July 2023 – Chaffetz Lindsey recently won a victory in federal court in Manhattan in a case that clarifies both the broad subject matter jurisdiction of federal courts over disputes arising from international arbitrations and, at the same time, the narrow scope of their supervisory power. It also reinforces the high standards that apply when a party challenges an arbitrator for bias.
The firm’s clients were two Bermuda entities in a Bermuda-seated Arbitration against Endurance Specialty Insurance Ltd. (“Endurance”), a Sompo International affiliate. Pursuant to the governing arbitration clause, the parties asked the ICC Court of International Arbitration to appoint the presiding arbitrator. However, Endurance subsequently objected that the person whom the ICC Court appointed 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. Endurance contended that the ICC-appointed arbitrator would be biased against it, because those submissions showed that the Chaffetz Lindsey clients 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 filed the same objections in a petition in New York State court.
The Chaffetz Lindsey team removed the state court petition to the U.S. District Court for the Southern District of New York based on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Chapter 2 of the Federal Arbitration Act incorporates the New York Convention into federal law and provides for federal question jurisdiction over all proceedings “falling under” the New York Convention. The team simultaneously moved to dismiss the petition to disqualify the arbitrator, principally on three grounds: (i) a United States court has no authority to consider a claim of arbitrator bias before issuance of a final award; (ii) a court in the United States has no jurisdiction to remove an arbitrator in a Bermuda-seated arbitration; and (iii) even if the court had the power to consider the allegations of the petition, the facts alleged did not state a cognizable claim of bias under either Bermuda or New York law.
For its part, Endurance moved to remand the case back to state court for lack of federal jurisdiction over its petition. It contended that federal subject matter jurisdiction under the New York Convention was strictly limited to actions to compel arbitration, enforce or vacate awards, stay an arbitration, or obtain preliminary relief in aid of arbitration. On the merits of its petition, Endurance argued that both Bermuda and New York law permitted the court to remove an arbitrator in an ongoing arbitration and that its allegations of bias supported such removal.
On July 5, 2023, U.S. District Judge John G. Koeltl issued a 19-page decision rejecting Endurance’s challenge in all respects. First, Judge Koeltl reasoned that the action “plainly ‘falls under the Convention,’” Slip Op. at 8, and that 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.” Id. at 11. Accordingly, the Court found, “[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” under the New York Convention. Id. at 12.
Based on that jurisdictional determination, Judge Koeltl next ruled on the question of whether he had the power to remove an arbitrator in an ongoing, Bermuda-based arbitration. He found, “in accordance with the procedural law agreed by the parties 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. Thus, [the U.S. Court] is without authority to grant Endurance’s requested relief.” Id. at 15. That holding reinforces the bedrock international commercial arbitration principle that only a court at the seat of arbitration may intervene to remove an arbitrator.
Finally, Judge Koeltl made clear that, even if the power existed to remove an arbitrator, there would be no basis to do so. In his words, “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.” Id. at 17.
This ruling is consistent with the arbitration-friendly policy of the Federal Arbitration Act and the New York Convention and reflects the resulting reluctance of U.S. courts to derail a duly constituted arbitration tribunal, particularly where the seat of arbitration is overseas.
The Chaffetz Lindsey legal team included Peter Chaffetz, Steven C. Schwartz, David S. Blackman, and Thomas Hildebrand, and former paralegal Oslen Grant. The full opinion can be found here. Reporting on the ruling by Law 360 can be found here.