Proskauer Rose International Practice Guide Proskauer Rose LLP |
      Proskauer on International Litigation and Arbitration:
       Managing, Resolving, and Avoiding Cross-Border Business or Regulatory Disputes
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  1. The validity, revocability, or unenforceability of an arbitration contract, or the arbitral tribunal’s jurisdiction can be challenged post-award by a petition for vacatur under 9 U.S.C. § 10. Most parties, however, fearful of a failure to raise the jurisdiction challenge at the outset, will raise the challenge at some earlier stage in the process.
  2. Once an arbitration has been commenced, a respondent has a number of options.
    1. Boycott the arbitration. While this course of action is extreme, it is not unprecedented. If a respondent elects not to participate in the arbitration, the arbitration will likely proceed ex parte to award.
      1. Under the ICC Rules, for example, when a respondent defaults, the ICC Court will make a preliminary jurisdiction determination and more often than not, allow the arbitration to move forward. ICC Rules, Art. 6(2). After award, the respondent can seek to set aside the award or challenge enforcement based on lack of jurisdiction.
      2. This is a highly risky choice, however, as the respondent will have lost the ability to challenge the award on the merits.
      3. Moreover, if the respondent has been properly informed of the constitution of the tribunal and the relevant procedural deadlines and hearings, it is likely that an ultimate award will be enforceable against the respondent. It is also likely that the respondent will be ordered to pay costs.
    2. Challenge jurisdiction before the arbitral institution. Jurisdictional challenges can be raised before the arbitral institution (e.g., ICC).
      1. Respondents can argue that there has been no agreement to arbitrate at all, that there has been no agreement to arbitrate the specific claims, or that the agreement was to arbitrate under the rules of another institution.
      2. The standard for proceeding to arbitration—having the file transferred to the arbitral tribunal—however, is exceedingly low.
        1. For example, the ICC Court need only determine that “it is prima facie satisfied that an arbitration agreement under the Rules may exist.” ICC Rules, Art. 6(2). The reality is that where all parties to an arbitration are signatories of an arbitration agreement, the arbitration will likely proceed. This is true even when the arbitration clause is “pathological,” that is, unclear as to the institution before which the parties agreed to arbitrate.
    3. Challenge jurisdiction before the arbitral tribunal. Even if the institution determines that the arbitration can go forward, challenges to the jurisdiction of the arbitral tribunal can still be made. Pursuant to its “inherent power,” an arbitral tribunal investigates its own jurisdiction. The arbitral tribunal may examine the arbitration agreement, the terms of its appointment and any relevant evidence in order to decide whether a particular claim or claims falls within its jurisdiction. See id. A tribunal considering the question of its own jurisdiction may do one of the following:
      1. The tribunal may decide at the outset that it has no jurisdiction, which puts an end to the arbitral proceedings altogether. Whatever remedies open to the claimant, such as recourse to the national courts, may then be pursued. Note, however, arbitrators are predisposed to finding that they have jurisdiction.
      2. The tribunal may hear arguments on the issue of jurisdiction and issue an interim award. If the arbitral tribunal upholds its own jurisdiction, the respondent should continue to participate in the arbitration, having expressly reserved its position on the issue of jurisdiction so that this issue may be revisited after the final award is issued, either by a challenge of the award in the courts of the place of arbitration or by resisting attempts to obtain recognition or enforcement of the award. The respondent may also seek review of the interim award.
      3. If the facts on which the jurisdictional challenge are almost inseparable from the dispute on the merits, the arbitral tribunal may join the issue of jurisdiction to the merits. In this situation, no interim award on jurisdiction is issued and instead, the arbitral tribunal issues a final award that addresses both the jurisdiction of the tribunal and the merits of the claims.
      4. The arbitral tribunal’s decision on jurisdiction may be subject to review by a competent national court; however, the possibility of review does not prevent the tribunal from considering its own jurisdiction and arbitrability in the first instance.
    4. Apply to the national court to resolve the issue of jurisdiction. The procedures for applying to the national court are discussed more fully below.
      1. It should be noted, however, that if the arbitration has already been constituted, it is likely that the arbitral tribunal will proceed with the arbitration notwithstanding the pending court challenge.
      2. Moreover, as courts defer more and more to arbitration, this process can be costly and time consuming and often unsuccessful.
    5. Proceed with the arbitration and challenge the final award once issued by the arbitral tribunal. The respondent may challenge the award in the courts of the country in which the arbitration took place, or seek to oppose enforcement of the award.
