the arbitrators to award specific performance and injunctive relief.  The agreement further provided that the arbitration would be conducted under the AAA Rules, which likewise granted the arbitrators authority to issue injunctive relief.  The arbitrators had found that the shareholders’ parallel arbitration violated the arbitration clause and the implied covenant of good faith, and awarded the anti-suit injunction as the appropriate remedy.  The court held that it was well within the arbitrators’ authority, as defined by the agreement, to order an anti-suit injunction to remedy these breaches.

Read the court’s full decision here.


Southern District of Texas finds arbitrators exceeded their powers in amending award:

Tribunal’s redetermination of substantive issue of law went beyond correction of computational errors permitted by ICC Rules.

RSM Production Corp. v. Gaz du Cameroun, S.A., No. 4:22-CV-03611, WL X (S.D. Tx. Nov. 6, 2023).

The common law doctrine of functus officio bars an arbitrator from revisiting the merits of an award once issued.  The rule recognizes that once the arbitrators render an award, their contractual powers are exhausted.  If a tribunal modifies the substance of an award after it is functus officio, the amended award is subject to vacatur under FAA § 10(a)(4), which provides for vacatur “where the arbitrators exceed their powers.” This common law doctrine is, however, subject to certain well-known exceptions.  Most notably, arbitrators may correct clerical or computational errors, which are properly viewed as perfecting or explaining their determination, rather than altering the substance of their conclusions.  Moreover, because arbitration is a matter of contract, the parties are free to empower the arbitrators to revisit and modify their awards.  This can be accomplished by agreeing to arbitrate under the rules of an arbitral institution, such as the International Chamber of Commerce (ICC), which empower arbitrators to revise their awards in the manner specified in the rules.  However, the ICC Rules, like most, limit the arbitrators’ authority to correcting the same type of computational or clerical errors permitted under the functus officio doctrine.

In RSM Production Corp., the United States District Court for the Southern District of Texas held that the addendum modifying a final award may be vacated under FAA § 10(a)(4) where the arbitrators exceed their authority to correct awards under the institutional rules chosen by the parties.  Specifically, RSM Production Corp. concerned a petition to vacate an addendum issued pursuant to Article 36 of the ICC Rules, which grants arbitrators the power to correct “a clerical, computational, or typographical error, or any errors of a similar nature contained in an award.”

The underlying dispute arose from a set of agreements between RSM Production Corp. (RSM) and Gaz Du Cameroun, S.A. (GdC) concerning a natural gas production and distribution project.  Under the contracts, GdC would advance certain costs and serve as operator in exchange for a 60% interest in the project, while RSM retained a 40% interest for itself.  However, RSM was not entitled to receive its share of the proceeds until GdC recuperated 100% of its costs from the gas proceeds.  Thus, the contracts defined RSM’s “payout date” as “the first day of the calendar month following the calendar month” in which GdC fully recovered its costs.

The parties’ dispute concerned when GdC recuperated all costs and thus what constituted the contractual “payout date.”  GdC claimed that it had not recouped its costs until May 2016, and thus it did have to begin paying RSM its share of the proceeds until June 1, 2016.  RSM disagreed, claiming that GdC had recouped the costs recoverable under the contract by January 2016, and therefore the payout date was months earlier on February 1.  According to RSM, GdC’s arrived at the June 1 payout date by improperly including payments GdC made to a third company under a separate royalty contract in calculating its recoverable costs.  RSM therefore commenced arbitration, claiming its share of the proceeds based on a February 1 payout date.  RSM claimed a total of $10,578,123 comprised of three components: (i) $6,566,497 on the proceeds from sales generated between February 1 and June 1; (ii) $3,866,616 on the proceeds from sales generated prior to February 1, but received on or after February 1, 2016; and (iii) $145,009 on the proceeds received between GdC’s full cost recovery in January and the February 1 payout date.  The tribunal labelled this three-part claim as “Claim No. 1.”

In the alternative, RSM argued that, if the correct payout date was June 1, it was nevertheless entitled to components two and three of Claim No. 1, albeit calculated based on GdC’s alleged cost recovery in May 2016. The tribunal labelled RSM’s alternative claim as “Claims Nos. 2 and 3.”

The tribunal issued an award in RSM’s favor entitled, “RSM Claim No. 1: GdC’s Inclusion of the CHL Royalty in the Calculation of ‘Payout.’”  The tribunal found that GdC had improperly included the royalty payments in its recoverable costs, the proper payout date was February 1, and RSM was entitled to the full $10,578,123 it demanded.  In reaching this conclusion, the tribunal explicitly found that RSM’s compensation was calculated in “three steps,” citing specific contractual provisions entitling RSM to recover each of the three components of Claim No. 1.  The tribunal further found that Claims Nos. 2 and 3 were moot because they arose only in the event the tribunal deemed the proper payout date to be June 1, 2016.

In response, GdC filed an application under Article 36 of the ICC Rules seeking a “correction” of the amounts awarded.  GdC did not contest the tribunal’s conclusion that the proper payout date was February 1.  Rather, it argued that the tribunal had erred in granting the full $10,578,123 because, according to the title of the award, the tribunal only decided that the proper payout date was February 1.  Therefore, GdC argued, the tribunal did not address the second and third components Claim No. 1 concerning RSM’s share of the proceeds generated before February 1.  Those claims, GdC argued, were only encompassed in what the tribunal had labelled Claim Nos. 2 and 3.  GdC further argued that those claims were therefore not moot, the tribunal had yet to decide RSM’s entitlement to the second and third components of Claim No. 1, and it therefore erred in awarding RSM the full $10,578,123.

The tribunal issued an addendum award in which it agreed with GdC, and characterized its award to RSM of amounts generated prior to the payout date as a “miscalculat[ion of] the appropriate relief due to RSM.”  The Addendum Award then purported to correct this “computational error” by limiting the damages awarded RSM to $6,566,497.38 (the first component of Claim No. 1).

RSM moved to vacate the Addendum Award under FAA § 10(a)(4), arguing that the arbitrators had exceeded their powers under the ICC Rules by issuing the Addendum Award, because it did not merely correct a computational error, but amounted to a “re-do” of its prior merits determination.  The court agreed.

The court observed that mere computational errors are typically straightforward and involve simple mistakes, such as 2+2=5.  Here, however, rather than making such ministerial corrections, the tribunal revisited the merits and “effectively reversed” its “comprehensive breakdown” of why RSM was owed amounts corresponding to the second and third components of Claim No. 1.  The court emphasized that the tribunal’s Addendum Award “conflate[d] the title of its original decision with its substance.”  The title of the tribunal’s first award may have suggested it was limited to determining the appropriate payout date, and thus only RSM’s entitlement to the first component of Claim No. 1.  But RSM’s submissions were clear that it was seeking all three components of Claim No. 1, and the “substance of [the tribunal’s] decision expressly determined that RSM was entitled to recover on each of the three components that made up the $10,578,123.28 award.”

The court therefore held that “the tribunal committed a textbook case of reversing course on a substantive legal issue previously decided.”  Notably, in reaching this conclusion, the court rejected GdC’s argument that “the tribunal is entitled to extreme deference on the interpretation of its power, including what constitutes a ‘computational error’” under the ICC Rules.  Rather, for the court, “the tribunal exceeded its authority by modifying the award in a way forbidden by the plain text of the agreement.”  The parties agreed to the application of the ICC Rules, and the meaning of ICC Rule 36 was clear.

Read the court’s full decision here.

James Hosking and Marcel Engholm Co-Author Article for the Bahrain Chamber for Dispute Resolution International Arbitration Review

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December 2023 – Chaffetz Lindsey’s James Hosking and Marcel Engholm contributed to the 14th edition of the Bahrain Chamber for Dispute Resolution’s International Arbitration Review. Published biannually and featuring content in both Arabic and English, the Review comprises articles, case summaries and other significant reports; each issue focusing on a topic of universal interest in international arbitration with an emphasis on relevance to the Arab Region.

James and Marcel co-authored the article titled “The Central Importance of the Seat in Online Dispute Resolution”. The article discusses the authors’ view that while advances in remote hearing technology have liberated arbitrations from the shackles of geography, they may paradoxically have made the juridical seat of arbitration all the more important. The article discusses the main challenges arising in remote hearings and concludes that most are best resolved by reference to the law of the seat.

The full publication can be found here 

Marcel Engholm to Speak at Université Côte d’Azur Conference

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November 2023– Chaffetz Lindsey’s Marcel Engholm will speak at the upcoming conference “La Justice à la Croisée des Chemins: entre marchandisation et algorithmization” (“Justice at a Crossroads: between commodification and algorithmization”) on Monday, November 20th. The event, hosted by the Universite Côte d’Azur under the direction of Gustavo Cerqueira (Université Côte d’Azur) and Marina Teller (Université Côte d’Azur) will take place from November 20th-November 21st in Nice, France.

