Stok and Associates (“Stok”) is a small Florida law firm that holds its bank accounts with Citibank. In November 2008, Stok deposited a substantial client cashier’s check into its Trust Account with Citibank. Although Citibank granted Stok immediate credit and availability of funds (enabling Stok to wire most of the funds to its client’s foreign bank account), Citibank subsequently revoked its acceptance of the check on the basis that the check was counterfeit. Citibank charged back the funds in question from the Trust Account. Stok demanded return of the removed funds but Citibank did not accede.

The contract governing the relationship between Stok and Citibank included an arbitration provision that provided, in relevant part: “[E]ither Citibank or [Stok] may elect to require any dispute between [them] concerning the aforementioned accounts or any other Bank deposit account or line of credit be resolved by binding arbitration.” However, Stok preferred to litigate and filed suit against Citibank in Florida state court in December 2008. In January 2009, Citibank filed its Answer, which raised one affirmative defense, but made no reference to the arbitration provision.

On February 23, 2009, Citibank sent Stok a letter electing arbitration. Stok rejected Citibank’s election, so Citibank filed a motion to compel arbitration the following day, initially in state court. When it became apparent that under Florida state law, Citibank had waived its right to arbitrate by filing its Answer without expressly reserving the right to elect arbitration, Citibank withdrew its motion to compel. Instead, Citibank filed a petition to compel arbitration in the U.S. District Court for the Southern District of Florida. In May 2010, the district court denied Citibank’s petition, holding that Citibank had waived its right to arbitrate. As part of this determination, the district court found that Stok had suffered prejudice due to Citibank’s delay in demanding arbitration.

Citibank appealed to the U.S. Court of Appeals for the Eleventh Circuit. In July 2010, the Eleventh Circuit allowed the appeal. The Eleventh Circuit applied the two-part test set down in Ivax Corp. v. B. Braun of America, Inc., 286 F.3d 1309 (11th Cir. 2002): “First, we decide if, ‘under the totality of the circumstances,’ the party ‘has acted inconsistently with the arbitration right,’ and, second, we look to see whether, by doing so, that party ‘has in some way prejudiced the other party.’” Id. at 1315–16 (quoting S&H Contractors, Inc. v. A.J. Taft Coal Co., 906 F.2d 1507, 1514 (11th Cir. 1990)).

With respect to the first element, the Eleventh Circuit assumed, without deciding, that Citibank’s participation in state court litigation was sufficiently substantial to show that it did not intend to avail itself of the arbitration provision. However, the Eleventh Circuit concluded that Stok did not satisfy the second element of the two-part waiver test set out in Ivax – namely the requirement to show prejudice sufficient to warrant waiver. In reaching this conclusion, the Eleventh Circuit stated that the prejudice element of the waiver test is examined by taking into account the expense incurred by the party alleging prejudice from participating in the litigation process, the use of pre-trial discovery procedures by a party seeking arbitration, and the length of delay in demanding arbitration. Applying these factors, the Eleventh Circuit held that Stok had failed to satisfy its burden on the basis that: (1) courts have declined to find waiver in cases with similar or more extensive litigation activity prior to the motion to compel arbitration; (2) Stok had failed to provide evidence of either the amount of money it spent or the number of hours it dedicated to pursuing litigation-specific activities; and (3) Citibank’s delay in invoking its right to arbitrate was brief and “when little meaningful litigation has taken place, this Court has declined to find waiver from even longer delays.” (Both the district court and the Eleventh Circuit agreed that the period relevant to the prejudice analysis was the time that had elapsed between Citibank’s filing its Answer in state court and sending a letter to Stok demanding arbitration – a period of 24 days).

Stok petitioned for certiorari, noting a circuit split regarding whether prejudice on the part of a resisting party is necessary for an opposing party’s right to compel arbitration to be deemed waived. Stok noted that the majority of circuits (namely the First, Second, Third, Fourth, Fifth, Sixth, Eighth, and Eleventh Circuits) permit parties to compel arbitration unless the parties seeking to oppose arbitration are able to demonstrate that they have suffered substantial prejudice due to the adverse party’s delay in seeking arbitration. In contrast, the Seventh, Tenth, and D.C. Circuits have held that once a party participates in litigation, it is precluded from demanding arbitration, even if the adverse party has suffered no prejudice. Even within the majority, courts had required different degrees of prejudice necessary to find a waiver of the right to compel arbitration. Stok argued that “the notion that contracting parties should be able to rely on predictability and uniformity in achieving their bargained for expectations is completely lost in the context of the divergent waiver analyses among the Circuits.”

Citibank, in its Brief in Opposition, denied that any “true” circuit split exists. It argued that even in the three circuits classified by Stok as forming the minority, prejudice is at a minimum a “relevant factor” in the applicable waiver analysis. Citibank argued “without naming prejudice as an element, [these three circuits] in varying degrees, do hold it to be a significant part of the waiver decision. This is a semantic, not a substantive difference.” However, Citibank’s position was untenable. It is simply not plausible to say there is no distinction of real import between an absolute requirement for some level of prejudice to exist before waiver will be found, and no requirement for prejudice before waiver will be found. That the minority circuits identified by Stok might take prejudice into account if it exists does not detract from the fact that they are still open to finding waiver where no prejudice exists – circumstances that would absolutely preclude a finding of waiver in the majority circuits. Indeed, as Stok rightly pointed out in its Reply Brief, the Seventh Circuit (whose Judge Richard Posner has been one of the chief proponents of the view that prejudice is not needed for a finding of waiver) expressly acknowledges that it is in the minority on this issue.

In granting certiorari, the Supreme Court evidently agreed with Stok’s analysis. Now that the case has been dismissed, it seems likely that the Supreme Court will grant certiorari the next time it finds itself presented with an appropriate opportunity to address this issue. Where, however, the Court will (or should) end up on this issue is open to debate.

Although Stok & Associates, P.A., v. Citibank, N.A settled before the parties had the opportunity to fully brief the substantive question at issue, Stok addressed the merits briefly in its Petition, advocating a complete abandonment of the requirement for prejudice. Pointing to the Supreme Court’s holding that the purpose of the FAA was “to reverse the longstanding judicial hostility to arbitration agreements and to place [arbitration agreements] upon the same footing as other contracts,” Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 80 (2000) (emphasis added), Stok argued that a requirement to establish prejudice before waiver will be found goes beyond this, amounting to “a contractual term … inserted by the judiciary into every arbitration provision.” Stok asserted that a bright-line rule (eradicating the prejudice inquiry entirely) is the only way to resolve the issue: “creating a simple standard for waiver of an arbitral forum whenever one participates in litigation without reservation, will [enable] the monumental waste of scarce judicial and party resources [to] subside – the very goal the FAA was supposed to realize.”

While bright-line rules (and the perceived certainty that they bring) can have a certain initial appeal, the flip-side of that certainty is a lack of flexibility. The rule that Stok advanced in its Petition (that waiver of the right to arbitrate occurs whenever one participates in litigation without reservation) goes beyond merely rejecting a requirement for prejudice before waiver will be found. Rather, it also seeks to modify the first part of the two part test for waiver applicable in the Eleventh Circuit – the requirement that the party acted inconsistently with the arbitration right “under the totality of the circumstances.” As formulated, Stok’s proposed rule would shut the door to the possibility that parties who participate without reservation in proceedings brought against them – even in the most preliminary of ways –might still exercise their contractual right to arbitration. This is out of step with the pro-arbitration scheme of the FAA and U.S. federal jurisprudence more generally.

