Brexit and ADR, Untangling the Complexities

The United Kingdom’s recent referendum vote to leave the European Union (EU) is just a few weeks old, and dealmakers are rightfully concerned about its ramifications. The falling pound, the most immediate consequence, is just one of many factors that could affect pending deals with British companies. Many parties entered into contracts with UK-based companies with certain assumptions based upon the country’s membership in the EU. Now, with the UK’s situation uncertain, the lawyers are lining up to figure out next steps.

On July 18, CPR’s arbitration committee convened a panel on the topic of Brexit’s impact on cross-border arbitration and litigation involving the UK, hopefully clearing up some of the mystery. The panel was moderated by Jean-Claude Najar (France) of Lazareff Le Bars, and featured Tim Hardy (UK) of CMS Cameron McKenna LLP, Vanessa Alarcon Duvanel (Switzerland) of White & Case LLP, and Clifford J. Hendel (Spain) of Araoz & Rueda Abogados, S.L.P.

As explained by Mr. Hardy, Brexit’s main immediate impact on cross border litigation in the EU is the uncertainty as to what will happen post-exit to the existing unified regime for dispute resolution applying to all Member States. Since 1973, the UK has been required to adopt unifying arrangements to avoid duplicate litigation in different States through a series of rules intended to determine that the court of only one State can have jurisdiction and that the decision of that court should be respected by all other courts of Member States. Initially, the incorporation of these reciprocal arrangements into the legal framework of Member States was undertaken through a  series of treaties – each requiring each State to approve, ratify and implement each Treaty.  As this was extremely cumbersome and slow, subsequently, EU Regulations were implemented directly applying the rules into the law of each member state.

To exit the EU the UK will have to repeal the European Communities Act which will automatically repeal all Regulations but it will not repeal all treaties. Accordingly, a complex situation could develop where arguably some treaties will survive and may be applicable and relevant to determining parties’ positions if disputes arise. “One would hope,” said Mr. Hardy, “that the legislature will do what it can to avoid this mess. But at the moment, we don’t know what steps will be taken to address and tidy it up.”

As for the practice of international arbitration in the UK or London, Mr. Hendel explained, there is no reason to think that Brexit will have any legal effect because the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), which is the lifeblood of international arbitration, is immune from what will happen with Brexit. The situation is different, however, in the world of judicial dispute resolution. Mr. Hendel referenced the falling away of important EU regulations concerning the automatic recognition and enforcement of judgments throughout the EU, jurisdiction and choice of courts, as well as choice of law, in two years’ time or so, unless the UK takes action before then through negotiation with the EU or unilateral action to keep these legal mechanisms in place. These regulations currently provide an important degree of harmonized certainty on how to deal with everyday issues that arise in EU cross-border disputes, and Brexit will inevitably undermine this certainty. Mr. Hendel noted that the UK might have an incentive to preserve this framework one way or another in order to preserve its perceived supremacy in the financial and legal industries.

Ms. Duvanel examined how Switzerland has managed in the years since it voted in 1992 not to join the European Economic Area (EEA) to overcome isolationism vis-à-vis the EU. Although it took several decades, Switzerland managed to negotiate and ratify bilateral agreements with the EU to harmonize its legislation with that of the EU. For example, the Lugano Convention addresses the issues relating to jurisdiction and recognition and enforcement of judicial decisions between Switzerland and the EU. In the end, she explained that Switzerland has its own set of legislation, but that much of it is inspired by the EU, “fully harmonized but always a bit later.” The harmonization of the two legislative systems has been long and difficult for Switzerland, and it is likely to be difficult for the UK as well. She stressed, however, that all of that had no effect on international arbitration in Switzerland. Switzerland remains very attractive. Swiss arbitrators are among the most nominated in the world in international arbitration cases. Switzerland is the second most chosen seat for international arbitration and Swiss law is one of the most chosen applicable law due to the stability of the Swiss legal system.

