By: Edward “Teddy” Baldwin,1Teddy Baldwin is a partner in Baker & McKenzie’s Washington, DC office. Mr. Baldwin focuses his practice on complex international and multijurisdictional arbitration. He has represented many foreign entities and multinational corporations in arbitrations under the Rules of the ICSID, ICC, ICDR, LCIA, HKIAC and other institutions, as well as ad hoc proceedings. Justin Marlles,2Justin Marlles is a partner in Baker & McKenzie’s Houston office. His practice involves international litigation and arbitration, with a focus on clients in the energy industry. Mr. Marlles previously served as in-house litigation counsel for BHP Billiton and Petrohawk Energy Corporation. and Brandon Caire3Brandon Caire is a senior associate in Baker & McKenzie’s Houston Dispute Resolution group, focusing primarily on energy, securities and pharmaceutical disputes. He has represented clients in arbitrations under the rules of the ICC, LCIA, CPR, and other institutions.
A. Legislation, Trends and Tendencies
A.1 Legislation
The United States is a federal country with arbitration-related legislation at both the national (federal) and state levels. The Federal Arbitration Act (FAA) of 1925 continues to be the controlling Federal statute regarding arbitration and reflects a well-established national policy in favor of arbitration. There has been no federal legislation in the past year amending or altering the FAA.
However, there has been some activity at the state level intended to streamline and simplify the arbitration process. Most significantly, on 4 May 2015, the Delaware Rapid Arbitration Act (DRAA) took effect in the State of Delaware. As its name indicates, the DRAA’s stated purpose is “to give Delaware business entities a method by which they may resolve business disputes in a prompt, cost-effective, and efficient manner …, and to ensure rapid resolution of those business disputes.” The Act requires that: (1) the parties agree to arbitrate under the DRAA and select Delaware law to govern their agreement; and (2) at least one party be a business entity either formed in Delaware or with its principal place of business in Delaware. The Act provides that all issues of substantive and procedural arbitrability be resolved by the arbitrator and not by the courts. The Act requires that the arbitrator issue a final award within 120 days of the acceptance of appointment, and only allows for an extension of 60 days by unanimous consent. The Act further gives the arbitrator authority to make interim rulings and issue interim orders.
The DRAA also allows the parties to an arbitration agreement to select an arbitrator not trained in law to resolve their dispute. In such circumstances, however, the arbitrator may retain a lawyer to decide any legal issue that arises during the course of the proceeding while the arbitrator still retains a role as the finder of fact. In this scenario, although the expert arbitrator will still render the final award in the arbitration, the retained lawyer (subject to the arbitrator’s determination) may exercise the full power of the arbitrator to render decisions on such issues of law. Under the DRAA, review of an award will be undertaken solely by the Delaware Supreme Court and any petition for review must be filed within 15 days after the award is rendered.
A.2 Trends and Tendencies
While it has not yet resulted in legislation, there are increasing efforts at the federal level and in certain US states to pass laws limiting the effect of arbitration agreements in consumer and employment contracts. In 2015, the California legislature passed bill AB-465 that would have prohibited employers from requiring employees to sign arbitration agreements absent certain narrow exceptions, although California governor Jerry Brown vetoed the bill, thereby preventing it from taking effect.
Further, several bills have been proposed at the national (federal) level, including most recently the “Arbitration Fairness Act” of 2015, which purports to limit or prohibit arbitration agreements involving consumers or employees when those agreements are entered into before a dispute arises. While none of these efforts have resulted in any new binding legislation, it is likely that at least some of these legislative efforts, particularly at the state level, may actually succeed in becoming binding law in the near future.
B. Cases
B.1 Chevron’s Award Against Ecuador Upheld on Appeal
For two decades, Chevron Corporation and the Republic of Ecuador (“Ecuador”) have engaged in a series of lawsuits related to Chevron’s investment in Ecuador. In Chevron Corp. v. Republic of Ecuador, 795 F.3d 200 (D.C. Cir. 2015), Ecuador appealed the confirmation by a US federal district court of an arbitration award granted to Chevron.
Ecuador argued that the district court erred in applying the US Foreign Sovereign Immunities Act (FSIA) to the confirmation of the arbitration award. The FSIA generally grants foreign states immunity from the jurisdiction of courts in the United States, subject to certain exceptions. The district court had held that it had subject matter jurisdiction under the FSIA’s “arbitration exception,” 28 U.S.C. § 1605(a)(6), which waives sovereign immunity for the confirmation of an arbitration award made pursuant to an arbitration agreement governed by an international treaty. Here, relying on the arbitrators’ determination that the claim was arbitrable under the BIT between the United States and Ecuador, the district court found that the arbitration exception applied. Ecuador asserted that the district court could not rely on the arbitrators’ determination of arbitrability and instead had to make a de novo determination that an arbitration agreement existed between the parties that encompassed Chevron’s claims.
