4 – FORMATION AND VALIDITY OF INTERNATIONAL ARBITRATION AGREEMENTS
The formation and validity of international arbitration agreements are of vital importance to the arbitral process. Both issues arise in many international arbitration cases and can have a decisive impact on the course of arbitral proceedings. This chapter provides an overview of issues relating to the formation and validity of international arbitration agreements, focusing on international commercial arbitration agreements, but also considering inter-state and investor-state agreements to arbitrate.
First, the chapter examines the formation of international arbitration agreements, including the essential terms of agreements to arbitrate, the formation of arbitration agreements, standards of proof and tacit consent. Second, the chapter considers the formal validity of international arbitration agreements. Third, the chapter addresses the substantive validity of international arbitration agreements, including the presumptive validity of such agreements under the New York Convention, and the substantive bases for challenging the validity of international arbitration agreements. Fourth, the chapter explores the nonarbitrability doctrine, which provides that certain types of disputes may not be arbitrated. Finally, the chapter addresses agreements to arbitrate investment disputes, focusing on “arbitration without privity.”
A. FORMATION OF INTERNATIONAL ARBITRATION AGREEMENTS
Although parties frequently agree to arbitrate, they also sometimes reconsider that commitment when disputes arise, and instead seek to litigate their claims in more familiar local courts. Ultimately, the efficacy of any arbitration agreement will depend on the parties’ ability to enforce that agreement. As discussed above, the enforceability of international arbitration agreements has undergone important changes over the past century, evolving from a position of relative disfavor in some leading jurisdictions to one of essentially universal favor and encouragement.1 This pro-arbitration enforcement regime for international arbitration agreements is of fundamental importance to the efficacy of the arbitral process, by ensuring that agreements to arbitrate can be enforced predictably and expeditiously in forums around the world.
1. Essential Terms of International Arbitration Agreements
In order for a valid international arbitration agreement to be formed, agreement must be reached on a core of essential issues. These rights and obligations are reflected in the definitions of “agreements to arbitrate” under international arbitration conventions2 and national arbitration legislation,3 and are elaborated by national courts and other authorities.4 (As discussed above, arbitration is a process by which parties consensually submit a dispute to a non-governmental decision-maker, selected by or for the parties, to render a binding decision resolving a dispute in accordance with neutral, judicial procedures affording the parties an opportunity to be heard.5) The materials excerpted below consider what, in light of this definition, constitutes the essential elements of an arbitration agreement. What elements must the parties agree upon, in order to validly conclude an agreement to arbitrate; conversely, what elements are not essential, although they may be useful or advisable?
JUDGMENT OF 3 FEBRUARY 1990
XVII Y.B. Comm. Arb. 542 (1992) (Genoa Corte di Appello)
Samara and Coppola entered into a charter party containing a clause reading: “General average/arbitration, if any, in London in the usual manner.” When a dispute arose, Coppola initiated court proceedings in Italy. The Court of First Instance held that it had jurisdiction to hear the case, and decided on the merits. The Court of Appeal reversed the lower court’s decision, for the reasons set out below.
In order to establish the validity and efficacy of a clause for foreign arbitration in a contract to which an Italian national or company is a party, we must exclusively consider Art. II of the New York Convention, which establishes a uniform law. As far as the form of the clause is concerned, this Convention deems it sufficient that it be contained in an agreement signed by the parties or in an exchange of letters or telegrams. Stricter formal provisions of the place where the contract has been concluded (in this case Italy) do not apply (in casu, Art. 1341 CC, which provides for the specific approval in writing of the arbitration clause). Art. II does not provide for an autonomous discipline regulating the validity of the arbitration clause; it only provides, at [Art. II(3)], that the national court can ignore the effects of the arbitration clause [on court proceedings] when the clause is “null and void, inoperative or incapable of being performed.”
The law applicable to the issue of the validity of the arbitration clause is either the law chosen by the parties in their contract or the law applicable to the arbitral proceedings. This principle can clearly be inferred from Art. V of the Convention, according to which recognition of the arbitral award shall be denied only when the arbitration clause is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made. Considering the eadem ratio and the close connection between the two provisions mentioned above, the criteria for the evaluation of the arbitration clause which are to be applied in enforcement proceedings must also be applied when the clause is invoked in order to derogate from the jurisdiction of the national courts. The uniform discipline laid down in the Convention is of the autonomous and exclusive nature; hence, it bars [the courts] from referring to national provisions referred to by the private international law norms of the forum (the so-called lex fori), save in the case of the evaluation of the arbitrability of the subject matter, provided for in Art. V(2).
On the basis of the aforesaid, concerning the validity of the arbitral clause, we hold that [the arbitral clause at issue] is valid. Notwithstanding the contrary opinion of the Court of First Instance, this clause is not null and void on the strength of Art. 809 CCP,6 which requires that the number of the arbitrators and the manner of their appointment be indicated in the arbitral clause, because there is no similar provision in the law regulating the arbitration—that is, English law. On the contrary, certain provisions in English law are to be applied when the number and powers of the arbitrators, or the manner of their appointment, are not indicated (see §6 of the Arbitration Act).
Nor can it be said that the clause is null and void because the referral to general average [in the arbitral clause] indicates that the parties only agreed to refer to arbitration the disputes concerning general average—which is not the case here. Neither the general nor the literal grounds on which the restrictive interpretation given by the Court of First Instance is based can be shared. If the parties had intended to provide for arbitration only in the case of general average, it would have been more effective and clear to amend clause 12 of the contract, concerning general average, instead of adding a clause to the contract….
E. GAILLARD & J. SAVAGE, FOUCHARD GAILLARD GOLDMAN ON INTERNATIONAL COMMERCIAL ARBITRATION
§486 (1999)
A “blank clause” (clause blanche) is one which contains no indication, whether directly or by reference to arbitration rules or to an arbitral institution, as to how the arbitrators are to be appointed. This is the case where, for example, the clause merely states “Resolution of disputes: arbitration, Paris.”
In French domestic arbitration law, such clauses will be held ineffective. Article [1443(2)] of the New Code of Civil Procedure provides that the arbitration agreement must “either appoint the arbitrator or arbitrators or provide for a mechanism for their appointment,” failing which the clause is void.7 However, such clauses are valid in French international arbitration law. There is no French statutory provision requiring the parties to an international arbitration agreement to themselves specify a mechanism for appointing the arbitrators. Further, French case law has consistently confirmed that Article 1443 … “does not apply to international arbitration.”8 In practice, the French courts will interpret such clauses as providing for ad hoc arbitration in which any difficulties with the composition of the arbitral tribunal will be resolved by the President of the Paris Tribunal de grande instance, under Article 1493 of the New Code of Civil Procedure.… That is not to say, however, that blank clauses are to be recommended.
The pathological element of a blank clause really only emerges where the arbitration agreement contains no detail linking the blank clause, by the choice of a seat or a procedural law, to a country whose courts are able to appoint the arbitrators. An example will be a clause stipulating that “any disputes arising from the interpretation of the present contract will be settled by an arbitral tribunal sitting in a country other than that of each of the parties.” It is not clear whether the French courts, for instance, would agree to rule on a request to appoint arbitrators if confronted with an arbitration agreement of that kind between two non-French parties, one of which sought to commence arbitration in France. In order for the courts to agree to carry out such an appointment, the clause would have to be interpreted as containing an agreement between the parties whereby, in the event of a dispute, the plaintiff would be entitled to choose the seat of arbitration. If France were the chosen seat, the courts would then be able to apply Article 1493 …, which empowers the President of the Paris Tribunal of First Instance to rule on any difficulty encountered in the constitution of the arbitral tribunal. In the above example, this result could be obtained by an a contrario interpretation of the arbitration agreement, the parties having excluded the jurisdiction of the courts of each of their home countries. However, the courts’ response to this line of reasoning remains uncertain.
LUCKY-GOLDSTAR INTERNATIONAL (H.K.) LTD v. NG MOO KEE ENGINEERING LTD
[1994] Arb. & Disp. Resol. L.J. 49 (H.K. Ct. First Inst.)
I have before me an application for a stay of these proceedings pursuant to the provisions of Article 8 of the Model Law. Both plaintiff and defendant are Hong Kong companies having their place of business in Hong Kong. The plaintiff is a subsidiary of a well-known Korean company which trades under the name of “Lucky Goldstar.” … It will soon become apparent that [the parties] have agreed that the place of arbitration is to be outside that state.
By a written agreement dated 3 December 1990, the plaintiffs sold to the defendants five sets of elevators. The contract contained the following dispute resolution clause:
“Claims: Any claims by Buyer of whatever nature arising under this contract shall be made by cable within thirty (30) days after arrival of the merchandise at the destination specified in the bills of lading…. Any dispute or difference arising out of or relating to this contract, or the breach thereof which cannot be settled amicably without undue delay by the interested parties shall be arbitrated in the 3rd Country, under the rule of the 3rd Country and in accordance with the rules of procedure of the International Commercial Arbitration Association. The award shall be final and binding upon both parties.”
The defendants seek to rely on the arbitration agreement and thus they seek a stay of these proceedings under Article 8 of the Model Law….
The parties appear to agree that the phrase “3rd Country” which appears in the arbitration clause means any country other than Hong Kong and probably Korea. No evidence was put in as to what was intended by the use of this phrase. For all I know it might have been intended to convey to the parties using this clause that a specific 3rd country had to be inserted where those words appeared. Be that as it may, the conditions of this contract were the standard terms and conditions used by the plaintiff’s Korean head office with the deletion of the word “Korea” which was replaced by the words “3rd Country.” It is also common ground between the parties that the International Commercial Arbitration Association referred to in the arbitration clause is a non-existent organization. No useful purpose can be served by speculating as to what was actually intended by the use of these words.