From an in-house perspective, explained Mr. Najar (who held various senior legal positions in GE for close to 24 years), companies must analyze the potential consequences of Brexit on their contracts governed by English law, particularly long-term contracts, and determine how to best mitigate the uncertainty related to the impact of Brexit. There is a wide array of potential issues to consider, such as currency fluctuation, access to the EU market, organization setups, employees’ rights, corporate governance, and specific regulations. Dispute resolution clauses will also need to be reviewed closely. Najar pointed out that some companies had already started to opt out of the UK, in favor of jurisdictions such as France and Switzerland, several years ago out of other concerns, such as costs or being closer to a civil law environment. Najar stressed that English law enjoys a longstanding and solid reputation as the governing law in many contracts. However, it incorporates many elements of EU law, and Brexit will therefore create some uncertainty as these elements are being pulled out of English law. Since businesses do not like uncertainty, Brexit might deter companies from choosing the UK as a seat or English law as the applicable law.

For anyone involved in business in the UK, CPR’s European Advisory Board (EAB) is an excellent resource for efficient dispute prevention and resolution. The EAB, a highly experienced and distinguished group of sophisticated practitioners and users from Europe’s leading law firms and corporations, has recently released a European Mediation and ADR Guide. Developed under the leadership of CPR’s EAB, the Guide provides a valuable overview of the most widely used alternative dispute resolution processes (particularly mediation) and when they might be suitable, with practical suggestions on how to make use of them.

While Brexit may seem like an ugly divorce, the fallout for companies doesn’t have to be messy.

The Nominee’s Record on Dispute Resolution

BY PETER FEHER & RUSS BLEEMER

President Obama’s nomination of District of Columbia U.S. Circuit Court Chief Judge Merrick Garland didn’t bring with it a substantial judicial record on alternative dispute resolution cases.

But a new U.S. Supreme Court Associate Justice Garland won’t be a stranger to litigation over arbitration either.

Garland, 63, is in a tough confirmation fight.  At this writing, Senate Majority Leader Mitch McConnell, R., Ky., vowed not to allow a vote on a successor to the late Antonin Scalia before the November presidential election.

But Garland had bipartisan support when he was nominated to the D.C. Circuit in 1999 by President Clinton. He was confirmed 76-23, with a majority of Senators in both parties supporting him. Garland is well-respected on both sides of the aisle and in the legal community and reportedly was on the president’s list for SCOTUS nominees previously, when Associate Justice Sonia Sotomayor was nominated and confirmed in 2009, and Associate Justice Elena Kagan joined the Court a year later.

Research provided a limited number of arbitration cases before the D.C. Circuit in which Garland participated.  They show he backed arbitration.

It’s unclear whether and how the subject of ADR processes arose in his non-judicial career, which also is discussed below.  Garland’s extensive prosecutorial work at the U.S. Department of Justice as well as an Assistant U.S. Attorney for the District of Columbia was on the criminal side; he also was a litigation partner at Washington, D.C.’s Arnold & Porter.

Garland is probably best known for his U.S. Justice Department service from 1993 to his 1999 appointment as U.S. Circuit Judge.  During the period, when he was DOJ’s Principal Associate Deputy Attorney General, his responsibilities included supervising the Oklahoma City bombing and Unabomber prosecutions.

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In the D.C. Circuit, Garland wrote the unanimous affirmance in Kurke v. Oscar Gruss and Son Inc., 454 F.3d 350 (D.C. Cir. 2006)(available at bit.ly/1MjsCPT). The opinion backs arbitrators who awarded a brokerage customer damages after his account was churned, and the defendants charged that the award was made in manifest disregard of the law.
The case concerned a customer who brought an action seeking confirmation of an arbitration award brought by plaintiff David Kurke against securities firm Oscar Gruss, and a firm executive, after the customer’s account was subjected to what the plaintiff charged was unauthorized trading, churning and a breach of fiduciary duty.

