Alan Scott Rau

Arbitral Power and the Limits of Contract: The New Trilogy

The American law of arbitration has for some reason been replete with what we have become accustomed to call “trilogies” – and the last two terms of the U.S. Supreme Court have curiously continued that pattern. Once again the Court has handed us three leading cases on closely-related themes – and these decisions have turned out in fact to be in many ways the most interesting of the lot. (I am referring of course to Stolt-Nielsen, Rent-A-Center, and Concepcion.) All three amount to extended riffs on the Question of Questions – the scope of arbitral power: And so the Court has continued to dip its finger into this rich mixture – compounded of notions of judicial review, “arbitrability,” “separability,” competence/competence, and the preemption of state law – all of our hard-earned lore and learning is there. Apparently it is now well beyond the power of arbitrators to hold that “classwide proceedings are permitted,” at least without some pretty special authorization (Stolt-Nielsen) – while it is well beyond the power of courts to hold that they must be – certainly not when the parties have agreed to an arbitral determination (Rent-A-Center), and even when they haven’t (Concepcion). It seems reasonably clear that these cases will continue to generate endless discussion. Undoubtedly for the moment the greatest salience will be with respect to arbitration clauses in contracts of adhesion entered into by consumers and employees – although this recent jurisprudence has the potential of sweeping far more broadly. Things now seem curiously muddled: If our law of arbitration no longer seems to have any clear unifying theme, this suggests that private adjudication – rather than presenting us as it once did us with a coherent and self-contained body of doctrine – has become a hostage to a game played out on a larger stage, a pawn of wider, systemic “political” concerns. Throughout the “trilogy” we have seen much familiar learning yoked to the service of a market-driven political agenda, in the process inevitably becoming warped and almost unrecognizable. And so – yet another untoward result – these cases will require the reevaluation of what seemed, for a while, to constitute comfortably settled certainties. Here is at least one step in that direction.

Understanding (and Misunderstanding) 'Primary Jurisdiction'

In our “Westphalian” regime of international arbitration, conflict and competition between national jurisdictions, with overlapping and yet plausible claims to supervise the process, become inevitable. The conventional starting point for any discussion - the fulcrum around which the entire arbitral enterprise pivots - has been the supposed dichotomy between the state of the “seat” - where the arbitration finds its juridical “home,” and whose jurisdiction over the process is therefore “primary” - and all other states whose jurisdiction must therefore be deemed only “secondary.” Both legislation and Convention envisage an exclusive role for the former in setting the process in motion - for example, by appointing the arbitrators - and above all in monitoring compliance with the agreement - for example, by annulling or vacating the resulting award. That the “seat” is the privileged starting point with respect to any allocation of judicial authority has traditionally been a simple reflection of the power of any sovereign over acts taking place within its “territory”; an alternative and perhaps more robust explanation would be somewhat more “contractualist,” giving priority to the parties’ exercise of autonomy in the very act of selecting the place of arbitration - and to the intuition that, by extension, they have presumptively chosen to subject themselves both to a certain body of “arbitration law,” and to the supervisory jurisdiction of the courts charged with applying that law. I begin by canvassing the various fact patterns in which the traditional allocation of international competence on the basis of “primary” and “secondary” jurisdiction might possibly be thought useful: It has become, for example, the heuristic of choice to test the extraterritorial effect of an award, in circumstances where the agreement of the parties has subjected the arbitral process to a particular legal system whose own courts have found it lacking in legitimacy. All this is much controverted, but generally well understood. The inevitable problem, though, is that none of this is a universal solvent - the world can after all be understood and patterned and divided up in all sorts of ways. What may have begun as a rough attempt to allocate responsibility over the unfolding of the process, has often been unthinkingly applied to all sorts of new and unexpected and inappropriate contexts. Where, for example, a party has asked a court to enjoin an arbitration against him that has been threatened or initiated - perhaps on the fundamental ground that he has never even given his assent - American courts will increasingly hold that, whatever power they might have to enjoin a “local” arbitration, it would be “inconsistent with the purpose of the New York Convention” to enjoin arbitral proceedings in a state of “secondary jurisdiction” - and thus they “lack jurisdiction” to do so. Where a party has claimed that a foreign award has been obtained by bribery and corruption, and wishes to institute a “collateral attack” in this country through a RICO action, it may equally be held that the court lacks “subject matter jurisdiction” to reassess an award rendered in a state of “primary jurisdiction”; “under the framework of the New York Convention, the proper method of obtaining this relief is by moving to set aside or modify the award in a court of primary jurisdiction.” American courts thus seem curiously mesmerized, when asked to deploy familiar procedural devices in aid of their nationals, by a rhetoric invented for quite different purposes. What purports in cases like these to be a commendable solicitude for the needs of international arbitration, takes the form of an abdication of any decision making power whatever, in favor of the courts of the seat. To invoke a putative lack of “power” based upon absolute prohibitions that supposedly emanate from the Convention seems a crude and clumsy and overbroad and irresponsible way of responding; even a legal system quite committed, for example, to the proposition that attempts to evade the arbitral process are likely to be quite without merit - or for that matter to the proposition that international neutrals cannot possibly be corrupt - need not shrink, on the prophylactic grounds of lack of jurisdiction, from testing any challenges.