Tellingly, Stok’s argument goes beyond the position taken even in the minority circuits. The Seventh Circuit in Cabinetree of Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir. 1995), one of the cases on which Stok relied in its petition for certiorari, held that an election to proceed with litigation is only a presumptive waiver of the right to arbitrate. Id. at 389. This is a rebuttable presumption. As the Seventh Circuit held, it is easy to imagine situations where participation in court proceedings does not signify an intention to proceed in litigation to the exclusion of arbitration: “[t]here might be doubts about arbitrability, and fear that should the doubts be resolved adversely the statute of limitations might have run. Some issues might be arbitrable, and others not. The shape of the case might so alter as a result of unexpected developments during discovery or otherwise that it might become obvious that the party should be relieved from its waiver and arbitration allowed to proceed.” Id. at 390. In such circumstances, the Seventh Circuit permits a finding of no waiver. This essentially serves the same function that is served by the prejudice element of the two-part test followed by the majority of circuits — both provide the courts with a route to avoiding an unfair denial of a party’s right to arbitrate.

There is no need (or justification) for the Supreme Court to go as far as Stok advocated. The question presented in Stok related solely to whether a showing of prejudice is required before an opposing party’s contractual right to arbitrate will be deemed waived. Even if the Supreme Court ultimately chooses to reject the requirement of prejudice, the federal courts should still be able to ensure that parties’ rights to arbitrate are not unduly fettered, through a careful consideration and application of first part of the test for waiver, with its requirement to take into account the “the totality of the circumstances.”

By Gary Born & Anna Holloway

U.S.-style class actions are by now familiar, if only by reputation, in many international quarters. Under the U.S. litigation system, a class action is a civil suit, often a mass torts or consumer litigation, in which one or more named plaintiffs represent a large, sometimes indeterminate, number of similarly-situated individuals in pursuing related claims against one or more defendants. The logic of class actions is to permit large numbers of comparatively small claims, which would otherwise not readily be pursued, to be heard efficiently in a single proceeding. The class action system is, to be sure, beset by many flaws and challenges, but it is also one that has attracted, and continues to attract, substantial interest and following in non-U.S. legal systems.

Over the past two decades, the use of class action procedures migrated from litigation to arbitration in domestic U.S. practice. State courts, notably in California, paved the way in permitting arbitrations to be conducted on a class basis, on behalf of large numbers of similarly-situated claimants (usually consumers), all having identical arbitration agreements with the same defendant. For a time, class arbitration was, in the words of one commentator, a “mythical beast: half litigation, half arbitration and rarely seen.” After the U.S. Supreme Court’s decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), however, class arbitration sightings became frequent in U.S. practice. Indeed, according to recent reports, the American Arbitration Association (AAA) is currently administering nearly 300 class arbitrations.

In Bazzle, a plurality decision of the Supreme Court considered whether or not class action claims could be pursued in arbitration and concluded that arbitrators, not courts, must determine in the first instance “whether [an] arbitration contract[] forbid[s] class arbitration”; moreover, consistent with its analysis in First Options and similar decisions on arbitrators’ competence-competence, the Bazzle plurality also declared that arbitral decisions about the availability of class arbitration were subject to only minimal judicial review. At the same time, Bazzle also indicated that class arbitration could be available even when the arbitration agreement was silent on the issue (with class arbitration impliedly contemplated by the parties). Needless to say, Bazzle rested on the premise that class arbitration was compatible with the FAA (otherwise, there would have been no basis for permitting arbitral tribunals to order class arbitrations) and that class arbitration agreements were fully enforceable under sections 2 and 4 of the FAA.

The Court’s decision in Bazzle created the platform for arbitral tribunals to permit class arbitrations – a possibility which, in practice, tribunals not infrequently permitted. At the same time, in the wake of Bazzle, both the AAA and JAMS issued rules for the administration of class arbitration. And, as noted above, arbitral tribunals not infrequently found that parties had agreed to class arbitration, particularly in cases involving consumer contracts – resulting in a significant caseload of more than 300 pending class arbitrations by 2011.

In a related development, some state courts ruled that provisions in arbitration agreements waiving the right to arbitrate on a class-wide basis were, in certain circumstances, unconscionable as a matter of state law and therefore unenforceable. That development contributed to the increase in class arbitrations, by restricting the ability of parties contractually to exclude the possibility of class arbitration.

The Supreme Court’s approach to class arbitration shifted dramatically in Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010). Notwithstanding its earlier decision in Bazzle – that the availability of class arbitration was for arbitrators to decide, subject to only minimal judicial review – the Court’s Stolt-Nielsen decision overturned an arbitral tribunal’s finding that class arbitration was impliedly permitted by the parties’ agreement. The Court held that the arbitrators’ decision that class arbitration was permitted was based on supposed policy considerations, and not the parties’ agreement. The Court also held that “class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed that the parties consented to it by simply agreeing to submit their dispute to an arbitrator.” The Stolt-Nielsen Court appeared to require an express agreement to class arbitration and, if not, a relatively clear affirmative showing of an implied agreement to class arbitration: only when “the parties agreed to authorize class arbitration” could arbitrators find that class arbitration was available. The Court’s Stolt-Nielsen decision not only reversed its earlier decision, in Bazzle, that questions whether the parties had consented to class arbitration should be decided by the arbitrators, but also adopted a fundamentally different, and more hostile, approach to the question whether or not an arbitration agreement in fact permitted class arbitration.

In late April of this year, less than ten years after its decision in Bazzle ushered in class arbitration in the United States, the Supreme Court appears to have come nearly full circle and very substantially limited the future of class arbitrations. The Court’s decision came in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), which arose when the Concepcions filed a complaint against AT&T alleging that it had defrauded them by charging sales tax (about $30) on phones advertised as free. The Concepcions’ complaint was consolidated with a class action on behalf of other cell phone users, and AT&T sought dismissal of the litigation; it moved to compel individual arbitration as provided by an arbitration clause contained in the cell phone contracts of the Concepcions and other AT&T customers. Those arbitration clauses required arbitration of all disputes between AT&T and each of its customers, while also containing a class action waiver that provided that all claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” The arbitration clauses also provided (if any doubt remained) that “the arbitrator may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class proceeding.”

In turn, the Concepcions argued that the class action waiver was unenforceable under the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). Discover Bank declared class action waivers unconscionable under California state law when “the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involved small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money.” Applying the Discover Bank rule, the District Court and the Ninth Circuit Court of Appeals rejected AT&T’s motion to compel individual arbitrations, holding that the class action waiver was unconscionable, and therefore permitting the Concepcion’s class action litigation to proceed.

The lower courts were unmoved by the “consumer-friendly” aspects of the arbitration agreement at issue in AT&T’s cell phone contracts. Among other things, that agreement provided for arbitration in a convenient situs (where the consumer is billed); arbitration in person, by telephone or online, at the consumer’s choice, for amounts less than $10,000; the availability of injunctive relief and punitive damages; no right by AT&T to claim attorneys’ fees; and an option to choose small claims court (rather than arbitration). These features did not, however, dissuade the lower courts from invalidating the class action waiver (and the underlying agreement to arbitrate) on unconscionability grounds.