Marcel will participate in the Monday afternoon session to discuss Efforts and Perspectives on Third Party Funding Regulation (“Tentatives et Perspectives de Régulation – Approche Comparée”). Additionally, he will join a roundtable on Third Party Funding in Arbitration and Courts (‘Le Traitement Judiciaire et Arbitral”) with Elena Fedorova (Bonifassi Avocats), Jacques-Alexandre Genet (Archipel Avocats), Alain Grec (Profile Investment) and Cécile Schwal (L’Ordre des Avocats de Nice).

For more information and a full program of events, click here.

NYIAC Grand Central Forum & 10th Anniversary Celebration September 20th, 2023

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September 2023—The New York International Arbitration Center (NYIAC) Grand Central Forum will take place Wednesday, September 20th from 5pm-8:30pm. The flagship annual event will include a celebration of NYIAC’s 10th anniversary. Chaffetz Lindsey’s James Hosking and Marisa Marinelli (Holland & Knight) are Co-Chairs of the Program Committee together with Chaffetz Lindsey associate and Secretary of the Program Committee, Marcel Engholm Cardoso.

The 2023 forum “Selecting New York Law for Cross-Border Transactions — A Wise Choice?” will feature keynote speaker Eduardo Zuleta (Arbitration Chambers) and a moderated panel discussion featuring Lucy Reed (Arbitration Chambers), Elisabeth Eljuri (Westlawn Americas Offshore), Maureen Ryan (Former Atlas Renewable Energy) and Stephen Smith (Former Lockheed Martin).

A celebration of NYIAC’s 10th anniversary will take place following the forum and include guest speaker Michael J. Garcia (Associate Judge of the New York Court of Appeals).

Event Details

NYIAC Grand Central Forum & 10th Anniversary Celebration

Date: September 20, 2023

Schedule:  5:00-6:30pm Grand Central Forum / Intermission / 6:45-8:30pm 10th Anniversary Celebration

Venue: New York City Bar, 42 West 44th Street (between 5/6 Avenues)

Registration:

Click here to register for the NYIAC Grand Central Forum.

Click here to register for the 10th Anniversary Celebration.

About NYIAC

The New York International Arbitration Center (“NYIAC”) is a nonprofit organization formed to advance, strengthen and promote the conduct of international arbitration in New York.

Marcel Engholm Cardoso to Speak at 22nd CBAr International Arbitration Conference

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September 2023— Marcel Engholm Cardoso is set to speak at the 22nd Brazilian Arbitration Committee (CBAr) International Arbitration Conference on Wednesday, September 13th. The conference held in Rio de Janerio will take place from September 13th-September 15th with the theme “Arbitration and Business Contracts”.

Marcel will join Ana Morales Ramos (De Brauw, Netherlands), Ana Teresa Boscolo (Conti Craveiro, Brazil) for the Young Practitioners’ Event panel “UNIDROIT Principles and international Arbitration.” Osny da Silva Filho (FGV University, Brazil) will moderate the discussion.

The three-day event will feature four panels, which will address issues on i) business contracts and the arbitrator; ii) business contracts and arbitration proceedings; iii) arbitrability and business contracts, and iv) arbitration and contractual imbalance.

Learn more about the Brazilian Arbitration Committee and the event here.

Arbitration in the Courts, August 2023
(Vol. 11)

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U.S. Supreme Court holds that appeal from the denial of a motion to compel arbitration automatically stays litigation:

The filing of appeal divests the district court of jurisdiction because the very issue on appeal is whether the case can proceed before the trial court.

Coinbase, Inc. v. Bielski, 143 S. Ct. 1915 (2023).

Congress added Section 16(a) to the Federal Arbitration Act (FAA) in 1988, authorizing an immediate, interlocutory appeal from a trial court’s order denying a motion to compel arbitration.  The FAA is silent, however, on whether such appeal operates to stay proceedings before the trial court.  Most Circuit Courts of Appeal have held that an appeal from a non-arbitrability determination automatically stay district court proceedings, but the Ninth Circuit has held that a stay of district court proceedings is discretionary.  In Coinbase, the Supreme Court resolved this Circuit split, holding that a district court must stay its proceedings pending an appeal from the denial of a motion to compel arbitration.

The underlying dispute in Coinbase arose out of a putative class action by users of the online cryptocurrency platform who alleged that Coinbase had failed to replace funds fraudulently taken from their accounts. Coinbase moved to compel arbitration pursuant to the arbitration provision contained in the User Agreement.  The United States District Court for the Northern District of California denied Coinbase’s motion.  Coinbase took an immediate appeal under FAA §16(a) to the U.S. Court of Appeals for the Ninth Circuit.  After the district court and the Ninth Circuit both declined to stay the litigation pending resolution of the appeal, Coinbase sought review by the Supreme Court, which granted certiorari.

The Court held that an interlocutory appeal from an order refusing to compel arbitration automatically stays the district court proceedings.  The Court found that Congress enacted Section 16(a) against the background of the Court’s 1982 decision in Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58 (1982), which held that “an appeal, including an interlocutory appeal, divests the district court of its control over those aspects of the case involved in the appeal.”  Under Griggs, a stay is mandatory pending an appeal on arbitrability because “when a party appeals the denial of a motion to compel arbitration, whether the litigation may go forward in the district court is precisely what the Court of Appeals must decide.”

The Court further explained the practical reasons for requiring an automatic stay.  It noted, “absent an automatic stay of district court proceedings, Congress’s decision in § 16(a) to afford a right to an interlocutory appeal would be largely nullified.”  If trial court proceedings moved forward in the district court while the appeal on arbitrability was pending, “many of the asserted benefits of arbitration (efficiency, less expense, less intrusive discovery, and the like) would be irretrievably lost.”  In addition, the “parties could be forced to settle to avoid the district court proceedings (including discovery and trial) that they contracted to avoid through arbitration.”  For the Court, an interlocutory appeal without an automatic stay of trial court proceedings is “like a lock without a key, a bat without a ball, a computer without a keyboard – in other words, not especially sensible.”

Following Coinbase, it is now clear that an immediate appeal from an order denying a motion to compel arbitration automatically stays the litigation.  It is important to note, in contrast, there is no right under the FAA to an immediate appeal from an order granting a motion to compel arbitration.  Rather, consistent with the strong federal policy in favor of arbitration, appellate review of a district court’s decision to compel arbitration must await completion of the arbitration.

Read the court’s full decision here.


U.S. Supreme Court holds that foreign award creditor can pursue RICO claim to redress domestic debtor’s scheme to avoid enforcement:

A California award debtor’s frustration of efforts to collect on U.S. court judgment confirming a foreign award constitutes a “domestic injury” for RICO purposes.

Yegiazaryan v. Smagin et al., 143 S. Ct. 1900 (2023).

It is an unfortunate fact that award debtors sometimes resort to extreme measures to frustrate collection by hiding assets or taking other evasive measures.  In Smagin, the Supreme Court recognized that a debtor who attempts to frustrate enforcement of a U.S. judgment confirming a foreign arbitral award may be liable under the Racketeer Influenced Corrupt Organizations Act (RICO), a federal statute designed to combat organized crime.

RICO prohibits multiple participants comprising an “enterprise” from engaging in “a pattern of racketeering activity,” or conspiring to commit such violations. 18 U.S.C. § 1962.  Section 1961(1) defines “racketeering activity” to include certain enumerated predicate criminal acts, such as murder, robbery, extortion, bribery, obstruction of justice, mail or wire fraud, and money-laundering.  In addition to criminal penalties, RICO provides those injured by RICO activities with a private civil right of action for damages, which includes treble damages and attorneys’ fees.  However, a private right of action is only available where the RICO activity results in a “domestic injury.”

The Smagin case arose after an arbitral tribunal seated in London awarded $84 million to Vitaly Smagin against his former partner in a Moscow-based real estate venture, Ashot Yegiazaryan, who fraudulently misappropriated Smagin’s real estate investment.  Although both parties were Russian nationals, Yegiazaryan had relocated to California to evade indictment for that fraud.  Smagin therefore sought and obtained recognition and enforcement of the award in the United States District Court for the Central District of California.  After reducing the award to judgment, the district court issued an injunction freezing Yegiazaryan’s assets.

Yegiazaryan then allegedly embarked on a scheme to avoid this asset freeze by (i) creating a “complex web of offshore entities to conceal the funds;” (ii) “direct[ing] those in his inner circle to file fraudulent claims against him” to obtain collusive “sham judgments” that would encumber his assets; and (iii) “hiding his assets in the United States through a system of ‘shell companies’ owned by family members.”  After the district court held him in contempt for failing to comply with post-judgment orders prohibiting him from taking actions to prevent collection of the judgment, Yegiazaryan sought to avoid complying with the order by feigning illness, supported by a forged doctor’s note.  When Smagin sought to subpoena evidence from the doctor, Yegiazaryan “used ‘intimidation, threats, or corrupt persuasion’” to convince the doctor to avoid service of the subpoena.

