Second Circuit: 'You Must Follow All Steps in Arbitration Procedure to Have Award…’ (Web)

Second Circuit: ‘You Must Follow All Steps in Arbitration Procedure to Have Award Confirmed under N.Y. Convention.’
 
On March 31st, 2005, the Second Circuit affirmed a District Court denial of a motion to confirm an arbitration award under the N.Y. Convention.  The 3rd member of the panel was selected before the two party appointed neutrals had attempted to find a mutually acceptable chair.  Since the selection of the chair “was not in accordance with the agreement of the parties,” denial of the motion was affirmed.
 
However, Judge Parker, writing for the panel, reversed the district court’s ruling that the arbitrators “exceeded their powers” and vacated the lower court’s order of supplemental remedy.  Noting that the FAA, and not the N.Y. Convention, authorizes review for whether the arbitrators exceeded their powers, the panel ruled that confirmation could be withheld only under one of the seven grounds for denying enforcement under the Convention.
 
One such provision allows courts to refuse to recognize awards where “the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties.” Art. V(1)(d).  The court read the arbitration agreement as requiring that the two party-appointed arbitrators attempt to choose a third arbitrator and that the third arbitrator would be selected from a list at the British Chamber of Commerce only if the party appointed arbitrators could not agree.
 
In this case, Encyclopaedia Britannica stopped making royalty payments to Encyclopaedia Universalis (“EUSA”).  After a demand for arbitration, the two party appointed arbitrators were selected and communicated between each other. The two neutrals discussed the scope and procedures of the arbitration, but not the identity of a third arbitrator.  EUSA’s arbitrator then contacted the Tribunal of Commerce of Luxembourg (because the British Chamber of Commerce no longer maintained a neutrals list) and the Tribunal appointed an arbitrator.
 
Encyclopaedia Britannica’s arbitrator wrote to the Tribunal to say that “a major step in the course to be followed under the applicable arbitration clause ha[d] been overlooked.”  At an arbitration, in which Britannica and their arbitrator did not participate, Britannica was ordered to pay 3.1 million Euros, interest, and costs.
 
Noting that a delay for the arbitrators to try to agree on a third member would likely fail because there would be no incentive for the EUSA arbitrator to negotiate in good faith, the Circuit opinion agreed with the District Court that “the Tribunal’s premature appointment of [the third arbitrator] irremediably spoiled the arbitration process.”
 
Finally, the appellate panel vacated the District Court’s supplemental remedy disqualifying EUSA’s arbitrator and the Tribunal appointed arbitrator from any future arbitration between the parties.  The trial court also ordered that if needed a third arbitrator should be selected from the list maintained by the London Court of International Arbitration.  The Second Circuit observed that the confirmation of an arbitration award is a summary proceeding, and therefore the court lacked jurisdiction to regulate a subsequent arbitration.
 
The Second Circuit’s opinion can be found at 2005 WL 730080.

- Mark Boyko