International Arbitration in New York

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Daniel Rothstein Kiev, April 18, 2013 International Arbitration in New York Early resistance to private choice of mechanisms of resolving commercial disputes Until the nineteenth century, courts in the United States, following traditions inherited from England, considered arbitration to be a usurpation of the courts authority. Therefore, the courts refused to enforce pre-dispute agreements to submit to arbitration. In the late nineteenth century, American business associations and lawyers associations came to the view that in modern commercial relations, private parties should be allowed to use private alternatives to the courts in order to resolve their disputes. In particular, business groups and lawyers associations in New York advocated a more tolerant attitude toward arbitration. As a result, in 1920, the New York state legislature adopted the first modern arbitration statute in the United States. The law required courts to enforce agreements to arbitrate. The law also required courts to enforce arbitrators final decisions. These are the two main elements of modern arbitration laws. Exceptions in New York s 1920 law are also part of modern arbitration laws: an arbitration agreement is not enforceable if it the result of fraud, and an arbitration decision is not enforceable if it violates public policy or if the arbitrators exceed their authority. New York s law on arbitration was the model for the United States federal law on arbitration, which the Congress adopted in 1925. Most other state legislatures in the United States followed this trend and adopted modern arbitration laws. The state laws apply mostly to legal relations that do not have an inter-state or international character.

At the time of these legislative developments in the United States, there were efforts around the world to support international arbitration by requiring the courts of one country to enforce (a) an agreement to arbitrate made in another country and (b) the final decision in an arbitration that takes place in another country. These efforts led to the United Nations Conference on International Commercial Arbitration, which took place in New York in 1958. The United States actively promoted the Conference and participated in the drafting of the resulting document, which was the Convention on Recognition and Enforcement of Foreign Arbitral Awards. New York lawyers are proud that it is called the New York Convention. However, the United States was not one of the original signatories of the Convention. The U.S. delegation to the Conference recommend[ed] strongly that the United States not sign or adhere to the convention. The delegation thought that the United States should not endorse some of the principles written into the convention, including provisions that allow separation of the arbitration process from contact with national laws and more immediately from supervision by the national courts. The United States finally joined the New York Convention in 1970. From the legislative materials on adopting the Convention, it appears that business associations, lawyers associations, and legislators unanimously supported ratification. The previous reluctance to join the Convention was not explained and was almost not even mentioned in the legislative 2

materials. 1 This history has mostly been forgotten. The delegation s official report was not published until 2009. 2 In 1972, two years after the United States joined the New York Convention, the U.S. Supreme Court abandoned another traditional restriction on parties freedom to choose their forum for resolving disputes. In a shipping dispute called The Bremen v. Zapata Offshore Co., the Supreme Court upheld a contract calling for litigation in an English court. The Court noted that traditionally, many courts... declined to enforce such clauses on the ground that they were contrary to public policy, or that their effect was to oust the jurisdiction of the court. The Supreme Court rejected this view and stated: The expansion of American business and industry will hardly be encouraged if,... we insist on a parochial concept that all disputes must be resolved under our laws and in our courts. Today, American lawyers take for granted the freedom to submit international commercial disputes to arbitrators or judges in another country. But 1970, when the United States joined the New York Convention, and 1972, when the Supreme Court decided the Bremen case, were not long ago. For example, at the halfway mark between then and now, in 1992, the Soviet Union was disbanded. Intersection between international arbitration and U.S. law and New York law In every arbitration, at least two legal systems operate. One system is the rules that the parties agree on for conducting the arbitration. Another legal system that operates is local law. 1 See House of Representatives, Report No. 91-1181, 91st Congress, 2d Session (1970) ( Although the United States participated in the Conference, the Convention was not signed on behalf of our government at that time because the American delegation felt that certain provisions were in conflict with some of our domestic laws ). 2 Official Report of the United States Delegation to the United Nations Conference on International Commercial Arbitration, May 20 June 10, 1958, reproduced in The American Review of International Arbitration, Vol. 19, No. 1. 3

