DMC Category: Confirmed

Case Note contributed by Matthew H. James of Healy & Baillie, LLP in New York. Healy & Baillie are the International Contributors to the website for the United States of America

Background
The plaintiff, Universalis, commenced arbitration proceedings against defendant, Britannia, pursuant to the terms of an arbitration clause in a licensing agreement, when a dispute arose over the payment of royalties. The arbitration clause required that the parties each select an arbitrator. If a "disagreement" between the two resulted, they were to select a third arbitrator from a list maintained by the British Chamber of Commerce (the "Chamber"). The agreement did not specify what the two arbitrators needed to "disagree" about before selecting the third arbitrator. Nevertheless, if they could not agree as to who should serve as the third arbitrator, they could request that the president of the Tribunal of Commerce of Luxemburg (the "Tribunal") select the third arbitrator from the Chamber’s list.

The parties appointed their respective arbitrators who thereupon discussed the scope of the proceedings and the procedures that would be followed, but not the merits of the dispute or who would serve as the third arbitrator. A few months later, the plaintiff’s arbitrator wrote to the Tribunal to request that a third arbitrator be appointed from the Chamber’s list because the party-appointed arbitrators could not agree who would serve as the third arbitrator. Upon learning of the request, the defendant’s arbitrator immediately wrote to the Tribunal and objected to any such appointment. He stated that he and plaintiff’s arbitrator had, in fact, never discussed who would serve as the third arbitrator, and also suggested that a New York lawyer or London resident familiar with New York law serve as the third arbitrator because the agreement required the application of New York law. However, the presiding judge of the Tribunal had already appointed a Luxemburg attorney as the third arbitrator before receiving the objection.

When the Tribunal judge learned of the objection, he suspended the arbitration proceedings and ordered a hearing to address the dispute. In response to the letter from the defendant’s arbitrator, the plaintiff’s arbitrator wrote to the Tribunal and stated that he did not agree that the third arbitrator should be a New York or London lawyer and, therefore, concluded that the party-appointed arbitrators could not agree who would serve as the third arbitrator, thereby justifying the Tribunal’s appointment. Following the hearing, the judge ordered that the arbitration proceed with the Tribunal-appointed arbitrator. Both the defendant and its arbitrator refused to appear at the arbitration, and the remaining arbitrators conducted the arbitration and entered an award in favor of the plaintiff.

The plaintiff then commenced an action in the Federal Court for the Southern District of New York to confirm the award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). At the behest of the district court, the plaintiff moved for summary judgment. However, the district court denied the motion because (1) the request to the Tribunal to appoint the third arbitrator was premature, as there was no evidence that the party-appointed arbitrators had discussed who would serve as the third arbitrator and (2) the panel had no authority to grant an award because it was improperly composed. In addition, the district court disqualified the plaintiff’s arbitrator and the Tribunal-appointed arbitrator from re-hearing the dispute and ordered that if the two arbitrators ultimately selected by the parties could not agree upon a third arbitrator, they must select one from a list maintained by the London Court of International Arbitration.

Judgment of the Appellate Court
On appeal, the Second Circuit determined that the arbitration clause required that (1) the party-appointed arbitrators must "disagree" about a satisfactory resolution of the dispute between the parties before selecting a third arbitrator, (2) the party-appointed arbitrators must attempt to choose a third arbitrator, and (3) if they fail to agree on a third arbitrator, the Tribunal must appoint a third arbitrator from the Chamber’s list. The appellate court determined that a "disagreement" had arisen as to the procedural rules to be applied, thus requiring the selection of a third arbitrator. However, there was no evidence that the party-appointed arbitrators had attempted to select a third arbitrator before seeking redress from the Tribunal. The appellate court specifically refused to credit the plaintiff’s argument that the party-selected arbitrators disagreed about whether a New York or London lawyer should be selected, as that dispute arose only after the Tribunal’s assistance had already been requested and was nothing more than a self-serving attempt to justify what was otherwise a premature request to the Tribunal.

However, the appellate court reversed the district court’s alternate holding that the panel had "exceeded its powers" within the meaning of the Federal Arbitration Act, 9 U.S.C. § 10(a)(4). While this is an available defense to enforcement under the FAA, the award here at issue was governed by the New York Convention, which specifically enumerates the seven specific grounds to justify the refusal to confirm an award. The argument that a panel "exceeded its powers" is not one of the grounds enumerated under the Convention.

Finally, the appellate court vacated (set aside) the district court’s order disqualifying the prior panel members who entered the award and directing that the party-appointed arbitrators ultimately chosen must select from the Chamber’s list if they cannot agree upon a third arbitrator. The appellate court noted that controlling precedent concerning the New York Convention strictly limited a district court’s review to whether or not an award be enforced. Therefore, the appellate court concluded that the district court lacked authority to specify any subsequent arbitration procedures after it denied enforcement.

Comment
This decision demonstrates the limited scope of review of an arbitration award under the New York Convention while also making clear that participants are not altogether without protection where procedural irregularities arise which may materially affect the fairness of the proceedings.