Baker McKenzie International Arbitration Yearbook 2023-2024

A. Legislation and rules

A.1 Legislation

The United States has a federal form of government, and there is, accordingly, arbitration-related legislation at both the federal (national) and state levels. The Federal Arbitration Act (FAA) of 1925 continues to be the controlling federal arbitration statute and reflects a well-established national policy that strongly favors arbitration as an alternate means of dispute resolution. In 2023, the House and Senate introduced four amendments to the FAA, none of which passed in 2023, as discussed below.

First, the Ending Forced Arbitration of Race Discrimination Act of 2023 was introduced for the first time in 2023. This bicameral amendment would allow individuals with racial discrimination workplace claims to pursue those claims in court rather than exclusively in arbitration. Second, the Senate reintroduced the Forced Arbitration Injustice Repeal Act (“FAIR Act“). The FAIR Act, which was initially introduced in 2022 and passed in the House, would ban mandatory pre-dispute arbitration agreements in antitrust class actions, employment, consumer and civil right disputes, as well as pre-dispute joint/class action waivers for those disputes in any forum. Third, the Senate introduced the Protecting Older Americans Act of 2023. This legislation would nullify mandatory arbitration clauses prohibiting age discrimination victims from seeking a remedy in court. Fourth, the House and Senate both introduced the Court Legal Access and Student Support Act of 2023 (“CLASS Act“). The CLASS Act would invalidate arbitration agreements that would prevent students from bringing claims in court against certain institutions of higher education pertaining to enrollment agreements and any other limitations or restrictions for other claims against certain institutions.

Some states have also introduced new legislation pertaining to arbitration. In California, Governor Gavin Newsom signed S.B. 365 into law, which removes the requirement of an automatic stay of trial court proceedings pending appeal of a denial of a motion to compel arbitration. The new law took effect on 1 January 2024; however, it remains to be seen if it will be preempted by the FAA. In New York (which remains the situs in the US with the largest number of arbitrations), the Senate introduced Bill 3259, which, if signed into law, would require employment and consumer dispute arbitrations to be submitted to neutral third-party arbitrators and prohibits arbitration agreements that refer the dispute to a non-neutral arbitrator. New York Assembly Bill A6889, also introduced in 2023, would amend provisions of law governing arbitration proceedings for the purported benefit of employees and consumers by seemingly invalidating arbitration class action waivers by permitting multiple parties seeking arbitration against the same party to file their claim in court. Bill A6889 would also permit the case to proceed in court if the “drafting party” (i.e., the company/employer) fails to pay the arbitration fees within 30 days of the consumer/employee initiating arbitration.

A.2 Institutions, rules and infrastructure

The major arbitral institutions in the US include JAMS, the International Institute for Conflict Prevention and Resolution (CPR), the AAA and the ICDR, which is the international division of the AAA. JAMS is headquartered in Irvine, California, but maintains offices in 27 locations throughout North America and the United Kingdom; it did not update its rules in 2023. CPR, headquartered in New York, also did not update its rules in 2023. The ICDR, an affiliate of the AAA with administrative offices in New York City, Texas, Miami, Florida and Singapore, has not changed its rules over the past year. Neither did the AAA itself.

B. Cases

B.1 Supreme Court rules that lower court proceedings must be stayed pending the appeal of a denial of a motion to compel arbitration^[1]

Coinbase operates an online platform on which users can buy and sell cryptocurrencies. Abraham Bielski filed a putative class action alleging that Coinbase failed to replace funds fraudulently taken from the users’ accounts. Coinbase moved to compel arbitration based on an arbitration clause in its user agreement. The district court denied the motion, and Coinbase filed an interlocutory appeal. Coinbase also moved the district court to stay its proceedings pending resolution of the interlocutory appeal. The district court denied that request, and the appellate court likewise declined to issue a stay.

Under Supreme Court precedent, an appeal, including an interlocutory appeal, “divests the district court of its control over those aspects of the case involved in the appeal.” Here, the question on appeal was whether the case should be in arbitration rather than the courts. This meant, according to the Supreme Court, that the entire case was essentially “involved in the appeal.” Put another way, the question of whether “the case should be litigated in the district court . . . is the mirror image of the question presented on appeal.” Thus, precedent dictated a stay of the district court proceedings while the interlocutory appeal on arbitrability was ongoing. Most courts of appeals that have addressed this question (Eleventh, Fourth, Third, Tenth, DC, Seventh and Fifth), as well as leading treatises, agree with that conclusion.