The DC Circuit Court of Appeals rejected Ecuador’s argument and held that the lower district court was right to defer to the arbitral tribunal’s decision on arbitrability for purposes of determining whether Chevron’s claims were arbitrable under the BIT. The DC Circuit held that Chevron satisfied its prima facie burden to prove that the FSIA’s arbitration exception applied by producing the BIT and the notice of arbitration. The court held that the burden then shifted to Ecuador to attempt to rebut the presumption that the BIT and Notice of Arbitration constituted an agreement to arbitrate under an international treaty. The court noted that the BIT “includes a standing offer to all potential US investors to arbitrate investment disputes, which Chevron accepted in the manner required by the treaty,” meaning by filing the Notice of Arbitration. The DC Circuit thus found that the FSIA’s arbitration exception applied and that the district court had jurisdiction to confirm the award.
Ecuador also argued that the award was not enforceable under the New York Convention because: (1) Article V(1)(c) provides that the award should not be confirmed if it “deals with a difference not contemplated by or not falling within the terms of the submission to arbitration”; and (2) the award was contrary to public policy. The DC Circuit denied these challenges to the award as well.
B.2 Agreement to Arbitrate Arbitrability via Choice of AAA Rules
In Brennan v. Opus Bank, 796 F.3d 1125 (9th Cir. 2015), the plaintiff filed an action in US court against his former employer Opus Bank for an alleged breach of his employment agreement and wrongful termination under California and Washington state law. The agreement contained a broad arbitration clause stating that “. . . any controversy or claim arising out of this Agreement or [the plaintiff’s] employment with the Bank or the termination thereof . . . shall be settled by binding arbitration in accordance with the Rules of the American Arbitration Association.” The agreement also stated that in the event of arbitration, “the parties shall retain . . . [a]ll rights, causes of action, remedies and defenses available under California law and equity . . . as though in a court of law.”
The plaintiff tried to avoid arbitration by arguing in court that the arbitration clause was both procedurally and substantively unconscionable. Opus Bank sought to compel arbitration under the FAA, and it argued that the AAA Rules, which were expressly incorporated in the agreement, provide that the “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the . . . validity of the arbitration agreement.” The district court agreed with Opus Bank that the express incorporation of the AAA Rules constituted clear and unmistakable evidence that the parties intended to have the unconscionability questions decided by an arbitrator and, thus, dismissed the court action and ordered arbitration under the agreement.
On appeal to the Ninth Circuit, the plaintiff argued that California law, not the FAA, should apply, because the Agreement stated that the parties retained all rights and remedies under “California law and equity.” The Ninth Circuit rejected the plaintiff’s argument, holding that US federal substantive law governed the question of who decides the arbitrability question by default, because the agreement, as a contract evidencing a transaction involving commerce, was covered by the FAA, and the parties did not clearly and unmistakably agree to apply nonfederal arbitrability law. The court noted that although the agreement made clear that California’s procedural rules, rights, and remedies would apply during an arbitration, it did not address whether California law governs whether certain disputes are to be submitted to arbitration in the first place. The Ninth Circuit also agreed with the district court that incorporation of the AAA rules constitutes clear and unmistakable evidence that the contracting parties agreed to arbitrate the questions of arbitrability.
B.3 US District Court Allows Ex Parte Confirmation of ICSID Award
In Miminco, LLC v. Democratic Republic of the Congo, Case No. 14-01987 (D.D.C. 9 February 2015), a US District Court sitting in Washington, DC allowed for an ex parte confirmation of an ICSID award. The petitioner, Miminco LLC, had obtained a US$13 million ICSID award against the Democratic Republic of the Congo. Following the award, Miminco filed an ex parte petition4Ex parte proceedings are proceedings in which only the plaintiff is represented, with a hearing and decision being issued by the court without notice to the defendant. They are relatively rare in the US courts. in the US District Court for the District of Columbia seeking not only the unpaid balance of the award, but also post- and prejudgment interest, attorneys’ fees and costs.
The District Court held that ex parte proceedings suffice for recognition of ICSID awards, as this is consistent with the statutory mandate under 22 U.S.C. § 1650a that courts afford ICSID awards the same full faith and credit as a state court judgment. The court held that because Miminco complied with the ICSID Convention requirements in Article 54(2) by filing a certified copy of the award, the court would treat the ICSID award as if it were its own judgment.
