ARBITRATION AND THE COURTS: SOME RECENT AMERICAN CASES

by

Charles S. Haight, Jr.

Senior United States District Judge

for the Southern District of New York

_______________________

President Martowski, distinguished conferees, colleagues of the Bench, members of the Bar, ladies and gentlemen:

It gives me great pleasure to appear before you at this Fourteenth International Congress of Maritime Arbitrators.

The generous introduction identified me as a previous Cedric Barclay Memorial Lecturer. I am proud of that title. Cedric Barclay was a leading maritime arbitrator, lecturer, and author of learned papers. He was also a visionary. Cedric Barclay had a broad vision of prompt, cost-effective, expert arbitral resolution of maritime disputes; and the particular vision of international congresses of like-minded persons. The fulfillment of that vision accounts for your presence here today.

When I was preparing the second Cedric Barclay Memorial Lecture for delivery at ICMA Eleven in Hong Kong in 1994, my friend Michael Marks Cohen did me the great favor of making available his private collection of Mr. Barclay's writings. I concluded that Lecture with a quotation from a Cedric Barclay paper which intrigued and mystified me then, and still does today.

In 1985 Barclay read a paper at the ICMA Seventh Congress at Casablanca. The paper was titled: "Oil Shortages - Allowances and Tolerances." You would not think it possible to infuse so prosaic a topic with elements of poetry and mystery. But Cedric Barclay could. He concluded his informative discussion on oil shortages with these words:

"For as the fox said when he ate the bag-pipes, here's meat and music too, and no one can really tell which is which."

I had no idea then what on earth Cedric Barclay meant by that. Having thought about it for seven years, I still have no idea. If anyone can interpret this Delphic utterance, please see me after lunch.

I want to say a few words today about the part that American judges play, or to be more precise are asked to play, in the arbitral process, with particular reference to cases falling within the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the "New York Convention."

In a perfect world, judges would play no part in arbitration, since arbitrators are widely regarded, certainly by Cedric Barclay, as vastly superior to judges and courts in the resolution of commercial disputes. But that pristine concept of an arbitration process uncontaminated by the presence of judges has never been fully achieved; and, given the litigious and contentious nature of the human race, probably never will. But there are steps maritime companies can take to reduce the presence of judges.

Judges, when they become involved in arbitration, do so at the very beginning of the arbitral process or at the very end. We are Alpha and Omega. At the beginning, courts are frequently asked to decide whether parties to a commercial transaction should be compelled to arbitrate a particular dispute. At the end, when arbitrators have rendered an award, courts are frequently asked to enforce the award or to vacate it. There have been a number of interesting recent cases on these issues in the District Court I serve and in the Court of Appeals, that I will say something about. The first principle, frequently stated but always to be kept in mind, is that under American law no one can be compelled to arbitrate a dispute unless they have entered into a contract agreeing to do so. The Federal Arbitration Act, whose procedural provisions apply to arbitrations falling under the Convention,[1] requires a District Court, if "the making of the arbitration agreement" be disputed, to "proceed summarily to the trial thereof."[2] And the question will turn upon the unadorned law of contract. Much is written about the current high favor in which arbitration is held as a matter of public policy; but as the Second Circuit Court of Appeals cautioned in the Titan case earlier this year: "Notwithstanding the strong federal policy favoring arbitration as an alternative means of dispute resolution, courts must treat agreements to arbitrate like any other contract."[3]

In the Titan case the Court of Appeals summarized the elements that bring an arbitration agreement within the Convention. The court said:

An agreement to arbitrate exists within the meaning of the Convention and the Federal Arbitration Act if (1) there is a written agreement; (2) the writing provides for arbitration in the territory of a signatory of the Convention; (3) the subject matter is commercial; and (4) the subject matter is not entirely domestic in scope.

241 F.3d at 146.

You will note that the first two elements required to bring an arbitral proceeding within the Convention stress the necessity of a written agreement, that is to say a contract, to arbitrate disputes in a particular place. However, that written agreement can take a number of forms. In the Titan case, the Court of Appeals dealt with the not uncommon situation of a shipowner and a charterer communicating with themselves through two chartering brokers, one representing the owner and the other the charterer. There was the usual blizzard of faxes and telexes between the brokers themselves, and between the brokers and their principals, all cast in that esoteric commercial maritime shorthand with which this audience is familiar.[4] The parties contemplated a one-year time charter. But no formal charterparty was ever signed. The owner did not deliver the ship to the charterer, who claimed a breach of the charterparty and demanded arbitration in London. The issues before the court were (1) whether the parties entered into a binding contract of charterparty, and (2) whether that contract included an agreement to arbitrate disputes in London.