An arbitration panel agreed, awarding Kurke compensatory damages from both Oscar Gruss and the executive, in the amounts of $648,000 and $58,000, respectively. According to the Garland opinion, Oscar Gruss trading had turned Kurke’s $520,000 investment into $39,000, just four months after the account had been valued at more than $1 million.
The federal district court granted Kurke’s enforcement petition, and Oscar Gruss appealed the arbitration award.

The appellants urged that the awards can be vacated on the ground that the arbitrators made them in “manifest disregard” of the law.

The opinion indicated that manifest disregard “is an extremely narrow standard of review.” Under the standard, the reviewing court must find that arbitrators knew of governing legal principle yet refused to apply it or ignored it altogether, and the law ignored by the arbitrators was well-defined, explicit and clearly applicable to the case. Kurke, at 354 (quoting LaPrade v. Kidder, Peabody & Co. Inc., 246 F.3d 702, 706 (D.C.Cir. 2001)).

The firm argued that the arbitration panel’s award to Kurke was made in manifest disregard of the law because under the terms of his margin agreement, Kurke’s failure to object to the unauthorized trades in writing within the stipulated time frame effectively ratified those trades.  The defendants argued that Kurke’s failure to mitigate his damages after he became aware of them relieved the company for liability for Kurke’s losses. Kurke, at 355.

Circuit Judge Garland noted three exceptions to the rule that ratification agreements will be enforced.  The opinion notes that the arbitrators could have refused to enforce the ratification agreement if they credited Kurke’s testimony that he did not comprehend the highly complicated options trades contained on his monthly statements; that assurances or deceptive acts forestalled his filing of the written complaint; or that Kurke was not advised of his right to reject the unauthorized trades.  Kurke, at 356.

Focusing on statements by an Oscar Gruss employee that forestalled the plaintiff from acting, Judge Garland wrote, “we can readily ‘discern [a] colorable justification for the arbitrator[s’] judgment,’ . . .  and cannot say their award was made in manifest disregard of the law regarding ratification.’” Id.

Garland rejected the appellants’ other arguments to establish manifest disregard and affirmed the District Court’s arbitration award in full.

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In Aliron Int’l Inc., v. Cherokee Nation Indus. Inc., 531 F.3d 863 (D.C. Cir. 2008)(available at bit.ly/22BaC7J), Circuit Judge Garland, who became the D.C. Circuit’s chief judge in February 2013,  affirmed a district court’s decision to compel arbitration.

In the case, the U.S. Army entered into a “Prime Contract” with Cherokee Nation, or CNI, which in turn entered into a subcontract with Aliron to provide the service and staffing resources that CNI needed to fulfill its duties under the Prime Contract.

The parties agreed that the subcontract “shall be construed and interpreted in accordance with the laws of the State of Oklahoma” and that “any dispute between the parties will be submitted to binding arbitration in the State of Oklahoma. The parties further agreed Oklahoma law “shall govern the arbitration proceedings.” Aliron International Inc., at 864.

About two weeks into the contract performance, the parties had to enter into an additional support agreement in order to comply with the Status of Forces Agreement between the United States and Germany.  The SOFA precluded CNI from hiring a subcontractor under the Prime Contract. But unlike the subcontract, the Support Agreement did not include an express provision requiring arbitration of all disputes. Id. at 864.

Aliron filed an action against CNI for breach of obligations under the Support Agreement. CNI moved to compel arbitration of the dispute. CNI argued that although only the subcontract contained an express arbitration clause, the two documents should be read together.

The District of Columbia federal district court agreed with CNI, holding that “because the Subcontract and the Support Agreement involve the same subject matter, and because the plain language on the fact of the Support Agreement indicated that it was entered into to preserve the intent of the Subcontract, they must be construed together as one contract.” Id. at 865.