Although the court confirmed the award on an ex parte basis, the court refused to accept Miminco’s precise calculation of the current amount due, as this was determined to be a factual matter. In other words, the Congo could not challenge the confirmation of the award, but was entitled to provide its evidence and information with respect to the amount currently owing. The court also addressed the payment of interest. The court noted that post-judgment interest is imposed on “any money judgment in a civil case recovered in a district court.” The ICSID award qualified as a money judgment as the parties were clearly identified and the amount owed (US$13 million specified on the face of the arbitral award) was “definite and certain.” The petitioners were therefore entitled to accrual of post-judgment interest on the full US$13 million award.
The court declined, however, to award Miminco prejudgment interest. The decision to award prejudgment interest for an arbitration award is generally a matter of discretion, except that this discretion must be exercised in a manner consistent with the underlying award. Here, the ICSID award did not address prejudgment interest, giving the court discretion to consider whether such interest was warranted in the particular circumstances of the case. The court declined to “graft new requirements onto the plain language of the award.” The court also declined to award attorneys’ fees or costs based on the Congo’s alleged bad faith refusal to participate in the litigation. The court held that Miminco had not provided clear and convincing evidence that the Congo acted in bad faith in this litigation, as the Congo was not even a party to the ex parte confirmation proceeding.
B.4 ICSID Judgments Are Not Subject to Review
Mobil Cerro Negro and the Bolivarian Republic of Venezuela have litigated several cases in the United States related to Mobil’s US$1.6 billion arbitration award against Venezuela. In Mobil v. Venezuela, Case No. 14-8163-cv (S.D.N.Y. Mar. 4, 2015), Venezuela sought to modify the prior confirmation of the award so as to adjust the postjudgment interest rate.
The Mobil tribunal had set out a postjudgment interest amount of 3.25 percent compounded annually. Venezuela argued that the post-judgment interest rate should be modified to reflect the rate provided under 28 U.S.C. § 1961, and not the higher rate of 3.25 percent compounded annually, as provided in the ICSID tribunal’s award.
The court rejected Venezuela’s argument, stating that such relief “is flatly precluded by the principles governing recognition of ICSID awards.” The US Congress adopted the ICSID Convention in 1966 and passed the enabling statute, 22 U.S.C. § 1650a. Under the statute, the court noted, US courts are “required to recognize all aspects of awards issued by ICSID” and cannot “undertake substantive review of such awards.” Specifically, the court analyzed the enabling statute and the ICSID Convention, concluding that both obligate the court to recognize the pecuniary obligations of an ICSID award, and that interest is certainly pecuniary.
B.5 Award Not Contrary to Public Policy Protecting Seamen
Most challenges to arbitration award in the United States based on a public policy objection fail. In Asignacion v. Rickmers Genoa Schiffahrtsgesellschaft MBH & CIE KG, 783 F.3d 1010 (5th Cir. 2015), however, the petitioner Lito Martinez Asignacion succeeded in vacating an award in a US District Court because of public policy concerns. Ultimately, however, the Fifth Circuit Court of Appeals reversed that decision and upheld the award.
Asignacion, a citizen and resident of the Philippines, signed a contract to work as a seaman aboard a vessel owned by the defendant, German company Rickmers Genoa Schiffahrtsgesellschaft mbH & Cie KG. The vessel sailed under the flag of the Marshall Islands. As required by Philippine law, Asignacion’s contract incorporated the terms governing the employment of Filipinos on ocean-going vessels (“Standard Terms”). The Standard Terms included a mandatory arbitration clause, and also included a choice of law clause providing that Philippine law would govern any dispute between the parties
When the vessel was docked in New Orleans, a cascade tank aboard the vessel overflowed, and Asignacion suffered severe burns and injuries. Asignacion sued Rickmers in Louisiana state court to seek recovery for his injuries. The state court granted Rickmers’ request to enforce the arbitration clause in Asignacion’s contract, stayed the litigation, and ordered arbitration in the Philippines. During the arbitration, the Philippine panel refused to consider United States or Marshall Islands law, instead applying Philippine law based on the contract’s choice of law provision. The panel accepted Rickmers’ physician’s finding that Asignacion had the lowest grade of compensable disability under the Standard Terms, and granted Asignacion total damages of US$1,870.
Asignacion filed a case in Louisiana state court seeking to set aside the arbitration award as being against United States public policy. Rickmers removed the suit to US federal court and sought enforcement of the award. The US district court, applying the New York Convention, held that the award implicated the public policy exception, because applying Philippine law “effectively denied Asignacion the opportunity to pursue remedies to which he was entitled as a seaman” under US law, which provides special protections to mariners.