      1. The disadvantage of this strategy is that under many systems of law, failure to raise an objection to jurisdiction promptly may operate as a waiver of the objection. See, e.g., LCIA Rules, Art. 23.2 (“A plea by a Respondent that the Arbitral Tribunal does not have jurisdiction shall be treated as having been irrevocably waived unless it is raised not later than the Statement of Defence. . . .”). In other words, if a party has appeared and participated in the arbitration without raising any objections to the jurisdiction of the tribunal, it may be deemed to have impliedly submitted to the arbitration, and any challenge to jurisdiction thereafter might be viewed as a mere device
      2. .
  3. Challenge to the jurisdiction of the arbitral tribunal before national courts. The respondent may:
    1. Seek an injunction to restrain the arbitral tribunal from proceeding;
    2. Seek a declaration stating that the arbitral tribunal does not have jurisdiction with respect to the particular claim or claims advanced by the claimant; or
    3. Take the offensive and file suit in the courts at the seat of arbitration, and seek to stay the arbitration. The respondent employing this tactic risks an adverse decision, which will bolster the standing of the arbitration and, thus, make it more difficult to oppose enforcement of any subsequent award against it on the ground of lack of jurisdiction.
      1. Rather than applying to the courts of the place of arbitration, a party challenging the arbitration may apply to another national court, provided that court has jurisdiction to entertain the application and there is some rationale or advantage in applying to that court. This tactic, however, raises the issue of interference by courts in the arbitral process.
      2. A respondent may also challenge the arbitral tribunal’s jurisdiction in opposition to a motion to compel arbitration and/or stay already existing litigation.
  4. Where to Challenge
    1. The FAA does not itself provide a basis for personal jurisdiction. The court, therefore, must look for an independent basis to exercise personal jurisdiction over the claimant/defendant.
    2. If the plaintiff/respondent is seeking to litigate in the specified forum of the arbitration, it is likely that personal jurisdiction will not be an issue; the majority view is that a forum selection clause (e.g., the arbitration clause designating the site of the arbitration) is a sufficient basis for personal jurisdiction. Many courts, including the First, Second, Sixth, Ninth and D.C. Circuits have held that a forum selection clause, or agreement to arbitrate in a forum, is sufficient to confer personal jurisdiction. See, e.g., Management Recruiters Int'l, Inc. v. Bloor, 129 F.3d 851, 854 (6th Cir. 1997) (“When parties have agreed to arbitrate in a particular forum, only a district court in that forum has jurisdiction to compel arbitration. . . .”); Petrol Shipping Corp. v. Kingdom of Greece, Ministry of Commerce, 360 F.2d 103, 107 (2d Cir. 1966) (“[B]y agreeing to arbitrate in New York a party makes himself as amenable to suit as if he were physically present in New York.”).
    3. Many states’ long-arm statutes specifically provide that a forum selection clause confers personal jurisdiction. See, e.g., Chan v. Society Expeditions, 39 F.3d 1398, 1406 (9th Cir. 1994) (noting that a forum selection clause alone can confer personal jurisdiction); Diebold, Inc. v. Firstcard Fin. Servs., 104 F. Supp. 2d 758, 763 (N.D. Ohio 2000) (holding that forum selection clause conferred personal jurisdiction upon Ohio district court); National Union Fire Ins. Co. v. Worley, 257 A.D.2d 228, 230 (NY 1999) (holding that forum selection clause is tantamount to consent to personal jurisdiction). Florida’s long-arm statute does not confer jurisdiction as the result of a forum selection clause. This, however, is the minority view.
    4. If the plaintiff/respondent is seeking to litigate in a forum other than the place of the arbitration, the plaintiff/respondent will need to demonstrate an independent basis for personal jurisdiction
      1. The federal courts have original jurisdiction over actions or proceedings falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 (the “New York Convention”) by deeming such actions to arise under the laws and treaties of the United States. Such original jurisdiction is granted regardless of the amount in controversy. Foreign states are not immune from the jurisdiction of the federal or state courts. Federal courts, therefore, have subject-matter jurisdiction in arbitration actions between foreign entities.
      2. An action or proceeding over which the district courts have jurisdiction pursuant to the New York Convention may be brought:
        1. in any such court in which save for the arbitration agreement, an action or proceeding with respect to the controversy between the parties could be brought; or
        2. in such court for the district and division which embraces the place designated in the agreement as the place of arbitration, if such place is within the United States. 9 U.S.C. § 204.
  5. Grounds for Challenges. In international arbitrations, under the New York Convention and the implementing provisions of the FAA, courts consider the following threshold issues:
    1. whether there is a written agreement;
    2. whether the subject matter is commercial;
    3. whether the dispute is international in scope; and
    4. whether the particular claim is covered by the arbitration agreement. Smith/Enron Cogeneration Ltd. P’ship. v. Smith Cogeneration Int’l Inc., 198 F.3d 88, 92 (2d Cir. 1999). The primary focus in such litigations is whether there is an agreement to arbitrate that covers the claims in issue.