Smagin then filed a RICO action, alleging a conspiracy “to frustrate Smagin’s collection of the California judgment through a pattern of wire fraud and other RICO predicate racketeering acts, including witness tampering and obstruction of justice.”  Yegiazaryan moved to dismiss the claims, asserting that these allegations did not plead a “domestic injury,” as the statute requires, because Smagin, as a Russian domiciliary, necessarily suffered any financial injury resulting from the non-payment outside of the United States.  The crux of Yegiazaryan’s argument was that a foreign award creditor could never recover under RICO because financial injury in the form of non-payment to a foreign domiciliary is necessarily a nondomestic injury.

The Court rejected this proposed bright line rule.  Rather, the Court held that whether a RICO claim alleges a domestic injury depends upon all of the “circumstances surrounding the alleged injury,” including “the nature of the alleged injury, the racketeering activity that directly caused it, and the injurious aims and effects of that activity.”  Where “those circumstances sufficiently ground the injury in the United States, such that it is clear the injury arose domestically, then the plaintiff has alleged a domestic injury.”

Applying this standard to the facts here, the Court reasoned Smagin’s interests in a “California judgment against . . . a California resident . . . directly injured by racketeering activity either taken in California or directed from California, with the aim and effect of subverting . . . rights to execute on that judgment in California” sufficed to show domestic injury for purposes of RICO.

In Smagin, the Supreme Court has now recognized RICO liability as a potential tool to deter and redress evasion of the enforcement of foreign awards in the U.S.  However, according to the Court, because RICO covers an “expansive” scope of predicate acts and the domestic-injury inquiry is contextual, no definitive set of factors captures the relevant considerations in all cases.  Thus, it remains to be seen, as a practical matter, the extent to which courts will find that attempts to evade foreign award enforcement rise to the level of a RICO violation.

Full disclosure: Chaffetz Lindsey represented Professor George A. Bermann of Columbia Law School as amicus curiae in support of Respondent Vitaly Ivanovich Smagin.

Read the court’s full decision here.


The FAA equitably tolls for thee:

Eleventh Circuit holds that three-month deadline to seek vacatur of an arbitral award is subject to equitable tolling and vacates award for fraud based on belatedly uncovered evidence of witness coaching during remote hearing.

NuVasive Inc. v. Absolute Medical LLC, 71 F.4th 861 (11th Cir. 2023).

Section 10 of the Federal Arbitration Act (9 U.S.C. § 10) provides the exclusive grounds for vacating an award arising from a U.S.-seated arbitration.  Pursuant to FAA § 12, notice of a motion to vacate under § 10 must be served upon the opposing party “within three months after the award is filed or delivered.”  Courts have generally strictly enforced this three-month deadline to move for vacatur, but in NuVasive, the Eleventh Circuit Court of Appeals held that the deadline may be equitably tolled in “extraordinary circumstances.”  It further found that such circumstances existed based on the discovery of evidence that one party to the arbitration was sending text messages coaching a witness who was testifying remotely.

The dispute in NuVasive concerned claims under an exclusive distribution agreement whereby Absolute Medical had the exclusive right to distribute the products of NuVasive, a medical device manufacturer.  The agreement covered a territory that included central Florida, and prohibited Absolute from distributing any NuVasive competitor’s products during the term of the agreement or for one year thereafter.  Less than one year into the agreement, Absolute terminated the agreement, and its owner immediately formed a new entity, AMS, which began distributing a competitor’s product.

NuVasive commenced suit in the U.S. District Court for the Middle District of Florida against Absolute, AMS, the companies’ owner, and certain of their sales representatives, seeking injunctive relief and damages.  The district court compelled arbitration of NuVasive’s claims for breach of contract against Absolute pursuant to the arbitration clause in the distribution agreement, and stayed the remainder of the claims pending arbitration.  The arbitrators ultimately issued an award in March 2021, finding that Absolute had breached the distribution agreement, but that NuVasive had failed to prove that Absolute caused NuVasive’s alleged lost-profit damages.

Following the award, litigation of NuVasive’s remaining claims resumed in the district court.  After NuVasive served requests for documents on the defendants, and moved the court to compel production, the district court granted the motion, in part, ordering defendants to produce certain documents by August 26, 2021.  Rather than comply, defendants moved for reconsideration, which was denied.  They did not ultimately produce the requested documents until November 4.  Six days after its belated production, Absolute moved to confirm the award.  In its motion, Absolute suspiciously stated that it believed that NuVasive would allege that there was some misconduct that would justify vacating the award, and that the court should deny any such motion as untimely.

In turns out that defendants’ belated production included certain text messages demonstrating that Absolute’s principal had been coaching a witness testifying remotely in the arbitration on how to answer certain questions during cross-examination.  As Absolute predicted, NuVasive did move to vacate the award under FAA, § 10(a)(1) on the ground that Absolute had procured the award through “corruption, fraud, or undue means.”  NuVasive, recognizing its motion was made more than three months after the award, argued that the district court should equitably toll the deadline and consider its overdue motion.

The district court held that the deadline in § 12 could be equitably tolled, and vacated the award on the grounds that Absolute had procured the award by fraud; the Eleventh Circuit affirmed.

The Eleventh Circuit first held that the three-month statutory deadline in § 12 could be equitably tolled, provided the moving party demonstrates that this “extraordinary remedy” is warranted by showing “extraordinary circumstances that are both beyond the [movant’s] control and unavoidable even with diligence.”

The court found the requisite “extraordinary circumstances” existed here considering Absolute’s “shocking conduct” in coaching its witness during a remote hearing, compounded by its attempt to “run out the clock” and cover up its misdeeds by resisting NuVasive’s attempts to obtain the documents revealing this conduct.  The court further found that NuVasive exercised due diligence.  It could not have known about the text messages until it received Absolute’s post-award document production, and once those messages were produced, NuVasive requested the district court’s permission to file its vacatur motion “mere days later.”

Turning to whether vacatur was warranted under FAA § 10(a)(1) the court applied a three-part test for whether the award was procured by fraud: (1) there was clear and convincing evidence of fraud; (2) the fraud was not discoverable upon the exercise of due diligence during the arbitration; and (3) the fraud “materially related to an issue in the arbitration.”  The court held that all three elements were met.

First, the fraud was established by clear and convincing evidence, as the timing of the text messages coincided with the witness’s testimony, and that testimony tracked the texted instructions.  Second, NuVasive could not have discovered the fraud during the arbitration because the arbitration was conducted remotely, and there was no noticeable behavior that would have alerted NuVasive to the coaching.  Third, the testimony influenced by the text messages “related directly” to several issues bearing on Absolute’s liability.

Finally, the court rejected Absolute’s argument that the fraud was not material because the testimony related only to Absolute’s liability, not the issue of damages, and the arbitrators had found that Absolute breached the parties’ agreement, but NuVasive had failed to prove that breach caused its damages.  The court held that the materiality element “does not require the movant to establish that the result would have been different absent the fraud,” because “to permit a party who committed fraud to render its fraud immaterial in this way would undermine the purpose of vacatur for fraud under § 10(a)(1).”

Read the court’s full decision here.


SDNY finds it has subject-matter jurisdiction over action to remove arbitrator for bias in Bermuda-seated arbitration:

But court holds that an arbitrator’s unfavorable procedural rulings against a party’s counsel in prior arbitration do not demonstrate bias.

Endurance Specialty Insurance Ltd v. Horseshoe Re Ltd, No. 23-cv-1831 (S.D.N.Y. July 5, 2023).

In Endurance Specialty, the United States District Court for the Southern District of New York (SDNY) clarified the broad subject matter jurisdiction of federal courts over disputes concerning international arbitrations, while reaffirming the narrow scope of their supervisory power.  Relatedly, the court reinforced the heavy burden a party faces when challenging an arbitrator for bias.

The case arose out of a reinsurance dispute between Endurance Specialty Insurance Ltd. and Horseshoe Re Ltd., both Bermuda-based companies engaged in a Bermuda-seated ad hoc arbitration.  Pursuant to the governing arbitration clause, the parties had asked the ICC Court of International Arbitration to appoint the presiding arbitrator.  After the ICC made the appointment, Endurance objected that the person appointed by the ICC Court was biased against Endurance’s counsel based on experience in a prior, unrelated arbitration.  Endurance further contended that the ICC had tainted the appointment by sharing with the arbitrators the parties’ submissions in the ICC appointment process, which showed that Horseshoe preferred an arbitrator with qualifications similar to those of the person appointed, while Endurance had urged the ICC to pick someone with a different profile.

After the ICC Court rejected Endurance’s petition to disqualify, Endurance petitioned a New York state court to remove the arbitrator based on the same objections. Horseshoe removed the state court petition to the SDNY pursuant to Chapter 2 of the Federal Arbitration Act, which incorporates the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”).  FAA § 203 provides for federal question jurisdiction over all proceedings “falling under” the New York Convention, and § 205 permits the removal of state court proceedings concerning matters within the purview of § 203.

Before the SDNY, Endurance moved to remand the case back to state court for lack of federal jurisdiction over its petition and Horseshoe cross-moved to dismiss Endurance’s petition to disqualify the arbitrator.