On appeal, the Fifth Circuit reversed the district court and reinstated the Philippine panel’s arbitral award. The Fifth Circuit observed that under the New York Convention, which governed enforcement of the award, a court “shall confirm” the foreign arbitral award save for particularized exceptions, including the public policy exception. The public policy exception must be applied “only where enforcement would violate the forum state’s most basic notions of morality and justice.” The Fifth Circuit rejected the premises of the district court’s ruling concerning applicable law, holding that the Philippine arbitrator’s “exclusive reliance on the contract’s choice of law provision” to apply Philippine law was, at most, an “unexceptional legal error” that did not merit reversal of the award.
Furthermore, the court commented on the importance of the Standard Terms, which Philippine law required be incorporated into the parties’ contract. That requirement raised concerns over international comity and the need for predictability in the resolution of disputes in the international commercial system, weighing in favor of enforcement. This, added the court, would have been the case “even assuming that a contrary result would be forthcoming in a domestic context.”
C. Costs in International Arbitration
C.1 Allocation of Costs
The FAA, which governs arbitration at the national (federal) level in the United States, is silent on the question of the allocation of costs5It should be noted that in the United States, the term “costs” is commonly considered to mean solely the filing fees and ancillary costs of a proceeding, excluding attorneys’ fees. and attorneys’ fees by arbitral tribunals. Because the default rule in the United States is that each litigant is responsible for bearing his or her own expenses, a party seeking to recover its arbitration costs and attorneys’ fees must either rely upon: (a) state level arbitration statutes; (b) the provisions of the arbitration clause itself; (c) the substantive law of the contract; (d) some agreement by the parties after the start of the arbitration; or (e) the rules of the arbitral institution.
Arbitral tribunals in the United States generally have broad discretion with respect to the award of costs and attorneys’ fees in arbitration. The rules of most American arbitral institutions permit the recovery of costs and attorneys’ fees, without stipulating whether the arbitral tribunal should utilize a costs “following the event” approach. In some instances, fees may be rebalanced if a party engages in misconduct during the arbitral process. Article 34 of the International Dispute Resolution Procedures of the AAA states that: “The arbitration tribunal shall fix the costs6Due to the international focus of these particular AAA rules, costs are broadly defined to include a variety of items including “the reasonable legal and other costs incurred by the parties,” which covers attorneys’ fees. of arbitration in its award(s). The tribunal may allocate such costs among the parties if it determines that allocation is reasonable, taking into account the circumstances of the case.” Rule 47 of the AAA’s Commercial Arbitration Rules for domestic US arbitrations gives the arbitrator broad discretion to assess fees and expenses “in such amounts as the arbitrator determines appropriate,” although attorneys’ fees may be awarded only “if all parties have requested such an award or it is authorized by law or their arbitration agreement.” Similarly, Rule 24 of the JAMS arbitration rules states that arbitrators “may allocate attorneys’ fees and expenses and interest…if provided by the Parties’ Agreement or allowed by applicable law,” and in doing so “may consider whether the failure of a Party to cooperate reasonably in the discovery process and/or comply with the Arbitrator’s discovery orders caused delay to the proceeding or additional costs to the other Parties.”
American courts rarely question an arbitrator’s allocation of costs set forth in an award. For instance, in the case of Moore v. First Bank of San Luis Obispo, 996 P.2d 706 (Cal. 2000), a party challenged an arbitrator’s decision not to award attorneys’ fees to either side in a final award issued under the AAA Commercial Arbitration Rules even though that party claimed it had won the arbitration. In rejecting the challenge, the Supreme Court of California held that “Plaintiffs’ overall success in the arbitration does not compel the inference the arbitrators implicitly found them the prevailing parties” while stating that, “[e]ven if legally erroneous, such an arbitral decision as to who, if anyone, prevailed in the contractual dispute would not ordinarily be reviewable[.]”
C.2 Security for Costs
There is no universally accepted approach under American law to arbitral tribunals who decide to require a claimant to provide security for a respondent’s costs before proceeding with an arbitration. However, because of the liberal federal policy favoring arbitration, American courts would probably hesitate to interfere in any such decision by an arbitral tribunal, provided it is within the scope of the tribunal’s power to render such an order.
For instance, in 2000, the United States Supreme Court considered a challenge to a domestic arbitration clause contained in a home financing agreement on the grounds that the clause failed to explain how the costs and fees of the arbitration should be allocated and thus “fail[ed] to affirmatively protect a party from potentially steep arbitration costs.” In Green Tree Financial Corp.–Alabama v. Randolph, 531 U.S. 79, 82 (U.S. 2000), the Supreme Court rejected the challenge to the clause, holding that “we believe that where, as here, a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs.”
