An employee of a Louisiana financial service company who lost in an employment-related arbitration is asking the U.S. Supreme Court to resolve an arbitration-related issue that has divided the circuit courts: Do federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the Federal Arbitration Act (FAA) where the only basis for such jurisdiction is that the underlying dispute involved a federal question?

The federal courts of appeals are split on this issue. The 1st, 2nd, 4th, and 5th Circuits have ruled that federal courts have jurisdiction over such motions, because the court can “look through” the motion to determine if the underlying arbitration proceeding would have been subject to federal jurisdiction but for the arbitration clause. See Quezada v. Bechtel OG & C Constr. Servs., 946 F.3d 837 (5th Cir. 2020); McCormick v. Am. Online, Inc., 909 F.3d 677 (4th Cir. 2018); Ortiz-Espinosa v. BBVA Secs. of Puerto Rico, Inc., 852 F.3d 36 (1st Cir. 2017); and Doscher v. Sea Port Group Secs., LLC, 832 F.3d 372 (2d Cir. 2016). The 3rd and 7th Circuits, however, have ruled that federal courts do not have jurisdiction over such motions. These courts have held that the court cannot “look through” the motion to determine if the underlying proceeding would have been subject to federal jurisdiction. Rather, they apply the traditional “well-pleaded complaint” rule, so that a motion to confirm or vacate an arbitration award must, on its face, necessarily raise a federal issue or otherwise have a basis for federal jurisdiction. See Goldman v. Citigroup Global Markets, Inc., 834 F.3d 242 (3d Cir. 2016); Magruder v. Fid. Brokerage Services LLC, 818 F.3d 285 (7th Cir. 2016).

This jurisdictional quandary arises because the FAA’s domestic arbitration provisions under Chapter 1 do not bestow an independent basis for federal court jurisdiction, unlike Chapter 2 of the FAA, which governs international arbitration and implements the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards — and provides for federal court jurisdiction.

In Vaden v. Discover Bank, 556 U.S. 49 (2009), the Supreme Court addressed the proper standard for determining federal jurisdiction when faced with a petition to compel arbitration under Section 4 of the FAA. The Court rejected the standard articulation of the well-pleaded complaint rule ordinarily used to analyze federal jurisdiction, under which courts would look to the face of the federal court petition for a basis for federal jurisdiction. Instead, the Court adopted the so-called “look through” approach. Under this approach, “[a] federal court may ‘look through’ a § 4 petition to determine whether it is predicated on an action that ‘arises under’ federal law.” Id. at 62. Thus, whereas the well-pleaded complaint rule would require that the Section 4 motion to compel itself evinces a federal cause of action, under Vaden, courts examine the underlying dispute potentially subject to arbitration to determine whether that dispute presents a federal question.

In reaching this result, the Supreme Court relied in part on the language of Section 4, which states that a proponent of arbitration may seek an order compelling arbitration in “any United States district court which, save for [the arbitration] agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties.” The Court also held that the look-through approach was consistent with basic jurisdictional tenets and practical considerations, because failure to look through to the arbitration proceeding’s subject matter “would permit a federal court to entertain a § 4 petition only when a federal-question suit is already before the court, when the parties satisfy the requirements for diversity-of-citizenship jurisdiction, or when the dispute over arbitrability involves a maritime contract.” Id. at 65. Such an “approach would not accommodate a § 4 petitioner who could file a federal-question suit in (or remove such a suit to) federal court, but who has not done so.” Id.

After Vaden, however, the circuit courts have split over whether the same logic applies to motions to confirm an arbitration award under Section 9 of the FAA, to vacate an award under Section 10, or to modify an award under Section 11. The circuits are divided principally because Sections 9, 10, and 11 lack the “save for [the arbitration] agreement” language of Section 4 that was, at least in part, the basis for the Supreme Court’s ruling in Vaden. The 3rd and 7th Circuits maintain that the absence of that language in Sections 9, 10 and 11 compels a different jurisdictional analysis for the various motions that can be brought after an arbitration award has been issued under the FAA. The 1st, 2nd, 4th and 5th Circuits, however, reason that although this “save for” language is absent in these other sections, the Supreme Court’s guidance in Vaden and the background principles animating its jurisdictional analysis under the FAA require the use of the same look-through approach for post-award motions as those brought pre-award under Section 4.

