USA: District Court Compels Arbitration of Arbitrability Based on Vilnius Arbitration Rules

Terra Holding GmbH and Terra Handels-und Speditionsgesellschaft mbH v. Unitrans International, Inc., No. 14-cv-1788 (E.D. Va. Aug. 19, 2015), the District Court for the Eastern District of Virginia compelled arbitration of the question of arbitrability where the arbitration agreement incorporated Vilnius Court of Commercial Arbitration rules that delegated that decision to the arbitrators.

Plaintiffs, Terra Holding GmbH and Terra Handels-und Speditionsgesellschaft mbH (both German entities), sued Defendant, Unitrans International, Inc. (a U.S. corporation), for, inter alia, breach of a loan agreement and breach of a shareholders agreement.

Defendant first moved to dismiss the Eastern District of Virginia action on forum non conveniens grounds.  In its reply brief, however, Defendant amended the motion to include a request to compel arbitration pursuant to the shareholders agreement’s arbitration clause, arguing that it applied to disputes over subsequent agreements (such as the loan agreement) between the parties.

The parties subsequently submitted a joint supplemental brief concerning the Defendant’s motion to dismiss, and requested (1) an order compelling arbitration of the dispute before the Vilnius Court of Commercial Arbitration (the forum elected by the parties in the arbitration clause) to determine whether the dispute is arbitrable pursuant to the shareholders agreement; and (2) an order staying the district court case pending a decision of the arbitrators.

In order to arrive at its decision, the court presented three issues.  It first analyzed whether the court or the arbitrators should decide the issue of arbitrability.  Despite Fourth Circuit case law stating that arbitrability is generally a question for judicial determination, the district court found that “well-reasoned opinions in other circuits” have found that the issue of arbitrability may be decided by the arbitrator where the agreement clearly and unmistakably provides that the arbitrator shall determine whether the parties agreed to arbitrate.  These well-reasoned opinions further found that the “clearly and unmistakably” standard is met when the arbitration clause includes broad language and incorporates a specific set of rules that authorize the arbitrator to determine arbitrability.  The arbitration clause in this case provided that “disputes arising from or in connection with” the shareholders agreement “shall be resolved by arbitration in accordance with the Arbitration Rules of the Vilnius Court of Commercial Arbitration.”  Those rules specifically state that the arbitral tribunal has the power to rule on its competence.  Accordingly, the standard was satisfied.

The court then analyzed whether it had the power to compel arbitration of the dispute in Lithuania pursuant to the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq.  In the Fourth Circuit, there are four jurisdictional requirements in determining whether to enforce a foreign arbitration clause pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “NY Convention”).  First, there must be an agreement in writing within the meaning of the NY Convention.  Second, the agreement must provide for arbitration in a territory of a signatory of the NY Convention.  Third, the agreement must arise out of a commercial relationship.  And fourth, a party to the agreement must not be a U.S. citizen, or the commercial relationship must have a reasonable relation with one or more foreign states.  If these jurisdictional requirements are met, the court must order arbitration, unless it finds that the arbitration agreement itself is null and void, inoperative or incapable of being performed.

The court found that the four requirements were met because the shareholders agreement contained a valid written agreement to arbitrate, Lithuania was a signatory of the NY Convention, the parties were involved in a commercial relationship, and the Plaintiffs were German corporations.  Thus, the court compelled arbitration in accordance with the terms of the shareholders agreement.

Finally, the court addressed whether to dismiss or stay the proceeding pending arbitration of the dispute.  The court first noted that neither the U.S. Supreme Court nor the Fourth Circuit had addressed this question, and the circuits that have addressed it are split.  The court sided with the circuits that require a stay, citing the Second Circuit’s 2015 decision in Katz v. Cellco P’ship, (“The FAA’s ‘text, structure, and underlying policy command this result’”), and citing the FAA (“where, as here, an issue is referable to arbitration, the court ‘shall on application of one of the parties stay the trial of the action’”).  Notably, the court reasoned that a mandatory stay “comports with the FAA’s appellate structure because a stay, unlike a dismissal, is an unappealable interlocutory order consistent with the FAA’s denial of the right to an immediate appeal from an interlocutory order that compels arbitration or stays proceedings.”  See 9 U.S.C. § 16(a)(1)(A)-(B).

Therefore, the court ordered the parties to proceed with the dispute before the Vilnius Court of Commercial Arbitration, and stayed the matter pending further order of the arbitrators.  The court deferred the forum non conveniens motion as it was not necessary to address unless the parties returned to the court to continue the proceedings.

A version of this post originally appeared in the January 2016 edition of Baker & McKenzie’s International Litigation & Arbitration Newsletter, which is edited by David Zaslowsky and Grant Hanessian.