It has also been correctly stated that “[w]hether or not concerns about international arbitral efficiency are exaggerated, the international arbitration community must face this discontent and, more importantly, take steps to maintain its legitimacy with its users.”³

The problems of cost and delay in high value disputes are not, however, new subjects. In 1989 Lord Mustill posed the following (largely rhetorical) questions with respect to high value commercial arbitrations:

Do the parties work together to achieve a result which is fair and sensible in commercial terms, or do they not rather seek out every procedural advantage to ensure that they win, regardless of the merits? Do the parties really want a speedy decision, or will not the defendant spin out the arbitration for as long as possible? Are the proceedings any longer imbued by informality, or do they not have all the elephantine laboriousness of an action in court, without the saving grace of the exasperated judge’s power to bang together the heads of recalcitrant parties⁴

Building on the foundations laid in the 1985 UNCITRAL Model Law,⁵ the major sets of arbitral rules have gradually evolved over the last 20 years to clarify: (i) the extent to which parties are obliged to conduct arbitrations in a timely and cost efficient manner; and (ii) the circumstances in which arbitral tribunals may in fact be empowered to bang parties’ heads together.⁶

The most recent step in that evolution was the publication of the revised ICC Rules on September 12, 2011, which come into effect from January 2012.

Article 22(1) of the new ICC Rules states:

The arbitral tribunal and the parties shall make every effort to conduct the arbitration in an expeditious and cost-effective manner, having regard to the complexity and value of the dispute.

Article 22(1) thus contains an explicit contractual obligation on the parties to conduct their arbitration in a ‘proportionate’ manner. More often than not, however, when large sums of money are at stake and experienced counsel are engaged on both sides, at least one of the parties has a rational incentive to ‘intensively litigate’ the dispute, thus increasing costs and causing delays.

Once a dispute has arisen, it is unrealistic to expect either party to act contrary to its self-interest in pursuit of the ‘higher ideal’ of arbitral efficiency. In such situations, time and costs are best kept in check by empowering tribunals to take ‘proportionality’-based case management decisions. The existence of such a power is common to most modern sets of rules, and is contained in Article 22(2) of the new ICC Rules:

The innovation with regard to case management in the new Rules is Article 24, which makes it mandatory for the tribunal to convene an initial “case management conference to consult the parties on procedural measures” which may be held “in person, by video conference, telephone or similar means of communication”. Article 24 also suggests that the tribunal may adopt one or more of the case management techniques described in Appendix IV.

Appendix IV contains a useful summary of case management techniques (such as bifurcation, limiting document requests, and limiting the length and scope of written submissions and witness evidence). It also emphasizes that “[a]ppropriate control of time and cost is important in all cases. In cases of low complexity and low value, it is particularly important to ensure that time and costs are proportionate to what is at stake in the dispute.”

While the case management techniques set out in Appendix IV will be familiar to all experienced arbitration practitioners, the ‘codification’ fulfils at least two important functions. First, it can reasonably be expected that the explicit encouragement to use such techniques will increase their use by less experienced arbitrators. Second, the explicit enunciation of case management techniques serves further to legitimize their use and hence to insulate awards from challenge on due process grounds.

One member of the CCIAG has suggested that “[t]o fix arbitration, practitioners must return the process to its original state as a streamlined option for dispute resolution.”⁷ In practice, it is likely impossible to reverse the trend by which arbitration has absorbed certain features of litigation, but it remains realistic to hope that tribunals (which, unlike the national court judge, will see through a case from beginning to end) will use their case management powers to ensure that the procedure is as streamlined a possible.