The court first addressed Endurance’s remand motion, which contended that federal subject matter jurisdiction under FAA § 203 was strictly limited to four types of actions, namely those to compel arbitration, enforce or vacate awards, stay an arbitration, or to obtain preliminary relief in aid of arbitration.  The court disagreed, holding that jurisdiction existed because the action “plainly ‘falls under the Convention.’”  For the court, it was “hard to conceive of a proceeding more intimately intertwined with an international arbitration than a petition to disqualify and replace the presiding arbitrator.”  Accordingly, “[b]ecause the parties’ arbitration falls under the New York Convention and the relief sought in Endurance’s petition is tightly intertwined with that arbitration, the Court has federal subject-matter jurisdiction” over the petition.

The court then turned to Horseshoe’s motion to dismiss.  As a threshold matter, the court held that it did not have the power to remove an arbitrator in an ongoing, Bermuda-based arbitration.  The parties designated Bermuda law as the procedural law, and “consistent with the plain language of the Bermuda Arbitration Act, only the Supreme Court of Bermuda can remove an arbitrator for bias in this proceeding.”

The court further explained that, even if it had the power to remove an arbitrator for bias, there would be no basis to do so.  Under Bermuda law, an arbitrator can be removed only if “there is a real danger of bias.”  The court agreed with the ICC Court’s determination that neither of the alleged grounds urged by Endurance met this standard.

First, the disclosure of the parties’ formal submissions on the appointment of an arbitrator – in accordance with the ICC Court’s usual practice – did not meet this standard, because it is “plain … that the disclosure of a party’s general preferences as to the profile of the presiding arbitrator are not sufficient to give rise to a risk of the arbitrator having a bias.”

Likewise, the alleged bias towards Endurance’s counsel based on his experience with the arbitrator in a prior case was insufficient to demonstrate a real danger bias.  First, that proceeding was “unrelated to the present case” and the “bias was alleged toward counsel and did not involve a party in the present case.”  Moreover, and in any event, “unfavorable procedural decisions by an arbitral tribunal typically do not constitute bias unless they are manifestly improper or raise due process concerns,” neither of which was shown here.  Thus, the court concluded, “the cited bases for [the presiding arbitrator’s] supposed bias and prejudice fall far short of meeting [the applicable ‘real danger’] standard, whether considered individually or taken together.”

Finally, the court noted that the result would be the same if New York law governed the bias inquiry.

Full disclosure:  Chaffetz Lindsey was counsel for Horseshoe Re Ltd.

Read the court’s full decision here.

Arbitration in the Courts, June 2023
(Vol. 10)

by

The Achmea-mania continues:

DC district court reaches conflicting decisions whether EU high court’s landmark decision deprives US courts of jurisdiction to enforce investors’ arbitral awards against Spain.

9REN Holding SARL v. Kingdom of Spain, No. 1:19-cv-1871-TSC (D.D.C. Feb. 15, 2023); Blasket Renewable Investments LLC v. Kingdom of Spain, No. 21-3249 (RJL) (D.D.C. March 31, 2023).

The Slovak Republic v. Achmea B.V., the Court of Justice of the European Union (CJEU) held that arbitration agreements in European Union Member States’ bilateral investment treaties violate EU law if they vest arbitrators with the authority to decide questions of EU law without review by EU courts. In Republic of Moldova v. Komstoy, the CJEU held that its decision in Achmea extends to arbitration agreements in multilateral treaties between EU Member States, such as the Energy Charter Treaty (ECT), a multilateral agreement intended to promote cooperation and investment in the energy sector.

In the wake of Achmea and Komstoy, US courts deciding petitions to recognize arbitral awards against European Union Member States have grappled with the jurisdictional implications of these decisions.  US courts have jurisdiction over such cases exclusively to the extent permitted by the Foreign Sovereign Immunities Act (FSIA).  The FSIA provides that foreign states are presumptively immune from suit in the US, and US courts therefore lack subject matter jurisdiction over such actions, unless one of the FSIA’s enumerated exceptions to immunity apply.  One such exception is the “arbitration” exception (FSIA § 1605(a)(6)), which provides that a foreign state is not immune against suits to enforce arbitration awards if the foreign state agreed to arbitrate and is also a signatory to any treaty or international agreement, such as the New York Convention, calling for the enforcement of such awards in the US.

In two recent decisions – 9REN Holding SARL v. Kingdom of Spain and Blasket Renewable Investments v. Kingdom of Spain – the United States District Court for the District of Columbia addressed whether Achmea and Komstoy deprived the court of jurisdiction under the FSIA’s arbitration exception to confirm awards against Spain.  Although both cases presented analogous facts and the same jurisdictional question, the courts reached opposite conclusions.

First, the similarities.  9REN and Blasket each concerned arbitration awards against Spain in favor of investors from other EU Member States who had invested in Spanish renewable energy projects.  The investor in 9REN was a Luxembourg corporation, who had invested in seven Spanish solar power projects in reliance on certain Spanish legislation incentivizing such investments, which Spain later rolled back.  The investors in Blasket were Dutch companies who had invested in Spanish renewable energy projects in reliance on certain tax incentives, which Spain later rescinded.  The investors in both cases claimed that Spain’s rescission of the favorable legislation violated the investors’ rights under the ECT.  In accordance with the ECT’s arbitration provision, the investors in both commenced arbitration against Spain.  While 9Ren pursued arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), the investors in Blasket initiated ad hoc arbitration in Geneva under the UNCITRAL Rules.  In both cases, the tribunals issued substantial damages awards against Spain.

In each case, Spain unsuccessfully challenged the award on jurisdictional grounds.  In 9REN, an ICSID Annulment Committee denied Spain’s jurisdictional challenge.  In Blasket, after the arbitrators rejected Spain’s challenge, the Swiss Federal Supreme Court refused to annul the award.  The investors in both cases filed petitions in the United States District Court for the District of Columbia, the default venue for suits against foreign sovereigns, seeking confirmation of their respective awards.

Spain argued in both cases that the court lacked subject-matter jurisdiction under the FSIA.  Relying on Achmea and Komstoy, Spain argued that it never had the authority or legal capacity to agree to the ECT’s arbitration provisions, and thus there was no agreement on Spain’s part to arbitrate.  That is where the similarities end.  The 9REN court held it had jurisdiction over the enforcement petition, while the Blasket court held that it lacked jurisdiction.

9Ren was decided first.  The court explained that jurisdiction under the FSIA’s arbitration exception is predicated on a narrow set of jurisdictional facts, namely “the existence of an arbitration agreement, an arbitration award and a treaty governing the award.” On the other hand, a challenge to the “arbitrability of a dispute is not a jurisdictional question under the FSIA,” but rather goes to the merits of the petition.

Applying this framework, the 9REN court held that Spain’s claim that it lacked the legal capacity to agree to the ECT’s arbitration provision went to the arbitrability of the investor’s claims, not the existence of the arbitration agreement.  According to the court, “[t]he assertion that a party lacked a legal basis to enter or invoke an arbitration agreement is not a challenge to the jurisdictional fact of that agreement’s existence.”  Rather, Spain’s assertion “goes to arbitrability even if it contends that the ECT was not validly applied.”  Thus, the court held, an award debtor may “assert the lack of a legal basis for entering an agreement to contest an award’s merits…, but not to rebut a plaintiff’s evidence that an agreement to arbitrate exists.”  The court noted that “there is no question as to the existence of the ‘copies of [the underlying treaty], the notice of arbitration, and the tribunal’s decision.”  It therefore concluded that whether Spain “lacked a legal basis” to enter the arbitration agreement went to the merits of the petition, and Spain could not deploy this “arbitrability” argument as a “backdoor challenge to FSIA jurisdiction.”

After finding jurisdiction, the court moved to considering 9REN’s motion for a preliminary anti-suit injunction enjoining Spain from continuing to prosecute an action in Luxembourg, which sought to enjoin 9REN from continuing to prosecute its petition to confirm the award before the DC court.  The court found that the anti-suit injunction, while an extraordinary measure, was warranted to preserve its own jurisdiction, as Spain’s “express and primary purpose” in pursuing the Luxembourg action was to terminate the proceeding before the DC court.

9Ren also had to demonstrate a likelihood of success on the merits of its petition to confirm the award to obtain a preliminary injunction.  In that context, the court ruled that “9Ren’s success in confirming the award highly likely” because “the court’s role in enforcing an ICSID arbitral award is … exceptionally limited.”  Once the court is satisfied that it has jurisdiction, it must accord ICSID awards the same full faith and credit as the judgment of any US state.  Thus, the court had no basis to scrutinize the substance of the award, including the finding that the arbitrators had jurisdiction, notwithstanding Achmea and Komstroy.  Spain has appealed the court’s decision to the United States Court of Appeals for the District of Columbia.