In a 5-4 decision, the Supreme Court reversed. Writing for the majority, Justice Scalia reasoned that California’s Discover Bank rule disfavors arbitration because it requires class arbitration, which, in his view, is incompatible with the “fundamental” or true historic character of arbitration. Justice Scalia relied on section 2 of the FAA, which makes arbitration agreements “valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” According to the Court, state law may not require procedures that are “not arbitration as envisioned by the FAA,” and “[r]equiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

The foundation for the Court’s reasoning was its claim that class arbitration was not really arbitration in the sense contemplated by the FAA. The Court opined that “class arbitration requires procedural formality” and then said that “the switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.” The Court also thought that “class arbitration greatly increases risk to defendants” by aggregating claims without providing for multilayered review. Given the limited grounds upon which courts can vacate an arbitral award, arbitration is “poorly suited to the higher stakes of class litigation.” Finally, the Court found it significant that class arbitration did not exist in 1925, when the FAA was enacted – apparently suggesting that class arbitration was thus inconsistent with “arbitration as envisioned by the FAA.”

The Court concluded that imposing California’s prohibition against class action waivers, and the resulting preference for class arbitration, would frustrate the purpose of arbitration as contemplated by the FAA and could result in fewer companies choosing to arbitrate. The Court therefore held that the Discover Bank rule “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” and is preempted by the FAA.

Writing for the dissent, Justice Breyer reasoned that the FAA’s purpose is not to promote arbitration, but to treat arbitration on equal footing as other contracts, citing the savings clause of section 2 of the FAA. Thus, the dissent reasoned that “California is free to define unconscionability as it sees fit…. Because California applies the same legal principles to address the unconscionability of class arbitration waivers as it does to address the unconscionability of any other contractual provision, the merits of class proceedings should not factor into our decision.” Justice Breyer also reasoned that “class arbitration is consistent with the use of arbitration,” and pointed out that the AAA’s amicus brief in Stolt-Nielsen “found class arbitration to be ‘a fair, balanced and efficient means of resolving class disputes.’” Invoking federalism principles, the dissent concluded that “weighing the pros and cons of all class proceedings” was California’s decision to make.

Reading the various opinions in Bazzle, Stolt-Nielsen and now Concepcion makes one wish that the U.S. Supreme Court would stop deciding arbitration cases for a while – preferably, a long while. Preliminarily, the erratic course of ushering in class arbitration in Bazzle, followed by largely or entirely ushering it out again a decade later in Stolt-Nielsen and Concepcion, is both an institutional embarrassment and a profligate waste of resources – What was the point, and why must parties and taxpayers bear the costs, of the countless disputes, arbitrations and litigations over the past ten years provoked by the Court’s shifting views? What happens now to the 300 or so AAA class arbitrations which are pending? What weight should parties and lower courts give to future Supreme Court pronouncements on the FAA – and for how long?

Turning to the law, Justice Scalia’s opinion is profoundly misconceived and fundamentally misunderstands the arbitral process. Most importantly, Justice Scalia’s declarations about the supposed “fundamental” character of arbitration, which is envisioned by the FAA, are both woefully inaccurate and dangerous: indeed, those declarations threaten the broader body of U.S. arbitration law by suggesting that the FAA only protects a particular type of arbitration, being the archetype that, in Justice Scalia’s view, was envisioned by Congress in 1925. In fact, contrary to the Court’s supposed archetype, arbitration has historically taken widely varying forms, in widely varying settings – ranging from institutional to ad hoc arbitration, from trade, commercial, religious, and international to investor-state arbitration, ranging from documents only, on-line or quality arbitrations to arbitrations resembling trial court litigations.

First, arbitration is by no means necessarily informal – rather, arbitration is aimed first and foremost at ensuring the parties’ procedural autonomy. Sometimes that means procedural informality; sometimes it means procedural innovation; and sometimes it means procedural formality. Arbitrations with a high degree of procedural formality are conducted around the United States, and the world, every day – if that is what the parties desire and agree upon. Contrary to the Court’s suggestions, there is nothing inherent in arbitration that excludes formality, motions, or complexity.

Second, again contrary to Justice Scalia’s views, there is nothing inherent in arbitration that limits it to small stakes. On the contrary, enormous disputes have always been, and still are, decided in arbitration – take, variously, the 19th century Alabama Arbitration (where the United States recovered an amount from the United Kingdom equal to its annual government budget), the IBM/Fujitsu arbitration (involving, in the 1970s, billions of dollars), the 1980’s Iran-U.S. Claims Tribunal (which adjudicated many billions of dollars in claims, by both private and government parties), the Andersen Consulting arbitration (with an award in excess of $10 billion), and any one of the dozens of currently pending domestic and international commercial and investment arbitrations, all involving amounts well in excess of $1 billion. Justice Scalia’s conception of arbitration as inherently small is flatly wrong.

Third, the Court’s suggestion that arbitration is somehow limited to what Congress envisioned in 1925 is equally wrong. Arbitration in the 21st century has no necessary resemblance to that in 1925 – nor should it: arbitration has historically evolved and been tailored to respond to economic, social and technological developments. As a consequence, contemporary arbitration now routinely addresses statutory claims (under legislation enacted decades after 1925), using telecommunications, on-line and other technologies (developed decades after 1925), dealing with commercial businesses and industries that did not exist when the FAA was enacted. Indeed, although the irony was apparently lost on the Court, the arbitration agreement at issue in Concepcion itself provided for on-line consumer arbitration of cell phone disputes involving multiple statutory claims. Justice Scalia’s suggestion that the FAA only envisioned a particular kind of informal, small stakes, bipartite arbitration of the sort supposedly conducted in the 1920’s is Tea Party originalism run amok – and patently wrong.

Justice Scalia’s suggestion that arbitration under the FAA is really only that kind of dispute resolution that existed in 1925 is as dangerous as it is misinformed: taken at face value, the suggestion that the FAA protects only or primarily a particular historical conception of arbitration – involving informal, small bipartite trade disputes – threatens to radically limit the meaning and effect of the FAA. Indeed, the various aspects of Justice Scalia’s conception of arbitration are eerily reminiscent of some 19th century judicial decisions, which treated arbitration as a second class form of rough justice suitable only for limited types of disputes and subject to strict judicial supervision. Hopefully, the Court’s erroneous conception of arbitration will remain but an historical oddity that does not further confuse the development of arbitration law under the FAA or elsewhere – but the risk that it will have further deleterious consequences, like Justice Story’s antipathy for arbitration in the 1800’s, is a very real one.

Tragically, the result in Concepcion could have been arrived at in a sensible manner, without resurrecting long-dead biases against arbitration or threatening to confuse and limit the protections of the FAA. The Discover Bank rule of unconscionability was not, as the dissent concluded, a generally-applicable rule of unconscionability, applicable to all contracts within the meaning of section 2 of the FAA. Rather, the Discover Bank rule was tailored for and specifically directed to class action waivers, in arbitration and litigation, and created a special standard of invalidity for such waivers (i.e., class actions waivers were invalid whenever they involved adhesion contracts, multiple small claims and an alleged scheme to defraud consumers). That kind of rule fails the most basic requirement of section 2 – which requires the application of generally-applicable contract law defenses which could apply to “the revocation of any contract.” Here, the California rule applied only to a narrow sub-set of contractual provisions – namely, waivers of particular forum selection provisions – and was not, as demanded by section 2, a rule generally applicable to all contracts. As such, the Discover Bank rule is preempted by section 2’s requirement that arbitration agreements be enforced in accordance with their terms.