Denise Badgerow, who was on the losing side of an employment-related arbitration that she brought, is now asking the Supreme Court to resolve the circuit split in a petition for certiorari she filed in February 2021, in a case entitled Badgerow v. Walters, No. 20-1143, 2021 WL 706204 (Feb. 2021). Badgerow originally filed a petition to vacate the arbitration award as to certain defendants in Louisiana state court. The defendants removed the action to federal court. Badgerow moved to remand, asserting that the federal court lacked subject-matter jurisdiction over her petition to vacate. The district court held that it did have subject-matter jurisdiction, denied the remand, and then denied Badgerow’s motion to vacate the arbitration award. Badgerow appealed to the U.S. Court of Appeals for the 5th Circuit, solely on the jurisdictional issue. The 5th Circuit affirmed, following the “look through” analysis that the court had adopted in Quezada and finding that Badgerow’s assertion of a federal law claim in the underlying arbitration was sufficient for the court to have jurisdiction over her motion to vacate. See Badgerow v. Walters, 975 F.3d 469 (5th Cir. 2020). Badgerow’s petition for certiorari followed, in which she argued that the jurisdictional issue “is ripe and cries out for a definitive resolution by this Court.” The Supreme Court is expected to decide shortly whether to grant the petition and review the issue.

Insolvency proceedings can create potential roadblocks for arbitration proceedings that require careful navigation. Arbitration proceedings are private contractual proceedings intended to resolve individual claims. In contrast, insolvency proceedings are public proceedings intended to resolve claims collectively. Yet, an arbitration within an insolvency proceeding can be useful for resolving individual claims that may help resolve the collective issues. Counsel must be aware that the jurisdiction in which the insolvency proceeding is pending, as well as the applied law of the arbitration (lex arbitri) will determine the rules for resolving the conflicts between the two types of proceedings

One of the primary goals of any arbitration is to arrive at an enforceable award that is not subject to vacatur. Thus, parties should not proceed with an arbitration without knowing whether the insolvency proceeding will affect the enforceability of the award.

Basic Checklist

Will the arbitration be stayed during the insolvency proceedings?

Generally, insolvency proceedings stay all claims against the debtor, including arbitration proceedings. Sometimes the insolvency proceedings will stay not only arbitrations against the debtor, but also arbitrations brought by the debtor against others. A review of the law in the jurisdiction where insolvency proceeding is taking place, as well as any orders in the insolvency case, will determine whether the arbitration can be filed, whether it can proceed and against whom.

Can permission be obtained to file an arbitration or to proceed with an arbitration within the insolvency proceeding?

If the filing or continuation of an arbitration is stayed by the insolvency proceedings, there may be grounds to obtain relief from the insolvency court to proceed. The insolvency court wants to resolve claims and preserve assets. For example, the insolvency court may allow proceedings against the debtor’s insurance carrier only, without recourse to the debtor’s assets. Sometimes the insolvency court will allow an arbitration to commence or continue, but only to decide the quantum of the claim, so that the claim can be submitted in the insolvency proceeding.

The insolvency proceeding may have its own legal regime that applies to certain issues central to the proceeding itself — such as whether the proceeding is properly filed, whether assets have been improperly transferred or recoverable, and how the insolvency proceeding should be resolved as a whole.

The regime of bankruptcy law on these issues in the United States is well-developed. The U.S. Federal Arbitration Act is also well-developed and establishes a strong preference for arbitration where the parties have agreed to arbitrate resolution of disputes. This policy preferring arbitration conflicts with the bankruptcy laws where the substantive rights sought to be arbitrated are rights created by the bankruptcy proceeding, and would not exist but for the bankruptcy proceeding.