Gateway-Schmateway: An Exchange between George Bermann and Alan Rau

What role do national courts play in international arbitration? Is international arbitration an “autonomous dispute resolution process, governed primarily by non-national rules and accepted international commercial rules and practices” where the influence of national courts is merely secondary? Or, in light of the fact that “international arbitration always operates in the shadow of national courts,” is it not more accurate to say that national courts and internatonal arbitration act in partnership? On April 27, 2015, the Pepperdine Law Review convened a group of distinguished authorities from international practice and academia to discuss these and other related issues for a symposium on International Arbitration and the Courts.The issue begins with a transcript of a moderated exchange between Professor Bermann, the Reporter for the American Law Institute’s (ALI) ongoing Restatement (Third) of the U.S. Law of International Arbitration project, and Professor Rau, an ALI-appointed Advisor on the project. Professor Coe poses questions to both scholars that focus on selected issues that are characteristic of matters discussed during the ALI drafting and consultative process, especially so-called “gateway” matters like competence-competence. This exchange revealed several questions on which Professors Bermann and Rau diverged – namely, arbitrability of scope issues, the concept of delegation, and whether an express remedy limitation in a contract should be treated as a limit on a tribunal’s authority. For those interested in the iterative process that creates an ALI Restatement, this is a must read.

BG Group and 'Conditions' to Arbitral Jurisdiction

Although the Supreme Court has over the last decade generated a robust body of arbitration caselaw, its first decision in the area of investment arbitration under a Bilateral Investment Treaty was only handed down in 2014. BG Group v. Argentina was widely anticipated and has attracted much notice, and general approval, on the part of the arbitration community. In this paper we assess the Court’s decision from two different perspectives -- the first attempts to situate it in the discourse of the American law of commercial arbitration; the second considers it in light of the expectations of the international community surrounding the proper construction of Conventions between states. Our initial goal had been to write jointly, with the hope that we could bridge our differences to find, if not common, at least neighboring, ground. On some points we did so, but ultimately our divergent appreciations of the proper way to interpret the condition precedent in the investment treaty in BG Group overcame the idealism with which we commenced the project. Nonetheless we have decided to present the two papers together to emphasize the dichotomous approaches to treaty interpretation that two moderately sensible people, who inhabit overlapping but non-congruent interpretive communities, can have.

“Punitive, Exemplary, “Vindictive,” or “Edifying Damages of Whatever Nature”

One critical arena for the clash of competing visions of arbitration - viewed from one angle as an exercise in adjudication, and yet from another as an exercise in private self-government - is the subject of the present paper - the ability of arbitral tribunals to grant or to withhold awards of punitive damages.As the United States is one of the rare jurisdictions in which such awards are regularly given, it would only be natural that it is the jurisdiction that has experienced the most angst on the subject. In this paper I run through, in a summary fashion, the spectrum of cases in which the problem of punitive damages is likely to arise - focusing on concrete factual patterns, and moving from the fairly straightforward to the highly controverted. These fact patterns include the cases where:• The parties have expressly provided by contract that the arbitrators, once they find liability, may award punitive damages, but local courts, on a motion for vacatur, hold that such awards are impermissible;• The parties have no express agreement at all conferring on their arbitrators the power to make such awards but the arbitrators proceed nevertheless to do so;• The parties have not expressly excluded an arbitral award of punitive damages, but they do include a choice of law clause incorporating the law of a state under which such awards are deemed to be against public policy;• The parties have expressly excluded awards of punitive damages and yet the arbitrators proceed nevertheless to render an award that looks very much as if it includes punitives;• The parties have expressly excluded the possibility of any arbitral award of punitive damages, and the tribunal has respected such an exclusion and has declined to award them.These latter cases of course raise further questions:• whether any contractual exclusion functions as a limit on the authority of the arbitral tribunal, bringing with it the possible consequence of vacatur on the ground of excess of power, and• just what is to be understood by “punitive damages” anyway?: The taxonomy of what is “punitive” is obviously a delicate matter, hardly self-evident, and an enterprise that is precarious, unstable, shifting, and easily manipulated.• A final section considers the scenario raising the question the transnational implications of a US award: What is likely to be the currency of an American award of punitive damages in other jurisdictions?Civil law jurisdictions traditionally wary of US punitive damage awards do now seem to be displaying somewhat greater receptiveness; a further level of analysis reminds us that when we are faced with an international arbitral award, other interests also come into play to be weighed against any state’s own “public policy”: The structure of the New York Convention exists after all to make effective contractual exercises of private autonomy, at the same time adding to “comity” or courtesy the force of international obligation - both values that embody strong “policy” in their own right.So in a world where privately negotiated arrangements assume a privileged position, and where proponents of the arbitral process pursue their progress towards the ideal of an autonomous system, punitive damage awards are increasingly unlikely to be seen as implicating (in the canonical formulation), fundamental principles of justice or morality or the foundation of a state’s legal order.