More fundamentally, the Discover Bank rule is precisely the type of state law invalidation of arbitration agreements that the FAA was intended to prohibit. The Discover Bank rule forbids agreements to arbitrate a defined category of disputes (involving specified categories of fraud claims arising from particular types of contract). As applied in Concepcion, the Discover Bank rule required resolution of these disputes in a different forum from the arbitral forum agreed to by the parties (specifically, in class action litigation – because, as the lower courts in Concepcion held, the parties had not agreed to class arbitration and the Concepcion’s class action claims therefore had to be pursued in litigation). Thus, this application of the Discover Bank prohibition is precisely like typical state law non-arbitrability rules, such as requirements that all state securities law or franchise disputes be resolved in state courts or before state administrative tribunals; like those requirements, the Discover Bank prohibition is also preempted by section 2.

The fact that the Discover Bank rule is characterized as one of “unconscionability” does nothing to alter its substantive character – being to forbid agreements to arbitrate certain categories of disputes and to instead require class litigation – and directly contradicts section 2. Contrary to Justice Breyer’s dissent, it is irrelevant that the Discover Bank rule forbids class actions waivers in litigation as well as arbitration: it is indisputable that a state law rule requiring that all securities fraud or employment claims be resolved only in a specified state administrative agency, or a particular, specialized state court, would be invalid under section 2 of the FAA – notwithstanding the fact that the state law applied equally to forum selection clauses and arbitration agreements. Similarly, the fact that state law might forbid forum selection agreements choosing an out-of-state forum, in all or specific categories of cases, would not permit application of such rules to arbitration agreements. The fundamental point is that a state law rule which invalidates the parties’ agreement to arbitrate, on a basis not applicable equally to all contracts, is preempted by section 2.

Finally, this analysis would be no different if the Ninth Circuit in Concepcion had applied the Discover Bank rule to require class arbitration, rather than class litigation. The Discover Bank rule would still not be a generally-applicable rule of contract law, as requiring by section 2’s savings clause, and, on the contrary, would still be a specially-designed rule applicable to limited categories of contracts – particularly, agreements to arbitrate – which is preempted by section 2. As already noted, it is irrelevant that the Discover Bank rule applies to class action waivers in forum selection clauses, as well as arbitration agreements: the decisive point is that the rule is not one that applies generally to all contracts and that instead applies only to the provisions of dispute resolution agreements.

More fundamentally, there is no basis in the FAA for a court to require parties to arbitrate in a manner they never agreed (it being clear that the AT&T arbitration agreement specifically did not provide affirmatively for class arbitration, even under the Bazzle standards). Just as section 2 does not permit states to require class litigation of particular categories of disputes, so neither section 2 nor section 4 of the FAA permit states to require class arbitrations that the parties have not accepted, and instead have specifically excluded, in their agreement to arbitrate. This conclusion does not rest on any judgment that class arbitration is not true arbitration or what Congress envisioned in 1925; it rests on the simple conclusion that the Discover Bank rule requires parties to arbitrate against parties with whom they have not agreed to arbitrate – a simple and obvious breach of section 2’s basic rule of party autonomy.

The same conclusion would apply equally to a state law requirement that all arbitrations be conducted only in a local, in-state seat (regardless what the parties’ agreement on arbitral seat provided), that all arbitrations be conducted before a sole arbitrator (regardless what the parties’ agreement provided) or that all arbitrations include either broad discovery or an in-person evidentiary hearing (again, regardless what the parties had agreed). In each case, there is nothing in the “fundamental” character of arbitration that is inconsistent with arbitrations being conducted in any particular place, before a sole arbitrator or with discovery or a live evidentiary hearing: arbitrations are conducted in such places, before sole arbitrators and with discovery and live hearings all the time. Rather, in each case, the requirement imposed by state law offends sections 2 and 4 of the FAA because it forces parties to conduct an arbitration in a manner that they have not agreed. Those requirements – like the Discover Bank rule requiring parties to arbitrate in a manner to which they have not agreed – violate the FAA’s basic rule of party autonomy.

Despite these easy answers to Concepcion, the U.S. Supreme Court embarked on unnecessary and ill-informed discourse on the supposedly fundamental or inherent character of the arbitral process. One can only wonder what the Court will say next about arbitration. And, sadly, one can only hope that we will wait a long time to hear.

Gary B. Born and Claudio Salas

The Obama Administration clearly wishes to avoid alienating any potential supporters of the pending free trade agreements with Colombia, Panama and South Korea, which are (understandably) considered a higher priority than the TPP. Consultations with “stakeholders” and Congress on TPP issues are said continuing as, for example, with some Members of Congress demanding that the key elements of the May 2007 “Bilateral Trade Deal” negotiated by USTR with the Democratic Congress be included in the language on the environment in the TPP. (WorldTrade Online)

The challenges go well beyond the domestic political minefield as the anticipated content of any new U.S. FTAs such as the TPP become more extensive and complex. All of the critical chapters beyond trade in goods found in recent FTAS—labor rights, environmental protection, intellectual property, sanitary and phytosanitary measures, financial and telecommunications services, government procurement, rules of origin (particularly for textiles and apparel), transparency (now encompassing “regulatory coherence”), trade capacity building—remain essential if a completed TPP is to be supported by the business community and Congress. However, additional issues have surfaced. These include the desirability of stronger national treatment provisions for dealing with national preferences and exemptions from government procurement disciplines offered to state owned enterprises (SOEs), particularly in Vietnam. There also appears to be increased, related interest at USTR and elsewhere in the Administration in negotiating stronger provisions on competition issues, treated extensively in the 2002 United States—Singapore FTA but not in most of the other Bush-era FTAs.

The desired SOE obligations are perhaps the most important and far-reaching of this first trade agreement of the Obama Administration, a ”critical issue in ensuring fair competition” according to USTR. Chapter 15 of NAFTA and similar provisions of most subsequent U.S. FTAs dealt, very briefly and rather ineffectively, with competition policy, monopolies and state enterprises as a group, with the NAFTA provisions reflecting United States and Canadian business concerns with Mexico’s Pemex and Comisión Federal de Electricidad monopolies. Today, in the TPP context, U.S. business interests are particularly concerned about the impact on U.S. enterprises and workers of relatively recent “significant distortions in the terms of competition in the global marketplace” by SOEs, who with the cooperation of their governments “choose to discriminate against imported goods in derogation of their core trade obligation to provide treatment no less favorable than that accorded to domestic like products.” However, the proponents also worry about SOE export competition in global markets. (Apr. 15 letter from various industry and trade associations)

Among the TPP negotiating parties these issues are most pronounced in Vietnam, where despite some progress toward reform it is unclear whether the government has the political will to rein in SOEs and reduce the preferential benefits that many SOEs still receive. Long-existing Vietnamese SOE textile and apparel producers, which employ thousands of workers, and account for the second largest volume of U.S. textile and apparel imports after China, are said to remain heavily subsidized (BNA Int’l Trade Rep., Jun. 9), but the concerns over preferential treatment for SOEs in the TPP likely also reflect issues relating state capitalism in other TPP group members, such as Singapore and Malaysia, as well.