The Court of Appeals, affirming the judgment of the District Court,[5] held that the reference to the Shell Time 4 Charter form in a "recap" or "fixture" fax sent by the charterer's broker to both parties was sufficient to create a binding charterparty, and to require arbitration in London, as provided for in the Shell Time 4 form. The court relied upon an earlier decision in the Great Circle Lines case,[6] holding that agreement upon the "main" terms in a "fixture" communication is enough to create a contract, even though the fixture states that the parties must continue to negotiate details amending the form contract specified in the fixture. The Court of Appeals affirmed the District Court's order, entered under the Convention, which compelled the shipowner to arbitrate the dispute with the charterer in London.

I should add at this juncture that the shipowner in the Titan case has made a motion in the Court of Appeals for rehearing, arguing that the Great Circle Lines case was wrongly decided and should be overruled. The Court of Appeals took the relatively unusual step of inviting maritime trade associations to submit briefs amicus curiae on that issue. Counsel for the Society of Martime Arbitrators have filed an amicus brief on the Society's behalf, urging that Great Circle Lines be overruled, which, should that occur, would presumably change the result in the Titan case. The Court of Appeals has not yet acted on the motion for rehearing. In the Titan case the owner argued that the exchanges of faxes and telexes should be read to contain an "ad hoc" agreement to arbitrate whether the parties had formed a binding charterparty. The Court of Appeals held that these exchanges of communications did not give rise to such an agreement, so that it was for the court to perform its traditional role of deciding whether a contractual agreement to arbitrate existed. However, given the American law's concentration upon the consensual, contractual nature of an agreement to arbitrate any and all disputes, it seems to me that the Court of Appeals would have enforced the "ad hoc" agreement for which the shipowner contended if the court had been able to track such an agreement through the blizzard of communications.

It is not clear to me that the shipowner would press that argument if the Court of Appeals grants rehearing and overrules Great Circle Lines. But counsel for the shipowner do not need my advice on the point.

Notwithstanding this emphasis upon contract, American law recognizes that a party can be bound by an arbitration agreement contained in a contract between others, which the party in question did not sign. We are dealing here with the concept of incorporation by reference. In the maritime field, the question often arises where a charterparty contains an arbitration clause and the charterparty is then incorporated by reference in a bill of lading. The issue is whether, in the event of cargo loss or damage, the bill of lading holder can be compelled to submit its claim against the owner or charterer to arbitration, even though the holder was not a party to the contract containing the arbitration clause.

Again, the courts look to the language of the documents to determine whether it is fair to conclude that a non-signatory to a contract is bound by its arbitration clause. The key language is found in the arbitration clause itself. Where the charterparty arbitration clause provided for the arbitration of disputes "between the Disponent Owners and the Charterers," the Court of Appeals held that the incorporation of the charterparty by reference in a bill of lading did not obligate the bill of lading holder to arbitrate its claim.[7] However, where the charterparty arbitration clause provided for arbitration of "any and all differences and disputes arising out of this Charter," the Court of Appeals held that so broad a clause was binding on parties to a bill of lading which incorporated the charterparty by reference.[8]

The question turns upon whether it would be "unduly stretching" the arbitration clause in a contract to extend it to a non-party by means of incorporation by reference.

The Court of Appeals' leading recent opinion on the incorporation by reference theory is Progressive Insurance Company.[9] I had the case in the District Court.[10] Progressive Insurance involved contracts of reinsurance. The courts deal with many reinsurance cases. Have you ever noticed that your insurance companies much prefer collecting premiums to paying claims? It is somehow comforting to realize that they treat themselves the same way. Following a casualty, the reinsurers in Progressive did not want to pay the lead insurers. Somewhere in the stacks of retrocession, treaties, contracts, addenda, riders, and the other documents that reinsurance typically generates, there lay buried an arbitration clause in a contract between two of the insurers involved. I held that this arbitration clause was not binding on other reinsurers in the chain of coverage. The Court of Appeals reversed my judgment and compelled arbitration. Having considered all the documents, the court concluded that it would not be "unduly stretching" the arbitration clause to extend it to the non-signatory reinsurers.[11] That a judgment of mine could be reversed surely furnishes dramatic evidence that this is a complex and vexing subject.