Ambitious lawyers in every jurisdiction want their laws to support international arbitration. Every jurisdiction advertises that its law is arbitration-friendly. But this is a platitude, a simplification, perhaps an anachronism from the time when courts were hostile to arbitration. Today, in many countries, the laws affecting arbitration are quite similar. Calling any any law arbitration-friendly ignores the fact that contradictions between local law and the rules or goals of arbitration are inevitable. Commonly stated goals of arbitration are that it should be fast and inexpensive. When local law contradicts the rules or goals of arbitration, the parties often disagree on the application of local law in the given situation. For example, local law might affect the time for gathering evidence. Speed might be good for a party who has a strong case and has all of the evidence it needs. But a slower pace might be better for a party that either has a weaker case or a party that needs time in order to gather evidence. Usually, local law can affect an arbitration in three situations: 1. A party might need help from the state authorities if the party (a) needs to preserve the status quo during the arbitration, or (b) wants to change the status quo so that it reflects the arbitrator s decision after the arbitration. (Arbitrators are not allowed to use guns to enforce their decisions.) 2. Local law usually imposes some mandatory rules for conducting an arbitration. 3. If the parties have not agreed on all of the rules for conducting the arbitration, and have not authorized the arbitrators to decide all unclear questions on how to conduct the arbitration, local law might provide an answer. Anyone who is considering arbitration in New York should be aware of how U.S. law and New York law work in those three situations. 4

Preserving status quo during arbitration ( interim measures ) If a debtor moves its property before or during an arbitration, the claimant might not be able to obtain the property in satisfaction of the arbitrators decision. Similarly, the loss of evidence before an arbitration can make it impossible for a party to prove its claim in the arbitration. Under New York law, a party can ask the court to preserve the status quo by prohibiting the movement or destruction of the property or evidence. An order to preserve assets is also available when the arbitration takes place outside New York, including abroad. 3 In the United States, such interim measures are created by state law rather than federal law. Law to fill gaps in parties agreements on rules of arbitration Under the Federal Arbitration Act, if the agreement to arbitrate does not provide a method for appointing arbitrators, the court can appoint them. 4 Mandatory rules for conducting an arbitration Under the Federal Arbitration Act, arbitrators are authorized to summon witnesses to give testimony and produce documents. A witness can be compelled to appear by an order of the court. 5 Enforcement of arbitral awards In light of legislative amendments and court decisions in the last several years, New York has powerful mechanisms to enforce arbitral awards issued in the United States or abroad. For example: 3 New York Civil Practice Law and Rules Section 7502(c) (property), Section 3102(c) (evidence). 4 Federal Arbitration Act 5. 5 Federal Arbitration Act 7. 5

1. If a debtor is subject to personal jurisdiction in New York, the court can order the debtor to bring property to New York in order to satisfy the arbitrators award. 6 2. If the debtor is subject to personal jurisdiction in New York, and if a non-party that holds the debtor s property (such as a bank) is also subject to personal jurisdiction in New York, the court can order the non-party to deliver the property to New York (such as money in a foreign branch) in order to satisfy the arbitration award. 7 3. If the debtor is a sovereign subject to personal jurisdiction in New York, and its bank is subject to New York jurisdiction, the bank can be ordered to produce evidence of the debtor s assets held in the bank s foreign branches. 8 Opposing enforcement of an arbitral award issued in the United States The Federal Arbitration Act provides that the decision in an arbitration in the United States can be vacated in cases of fraud in procuring the arbitration agreement, corruption by the arbitrators, procedural misconduct by the arbitrators, and when the arbitrators exceeded their powers. 9 The parties cannot expand these grounds for vacating an arbitral award. Thus, in 2008, the Supreme Court invalidated an arbitration agreement that allowed an appeal to a firstinstance federal court if the arbitrator s conclusions of law are erroneous. 10 On the other hand, the courts have in rare cases held that the arbitrators exceeded their powers when they knew of a governing legal standard but ignored it or refused to apply it. Only two international 6 New York Civil Practice Law and Rules Section 5225(b). 7 Koehler v. Bank of Bermuda Ltd., 12 N.Y.2d (2009). 8 EM Ltd. v. Argentina, No. 11-4065-cv (2d Cir. Aug. 20, 2012) 9 Federal Arbitration Act 10(a). 10 Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008). 6

arbitration awards have ever been vacated on these grounds. The lower courts have expressed differing views on whether such a result is possible after the Supreme Court s decision in 2008. 11 Arbitration resources in New York One way a city can be arbitration-friendly is in its resources. New York has considerable resources to support international commercial arbitration. For example: 1. Excellent federal courts 2. State courts that are improving, especially with the recent creation of a Commercial Division 3. Lawyers who are experienced counsel and arbitrators under the rules of many international arbitration institutions 4. Many lawyers who speak foreign languages or have studied and practiced law abroad. 5. New York s own international arbitration institution: the International Center for Dispute Resolution, which is the international division of the American Arbitration Association 6. The New York International Arbitration Center (NYIAC) a new physical facility for international arbitration that is open to any ad hoc or institutional arbitration. It will open in July. It does not administer arbitration. See www.nyiac.org. Thank you for inviting me to Kiev. 11 New York City Bar, Report of Committee on International Commercial Disputes, The Manifest of Law Doctrine and International Arbitration in New York (2012), available at www.abcny.org. 7