Whether USTR will be willing and able to table positions on these issues at the next TPP negotiating session in the United States in September remains to be seen; the answer may well depend on whether the Congress votes on the Colombia, Panama and Korea FTAs this summer, or whether disagreement over companion funding of trade adjustment assistance (TAA), demanded by the Democrats, results in a continuing congressional stalemate. The progress of the United States toward approving the pending FTAs is also being watched closely by other TPP countries; approval by the Congress will likely encourage the other TPP negotiating parties to move forward, while the absence of FTA approval will likely lead to reduced progress in the coming months. (New Zealand Trade Minister Groser)

Regardless of these immediate political issues there is general consensus that the TPP negotiations will not be concluded in 2011, certainly not by the time of the November summit of the Asia-Pacific Economic Cooperation forum, although conceivably if all goes well a framework agreement is possible by that time. Regardless of the outcome at APEC some, including this writer, believe that 2012, with a presidential campaign dominating U.S. domestic politics for most of the calendar year, is not a propitious time for concluding anything as sensitive and controversial as the TPP. The Obama Administration has not sought trade promotion authority (formerly “fast-track”) to date, without which no responsible foreign government would finalize the TPP text, and almost certainly will not do so in 2012. Thus, the most optimistic scenario for concluding the TPP is probably sometime in 2013, after the November 2012 elections. With the Doha Round as we know it now ended, those who believe that the United States is falling behind many of its trading partners in addressing trade concerns and seeking market opening through regional trade agreements can only hope that the United States and its negotiating partners will be able to bring the TPP to conclusion in the foreseeable future.

The case arose out of a contract between the petitioner, a Japanese-based company, and the respondent, an Indian-based company, pursuant to which the petitioner agreed to provide Chinese-produced telecommunications equipment to the respondent in India. The respondent was to make payments for the equipment to an escrow account at an Indian-based commercial bank from which the petitioner would withdraw the funds. The contract was governed by English law and provided that any disputes arising from or relating to the contract were to be resolved by arbitration in Singapore. In early 2008, the petitioner delivered equipment pursuant to the contract and issued invoices and bills of exchange to the respondent in the amount of approximately $47.5 million. The respondent accepted the delivery of the equipment without complaint but only paid the petitioner approximately $5.6 million of the total amount due, citing cash-flow problems.

Anticipating a favorable arbitral award, the petitioner sought an ex parte order attaching a debt owed to the respondent by a New York-domiciled customer in the amount of $18,480 under New York’s Civil Practice Law and Rules § 7502(c). Section 7502(c) provides for the pre-award attachment of assets located in New York in connection with an arbitration regardless of where it is seated:

“[New York courts] may entertain an application for an order of attachment or for a preliminary injunction in connection with an arbitration that is pending or that is to be commenced inside or outside this state, whether or not it is subject to the United Nations convention on the recognition and enforcement of foreign arbitral awards, but only upon the ground that the award to which the applicant may be entitled may be rendered ineffectual without such provisional relief.”

In its decision, the appellate court began by recounting the statutory history of § 7502(c). The court explained that the New York Court of Appeals (the highest court in the New York judicial system) concluded in a much-criticized 1982 decision – Cooper v. Ateliers de la Motobecane, 57 N.Y.2d 408 (1982) – that New York courts had no authority to order the attachment of property in connection with an arbitration. The Court of Appeals had held in Cooper that New York statutory law in effect at the time permitted a court to issue an order of attachment only in an action for damages, not in a connection with an arbitration. Moreover, the Court of Appeals had held that, even if an attachment order could be issued, such an order would be inconsistent with the New York Convention because the Convention precludes courts from doing anything other than ordering an arbitration to proceed. The latter holding had placed New York in a distinct minority among courts internationally, as well as in the United States. (For further background, see Gary Born, International Commercial Arbitration 2030-2042 (2009).)

In response to the Cooper decision, the New York legislature added § 7502(c) in 1985. However, the provision as enacted at that time permitted New York courts to issue orders of attachment or preliminary injunctions only in connection with arbitrations seated in New York that were not subject to the New York Convention. It was not until 2005 that the New York legislature amended § 7502(c) to add the current language to the statute, extending its application to arbitrations seated outside of New York and to arbitrations under the New York Convention. This amendment foreshadowed UNCITRAL’s addition of Article 17J to the UNCITRAL Model Law the following year. Article 17J expressly provides that courts located outside the arbitral seat can issue interim measures in aid of international arbitrations.

After discussing the statutory history, the appellate court analyzed whether the $18,840 debt could properly be attached in the absence of personal jurisdiction over the respondent. (The court lacked personal jurisdiction because the respondent had no offices, employees, or bank accounts in New York, had only occasionally solicited business in New York, and had not undertaken any business activities in connection with the contract at issue in New York.) The court determined that the attachment was proper.

In reaching this conclusion, the court distinguished Shaffer v. Heitner, 433 U.S. 186 (1977), a leading U.S. Supreme Court decision that had held that a state court could not exercise personal jurisdiction over a party merely because the party owned property in the state. The appellate court reasoned that the Supreme Court had noted in dicta in Shaffer that this principle did not preclude an action to attach property in a forum as security for a judgment being sought in another forum, even where the property owner had no other contacts with the forum in which the property was located to give rise to personal jurisdiction. The appellate court concluded that this “security” exception applied in the arbitration context under § 7502(c) because the petitioner was not seeking to rely on the property to confer personal jurisdiction but rather was “merely seek[ing] to have the property attached for future execution in the event a recovery is ordered by the out-of-state forum.”

The appellate court further noted that two safeguards built into § 7502(c) – a requirement that the petitioner must show that any arbitral award made would be ineffectual without the attachment and a provision that the attachment order expires if the petitioner fails to initiate an arbitration within 30 days of the attachment being granted – addressed any concerns regarding fairness. Oddly, the Sojitz court did not address its prior interpretation of the New York Convention in Cooper – holding that the Convention precluded grants of provisional relief in aid of an international arbitration. That holding was a matter of U.S. federal law (because U.S. treaties have the status of federal law) and, as a consequence, not subject to being “overruled” by state law – including state legislation such as the amendment to § 7502(c). The Sojitz court presumably, and correctly, reconsidered and reversed its prior interpretation of the New York Convention in Cooper, but its opinion does not explain this reasoning. Assuming that this logic is followed in the future, the Sojitz decision provides a useful tool for parties to international arbitration whose counter-parties have assets located in New York and comes as a welcome development in the field of international arbitration.

By Gary B. Born & Thomas R. Snider

Building on the American Law Institute’s draft Restatement of the U.S. Law on International Commercial Arbitration, Gary Born, Jan Paulsson, J. William Rowley, QC, Linda Silberman, and Judge Diane P. Wood will discuss controversial themes that have emerged in the course of the drafting process. These include: (1) How National Is International Arbitration?; and (2) The Limits of Party Autonomy.

Although the themes for the conference may have an abstract tone, they encompass a host of issues relevant to anyone practicing in the field. Take the first theme, which one could easily reframe as “How International Is National Arbitration?”

Assuming that one drafts a national Restatement on an international topic, should the process aim to record the existing specificities of national practice, or to facilitate their subordination to international norms? To the extent that one aims to bridge gaps between national and international norms, should one focus on elimination of the most unusual local practices, which the draft Restatement does by rejecting (1) the application of forum non conveniens to enforcement proceedings, and (2) the use of “manifest disregard of the law” as a judicially created ground for vacating awards under § 10 of the Federal Arbitration Act (FAA)? See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 5-21(a) (Council Draft No. 2, 2010) (“An action to enforce a Convention award is not subject to . . . dismissal on forum non conveniens grounds.”); RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-11E, ALTERNATIVE C (Preliminary Draft No. 4, 2010) (“A court may not vacate a U.S. Convention award for manifest disregard of the law.”).

