We came across an interesting article regarding the intersection of arbitration and bankruptcy published by the Defense Research Institute (“DRI”). The piece is entitled Which Federal Law Takes Precedence? The FAA vs. the U.S. Bankruptcy Code? written by John L. McCants. Here is an excerpt: In a construction law practice, a lawyer will have cases involving both the Bankruptcy Code, 11 U.S.C. 1 et seq. (FAA). This article addresses which of the two federal laws takes precedence when both are applicable to a construction or commercial dispute. Section 2 of the FAA makes agreements to arbitrate “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” The full article is available here. Hat tip to our friend Glen Wilkerson.

The United States Court of Appeals for the Fifth Circuit has held that corporate officers are not bound personally by an arbitration agreement and overturned an arbitral award. In DK Joint Venture 1 v. Weyand, No. 09-11000 (5th Cir. August 4, 2011) six business entities (the “plaintiffs”) filed an arbitration demand against Richard Weyand and Peter Theiessen and fifteen corporations controlled by them (the “defendants”). Weyand and Thiessen were respectively the chief executive officer and chief financial officer. The plaintiffs alleged that defendants committed fraud, breach of contract, and breaches of fiduciary duty in order to induce their investment of money in a purported oil and gas venture. The plaintiffs filed for arbitration pursuant to arbitration provisions contained in contracts between the plaintiffs and some of the defendant corporations. When Weyand and Thiessen resisted arbitration, the plaintiffs filed a motion to compel arbitration. The district court held that all defendants, including Weyand and Thiessen, were bound by the arbitration agreements. The arbitration proceedings took place before a panel of three arbitrators appointed by the American Arbitration Association. The plaintiffs were awarded damages and fees totaling $13,317,381 against Weyand and $311,329 against Thiessen. Thereafter, plaintiffs filed a motion in federal district court, seeking confirmation of the arbitral award. The district court granted the motion and the defendants appealed. The issue decided by the Fifth Circuit was whether Weyand and Thiessen, in their personal capacities, are bound by the arbitration agreements that were entered into by the defendant corporations. The court concluded that although the defendant corporations had entered into the contracts containing arbitration provisions, this alone did not cause their agents, Weyand and Thiessen, who were acting only as officers on behalf of the corporations, to be personally bound by those agreements. There being no valid basis for Weyand and Thiessen to be personally bound by the arbitration agreements, the court reversed and remanded. Jeff Boggers represented the defendants in this case.

By S.I. Strong Ultimately, concerns about individual litigation rights did not turn out to be a problem for several reasons. First, the scope of the consent given in the TFA offset any objections from claimants. Second, the homogenous nature of the claims offset any objections from the respondent. Indeed, the tribunal noted that forcing Argentina “to face 60,000 proceedings would be a much bigger challenge to Argentina’s effective defense rights than a mere limitation of its right to individual treatment of homogenous claims in the present proceedings.” Award dated August 4, 2011, ¶ 545. Interestingly, this is an issue that AT&T – the perceived victor of a recent Supreme Court battle over a class arbitration waiver – is now having to face in the form of approximately 1,000 arbitrations filed recently by customers hoping to block a proposed merger. See AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011); Martha Neil, “After Supreme Court Win Forcing Customers to Arbitrate, AT&T Now Sues to Stop the Arbitration,” ABA Journal Online, Aug. 17, 2011. The tribunal in Abaclat also took institutional, access to justice and international public law concerns into account in its award. Thus: The Tribunal finds that not only would it be cost prohibitive for many Claimants to file individual claims but it would also be practically impossible for ICSID to deal separately with 60,000 individual arbitrations. Thus, the rejection of the admissibility of the present claims may equal a denial of justice. This would be shocking given that the