[The plaintiffs] attempted to argue that there was no binding arbitration agreement on the grounds that a common mistake had been made. [They] submitted that when the parties have agreed to undertake arbitration only in certain circumstances, and according to certain rules and those rules turn out to be non-existent, the consent to arbitration is therefore nullified.… I cannot accept this argument. It is perfectly clear that the parties, by this clause, intended to arbitrate any disputes that might arise under this contract. This agreement is not nullified because they chose the rules of the non-existent organization. It must be noted that the clause refers to arbitration in the 3rd country “under the rule of the 3rd Country and in accordance with the rules of procedure of….” The word “rule” must mean “law.” As there are no rules and this non-existent organization the arbitration has to be conducted under the law of the 3rd country chosen by the plaintiff. In this regard, they are in the fortunate position of being able to choose a country whose law and practice of arbitration is acceptable to them and no doubt they will also take into account whether that country has ratified the New York Convention.
I do not, and cannot, accept that this agreement to arbitrate is nullified in the manner suggested. [The plaintiffs] turn[] to the words used in Article 8 of the Model Law and attempts to argue that this arbitration agreement is “inoperative or incapable of being performed” was taken from the New York Convention…. Professor Albert Jan van den Berg, in his book on The New York Arbitration Convention 1958, in dealing with the word “inoperative” stated at page 158:
“The word ‘inoperative’ can be deemed to cover those cases where the arbitration agreement has ceased to have effect. The ceasing of effect to the arbitration agreement may occur for a variety of reasons. One reason may be that the parties have implicitly or explicitly revoked the agreement to arbitrate. Another may be that the same dispute between the same parties had already been decided in arbitration or court proceedings (… res judicata)”.
He goes on to give other examples … where the award has been set aside or there is stalemate in voting of the arbitrators or the award has not been rendered within the prescribed time limit. Further he suggests that a settlement reached before the commencement of arbitration may have the effect of rendering the arbitration agreement inoperative…. As to the phrase “incapable of being performed,” Professor van den Berg is of the view that this would seem to apply to a case where the arbitration cannot be effectively set in motion. The clause may be too vague or perhaps other terms in the contract contradict the parties’ intention to arbitrate. He suggests that if an arbitrator specifically named in the arbitration agreement refuses to act or if an appointing authority refuses to appoint, it might be concluded that the arbitration agreement is “incapable of being performed.” However, that would only apply if the curial law of the state where the arbitration was taking place had no provision equivalent to … Article 11 of the Model Law [permitting judicial selection of an arbitrator, see infra pp. 705–06]….
Having considered all of [the plaintiffs’] arguments, I cannot see how it can be said that this arbitration clause is “inoperative or incapable of being performed.” True, it is, that there will be no arbitration under the rules of the International Commercial Arbitration Association, but there will be an arbitration under the law of the place of arbitration chosen by the plaintiffs and they have a very wide choice indeed. The parties have made their intentions to arbitrate perfectly plain in this clause. If the use only of the word “arbitration” is sufficient to create a binding arbitration agreement then, a fortiori, this clause is valid (see Hobbs Padgett & Co. (Reins.) Ltd v. J.C. Kirkland Ltd [1969] 2 Lloyds Rep. 547, 549).
I believe that the correct approach in this case is to satisfy myself that the parties have clearly expressed the intention to arbitrate any dispute which may arise under this contract. I am so satisfied: I am also satisfied that they have chosen the law of the place of arbitration to govern the arbitration even though that place has not yet been chosen by the plaintiffs. As to the reference to the non-existent arbitration institution and rules, I believe that the correct approach is simply to ignore it. I can give no effect to it and I reject all reference to it so as to be able to give effect to the clear intention of the parties.
I further reject [the plaintiffs’] submission that both parties only agreed to arbitrate if it was to be under these non-existent set of rules. The defendants would seem to have had no choice but to accept the plaintiffs’ standard terms and conditions and they can be forgiven for thinking that an organization as large as Lucky-Goldstar knew what they were talking about. [The plaintiffs] submit[] that I cannot salvage this arbitration agreement by ignoring reference to the non-existent organization, because the seat of this arbitration is going to be outside Hong Kong and thus only Articles 8 and 9 of the Model Law apply. However, [they] did concede that I could and, indeed, had to construe this agreement, and that is all I believe I am doing using canons of construction applied by the law of the state exercising jurisdiction under article 8.
Having decided that this arbitration agreement is not “null and void inoperative or incapable of being performed,” I have no choice under article 8 but to stay these proceedings, which I do accordingly. Before parting with this case, I would like to add the following. This is not the first case with which I have had to deal where the arbitration clause has left something to be desired. Many contract drafters seem to have difficulty in the fairly simple task of drafting an arbitration clause or even replicating a standard form clause. Arbitral institutions and associations go to the trouble of drafting standard form arbitration clauses and disseminating them for the benefit of users, yet in far too high a percentage of cases something goes wrong. The former Secretary General of the ICC told an audience in Hong Kong a few years ago that only in a very small number of cases which came to the ICC, did the parties manage to replicate accurately in their contract the standard ICC clause. A badly-drafted clause leads to disputes and wasted costs, both of which are anathema to the arbitral process. In many cases in this region, I imagine the problem is caused by contract drafters not drafting in their native tongue and this problem is appreciated. However, anything that can be done to ensure that arbitration clauses are clear, meaningful and effective would enhance the arbitration process quite considerably….
Since drafting this judgment my attention has been drawn to a decision from New York which is of interest to the matters raised in this application. In Laboratories Grossman v. Forest Laboratories, 295 NYS2d 756, the parties agreed to arbitrate under the rules of a non-existent organization…. [T]he Supreme Court of New York ordered a hearing to determine the parties’ true intent. If their true intent was not to arbitrate under the rules of the organization put forward by the respondent then the Court had to determine, “whether the dominant purpose of the agreement was to settle disputes by arbitration, rather than the instrumentally through which arbitration should be effected…. In such event, there being no viable organization named in the agreement through which arbitration may be had, the court may direct arbitration before such tribunal as it may determine would be the most appropriate in the circumstances.”
I think that this is a useful test and when applied to the facts before me, I have no doubt that the parties’ dominant intention was to settle disputes by arbitration rather than the instrumentality through which arbitration was to be conducted. This is clear from the fact that the organization referred to was a non-existent and further, unlike in the case cited, neither party deposed to intending any specific alternative arbitral institution.… I therefore grant the stay sought by the defendants….
LEA TAI TEXTILE CO. v. MANNING FABRICS, INC.
411 F.Supp. 1404 (S.D.N.Y. 1975)
DUFFY, District Judge…. Petitioner, Lea Tai Textiles, Ltd (“Lea Tai”), is a corporation organized under the laws of Hong Kong where it has its principal place of business. Respondent, Manning Fabrics, Inc. (“Manning”), is a New York corporation with its principal place of business in St. Paul, North Carolina…. From November 1973 to April 1974, the parties entered into a series of contracts for the sale of cotton cloth. Manning would send a purchase order from its New York office to Lea Tai in Hong Kong. Lea Tai, in turn, mailed confirmations to Manning. In September of 1974, Lea Tai shipped 400,000 yards of cotton duck and 120,000 yards of cotton sateen to Manning. Lea Tai alleges that due to changing market conditions Manning wrongfully refused to accept the goods. Manning argues that after an August, 1974 shipment of defective goods it instructed Lea Tai to cease further shipments. Manning filed suit in the Court of Common Pleas, State of South Carolina…. Lea Tai seeks to stay this suit and compel arbitration in New York. Manning contends that no agreement to arbitrate was ever made.
The Act provides that a party aggrieved by another’s failure to arbitrate may petition a U.S. District Court to compel arbitration, 9 U.S.C. §4[:] “If the making of the arbitration agreement … be in issue, the court shall proceed summarily to trial thereof.” Although the existence of the arbitration agreement is in dispute, the essential facts are not and thus the matter can be disposed of without plenary hearing.
In determining the validity of a contract to arbitrate, the Court of Appeals for this Circuit has consistently held that federal rather than state law controls. Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402 (2d Cir.); Coenen v. R. W. Pressprich & Co., 453 F.2d 1209 (2d Cir. 1972). In the context of this case the conflict of law inquiry is more of an academic pursuit. Although Congress did not substitute the Uniform Commercial Code (“U.C.C.”) for the federal common law of contracts, the Code is nevertheless “a most appropriate source of federal law.” In re Yale Express System, Inc., 370 F.2d 433, 435 (2d Cir. 1966)….
Turning to the existence of a contract to arbitrate, I am faced with the not uncommon exchange of inconsistent forms between a buyer and a seller. Both parties apparently concede the existence of a series of valid contracts for the sale of goods, they argue whether an arbitration clause was made a part thereof. Manning’s order form under which Lea Tai seeks to compel arbitration provides as follows:
“11. ARBITRATION: Any controversy arising out of or relating to this contract shall be settled by arbitration in the City of New York in accordance with the Rules then obtaining of the American Arbitration Association or the General Arbitration Counsel [sic] of the Textile Industry, whichever shall be first selected by the party instituting the arbitration…. The parties consent to the jurisdiction of the Supreme Court of the State of New York and the United States District Court for the Southern District of New York for all purposes in connection with said arbitration….”