Blasket was subsequently decided by a different judge on the same DC court.  The court applied the same basic jurisdictional framework, but expressly rejected the 9REN court’s distinction between the arbitrability and the jurisdictional analyses.  The court found that it lacked jurisdiction to enforce the award at issue because Achmea and Komstroy rendered Spain’s agreement to arbitrate in the ECT a nullity.  For the Blasket court, the issue was not merely whether the investors’ claims fell within the scope of a valid arbitration agreement, but rather, whether any arbitration agreement existed at all.  Because the court read Achmea and Komstroy to hold that EU Member States such as Spain lacked legal capacity to agree to arbitrate, “no valid agreement to arbitrate existed.”  Finding that petitioners failed to establish the jurisdictional predicate of a valid arbitration agreement, the Blasket court held the FSIA’s arbitration exception did not apply, and it therefore lacked jurisdiction to hear the petition.

In reaching this conclusion, the Blasket court also rejected investors’ arguments that it should defer to the arbitrators’ prior determination that a valid arbitration agreement existed.  For the court, the question was whether, “under the law applicable to them, the parties were incapable of entering into an agreement to arbitrate anything at all.”  This, the court reasoned, could not be a question for the arbitrators, because “deference to the tribunal in such a case effectively assumes away the antecedent question of whether the parties could have agreed to [delegate that question to the arbitrators] in the first instance.”  Blasket too is now on appeal to the DC Circuit.

The DC Circuit will hear these appeals in these cases together, and will hopefully provide some much needed clarity on the impact of Achmea and Komstoy on the jurisdiction of US courts to entertain petitions to confirm awards in favor of European investors against EU Member States.

Read the court’s full decision here.


Eleventh Circuit reverses long-standing precedent to hold that FAA Chapter 1 grounds for vacatur of domestic awards apply to non-domestic awards seated in the United States.

Court joins majority of federal appellate circuits in recognizing that the New York Convention permits countries to apply their own domestic laws to annul awards issued under that country’s law.

Corporación AIC SA v. Hidroeléctrica Santa Rita SA, 66 F.4th 876 (11th Cir. 2023).

The Convention on the Recognition and Enforcement of Arbitral Awards (New York Convention) is codified in Chapter 2 of the FAA (9 U.S.C. § 201 et seq).  It governs not only awards issued outside of the US, but also “non-domestic” awards governed by the Convention – those awards issued by tribunals seated in the US, which involve one or more foreign parties or have some other reasonable relation with one or more foreign states.  The Second, Third, Fifth, Sixth, Seventh, Ninth, Tenth and D.C. Circuits have all held that, in addition to the grounds for refusing to recognize and enforce awards found in Article V of the Convention, FAA Chapter’s 1’s vacatur standards (FAA, § 10) also apply to non-domestic awards and govern their validity.

The Eleventh Circuit, whose jurisdiction includes appeal from district courts in Miami, had been an outlier, having previously held that Article V of the Convention provided the exclusive grounds on which a court may not only refuse to recognize or enforce an award governed by the Convention, but also vacate awards seated in the U.S.  In Corporación AIC, the Eleventh Circuit revisited this issue, overruled its prior decisions, and held that the grounds for vacatur in FAA § 10 do apply to nondomestic awards governed by the Convention.

Other federal appeals courts had reasoned that Article V(1)(e) of the Convention – permitting an enforcing court to refuse enforcement of an award that “has been set aside or suspended by a competent authority of the country in which … [it] was made” – necessarily contemplates that the courts at the seat may apply their own domestic arbitration laws to vacate a Convention award.  Agreeing with its sister circuits, the Eleventh Circuit acknowledged that its prior decisions erroneously “equated the defenses to recognition and enforcement [in Article V] with the grounds for vacatur.” The court held its prior decisions were wrong because Article V refers to grounds for refusing “[r]ecognition and enforcement,” which “serve different purposes and request different relief than vacatur.” “Recognition and enforcement seek to give effect to an arbitral award, while vacatur challenges the validity of the award and seeks to have it declared null and void.”  The reference in Article V(1)(e) to “set aside or suspension” referred to what the FAA terms “vacatur,” i.e., invalidation or annulment of an award.  Article V(1)(e) therefore distinguishes between the legal seat of the arbitration (i.e., the “primary jurisdiction”) and other signatory jurisdictions in which the award may be recognized (i.e., “secondary jurisdictions”).  Under the Convention, “only a court in the primary jurisdiction can vacate an arbitral award,” which then becomes a ground on which a secondary jurisdiction may refuse recognition and enforcement.

The Convention, however, “does not purport to regulate the procedures or set out the grounds for vacatur in the primary jurisdiction.”  Rather, “the Convention requires courts to rely on domestic law to fill gaps.”  Thus, the court held, “in a case under the Convention where the United States is the primary jurisdiction—the jurisdiction where the arbitration was seated or whose law governed the conduct of the arbitration—the grounds for vacatur of an arbitral award are set out in domestic law, currently Chapter 1 of the FAA.”

Following Corporación AIC, every federal appellate circuit to have addressed the issue is now in agreement that the grounds for vacatur in FAA § 10 apply to nondomestic awards.

Read the court’s full decision here.


Tenth Circuit enforces Bolivian arbitration award notwithstanding annulment by Bolivian court.

Bolivian annulment order not entitled to comity when award debtor sought and obtained annulment after the US district court entered judgment recognizing the award.

Compañía de Inversiones Mercantiles S.A. v. Grupo Cementos de Chihuahua S.A.B. de C.V., 58 F.4th 429 (10th Cir. 2023).

Article V of the New York Convention (codified in Chapter 2 of the Federal Arbitration Act) sets forth the exclusive grounds on which US courts may refuse to recognize and enforce arbitration awards governed by the Convention and issued under the laws of a foreign state.  Article V(1)(e) provides that “recognition and enforcement of the award may be refused” if “the award … 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.”  This permits a US court to deny enforcement of an award that has been vacated or annulled by a court at the seat.  While the Convention does not mandate non-recognition of such awards, under principles of international comity, US courts will ordinarily give effect to foreign annulment orders and refuse enforcement of the annulled award.  It is only in the rare and narrow circumstances in which refusing enforcement violates a strong US public policy that US courts will enforce an award that has been set aside at the seat.

In Compañía de Inversiones Mercantiles, the United States Court of Appeals for the Tenth Circuit held that such extraordinary circumstances existed to justify enforcing the underlying award, notwithstanding that it had been annulled by a Bolivian court.  Until Compania, the Second Circuit’s decision in Corporacion Mexicana de Mantenimiento Integral, S. de R.L. de C.V. v. Pemex-Exploracion y Produccion, 832 F.3d 92, 106 (2d Cir. 2016) (Pemex) was the only instance in which a federal appeals court had upheld a US court’s judgment enforcing an award that had been set aside by a court at the seat.  

The dispute arose from a shareholder agreement between Compañía de Inversiones Mercantiles (CIMSA) and Grupo Cementos de Chihuahua (GCC), pursuant to which GCC acquired a 47% interest in Bolivian cement company Sociedad Boliviana de Cemento (SOBOCE).  At that time of purchase, CIMSA was SOBOCE’s controlling shareholder. The shareholder agreement provided that, after five years, either party could sell its shares to a third party, subject to the other party’s right of first refusal to purchase the shares on the same or better terms.  The agreement’s arbitration clause required that any dispute under the agreement be submitted to arbitration before the Inter-American Commercial Arbitration Commission (IACAC) in Bolivia, and the arbitration would be governed by Bolivian law.

When GCC sought to sell its shares to a third party, CIMSA exercised its right of first refusal and offered to purchase GCC’s shares on the same terms. GCC accepted CIMSA’s offer, but just before the transaction was set to close, GCC demanded additional collateral to secure payment of the purchase price under the agreed schedule.  When CIMSA refused, GCC declared CIMSA’s offer invalid and sold its shares to the third party.

CIMSA initiated arbitration, claiming that GCC had violated CIMSA’s contractual right of first refusal. The tribunal issued a merits award for CIMSA holding GCC in breach of the shareholder agreement, and a separate damages award providing compensation to CIMSA for GCC’s breach.  GCC sought annulment of the awards in Bolivian court, and CIMSA petitioned the United States District Court for the District of Colorado to enforce the damages award. Following procedurally complex actions in Bolivian courts, Bolivia’s highest court refused to annul the damages award.  The District of Colorado subsequently entered judgment recognizing the award. After the US court issued its judgment, GCC again petitioned the Bolivian courts to annul the damages award, and a different chamber of Bolivia’s highest court, which had not been involved in the prior decision, issued an order annulling the award.  GCC then returned to the District of Colorado, and moved under Federal Rule 60(b)(5) to vacate the district court’s earlier judgment enforcing the award. The district court denied GCC’s motion, finding that vacating its earlier judgment would offend US public policy.  The Tenth Circuit affirmed.

The Tenth Circuit began its analysis by noting the unusual procedural posture of the case, where GCC both started a new annulment proceeding and obtained the Bolivian court’s annulment order after the district court had already entered judgment confirming the award.  Given this posture, this case involved the confluence of Convention Article V(1)(e) and Federal Rule of Civil Procedure 60(b) governing the courts’ power to relieve parties from the effect of final federal court judgments.