The Supreme Court also explained how staying the district court case was the common-sense solution. If the district court were permitted to move forward with pretrial and trial proceedings while the appeal on arbitrability was ongoing, then many of the asserted benefits of arbitration (such as efficiency, less expense and less intrusive discovery) would be irretrievably lost. It would be of no moment if the court of appeals later concluded that the case actually had belonged in arbitration from the outset because, without the stay, nothing could undo the expenses and intrusiveness that would have been incurred while the appeal was pending. Absent a stay, the court explained, parties might also be forced to settle to avoid the very district court proceedings (including discovery and trial) that they contracted to avoid.

The Supreme Court then went on to reject all of Bielski’s arguments in favor of there not being an automatic stay. First, in response to his argument that an automatic stay would encourage frivolous appeals, the Supreme Court said there was no evidence to support that contention and, anyway, there are procedural mechanisms to control for that (such as the district court certifying that an appeal is frivolous). Second, Bielski argued that Section 3 of the FAA and §1292(d)(4) of Title 28 specifically provide for stays, implying that the lack of a stay in the language in Section 16(a) regarding interlocutory appeals shows that none was intended. The Supreme Court explained that the Section 3 stay was of the lawsuit pending arbitration. There was no authority that automatically authorized such a stay, so a specific provision was required. Likewise, a specific provision was required in Section 1292(d)(4) because 1292(d)(3) had a discretionary stay, and Congress wanted to avoid any possibility of misinterpretation. Third, Bielski argued that requiring an automatic stay would create a special, arbitration-preferring procedural rule. The Supreme Court disagreed and said, to the contrary, that Bielski’s proposed approach would disfavor arbitration compared with other areas of law. Fourth, Bielski argued that there is no need for an automatic stay because the ordinary discretionary stay factors would adequately protect parties’ rights to an interlocutory appellate determination of the stay issue. But the evidence was to the contrary. And, in any event, Supreme Court precedent applied regardless of how often courts might otherwise grant stays under the ordinary discretionary stay factors.

The Supreme Court decided that, after Coinbase appealed the denial of its motion to compel arbitration, the district court was required to stay its proceedings. The decision of the appellate court was therefore reversed. The Coinbase decision has now made clear to all courts across the country that district court proceedings must be stayed whenever there is an interlocutory appeal of a decision denying a motion to compel arbitration.

B.2 Second Circuit holds that remand for a reasoned award does not violate the functus officio doctrine and is consistent with Sections 10(a)(4) and 11 of the FAA^[2]

Smarter Tools, Inc. (“STI“), a Virginia-based corporation, entered into a series of contracts with China-based Chongqing SENCI Import & Export Trade Co., Ltd. and Chongqing AM Pride 20 Power & Machinery Co. Ltd. (collectively, “SENCI“), to purchase gas-powered inverter generators. SENCI sells multiple types of these generators, including one that is certified by the Environmental Protection Agency but not by the California Air Resources Board (CARB). A dispute arose between the parties as to whether the generators STI ordered were to be CARB-compliant. STI was fined USD 507,000 by CARB for reselling the noncompliant generators, prompting STI to pull out of the market and stop payment on USD 2,402,680 worth of SENCI generators for which it had already accepted delivery. SENCI then initiated an ICDR arbitration based on the arbitration clause in the generator purchase orders. The parties agreed that the arbitrator should issue a reasoned award.

When the award was issued, it set out only a brief description of the parties and the proceedings, excluded certain expert testimony and exhibits, and, without detailed reasoning, awarded SENCI USD 2,402,680 and denied all of STI’s claims. STI sought to vacate the award in the US District Court for the Southern District of New York, arguing that the award was not reasoned and that the arbitrator had manifestly disregarded the law. The court agreed that the award was not reasoned and remanded to the arbitrator “for clarification of his findings.” The arbitrator subsequently issued an amended award that explained that STI’s claims were rejected due to a lack of evidence that it actually ordered generators compliant with Californian regulations. STI again sought a vacatur of the amended award, and SENCI sought to confirm it. The district court held that the award was reasoned and did not reflect a manifest disregard for the law; it confirmed the award.