investment at stake is protected under the BIT, which expressly provides for ICSID jurisdiction and arbitration. Award dated August 4, 2011, ¶ 537. Although the August 4 award will have a significant effect on the shape of the arbitral proceedings, the tribunal made it very clear that it was not ruling on the admissibility of any particular claims. Instead, the award simply set forth the general criteria that must be met for a claim to be considered admissible. The tribunal was also very clear in that it was not setting up general rules of procedure for mass dispute resolution within the ICSID framework. Instead, the tribunal limited itself to creating a procedure to be used in this particular dispute. However, in so doing, the tribunal had to have been aware that ICSID awards are often considered to have some sort of precedential or persuasive value, particularly with respect to matters of procedure. See Gabrielle Kaufmann-Kohler, “Arbitral Precedent: Dream, Necessity or Excuse?” 23 Arbitration International 357 (2007). Therefore, it may very well be that future ICSID tribunals will look to this award as persuasive authority regarding the procedures to be used in mass investment arbitrations. Although the possibility of other large-scale investment claims may seem somewhat far-fetched at the moment, the tribunal appeared to contemplate a possible role for mass claims in international investment disputes, noting that the claimants took the view that this type of suit can provide an additional means of addressing defaults by rogue debtors. See Award dated August 4, 2011, ¶ 514. Despite the award in Abaclat, mass claims are unlikely to be brought in ICSID arbitrations with any regularity. Nevertheless, this award will likely prove highly influential within a narrow field of disputes, since it provides a thoughtful and insightful look into a number of issues relevant not only to mass claim proceedings in investment arbitration, but also to private forms of class and collective arbitration. Indeed, the award is far too intricate to discuss in a writing of this nature, and this overview has simply set the stage for more detailed discussions that will be forthcoming in time. See S.I. Strong, Class Arbitration and Collective Arbitration: Mass Claims in the National and International Sphere (Oxford University Press, anticipated 2012). Nevertheless, it is hoped that these preliminary comments will inspire those working in the area of class actions, class arbitrations and other forms of collective redress to read the award for themselves. The time spent will pay dividends in the future.   [This is the third installment in a three-part series on the Guest-Post: ICSID Accepts First-Ever Class-Type Arbitration. Part I is here and Part II is here.] Technorati Tags: law, ADR, arbitration S.I. Strong is currently Associate Professor of Law at the University of Missouri and Senior Fellow at the award-winning Center for the Study of Dispute Resolution, having previously taught law at the University of Cambridge and the University of Oxford in the United Kingdom. Prior to joining the faculty at Missouri, Dr Strong was Counsel specializing in international dispute resolution at Baker & McKenzie LLP and a dual-qualified practitioner (U.S.-England) in the New York and London offices of Weil, Gotshal & Manges LLP. Dr Strong has acted in arbitral proceedings under a wide range of institutional rules and is listed as a neutral on various national and international rosters. Dr Strong is the author of numerous works on international arbitration, including the award-winning article, The Sounds of Silence: Are U.S. Arbitrators Creating Internationally Enforceable Awards When Ordering Class Arbitration in Cases of Contractual Silence or Ambiguity? 30 Michigan Journal of International Law 1017 (2009), as well as the books Research and Practice in International Commercial Arbitration: Sources and Strategies (2009) and Class Arbitration and Collective Arbitration: Mass Claims in the National and International Sphere (forthcoming), both from Oxford University Press. Dr Strong, who is qualified as a lawyer at the New York and Illinois bars and as a solicitor of the Supreme Court of England and Wales, holds a Ph.D. in law from the University of Cambridge, a D.Phil. from the University of Oxford, a J.D. from Duke University, an M.P.W. from the University of Southern California and a B.A. from the University of California.

