California Mediation and Arbitration

Jurisdiction, International Arb, FAA, Standard Of Review: Ninth Circuit Reminds Us Of Its Limited Ability To Fix Things In Arbitration When They Go Wrong To

It Is With A Heavy Heart That A Ninth Circuit Panel Tells Us It Can't Fix A Mess.

        "This award shows in stark terms the real risks that parties assume when they trade away their right to adjudicate their claims in court for the potential efficiencies of arbitration. When, as here, things go wrong, our power to fix them is uncomfortably, but plainly, limited under the FAA." HayDay Farms, Inc. et al. v. FeeDx Holdings, Inc., 21-55650 anhd 21-55698 (9th Cir.  12/19/22) (Smith, Nelson, Drain).

        The underlying arbitration involved a contract dispute between HayDay Farms, Inc. and Nippon Kokusai Agricultural Holdings, Inc., on the one hand, and FeeDx Holdings, Inc., on the other. A panel of three arbitrators, after four years of arbitration, issued a final award in excess of $21 million in favor of HayDay Farms, Inc. and Nippon. The trial court judge then confirmed the award in part, but removed $7 million from the award. On appeal to the Ninth Circuit, FeeDx argued that the award put HayDay and Nippon in a better shape than if both sides had fully performed the contract, something that California Civil Code § 3358 does not allow: "Except as expressly provided by statute, no person can recover a greater amount in damages for the breach of an obligation, than he could have gained by the full performance thereof on both sides." That was the justification for the district court's decision to remove the $7 million component of the award.

        Before it could address the merits, the Court of Appeals had to address its jurisdiction. HayDay and Nippon had sought to confirm the award in state court, and FeeDx had removed the proceeding to federal court, purportedly under diversity jurisdiction. The federal district court did not address its jurisdiction. In fact, complete diversity was lacking, because a California, Samoa, and Cayman Island corporation were involved, and diversity jurisdiction does not apply to a foreign entity suing a foreign entity. But the Court of Appeals, analyzing its own jurisdiction, found the trial court's jurisdiction to lie in 9 USC § 203, which provides that an action or proceeding falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards shall be deemed to arise under the laws and treaties of the United States. And if the district court had jurisdiction, then the Court of Appeals had jurisdiction under 9 USC § 16 and 28 USC § 1291.

        Next, the Ninth Circuit had to address a question of first impression in its own circuit: whether the standards for vacatur in the Federal Arbitration Act applied for awards governed by the Convention, when the Convention did not specifically say so. Agreeing with other circuits, the Ninth Circuit held that the FAA standards did apply. And the standard, expressed in different ways, is exceedingly tough.

        A plausible interpretation of the contract cannot be overturned. An award that is manifestly irrational and completely disregards the law can be overturned under FAA standards. The "irrationality standard 'is extremely narrow and is satisfied only where the arbitration decision fails to draw its essence from the agreement.'" Does the decision fail to draw its essence from the agreement? Have we entered the realm of the metaphysical?

        In any case, the Court of Appeal held that the arbitral decision was not irrational, and thus it affirmed the award, while reversing the district court, which had removed $7 million from the award.

        And yet it seems to have done so with some pain. Judge Milan wrote that the losing party, FeeDx, "probably offers the best interpretation of the parties’ agreements . . .", while he assures us that the award "was not some form of vigilante justice . . . " And, he wrote, "We share the district court's concern about a seemingly unfair damages award that likely violate § 3358." 

        Small consolation for the losing party. However, these were sophisticated parties that agreed to arbitrate

Arbitration, Nonsignatories, Equitable Estoppel, International, Choice Of Law: 9th Cir. Affirms District Court's Order Denying Motion To Compel Arbitration Pursuant To NY Convention

And Judge Bea Dissents.