Paul Friedland and Paul Brumpton, White & Case LLP

Stolt-Nielsen involved an arbitration brought in New York by AnimalFeeds against Stolt-Nielsen, a commercial shipping company, after Stolt-Nielsen had been subject to a U.S. Department of Justice criminal investigation involving charges of illegal price-fixing. The arbitration was brought pursuant to a broad arbitration clause (“[a]ny dispute arising from the making, performance or termination . . . .”) in a standardized shipping contract that did not mention class arbitration. AnimalFeeds demanded a class arbitration on behalf of itself and similarly situated shipping customers. The parties entered a supplemental agreement which, consistent with the AAA Supplementary Rules on Class Arbitration, submitted to the arbitrators the question whether the clause authorized class arbitration. During the course of the arbitration, the parties stipulated that the arbitration clause was “silent” on the question of class arbitration

The arbitral tribunal issued a partial award stating that the arbitration clause permitted class arbitrations, citing a consensus of arbitral awards interpreting “a wide variety of clauses in a wide variety of settings.” Stolt-Nielsen challenged the award in the federal courts. The Supreme Court found that the arbitrators had exceeded their authority by basing their decision on policy grounds rather than on the applicable law. The Supreme Court found that the FAA barred class arbitrations where the arbitration clause was “silent.” Justice Alito’s majority opinion based this holding on the premise that arbitration is a creature of consent, and that class arbitration cannot be forced on parties who have not consented to it.

As Justice Ginsburg’s dissenting opinion points out, “the Court does not insist on express consent to class arbitration,” and Justice Alito’s majority opinion specifically noted that the Court had “no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration.” This leaves little guidance to tribunals and courts interpreting arbitration clauses as to what contractual or factual basis can support a finding that the parties agreed to authorize class arbitration. While the Stolt-Nielsen opinion implies a restrictive interpretation of broad arbitration clauses on the issue of class arbitration, given the uncertainty noted by the dissent, and the singular fact that in Stolt-Nielsen the parties had stipulated that the arbitration clause was silent on the issue of class arbitration, the impact of Stolt-Nielsen on clause drafting in different contexts is uncertain.

The best option for drafters of arbitration clauses who want to provide for class arbitration is to make consent express in the clause, for example by including language such as “the parties agree that class action arbitration shall be available under this clause.” Drafters intent on including class arbitration should also consult the AAA’s Supplementary Rules for Class Arbitration, which provide a mechanism for the administration of class arbitration, and may wish to incorporate those Rules into their arbitration clause. It is to be noted, however, the AAA’s Supplementary Rules for Class Arbitration are likely subject to amendment in the wake of the Stolt-Nielsen decision. Drafters who want to exclude class arbitration should do so expressly by stating in their clause that “there shall be no class action arbitration.”

White & Case represented Stolt-Nielsen in the dispute. The writers of this post were not part of the team representing Stolt-Nielsen and this post is based exclusively on information available to the public.

By Paul Friedland and Michael Ottolenghi

Though it addresses enforcement of an arbitration agreement, the Eleventh Circuit decision may be seen as about choice of law more than about arbitration.

The contract at issue in Thomas v. Carnival Corporation, No. 08-10613 (11th Cir., July 1, 2009), was a Seafarer’s Agreement (between Thomas, a seaman, and Carnival, a cruise line) which contained an arbitration clause that provided for arbitration in the Philippines and a choice of law clause that provided that Panamanian law would govern the Agreement and all disputes arising out of it. The choice of law clause specified that Panamanian law would apply notwithstanding the availability of claims under the laws of any other jurisdiction.

The Eleventh Circuit found that it was against public policy for the Seafarer’s Agreement to forfeit the rights of a seaman injured during his employment to pursue against the cruise line remedies available under the Seaman’s Wage Act and that the choice of foreign law and a foreign forum “operated in tandem” to do just that. The problem for the Eleventh Circuit was that the choice of Panamanian law excluded remedies provided to injured seaman in the Seaman’s Wage Act. The issue was, therefore, the contract’s choice of law clause more than the choice of forum. Even had the contract provided a US court as the forum for resolving disputes, the choice of law clause by itself would likely still have been stricken as counter to public policy.