I faced the same problem last year in the Intertec and Turner case.[12] A real estate developer in Sri Lanka wished to erect two large office buildings. The developer hired Turner Construction Company as the general contractor. Turner retained a number of sub-contractors. One of these was a Danish company, Intertec, which was hired to do the electrical and plumbing work. The general contract between the developer and Turner, the general contractor, contained elaborate mandatory provisions for dispute resolution, which, if they failed, would be submitted to compulsory arbitration in Sri Lanka. The sub-contract between Turner and Intertec contained an incorporation by reference of the terms of the general contract. Disputes arose between Turner and Intertec. Intertec commenced an action at law against Turner in a New York state court to recover amounts Turner allegedly owed. Because the arbitration clause in the general contract fell under the Convention, Turner was able to transfer the case to the federal court, and I was asked to compel Intertec to arbitrate its claim against Turner in Sri Lanka.

Once again, I studied the series of contracts. Once again, I concluded that Intertec, the non-signatory to the arbitration clause, was not bound by it. So I refused to compel arbitration and sent Intertec's suit back to the state court. Turner appealed. If I had been reversed again, I would not have mentioned the case in these remarks. But this time the Court of Appeals kindly affirmed my judgment, stating:

The district court was correct in its assessment that it would be unduly stretching the General Contract's mandatory pre-arbitration dispute resolution procedures to include a subcontractor such as Intertec; and, if Intertec is not subject to those procedures, it cannot be subject to an arbitration clause that requires their exhaustion before arbitration can be demanded.[13]

What is the lesson to be learned from cases such as these? It is that if business companies wish to keep judges from deciding whether or not a company has agreed to arbitrate -- and what sane business company would not want to keep judges from doing anything? -- the way to do it is to make the contractual scheme crystal clear as to who must arbitrate what and with whom. Judges get involved at this early stage of the arbitral process only when the underlying agreement is not clearly expressed.

Now let us turn briefly to the other end of the process. Here is the particular problem I wish to put before you. What happens when, pursuant to an arbitration agreement falling under the Convention, an award is made in a country other than the United States, the winning party moves in an American court to confirm the award and enter judgment upon it, but the losing party has asked the courts of the country where the arbitration took place to vacate the award?

This was the situation in the Spier case, a case I decided in 1987 and was asked to reconsider in 1999.[14] You must understand that if you ask a judge to make a speech, you run the risk that he will want to discuss his own cases, and if he does, there is nothing anyone can do to stop him.

In the Spier case, an American engineer, Spier, and an Italian manufacturer of footwear, Tecnica, entered into a contract which provided for the arbitration of any disputes before a panel of three arbitrators in Italy. Disputes arose. The arbitration panel rendered a unanimous award in Spier's favor in the amount of $700,000. Tecnica did not pay the award. Instead, one month later it commenced litigation in an Italian court to vacate the award on the basis of Italian law. Spier did not appear in that action. Instead, he filed an action in the federal District Court here, invoking the Convention and asking that the award be confirmed and judgment entered upon it. Tecnica responded that its pending action in the Italian courts to vacate the award barred its recognition and enforcement in an American court.

Two provisions of the Convention were implicated.[15] Article

V(1)(e) provides that "[r]ecognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, if "[t]he award . . . has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made." You will note that Article V(1)(e) assumes that the court of that country has set aside the award. But what if an action to set aside the award in the courts of the country where the award was made is only pending when enforcement is sought in an American court? This was the situation in the Spier case. Article VI of the Convention speaks to that. It provides that if "an application for the setting aside or suspension of the award has been made to a competent authority" of the country where the award was made, the court asked to enforce the award

may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security.

Article VI leaves it to the enforcement court's discretion whether or not to adjourn, or stay, the motion to enforce the award until the courts of the country where the award was made have decided whether or not to vacate it. Nor does the Convention specify what circumstances should inform the exercise of that discretion. But it seemed to me in the Spier case that unless Tecnica's action in the Italian courts was transparently frivolous or filed in bad faith, neither of which appeared from the papers before me, a stay was the sensible thing to do. I said in the judgement:

[I]t is better to permit the validity of this Italian arbitral award to be first tested under Italian law by Italian courts. That is preferable to an American court seeking to apply the law of the foreign country where the award was made, and entering an order enforcing an award later condemned by the courts of that foreign country.[16]

So I stayed Spier's enforcement action here and waited to see what the Italian courts would do. But I required Tecnica to post security in this court in an amount sufficient to pay the award if the Italian courts confirmed it. Ultimately the Italian courts set the award aside, on the ground that the arbitrators had exceeded their powers. Spier again asked me to enforce the award, but I denied his petition, this time on the authority of Article V(1)(e) of the Convention.[17]

Spier did not appeal, and so my judgment was not subjected to the scrutiny of the Court of Appeals.