        In Setty v. Shrinivas Sugandhalaya LLP, No. 18-35573 (9th Cir. 7/7/21) (Nelson, Rawlinson; Bea, dsst.), the court holds that the district court did not  abuse its discretion by rejecting defendant SS Mumbai's argument that  plaintiff SS Bangalore should be equitably estopped from avoiding arbitration. Defendant SS Mumbai was a non-signatory to an arbitration agreement contained in a  partnership deed to which plaintiff SS Bangalore was a  party. Because it was not a party to the arbitration agreement, which was contained in a document executed in India by Indian parties, SS Mumbai tried to rely on the doctrine of equitable estoppel to argue that if the plaintiff was claiming the benefits of the partnership deed, it  could not equitably disclaim its obligation to arbitrate. (Quisensit commodum debet et sentire onus.)   But the Ninth Circuit concluded plaintiff's intellectual property federal claims were not  sufficiently intertwined with the  partnership deed, and as a result, the court could not look to the partnership deed to determine whether Indian law should apply to decide the estoppel question. Instead, the court concluded federal common law governs, and decided under federal common law that the facts did not support equitable estoppel.

        Dissenting, Judge Bea wrote: "I would hold, simply, that  whether a particular contract is governed by the New York Convention or not, a nonsignatory's equitable estoppel claim to compel arbitration is brought pursuant to the FAA, which requires that state contract law (or in the case of a foreign contract, perhaps the foreign state's contract law, depending on the state's choice of law rules) govern the issue."

        Comment: This case has a lively procedural history. In a prior opinion, the Ninth Circuit held that SS Mumbai, the defendant and non-signatory to a partnership deed that contained an arbitration provision, could not equitably estop plaintiff SS Bangalore from avoiding arbitration. (See my 1/23/21 post on this case). The Supreme Court granted cert, remanding for further consideration in light of GE Energy Power Conversion Power France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020). GE Energy held the New York Convention does not conflict with enforcing arbitration agreements by non-signatories under domestic-law equitable estoppel doctrines. The Ninth Circuit took up the case again, leading to the current majority opinion and dissent. Given the lengthy dissent, might the procedural history still have legs?

International Arbitration, Discovery: SCOTUS Grants Review In Servotronics, Inc. v. Rolls-Royce PLC

Can US Federal Courts Allow Discovery For Private International Arbitrations?

        As set forth in SCOTUSBlog, this is the issue before the Supreme Court in Servotronics, Inc. v. Rolls-Royce PLC:  "Whether the discretion granted to district courts in 28 U.S.C. § 1782(a) to render assistance in gathering evidence for use in 'a foreign or international tribunal' encompasses private commercial arbitral tribunals, as the U.S. Courts of Appeals for the 4th and 6th Circuits have held, or excludes such tribunals without expressing an exclusionary intent, as the U.S. Courts of Appeals for the 2nd, 5th and, in the case below, the 7th Circuit, have held." 

        The key issue is whether private international arbitration qualifies as "a foreign or international tribunal", in which case discovery could be permitted in U.S. district courts. 

        John Elwood, posting on March 18, 2021 for SCOTUSBlog, writes: "Servotronics notes that until the provision was revised in 1964, it applied to 'any judicial proceeding pending in any court in a foreign country.' Servotronics contends that the change in wording suggests Congress intended to include quasi-judicial proceedings such as arbitral proceedings. We’ll have a better idea what the Supreme Court thinks on Monday." That was written before the Supreme Court granted cert on March 22, 2021.

        On March 22, 2021, Paul Weiss Rifkind Wharton & Garrison LLP posted about Servotronics on Lexology. The post makes the point that, regardless of how the case is decided, issues are likely to remain regarding the interpretation of 1782: "First, even after the Supreme Court rules in Servotronics, we may not know whether an international arbitration seated in the United States qualifies as a 'foreign or international tribunal' under Section 1782. In addition, regardless of the outcome, courts may continue to find that investor-state arbitrations qualify for Section 1782 discovery."

 

International Arbitration, Nonsignatories, Equitable Estoppel: SCOTUS Holds Enforcement Of Arbitration Agreement By Nonsignatory May Be Consistent With New York Convention

The US Supreme Court Was In Agreement About This One.

          The Supreme Court has held unanimously, with Justice Sotomayor concurring, that the "New York Convention does not conflict with the enforcement of arbitration agreements by nonsignatories under domestic-law equitable estoppel doctrines." GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, et al (US S.Ct.  6/1/20) (Thomas, J.).