Alternatively, instead of just pruning the outliers, should one aim for virtual congruence between national and international standards? If so, should the Restatement promote greater harmony between those formally distinct sources of law, or should it abolish the formal distinctions through direct incorporation of international norms into domestic law?

As a concrete example of the questions just posed, one may cite the draft Restatement’s treatment of the grounds for vacatur of New York Convention awards rendered in the United States (U.S. Convention awards). In its current form, the draft Restatement proposes (but will have to choose between) two alternatives: (1) vacatur in accordance with the grounds set forth in § 10 of the FAA (which generally governs the vacatur of domestic awards), or (2) vacatur in accordance with the grounds for refusal to enforce awards under Article V of the New York Convention. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7, ALTERNATIVES A & B (Preliminary Draft No. 4, 2010).

In one sense, the choice of vacatur grounds for U.S. Convention awards is not simple. As a purely textual matter, one can defend either of the alternatives mentioned above. For example, § 10 of the FAA might be the appropriate vehicle because (1) the Convention does not regulate the standards for vacatur of awards at the place of arbitration, but contemplates that the curial courts will continue to apply national standards in vacating awards (Article V(1)(e)); (2) in implementing the Convention by statute (9 U.S.C. § 208), Congress provided for the continued application of the FAA’s domestic provisions to the extent that they do not conflict with the Convention or any part of its implementing legislation; and (3) in implementing the Convention by statute (9 U.S.C. § 207), Congress also required confirmation of awards unless a court finds any of the grounds for refusal “specified” in the Convention. Because those grounds include vacatur by a court applying national standards at the place of arbitration (Art. V(1)(e)), recourse to § 10 of the FAA does not conflict with the Convention or its implementing legislation. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note b (Preliminary Draft No. 4, 2010). On the other hand, one could take the position that the same provisions permit vacatur only for the grounds “specified” in the New York Convention itself because the application of any other standard would “conflict” with § 207, which requires U.S. courts to confirm awards absent one of grounds “specified” in the Convention. Id.

Although selection of the proper grounds for vacatur may not be easy as a textual matter, the stakes are surprisingly low because the draft Restatement considers § 10 of the FAA to be “largely congruent” with Article V of the New York Convention. RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note a (Preliminary Draft No. 4, 2010). As a result, selection of either source “presumably would not have any importance as a matter of substance.” Id. Both approaches should, thus, generally yield the same outcomes on petitions to vacate Convention awards.

If both options remain defensible and produce identical outcomes, why agonize over the method that the Restatement adopts for striking a balance between national and international norms? See id. (“An initial question is whether a choice among the alternatives even matters.”). As in so many cases, the question is not “what” one chooses, but “how” one chooses—an issue that may have cascading effects for the entire Restatement.

If the Restatement were to let courts decide through the accumulation of judicial precedent, it would favor the application of § 10 of the FAA by a three-to-one margin among United States Courts of Appeal. RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note c (Preliminary Draft No. 4, 2010). However, the reporters have rejected this approach on the grounds that the Restatement is not a popularity contest.

If the Restatement were to let its advisors and members of its consultative group decide through the accumulation of comments, it would overwhelmingly favor the application of Article V grounds. However, one wonders if that represents a different kind of popularity contest involving practitioners driven to promote New York as a venue for international arbitration, and academics eager to bring the FAA into line with the UNCITRAL Model Law, which offers a “pleasing symmetry” between (1) the grounds for refusing enforcement, and (2) the grounds for vacating awards. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note d (Preliminary Draft No. 4, 2010) (examining the policy considerations, and emphasizing that the unification of grounds for non-enforcement and for vacatur may “enhance the attractiveness of the U.S. as an arbitral forum”). See also United Nations Commission on International Trade Law Model Law on International Commercial Arbitration, arts. 34, 36, 40 U.N. GAOR Supp. (No. 17) at 89, U.N. Doc. A/40/17 (1985) (adopting the substance of New York Convention Article V as the grounds both for refusing enforcement and for setting aside awards); NIGEL BLACKABY ET AL., REDFERN AND HUNTER ON INTERNATIONAL ARBITRATION 595 (5th ed. 2009) (emphasizing the “pleasing symmetry” between the grounds for non-enforcement and for setting awards aside under the UNCITRAL Model Law).

If the Restatement were to follow the intent of Congress, the question becomes whether to focus on (1) what Congress would do if presented with the options today, or (2) what Congress probably had in mind when adopting the Convention’s implementing legislation in 1970. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 4-7 reporters’ note d (Preliminary Draft No. 4, 2010) (“The issue . . . is what Congress intended in enacting Section 207.”).

If approached as a forward-looking judgment about policy, it makes sense to limit the grounds for vacatur of U.S. Convention awards to the grounds actually specified in Article V of the Convention. As explained above, that would not change the substantive outcome of actions to vacate awards, but it would send a clear signal that United States adheres to universally accepted standards for vacating awards, thereby increasing New York’s appeal as a venue for international arbitration. Id.

If approached as a backwards-looking inquiry into the likely intent of Congress during 1970, the picture changes dramatically. As a matter of historical record, the United States did not sign the New York Convention in 1958 because the U.S. delegation concluded that “certain provisions were in conflict with some of our domestic laws.” H.R. Rep. 91-1181, at 1, reprinted in 1970 U.S.C.C.A.N. 3601, 3601-02. See also Certain Underwriters at Lloyd’s London v. Argonaut Ins. Co., 500 F.3d 571, 576 (7th Cir. 2007).

In addition, some contemporaneous observers expressed concerns about the use of multilateral treaties to regulate a topic for which the 50 states had at least a degree of concurrent jurisdiction. See Martin Domke, The United Nations Conference on International Commercial Arbitration, 53 AM. J. INT’L L. 414, 417 & n.27, 419 & n.41 (1959).

Still concerned about unintended changes to U.S. law in 1970, the State Department proposed to implement the New York Convention not by general amendments to the FAA’s existing provisions, but through a separate chapter that would “deal exclusively with recognition and enforcement of awards falling under the Convention.” H.R. Rep. 91-1181, at 2, reprinted in 1970 U.S.C.C.A.N. 3601, 3603 (emphasis added). In doing so, the State Department assured Congress that “[t]his approach would leave unchanged the largely settled interpretation of the Federal Arbitration Act.” Id. (emphasis added).

Given the history of concern about unintended changes to domestic law, one might regard it as perilous to assume that the Convention’s implementing legislation reflects enthusiasm for abolishing the use of national standards for vacatur of U.S. Convention awards. To the contrary, the historical context arguably reflects a sense of caution aimed at preservation of a national character for arbitration.

Perhaps the same sense of caution should militate against the consideration of foreign standards as a dimension of public policy for purposes of refusal to enforce awards under Article V(2)(b) of the Convention. See RESTATEMENT (THIRD) OF THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION § 5-14 cmt. e (Council Draft No. 2, 2010) (indicating that “a court may take into account public policies recognized at the arbitral seat or in other jurisdictions having a connection to the dispute”). But that remains a topic for discussion on March 23.