      1. Note that while a court considering whether arbitration is appropriate must determine whether the arbitration agreement is in writing, arbitration rules for a number of arbitral institutions do not require a written agreement.
      2. The New York Convention and the FAA, which implements the strong federal policy in favor of arbitration as an alternative means of dispute resolution, govern. This “presumption of arbitrability,” however, “is not without limits.” Nordin v. Nutri/System, Inc., 897 F.2d 339, 344 (8th Cir. 1990).
    5. Is there an agreement to arbitrate? Challenges to the arbitration agreement
      1. Under the New York Convention, courts should refer parties to arbitration “unless [the court] finds that the said agreement is null and void, inoperative or incapable of being performed.” Art. II(3); see also 9 U.S.C. § 1 (court may refuse to refer the parties to arbitration if it finds the arbitration agreement itself, as opposed to the entire contract, to be “null and void, inoperative or incapable of being performed”); Art. 4 of the 1923 Geneva Protocol (courts shall refer disputes to arbitration if there is an arbitration agreement that is “valid” and “capable of being carried into effect); UNCITRAL Model Law, Art. 8 (a court shall refer the parties to arbitration “unless it finds that the agreement is null and void, inoperative or incapable of being performed”).
        1. This exception is narrowly construed, and is interpreted to encompass only situations such as fraud, mistake, duress, and waiver that can be applied neutrally on an international scale (e.g., generally applicable contract defenses). It requires the party resisting enforcement to show that the essence of the obligation or remedy is prohibited by a pertinent statute or other declaration of public policy of the forum. See Antco Shipping Co., Ltd. v. Sidermar S. p. A., 417 F. Supp. 207 (S.D.N.Y. 1976). Matters that are generally not arbitrable include criminal matters, disputes that affect the status of an individual or a corporate entity (e.g., bankruptcy or insolvency), and disputes concerning the grant or validity of patents and trademarks.
      2. The New York Convention offers, as a ground for declining to enforce an arbitral award, that the “subject matter of the difference is not capable of settlement by arbitration” under the law of the country where enforcement is sought. New York Convention, Art. V(2)(a). Thus, a court may reject the award if “recognition or enforcement of the award would be contrary to the public policy of the forum state.” Id. at Art. V(2)(b); see also Model Law., Art. 36(a)(iv). However, rarely are internationally-reported New York Convention cases refused enforcement for public policy reasons.
  6. Challenges to the contract as a whole, severability
    1. Challenges to the contract as a whole are usually based either on a ground that directly affects the entire agreement or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid. A party might argue that the contract was not signed by both parties; one of the parties did not have legal capacity or the authority to sign the contract; or, the contract was fraudulently induced.
    2. Under the “severability” or “separability” doctrine, however, an arbitration clause is separable from the contract containing it and therefore can survive a successful challenge to the validity of the contract itself. See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S. Ct. 1204, 1209 (2006).
      1. Thus, the validity of the arbitration clause does not depend on the validity of the contract as a whole. See, e.g., UNCITRAL Arbitration Rules, Art. 21; LCIA Arbitration Rules 23.1; AAA Arbitration Rules, Art. 15.2; Model Law, Art. 16(1); English Arbitration Act 1996, s.7; ICC Arbitration Rules, Art. 6.4.
      2. Therefore, an arbitral tribunal does not cease to have jurisdiction by reason of a claim that the contract is null and void provided that the arbitral tribunal upholds the validity of the arbitration agreement.
    3. In the past, courts and commentators have distinguished between contracts that are “voidable” (e.g. the contract exists but is subject to rescission) and contracts that are void ab initio, and arguing that the severability doctrine should be applied only to contracts that are voidable. See, e.g., Pollux Marine Agencies, Inc. v. Louis Dreyfus Corp., 455 F. Supp. 211, 219 (S.D.N.Y. 1978) (holding that “something can be severed only from something else that exists”). However, in Buckeye Check Cashing, 126 S. Ct. at 1210, the United States Supreme Court rejected this distinction.