        The case involved cold rolling mills in Alabama : ThyssenKrupp Stainless USA contracted with F. L. Industries, Inc., for the construction of cold rolling mills at ThyssenKrupp's steel manufacturing plant in Alabama.

Sheffield, Alabama. Reynolds Alloys Company. Cold rolling of aluminum sheets. Jack Delano, photographer. August 1942.

        The contracts included arbitration clauses that, on the face of the contracts, applied to the seller, F.L. Industries, the buyer ThyssenKrupp, and F.L. Industries' subcontractors. One of the subcontractors, GE Energy, provided nine motors to power the mills. When the motors failed, Outokumpu Stainless USA, which had acquired the plant, sued GE Energy, which removed to federal court, seeking to compel arbitration, though as a subcontractor, it was not a signatory to the arbitration agreement. 

        The New York Convention is a multilateral treaty addressing international arbitration. While the New York Convention provides that parties to an arbitration may compel arbitration, the Court found that the treaty is silent about nonsignatories. Under many state law theories, such as agency, alter ego, and equitable estoppel, nonsignatories to an arbitration agreement can compel arbitration.  SCOTUS found that the New York Convention allows domestic law as a filler where it does not contradict the New York Convention. And because Alabama law allows nonsignatories to rely on equitable estoppel in order to compel arbitration, GE Energy will now be allowed on remand to argue that Alabama law allows it to compel arbitration.

        Justice Sotomayor concurred, while insisting on a clarifying point: "Any applicable domestic doctrines must be rooted in the principle of consent to arbitrate." So the applicable state doctrine allowing a nonsignatory to compel arbitration must also be based on the principle of consent to arbitrate.

        BONUS: Wikipedia has an article on the rolling process in metal working. The article includes a gif that enables us to visualize how the process works, as metal is extruded between the rollers. Looks kind of like a pasta machine. 

        

 

International Arbitration: California Supreme Court Allows Service Of Process By FedEx On Chinese Company Where Parties Waived Formal Service Requirements Of Hague Service Convention

The Hague Service Convention Between The US And China Did Not Apply Because . . . 

        The first sentence of an opinion is often an arrow pointing to where the court is headed. So it is in Rockefeller Technology Investments (Asia) VII v. Changzhou Sinotype Technology Co., Ltd., S249923 (Cal. S.Ct  4/2/20) (Corrigan, J.): “The parties here, sophisticated business entities, entered into a contract wherein they agreed to submit to the jurisdiction of California courts and to resolve disputes between them through California arbitration.” When a court tells us that sophisticated parties entered into a contract, it’s usually a pretty good hint that the court will follow the contract.

        The issue here was whether the contract provided for a means of service on a company in China that was preempted by the requirements of the Hague Service Convention. The Convention provides for a  Central Authority to serve in the receiving country, and in fact at the time the Convention was adopted, China objected to service by alternative postal means. Here, however, the contract (a Memorandum of Understanding or MOU) provided for notice and service by FedEx and email, jurisdiction in California, and a JAMS arbitration provision.

        Rockefeller Technology initiated arbitration by FedEx and email, and Changzhou Sinotype defaulted.The award was subsequently confirmed by a judge, Changzhou Sinotype moved, unsuccessfully, to set aside the default, the Court of  Appeal reversed, and the Supreme Court reversed the Court of Appeal.

        The Supreme Court analyzes whether service of process in the technical sense is required, and explains that the answer depends on the law of the state where the action is brought. Therefore, if formal service is required by California, then the Convention applies. 

        California, however, permits the parties to waive formal service in favor of an alternative form of service. That’s what the parties did here. Therefore, the Convention does not apply, and service was effective under California law. “Holding that the Convention does not apply when parties have agreed to waive formal service of process in favor of a specified type of notification serves to promote certainty and give effect to the parties’ express intentions.”

International Arbitration, Jurisdiction: Settlement Agreement May Not Amount To Arbitral Award Under Peculiar Facts

Case Is Remanded So District Court Can Assess Jurisdictional Issue.

