Second Circuit Backs Overturning Award That Had Been Annulled At Arbitral Seat

By Ugonna Kanu

The Second U.S. Circuit Court of Appeals this summer affirmed a New York Southern District federal court decision to vacate the trial court’s previous enforcement of an arbitral award after the award was annulled at its seat in Malaysia.

In Thai-Lao Lignite (Thailand) Co., Ltd. v. Government of the Lao People’s Democratic Republic, Docket Nos. 14-597, 12-1052, 14-1497 (2d Cir. July 20, 2017)(available at http://bit.ly/2wS9HpS)(available at http://bit.ly/2vKDHnE), a commercial dispute arose between Thai-Lao Lignite (Thailand) with its subsidiary, Hongsa Lignite (Lao PDR), and the Government of the Lao People’s Democratic Republic, which the parties submitted to arbitration in Malaysia.

According to the Second Circuit opinion, in the 2009 Kuala Lumpur arbitration, a panel of three U.S. lawyers conducting the matter under the United Nations Commission on International Trade Law Arbitration Rules found the defendants—the government of Laos–in breach over a dispute on mining rights the defendants had granted to the mining company petitioners.

The tribunal awarded the petitioners about $57 million.

The case, the opinion states, addresses “how a district court should adjudicate a motion to vacate a judgment that it has entered enforcing a foreign arbitral award, when that award has later been set aside by courts in the arbitral seat.” It examines the interaction between a Federal Rule of Civil Procedure 60(b) motion and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, better known as the New York Convention.

After a period for challenging the award expired, the petitioners successfully brought enforcement proceedings in the United States and United Kingdom. But almost a year after the award, the defendants applied at the Malaysian courts for the award to be set aside on the grounds that the arbitrators exceeded their jurisdiction by addressing disputes under contracts not covered by the relevant arbitration agreement.

The motion setting aside the award was granted in 2012. Then, returning to the United States, the defendants moved to vacate the order enforcing the award.

U.S. District Court Judge Kimba Wood relied on Federal Rule of Civil Procedure 60(b), in which the court can relieve a party from a final judgment if the judgment is based on an earlier judgement that has been vacated or reversed.

Wood analyzed the FRCP in conjunction with the New York Convention Article V(1)(e), which gives courts the discretion to refuse to recognize or enforce an award on party’s request under specific circumstances. In 2011, a year after confirming the award, Wood vacated the judgment to enforce, following the Malaysian nullification.

On appeal, the Second Circuit affirmed Wood’s decision to vacate her original judgment. In backing the district court decision, the Second Circuit referred to the clash between the federal rules and the convention. The appellate decision cited TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928 (D.C. Cir. 2007)(available at http://bit.ly/2vR2S7S), where a unanimous panel, in an opinion written by Circuit Judge Susan L. Carney, noted that the convention’s “text appears to leave the District Court with discretion to enforce an award that has been annulled in the primary jurisdiction—after all, it does not say that enforcement of the award ‘must’ be refused—[but] held . . . that the scope of that discretion is ‘constrained by the prudential concern of international comity.’”

The Thai-Lao Lignite opinion endorsed TermoRio, where the D.C Circuit affirmed a decision denying enforcement of an annulled award, stating “when a competent foreign court has nullified a foreign arbitration award, United States courts should not go behind that decision absent extraordinary circumstances.” (Quoting the TermoRio appellees’ brief).  The D.C. Circuit said the exception to enforcement would be where a judgment is contrary to U.S. public policy.

The Second Circuit opinion notes that TermoRio followed the Second Circuit view on foreign awards in Baker Marine Ltd. v. Chevron Ltd., 191 F.3d 194 (2d Cir.  1999)(available at http://bit.ly/2uQIFBN). In Baker, the appellate court upheld the district court’s refusal to enforce an award that had been annulled in Nigeria, the arbitration seat, because to do otherwise would give a losing party “every reason to pursue its adversary with enforcement actions from country to country until a court is found, if any, which grants the enforcement.”

The result would be a loss of finality and conflicting judgments, as well as overall difficulty in maintaining a uniform and predictable arbitral framework and to prevent producing regularly conflicting judgments.

