Arbitration Process Issues

UK COURT REFUSES TO REMOVE ARBITRATOR FOR ALLEGED BIAS

April 12, 2017 by Rob DiUbaldo

A court in the United Kingdom refused to remove an arbitrator for perceived bias where the arbitrator was appointed to arbitrate multiple disputes arising from the same underlying incident triggering insurance coverage. A company (“H”) was adjudged in a US proceeding to be liable and subsequently settled the claims before judgment. A Bermudan insurance company (“L”) wrote the top layer of H’s liability insurance and refused H’s claim for the full coverage of its layer, on the grounds that the settlement was not reasonable and L had reasonably not consented to it. The dispute was subject to arbitration in London, and the instant opinion addressed H’s arguments that the third, neutral arbitrator appointed (“M”) was partial and biased, warranting removal.

The claims of partiality concerned the revelation that M had accepted arbitral appointments in two other cases arising out of the same underlying incident and another party (“R”)’s disputes with its excess liability insurers—including a claim by R against L. H made three arguments regarding M’s conduct allegedly demonstrating bias: M’s acceptance of the R arbitral appointments, M’s failure to disclose those appointments, and M’s response to H’s challenge to his impartiality.

The court rejected the first argument, finding that no fair-minded or informed observer would doubt M’s impartiality because it was receiving remuneration for arbitrating other disputes involving L and that overlapping subject matter was a regular feature of international arbitration in London. The court rejected the second argument because—already having found the other arbitral appointments were not problematic—there was no reason to disclose the appointments; alternatively, the court found even if M should have disclosed the appointments, the failure to do so did not give rise to a real possibility of apparent bias. Finally, the court rejected the third argument, holding that if an arbitrator were biased merely because a party had challenged his impartiality, any party would be able to self-select neutral arbitrators by unjustifiably challenging disfavored arbitrator’s impartiality.

H v. L [2017] EWHIC 137 (Comm) (Mar. 3, 2017).

This post written by Thaddeus Ewald .

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DISTRICT COURT FIND NO FEDERAL QUESTION JURISDICTION IN ACTION CHALLENGING ARBITRATION AWARD BASED ON ARBITRATOR BIAS

April 11, 2017 by Rob DiUbaldo

A federal court has rejected the attempt of the losing party in an arbitration to engage in discovery regarding the potential bias of the arbitrator, finding that it had no jurisdiction over the matter because it did not involve a question of federal law and that it was not appropriate to allow discovery on this issue based solely on speculation.
The arbitration arose out of a dispute over allegedly defective work performed by a building contractor, BCI Construction, Inc., resulting in an award of approximately $586,000 in damages and attorney’s fees to 797 Broadway Group, LLC. BCI filed an action to vacate the award in federal court on the basis that the arbitrator was biased and moved to compel the arbitrator’s deposition.

The district court began with the question of it jurisdiction over the matter, repeating the well-established rule that the Federal Arbitration Act does not create an independent basis for jurisdiction in federal court. BCI argued that it was premature to consider the jurisdictional question because the court had “not had the opportunity look through the pleadings and conduct an analysis of the underlying dispute to determine if jurisdiction is appropriate.” The court disagreed, finding that there was no apparent federal question in the underlying dispute and that it would not allow BCI to depose the arbitrator “in hopes that an underlying federal question will present itself.” Having found no basis for federal jurisdiction, the court dismissed the matter. The court also awarded 797 Broadway’s motion for costs and an attorney’s fees, finding that BCI had failed to “articulate[] a colorable reason why the parties’ underlying dispute presented a federal question.” BCI Construction, Inc. v. 797 Broadway Group, LLC, Case No. 1:16-cv-1077 (FJS) (N.D.N.Y. March 15, 2017)

This post written by Jason Brost.

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NINTH CIRCUIT HOLDS PAGA CLAIMANTS MAY BE COMPELLED TO ARBITRATE

April 3, 2017 by Michael Wolgin

Terminix appealed from a district court order denying its motion to compel arbitration of a former employee’s representative claim under California’s Private Attorneys General Act (PAGA) alleging that Terminix failed to provide workers with proper breaks, payment, and pay stubs. On appeal, the Ninth Circuit reversed and remanded. It found persuasive Terminix’s argument that the district court erred in concluding that PAGA claims categorically cannot proceed to arbitration. Specifically, the district court reasoned that a PAGA claim “belongs to the state, and the state has not waived the judicial forum” even where an employee signs an employment contract requiring arbitration of PAGA claims. The Ninth Circuit disagreed and found that individual employees can bind the state to an arbitral forum. Specifically, the court reasoned “[a]n individual employee, acting as an agent for the government, can agree to pursue a PAGA claim in arbitration” and clarified that the California Supreme Court’s Iskanian ruling holds only that a complete waiver of the right to bring a PAGA claim is invalid. Valdez v. Terminix Int’l Co. Ltd. P’ship, Case No.15-56236 (9th Cir. Mar. 3, 2017).

This post written by Gail Jankowski.

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THIRD CIRCUIT RULES ARBITRATION AGREEMENT INCLUDED IN PRODUCT MANUAL IS UNENFORCEABLE

March 30, 2017 by John Pitblado

This action involved a class action suit brought in New Jersey federal court. The complaint alleged that plaintiff David Noble saw Samsung advertisements stating that the Samsung smartwatch’s battery lasted 24 to 48 hours with typical use. Noble claimed that the battery in his Samsung smartwatch lasted only four hours, and that two replacements provided equally poor battery life. The suit was brought based on the New Jersey Consumer Fraud Act, common law fraud, negligent misrepresentation, breach of warranty and unjust enrichment, accusing the company of deceptive marketing and pricing. Samsung moved to compel arbitration, based on an arbitration provision, printed on page 97 of a 143-page “Health and Safety and Warranty Guide” in the watch box. The New Jersey district court denied the motion, finding that there was no binding contract and that the arbitration clause was unreasonably hidden. Samsung appealed.