My decision in Spier has been criticized in an academic publication for failing to spell out the factors that should inform an American court's discretion in granting a stay, and for unduly deferring to the pendency of the Italian court action, in violation of the spirit of the Convention.[18] But the Convention clearly gives courts in countries where enforcement of a foreign award is sought the discretion to enter such a stay, and it seems to me only common sense to do so in ordinary circumstances, so long as the party attacking the award abroad is required to post full security here. A stay need not be automatic. Judge Patterson of the Southern District of New York enforced an award rendered in the Ukraine, notwithstanding pending judicial review of the award in that country, where the circumstances suggested that the party resisting the award was acting in bad faith by, among other things, transferring all its assets to a different shell corporation two days prior to the issuance of the award.[19] I think the issue must be decided on a case-by-case basis. In Europcar, a 1998 decision,[20] the Second Circuit Court of Appeals vacated the District Court's order enforcing an Italian arbitration award then under review by the Italian courts, and remanded the case with instructions to the District Court to consider whether or not to stay enforcement proceedings in the light of six enumerated factors which the Court of Appeals said should guide the judge's discretion.[21] In Europcar the Court of Appeals discussed my judgment in Spier with apparent approval, stating at one point:

Thus, where a parallel proceeding is ongoing in the originating country and there is a possibility that the award will be set aside, a district court may be acting improvidently by enforcing the award prior to the completion of the foreign proceedings.[22]

To which I would add: my sentiments exactly.

It should be noted that when an American court is asked to enforce an award falling under the Convention, it makes a difference where the arbitration was conducted. The Second Circuit held in a 1997 case that where the arbitration took place in the United States and an American court is asked to vacate the award, the principles of domestic law found in chapter 1 of the Federal Arbitration Act for refusing to enforce the award apply, notwithstanding the fact that a petition to enforce the award is determined by the Convention. On the other hand, if the award is made in a foreign state and sought to be enforced in an American court, the grounds for resisting the award are limited to those found in Article V of the Convention.[23] The latter principle is illustrated by a subsequent 1999 case, where an award rendered in Nigeria was set aside by the Nigerian courts. The Court of Appeals held that Article V(1)(e) of the Convention barred enforcement of the award in an American court.[24]

My last point -- and here I end where I began -- is to observe that if the parties state explicitly in their contract that an arbitration award will not only be final and binding upon the parties, but also that no appeal will be taken to any court, an American court will enforce that contract and enforce an arbitration award rendered in a foreign country, even though the courts of that country have vacated the award. This is the holding of a District Court in the Chromalloy case,[25] where the contract provided for arbitration in Egypt and that any award "shall be final and binding and cannot be made subject to any appeal or other recourse." The American court enforced the award, notwithstanding the fact that the losing party, the Egyptian government, had persuaded the Egyptian Court of Appeal vacate it. The American court reasoned that Egypt was "seeking to repudiate its solemn promise to abide by the results of the arbitration"[26], and refused to go along.

And so you see, to paraphrase Julius Caesar, that your arbitral fate is not in your stars, but in your contracts;[27] let them be clear enough, and you need not fear the tyranny or whim of judges.

I have very much enjoyed the opportunity to again address this Congress. In preparing to do so, I have reflected upon the name of this gathering: the International Congress of Maritime Arbitrators: two nouns, and two adjectives that modify them. Of these four words, I regard "maritime" as the most significant. There are many international congresses; probably one each day, in some part of the world. And there are many kinds of arbitrators. But you are here because you are maritime arbitrators; and the word "maritime" invokes the endless fascination of the sea; of the ships, great and small, and the brave men and women who go down to the sea in them; a fascination that carries over into the law of the sea, of which you are lay judges. It is easy to imagine our prehistoric ancestors, emerging from the forests or the valleys, and beholding for the first time the endless and trackless oceans of the world, becoming afraid, and returning to their forests and valleys. But such is the courage and adventurous spirit of mankind that those ancestors built ships, and sailed in them out of sight of the shore, thereby transforming the oceans from barriers that might have kept the nations apart into highways that bring them together.

You come together in this Congress to promote, in mutual respect and good will, the peaceful resolution of maritime disputes within the rule of law; and in this city, this world, and the times in which we live, there may never have been a greater need for people to pursue those goals and in that spirit.