Lea Tai’s confirmation form, labelled a “contract,” contains an arbitration clause different from Manning’s:
“12. ARBITRATION…. Should any dispute arise between the Buyers and the Sellers in relation to this Contract which they are unable themselves to settle the same shall be referred to the arbitration of two arbitrators; one to be appointed by the Sellers and the other by the Buyers, and the provisions of the Hong Kong Code of Civil Procedure as to a reference to two arbitrators shall apply.”
Thus, the parties now seek me to decide whether they agreed to arbitrate and if so which clause controls. U.C.C. 2-207(1) provides that a confirmation may operate as an acceptance even though its terms differ from that of the offer: “A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.” [U.C.C. 2-207(2)] outlines the effect of the conflicting term:
“The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to the terms of the offer; (b) they materially alter it;9 or (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.”
The Official Comment to the section clearly indicates that a conflicting clause is to be considered as a notification of objection for the purposes of U.C.C. §2-207(2)(c)…. Since the arbitration clauses are in hopeless conflict, I find that no contract to arbitrate was made.
This result suggested by the U.C.C. has a solid basis in logic and reason. While there is a strong federal policy favoring arbitration, … it remains a creature of contract. This Court will not impose its will on parties whose intentions are in clear conflict on this important issue. Arbitration under the Code of Hong Kong rather than the laws of New York may well affect important substantive rights. It is irrelevant to the issues of contract formation that the Hong Kong seller now concludes that it would be willing to arbitrate in New York….
JUDGMENT OF 21 NOVEMBER 2003
DFT 130 III 66 (Swiss Fed. Trib.)
The parties concluded … an exclusive distributor agreement which contains the following arbitration clause in Article 22.2:
“The parties agree that any dispute or difference which may arise out of this Agreement or the execution or interpretation of any of the clauses hereof shall be settled amicably. If such dispute or difference cannot be settled in the aforementioned manner they shall be finally settled under the Rules of Conciliation and Arbitration of the Zurich Chamber of Commerce, Zurich/ Switzerland, in accordance with the UNCITRAL Arbitration Rules. The number of arbitrators shall be three (3). ICC shall be the Appointing Authority acting in accordance with the rules adopted by ICC for that purpose.”
In August 2002, the respondent initiated at the Zurich Chamber of Commerce (“ZCC”) an arbitration against the appellant.… [T]he president of the Chamber of Commerce appointed the lawyer Dr. Rudolf Tschäni as president of the tribunal on 16 September 2002. On 19 September 2002, he selected [four Swiss lawyers] as potential members of the arbitral tribunal. On 23 October 2002, the president of the arbitral tribunal submitted to the parties a draft Order of Constitution, were he listed in addition to himself and [two of the four Swiss lawyers] as members of the arbitral tribunal. He ordered inter alia the following: “Both parties are invited to submit their comments or objections with regard to the aforementioned draft or the appointment of the arbitrators on or before November 1, 2002. Otherwise, the order of constitution will be issued in this form.” On 31 October 2002, the respondent informed the president of the tribunal that it had no comments or objections. The appellant did not [reply] within the period allotted.
On 12 November 2002, the arbitral tribunal sent the parties the “Order of Constitution” dated 5 November 2002 in its original form. By this order, the parties were called for advance payment of court fees each for CHF 100,000. The respondent paid, the appellant did not. On 20 February 2003, the president of the arbitral tribunal asked the respondent to pay the share of the appellant or to dismiss the arbitration (Article 55 of the ZCC Arbitration Rules). The respondent paid the outstanding half of the advance.
In the Order of Constitution the arbitral tribunal had set a deadline for the appellant to reply until 26 November 2002. The appellant asked for an extension of that deadline and stressed at the same time that its request for an extension did not imply the recognition of the jurisdiction of the arbitral tribunal. On 13 January 2003, the appellant filed a motion to limit the procedure on the question of jurisdiction for the time being. The appellant objected to the arbitral tribunal’s jurisdiction on the grounds that the tribunal was not constituted validly.… [T]he arbitral tribunal issued an interim decision and order in which it recognized to be constituted properly (“The Arbitral Tribunal is properly constituted”). The appellant [appealed to the Swiss Federal Tribunal, which rejected the appeal].
The appellant asserts that the arbitral tribunal had no jurisdiction due to lack of a valid arbitration agreement [citing Article 190(2)(b) of the Swiss Law on Private International Law (“SLPIL”)]. [The appellant argued that the arbitration was invalid because it referred to] three different rules of arbitration (ZCC Arbitration Rules, UNCITRAL Arbitration Rules and ICC Arbitration Rules), [and therefore] contained contradictory orders, which could not be interpreted in a compatible way. Consensus between the parties on the contents of the arbitration agreement was therefore not identifiable and the agreement therefore was invalid.
Article 178 of the SLPIL deals with the formal requirements of the arbitration clause and determines the law applicable to its substantive validity, especially as regards its conclusion, its scope and its expiry. The provision does not refer to the main characteristics and to the necessary content of an arbitration clause. In line with the traditional concept of private arbitration, this is to be understood as an agreement by which two or more identified or identifiable parties agree to subject one or more existing or certain future disputes in a binding way and under the exclusion of state court litigation to an arbitral tribunal in accordance with a directly or indirectly identified legal order. A general requirement of an arbitration agreement is also its clarity and certainty regarding the private jurisdiction, i.e., the arbitral tribunal that is appointed to make the decision, must be determined either clearly or at least be determinable. Provisions in arbitration agreements that are incomplete, unclear or contradictory are considered to be pathological clauses. If they do not contain mandatory elements of the arbitration agreement, namely the binding reference of the decision on the dispute to private arbitration, they do not necessarily lead to its invalidity. Instead, in these circumstances, a solution has to be found by interpretation or at most by amending the contract in accordance with general contract law; a solution that respects the basic intent of the parties, to be bound by an arbitration clause. If the parties intended the seat of the arbitration in Switzerland, they may regulate the constitution of the arbitral tribunal themselves [citing Article 179(1) of the SLPIL]. This order can be made individually ad hoc or through reference to institutional arbitration rules. If there is no such agreement, the judge at the arbitral seat can be requested to decide on this issue. He can determine in analogy of Swiss law the appointment, dismissal or replacement of arbitrators [citing Article 179(2) of the SLPIL].
The arbitration agreement is interpreted in the same manner and according to the same general principles as other declarations of intent. The determining factor is primarily the agreed actual subjective understanding of the parties regarding their declarations to one another. If such an actual intention of the parties can not be identified, the arbitration agreement has to be interpreted objectively, i.e. the presumed intention of the parties has to be determined based upon how the respective addressee of the statements would and could have understood the statements in good faith. If it is established as a result of this interpretation that the parties wanted their dispute to be excluded from state jurisdiction and that they wanted to bring their case to arbitration, but differences remain regarding the settlement of the process of the arbitration, the validation principle (“’Utilitdtsgedanke”) applies. This principle states that a contractual interpretation which justifies and gives effect to an arbitration clause must be found. Accordingly, an imprecise or faulty description of the arbitral tribunal does not mean that the arbitration agreement is invalid if it can be determined by interpretation, which arbitration tribunal the parties have designated. Similarly and based on Article 179(2) of the SLPIL the state judge in the place where the parties have chosen the arbitral seat has jurisdiction to appoint the arbitral tribunal if the parties have not selected the arbitrators or a means for doing so. This judicial appointment of the arbitral tribunal requires that the parties have determined the arbitral seat.
The arbitration agreement [in this case] is unambiguous and clear insofar as the parties have excluded any possible disputes arising out of their exclusive distributor agreement form the jurisdiction of any court and agreed upon a private arbitration instead. With the primary reference to the conciliation and arbitration rules of the Zurich Chamber of Commerce the parties have agreed upon an institutional arbitral tribunal based in Zurich. The fact that the arbitration agreement refers to arbitration under the ZCC Arbitration Rules “in accordance with the UNCITRAL Arbitration Rules” shall be interpreted based on the principles of good faith and validation (“Utilitdtsprinzip”), [which indicates that the parties intended] that the primary procedural law was to be complemented. This does not appear to be an incurable pathological clause. However the arbitration clause creates a possible conflict of competence regarding the appointment of the arbitral tribunal, insofar as it provides for a three person arbitral tribunal, appointed by the [ICC] in Paris and according to the ICC Rules, and insofar as these rules do not tolerate the primary applicable ZCC-Arbitration Rules.
According to Article 11(2) of the ZCC Arbitration Rules the President of the ZCC appoints the chairman of the tribunal, in principle from a list of the Board of the ZCC. The other two arbitrators shall be appointed by the parties, provided that they have agreed to this in writing; failing such agreement, the President of the arbitral tribunal shall appoint the two remaining arbitrators based on a list provided by the President of the ZCC (Article 12(1) and (3) of the ZCC Arbitration Rules). According to Article 8(4) of the ICC Rules, each party shall appoint one arbitrator who must be confirmed by the ICC Court. The third and presiding arbitrator shall be appointed by the ICC Court, unless the parties agreed upon a different designation process. In this case, the appointment by the parties requires a confirmation of Court (Article 9 of the ICC Rules).
