Arbitration Process Issues

The Ninth Circuit reversed a district court ruling that had compelled arbitration, holding that a party may not enforce an arbitration agreement where the clause is contained in a nonbinding contract. The parties had entered into two contracts in Italy. The first contract was a commercial franchise agreement containing an arbitration clause. The second contract disclaimed any liability on the parties resulting from the first contract until a new franchise agreement was signed in the United States. The party seeking to avoid arbitration argued that the first contract was signed to allow them to obtain proper visas into the United States and not actually confer any contractual rights. The district court ruled that “the issue of whether the broad arbitration clause contained in the first contract survives after the second contract should be submitted to the arbitrator.” The Ninth Circuit, however, disagreed. Turning to traditional principles of contract interpretation, the appellate court held that the parties did not manifest express or implied consent to be bound to the original contract, because the original contract was a sham. The court concluded: “Because we find that the document the parties described as the Commercial Contract was a sham, the arbitration clause is no more enforceable than any other provision in that document.” Casa Del Caffe Vergnano S.P.A. v. ItalFlavors, LLC, Case No. 13-56091 (9th Cir. Mar. 15, 2016).

This post written by Joshua S. Wirth.

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A dispute arose over a project in Iraq between a British Virgin Island claimant and a Malaysian defendant with a sole Canadian QC arbitrator. The claimant’s challenge of the arbitrator’s award was based upon bias because of the arbitrator’s purported conflict of interest. The basis of the conflict was that members of the arbitrator’s firm regularly represented the claimant’s affiliate, deriving substantial financial income from the representation. The arbitrator neither advised nor received income from the firm’s representation of the affiliate. Further, for the past dozen years or so, the arbitrator served almost solely as an international arbitrator, did not participate in partnership matters, nor really represented clients and is treated by the firm as a sole practitioner. In accepting the appointment, the arbitrator never disclosed that his firm represented the affiliate because the firm’s conflict system never disclosed the representation and he was not aware of it.

In finding that there was no possibility of bias, the court considered these facts: (i) the arbitrator was a partner in a law firm; (ii) the law firm earns a substantial amount of money from another entity that has the same corporate parent as the party in the arbitration; (iii) the party in the arbitration was not advised by the firm or the arbitrator; (iv) the arbitrator operated as a sole practitioner only using the firm for secretarial and administrative support; and (v) the arbitrator made all disclosures of which he was advised, although the firm’s conflict system had not advised him of its representation of the affiliate. The court then examined the 2014 International Bar Association Guidelines on Conflicts of Interest in International Arbitrations, pointing out that these were only guidelines and not the force of law. While the Guidelines contain a section entitled “Non-Waivable Red List” which encompassed this situation, the court took issue with them since he believed that this situation was clearly one that should be waivable. Finding that the challenge must fail, the award was confirmed. In the High Court of Justice Queen’s Bench Division Commercial Court, W Limited v. M SDN BHD, Neutral Citation Number [2016] EWHC 422 (Comm).

This post written by Barry Weissman.

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A borrower had previously entered into a pay day loan agreement in August of 2012, which contained an arbitration provision mandating that all claims be arbitrated in the National Arbitration Forum (NAF), and under the Code of Procedure of the NAF. However, as of 2009, NAF did not accept consumer arbitrations. Under Section 5 of the Federal Arbitration Act, where a forum chosen is unavailable, the court may substitute another arbitrator. An agreement to arbitrate is only enforceable if the choice of forum provision was not integral to the agreement as a whole. The Eleventh Circuit affirmed the trial court’s ruling that the arbitration agreement’s choice of forum of the NAF was not an “ancillary logistical concern,” but was central to the arbitration agreement. Accordingly, the lender could not enforce the arbitration agreement, and the borrower’s lawsuit was permitted to proceed in court. Flagg v. First Premier Bank, Case No. 14-14052 (11th Cir. Feb. 23, 2016).

This post written by Joshua S. Wirth.

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