Arbitration Process Issues

DESPITE HEAVY CRITICISM OF THE RATIONALE, BRITISH COURT REFUSES TO ENFORCE ARBITRAL AWARD SET ASIDE BY RUSSIAN COURT

November 6, 2017 by Carlton Fields

The British High Court of Justice recently decided not to enforce an arbitral award in a dispute over the calculation of the purchase price of a Russian metallurgical company where a Russian court set aside that award and Russian appellate courts affirmed the decision. The plaintiff had argued the British court should not recognize the Russian judgments setting aside the award because it was the result of bias, while the defendant argued under the doctrine of ex nihilo nihil fit that because the award had already been set aside there was nothing for the British court to enforce.

The court started its analysis by observing the heavy burden borne by the party challenging the foreign court decision. Not only must the party show the decision is wrong or manifestly wrong, they must also show the decision is “so wrong as to be evidence of bias, or be such that no court acting in good faith could have arrived at it.”

The original Russian judge decided to set the award aside on three grounds: (1) the non-disclosure of potential bias because of the arbitrator’s relationships with expert witnesses was non-waivable; (2) the arbitrators’ method of calculating the purchase price violated public policy because it did not follow the purchase agreement’s terms; and (3) the dispute involved a “corporate claim” which is non-arbitratable under Russian law. It is noteworthy that the latter two grounds were not ones raised by the parties and were only raised by the judge in her written opinion.

In a lengthy opinion, the British High Court criticized the Russian court’s decision on all three grounds. On the non-disclosure issue, the British court took issue with the Russian court’s failure to address the appropriate test for waiver (actual or constructive notice), and failure to reach any factual conclusions. The court also took issue with the sua sponte nature of the latter two grounds. On the public policy issue in particular, the court found it difficult to see how the arbitrators acted in contravention of the agreement terms in arriving at a price calculation. Moreover, even if it were in contravention, that would amount to an error of law at most, not an act against public policy. On the non-arbitrability issue, the court determined that the Russian judge might have been a pioneer in concluding that corporate disputes are not arbitrable, because it could not find any record of cases holding applying that rule. However, a number of Russian courts since have followed her ruling.

Despite taking issue with the “shaky” grounds upon which the Russian court decided to set aside the award, and with the Russian appellate courts’ decisions affirming, the High Court nevertheless refused to enforce the award. It held that the decisions were not “so extreme and perverse that they can only be ascribed to bias” against the Plaintiff. For that reason, the court dismissed the application to enforce the award and did not reach the ex nihilo nihil fit argument.

Maximov v. Open Joint Stock Co., [2017] EWHC 1911 (Comm) July 27, 2017.

This post written by Thaddeus Ewald .
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FIFTH CIRCUIT FINDS ORDER NOT “FINAL” FOR PURPOSES OF APPELLATE JURISDICTION

October 24, 2017 by John Pitblado

The U.S. Court of Appeals for the Fifth Circuit held that an order compelling arbitration and staying a related action was not an appealable “final decision with respect to arbitration” under the Federal Arbitration Act (“FAA”).

Anthony Charles filed an action asserting substantive claims regarding construction of a home in Mississippi (“Charles I”). While it was pending, the defendants filed a separate action against Charles (“Charles II”), seeking to compel him to arbitrate the claims in Charles I. The court in Charles II granted the motion to compel, and ordered that the unresolved claims in Charles I be stayed pending arbitration. Charles appealed.

The Fifth Circuit held that it did not have jurisdiction over the appeal. The court noted that the FAA only allows courts to consider an appeal from a “final decision with respect to arbitration,” meaning one that “ends the litigation on the merits.” In ruling, the court found that furthering the strong interest in favor of arbitration required considering Charles II together with Charles I. Because the claims in Charles I were merely stayed by virtue of Charles II – not dismissed – the court held that the decision in Charles II could not be considered a “final appealable order” under the FAA.

Green Tree Servicing, LLC, et al. v. Anthony Charles, No. 17-60165 (5th Cir. Sept. 29, 2017)

This post written by Alex Silverman.

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NINTH CIRCUIT AFFIRMS APPLICATION OF ARBITRATION CLAUSE FOUND IN AMAZON’S CONDITIONS OF USE

October 23, 2017 by John Pitblado

Applying Washington law, the Ninth Circuit Court of Appeals affirmed a California federal court’s ruling that Amazon’s Conditions of Use (COU) created a valid contract between Amazon and its customers, and there was no procedural unconscionability in the presentation of the arbitration clause. Further, the Court found that, “[w]hile the COU are adhesive in nature, adhesion is insufficient to support a finding of procedural unconscionability.”