Ordinarily, courts will refuse enforcement of awards set aside at the seat (i.e., the “primary jurisdiction”) because “comity interests generally constrain a court from disregarding a primary jurisdiction’s annulment of an arbitral award.”  US courts may only refuse to give effect to a foreign annulment order if doing so would violate a fundamental US public policy.  This is a high threshold, which is met only where giving effect to the foreign judgment would be “repugnant to fundamental notions of what is decent and just in the United States.”

But, the court noted, revisiting a final judgment under Rule 60(b) is also “extraordinary relief” that may only be granted in “exceptional circumstances.”  In deciding whether to undo a final judgment, the movant must not only show grounds for relief under Rule 60(b), but also why “its conduct, as a matter of equity, should allow vacatur.”  And the district court has broad discretion to weigh the relevant factors in determining whether to vacate its prior judgment.

Applying these standards to the instant case, the Tenth Circuit found the district court acted within its discretion in refusing to afford comity to the Bolivian annulment order.  This was because, although the court recognized that the Bolivian annulment order was not itself repugnant to US public policy, it found that giving “effect to” the Bolivian order and refusing enforcement of the award would violate three “strong” US public policy interests.  These included protecting the finality of judgments, upholding parties’ contractual expectations, and the policy favoring arbitral dispute resolution.  Focusing on the standard for vacating judgments under Rule 60(b), the court further emphasized how GCC’s “inequitable” conduct frustrated these fundamental policies.

The court was primarily focused on how giving effect to the Bolivian annulment order and vacating its prior judgment would violate the public’s “strong interest in protecting the finality of judgments.”  At the time the district court entered judgment, Bolivia’s high court had already refused annulment.  But GCC then went back to Bolivian courts to seek a new annulment order.  Applying Rule 60(b), the court concluded that it was inequitable for GCC to wait until after the district court recognized the award to initiate new annulment proceedings in Bolivia, which militated against undoing the court’s final judgment.  Emphasizing the point, the court distinguished this case from others that had refused to enforce awards that had been annulled at the seat, noting that “in every case affirming a district court’s decision not to confirm an arbitral award due to a foreign court’s annulment, the movant had sought annulment in the primary jurisdiction before confirmation of the arbitral award in the United States.”

The court then noted that vacating the judgment and refusing to recognize the award would also frustrate the strong policy in favor of upholding parties’ contractual expectations, particularly whereas here, the parties’ arbitration agreement provided that the parties “waive[d] all actions for annulment, objection, or appeal against that award.”  Finally, and relatedly, refusing to enforce the award would also frustrate the “emphatic federal policy in favor of arbitral dispute resolution,” which “applies with special force in the field of international commerce.”

There was a dissent.  According to the dissent, a foreign judgment should only be denied comity in the narrowest of circumstances, where it is “the judgment itself, or the processes that yielded it, that violates fundamental notions of decency and justice in the United States.”  There being no question that the Bolivian annulment order itself was not repugnant to any strong US public policy, the dissent believed that the majority erred in declining to afford comity to the Bolivian order.  In the dissent’s view, the majority was wrong to conclude that the mere fact that “giving effect” to an otherwise unobjectionable foreign judgment frustrated the US public policy favoring finality of judgments.  This, the dissent argued, “suggests the presumption of comity yields to an easily satisfied ‘repugnancy’ standard,” which would be not only inconsistent with the decisions of other federal appellate courts, but “moves this court out of line globally with signatory countries.”

The case was not appealed to the Supreme Court, so it remains to be seen whether future disputes clarify whether the Tenth Circuit’s decision is truly out of step with the strong presumption of comity afforded foreign judgments, or whether it is a sui generis decision limited to its unique facts.

Read the court’s full decision here.


District court in Philadelphia holds agreement to arbitrate under ICC rules not clear and unmistakable agreement to arbitrate arbitrability where dispute arguably fell within arbitration agreement’s carveout for equitable claims:

But court construed carveout merely to permit parties to seek court intervention in aid of arbitration and compelled arbitration.

Continental Materials, Inc. v. Veer Plasticas Private Limited, No. 22-cv-3685-MRP (E.D. Pa. April 4, 2023).

Whether a dispute falls within the scope of the parties’ arbitration agreement, often termed “arbitrability,” is a “gateway” issue that is presumptively for the court, rather than the arbitrators, to decide.  However, where the parties have “clearly and unmistakably” agreed to arbitrate arbitrability, the question is for the arbitrators.  The rules of many arbitral institutions, including the ICC rules, provide that arbitrators may determine their own jurisdiction, and courts have consistently held that the agreement to arbitrate under such institutional rules therefore constitutes clear and unmistakable intent to arbitrate arbitrability.  In Continental Materials, the United States District Court for the Eastern District of Pennsylvania recognized a narrow exception to this rule.  Because the parties’ arbitration agreement arguably carved out a category of disputes from arbitration, whether the dispute falls within the carveout was for the court, notwithstanding the agreement to arbitrate under the ICC rules.

The underlying dispute in Continental Materials concerned a distribution agreement between Continental Materials, Inc. (CMI), a Pennsylvania roofing products company, and Veer Plastics, an Indian roofing products company.  Under the agreement, CMI would distribute Veer’s products in North America, and would appoint a sales manager to “develop and facilitate new sales” of Veer’s products.  The agreement prohibited Veer from soliciting or hiring CMI employees.

CMI hired Mark Hinterlong to serve as sales manager under the agreement with Veer.  As a condition of his employment, Hinterlong signed a Confidential Information and Relationship Protection Agreement, which precluded him from disclosing CMI’s trade secrets and from accepting employment with CMI’s competitors or interfering with its vendor relationships for one year after the termination of his employment.

In August 2022, Hinterlong resigned from CMI.  Shortly thereafter, he began working for Veer.  CMI instructed Hinterlong to return his company-issued laptop, but before doing so Hinterlong provided the computer to Veer, who hired a third party to image the hard drive and delete information related to Veer.  CMI then commenced suit against Veer in the Eastern District of Pennsylvania, asserting various claims, including a claim for injunctive relief.  Veer moved to compel arbitration under the arbitration clause in the parties’ distribution agreement.

Though the agreement required that “any dispute, controversy or claim between the parties” be settled by arbitration before the ICC in London, it further provided that “notwithstanding the foregoing, a Party may seek specific performance of this Agreement or any other equitable relief in a court of competent jurisdiction.”  CMI argued that this carveout permitted any party seeking equitable relief to litigate its claims in court.

In deciding whether to compel arbitration, the court first determined that whether the carveout applied was a question for the court, not the arbitrators.  The court noted that the burden of overcoming the presumption that courts decide arbitrablity was “onerous, as it requires express contractual language unambiguously delegating the question of arbitrability to the arbitrator.”  The court recognized that a broad agreement to arbitrate any dispute coupled with designation of the ICC rules “tend to evince the parties’ intent to delegate questions of arbitrability to the arbitrators.” However, “the inclusion of a provision that at least arguably carves out” CMI’s claims “creates an ambiguity.”  Accordingly, Veer did not meet its burden of demonstrating the parties’ “clear and unmistakable” intent to arbitrate arbitrability, and thus it was for the court to decide arbitrability.

But on the merits, the court held the dispute was arbitrable and granted the motion to compel.  The most reasonable interpretation of the carveout was that it permitted the parties to seek equitable relief from a court only in aid of arbitration, such as “judicial enforcement of the arbitration agreement and of any award entered by the arbitrators.”  This was because accepting CMI’s claim that the equitable relief carveout “broadly permits the parties to seek injunctive relief directly from any court” would permit a party to circumvent arbitration by merely including any claim for equitable relief.  This “would create a carveout so broad that it would render the rest of the arbitration agreement void,” which would be “contrary to … the parties’ evidenced intent to send the disputes to arbitration.”

Read the court’s full decision here.

Arbitration in the Courts, February 2023
(Vol. 9)

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Functus Officio gets a new exception:

Second Circuit holds that district courts remand of unreasoned award to arbitrator does not violate the functus officio doctrine.

Smarter Tools, Inc. v. Chongqing SENCI Import & Export Trade Co., Ltd., No. 21-724, (2d Cir. January 17, 2023).

The functus officio doctrine – Latin for having “completed one’s office” – dictates that “once arbitrators have fully exercised their authority to adjudicate the issues submitted to them, their authority over those questions is ended, and the arbitrators have no further authority, absent agreement of the parties, to redetermine those issues.”  Its principal purpose is to prevent “re-examination of an issue by a nonjudicial officer potentially subject to outside communication and unilateral influence.”  But courts have developed a number of exceptions to the doctrine, permitting arbitrators to revisit their awards to make non-substantive modifications, lest the doctrine waste tremendous efforts and resources.

In Smarter Tools v. SENCI, the Second Circuit Court of Appeals held that the doctrine warranted another exception – permitting remand to the arbitrator to provide the requisite reasoning for his award.