I would urge that, during the coffee breaks, the lunch hours, the dinner tonight, and at all other opportunities, each conferee reach out to others you do not know; make new friends; forge new bonds; and, when you return home, do not let them go. Keep in touch; write to those new colleagues; call them up; tell them what is happening in your country and ask them what is happening in theirs. For it is upon friendships between peoples of different nations, brought together by a shared devotion to the rule of law and the peaceful resolutions of conflict, that the security of our world may largely depend.

May God bless the work of this Congress, and bring each of you safely back to your home port.

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[1] The United States ratified the Convention in 1970. 21 U.S.T. 2517, TIAS 6997 (1970). Chapter 2 of the Federal Arbitration Act, 9 U.S.C. §§ 201-208, implemented the Convention into American domestic law. Section 208 provides that chapter 1 of the Act "applies to actions and proceedings brought under this chapter to the extent that that chapter is not in conflict with this chapter or the Convention as ratified by the United States."

[2] 9 U.S.C. § 4.

[3] U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., 241 F.3d 135, 146 (2d Cir. 2001) (citations omitted).

[4] Under the Convention a written agreement "include[s] an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams." See 9 U.S.C. § 201. The Convention entered into force for the original signatories in 1959, and for the United States in 1970. The reference to "letters and telegrams" reflects the communication technology of those times. As the Court of Appeals' decision in Titan demonstrates, those forms of communication have been replaced by telexes and, more recently, faxes and e-mail.

[5] The District Court's opinions are reported at 16 F.Supp. 2d 326 (S.D.N.Y. 1998) and 182 F.R.D. 97 (S.D.N.Y. 1998).

[6] Great Circle Lines, Ltd. v. Matheson & Co., 681 F.2d 121, 125 (2d Cir. 1982).

[7] See Import Export Steel Corp. v. Mississippi Valley Barge Line Co., 351 F.2d 503 (2d Cir. 1965).

[8] See Compania Espanola de Petroleos, S.A. v. Nereus Shipping, S.A., 527 F.2d 966, 973 (2d Cir. 1975), cert. denied, 426 U.S. 936 (1976).

[9] Progressive Insurance Co. v. C.A. Reaseguradora Nacional de Venezuela, 991 F.2d 42 (2d Cir. 1993).

[10] See 802 F.Supp. 1069 (S.D.N.Y. 1992).

[11] See 991 F.2d at 48.

[12] Intertec Contracting A/S v. Turner Steiner International, S.A., No. 98 Civ. 9116, 2000 WL 709004 (S.D.N.Y. May 31, 2000).

[13] No. 00-7796, 2001 WL 266997 (2d. Cir. Mar. 16, 2001) (unpublished opinion).

[14] Spier v. Calzaturificio Tecnica S.p.A., 663 F.Supp. 871 (S.D.N.Y. 1987); 71 F.Supp.2d 279 (S.D.N.Y. 1999); 77 F.Supp.2d 405 (S.D.N.Y. 1999).

[15] The full text of the Convention appears in a note following 9 U.S.C. § 201.

[16] 663 F.Supp. at 875.

[17] The decision denying Spier's petition for enforcement of the award is reported at 71 F.Supp. 279 (S.D.N.Y. 1999). I adhered to that ruling in denying Spier's motion for reargument. 77 F.Supp. 405 (S.D.N.Y. 1999).

[18] See Sampson, Staying the Enforcement of Foreign Commercial Arbitral Awards: A Federal Practice Contravening the Purposes of the New York Convention, 26 Brook. J. Int. L. 1839 (2001).

[19] Ukrvneshprom State Foreign Econ. Enter. v. Tradeway, Inc, No. 95 Civ. 10278, 1996 U.S. Dist. LEXIS 2827 (S.D.N.Y. Mar. 11, 1996).

[20] Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310 (2d Cir. 1998).

[21] 156 F.3d at 317-18.

[22] 156 F.3d at 317.

[23] Yusuf Ahmed Alghanim & Sons, W.W.L. v. Toys "R" Us, 126 F.3d 15 (2d Cir. 1997).

[24] Baker Marine (Nig.) Ltd. v. Chevron (Nig.) Ltd., 191 F.3d 194 (2d Cir. 1999).

[25] In re Chromally Aeroservices, 939 F.Supp. 907 (D.D.C. 1996).

[26] 939 F.Supp at 913.

[27] "The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings." Act I, scene ii, line 134.