Plaintiff made three arguments for substantive unconscionability which the Court found lacked merit: (1) “the unilateral modification clause does not render the arbitration provision substantively unconscionable because Amazon is limited by the implied covenant of good faith and fair dealing;” (2) “the arbitration clause’s exemption of intellectual property claims for injunctive relief does not make the provision overly harsh or one-sided;” and (3) “the attorneys’ fees provision does not create substantive unconscionability because it mirrors Washington’s statutory right to attorneys’ fees for frivolous claims” and “also complies with California law, which permits Amazon to seek fees as a sanction for frivolous claims.”

Class action waivers continue to be a hotly contested issue. We previously reported that the California Fifth District Court of Appeal held that, while California Private Attorneys General Act (PAGA) claims for civil penalties cannot be arbitrated or waived, the underlying worker claims for the wages themselves are subject both to arbitration and a class action waiver, which substantially undercuts an employer’s group exposure in wage and hour actions.

Wiseley, et al. v. Amazon.com, Inc., No. 15-56799 (9th Cir. Sept. 19, 2017)

This post written by Nora A. Valenza-Frost.

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SECOND CIRCUIT ENFORCES ARBITRATION AGREEMENT IN FAVOR OR NON-PARTY WHOSE AGENT ENTERED INTO THAT AGREEMENT

October 17, 2017 by Rob DiUbaldo

The Second Circuit has affirmed an order compelling a plaintiff-employee to arbitrate his employment related claims against Carnival Cruise Lines, despite the fact that the one page employment agreement that he signed did not contain an arbitration clause and did not mention Carnival.

The plaintiff sued Carnival in connection with injuries allegedly suffered while working on one of their ships, and Carnival moved to compel arbitration. The plaintiff argued that he should not be required to arbitrate his claims because his employment contract did not contain an arbitration clause or expressly incorporate any other document, and Carnival was not a party to or even mentioned in that agreement. The Court disagreed.

First, the Court noted that incorporation by reference was a matter of law and thus for the court to decide. Second, it found that the language – stating that the “herein terms and conditions in accordance with POEA Governing Board Resolution No. 09 and Memorandum Circular No. 10 … shall be strictly and faithfully observed,” was sufficient to incorporate those documents, which contained an arbitration clause. Third, the Court found that it did not matter that the plaintiff was unaware of the arbitration clause, as he was bound by the terms of his contract and the incorporated documents, regardless of whether he had actually read them. Finally, the court held that the company with which the plaintiff had entered into a contract was acting as an agent for Carnival, and that Carnival had the power to enforce an arbitration agreement made by its agent.

Pagaduan v. Carnival Corporation et al., No. 16-465 (2d Cir. Sept. 18, 2017)

This post written by Jason Brost.

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BANKRUPTCY COURT GRANTS MF GLOBAL HOLDINGS’ MOTION TO RECONSIDER DECISION TO COMPEL ARBITRATION IN BERMUDA, BUT REACHES SAME RESULT

October 16, 2017 by Rob DiUbaldo

On September 6, 2017, the Bankruptcy Court for the Southern District of New York issued the latest order in the ongoing coverage battle between MF Global Holdings (“MF Global”) and Allied World Assurance Company regarding the former’s bankruptcy. The decision stemmed from MF Global’s motion to reconsider the court’s August 24, 2017 order compelling arbitration in Bermuda. While the court initially granted the motion to reconsider, it reached the same result and granted Allied World’s motion to compel arbitration.

MF Global’s request for reconsideration was based on the court’s alleged failure to address its argument that the global bankruptcy plan explicitly retained jurisdiction over adversary proceedings, a provision which should have superseded the underlying insurance contract’s arbitration provision which formed the basis of the court’s decision to compel arbitration. The court noted that while its decision mentioned the argument, it did not address the merits of the argument, so the court granted the motion to reconsider.

On reconsideration, the court was unpersuaded by MF Global’s argument that the bankruptcy court retained jurisdiction pursuant to the global bankruptcy plan. In a short opinion, the court distinguished the principal authority upon which MF Global relied: Ernst & Young LLP v. Baker O’Neal Holdings, Inc., 304 F.3d 753 (7th Cir. 2002). That case addressed an adversary proceeding that commenced before the bankruptcy plan and a plan provision which retained jurisdiction over pending adversary proceedings. Here, the adversary proceeding was not filed until after the plan was confirmed, and, the court concluded, the plan language retaining jurisdiction of pending adversary proceedings should not be interpreted to supersede the contractual arbitration provision in the pre-petition contract without explicit instruction in the plan as to that interpretation. Furthermore, Allied World had not waived its right to demand arbitration at any point in the proceedings.

Thus, even though the court granted MF Global’s motion to reconsider, it ultimately reached the same conclusion and granted Allied World’s motion to compel arbitration and denied MF Global’s motion to stay the arbitration.

In re: MF Global Holdings Ltd., Case No. 11-15059 (Bankr. S.D.N.Y. Sept. 6, 2017).

This post written by Thaddeus Ewald .

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