    4. Non-signatories. A non-signatory can be ordered to arbitrate, or be bound by the resulting arbitral award, irrespective of whether they participated in the arbitration. International Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 418 (4th Cir. 2000). A party can agree to submit to arbitration by means other than personally signing a contract containing an arbitration clause. Courts have recognized five theories arising out of common law principles of contract and agency law that provide a basis for binding non-signatories:
      1. Incorporation by reference of the arbitration agreement into a subsequent contract;
      2. Assumption by the rights of the respondent or assignment of the rights and obligations under the contract to the respondent;
      3. Where the signatory and the respondent have an agency relationship;
      4. Under the concept of veil piercing or alter ego theory; and
      5. Equitable estoppel, which in the arbitration context recognizes that a party is estopped from asserting that the lack of a signature on a written contract precludes enforcement of the contract’s arbitration clause when the party has consistently maintained that the other provisions of the same contract should be enforced to the party’s benefit. International Paper, 206 F.3d at 418. In other words, a “nonsignatory is estopped from refusing to comply with an arbitration clause ‘when it receives a “direct benefit” from a contract containing an arbitration clause.’” American Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir. 1999). See Smith/Enron Cogeneration Ltd. P’ship, 198 F.3d at 92; Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F.3d 773, 776 (2d Cir. 1995).
  7. Does the arbitration agreement cover the asserted claims? Even if the court finds that a valid and enforceable arbitration agreement exists, it must nonetheless determine whether the parties contracted to arbitrate a given dispute.
    1. Courts make this determination by applying the “federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act.” Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).
    2. Questions of arbitrability “must be addressed with a healthy regard for the federal policy favoring arbitration. . . . . [A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself. . . .” Id. at 24-25.
      1. If the arbitration clause is broad (e.g., it provides that “any and all claims” relating to the agreement are arbitrable), there arises a presumption of arbitrability and courts will likely refer to arbitration even a collateral matter or allegations underlying the claims that “touch matters” covered by the parties’ agreement. See Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading, Inc., 252 F.3d 218, 225 (2d Cir. 2001).
        1. Any questions concerning the scope of the arbitration clause will be resolved in favor of arbitration and the presumption in favor of arbitration can be overcome only if it may be said “with positive assurance that the arbitration clause is not susceptible to the interpretation that it brings plaintiffs’ claims within its sweep.” In re Currency Conversion Fee Antitrust Litig., 265 F. Supp. 2d 385, 406 (S.D.N.Y. 2003).
        2. However, courts will not stretch arbitration agreements beyond reason. Courts have held, for example, that wholly unexpected tortious behavior is not covered by an arbitration clause.
        3. However, courts have further held that a respondent cannot remove a claim from within the intended scope of an arbitration clause merely by casting it in tort where the claim itself clearly alleged a breach of contract. See, e.g., Altshul Stern & Co. v. Mitsui Bussan Kaisha, Ltd, 385 F.2d 158, 159 (2d Cir. 1967).
      2. If the arbitration clause is narrow (e.g., when the scope of the arbitral authority is limited in some fashion or only certain disputes are subject to arbitral determination in whole or in part), the court will refer to arbitration a claim that is prima facie within the scope of the narrow clause.
        1. A collateral matter will generally be ruled beyond the purview of the narrow clause.
  8. Additional Grounds for Challenge
    1. A respondent may argue it was not given proper notice of the appointment of the arbitrator in the proceeding and, for that reason, the proceeding should be stayed and the appointment process be restarted.
    2. The agreement does not effectively provide for arbitration under a certain set of rules.
      1. Such clauses often inaccurately refer to an arbitral institution (e.g. referring to the “Paris Chamber of Commerce” or “Arbitration Court in Zurich” instead of the ICC), and are termed “pathological.”
      2. Many arbitral institutions take a liberal view of such clauses and will, more often than not, find that such clauses refer to the arbitral institution before which the claimant has filed its demand for arbitration.
  9. Scope of the challenge. A challenge to the jurisdiction of an arbitral tribunal may be partial or total.
    1. A partial challenge raises the question of whether certain claims or counterclaims that have been submitted to the arbitral tribunal are within its jurisdiction.
    2. A total challenge generally questions whether there is a valid arbitration agreement at all.
    3. Note that even if certain claims or counterclaims are outside the scope of the arbitration agreement, the parties may agree that new matters should be brought within the jurisdiction of the arbitral tribunal.
      1. However, under some institution’s rules of arbitration, where the arbitral process has already commenced, new claims may only be added in the discretion of the arbitral tribunal. See, e.g., ICC Arbitration Rules, Art. 19.
  10. Who decides the issue of arbitrability?
    1. Under the Kompetenz-Kompetenz doctrine (a.k.a. competence-competence or “jurisdiction concerning jurisdiction”), there is the presumption that the arbitral tribunal itself has the authority to determine whether they have the power to hear a dispute.