In its analysis whether the arbitration clause is a valid contractual term, the Third Circuit noted that under New Jersey law, mutual assent between the parties is required for a contract to be binding and that mutual assent requires reasonable notice to the contracting parties of the contract’s terms. The Court noted that when the writing does not appear to be a contract and the terms are not called to the attention of the recipient, there is no reasonable notice and the terms cannot be binding. Thus, the Court stated that a contractual term, like an arbitration clause, is binding only when the terms are reasonably conspicuous, rather than in a manner that de-emphasizes its provisions. The Third Circuit then analyzed the arbitration clause at issue. The Court found that that the Samsung smartwatch arbitration clause was contained in a 3-inch by 2.5-inch booklet whose cover referred to itself as a “manual,” which “did not appear to be a bilateral contract, and the terms were buried in a manner that gave no hint to a consumer that an arbitration provision was within.” The Court also noted that the index in the manual includes “no language to tell consumers to expect bilateral terms, such as a bilateral arbitration agreement, in the guide.” Thus, the Third Circuit held that the arbitration clause was not a binding or valid contractual term, and affirmed the district court’s decision denying the motion to compel arbitration.

Noble v. Samsung Electronics America, Inc., No. 16-1903 (3rd Cir. Mar. 3, 2017).

This post written by Jeanne Kohler.

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SECOND CIRCUIT FINDS DISTRICT COURT ERRED IN DECISION ON ENFORCEMENT OF INTERNATIONAL ARBITRATION AWARD

March 28, 2017 by John Pitblado

The factual and procedural background of this case can be found here. In sum, beginning in the 1990s, the appellants, a group of Brazilian companies (collectively, “CBF”) entered into a series of contracts with Primetrade AG, a Swiss company, for the purchase and sale of pig iron. Primetrade transferred its assets, including the contracts with CBF, to another Swiss company, Steel Base Trade, AG (“SBT”), which “began operating with the same officers and directors as Primetrade AG and at the same offices.” AMCI International Gmb (“AMCI”) later acquired SBT. The following year, CBF entered into additional purchase and sale contracts with SBT that did not purport to bind any assigns or successors-in-interest. The contracts each contained an arbitration clause which provided for arbitration in Paris. In 2008, as commodity prices fell, SBT defaulted on its obligations under the contracts with CBF. CBF then commenced arbitration. During the course of arbitration, CBF alleged that SBT stalled the arbitration while it was fraudulently transferring its assets to Prime Carbon, a shell company formed and operated by the principals of SBT. In 2010, SBT filed for bankruptcy in Switzerland, and in 2011, SBT’s bankruptcy administrator informed the arbitration panel that the company had insufficient funds to participate in the arbitration and conceded CBF’s claims against SBT. The arbitration panel later issued a final award in favor of CBF for the amount of $48 million plus interest and costs. The award further held that CBF “did not introduce sufficient evidence . . . to demonstrate the existence of fraud in the bankruptcy proceedings.” In 2013, CBF commenced an action in New York federal court against various individuals and corporate entities alleged to be the “alter egos” and “successors in interest” of SBT. CBF sought to enforce the award and to assert various state law fraud claims relating to the underlying dispute. The New York district court dismissed the action because: (i) the award had not been first confirmed by a court of competent jurisdiction; and (ii) the fraud claims were barred by the doctrine of issue preclusion because the arbitration panel had denied similar claims. The appellants appealed.

On appeal, the Second Circuit vacated the district court’s judgment on two grounds: (i) the lower court erred by requiring the appellant, an award debtor, to bring a confirmation action prior to enforcement in a secondary jurisdiction; and (ii) the fraud claims were not barred by the doctrine of issue preclusion.

First, the Second Circuit held that there was no requirement to confirm an arbitration award at the arbitral seat of the arbitration before enforcing it in a secondary jurisdiction. The Second Circuit explained that the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) eliminated the “double exequatur” requirement, which mandated confirmation at the seat as a precondition to the enforcement of arbitral awards abroad. Under the Convention, the Second Circuit noted that CBF needed only to commence a summary, single-step proceeding to achieve recognition and enforcement of the award in a court in the United States. Thus, the Second Circuit held that the district court erred in holding that appellants were required to confirm their foreign arbitral award at the seat of the arbitration before they would be allowed to enforce it.

Next, the Second Circuit noted that the liability of the appellees for satisfaction of the arbitration award would be determined under the applicable law in the New York district court. Thus, as there were further legal and factual inquiries on the question of veil-piercing and alter ego liability, the Second Circuit remanded the case back to the district court to consider the issues under the applicable law in the New York district court.

Finally, with respect to issue preclusion, the Second Circuit noted that the doctrine is applicable to issues resolved by an earlier arbitration, but that the doctrine’s application is constrained by equity. The Third Circuit then noted that CBF claimed that it was denied a full and fair opportunity to litigate the fraud claims before the arbitration panel because the appellees deliberately misled the panel as to the extent of their fraud. Thus, the Second Circuit held that the grant of issue preclusion was inappropriate and that CBF should be afforded the opportunity to conduct discovery on its fraud claims, and that the appellees may be given the opportunity to re-raise the issue preclusion issue after discovery at the district court’s discretion.

CBF Indústria De Gusa S/A, et al. v. AMCI Holdings Inc., et al., No. 15-1133 (2nd Cir. Mar. 2, 2017).

This post written by Jeanne Kohler.

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