Garland noted in an opinion on behalf of the unanimous three-judge federal appellate panel that courts generally should apply ordinary state law principles that govern contract formation. He wrote, “The Oklahoma Supreme Court has long instructed that ‘[w]here two contracts, not executed at the same time, refer to the same subject matter and show on their face that one was executed to carry out the intent of the other, it is proper to construe them together as if they were one contract.’” [Citations omitted.]

Two criteria must be satisfied before the subcontract’s arbitration provision can be deemed to govern disputes under the Support Agreement, according to the Garland opinion:  “(1) the Subcontract and Support Agreement must each refer to the same subject matter, and (2) the Support Agreement must show on its face that it was executed to carry out” the subcontract’s intent. Id. at 866.

Judge Garland found both elements were satisfied and required the two contracts to be read together as one under Oklahoma law because they referred to the same subject matter, and because the Support Agreement plainly showed that it was executed to preserve the subcontract’s intent. Id. at 868.

In affirming the lower court, Garland rejected two additional arguments by Aliron, one which required extrinsic evidence about the contract, and another contesting the formation of an arbitration agreement.

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Judge Garland handed down another decision that mentioned alternative dispute resolution in labor law. In the case, Davenport v. Int’l Brotherhood of Teamsters, AFL-CIO, members of a flight attendants union brought an action against the union and the employer challenging the union’s failure to submit a temporary side agreement on work hours to the collective bargaining accord to a rank-and-file ratification vote. 166 F.3d 356 (D.C. Cir. 1999)(available at bit.ly/1Vyplyw).

The flight attendants sought a temporary injunction against the side agreement—which had been sparked by a change in federal law—that was denied in the district court.  Again writing for a unanimous D.C. Circuit panel, Garland’s opinion affirmed the lower court.
The employer-airline in the case—Northwest Airlines Inc., now part of Delta Air Lines Inc.–was subject to the Railway Labor Act.  Under the act, an adjustment board established by the employer and the unions had exclusive jurisdiction over “minor disputes”–those arising “out of grievances or out of the interpretation or application” of existing collective bargaining agreements.

Circuit Judge Garland noted that in “’major disputes,’ however, the district courts have jurisdiction to enjoin violations of the status quo pending the completion of required bargaining and mediation procedures.” Id. at 367. Major disputes go to the formation of the collective agreements, the opinion says.

But Garland wrote that the plaintiffs’ contention that the dispute was a “major dispute” requiring an injunction couldn’t be sustained.  The opinion held that there wasn’t enough grounds to vacate the district order for major-dispute ADR treatment or any of the other grounds on which the plaintiffs sought the court’s intervention.

It did allow re-argument of the “major dispute” controversy, since it was bought by the union itself late in the litigation.  But it’s not clear that the case got beyond the argument stages, because the collective bargaining agreement was due to be renegotiated to account for the side agreement. Press reports indicate that the relationship between Northwest and its union became strained later in 1999 over several issues, and headed to mediation. See, e.g., Associated Press, “Protesters disrupt Northwest Airline meeting,” Deseret News (April 24, 1999)(available at bit.ly/1RhBNQ9).

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Some business lobbyists are wary of Garland’s nomination given his deference to government agencies.

According to a Corporate Counsel article, while Garland has significant experience deciding challenges to government regulations, given the focus of the D.C. Circuit on administrative appeals, he has less experience on corporate law and governance questions. Rebekah Mintzer, “Justice Merrick Garland: Bad for Business?” Corporate Counsel (March 21)(available at bit.ly/1UCwHkS).

The article points out that, like Justice Scalia, who he would replace, Garland adheres to the Chevron doctrine, under which the judiciary defers to agency interpretations on ambiguous statutes under the agency’s jurisdictions.

This tendency, Corporate Counsel notes, has business groups worried because they are not sure how Garland would come out on corporate law decisions.  The nation’s largest small-business lobbying group, the National Federation of Independent Business, opposes Garland’s confirmation.