By S.I. Strong Another aspect of the consent analysis involved the question of whether this sort of mass claim was permitted under the ICSID Convention and the Argentina-Italy BIT. See id. ¶¶ 467-92. This posed an interesting dilemma, given that both documents are silent on the issue of mass proceedings. Perhaps unsurprisingly, the tribunal’s inquiry was reminiscent of the type of analyses that arise in the class arbitration context with respect to whether contracts that are silent or ambiguous as to class treatment may nevertheless support a class arbitration. See Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010). Thus, the tribunal considered arguments regarding the silence of the ICSID framework on the possibility of mass proceedings (a topic that was also addressed in the context of the tribunal’s discussion on admissibility), the fact that claims of this sort were unknown at the time the BIT was entered into, and the ability of the parties to mount individualized defenses or affirmative cases (an issue that was also addressed in the section on admissibility). One of the most important aspects of the section on consent involved the tribunal’s discussion of the nature of the claims at issue, found on pages 188 to 191 of the award. See Award dated August 4, 2011, ¶¶ 480-88. Here, the tribunal noted that there were two major means of dealing with large-scale claims: representative proceedings (which would include U.S.-style class actions and arbitrations as well as various other types of procedures) and aggregate proceedings (best typified by the English Group Litigation Order or GLO). See id. ¶ 483 (citing S.I. Strong (mistakenly attributed to “Stacy I. Starck”), “From Class to Collective: The De-Americanization of Class Arbitration,” 26 Arbitration International 493 (2010), discussed on this blog here. Furthermore, the tribunal noted that: all these various forms of collective proceedings share a common “raison d’etre”: Collective proceedings emerged where they constituted the only way to ensure an effective remedy in protection of a substantive right provided by contract or law; in other words, collective proceedings were seen as necessary, where the absence of such mechanism would de facto have resulted in depriving the claimants of their substantive rights due to the lack of appropriate mechanism. Id. ¶ 484 (citing Strong (misattributed to Starck)). An evaluation of the claims at issue in this dispute suggested the existence of both representative and aggregative elements. See id. ¶¶486-87. As a result, the tribunal characterized the arbitration as “a sort of a hybrid kind of collective proceedings, in the sense that it starts as aggregate proceedings, but then continues with features similar to representative proceedings due to the high number of Claimants involved.” Id. ¶ 488. This conclusion had a significant effect on how the tribunal analyzed matters involving its jurisdiction over mass claims. According to the tribunal, the central legal issue in representative proceedings involves consent while the primary concern in aggregative proceedings is admissibility, particularly “whether ordering the parties to proceed collectively is within the scope of the Tribunal’s discretion and authority.” Id. ¶ 485; see also id. ¶ 491. Because the proceedings in this case were primarily aggregative, the tribunal turned its attention to admissibility concerns. See id. ¶ 485. Admissibility is considered on pages 201 to 216 of the award. This analysis also had several constituent elements, including some that had been introduced in the section on consent. For example, the tribunal began by revisiting the question of how to determine the appropriate procedure, given the silence of the relevant treaties (ICSID and the Argentina-Italy BIT) regarding the possibility of mass claims. This problem is similar to that which arises in many class arbitrations, when arbitrators must construe contractual silence regarding the possibility of class treatment. However, Abaclat was slightly different in that it involved questions of public international law and policy rather than simple contract law. In particular, the arbitrators had to determine whether the treaties’ failure to address collective proceedings resulted in a “‘qualified silence’ that should be interpreted to mean that collective arbitration is not possible and not admissible under the current ICSID framework” or whether the silence should “be considered a ‘gap,’ which was unintended and which the Tribunal has the power to fill.” Id. ¶ 517. Ultimately, the tribunal concluded that the latter was the better interpretation. See id. ¶¶ 520-33. The tribunal next had to determine what procedures should be used to resolve this dispute and indeed whether any appropriate procedures could be identified in light of the existing ICSID framework. In considering this issue, the tribunal explicitly took into account the fact that mass proceedings could affect the rights of individual claimants to control the conduct of the case and the right of the defendant to mount an individualized defense. See id. ¶¶ 536-47. This is a particularly important matter in many civil law jurisdictions, where the individual right to pursue and defend against a claim is constitutional in nature. See Strong, Due Process, supra, at 32. [This is the second installment in a three-part series on the Guest-Post: ICSID Accepts First-Ever Class-Type Arbitration. Part I is here and Part III is here.] Technorati Tags: law, ADR, arbitration S.I. Strong is currently Associate Professor of Law at the University of Missouri and Senior Fellow at the award-winning Center for the Study of Dispute Resolution, having previously taught law at the University of Cambridge and the University of Oxford in the United Kingdom. Prior to joining the faculty at Missouri, Dr Strong was Counsel specializing in international dispute resolution at Baker & McKenzie LLP and a dual-qualified practitioner (U.S.-England) in the New York and London offices of Weil, Gotshal & Manges LLP. Dr Strong has acted in arbitral proceedings under a wide range of institutional rules and is listed as a neutral on various national and international rosters. Dr Strong is the author of numerous works on international arbitration, including the award-winning article, The Sounds of Silence: Are U.S. Arbitrators Creating Internationally Enforceable Awards When Ordering Class Arbitration in Cases […]