The two sets of arbitral rules [ICC and ZCC] are in conflict because they both refer to an institutional arbitral tribunal, which is administered, selected and controlled by the applicable arbitral institution (ZCC, ICC). The two regimes are thus incompatible insofar as the arbitration can only belong to one of the two institutions. It therefore raises the question of whether this incompatibility leads to the invalidity of the arbitration clause. This is also a question of the interpretation of the contract. According to the theory of good faith reliance, the arbitration agreement has to be understood to mean that the parties wanted any dispute arising from their agreement to be decided by the ZCC arbitral tribunal. This follows from the selection in the first place of the ZCC Arbitration Rules and from Zurich being explicitly designated as the arbitral seat, and also from the fact that the ICC Rules are not generally selected, but only for the appointment of the arbitrator. The agreed procedures for the appointment of the arbitrators are, however, excluded by the choice of a non-ICC arbitration, because there is a lack of administration by the ICC in such circumstances. In that regard, a part of the arbitration agreement is impossible to perform. But, by virtue of the clear intention of the parties to settle their disputes by private arbitration, this partial impossibility does not lead to the complete ineffectiveness of the arbitration agreement or the lack of jurisdiction of the ZCC arbitral tribunal…. [H]aving regard to the purpose of the arbitration agreement, simply deleting the appointment provision in favor of the ZCC Arbitration Rules, which enjoy contractual priority, is entirely reasonable; this conclusion is supported by the statutory appointment provisions set forth in Article 179(2) of the SLPIL. Consequently, the claim of lack of jurisdiction of the arbitral tribunal for lack of a valid arbitration agreement as unfounded.
HOOGOVENS IJMUIDEN VERKOOPKANTOOR BV v. MV SEA CATTLEYA
852 F.Supp. 6 (S.D.N.Y. 1994)
WHITMAN KNAPP, Senior District Judge. This is an admiralty action relating to damage caused to steel coils during their carriage from the Netherlands to the United States. Defendant Van Ommeren Bulk Shipping BV (“Van Ommeren”), one of the parties which shipped the coil, moves pursuant to the [New York] Convention to stay proceedings against it pending arbitration in the Netherlands.… Van Ommeren asserts that according to the terms of the charter party which and plaintiff entered into on January 12, 1989, in Ijmuiden, Netherlands, for the purpose of shipping plaintiff’s steel coils to Bridgeport, Connecticut, plaintiff must arbitrate its cargo damage claim in the Netherlands. Clause 2 of that charter states: “General Average and arbitration to be settled in the Netherlands.” Van Ommeren interprets this clause to require the parties to submit all disputes arising in connection with the charter to arbitration in the Netherlands[, citing] Oriental Commercial & Shipping Co. v. Rosseel NV, 609 F.Supp. 75, 77 (S.D.N.Y. 1985).
In Rosseel, defendant moved to compel arbitration under the [New York] Convention, based on the clause in a sales contract, “Arbitration: If required in New York City.” Applying federal law to determine whether or not the parties to a foreign contract have agreed to arbitrate, the court ruled that the clause bound the parties to arbitration of all claims arising with respect to the contract. It reasoned that “[a]rbitration clauses must be interpreted broadly, and all doubts as to whether a dispute is encompassed by a particular clause must be resolved in favor of arbitration, even where the problem is the construction of the contract language itself.”
Plaintiff, on the other hand, asserts that the clause merely states the parties’ choice of situs for any arbitration relating to the charter, if the parties were to voluntarily decide to arbitrate claims, or if such arbitration were otherwise required. Alternatively, plaintiff suggests that the clause only requires the parties to arbitrate general average claims in the Netherlands, no such claims being asserted in this suit.
Regretfully, we must disagree with [the court’s] interpretation of a very similar clause in Rosseel.… The first inquiry in a case governed by the [New York] Convention is whether or not the parties have made “any agreement in writing arbitrate the subject in dispute.” Filanto, SpA v. ChilewichIntern. Corp., 789 F.Supp. 1229, 1236 (S.D.N.Y. 1992), quoting Ledee v. Ceramiche Ragno, 684 F.2d 184, 186-87 (1st Cir. 1982). Where no such agreement exists, the court has no jurisdiction under the Convention and its implementing legislation to stay a federal action or to compel arbitration. We find that clause 24 of the January 1989 charter party is no more than an agreement that, if arbitration were to be conducted whether voluntarily agreed upon or required by some other contractual clause, it would proceed in the Netherlands. Therefore, we have no authority under the [New York] Convention to stay proceedings against Van Ommeren pending arbitration.
JUDGMENT OF 1 FEBRUARY 1979
1980 Rev. arb. 97 (Paris Tribunal de grande instance)
On 28 January 1947, Techniques de l’lngenieur (T.I.) and Sofel concluded a contract drafted on headed paper of T.I. for the distribution of a book edited by T.I. that Sofel was to publish. Article 7 of the contract reads: “Jurisdiction selections: in case of disagreement [sic] the parties must refer the matter to the Federation francaise de la Publicite. In case of dispute, the Court of Seine will have exclusive jurisdiction.” A dispute arose between the parties and Sofel referred it, pursuant the arbitration clause of Article 7, to a Federal Commission of Mediation and Arbitration of the Federation Nationale de la Publicité. T.I. defaulted in the arbitration and the Arbitral Commission nominated an arbitrator on behalf of the defaulting party, pursuant to the Commission’s rules. T.I. was held liable for damages in an award of 8 March 1978….
T.I. argues that article 7 is ambiguous and contradictory because it seems either to give jurisdiction to the Seine Court while at the same time obliges the parties to refer the matter to an Arbitral Commission or to make an untenable distinction between disagreement and dispute. T.I. asserts that this clause is void…. Sofel, on the other side, considers the arbitration clause valid, although acknowledging its ambiguity. Relying on Article 1196 of the Civil Code, Sofel argues that one must go beyond the literal meaning of the words and seek the common intention of the contracting parties to establish the arbitrators’ jurisdiction. [The court held:]
Whereas arbitration is a possibility offered to contracting parties that expressly agree thereto, which excludes the otherwise applicable jurisdiction of state courts;
Whereas in this case the ambiguous arbitration clause should be interpreted in light of the fact that if the parties did not wish to resort to arbitration they would not have referred to the possibility of resorting to arbitrators; but, whereas by including an arbitration clause in their agreement, the parties manifested their intention to refer difficulties arising from the contract to the Fédération de la Publicité;
Whereas article 7 is captioned “Jurisdiction selections (plural),” which reveals the parties’ intent to refer their disputes to arbitration, and which also explains the conditional form of the last sentence of the clause, which means that if there were no resort to arbitrators, the Court of Seine would be the second instance that would hear an eventual dispute;
Whereas the company T.I. which drafted the contract on its headed paper cannot claim an ambiguity stemming from its own doing and cannot assert a different interpretation of the common intent of the parties; that consequently the arbitration clause being valid, the judgment of 8 March 1978 is lawful and the appeal of T.I is ill-founded….
WSG NIMBUS PTE LTD v. BOARD OF CONTROL FOR CRICKET IN SRILANKA
[2002] 3 SLR 603, 637 (Singapore High Ct.)
[excerpted above at pp. 321–25]
INT’L LAW COMMISSION MODEL RULES ON ARBITRAL PROCEDURE
Article 2
2(1). Unless there are earlier agreements which suffice for the purpose, for example in the understanding to arbitrate itself, the parties having recourse to arbitration shall conclude a compromis which shall specify, as a minimum: (a) The undertaking to arbitrate according to which the dispute is to be submitted to the arbitrators; (b) The subject-matter of the dispute and, if possible, the points on which the parties are or are not agreed; (c) The method of constituting the tribunal and the number of arbitrators.
2(2). In addition, the compromis shall include any other provisions deemed desirable by the parties, in particular: (i) The rules of law and the principles to be applied by the tribunal, and the right, if any, conferred on it to decide ex aequo et bono as though it had legislative functions in the matter; (ii) The power, if any, of the tribunal to make recommendations to the parties; (iii) Such power as may be conferred on the tribunal to make its own rules of procedure; (iv) The procedure to be followed by the tribunal; provided that, once constituted, the tribunal shall be free to override any provisions of the compromis which may prevent it from rendering its award; (v) The number of members required for the constitution of a quorum for the conduct of the hearings; (vi) The majority required for the award; (vii) The time limit within which the award shall be rendered; (viii) The right of the members of the tribunal to attach dissenting or individual opinions to the award, or any prohibition of such opinions; (ix) The languages to be employed in the course of the proceedings; (x) The manner in which the costs and disbursements shall be apportioned; (xi) The services which the International Court of Justice may be asked to render. This enumeration is not intended to be exhaustive.
NOTES
1. Diversity of arbitration agreements and “pathological” arbitration clauses. Consider the model arbitration clauses of the UNCITRAL, ICC, LCIA and other institutions, excerpted at pp. 297–99 of the Documentary Supplement. Compare these provisions with the arbitration agreements in the cases excerpted above. Agreements to arbitrate are, like other contracts, products of the parties’ negotiations and drafting, and thus differ widely, depending on the parties’ interests, needs, skill and foresight. Consider the court’s comments at the end of the Lucky-Goldstar opinion, expressing concern at the inability of parties to make use of model institutional rules and the frequency with which potentially “pathological” (i.e., invalid) arbitration provisions are encountered. Why does this occur? Note from the cases excerpted above that non-specialist drafters often attempt to create specially-tailored solutions for particular transactions.
Note also that arbitration clauses are, to a considerable extent, relatively formulaic; even if drafted by different parties, for different transactions, arbitration clauses almost always involve similar provisions and language. What are the provisions that recur in model (and other) international arbitration agreements? Recall the German Bundesgerichtshof’s observations in its 27February 1970 decision, supra pp. 194–98 about the formulaic character of agreements to arbitrate. What conclusions did the Court draw from this observation about the proper approach to interpreting arbitration agreements? Are those conclusions valid?