    The plaintiff-appellant Mr. Castro took on a job as a deck hand on ship. His employment agreement contained a mandatory arbitration provision and it required arbitration to occur in and be subject to the procedural rules of American Samoa. After severely injuring himself, he had surgery for which the employer paid. He then met with a company representative, met with an arbitrator in a public lobby, and signed papers that included a settlement and release, and he received a check.  Because the surgery was unsuccessful, Mr. Castro filed a lawsuit, and the employer successfully enforced a purported arbitral award in district court. Castro appealed. Castro v. Tri Marine Fish Company LLC, et al., No. 17-35703 (9th Cir.  2/27/19) (McKeown, Friedland, Bolton).

    The award had been enforced pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). But there was a threshold problem: there had been a settlement, and thus no dispute to arbitrate, calling in to question the jurisdiction of the district court. Furthermore, the arbitral agreement provided for arbitration in American Samoa, according to Samoan procedure, and the lobby where Mr. Castro signed documents was in the Philippines. 

    The Court's conclusion says it all: "We review foreign arbitral awards deferentially, but we do not blind ourselves to reality when presented with an order purporting to be one. To cloak its free-floating settlement agreement in the New York Convention's favorable enforcement regime, Tri Marine asked an arbitrator to wave his wand and transform the settlement into an arbitral award. That is not sufficient to produce an award subject to the Convention.

Fashion waves her magic wand. Library of Congress. 1896.

    The case is revered in part, vacated in part, and remanded.

International Arbitration, Reviews: Article On "Golden Opportunities For The Golden State" Addresses Rise Of International Arbitration In California

Passage Of SB 766 Opens Up Opportunities For Foreign Attorneys To Participate In International Arbitration In California.

    An excellent article by Eric Z. Chang appearing in California Litigation --The Journal of the Litigation  Section of the CLA, Vol. 31,No. 2 (2018), p. 27, explains how an ambiguity in the law as to whether foreign attorneys could participate in international arbitration in California has been cleared up by the passage of SB 766. The problem had been uncertainty as to whether foreign attorneys who participated in international arbitration in California were engaging in the unauthorized practice of law. With the legislative fix now in place, Chang sees a bright new future for expanding the large market for international arbitration in California.

Arbitration, Construction of Agreement, International, FAA: Arbitration Agreement Not Signed By Parties Was Unenforceable, Based On Placement Of Comma

This Case Is For Grammar Afficionados; Or, What A Difference A Comma Makes.

       Only and exclusive photo of the Vestris as it went down.  Fred Hansen, photographer, active 1928.  Library of Congress.

           Mr. Yang, a seaman, died when the fishing vessel he worked on sank because of inadequate repairs and an incompetent crew.  There were two defendants:  Majestic Blue Fisheries, LLC, Mr. Yang's employer, and Dongwon Industries Co., Ltd., an affiliated company that provided the repairs and a crew for Majestic's vessel.  The district court denied a motion to compel arbitration with Dongwon, and Dongwon appealed.  Yang v. Dongwon Industries, 15-16881 (9th Cir.  11/30/17) (Nguyen, Fisher, Paez).

        The agreement containing an arbitration clause was signed by Mr. Yang and by Dongwon "on behalf of MAJESTIC BLUE FISHERIES, LLC."  Thus, the parties to the agreement were Mr. Yang and Majestic.  

        The key legal issue turned on the interpretation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Convention Act), which implements a Convention Treaty, and -- drum roll -- on the placement of a comma.  

        The Convention Act requires that a party seeking to compel arbitration must prove the existence and validity of "an agreement in writing withing the meaning of the Convention" Treaty.  And the Convention Treaty defines an "agreement in writing" to "include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams."  Dwell upon the placement of the comma.  Ponder what "signed by the parties" modifies.

        Under cannons of construction, when a comma is included, "the modifier is generally understood to apply to the entire series."  Thus, here, "signed by the parties" modifies both "an arbitral clause in a contract" and "an arbitration agreement."  Neither of which was "signed by the parties."  Hence, the arbitration provision could not be enforced by Dongwon.

        Nor could Dongwon rely on the Federal Arbitration Act to enforce the arbitration provision, "because the FAA expressly exempts from its scope any 'contracts of employment of seamen.'"