The Errors of Comity: Forum Non Conveniens Returns to the Second Circuit

What a federal court is expected to do when asked to enforce a foreign arbitral award --- what constraints the Conventions impose on its normal course of adjudication --- is of course a vast question. But there is one small piece of the puzzle that recurs frequently, and which has in particular been troublesome to the Second Circuit.: What remains of the inherent power of a common-law court to defer or dismiss litigation of a Convention case on the grounds that it constitutes an “inconvenient” forum?A decade ago a federal district court in Monde Re, “relying on the doctrine of forum non conveniens,” dismissed a petition to confirm a foreign arbitral award, and the Second Circuit affirmed. The received wisdom ever since has been quite hostile --- uniformly to the effect that the obligations imposed by the New York and Panama Conventions make any recourse to the doctrine inappropriate. Despite the fact that the Convention in art. III allows contracting states to continue to use their “rules of procedure” in recognizing or enforcing foreign awards, that is a category of very weak explanatory power: While litigants may have to take local courts as they find them, the one thing art. III cannot be intended to do, is to permit local courts to devise rules that compete with, or undermine, or put up obstacles to, the rules of decision under which the Convention expects them to assess the legitimacy of awards.Now in Monde Re itself the respondent, the state of Ukraine, had not been a signatory to the contract nor did it participate in the arbitration: Its defense --- “I was never a party to any agreement to arbitrate” --- would indeed constitute an art. V ground for the refusal of recognition and enforcement. The inquiry then becomes, “just how do we go about answering the question?” --- or more precisely, “just who is best placed to evaluate whether these ‘grounds’ are present? Or perhaps, “just who is to make the decision?” It is a familiar notion that the grounds for decision, and the identity of the appropriate decisionmaker, are likely to call for entirely distinct inquiries, and it seems plausible to say that the former may be so intertwined with the need to obtain foreign-source evidence, and with the need to assess foreign law, that it may become prudent to defer the decision to a foreign court.But by contrast the Second Circuit’s latest venture into the area, in Figueiredo Ferraz, is astonishing: Here the court deferred the enforcement of a Peruvian award on the basis of the “public interest factors” called for in the usual forum non conveniens analysis --- and these “factors” did not refer in any way to any supposed difficulties a U.S. court might face in establishing the identity of the “proper party.” Instead the “public interest” was entirely that of Peru, for Peruvian legislation imposed a limit on what a government agency was permitted to pay annually in satisfaction of a judgment against it. Apparently such “public factors” were closely congruent with considerations of international comity. But none of this even comes close to being an art. V ground for the refusal of recognition and enforcement, and in a Convention case the usual recourse to a court’s “discretion” must be foreclosed: While by its terms the Convention may allow a contracting state to enforce awards even where the canonical art. V grounds are present, it extends no leeway whatever to refuse to do so when they are not. Whether on a motion to confirm a Convention award --- or at an earlier stage on a motion to stay litigation or compel arbitration --- a doctrine of forum non conveniens must in the structure of our law have only the most marginal presence. Anything more robust would be in considerable tension with the goals of the Convention to increase the currency of awards by limiting challenges and expediting enforcement. But although forum non must play a slender role of only intermittent interest, it has a role nonetheless, whenever a Convention defense is in play and the identity of the appropriate decisionmaker is in doubt. The trick is to preserve the classic virtues of prudence and restraint and economy of means in adjudication, while at the same time managing to respect the structure of the Convention, and being alert to the policies in support of the arbitral process that the Convention seeks to advance.