In bankruptcy proceedings where the issues are “core proceedings,” the bankruptcy court has the discretion to stay arbitration in favor of the specialized bankruptcy court. For example, in Pillsbury Winthrop Pittman LLP v. Cuker Industries, now on appeal to the Court of Appeals for the 9th Circuit, the district court in January 2021 denied a request to arbitrate contested counsel fees pursuant to an arbitration clause in an engagement letter. The court held that the core issue of the extent and validity of the counsel fees as a secured claim was one of the issues that could be arbitrated.

A bankruptcy court in the United States has the discretion to decide that permitting the arbitration to proceed would conflict with the underlying purposes of the Bankruptcy Code to have bankruptcy law issues decided by bankruptcy courts, centralizing resolution of bankruptcy disputes and avoiding piecemeal litigation. In the case of GE Capital Retail Bank v. Belton, the U.S. Supreme Court denied certiorari from the 2nd Circuit on March 8, 2021, which held that an otherwise valid arbitration clause would not be enforced to resolve a putative class action case against the bank for violation of the post-discharge injunction by enforcing discharged claims against credit card holders. The lower courts had found that allowing arbitration would impede the bankruptcy court from enforcing its own orders.

Cases decided in jurisdictions outside of the United States apply similar reasoning in deciding the equities of allowing the parties to work out their dispute resolution issues outside of the insolvency regime.

Does the law of the arbitration provide that arbitration can proceed over the objection or notwithstanding the insolvency proceeding?

In some cases, arbitrators have concluded that the arbitration could or should proceed notwithstanding the objection of the insolvency proceeding. This decision may be correct based on the law of the arbitration, and yet diametrically opposed to the insolvency legal regime or under the choice of law provision.

This is illustrated best in several cases involving the Polish company Elektrim SA. Vivendi Universal SA had filed an arbitration before the LCIA against Elektrim SA, which then filed a Polish insolvency proceeding. Polish insolvency law abrogates commercial arbitrations against a debtor. But UK law, where Vivendi Universal SA is incorporated, contains no such provision. The ultimate arbitration award was confirmed by the High Court of London.

The results in an arbitration filed against Elektrim SA in Switzerland were entirely different. Under Swiss law, the conflicts of law analysis determined that Polish law should apply, and Elektrim SA was dismissed from the Swiss multiparty arbitration.

Moving forward with an arbitration without the permission or approval of the insolvency court creates two risks. First, proceeding without permission or approval may violate a stay order imposed upon the non-debtor party, which could have consequences. Second, the uncertainty of the disposition of the arbitration in light of the insolvency proceedings may result in an award that is unenforceable or subject to vacatur.

What are best practices when arbitrating and the insolvency proceedings may be in conflict with the arbitration proceeding?

Generally, the non-debtor party files a notice or a proof of its claim in the insolvency proceeding. But this decision must be reviewed carefully because, in most jurisdictions, this is akin to agreeing to the jurisdiction of the insolvency proceeding. In addition, the non-debtor party should seek relief from any injunction or order that is an impediment to arbitrating the matter. In the alternative, permission can be sought to arbitrate the matter, but collection will be limited to third party assets, such as insurance proceeds and guarantors, or the arbitration award can be used to establish the quantum of the claim in the insolvency proceeding, with collection pursued through the insolvency proceeding.

Conclusion

Insolvency proceedings pose numerous hurdles for parties in or about to commence arbitration. One must tread carefully and understand the rules of both games to ensure that an arbitration award, if obtained, will be enforceable.