        And finally, the Court rejected as a "doctrinal sleight of hand" Dongwon's argument that the Convention Act requirements could be circumvented "by importing into our Convention Act analysis precedent permitting a 'litigant who is not a party to an arbitration agreement to invoke arbitration under the FAA if the relevant state contract law allows the litigant to enforce the agreement.'" 

        Affirmed.

            COMMENT:  It is sobering to think that the legal rights of the family of a drowned seaman depended on the placement of a comma.

    

        

International Arbitration, Gateway Issue, Delegation, Scope: Ninth Circuit Holds That Incorporation Of ICC Rules Delegates Issue Of Scope Of Arbitration To The Arbitrator

Ninth Circuit Joins Second And First Circuits.

        In Portland General Electric Company v. Liberty Mutual Insurance Company, et al., No 16-35628 (9th Cir. 7/10/17) an opinion authored by Senior District Judge Jed S. Rakoff, the 9th Circuit joins the 2nd and 1st Circuits to conclude that "incorporation of the rules of the ICC [International Chamber of Commerce] constitutes clear and unmistakable evidence of a delegation of gateway issues to the arbitrator . . . "

        The case involves a dispute among Portland General Electric Company (PGE), its Contractor, its Contractor's parent and guarantor (Guarantor) and its Sureties.  The construction agreement between PGE and its Contractor, which did not provide for arbitration, required that the Contractor obtain a Guaranty from its parent, and that the Sureties issue a Bond to PGE.  The Bond was also silent about arbitration.  However, the Guaranty did include a broad arbitration clause covering disputes arising out of the same transaction, and allowing PGE or the Guarantor to implead third parties, provided that the third parties consented to participate in the arbitration. 

        The Guarantor sought to interplead the Sureties in the ICC arbitration, and the Sureties consented to be impleaded, claiming no obligation to pay under the Bond.  However, PGE objected in the district court that it had not initiated the impleader, that the Sureties' Bond did not provide for arbitration, and that the dispute was outside the scope of its arbitration agreement with the Guarantor.  The district court agreed with PGE, and entered a preliminary injunction prohibiting the Sureties from pursuing claims against PGE in arbitration and denying a mandatory stay of the judicial proceedings under section 3 of the FAA.

        The 9th Circuit vacated the judgment of the district court, and remanded for further proceedings consistent with the opinion.  Now, the ICC will need to rule on the scope of the arbitration provision in the Guaranty.

        COMMENT:  In a footnote, the Court notes that a few circuits have held that delegation to the arbitrator only applies to claims that are at least "arguably" covered by the agreement to arbitrate.  Here, however, the Court did not need to take a side in the circuit split, because the arbitration agreement arguably covered the Sureties' claims against PGE.

 

    

 

    

Mediation/Condition Precedent: International Lawyers Also Worry About Consequence Of Skipping Mandatory Pre-Arbitral Step

It’s Not Exactly The Same As Skipping Mediation In A Home Sale Purchase In California . . . .

     California courts have established that the consequence of not requesting mediation before suing for breach of a California Association of Realtor’s residential purchase agreement is that the plaintiff will not recover attorney’s fees even if the plaintiff prevails.  That result is the logical consequence of the contractual language in the C.A.R. purchase agreement.  See generally our sidebar category:  Mediation:  Condition Precedent.  Interestingly, practitioners of international construction law must also grapple with the consequences of skipping an ADR step.

     Matthias Scherer and Samuel Moss, attorneys with the international law firm Lalive, have authored a November 28, 2016 article entitled, “The consequence of skipping a mandatory pre-arbitral step.”  The article focuses on a recent ruling by the Swiss Federal Supreme Court considering the consequences of failing to comply with a mandatory pre-arbitral condition – in this case, a conciliation step.  The authors list potential consequences:  (1) dismiss the case for lack of jurisdiction or inadmissibility; (2) suspend the proceedings; or, (3) award damages for breach and proceed with the arbitration.

     Here, the court characterized the issue as one of lack of jurisdiction, resulting in suspension of the proceeding by the arbitral tribunal until the parties complied with the pre-arbitral condition.