The Second Circuit’s Thai-Lao Lignite opinion suggested that the result would have been different if the decision of the foreign court was contrary to the “fundamental notions of what is decent and just” in the United States.  It based this public policy exception on Corporación Mexicana de Mantenimiento Integral, S. De R.L. de C.V. v. Pemex-Exploración y Producción, 832 F.3d 92, 107 (2d Cir. N.Y. Aug. 2, 2016)(available at http://bit.ly/2xcyLXZ).

In that case, the Second Circuit affirmed a district court enforcement decision to confirm an award that had been nullified at the primary jurisdiction in Mexico, on the grounds that the Mexican appellate court had retroactively applied Mexican law and deprived the plaintiff of a remedy, contrary to fundamental U.S. public policy.

The Second Circuit Thai-Lao Lignite panel notes that it held its opinion until a U.S. Supreme Court cert petition in Corporación Mexicana had been decided. The request was denied earlier this year.

But in Thai-Lao Lignite, the U.S appeals court saw no grounds for public policy concerns.  A question as to the defendant’s delay in challenging the award, and its dilatory tactics in discovery matters arising in the U.S. courts, were viewed by as justifiable by the district court; “these factors would not have materially changed the outcome,” the opinion states, considering the district court’s reasons for vacating the award.

The author is an attorney in Nigeria who has just completed her L.L.M. in Dispute Resolution at the University of Missouri-Columbia School of Law.  She was a CPR Institute 2017 summer intern.

Examining New Jersey’s Arbitration Scrutiny

New Jersey courts’ recent arbitration decisions have opened a floodgate of controversy en route to the establishment of new precedent.

The most recent case, Morgan v. Sanford Brown Institute, 2016 WL 3248016 (N.J. June 14, 2016)(available at http://bit.ly/29mSQkS), demonstrates the discord among courts in reaching a consensus about arbitration enforcement—or, at least, a strong New Jersey trend of scrutinizing the particulars of agreements before compelling ADR processes.

The case stems from a complaint by New Jersey residents Annemarie Morgan and Tiffany Dever, who had enrolled in an ultrasound technician program provided by defendant Sanford Brown Institute, a for-profit educational company that is winding down its operations. The plaintiffs alleged that the defendant violated the Consumer Fraud Act and had committed breach of contract, breach of warranties and negligent misrepresentation. The complaint alleged the institute misrepresented the value of the ultrasound program, the quality of its instructors, and that the school used high-pressure and deceptive business tactics that led the plaintiffs to finance the classes using high-interest loans.

“This New Jersey trend should be taken as a warning for employers to address their notice provisions.”

The trial court followed the ruling in Atalese v. U.S. Legal Servs. Group L.P., 219 N.J. 430, 99 A.3d 306 (2014), cert. denied, 135 S. Ct. 2804 (2015)(available at http://bit.ly/ZtfbW4), invalidating the arbitration clause because it didn’t provide proper notice that court remedies were being waived, and violated the New Jersey Consumer Fraud Act (CFA), N.J.S.A. 56:8-1 to -195.

The Appellate Division reversed, ordering arbitration, noting that the ADR clause was sufficiently clear for all parties.

Last month, the New Jersey Supreme Court reversed again, holding that the arbitration provision and delegation clause in the school’s enrollment agreement failed to comply with the requirements of First Options of Chi., Inc. v. Kaplan, 514 U.S. 938 (1995), and Atalese. The arbitration and delegation clauses also failed to satisfy the elements necessary for the formation of a contract.

The defendants had argued that Rent-A-Center West, Inc. v. Jackson, 561 U.S. 63 (2010), required a specific challenge to the delegation clause by the plaintiffs, but the New Jersey Supreme Court found that the lack of the challenge didn’t matter.

“The arbitration provision did not clearly and unmistakably delegate arbitrability to the arbitrator,” wrote Associate Justice Barry T. Albin for a 5-1 court, adding, “Plaintiffs cannot be faulted for not objecting to an inadequately limned delegation clause that, in addition, did not define arbitration as a substitute for a judicial forum.”

Consequently, whether the parties agreed to arbitrate their dispute is an issue for determination by the court.