Like some other international arbitration institutions, the International Centre for Dispute Resolution (“ICDR”) recently adopted amendments to its International Dispute Resolution Procedures (the “2021 ICDR Rules”).  The ICDR’s amendment became effective on March 1, 2021. The amendments, according to the ICDR, aim to “promote greater efficiency and economy by addressing the early disposition of issues, emphasizing the use of mediation, and expanding the applicability of the expedited procedures. Importantly, the rules also place an increased emphasis on arbitrators’ ethical obligations.”  The 2021 ICDR Rules also address challenges and concerns related to the COVID-19 pandemic, including the use of video, audio, and other electronic means of communication.

Notable and significant revisions include:

Authority of International Administrative Council (“IARC”)

Article 5 of the 2021 ICDR Rules expressly authorizes IARC to (1) determine challenges to the appointment or continuing service of an arbitrator; (2) decide disputes regarding the number of arbitrators to be appointed; (3) determine whether a party has met the administrative requirements to initiate or file an arbitration; (4) in case of parties disagreement, determine the initial place of arbitration.

Joinder

            The joinder rules have been expanded in Article 8(1) as now the joinder is permitted after the constitution of the tribunal if the tribunal determines that the joinder is appropriate and the additional party consents to be joined.

As we have previously reported, International Court of Arbitration (“ICC”) also recently expanded its joinder rules. Continue Reading Revised ICDR 2021 Rules Are Now In Effect

In our recent post, we discussed the split in the federal appeals courts over whether a private international arbitration constitutes a “foreign or international tribunal” within the meaning of 28 U.S.C. § 1782(a), which authorizes U.S. district courts to provide assistance to foreign or international tribunals by ordering discovery of persons in the district.

On March 22, 2021, the U.S. Supreme Court agreed to decide the issue by accepting a petition for certiorari to review judgment of the Court of Appeals for the Seventh Circuit, which joined the Second and Fifth Circuits in holding that 28 USC § 1782(a) applies only to cases in foreign courts and not to private international arbitration. The Fourth and Sixth Circuits have held just the opposite – that 28 USC § 1782(a) does apply to private international arbitration.

In Servotronics, Inc. v. Rolls-Royce PLC et al., No 19-1847, the parties were involved in arbitration in England under the rules of the Chartered Institute of Arbiters, which concerned an indemnification dispute over losses incurred when an aircraft engine caught fire during testing in South Carolina. Servotronics filed an ex parte application under Section 1782 in the U.S. District Court for the Northern District of Illinois seeking a subpoena compelling Boeing to produce documents to be used in the arbitration in England. The District Court initially issued the subpoena, but after Rolls-Royce intervened and moved to quash it, the District Court ruled in with Rolls-Royce’s favor.

Servotronics, which was previously successful in the Fourth Circuit, appealed the District Court’s decision. The Seventh Circuit, after discussing the split among the circuit courts, held that “a more limited reading of Section 1782(a) is probably the correct one: a ‘foreign tribunal’ in this context means a governmental, administrative, or quasi-governmental tribunal operating pursuant to the foreign country’s ‘practice and procedure.’” The Seventh Circuit relied on the statute’s legislative history and the fact that the narrower interpretation of the “tribunal” avoids “a serious conflict” with the Federal Arbitration Act.

The Seventh Circuit noted that if Section 1782 were construed to permit federal courts to provide discovery assistance in private foreign arbitrations, litigants in those arbitrations would have access to more expansive discovery than litigants in domestic arbitrations:

It’s hard to conjure a rationale for giving parties to private foreign arbitrations such broad access to federal-court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations.

 Servotronics filed a petition for a writ of certiorari to the Supreme Court, posing the following question: “Whether the discretion granted to district courts in 28 U.S.C. §1782(a) to render assistance in gathering evidence for use in a ‘foreign or international tribunal’ encompasses private commercial arbitral tribunals, as the Fourth and Sixth Circuits have held, or excluded such tribunals without expressing an exclusionary intent, as the Second, Fifth, and, in the case below, the Seventh Circuit, have held.” The International Institute for Conflict Prevention and Resolution and the Atlanta International Arbitration Society filed amicus briefs in support of Servotronics’ petition.