When confronted several years later with a challenge to an arbitration agreement that prohibited the filing of “class action” style group arbitrations on the grounds that separate arbitrations made pursuing certain types of small claims too costly, the Supreme Court looked to its earlier decision in Green Tree in upholding the agreement (see American Express Co. v. Italia Colors Restaurant, 133 S. Ct. 2304, 2311 (U.S. 2013)). In doing so, the justices wrote that while arbitration agreements may be set aside when they prevent the “effective vindication” of certain statutory rights, such as when “filing and administrative fees attached to arbitration…are so high as to make access to the forum impracticable,” “the fact that it is not worth the expense involved in proving statutory remedy does not constitute the elimination of the right to pursue that remedy.”
Based on the United States Supreme Court’s decisions in Green Tree and American Express, it appears that an arbitral tribunal’s decision to order a claimant to provide security for a responding party’s costs would only be invalidated by an American court if it could be proven that the order would make the arbitration prohibitively expensive and thereby deprive the claimant of the effective vindication of its legal rights.
C.3 Recovery of Costs
Several American states, including California and Texas, have international arbitration statutes that specifically address the allocation of both costs and attorneys’ fees. California Code of Civil Procedure Section 1297.318(a) states that “[u]nless otherwise agreed by the parties, the costs of an arbitration shall be at the discretion of the arbitral tribunal.” Contrary to typical American usage, the California law defines “costs” broadly to include the fees and expenses of the arbitrators and expert witnesses, legal fees and expenses, any administration fees of the institution supervising the arbitration, and any other expenses incurred in connection with the arbitral proceedings. Section 172.145 of the Texas Civil Practice and Remedies Code contains virtually identical language and a similarly broad notion of the term “costs.” In contrast to this permissive approach to fees where the default position is to allow the arbitrators to issue an award for both costs and attorneys’ fees unless expressly prohibited, New York’s arbitration statute, contained at Section 7513 of the New York Civil Practice Law and Rules states: “Unless otherwise provided in the agreement to arbitrate, the arbitrators’ expenses and fees, together with other expenses, not including attorneys’ fees, incurred in the conduct of the arbitration, shall be paid as provided in the award.”
Although New York’s exclusion of attorneys’ fees from an award of arbitration costs may seem rather severe on its face, the exceptions to this rule have been applied on a relatively broad basis. In the case of PaineWebber Inc. v. Bybyk, 81 F.3d 1193 (2d Cir. 1996), the US Second Circuit Court of Appeals held that a standard arbitration clause that called for the arbitration of “any and all controversies” gave an arbitrator the power to allocate arbitration costs and attorneys’ fees even when the underlying contract selected New York law. The Second Circuit addressed the issue on another occasion in Stone & Webster, Inc. v. Triplefine International Corporation, 118 Fed. Appx. 546 (2d Cir. 2004), in which it upheld an arbitrator’s award of attorneys’ fees because it was permitted under the arbitral rules selected by the parties. The court wrote that the “ICC rules allow a grant of attorneys’ fees and the arbitrator clearly indicated that he was following the ICC rule.” Notably, the court distinguished the scenario at issue in Stone & Webster, Inc. from a prior decision of a lower federal court in Asturiana de Zinc Marketing, Inc. v. LaSalle Rolling Mills, Inc., 20 F. Supp. 2d 670 (S.D.N.Y. 1998), where attorneys’ fees were disallowed because the contract being litigated was silent on the issue and because the arbitration took place under the AAA’s Commercial Arbitration Rules, which only permit an award of attorneys’ fees “if all parties have requested such an award or it is authorized by law or their arbitration agreement.” Finally, even when a contract contains a New York choice-of-law clause, the United States District Court for the Southern District of New York held in McDaneil v. Bear Stearns & Co., 196 F. Supp. 2d 343 (S.D.N.Y. 2002) that “[a] party can acquiesce to the award of attorneys’ fees by either makings its own demand for attorneys’ fees or by failing to object to the other party’s demand for such fees.”
To the extent that a claim for arbitration costs and attorneys’ fees is permitted, the burden is on the party seeking to recover those costs and fees to provide some supporting documentation. Typically, this involves the submission of invoices from that party’s law firm and expert witnesses, redacted to remove privileged information, accompanied by invoices received from the administering arbitral institution and arbitrators. Generally, American arbitral tribunals do not require proof of payment of these invoices, on the assumption that the amounts reflected on the invoices will be paid eventually.