For more information about the conference, please visit the ITA’s website (http://www.cailaw.org/ita/ASIL_11.html).

The questions presented before the court were:
“(1)(a) Whether review of an arbitration award for “manifest disregard of the law” or “complete irrationality” remains available after Hall Street Associates L.L.C. v. Mattel, Inc., 552 US 576 (2008), a question that this Court again expressly reserved in Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 559 U.S. __, 130 S. Ct. 1758 (2010), and on which there is a clear Circuit conflict; and

(b) If such review is available, may a reviewing court determine whether an award is irrational under the totality of the circumstances (as the district court did here and as the Second Circuit permits), or are awards impregnable unless it is “clear from the record that the arbitrators recognized the applicable law and then ignored it” (as the Ninth Circuit below held).

(2) Whether the Federal Arbitration Act (“FAA”) requires vacatur of an arbitral award issued by arbitrators who failed to disclose material facts bearing on their integrity and their relationships with each other, in violation of the applicable rules governing arbitrations, or (as the Ninth Circuit held) are arbitrators required to disclose only their relationships with the parties and counsel, with the burden to investigate and unearth other material facts falling on the parties”(petition for certiorari as posted on SCOTUSblog, a blog contributed to closely following US Supreme Court decisions).

Manifest disregard is a subject of lengthy academic articles. It has already been frequently discussed on this blog and even some recently last week when discussing the Stolt Nielsen case. However, it remains unclear whether it remains as an option to essentially review the merits of the arbitral award in court. Despite split circuit treatment and a subsequent ambiguous decision in Hall Street Associates LLC v. Mattell, Inc., in which the Supreme Court held that grounds for vacatur are strictly found within the Arbitration Act, the Supreme Court decided against provided further light and clarification on this oft debate topic. Apparently, the Supreme Court, by denying cert, feels that its decision on Hall Street was not vague, but sufficient to settle the long-standing debate.

I recently sat in a meeting in which local arbitration professionals were discussing this very topic, briefly. It made me think, why not? As a newly relocated international arbitration practitioner to NYC after spending some years practicing with the Europeans, I thought it was an interesting idea. Certainly, as I heard frequently from my civil law counterparts in Europe, using New York (and even the U.S. altogether) makes many clients and their attorneys apprehensive, to put it lightly. I think most, if not all, of the readers will already know why: discovery. The fear of the fishing games breaking into mainstream international commercial arbitrations located in the US or even using US arbitrators is very real. While practicing abroad, even US attorneys who had spent years practicing abroad would express those same concerns. Sometimes the concerns were expressed to them by clients, others were directly concerned themselves.

Is this a reality? Not in truly international arbitrations with experienced international arbitrators and practitioners, but the fear remains. However, that is not the purpose of this article – yet it is connected. Why not enact the Model Law? Whether it is truly necessary due to the FAA, institutional arbitration rules and other mechanisms that prevent much of New York law playing a large role in the international arbitration itself….still, would it send a good message? Likely yes. So, what am I advocating here? Not just creating a separate international arbitration act to re-enforce the message that the state of New York is a serious player in the international arbitration arena, but to enact specifically the Model Law.

As my previous articles mentioned, the Model Law attempts to reflect a sort of marriage between the civil law and common law perspectives. It is a “known entity”, a familiar environment if you will for those unfamiliar with the realities of choosing the US, and specifically, the state of New York as the situs for the international arbitration.

Could it happen? I heard comments from those arbitration practitioners that were concerned with the reality of getting it through the legislator, but what I did not hear were substantive expressions of concern that it was a bad idea. I cannot say they do not exist anymore than I could read these practitioners’ minds. I can say, no solid argument was presented, but it wasn’t the main purpose of the meeting either. So – what are the reasons? In this economy, are we not all trying to “send the right message”? For that purpose alone – marketing – is it not a viable idea? Please, share your comments to this experienced practitioner, freshly minted in NYC.

The Federal Arbitration Act does provide many similarities to the Model Law. They both address enforcement of an arbitral award, grounds for setting aside the arbitral award, who has power to determine an arbitral tribunal’s competence, etc. However, it is also within these same categories that the FAA and the Model law differ. Wouldn’t aligning the FAA to the more commonly used Model Law provide greater transparency with the international community?

I have heard many arguments against aligning the FAA with the Model law. Some argue that the FAA’s relationship with the several state arbitration laws make it unnecessary or even inappropriate to modify the FAA to match the Model law. Others argue that with over 80 years of case law history, why change it now? Finally, often when parties opt for institutional rules, any discrepancies are cleared out, resulting in the same or almost the same outcome.

These are viable arguments for sure. Possibly, it wouldn’t be necessary to modify the FAA. However, there is still a matter of perception. Although the United States still enjoys large numbers of international arbitrations being filed here, many attorneys and their respective clients hold a fearful opinion of conducting an international arbitration within the United States. This may very well be premised on the idea of fishing discovery techniques and the fear of those practitioners who do not truly appreciate the difference between the developed hybrid international arbitration system and those more common law influenced domestic arbitration proceedings.

Nonetheless, knowing that the FAA laws also vary in several ways or even leaves items open for the attorneys/clients to then be concerned with state provisions can create a psychological negative reaction. Local counsel, of course, provides the assistance necessary in understanding and applying the FAA and, if appropriate, state laws; however, the decision to arbitrate and under what rules can be made possibly years in advance by other attorneys when the original arbitration clause is inserted in the applicable agreement.
Key areas in which the FAA and the Model Law differ are with respect to the actual grounds available for setting aside an award, who determines the tribunal’s competence, the power to modify or correct an award and appointing arbitrators. Under the Model Law, there are four grounds for setting aside an award which the FAA fails to address altogether, such as when the subject matter of the dispute falls outside of the scope of the arbitration agreement or violating public policy (which has successfully been used in some model law countries). The FAA, in turn, has grounds which the Model Law does not based on corruption and fraud or the “manifest disregard of the law” provision.

Ultimately, although I agree that utilizing institutional procedural rules can truly assist in rectifying any areas of difference, I feel that there are negative perceptions of conducting an international arbitration in the United States. Although possibly ill-founded, the opinion remains and foreign parties often work hard to navigate the choice of law and location for an arbitration agreement away from the United States. The fact that the United States has several years of history, and otherwise appears to flow well, may not greatly influence attorneys who are not comfortable with or sufficiently educated about the benefits of conducting international arbitrations in the United States.

With over 50 countries enacting the Model Law, it is a widely accepted and highly regarded model law which in turn provides greater uniformity and predictability in the international commercial arbitration context. In fact, even the list of countries which the UNCITRAL.org provides as having accepted and enacted the Model Law doesn’t provide an accurate reflection of just how universal this Model Law has become. Some countries, such as The Netherlands, were greatly influenced by its principles, enacting its core principles even if the differences remain substantial enough to not be listed on the UNCITRAL’s website.

The Model Law’s aim is to provide greater transparency for international parties seeking arbitration as its dispute resolution mechanism. Through past case law as well as incorporating both civil law and common law elements, foreign players can better understand how the process may work. Specifically, the Model Law standardizes what constitutes an arbitration agreement. It ensures existence of the compentence-compentence principle, and provides a uniform treatment of awards regardless of the country of origin, procedural rules involved, etc. amongst other standardizing attributes. With many jurisdictions having embraced the Model Law, there is a wealthy source of case law interpreting and applying its principles.