The Supreme Court granted the petition, which means that, unless there is some procedural reason not to reach the merits, the Court will now resolve this issue that has long divided the lower courts.

On March 3, 2021, Israel signed the HCCH Convention of 2 July 2019 on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters (“2019 Convention”).  Israel became the third State to sign the Convention, joining Uruguay and Ukraine.

The Hague Conference on Private International Law adopted the Convention to provide a uniform process to HCCH member states for enforcing civil judgments in other countries throughout the world.  The convention provides that contracting states will recognize and enforce certain civil or commercial judgments rendered by courts of other contracting states, obviating the need for a review of the underlying judgment on its merits.

The principal tenet of the convention is Article 4, which provides that “a judgment given by a court of a contracting state (state of origin) shall be recognized and enforced in another contracting state (requested state) in accordance with [chapter 2 of the convention].”

Although three States have now signed the 2019 Convention, the Convention has yet to be ratified, which is an important milestone for the Convention to come into full force and effect. Continue Reading Israel Becomes Third Signatory To 2019 HCCH Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters

The parties in a $238-million dispute over the construction of the third set of locks for the Panama Canal is raising issues concerning alleged conflicts of interest on the part of the International Chamber of Commerce (“ICC”) arbitrators in the United States District Court for the Southern District of Florida.[1] The case may resolve rarely litigated issues concerning whether arbitrators who sit on multiple arbitration panels together or who support appointment of each other to lead arbitration panels have disabling conflicts of interest.

The case pits Grupo Unidos por el Canal, S.A. (“Grupo”), a consortium of Spanish, Italian, Belgian, and Panamanian construction firms, against Autoridad del Canal de Panama (“ACP”), the Panamanian entity that operates the Panama Canal and that sponsored the multi-billion-dollar, decade-long project to expand the Canal’s capacity by building a new set of locks (the “Project”). The current dispute (the “Panama 1 Arbitration”), which centers on the suitability of the rock coming from the excavations to be used to produce concrete aggregates for the Project, was arbitrated before a three-member ICC Tribunal and resulted in a $238-million award to ACP and against Grupo. The ICC Tribunal reversed a decision of the dispute review board established in the parties’ contract.

Grupo has filed a motion to vacate the award, claiming undisclosed conflicts of interest on the part of the arbitrators involving “multiple cross-appointments and interrelationships among themselves and other involved in the dispute.” (Grupo Motion to Vacate, at 2.)

In particular, Grupo is claiming that it was improper for the arbitrators not to disclose that: (1) ACP’s arbitrator purportedly “appointed” the Tribunal president to a different arbitration tribunal before the Panama 1 Arbitration Tribunal began its deliberations, a position that Grupo said could garner the Tribunal president several hundreds of thousands of dollars; (2) during the Panama 1 Arbitration, the Tribunal president sat on multiple arbitral tribunals with the tribunal president in an earlier arbitration between the parties (the “Cofferdam Arbitration”), which dealt with “questions of principle” also at issue in the Panama 1 Arbitration; (3) potential conflicts of interest arising from the activities of the barristers’ chambers to which ACP’s arbitrator belongs; and (4) one of the arbitrators was sitting on an arbitration panel with counsel for ACP. (Grupo Motion to Vacate, at 7-12.)

For its part, ACP argues that none of Grupo’s claims raises true conflict requiring vacatur of the award.

The case is entitled Grupo Unidos por el Canal, S.A. v. Autoridad del Canal de Panama, Case No. 1:20-cv-24867 (S.D. Fla.). The issues are raised in Grupo’s motion to vacate the award and ACP’s cross-motion to confirm and enforce the award. Sarah Biser represents Constructora Urbana, the Panamanian contract that is one of the four shareholders of Grupo.