Thomas is the latest example of the potential for harmful spillover into international arbitration of rulings by US courts designed for a different context, namely, consumer or employment disputes. The Eleventh Circuit understandably sought to protect a seaman by preserving the seaman’s US statutory remedies. Yet, because the Federal Arbitration Act and precedent required the Eleventh Circuit to treat seaman employment contracts as commercial contracts, the Thomas ruling becomes a potential precedent for international commercial disputes of any kind. Citing Thomas, parties may seek to escape otherwise valid arbitration agreements simply by declaring their intention to bring a claim based on a US statute.

Paul Friedland and Kirsten Odynski
White & Case LLP

Unfortunately, U.S. law is muddled, and the courts are divided, on the extent of permissible non-party discovery under the FAA. The recent decision by the Court of Appeals for the Second Circuit in Life Receivables Trust v. Syndicate 102 at Lloyd’s of London helps to clarify the issue of non-party discovery as it relates to arbitrations seated in New York. Nonetheless, several questions remain.

In Life Receivables Trust, 549 F.3d 210 (2d Cir. Nov. 25, 2008), the Second Circuit, which includes New York, considered whether federal law empowers an arbitrator to order a non-party to an arbitration to produce documents before an arbitral hearing. The FAA provides that arbitrators “may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case.” 9 U.S.C. § 7 (emphasis added). The Court read this provision literally and concluded that an arbitrator may not order a non-party to produce documents prior to an arbitral hearing. See Life Receivables Trust, 549 F.3d at 216 (“There may be valid reasons to empower arbitrators to subpoena documents from third-parties, but we must interpret a statute as it is, not as it might be . . . .”). Consistent with the plain language of the FAA, the Court stated that an arbitrator is empowered to order a non-party to appear only at a preliminary hearing or a merits hearing to testify and to present evidence. Id. at 218. In many cases, rather than undertake the burden of appearing at a hearing, a non-party will choose to produce the documents to the parties in advance.

The Life Receivables Trust decision places the Second Circuit in the literalist camp on the issue of non-party discovery under the FAA. The Third Circuit agrees that non-party pre-hearing discovery is prohibited. See Hay Group, Inc. v. E.B.S. Acquisition Corp., 360 F.3d 404 (3d Cir. 2004). The Fourth Circuit, by contrast, has concluded that such discovery is available, although only in the case of a special need or hardship. See COMSAT Corp. v. Nat. Science Found., 190 F.3d 269 (4th Cir. 1999). The Eighth Circuit has taken the anti-literalist view, finding that such discovery is permissible regardless of any special need. See In re Sec. Life Ins. Co., 228 F.3d 865 (8th Cir. 2000). Therefore, in interstate and international arbitrations situated in the United States, the location of the arbitration may determine the availability of non-party discovery.

The complexity of U.S. law on the subject does not end with the division among the federal circuits. While the FAA governs interstate and international arbitrations in the United States, it also directs courts to respect party agreement, and parties can (though they seldom do) agree that state arbitration laws will govern their arbitration. Unlike the FAA, some state arbitration laws provide for broad discovery over non-parties. See, e.g., Florida Stat. § 684.15 (“The arbitral tribunal may issue subpoenas or other demands for the attendance of witnesses or for the production of books, records, documents, and other evidence, may administer oaths, may order depositions to be taken or other discovery obtained, without regard to the place where the witness or other evidence is located, and may appoint one or more experts to report to it.”). Therefore, the applicable arbitration law can affect the scope of discovery over non-parties. Moreover, the applicable arbitration law may have significant impact with regard to jurisdiction over non-party witnesses, some of whom may be located outside of the state of the seat of arbitration.

In sum, while Life Receivables Trust helps to clarify certain aspects of the law as to non-party discovery in international arbitration in New York, there remain several issues to consider when drafting arbitration clauses, and there remains significant room for dispute to the extent that a party or non-party to an arbitration opposes discovery.

By Paul Friedland and Todd Gluckman