One key area that may implicate conflict resolution practices is labor and employment. Garland has firmly backed the National Labor Relations Board, affirming the view of the agency—which oversees workplace issues as embodied in the National Labor Relations Act—in 18 out of 22 cases that have come before him.

It’s likely that the Supreme Court will get that exact task in the arbitration context soon.  Cases are bubbling up in which federal courts have firmly backed the Court’s view that the Federal Arbitration Act allows for mandatory individual arbitration processes in employment disputes where the employee is required to waive class action litigation or arbitration.

But the principal case from which federal courts are adopting that view is a consumer credit case, AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)(available at bit.ly/1MWMHVN).

The NLRB in 2012 decided that the NLRA trumps the FAA, and has produced dozens of decisions banning class action waivers.  It is continuing to issue those decisions even though it has been struck down in federal courts around the country, most notably in the Fifth U.S. Circuit Court of Appeals.  Both the NLRB and management-side labor lawyers expect the case to go to the U.S. Supreme Court to resolve the conflict. For full details, see “Cutting Arbitration Classes: Facing Court Defeats on Workplace Waivers, the NLRB Refuses to Back Down,” 34 Alternatives 1 (January 2016)(available at bit.ly/1LEnG8o).

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While Merrick Garland apparently hasn’t dealt with arbitration during his professional career as a corporate litigator and prosecutor, upon his confirmation he would be dealing with a slate of cases involving business issues.  But at this writing, no arbitration cases are on the Court’s docket.

Although unrelated to ADR practice, several partners at Garland’s former firm, Washington, D.C.’s Arnold & Porter said that the D.C. Circuit chief judge focused on the arcane area of antitrust, which he reportedly taught at his alma mater, Harvard Law School.  “Garland worked on antitrust cases, a specialty of the firm, several former partners said, yet few remembered specific cases he worked on.” Katelyn Polantz, “Lightning Strikes Twice at Arnold & Porter with Merrick Garland Nomination,” National Law Journal (March 17)(available at  bit.ly/1Re0Jcs). The article also notes that in one year during his practice, Garland also published articles in both Harvard Law Review and Yale Law Journal.

Garland, unlike some of his fellow appellate judges, does not speak publicly much. The National Law Journal collected some highlights of his notable decisions and public statements at Zoe Tillman, “The Quotable Merrick Garland: A Collection of Writings and Remarks,” National Law Journal (March 16)(available at  bit.ly/1pxgKPY).

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Feher is a Spring 2016 CPR Institute intern, and currently is a student at Brooklyn Law School, Class of 2016. Bleemer edits the CPR Institute-published Alternatives to the High Cost of Litigation.

ADR Around the World: Colombia

Throughout this summer, in part inspired by CPR’s recent activity in Brazil, “CPR Speaks” will be publishing a four-part series looking at the state of alternative dispute resolution (ADR) in a number of other rapidly changing locales. We begin with Colombia, to be followed by Taiwan, Turkey and Mexico.

Colombia: A Dynamic Economy with a Vibrant ADR Environment

By Boaz Cohon, CPR Student Intern

In 2014, market research firm Capital Economics reported that Colombia had surpassed Argentina as the third largest economy in Latin America. This economic success surprised few, as Colombia’s Gross Domestic Product (GDP) had grown close to 5% in both 2013 and 2014, despite the slowdown occurring throughout the rest of Latin America and falling oil prices (one of Colombia’s main exports), all while keeping inflation under 4%. Moreover, Foreign Direct Investment (FDI) in Colombia grew to $16,198,401,721 in 2013 from only $10,564,672,091 in 2008.

Colombia is a paragon of excellence in economic expansion for Latin America, and one factor that has helped contribute to Colombia’s stunning growth—particularly its high levels of FDI—is a corporate and legal environment conducive to international as well as domestic alternative dispute resolution (ADR). Continue reading