2. Minimum essential terms of agreement to arbitrate. What terms are required in order for a valid agreement to arbitrate to exist? Suppose that the parties to a contract agree “Disputes to be arbitrated.” Is that sufficient to constitute a binding arbitration agreement? What about the scope of the disputes to be arbitrated; the place of arbitration; the means of selecting the arbitrators; the applicable law? Are none of these terms necessary to form a binding arbitration agreement? Why not?
Consider the results in Judgment of 3 February 1990 and Hoogovens. Can you draft a more skeletal arbitration clause? Should these provisions be sufficient to form a binding arbitration agreement? For other examples of decisions upholding skeletal clauses, see CNA Reins. Co., Ltd v. Trustmark Ins. Co., 2001 WL 648948, at *6 (N.D. Ill.) (upholding phrase “Arbitration clause” in contract); Bauer Int’l Corp. v. Etablissements Soules & Cie., 303 N.Y.S.2d 884 (N.Y. 1969) (upholding: “Arbitration in New York”); Schulze & Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d 709, 715-16 (7th Cir. 1987) (upholding: “All disputes under this transaction shall be arbitrated in the usual manner”); Hobbs, Padgett & Co. (Reins.) Ltd v. JC Kirkland Ltd [1969] 2 Lloyd’s Rep. 547 (English Ct. App.) (upholding: “Suitable arbitration clause”); Judgment of 21 November 1983, X Y.B. Comm. Arb. 478 (1985) (Italian Corte di Cassazione) (upholding: “Arbitration. In London if necessary”).
Compare the results in Judgment of 3 February 1990 and Hoogovens. Which decision is wiser? What exactly is it that is required to form an arbitration agreement? Is it simply an exchange of promises to resolve disputes by “arbitration”?
Note that both the Judgment of 3 February 1990 and Hoogovens involved a specialized industry with substantial trade custom. How relevant is that to deciding whether or not the parties concluded a valid arbitration agreement?
3. “Blank clauses.” Consider the excerpt from Fouchard Gaillard Goldman on International Commercial Arbitration dealing with “blank clauses”—that is, agreements that do not specify either an arbitral seat or a means of selecting the arbitrators (either directly or through incorporation of institutional rules). Give an example of a “blank clause.” Why is it that a “blank clause” should arguably not be a valid agreement to arbitrate?
Suppose that a Swiss and a Russian party agree to a contract containing a “blank arbitration clause.” Is that clause incapable of being implemented? Where would the arbitration be seated? If the parties did not agree upon the identity (or identities) of the arbitrator(s), how would they be selected? Would not the courts of either Russia or Switzerland be capable of specifying the arbitral seat and appointing the arbitrators? What if both Swiss and Russian courts purported to fulfill these functions? Is the risk of inconsistent national court implementations of the arbitration clause sufficient to conclude that it is invalid? Why is it that “blank clauses” are invalid under French domestic arbitration law, but not under French international arbitration law? Does that make sense?
Is it appropriate to conclude that a clause providing only “Arbitration in New York,” is a valid agreement to arbitrate? What else is arguably required in order for the clause to be valid? How will arbitrators be selected? What procedures will govern the arbitration? Which law will be applied? Is the failure of the parties’ clause to address these issues sufficient grounds for concluding that it is not a binding agreement to arbitrate?
4. International Law Commission’s requirements for validity of inter-state arbitration agreements. Consider Article 2 of the ILC Model Rules on Arbitral Procedure. What are identified as the essential elements of an agreement to arbitrate between states by the ILC? Why are these elements so important? Should the same elements be required for an international commercial arbitration agreement?
5. Choice of law governing essential elements of international arbitration agreements. What law governs requirements for the essential elements of an international commercial arbitration agreement? Is it Article II of the New York Convention? Does Article II specify, expressly or impliedly, the essential elements of an arbitration agreement? Suppose State A required that an international arbitration agreement specify all of the arbitrators, the details of the arbitral procedure and the precise nature of the parties’ claims. Would that requirement comply with Article II of the Convention?
Consider the choice-of-law rules governing the validity of international arbitration agreements under the New York Convention. See supra pp. 308–10 & infra pp. 367, 407, 420. Do those rules apply to determination of the essential elements of an agreement to arbitrate?
6. Indefinite or internally-contradictory arbitration agreements. Suppose that an arbitration clause does address various aspects of the arbitral process, but does so in an ambiguous or indefinite manner. Does this affect the validity of the arbitration clause? Consider the following “pathological” arbitration clauses. What is wrong with each one? Is each such defect sufficient to invalidate the entire arbitration agreement, or only parts of it?
“All disputes arising in connection with the present agreement shall be submitted in the first instance to arbitration. The arbitrator shall be a well-known chamber of commerce (like the International Chamber of Commerce) designated by mutual agreement between buyer and seller.” W. Craig, W. Park & J. Paulsson, International Chamber of Commerce Arbitration ¶9.06 (3d ed. 2000).
“For all claims of disputes arising out of this agreement which could not be amicably settled between the parties, is competent the arbitrage for export trade at the Federal Chamber of Commerce in Beograd. In the case that the buyer is accused, the Chamber of Commerce in New York [which does not exist] is competent.” Astra Footwear Indus. v. Harwyn Int’l, Inc., 442 F.Supp. 907 (S.D.N.Y. 1978).
“All disputes arising in connection with the present agreement should be resolved by negotiation and friendly settlement. If this method of resolution should be impracticable, the disputed questions shall be decided in accordance with the Rules of Arbitration of the ICC in Paris. In the event the proceedings were not able to decide the question for any reason whatsoever, the judicial courts of the injured party shall decide the dispute on a legal basis.” W. Craig, W, Park & J. Paulsson, International Chamber of Commerce Arbitration ¶9.02 (3d ed. 2000).
“In case of dispute (contestation) the parties undertake to submit to arbitration but in case of litigation the Tribunal de la Seine shall have exclusive jurisdiction.” W. Craig, W, Park & J. Paulsson, International Chamber of Commerce Arbitration (9.02 (3d ed. 2000).
“All disputes arising in connection with the present contract (contract) shall be finally settled by arbitration. Arbitration to be held outside the United States of America shall be conducted in accordance with the Rules of Arbitration of the International Chamber of Commerce, unless by written agreement of the parties, they adopt the Rules of the American Arbitration Association. Arbitration to be held in the United States of America shall be conducted in accordance with the Rules of the American Arbitration Association, unless by written agreement of the parties, they adopt the rules of Arbitration of the International Chamber of Commerce.” Batson Yarn & Fabric Mach. Group, Inc. v. Saurer-Allma GmbH-Allgauer Maschinenbau, 311 F.Supp. 68 (D.S.C. 1970).
“If there will arise disputes or differences by fulfilling the present contract, the Parties will take measure to solve them in a friendly way. In case the parties do not come to an agreement to solve the existing differences, they are to be settled by the Court of Arbitration of Budapest, Hungary in accordance with the Rules of the International Chamber of Commerce.” Award in Court of Arbitration at the Hungarian Chamber of Commerce and Industry Case No. V-99130, excerpted in T. Varady, J. Barcelo & A. von Mehren, International Commercial Arbitration 92 (4th ed. 2009).
7. Agreement referring to nonexistent arbitral institution. Consider the issue in Lucky-Goldstar—where the parties’ agreement provided for arbitration pursuant to the rules of a nonexistent institution. Is the Hong Kong court’s analysis persuasive? Is it satisfactory to conclude that the parties were prepared to be bound by an ad hoc arbitration clause, when they provided for a (defective) form of institutional arbitration? Compare Nat’l Material Trading v. Tang Indus., Inc., 1997 WL 915000, at *6 (D.S.C.) (clause invalid where it provided “[a]ny disputes or differences that may arise out of or in connection with this contract shall be referred to the Court of Arbitration at the Chamber of Commerce and Industry of Switzerland and settled in conformity with the rules and procedures of said Commission”; there is no such institution as the “Court of Arbitration at the Chamber of Commerce and Industry of Switzerland”); Judgment of 24 January 1996, Harper Robinson v. Société Int’le de Maintenance et de Réalisation, 1997 Rev. arb. 82 (Grenoble Cour d’appel) (refusing to uphold clause providing for arbitration with nonexistent appointing authority).
8. Agreement referring to two arbitral seats or arbitral institutions. Following the adage that one can have too much of a good thing, some arbitration clauses specify not just one, but two (or more), arbitral seats or institutions. Consider the clauses in Judgment of 21 November 2003 and Lucky-Goldstar. Are such provisions invalid? Are the courts’ analyses persuasive? Recall the authority suggesting that “blank clauses” are invalid. If a blank clause, not specifying an arbitral seat, were invalid, would the same result apply to a clause that fails to specify a definite arbitral seat or institution, by instead specifying multiple seats and institutions?