STI appealed to the US Court of Appeals for the Second Circuit, arguing that the district court’s remand to the arbitrator contravened the functus officio doctrine and Sections 10(a)(4) and 11 of the FAA. STI argued that after an award was issued, an arbitrator’s revisions on remand must be limited to correcting ambiguities or minor clerical errors. Accordingly, once the district court held that the arbitrator exceeded his authority by not issuing a reasoned award, the only possible remedy was vacatur — not remand. STI also argued that the amended award was still not reasoned and reflected a manifest disregard for the law. The Second Circuit disagreed. It explained that remand is appropriate if the final award is ambiguous, the arbitrator’s clarification does not substantively modify the award, and the clarification is in line with the parties’ arbitration agreement. The court noted that it regularly applies this standard to remand for clarification of ambiguities that hamper enforceability or leave an arbitral award open to multiple interpretations.

The Second Circuit found that a remand to correct an error in the form of an award — such as a failure to produce a reasoned award — does not violate the functus officio doctrine, as it does not reopen the merits of the dispute. Rather, the court found that such a remand is consistent with its standard for remand for clarification, as it seeks to have the arbitrator complete their duties consistent with the parties’ arbitration agreement. Specifically, in this case, the court found that the arbitrator’s amended award provided a reasoned award in line with the parties’ expectations.

The Second Circuit also rejected STI’s argument that FAA Section 10(a)(4), which provides that awards may be vacated where the arbitrators exceed their powers, applies where an arbitrator fails to provide a reasoned award. The court explained that Section 10(a)(4) is to be read narrowly, and there was no question that the arbitrator had the power to reach the issues he addressed. Accordingly, Section 10(a)(4) did not require vacatur of the original award. Instead, the court found that failure to provide a reasoned award best fit under FAA Section 11, which permits courts to order the modification or correction of an award where “the award is imperfect in matter of form not affecting the merits of the controversy.” Consistent with its reasoning regarding the remand of the award, the appellate court determined that, under Section 11, the court’s authority stems from giving effect to the parties’ intent and promoting justice and that a remand for a reasoned award served both of these ends.

B.3 Second Circuit affirms district court’s ruling that the enforcement of an arbitration award should not be stayed despite a pending foreign annulment proceeding^[3]

In 2018, Iraq Telecom Ltd. (“Iraq Telecom“) brought an arbitration proceeding against IBL Bank S.A.L. (“IBL“) and others before the Lebanese Arbitration Center of the Chamber of Commerce, Industry and Agriculture of Beirut and Mount Lebanon. After a four-day evidentiary hearing, the arbitral tribunal ruled in favor of Iraq Telecom and awarded it USD 3 million. Iraq Telecom sought to confirm the award in the US District Court for the Southern District of New York. While those proceedings were ongoing, IBL initiated an exequatur proceeding in a Lebanese court seeking to annul the award. IBL then requested a stay of the US confirmation proceedings, arguing that the Lebanese court had the power to set aside the award and might do so. The district court did not find that IBL had demonstrated a likelihood of success in the annulment action and granted Iraq Telecom’s petition to confirm the award.

On appeal, the Second Circuit began its analysis by turning to the New York Convention, which provides that a district court “may, if it considers it proper, adjourn the decision on the enforcement of the award” if “an application for setting aside or suspension of the award” has been made in the jurisdiction in which the award was made. The Second Circuit then considered its earlier decision in Europcar Italia S.p.A. v. Maiellano Tours, Inc., in which it had set out a non-exhaustive list of six factors that a district court should consider in exercising its discretion to adjourn enforcement proceedings in the face of parallel foreign annulment proceedings.

The Second Circuit found that the district court reasonably determined that the two most important Europcar factors weighed against staying enforcement: (1) the expeditious resolution of disputes and the avoidance of protracted and expensive litigation, and (2) the status of the foreign proceedings and the estimated time for those proceedings to be resolved. Specifically, the district court found that the annulment action was in its earliest stage and that IBL had not provided any estimate of the length of those proceedings. The Second Circuit also rejected IBL’s contention that the district court had erred by not adequately considering the potential for future delay if the award was annulled and further litigation was required to set aside the enforcement judgment. The Second Circuit explained that the district court’s finding that IBL had not shown it was likely to succeed in the annulment proceeding largely neutralized those concerns.

The Second Circuit then turned to another Europcar factor — determining the “balance of the possible hardships to each of the parties[.]” IBL argued that a stay would not cause hardship to Iraq Telecom because IBL had issued payment in compliance with the enforcement award. Yet the district court rejected this assertion because, under Lebanese law, IBL’s attempt to pay Iraq Telecom was merely an offer that was rightfully declined by Iraq Telecom. Accordingly, if the enforcement action were stayed, there would be hardship for Iraq Telecom.