      1. Many countries, particularly France, have incorporated some form of this doctrine. See American Bureau of Shipping, Cass Civ 1ère, 26 June 2001 and Quarto Childrens Books, Cass Civ 1ère, 16 October 2001, in which the Cour de cassation held that the issue of jurisdiction is a matter for the arbitrator to decide.
      2. Several arbitral institutions’ rules incorporate the Kompetenz doctrine, providing that the arbitrators, rather than the courts, make the initial determination as to substantive arbitrability.
      3. Article 15 of the AAA’s International Arbitration Rules provide that the “tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” See also ICC Rules Art 6(4); UNCITRAL Arbitration Rules Art. 21(1); LCIA Rules Art. 23.1.
    2. However, in the United States, courts apply the same standard to the question of who decides arbitrability as they do to the question of arbitrability itself; what did the parties agree to?
      1. While there is a rebuttable presumption that issues of arbitrability are to be decided by the court, the parties may agree to have the question of arbitrability itself decided by the arbitral tribunal.
      2. However, the issue of arbitrability may only be referred to the arbitral tribunal where there is clear and unmistakable evidence from the arbitration agreement that the question of arbitrability is to be decided by the arbitral tribunal. See First Options v. Kaplan, 514 U.S. 938, 944 (1995)
        1. Such evidence may be found in the arbitration clause itself, even absent an express contractual commitment, where the arbitration clause is a broad clause.
        2. Courts have held that a referral of “any and all” controversies is such a broad clause and reflects such a “broad grant of power to the arbitrators” as to evidence the parties clear “inten[t] to arbitrate issues of arbitrability.” PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1195-2000 (2d Cir. 1996); see also Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 43, 46, 666 N.Y.S.2d 990, 991, 994 (1997) (language providing for ‘[a]ny controversy” between the parties to be “settled by arbitration” was sufficiently “plain and sweeping” to indicate an “intent and commitment” to have arbitrability decided by the arbitrators).
        3. Courts have also found such clear and unmistakable evidence when the parties agree to be bound by the rules of an arbitral tribunal that requires arbitrability to be decided in arbitration. For example, courts have held that an arbitration clause that requires arbitration to be conducted under the Rules of Arbitration of the ICC was an agreement to have issues of arbitrability decided by the arbitral tribunal. Shaw Group Inc. v. Triplefine Int’l Corp., 322 F.3d 115, 120-21 (2d Cir. 2003).
  11. When to challenge.
    1. If the respondent seeks to challenge the arbitration before the courts, it is best to do so as soon as possible, before the arbitral tribunal has been constituted. If the respondent waits until the tribunal has been constituted, it is likely that the arbitration will proceed without regard to the existence of the challenge before the courts.
    2. If the respondent seeks to challenge the arbitration before the tribunal, in most cases, the respondent must do so before the submission of the defense on the merits. See, e.g. the Model Law, Art.16(2); ICSID Convention, Regulations and Rules, Rule 41(1); UNCITRAL Arbitration Rules, Art. 21(3); LCIA Rules Art. 23.2.
  12. Judicial review of interim arbitral decisions regarding jurisdiction
    1. Arbitration on the merits may continue after an arbitral panel has decided it has jurisdiction to hear the dispute.
    2. Judicial review of jurisdictional decision is available at any time before or during arbitration on the merits, or after an award is rendered.
    3. Courts may grant a motion to stay arbitration pending the review of an arbitral decision regarding jurisdiction.
    4. In the United States, if the parties did not agree to arbitrate jurisdiction, review of an arbitral decision regarding jurisdiction will be de novo.
      1. However, in instances where the parties have agreed to arbitrate the very issue of arbitrability, any judicial review of the arbitral decision will be limited to the narrow grounds outlined in the FAA § 10. First Options, 514 U.S. at 943 (dictum).
      2. Where a party makes a jurisdictional objection but continues to participate in arbitration proceedings, courts will not infer a waiver of the right to challenge the jurisdiction of the arbitral tribunal. The objection, once stated, is preserved for judicial review. See China Minmetals Materials Imp. and Exp. Co. v. Chi Mei Corp., 334 F.3d 274, 290 (3d Cir. 2003).
  13. Disputes with multiple claims/parties
    1. Parallel arbitration of non-arbitrable claims.
      1. Under U.S. law, issues that may not be arbitrable in a domestic transaction may be subject to arbitration in an international transaction. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 629 (1985).
    2. Stay of related actions pending outcome of arbitration.
      1. If parties are signatories to the arbitration agreement, the court must stay related actions under FAA § 3. However, if a party is a non-signatory to the agreement, the court enjoys discretion as to whether a stay should be issued.
      2. A stay may be issued in limited circumstances where the issue being arbitrated has the potential to render litigation moot or redundant.

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