This decision does not stray far from its recent predecessors—Scamardella, et al. v. Legal Helpers Debt Resolution LLC, No. A-4170-14T3 and L-2402-14 (Middlesex County and Statewide) (April 19, 2016), and Guidotti v. Legal Helpers Debt Resolution, L.L.C., No. 15-1054 (3rd Cir. Feb. 10, 2016)(available at http://bit.ly/1QOkCSm), vacating 866 F. Supp. 2d 315, 332–36 (D.N.J. 2011)–New Jersey cases in, respectively, state and federal courts that also denied motions to compel arbitration.

Atalese, the parent case for the rest, outlined disclosure requirements that the subsequent decisions have used as the reason for invalidating the arbitration provision. The New Jersey Supreme Court found that the arbitration provision in the case did not have “clear and unambiguous” language stating that the plaintiff was waiving her right to sue in court to secure relief.

“Two more unpublished decisions show the significance of the new trend in addressing notice in arbitration provisions.”

The New Jersey Supreme Court stated in Atalese that an enforceable arbitration clause “at least in some general and sufficiently broad way, must explain that the plaintiff is giving up her right to bring her claims in court or have a jury resolve the dispute.”
Furthermore, the waiver must “be written in a simple, clear, understandable and easily readable way.”

Similarly, Scarmadella ruled that the arbitration clause failed to comply with Atalese disclosure requirements.

Guidotti determined that the plaintiff had not received the account agreement containing the arbitration provision. The court did not require or permit discovery on that issue because it concluded that the existing documentary record was sufficient. Further proceedings will be held next month.

There’s other arbitration coming out of New Jersey courts to raise eyebrows. Just before Morgan v. Sanford Brown Institute was released, a published Appellate Division decision, Kleine v. Emeritus at Emerson, Docket A-4452-14T3 (N.J. App. Div. June 9, 2016), struck an arbitration agreement because a forum suggested by the contract’s use of the American Arbitration Association rules was ruled by the court to be unavailable. The personal injury case was against a nursing home; the decision included strong wording about the presumption to arbitrate.

And there’s more. Two more unpublished decisions show the significance of the new trend in addressing notice in arbitration provisions. Shortly after the Atalese decision, in Kelly v. Beverage Works NY Inc., No. A-3851-13T4 (NJ App. Div. Nov. 26, 2014)(unpublished)(available at http://bit.ly/29kJwR6), the New Jersey Appellate Division applied Atalese to decide whether the arbitration provisions in a collective bargaining agreement barred a plaintiff’s lawsuit for wrongful termination.

The appeals court first declined to consider the employer’s argument concerning preemption because that argument was not raised prior to oral argument. The Appellate Division then held that “neither the arbitration provisions nor the employee handbook put plaintiff on notice that he was waiving his right to try his claims in court.”

Therefore, those provisions did not clearly and unambiguously waive plaintiff’s right to seek a remedy in court and, thus, were unenforceable.

Similarly, in Milloul v. Knight Capital (App. Div. N.J. Sept. 1, 2015)(unpublished)(available at http://bit.ly/1INt69V), the Appellate Division held that an arbitration agreement between a plaintiff and his employer was unenforceable because it did not “even mention a waiver of plaintiff’s right to a trial.” Therefore, the contract did not meet the minimal requirement of stating “in some express fashion that the employee is sacrificing his or her right to a trial.”

This New Jersey trend should be taken as a warning for employers to address their notice provisions. Employers should carefully review every arbitration agreement to ensure that every employee understands that they are waiving their right to bring claims in court, and agreeing to arbitrate all claims that may arise out of the contractual relationship.

This report will be expanded and updated in September’s Alternatives. For more recent background, see Daniela Albert & Russ Bleemer, “New Jersey Court Again Refuses To Compel, Demanding Better Arbitration Notices,” 34 Alternatives 66 (May 2016)(available at http://bit.ly/29lwZeG).

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CPR would like to thank interns Daniela Albert (working towards her LLM at Northeastern) and Elizabeth Heifetz (Brooklyn Law School), supervised by Alternatives editor Russ Bleemer, for their research and writing contributions to this post. A longer version of this post, with comments from the attorneys involved, will run in the September issue of Alternatives.