The underlying arbitration arose out of a series of contracts between Smarter Tools Inc. (STI) and Chongqing SENCI Import & Export Trade Co. Ltd. (SENCI) for the supply of gas-powered generators.  After STI failed to pay the purchase price for a number of generators, SENCI commenced arbitration before the Arbitration Association’s International Centre for Dispute Resolution (“ICDR”) to recover the outstanding amounts.  STI counter-petitioned, claiming that it was SENCI who had breached the contract by delivering generators that failed to comply with California Air Resources Board (CARB) standards. The arbitrator ultimately issued an award in favor of SENCI, finding that the parties’ contract did not specify that the generators had to comply with CARB standards.  However, although the parties had agreed that the arbitrator would issue a reasoned award, the arbitrator’s award contained scant reasoning.

STI petitioned the United States District Court for the Southern District of New York to vacate the award, arguing the arbitrator had exceeded his authority by issuing an unreasoned award.  The district court agreed, finding the award contained no rationale for rejecting STI’s counterclaims.  But, rather than vacate the award, the court remanded the case to the arbitrator “for clarification of his findings.”  The arbitrator issued an amended award granting the same relief and providing further reasoning and explanation for his findings.  STI again moved to vacate the award on the ground that remand was improper because the arbitrator was functus officio after issuing his original award.  SENCI cross-moved to confirm the award.  The district court confirmed the award and STI appealed.

On appeal, the Second Circuit noted that it was an “open question” as to “whether a court may remand for an arbitrator to produce a reasoned award,” but it was a “permissible choice” under these circumstances because “[i]t simply makes no sense to redo an entire arbitration proceeding over an error in the form of the award issued.”  Remand to provide further reasoning was analogous to well-recognized exceptions to functus officio, such as permitting arbitrators to clarify an ambiguous award.  As with such other exceptions, the arbitrator was not changing his merits determination and therefore remand would not “undermine the functus office doctrine’s purpose” of protecting against the risk the arbitrator would change his ruling “after issuance due to outside influence by an interested party.”

The court also rejected STI’s argument that the arbitrator had exceeded his powers by issuing an unreasoned award, and the lower court’s only option under the Federal Arbitration Act (FAA) was to vacate the award under Section 10(a)(4).  Awards are presumptively valid and vacatur is narrowly construed, and here “the question was whether the arbitrator’s original award was reasoned; there was no question that the arbitrator here had the power to reach the issues addressed.”  Accordingly, the failure to issue a reasoned award “best fits under Section 11 of the FAA,” which permits a court to “make an order modifying or correcting the award … where the award is imperfect in matter of form not affecting the merits of the controversy.”  The award’s failure to provide the requisite reasoning rendered it “imperfect in matter of form,” and remand to the arbitrator to produce an award comporting to the parties’ agreement best “effects the intent” of the parties and “promotes justice” between them.

Read the court’s full decision here.


Ninth Circuit holds that FAA Chapter 1 grounds are available to vacate New York Convention awards seated in the U.S.:

Confirming the award, the court reinforced that an arbitrator’s mere error of law does not warrant vacatur under FAA, §10(a)(4).

HayDay Farms, Inc. v. FeeDx Holdings, Inc., 55 F.4th 1232 (9th Cir. 2022).

The Convention on the Recognition and Enforcement of Arbitral Awards (New York Convention) is codified in Chapter 2 of the FAA,  9 U.S.C. § 201 et seq.  It governs not only awards issued outside of the U.S., but also “non-domestic” awards – those awards issued by tribunals seated in the U.S., but involving one or more foreign parties or having some other reasonable relation with one or more foreign states.  HayDay v. FeeDx concerned whether the grounds for vacating domestic awards under Chapter 1 of the FAA apply to non-domestic awards governed by the Convention.  This was a question of first-impression for the Ninth Circuit Court of Appeals, which has jurisdiction over appeals from U.S. district courts in several western states, including California.  The Ninth Circuit joined the Second, Third, Fifth, Sixth, Tenth and D.C. Circuits in finding that Chapter’s 1’s vacatur standards (set forth in FAA, § 10) apply to non-domestic awards.  (The Eleventh Circuit is the only federal appeals court to have addressed the issue and found chapter 1 inapplicable to nondomestic awards, although the Eleventh Circuit is now in the process of reconsidering the issue.  See Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 50 F.4th 97, 98 (11th Cir. 2022).)

The arbitration in HayDay arose out a series of contracts between Cayman corporation FeeDx and California corporation HayDay, which culminated in an exclusive global distribution agreement signed in 2014, under which FeeDx would purchase and distribute HayDay’s forage crops and pay Hayday $8 million to expand its operations.  Under a supplemental agreement, Hayday agreed to provide FeeDx at least 170,000 metric tons of crops per year at $360 per ton.  After disputes arose between them, the parties entered into a settlement agreement under which HayDay would pay FeeDx $8 million in monthly installments, and once this amount was fully paid, the parties would mutually release all claims under their distribution agreement, with their respective obligations to buy and sell HayDay’s crops terminating in December 2016.  Neither party performed the settlement.  HayDay paid only $1 million of the $8 million due.  FeeDx failed to continue purchasing HayDay’s crops through December 2016.  Arbitration ensued before a panel of three arbitrators seated in California before the American Arbitration Association’s International Centre for Dispute Resolution.

Over four years, the arbitrators issued various partial awards finding that: (i) the settlement agreement supplemented rather than supplanted the distribution agreement; (ii) FeeDx had breached the settlement agreement by failing to continue purchasing crops through December 2016; (iii) FeeDx breached the distribution agreement prior to entering into the settlement; and (iv) the settlement agreement did not release HayDay’s claims under the distribution agreement because FeeDx breached the settlement agreement. The Tribunal awarded HayDay approximately $21 million in lost profits. The tribunal rejected FeeDx’s argument that HayDay’s damages should be reduced by the remaining $7 million it owed under the settlement agreement, finding that FeeDx’s breach of the settlement agreement excused HayDay’s payment obligation.

FeeDx petitioned the United States District Court for the Central District of California to vacate the award under Section 10(a)(4) of the FAA on the grounds that the arbitrators had exceeded their authority.  The district court agreed in part and vacated $7 million from the award, finding that the arbitrators’ refusal to reduce HayDay’s damages by the $7 million outstanding under the settlement agreement violated California law precluding a party from receiving a windfall on a breach of a contract claim.  FeeDx appealed the court’s refusal to vacate the entire award; HayDay appealed the partial vacatur of the award.

On appeal, the Ninth Circuit first addressed the threshold question whether the vacatur grounds in Section 10 of Chapter 1 of the FAA applied to Convention awards in arbitrations seated in the U.S.  The court held that Section 10 applied.  In doing so, it adopted the Second Circuit’s oft-cited decision in Yusuf v. Toys “R” Us, 126 F.3d 15 (2d Cir. 1997), which held that Article V(1)(e) of the Convention – permitting an enforcing court to refuse enforcement of an award that “has been set aside or suspended by a competent authority of the country in which … [it] was made” – necessarily contemplates that the courts at the seat may apply the seat’s domestic arbitration laws to vacate a Convention award.

Turning to the merits, the court reversed the lower court’s partial vacatur.  Section 10(a)(4) permits vacatur of an arbitration award “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.”  The court held that Section 10(a)(4) permits only an “extremely limited” review of the award, and an arbitrator exceeds its authority in two circumstances – (i) when the arbitrator manifestly disregards the applicable law or (ii) his or her decision is completely irrational.  An arbitrator manifestly disregards the law only when there is “some evidence in the record other than the result, that the arbitrators were aware of the law and intentionally disregarded it.”  An award is “completely irrational” only where it “completely ignores controlling terms of the parties’ contract.”  If the arbitrator even “arguably construes the contract,” the court “must defer to the arbitrator’s decision.”  Neither standard is met by showing that the arbitrator merely “committed an error–or even a serious one.”

The court agreed with the lower court that the arbitrator likely erred in deciding that FeeDx was not entitled to credit for HayDay’s failure to make the $7 million payment, which resulted in a “seemingly unfair damages award that likely violates” California law.  Nevertheless, this error, without more, was insufficient to meet the stringent standard for vacatur.  To hold otherwise would frustrate the FAA, which reflected Congress’s decision to “carefully limit” judicial review of arbitration awards to protect the contractual choice to “forego the procedural rigor and appellate review” of judicial proceedings in favor of expediency and finality of arbitration.

Read the court’s full decision here.


SDNY holds that Section 1782 does not authorize discovery for use before ICSID tribunal:

ICSID panel does not qualify as a “foreign or international tribunal” under Section 1782 because it is not “imbued with governmental authority.”

In re Webuild S.p.A., 22-mc-140(LAK) (S.D.N.Y. Dec. 19, 2022).

28 U.S.C. § 1782 authorizes U.S. courts to order persons in the United States to give testimonial or document discovery “for use in a proceeding in a foreign or international tribunal.”  Whether Section 1782 discovery is available in aid of foreign arbitrations had split federal appellate courts.  In June 2022, the Supreme Court took up this issue in ZF Auto. US, Inc. v. Luxshare, Ltd., 142 S. Ct. 2078 (2022).  The Court held that neither commercial arbitration tribunals nor ad hoc investor-state tribunals qualified as foreign or international tribunals under the statute.  In so holding, the Court explained that a “foreign tribunal” is “imbued with governmental authority by one nation,” and an “international tribunal” is “imbued with governmental authority by multiple nations.”  Neither the commercial tribunal nor ad hoc investor-state tribunal before it fit either definition.