Conversely, if a blank clause is valid in a particular legal system, then why should a clause specifying contradictory arbitral seats or institutions not also be valid? Consider Star Shipping AS v. China Nat ‘l Foreign Trade Transp. Corp. [1993] 2 Lloyd’s Rep. 445 (English Ct. App.) (upholding clause providing “any dispute arising under the charter is to be referred to arbitration in Beijing or London in the defendant’s option”); Warnes SA v. Harvic Int’l Ltd, 1993 WL 228028 (S.D.N.Y) (“an agreement on a nonexistent arbitration forum is the equivalent of an agreement to arbitrate which does not specify a forum; since the parties had the intent to arbitrate even in the absence of a properly designated forum”); Peters Fabrics, Inc. v. Jantzen, Inc., 582 F.Supp. 1287, 1291 (S.D.N.Y. 1984) (competing forms providing for AAA and GAC arbitrations, held to constitute agreement to arbitrate); Award of Arbitration Court Attached to Chamber for Foreign Trade, Berlin of 17 March 1982, VIII Y.B. Comm. Arb. 128, 131 (1983) (“The arbitrators interpret the clause as an optional one which allows the Plaintiff the choice of applying to any arbitration court of the three mentioned countries….”).
In Lea Tai, the parties had exchanged writings that purported to designate two different arbitral seats (and two different appointing institutions). How does that differ from a case where the parties agree to a single text, which contains multiple or inconsistent arbitral seats or mechanisms? Is there a way that the apparently conflicting provisions in Lea Tai could have been reconciled? Could the claimant have been left with its option of where to initiate an arbitration? Assuming the two provisions were in conflict, does that mean that the parties did not agree to arbitrate? On what basis could the parties have been held to have concluded a binding arbitration agreement in Lea Tai? Compare I.T.A.D. Assocs., Inc. v. Podar Bros., 636 F.2d 75 (4th Cir. 1981) (competing forms providing for arbitration in, respectively, New York and India, held to constitute agreement to arbitrate and trial court left to determine seat).
9. Agreements containing both arbitration clauses and forum selection clauses. Suppose that the parties’ contract contains both an arbitration clause and a choice of forum clause. Does this invalidate both provisions? Does it invalidate the arbitration clause?
Consider the decision in Judgment of 1 February 1979. Is it well-reasoned? Consider also Paul Smith Ltd v. H & S Int’l Holding Inc., [1991] 2 Lloyd’s Rep. 127 (QB) (English High Ct.) (upholding agreement where one clause provided that disputes “shall be adjudicated upon” under the ICC Rules, while another clause provided that the “Courts of England shall have exclusive jurisdiction”; reference to English courts held to be a designation of the courts with supervisory jurisdiction (to appoint and remove arbitrators and entertain actions to set aside awards)). Are these conclusions appropriate? Is there not an argument that the parties were simply confused in both these cases? If so, is confusion enough to form a valid arbitration agreement? What motivates the courts’ conclusions in such cases? Recall the observations in Note 1 above.
10. Arbitration agreements with defective specifications of arbitral institution or seat. Consider again the decisions in Lucky-Goldstar and Judgment of 21 November 2003, and Award in ICC Case No. 5294, excerpted above. Are these well-reasoned? If the parties agreed to a particular, specifically-negotiated arbitral process, should they be assumed to have also agreed to other arbitral processes when their chosen mechanism cannot be implemented? Consider the court’s analysis at the conclusion of the Lucky-Goldstar opinion. How does that compare with the Swiss Federal Tribunal’s analysis in Judgment of 21 November 2003? Is that analysis persuasive? See also infra pp. 652–53, 655–56, 663–69.
The tribunal’s willingness in ICC Case No. 5294 to minimize imperfections in the parties’ arbitration agreement is consistent with most awards on the issue. See Preliminary Award in Zurich Chamber of Commerce Case of 25 November 1994, XXII Y.B. Comm. Arb. 211 (1997) (“international trade arbitration organization in Zurich” held to mean arbitration under Zurich Chamber of Commerce International Arbitration Rules); Final Award in ICC Case No. 5294 of 22 February 1988, XIV Y.B. Comm. Arb. 137 (1989) (“rules of conciliation and arbitration of the International Chamber of Commerce, Zurich, Switzerland” held to mean ICC arbitration seated in Zurich); Award in ICC Case No. 5103, reprinted in S. Jarvin, Y. Derains & J. Arnaldez, Collection of ICC Arbitral Awards, 1986-1990, at 361 (1994) (reference to Paris Chamber of Commerce interpreted as reference to ICC).
11. Arbitration agreements referring to unavailable, deceased, or incompetent arbitrators. Arbitration clauses sometimes specify the identity of the arbitrator(s) in advance. This is often unwise, because the nature of future disputes may not be foreseen by the parties (rendering their choice of arbitrator(s) inappropriate) or the specified arbitrators may die or become unavailable or incompetent. In the latter case, what is the status of the parties’ arbitration agreement? Does the unavailability of the contemplated arbitrator render the arbitration agreement invalid, or does it call for selecting a new arbitrator? See Stinson v. Am. ‘s Home Place, Inc., 108 F.Supp.2d 1278, 1285 (M.D. Ala. 2000) (“Although the arbitrator specified in [the contract] is not now available to resolve their dispute, there is no indication that the choice of that particular arbitrator was central to the arbitration clause. In such cases §5 [of the FAA] dictates that the court choose another arbitrator and enforce the arbitration clause.”); Judgment of 16 April 1984, 1986 Rev. arb. 596 (Swiss Fed. Trib.) (Swiss courts uphold ICC’s appointment of arbitrator after Director General of World Health refuses to accept parties’ designation).
12. Arbitration agreements containing other defects. The creativity of parties in drafting arbitration agreements is almost unlimited, with all variety of errors finding their way into arbitration clauses. How forgiving should courts and arbitral tribunals be in deciding whether these errors invalidate the agreement to arbitrate? Consider the courts’ patience in Lucky-Goldstar and Judgment of 1 February 1979. See also Mangistaumunaigaz Oil v. United World Trade Inc. [1995] 1 Lloyd’s Rep. 617 (Comm) (English High Ct.) (phrase “if any” disregarded as surplusage in clause providing “arbitration, if any, by ICC Rules in London”). A New Zealand decision recently expressed this general approach in cogent terms, invoking the
“general principle that Courts should uphold arbitration, by striving to give effect to the intention of parties to submit disputes to arbitration, and not allow any inconsistencies or uncertainties in the wording or operation of the arbitration clause to thwart that intention.” Marnell Corrao Assocs. Inc. v. Sensation Yachts Ltd, [2000] 15 PRNZ 608, ¶61-62 (Auckland High Ct.).
Is this appropriate? Compare Branham v. CIGNA Healthcare of Ohio, 692 N.E.2d 137, 139-40 (Ohio 1998) (holding that arbitration agreement was ambiguous and invalid where the agreement provided that “any controversy between GROUP, a Subscriber or Dependent (whether a minor or adult) or the heirs-at-law or personal representatives (including any of their agents, employees, or providers), arising out of or in connection with this Agreement shall, upon written notice by one party to another, be submitted to arbitration”; clause was ambiguous because the preposition “between” lacked a second object and thus, it was unclear which disputes were covered); Jiampietro v. Utica Alloys, Inc., 576 N.Y.S.2d 733, 733 (N.Y. App. Div. 1991) (“The agreement to arbitrate is ambiguous and unenforceable because the ‘schedule’ containing the list of sanctions available upon a breach of the underlying agreement is inconsistent with an agreement to arbitrate.”).
13. Consequences of defective term in arbitration agreement. Suppose that one term of an arbitration clause is invalid, for example, because it selects a deceased arbitrator or a nonexistent appointing authority. Is the remainder of the arbitration agreement still valid? Consider:
“Where one term of an arbitration agreement has failed, the decision between substituting a new term for the failed provision and refusing to enforce the agreement altogether turns on the intent of the parties at the time the agreement was executed, as determined from the language of the contract and the surrounding circumstances…. to the extent the court can infer that the essential term of the provision is the agreement to arbitrate, that agreement will be enforced despite the failure of one of the terms of the bargain. If, on the other hand, it is clear that the failed term is not an ancillary logistical concern but rather is as important a consideration as the agreement to arbitrate itself, a court will not sever the failed term from the rest of the agreement and the entire arbitration provision will fail.” Zechman v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 742 F.Supp. 1359, 1364 (N.D. Ill. 1990).
Consider the similar approach at the conclusion of the Lucky-Goldstar opinion. Is that a sensible approach?
14. Reliance on foreign authorities. Note the court’s reliance in Lucky-Goldstar on U.S. authorities. Compare that approach discussed above in the Shin-Etsu decision. Does it make particular sense to consider foreign decisions in addressing the validity and interpretation of international arbitration agreements? Why?
15. Arbitration clauses with undefined scope. Suppose an arbitration clause provides “Disputes shall be arbitrated in Paris in accordance with the AAA Commercial Arbitration Rules.” Is the absence of any express delimitation of the scope of the arbitration agreement fatal to the validity of the arbitration clause? Recall the discussion above of the requirement, under the New York Convention, that the arbitration agreement involve a “defined legal relationship.” See also supra pp. 148–58.
Is it not possible, and commercially-sensible, to interpret the provision as encompassing disputes related to the parties’ contract? Recall the court’s analysis in Roose Indus., supra pp. 149–50. How did the court interpret a potentially unlimited agreement to arbitrate? See also Tritonia Shipping Inc. v. S. Nelson Forest Prods. Corp. [1966] 1 Lloyd’s Rep. 114 (English Ct. App.) (court rejects challenge to clause providing “Arbitration to be settled in London,” reasoning that it meant “any dispute under this charter party to be settled by arbitration in London”). On the other hand, is it not equally possible to interpret the provision as encompassing only contractual disputes arising directly under the terms of the parties’ contract (not non-contractual disputes)? Compare Lovisa Constr. Co. v. County of Suffolk, 485 N.Y.S.2d 309, 310 (N.Y. Sup. Ct. 1985) (scope of issues to be submitted to arbitration were ambiguous and rendered agreement to arbitrate unenforceable).