The Second Circuit concluded its analysis by reviewing the district court’s decision regarding another Europcar factor — “whether the award sought to be enforced will receive greater scrutiny in the foreign proceedings under a less deferential standard of review[.]” The district reasoned that this factor “support[ed] a delay in [enforcement] only slightly” because, although a Lebanese court may have a broader range of tools to vacate an arbitration award, IBL failed to show “that additional authority will be of benefit to it.” The Second Circuit found this analysis reasonable and, consequently, did not find an abuse of discretion in the district court’s decision to enforce the arbitration award. Hence, the Second Circuit affirmed the district court decision.

B.4 Eleventh Circuit holds that, under the FAA and Article V of the New York Convention, a panel of appointed arbitrators’ familiarity with one another due to previous work-related encounters does not alone constitute enough bias to vacate an arbitration award^[4]

Grupo Unidos por el Canal (“Grupo Unidos“) is a consortium of European companies that was awarded a multibillion-dollar construction contract by Autoridad del Canal de Panama (“Autoridad del Canal“) to expand the Panama Canal. When Grupo Unidos completed the expansion 20 months past the deadline, liability disputes followed. Pursuant to the contract’s arbitration clause, disputes were required to be resolved through arbitration in Miami, Florida, under the ICC Rules. There were seven arbitrations, with the “Panama 1 Arbitration” being at issue here, under which Grupo Unidos made several contractual claims against Autoridad del Canal.

In 2015, the parties nominated a three-arbitrator panel. Grupo Unidos nominated one arbitrator, Autoridad del Canal nominated another, and the parties jointly nominated the third. The ICC confirmed all three, and the arbitrators were required to submit an “ICC Arbitrator Statement Acceptance, Availability, Impartiality, and Independence” disclosure mentioning any and all potential biases. Each arbitrator submitted the form asserting no impartiality. Neither Grupo Unidos nor Autoridad del Canal requested more information.

After five years of arbitration, on 21 September 2020, Autoridad del Canal received a partial arbitration award with a net win of over USD 265 million. On 15 October 2020, Grupo Unidos, for the first time, asked for four additional disclosures from the arbitrators detailing their relationship with each other and with the law firms involved in the arbitration. Among those disclosures was a statement that the arbitrators were familiar with the lawyers for Autoridad del Canal, given their prior involvement in Panama Canal arbitrations. Based on those disclosures, Grupo Unidos appealed to the ICC, arguing that all three arbitrators withheld “highly problematic” relationships with each other and counsel. The ICC ruled that, while additional disclosures should have occurred, there was no conflict. After that decision, Autoridad de Canal received a final award of USD 285 million.

Before the ICC ruled, Grupo Unidos moved to vacate the award under Article V of the New York Convention. The district court denied that motion and granted Autoridad del Canal’s motion to confirm the award. On appeal to the Eleventh Circuit Court of Appeals, Grupo Unidos argued that the undisclosed information by the arbitrators provided grounds for vacatur under Article V of the New York Convention. The court explained that absent exceptional circumstances, a judicial presumption exists in favor of upholding international arbitration awards. Though the court agreed with Grupo Unidos that while, ideally, the arbitrators should have disclosed more information than was disclosed here, the undisclosed information did not require vacatur. The court found that not all past work experience constitutes bias that would warrant vacating an arbitration award. The arbitrators on Panama 1’s panel were familiar with each other because they had worked together on previous arbitrations but were not biased in any significant way. The court noted that Grupo Unidos did not present a precedent where arbitrators’ familiarity with each other alone permitted vacatur, nor did it explain how such familiarity could result in impartiality. Furthermore, considering the complexities of the Panama Canal expansion, disqualifying an arbitrator based on familiarity would be impractical because only several dozen arbitrators worldwide are able to handle this level of dispute.

The court then analyzed whether there were grounds to decline confirmation of the arbitration award under Article V(2)(b) of the New York Convention, which provides a defense to an arbitral award if “[t]he recognition or enforcement of the award would be contrary to the public policy of that country.” The court acknowledged that the United States has a policy against “evident partiality,” or information which would lead a reasonable person to believe that a potential conflict exists. But Grupo Unidos only presented evidence of familiarity, not partiality. The four additional disclosures revealed information that should have been disclosed prior to the proceedings but did not violate the United States’ public policy against evident partiality, the composition of the tribunal, or fundamental procedural fairness. The appellate court affirmed the district court’s confirmation of the arbitration awards.

B.5 Third Circuit reverses and remands district court’s decision to compel arbitration, holding that asset purchase agreement called for expert determination rather than arbitration^[5]