Webuild applied ZF Auto to determine whether Section 1782 permitted discovery for use before an International Center for Investment Disputes (ICSID) tribunal.  The case arose after an Italian investor arbitrating claims against Panama under the Italy-Panama bilateral investment treaty (BIT) before an ICSID tribunal obtained an ex parte order pursuant granting it Section 1782 discovery from a non-party U.S. company for use in the arbitration.  The non-party moved to vacate the order and quash the ensuing subpoena.

The court granted the motion and quashed the subpoena, finding that under ZF Auto, the ICSID tribunal did not constitute “a foreign or international tribunal” within the statute because Italy and Panama did not “imbue it with governmental authority.”  The court noted that although ZF Auto “did not provide a test for lower courts to apply, it did set forth several factors that it considered in determining that such an intent did not exist.”  In a methodical opinion, the court explained how, under each of the factors set forth in ZF Auto, the ICSID tribunal here was analogous to the private commercial and ad hoc investor-state panels ZF Auto found not to be governmental or intergovernmental authorities. 

The court highlighted the following attributes demonstrating that the ICSID tribunal was not akin to a governmental body: (i) “ICSID does not have standing or pre-existing arbitration panels,” but rather it convenes tribunals in response to requests from the parties; (ii) the Panama-Italy BIT did not create the ICSID tribunal, but merely provides the set of rules that govern the tribunal’s formation; (iii) the ICSID tribunal “functions independently of and is not affiliated with either” Italy or Panama, with arbitrators chosen by the parties, who lack “any official affiliation” with either state; (iv) the ICSID tribunal is funded by the parties and “does not receive any government funding;” (v) the ICSID tribunal’s proceedings are confidential and not public; and (vi) the panel derives its authority from the “parties’ consent to arbitrate,” rather than any state law.

Accordingly, the court held that “Italy and Panama did not intend to imbue the ICSID Panel with governmental authority,” and therefore the ICSID panel was not a “foreign or international tribunal” under Section 1782.  In October 2022, the United States District Court for the Eastern District of New York likewise held that an ICSID tribunal empaneled pursuant to the Malta-China BIT did not constitute a “foreign or international tribunal” for purposes of Section 1782.  See In re Alpene, Ltd., 2022 WL 147008 (E.D.N.Y. Oct. 27, 2022).  It remains to be seen whether other federal courts will likewise hold that Section 1782 discovery is not available for use in ICSID arbitrations.

Read the court’s full decision here.


“Service of Suit” Clause complements rather than supersedes agreement to arbitrate: 

Parties’ agreement to submit to jurisdiction of court of competent jurisdiction merely ensured a judicial forum for enforcing the agreement to arbitrate and the arbitrator’s awards.

Upper Room Bible Church, Inc. v. Sedgwick Delegated Auth., No. 22-340 (E.D. La. Dec. 16, 2022).

Insurance contracts, particularly those issued by foreign insurers, often include both an arbitration clause requiring that all disputes be resolved in arbitration, and a “service of suit” clauses providing that the foreign insurer will submit to the jurisdiction of local courts.  Upper Bible Room confirmed that the two clauses can co-exist without vitiating the right to arbitrate.

Upper Room Bible Church was seeking coverage from a group of insurance companies under two policies of commercial property insurance for property damage allegedly sustained from Hurricane Ida and Tropical Storm Nicholas.  After the insurers denied these claims, Upper Room brought suit in the United States District Court for the Eastern District of Louisiana.  The insurers moved to compel arbitration based on the arbitration clause in the policies requiring that “all matters in difference between the Insured and the Companies … shall be referred to an Arbitration Tribunal.”

Upper Room opposed the motion, arguing that the policies’ arbitration clause was superseded by a separate policy endorsement stating that the “insurance shall be subject to the applicable state law to be determined by the court of competent jurisdiction as determined by the provisions of the Services of Suit Clause (USA).”  The “Service of Suit Clause,” in turn, stated, “in the event of failure of the Underwriters hereon to pay any amount claimed to be due hereunder, the Underwriters hereon … will submit to the jurisdiction of a Court of competent jurisdiction within the United States.”  Upper Room therefore argued that the endorsement reflected the parties’ intent that all coverage disputes be resolved in court, rather than through arbitration.

The court disagreed and granted the motion to compel arbitration.  Drawing on twenty years of precedent rejecting similar arguments, it noted that “courts have consistently held that endorsements and service of suit clauses like those in Upper Room’s policy do not nullify otherwise valid arbitration agreements.”  Rather, the arbitration and service of suit provisions were in harmony, and the service of suit clause was properly construed “as complementing the arbitration clause by providing a judicial forum for compelling or enforcing arbitration.”

Read the court’s full decision here.

Marcel Engholm to Speak at the 2022 ARIAS Fall Conference

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November 2022— Chaffetz Lindsey’s Marcel Engholm is set to speak at the 2022 ARIAS Fall Conference on Friday, November 4th.  Marcel will be joined by Michael Carolan (Troutman Pepper),  Stephanie Denker (Saul Ewing), Peter Golfman (Zelle), Shermineh Jones (Troutman Pepper) and Gina Santangelo (Arch Re) during the “Rapid Fire Case Presentations” session Friday morning where young practitioners will be given five minutes to convince the audience they have found the most important case in insurance and reinsurance law. The audience will vote on the most important case presented.

Marcel will be making a case that the Second Circuit’s decision in Fireman’s Fund v. OneBeacon this past September, a victory secured by Chaffetz Lindsey’s Steve Schwartz, is the most important of the year.

Conference Details:

Thursday, November 3rd– Friday, November 4th

New York Hilton Midtown (1335 6th Ave New York, NY 10019)

Learn more here.

About ARIAS

The AIDA Reinsurance and Insurance Arbitration Society, ARIAS U.S. is a nonprofit corporation dedicated to improving the insurance and reinsurance arbitration process for the international and domestic markets

Marcel Engholm Cardoso Publishes “NYIAC Grand Central Forum: Double-Hatting and the ICSID-UNCITRAL Draft Code of Conduct for Adjudicators in International Investment Disputes”

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August 2022— The latest feature on the Kluwer Arbitration Blog spotlights an article by Chaffetz Lindsey’s Marcel Engholm Cardoso and Holland & Knight’s Arantxa Cuadrado. The publication titled “NYIAC Grand Central Forum: Double-Hatting and the ICSID-UNCITRAL Draft Code of Conduct for Adjudicators in International Investment Disputes” reviews the topics discussed at The New York International Arbitration Center’s (“NYIAC”) annual Grand Central Forum which took place on July 13th, 2022.

The piece addresses the issues surrounding “double-hatting” in the newest draft of the Code of Conduct, reflecting the discussions from panelists Andrea Bjorklund (McGill University, Montreal), Lauren Mandell (WilmerHale, Washington D.C.), Kate Brown de Vejar (DLA Piper, Mexico City), Andrés Jana (Jana y Gil, Santiago) and moderator Donald Donovan (Arbitration Chambers, New York).

Visit the Kluwer Arbitration Blog for the full article and review of the event.

Kluwer Arbitration Blog (KAB) is a publication of Kluwer Law International providing information and news on international arbitration.

NYIAC Annual Grand Central Forum: Exploring the UNCITRAL-ICSID Code of Conduct for Adjudicators

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July 2022— Chaffetz Lindsey is pleased to be involved in the upcoming NYIAC Annual Grand Central Forum taking place on Wednesday, July 13th from 6:30pm-9:30pm EDT. The event is available to attend both virtually and in-person at Debevoise & Plimpton, NYC.

The program will highlight the newly-released draft UNCITRAL-ICSID Code of Conduct and the important questions that remain regarding the challenges of so-called “double-hatting” by arbitrators in international investment arbitration.  The interactive session will include speakers Andrea Bjorklund, Kate Brown de Vejar, Andrés Jana, Lauren Mandell and will be moderated by Donald F. Donovan.

The schedule will include time for Q&A, discussion and networking:

  • 6:00pm: Welcome | Delegate Check-In
  • 6:30pm: Substantive Session
  • 7:45pm: Q&A
  • 8:00pm: Networking | Cocktails & Canapés
  • 9:00pm: Close of Session

To attend the event in-person click here; to attend virtually click here.  The event has been organized under the direction of co-chairs of the NYIAC Program Committee Marisa Marinelli and Chaffetz Lindsey’s James Hosking, together with co-secretaries of the committee Arantxa Cuadrado and Chaffetz Lindsey associate Marcel Engholm.

About NYIAC:

The New York International Arbitration Center (“NYIAC”) is a nonprofit organization formed to advance, strengthen and promote the conduct of international arbitration in New York.

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