Consider Article 2(1)(b) of the ILC Model Rules. What is the rationale for this requirement?
16. “Optional” and “non-binding” agreements to arbitrate. Parties sometimes agree only to consider arbitration as an alternative or optional means of dispute resolution, but not to require mandatory submission of future disputes to arbitration. For example, parties could agree: “If both parties mutually agree, after a dispute under this contract arises, to resolve such dispute by arbitration, then the following procedures shall apply.” Would such a provision require either party to submit to arbitration of a dispute? Compare the foregoing hypothetical with the putative arbitration clauses in WSG Nimbus and Hoogovens. How are the provisions in those cases different from the hypothetical?
Consider the Singaporean court’s analysis in WSG Nimbus. Does it adopt a persuasive interpretation of the parties’ likely intentions? Note the court’s explanation that “While it is true that under clause 19, there is no compulsion to arbitrate until an election is made, once a party makes such election, arbitration is mandatory in respect of that dispute.” Does this make sense? What point would be served by a purely non-binding arbitration clause? See also Bonnot v. Congress of Indep. Unions Local #14, 331 F.2d 355, 359 (8th Cir. 1964) (“may” gives either party the option of requiring arbitration); Canadian Nat’l Railway Co. v. Lovat Tunnel Equip., (1999) 174 D.L.R.(4th) 385 (Ontario Ct. App.) (clause providing that “the parties may refer any dispute under this agreement to arbitration” is mandatory arbitration agreement).
Consider the court’s opinion in Hoogovens. Is the court’s analysis persuasive? Why should arbitration agreements be regarded as presumptively mandatory? Was the parties’ agreement in Hoogovens clearly non-mandatory? Compare the clause in Judgment of 3 February 1990.
2. Formation of International Arbitration Agreements
International arbitration agreements, like other categories of contracts, give rise to issues of contract formation (particularly issues of consent).10 In turn, these issues require consideration of rules of substantive contractual validity, as well as choice-of-law, separability and competence-competence principles. The materials excerpted below explore the issues raised in disputes over the formation of international arbitration agreements.
KULUKUNDIS SHIPPING CO., SA v. AMTORG TRADING CORP.
126 F.2d 978 (2d Cir. 1942)
[excerpted above at pp. 191–93]
REPUBLIC OF NICARAGUA v. STANDARD FRUIT CO.
937 F.2d 469 (9th Cir. 1991)
FERGUSON, Judge. The Republic of Nicaragua appeals from two orders of the district court which denied its motion to compel international arbitration of a contract dispute and granted summary judgment to Standard Fruit Company (“SFC”) and its two parent companies, Standard Fruit and Steamship Company (“Steamship”) and Castle & Cooke, Inc. (“C&C”), [referred to collectively as “Standard,”] on Nicaragua’s breach of contract claim. Nicaragua … argues [on appeal] that the questions of whether a document entitled “Memorandum of Intent” was a valid contract and whether SFC was bound by that contract should have been referred to arbitration in the first instance, not decided by the district court. Secondly, it contends that disputed issues of material fact exist on the question of whether the Memorandum of Intent was a binding contract for the purchase and sale of bananas, or merely an “agreement to agree” at some later date….
We hold that although it was the court’s responsibility to determine the threshold question of arbitrability, the district court improperly looked to the validity of the contract as a whole and erroneously determined that the parties had not agreed to arbitrate this dispute. Instead, it should have considered only the validity and scope of the arbitration clause itself. In addition, the district court ignored strong evidence in the record that both parties intended to be bound by the arbitration clause. As all doubts over the scope of an arbitration clause must be resolved in favor of arbitration, and in light of the strong federal policy favoring arbitration in international commercial disputes, Nicaragua’s motion to compel arbitration should have been granted. Whether the Memorandum was binding, whether it covered banana purchases, and whether SFC was bound by it are all questions properly left to the arbitrators….
Since 1970, defendant SFC has been involved in the production and purchase of bananas in western Nicaragua…. In 1979, the Sandinistas overthrew the Somoza government in Nicaragua, forming a new “Government of National Reconstruction,” led by a three-person junta. The Sandinistas wished to assume closer control over the banana industry, and eventually to transfer SFC’s shares in [certain banana plantation] partnerships to the Nicaraguan government.… [In due course,] Nicaragua promulgated “Decree No. 608,” which declared that the banana industry was to become a state monopoly, that all plantation leases would be transferred to a new government agency, and that all preexisting lease, partnership, and fruit purchase contracts were nullified. SFC interpreted this decree as an expropriation of its business, and immediately ceased all operations in Nicaragua…. Both sides were surprised and upset by the issuance of the decree and the almost immediate withdrawal of SFC, with the bananas still ripe on the trees and ready to pick. As a result, Nicaragua requested a “summit meeting” at which SFC and its two parent companies, Steamship and C&C, could sort out their differences … and come back to the country….
The meeting commenced in San Francisco on Friday, January 9, 1981, and continued for three days of intense negotiations, led by C&C Vice President and General Counsel Robert Moore (principal draftsman of the Memorandum) and Norton Tennille, Nicaragua’s legal counsel. On Sunday, January 11, a document entitled “Memorandum of Intent” was executed by two officers of C&C, two officers of Steamship, and two Ministers of Trade and a member of the ruling junta of Nicaragua. Sousane and other SFC representatives participated in the negotiations but did not sign the document.
The Memorandum, termed an “agreement in principle,” contained an arbitration provision, and envisioned the renegotiation and replacement of four operating contracts between SFC and “the competent Nicaraguan national entity.” These were to include a detailed fruit purchase contract, a technical assistance contract, the transfer of SFC’s shares in the production societies, and Nicaragua’s purchase of SFC’s assets in the country. The Memorandum also established the essential elements of the fruit purchase contract: a price term ($4.30 per box…), the length of the contract (five years …), and stated that it would cover all the first-quality bananas produced by the Nicaraguan growers….
Within a week after the Memorandum was signed, SFC returned to Nicaragua and resumed its operations there. In addition, it began negotiating with Nicaraguan officials regarding the technical assistance and fruit purchase contracts referred to in the Memorandum, as well as the share transfers and asset buy-outs. Many subsequent drafts of these four documents were exchanged, some similar to the Memorandum and some not, although none were ever finalized and executed. Throughout the negotiations and for the next 22 months, SFC complied with the terms of the Memorandum as though it were bound by it. For example, it began paying $4.30 per box of bananas…. During this period, C&C and SFC produced and disseminated a number of documents which referred to the Memorandum as “a contract,” a “commitment,” or “a final agreement,” several of which were signed and/or approved by Robert Moore. These included a C&C press release sent out the day after the Memorandum was signed, SEC reports, Annual Reports, letters, [etc.]. Although SFC, Steamship, C&C, and Nicaragua all acted as though the Memorandum was binding for almost two years, the implementing contracts were never finalized, and SFC left Nicaragua for good on October 25, 1982.
The arbitration clause [contained in the Memorandum] states that: “Any and all disputes arising under the arrangements contemplated hereunder … will be referred to mutually agreed mechanisms or procedures of international arbitration, such as the rules of the London Arbitration Association.” Nicaragua admits that this clause is less than crystal clear and in fact refers to an association which does not exist. However, it introduced a letter written by Robert Moore, principal draftsman of the Memorandum, to explain the inconsistency. The letter, written to Nicaragua’s representative only three weeks after the negotiations, described the “deep sense of urgency on both sides,” the “exceedingly tight time schedule,” and the “highly political nature of the agreement (from the Nicaraguan standpoint).” It explained that, during the negotiations themselves, neither side could remember the name of the arbitration body in London, and stated: “What resulted was an agreement for providing for arbitration but without finally fixing the forum or an automatic method of transmitting disputes.” Moore suggested “we would be better off agreeing in advance that Paragraph IV was to be read and interpreted to provide for arbitration by [a certain] agency,” and concluded “I am sure you will agree that it is best done in the infancy of the agreement and at a time that negotiations of the implementing agreements are being worked out” (Emphasis added.)11 Although this letter seems to suggest both that C&C intended the clause to be binding and that the parties intentionally left it vague because they could not remember the name of the London arbitration agency, the district court disregarded this evidence.
The district court applied a three-part test for arbitrability: “first, whether the parties entered into a contract; second, that the contract included an agreement to arbitrate disputes, and third, that the disputes covered by the arbitration agreement included those which are before the Court.” It then proceeded to find that the Memorandum as a whole was not a binding contract, that the arbitration provision was not a present agreement to submit to arbitration, but merely “a provision declaring the expectations of the parties that contracts to be negotiated later would include agreements to arbitrate.” … The court [also] determined that the phrase “all arrangements contemplated hereunder” in Paragraph IV referred only to the “implementing agreements” subsequently to be negotiated, executed, and performed in Nicaragua, and not to the Memorandum itself….
Section 2 [of the FAA] … embodies a clear federal policy of requiring arbitration unless the agreement to arbitrate is not part of a contract evidencing interstate commerce or is revocable “upon such grounds as exist at law or in equity for the revocation of any contract.” … [T]his “’liberal federal policy favoring arbitration agreements’ … is at bottom a policy guaranteeing the enforcement of private contractual arrangements.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 625 (1985) (quoting Moses H. Cone, 460 U.S. at 24). “Thus, as with any other contract, the parties’ intentions are generously construed as to issues of arbitrability.” Id.at 626. Therefore, the only issue properly before the district court was whether the parties had entered into a contract … committing both sides to arbitrate the issue of the contract’s validity….