[1]             The parties to the motion to vacate include Grupo Unidos por el Canal, S.A., Sacyr, S.A., Webuild S.p.A., Jan De Nul, N.V.

As we have discussed in previous posts, federal appeals courts in the United States are split over whether a private international arbitration constitutes a “foreign or international tribunal” within the meaning of 28 U.S.C. § 1782(a), which authorizes U.S. district courts to provide assistance to foreign or international tribunals by ordering discovery of persons in the district.  In a very recent case, the United States District Court for the District of Columbia recognized this split, and directed the parties to provide additional briefing before deciding this hotly disputed issue.

In In re Application of: Food Delivery Holding 12 S.A.R.L., 1:21-mc-00005, 2021 WL 860262 (Mar. 8, 2021), Food Delivery Holding 12 S.a.r.l. (“FDH”) filed an application under 28 U.S.C. §1782 for an order to issue a subpoena for the taking of deposition and production of documents for use in a matter before the Dubai International Finance Centre-London Court of International Arbitration (“DIFC-LCIA”).

The Court began its analysis by noting that deciding whether to grant discovery under Section 1782 involves a two-step inquiry:

First, the court must determine whether it can order the requested relief—that is, whether it has the authority to do so; second, it must decide whether it should order the requested relief—that is, whether exercising its discretion to do so would further the statute’s “twin aims of ‘providing efficient assistance to participants in international litigation and encouraging foreign countries by example to provide similar assistance in our courts.’”

Continue Reading Uncertainty Continues Over Whether Federal Courts Can Order Discovery in Aid of International Arbitrations

The leading international arbitration institutions, including the London Court of International Arbitration (“LCIA”) and the International Court of Arbitration (“ICC”), are revising their arbitration rules to improve efficiency, flexibility and transparency, and address challenges and concerns related to the COVID-19 pandemic.

In a previous post, we discussed LCIA’s updates to its arbitration and mediation rules, which came in effect on October 1, 2020.  The ICC has issued similar updates to its 2017 Arbitration Rules, which will take effect on January 1, 2021 (the “2021 ICC Rules”).  The updates, according to the ICC Court President, Alexis Mourre:

mark a further step towards greater efficiency, flexibility and transparency of the Rules, making ICC Arbitration even more attractive, both for large, complex arbitrations and for smaller cases.

Notable and substantive revisions to the 2021 ICC Rules include:

Electronic Submissions

            Article 3 of the 2021 ICC Rules now allows the parties to make their submissions by email, replacing the previous requirement to provide the submissions in a hard copy.  This amendment recognizes that most communications are now conducted electronically and addresses COVID-19 concerns when hard copy filing may be impossible and present health risks.

Virtual Hearings

            The ICC, like other international arbitration fora, quickly adopted to the COVID-19 reality of remote hearings.  Article 26(1) of the 2021 ICC Rules now provides that “[t]he arbitral tribunal may decide, after consulting the parties, and on the basis of the relevant facts and circumstances of the case, that any hearing will be conducted by physical attendance or remotely by videoconference, telephone or other appropriate means of communication.” Continue Reading 2021 ICC Rules Update Aims At Greater Efficiency, Flexibility, And Transparency and Addresses COVID-19 Issues

Sarah Biser moderated a webinar roundtable discussion on  how to conduct business in the UAE and Israel – now that the Abrahams Accords have made possible trade and commerce between Israel and the UAE.  The roundtable discussion, held on October 28, 2020,  included Sarah Biser and Mark Hess of Fox Rothschild, Uzi Dayan, Member of the Knesset; Charles Laubach, Partner at Afridi & Angell Legal Consultants (Dubai, UAE); Omar Al Busaidy, Fulbright Scholar, MICE International (UAE); Yoram Elkaim, Head of Legal, Google – Europe, Middle East and  Africa; and Stephen Barak Rozen, Partner at Amit Pollak Matalon & Co.

If you would like a recording of the session, kindly email sbiser@foxrothschild.com.