The question remains, to be addressed in my next blog: Why don’t more US states follow Florida and the other 6 states’ examples? Even more important is the question: Why the Federal Arbitration Act? Why not, instead, replace it with the Model Law? Hopefully, these questions will invoke opinions and answers as undoubtedly the practitioners worldwide have diverse and varying views on this point. My thoughts will be saved for my next blog, but I wanted to put the idea out there. If these US states and such countries as Australia and the United Kingdom (also common law jurisdictions) fell compelled to enacted its precepts, why not the United States?

The Federal Arbitration Act pre-dates the Model Law by some 60 years, being enacted in 1925. Over the years it has developed its own case law following and wealth of interpretive resources. I have heard comments that the Model Law simply wouldn’t work within the federal structure of the United States Clearly, that is not the case with the individual states (as others have already successfully incorporated the Model Law), but is that true from the federal perspective? Arguments to be considered in the next round include the argument, if it is not broken, why fix it, and why replace the FAA of 80 years of experience with something having only 25 years experience?

The applicability of 28 U.S.C. § 1782 to international arbitration has generated an interesting debate, especially on this blog (see lastly G. Born’s post, L. Reed’s post, E. Triantafilou’s post, adde, Y. Lahlou, l’applicabilité de l’article 28 USC 1782 à l’arbitrage commercial international, Gaz. Pal., 2009-3). The debate is essentially concerned with the question whether an international arbitral tribunal constitutes a “foreign tribunal” for purposes of § 1782 (see the recent: In re Application of Chevron, 2010 WL 1801526, at *6 (S.D.N.Y. May 6, 2010 and Roger Alford’s blog). Conflicting solutions on this issue have been rendered in the United States (against the application of § 1782 to international arbitration see e.g.: National Broadcasting Co. Inc and NBC Europe v. Bear Steans & Co., Inc et al, 165 F.3d 184 (2d Cir. 1999); El Paso Corp. v. La Comision Ejecutiva Hidroelectrica del Rio Lempa No 08-20771, 2009 US App. Lexis 17596 (5th Cir. Aug. 6 2009); In re Arbitration in London, England, No. 09-C-3092, 2009 US Dist. Lexis 49827. For the application of § 1782 to international arbitration see e.g. In re Oxus Gold plc, MISC 06-82-GEB, 2007 WL 1037387 (D.N.J. April 2,2001), In re Roz Trading Ltd, 469 F. Supp. 2d 1226; In re Hallmark Capital Corp., 534 F Supp. 2d 951 (D. Minn. 2007), Comisión Ejecutiva, Hidroeléctrica del Río Lempa v. Nejapa Power Co., LLC, No. 08-135, 2008 WL 4809035, at *1 (D. Del. Oct. 14 2008).

A related, and somewhat minor question, has however attracted little interest, and that is whether costs incurred by the party to an arbitration procedure in court proceedings based on § 1782 (“the Discovery costs”) may be treated as costs of the arbitration and allocated by the arbitral tribunal. The question will be relevant to the parties since, as it is known, costs are not refunded to the prevailing party in the context of Discovery court proceedings in the United States.

The critical issue is whether the Arbitral Tribunal has jurisdiction to allocate Discovery costs as costs of the arbitration.
The first element of answer may be found in the arbitration agreement.
Proceedings related to a Discovery application in aid of the arbitration may well be considered as a dispute arising out or relating to the underlying contract. Hence, there should not be any difficulty to admit that, in principle, Discovery applications are related to the contract. As a consequence, a broadly formulated arbitration clause (such as a clause worded as follows “all disputes arising out of or in connection with the present contract shall be finally settled through arbitration by one or more arbitrators”) may well be construed as applying to Discovery costs. This is not the end of the story, however.

A first argument against the arbitral tribunal’s jurisdiction to apportion Discovery costs is that applications for Discovery in aid of the arbitration applications usually involve third parties in possession of the evidence sought. Such circumstance, however, should not be relevant as long as the parties in dispute in the arbitration are also parties to the Discovery court proceedings.
Another possible objection relates to the concept of “costs of the arbitration”.

In the context of UNCITRAL or institutional arbitration, it should be seen whether the applicable arbitration rules permit to treat such costs as costs of the arbitration.

It is for example doubtful that, under Article 38 of the 1976 UNCITRAL rules, Discovery costs can be treated as costs of the arbitration. Article 38 provides that “the term ‘costs’ includes only: (a) the fees of the arbitral tribunal to be stated separately as to each arbitrator and to be fixed by the tribunal itself in accordance with article 39; (b) the travel and other expenses incurred by the arbitrators; (c) the costs of expert advice and of other assistance required by the arbitral tribunal; (d) The travail and other expenses of witness to the extent such expenses are approved by the arbitral tribunal; (e) the costs for legal representation and assistance of the successful party if such costs were claimed during the arbitral proceedings, and only to the extent that the arbitral tribunal determines that the amount of such costs is reasonable; (f) Any fees and expenses of the appointing authority as well as the expenses of the Secretary-General of the Permanent Court of Arbitration at the Hague”.

The new 2010 UNCITRAL rules, however, include a new wording of § (e) below. The new Article 40 (e) of the Rules now provides that costs include “the legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable”. Arguably, Discovery costs are costs incurred “in relation to the arbitration”. As a consequence, Discovery costs would be treated as costs of the arbitration.

The ICC rules, with respect to costs, provide in Article 31(3) that “The final Award shall fix the costs of the arbitration and decide which of the parties shall bear them or in what proportion they shall be borne by the parties”. Article 31(1) also provides that the costs of the arbitration include the “reasonable legal and other costs incurred by the parties for the arbitration”. Such a provision does not seem to encompass costs incurred “in relation” to the arbitration. It is generally admitted, however, that arbitrators have wide discretion in apportioning costs. Whether such discretion could be used to allocate Discovery costs remains to be seen.
The LCIA rules confer to an arbitral tribunal the power to “order in its award that all or part of the legal or other costs incurred by a party be paid by another party” (Article 28.3). However, this provision seems to relate to the costs incurred in the arbitration, and would thus not apply to costs incurred in court proceedings. The ICDR rules refer in Article 31 to “the costs of arbitration”. Although the rules also provide for a non-exhaustive list of what “may” be included as such costs, , the concept of costs of arbitration is arguably not equivalent to that of costs incurred “in relation to” the arbitration. The same observation applies with respect to Article 38 of the Swiss Rules.

Another possible ground to recover Discovery costs could be as damages for breach of the arbitration agreement. It is unlikely that the lex arbitri would prevent a party from seeking Discovery in aid of the arbitration, but it may well be that the arbitral tribunal enjoined the party from doing so or from pursuing an application made without the tribunal’s leave.

A U.S. court has, in this respect, decided that § 1782 application suppose the consent of the arbitral tribunal (see In re Bacock Borsig AG, 583 F. Supp. 2d a 233 (D. Mass. 2008)). Such principle is healthy as Discovery applications – as they include leave to depose witnesses and suppose broad discovery – are likely to be inconsistent with the tribunal’s procedural directions. In such a scenario, an application made in disregard of the tribunal’s directions or order would constitute a breach of the arbitration agreement insofar as the arbitration agreement obliges the parties to cooperate in good faith to the proceedings. There should be no valid reason why such a breach could not give rise to damages.

Alexis Mourre/Alexandre Vagenheim