Nicaragua’s primary claim [on appeal] is that the three-part test applied to determine whether the parties had in fact agreed to arbitrate violates Prima Paint, which expressly held that courts may not consider challenges to a contract’s validity or enforceability as defenses against arbitration.… In the instant case, the district court made a preliminary “Factual Conclusion” that the Memorandum “was not intended as a binding contract,” in direct opposition to the Prima Paint rule.12 … [This holding relied] chiefly on the trial testimony of Robert Moore, who drafted most of the Memorandum, and on what the court termed the “unambiguous” language of the document itself. However, as Nicaragua correctly points out, Moore’s testimony directly conflicts with contemporary documents in the record, which should have precluded any summary judgment. As a matter of law, the key language in Paragraph IV seems highly ambiguous, since it refers to “the arrangements contemplated hereunder,” and thus requires extensive inquiry into just what arrangements are being referred to….
[We repeat] Prima Paint’s clear directive that courts disregard surrounding contract language and “consider only issues relating to the making and performance of the agreement to arbitrate.” 388 U.S. at 404. The correct analysis is set forth in Sauer-Getriebe KG v. White Hydraulics, Inc., 715 F.2d 348, 350 (7th Cir. 1983):
“White argues that if there is no contract to buy and sell motors there is no agreement to arbitrate. The conclusion does not follow its premise. The agreement to arbitrate and the agreement to buy and sell motors are separate. Sauer’s promise to arbitrate was given in exchange for White’s promise to arbitrate and each promise was sufficient consideration for the other.” Ibid.
There, the Seventh Circuit ordered arbitration despite the facts that the district court had found the contract “vague and ambiguous,” and construed it against its drafter. See also Teledyne, Inc. v. Kone Corp., 892 F.2d 1404, 1410 (9th Cir. 1990). Thus, in the absence of any evidence that Paragraph IV of the Memorandum was intended as non-severable, we must strictly enforce any agreement to arbitrate, regardless of where it is found. Under Prima Paint and Teledyne, we hold that the district court erred in considering the contract as a whole to determine the threshold question of whether Nicaragua may enforce the arbitration agreement contained in Paragraph IV….
The next question is whether Paragraph IV in fact constitutes an agreement to arbitrate, and whether it encompasses the dispute at hand. The district court stated that the parties had not made any present agreement to submit all disputes under the Memorandum to arbitration, but merely agreed to include such clauses in future contracts.… It is unclear whether [this] statement[] [was] based on the language of the Memorandum itself, or on the evidence of the parties’ intent developed during the evidentiary hearing. In any case, since “the issue of arbitrability ‘is to be determined by the contract entered into by the parties,’ the task before this court remains one of contractual interpretation.” However, because of the presumption of arbitrability established by the Supreme Court, courts must be careful not to overreach and decide the merits of an arbitrable claim. Our role is strictly limited to determining arbitrability and enforcing agreements to arbitrate, leaving the merits of the claim and any defenses to the arbitrator. Here, the district court disregarded “the emphatic federal policy in favor of arbitral dispute resolution [which] applies with special force in the field of international commerce.” Mitsubishi Motors Corp., 473 U.S. at 631….
The district court also found that the clause’s “lack of specificity” mitigated against its enforcement. However, the clear weight of authority holds that the most minimal indication of the parties’ intent to arbitrate must be given full effect, especially in international disputes. See, e.g., Bauhinia Corp. v. China Nat’l Mach. and Equip. Co., 819 F.2d 247 (9th Cir. 1987) (arbitration ordered where contract contained two incomplete and contradictory arbitration clauses); Mediterranean Enter., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1462-63 (9th Cir. 1983) (broadly construing scope of Korean arbitration clause under the Act). Under this analysis, Paragraph IV here was not too vague to be given effect, especially when considered in light of Robert Moore’s letter explaining the ambiguity.… Nicaragua’s motion to compel arbitration is granted, and the case remanded to determine the appropriate arbitral agency.
JUDGMENT OF 30 MARCH 1993, NOKIA-MAILLEFER SA v. MAZZER
XXI Y.B. Comm. Arb. 681 (1996) (Vaud Tribunal Cantonal)
[On March 30, 1988, Nokia-Maillefer SA (“Nokia”), a Swiss company, sent one Mr. Mazzer, an Italian businessman, a confirmation of an order which he had placed. The confirmation referred to Nokia’s enclosed general conditions of sale, which contained a forum-selection clause choosing Swiss courts. On March 31, 1988, Leasindustria, an Italian financing company, replied to Nokia by sending a purchase order to which its general conditions of purchase were annexed. Article 10 of the general conditions included a forum selection clause providing for “jurisdiction of Milan courts.” Two months later, Nokia returned the purchase order, replacing the word “Milan” in Article 10 with “International Chamber of Commerce, Paris.” By a telex to Leasindustria, Mr. Mazzer accepted the modification. When a dispute arose, the Italian buyer commenced court proceedings before a Swiss court in the Canton of Vaud, where Nokia was headquartered. Nokia requested the Court to refer the dispute to arbitration.]
The dispute is whether Article 10 of the purchase order, as modified, is a valid arbitration clause. The autonomy of the arbitration clause as to the contract in which it is contained or to which it refers is unanimously recognized. Hence, to the exception of cases where a ground for nullity of the contract also affects the clause, the validity of the arbitration clause must be examined separately.
An arbitration clause can only be validly concluded where there is a common intention of the parties to refer a possible dispute to arbitration. The existence of such an agreement must be ascertained according to the general principles of the Code of Obligations, in particular Art. 2 CO.13 Considering the important consequences of an arbitration agreement, the court shall beware of finding too easily that such an agreement has been concluded.
In the present case, the … question of the authority having jurisdiction to decide on a possible dispute has been dealt with in different stages in two different documents, one of which has been modified by one party. In the annex to the confirmation of order … which it sent on 30 March 1988 to [Mr.] Mazzer, Nokia enclosed the general conditions of sale which, at no. 17.1, provided that the forum be at the seat of the supplier. Subsequently, the general conditions of purchase annexed to the purchase order sent on 31 March 1988 by Leasindustria initially provided that the parties agreed to accept the jurisdiction of the Milan courts over all possible disputes. Lastly, Milan was replaced by “International Chamber of Commerce, Paris.” Thus, the question of the authority having jurisdiction to decide on a possible dispute has not been provided for straightaway in a clear and indisputable manner.
In this evolutionary and uncertain context, there is no common intent on arbitration unless the “final” arbitration clause, that is, Article 10 as modified, has a manifest and certain meaning. It is at least necessary that a common intent of the parties can be deduced from their expressions. Considering the clause, it is not possible to ascertain the common intent of the parties, in particular as to the arbitration agreement. Initially, the clause at issue provides under “forum” for the jurisdiction of the (State) courts of Milan. Only the term “Milan” has been replaced by “International Chamber of Commerce, Paris,” with no mention of the fact that the jurisdiction of the courts is excluded and replaced by private arbitration.
The jurisdiction of the [ICC] in Paris cannot be deemed to be tantamount to the appointment of an arbitrator, as the word arbitrator or arbitration does not appear and the [ICC] itself does not act as arbitrator. Only physical persons may be arbitrators, to the exclusion of legal entities or collectivites; in particular, a Chamber of Commerce cannot be appointed as arbitrator. Appellant must bear the consequences of the ambiguity and obscurity of the alleged clause, which it modified with the intention of transforming a prorogatio fori into an arbitration clause functioning also as arbitration agreement. Appellee’s agreement as to the modifications does not clear away the uncertainty as to the meaning of the clause and, consequently, of the agreement. In a context in which it should not be held too easily that an agreement has been concluded, we cannot accept an unclear clause as proof of an agreement having an uncertain subject matter. Hence, we must hold that the parties did not conclude a valid arbitration agreement….
BUCKEYE CHECK CASHING, INC. v. CARDEGNA
546 U.S. 440 (2006)
[excerpted above at pp. 201–05]
INTERIM AWARD IN ICC CASE NO. 6149
XX Y.B. Comm. Arb. 41 (1995)
[excerpted above at pp. 290–92]
FIRST OPTIONS OF CHICAGO v. KAPLAN
514 U.S. 938 (1995)
[excerpted above at pp. 230–33]
BG GROUP PLC v. REPUBLIC OF ARGENTINA
134 S.Ct. 1198 (2014)
[excerpted above at pp. 233–47]
NOTES
1. Applicability of separability presumption in disputes over formation of underlying contract. As discussed above, most arbitration regimes recognize the separability presumption. See supra pp. 190–218. Under the separability presumption, an arbitration clause is viewed as presumptively separable from the parties’ underlying contract. As a consequence, defects in the formation of the underlying contract do not necessarily affect the formation of the arbitration clause. See supra pp. 215–17. Suppose one party denies ever having negotiated, agreed, or signed any contract (containing a putative arbitration clause) with another party. If those claims were true, how could the parties have concluded a valid arbitration clause? Is there some manner in which the “separable” agreement to arbitrate could be formed, even if the underlying contract was not?
(a) Authorities holding that arbitration clause may not validly be formed if underlying contract is not. Some authorities (particularly early ones) hold that non-formation of the underlying contract necessarily entails non-formation of the arbitration clause. Consider the analysis in Kulukundis. Note the remark that it would be “insane” to think that an arbitration agreement was concluded if the underlying charter was not. See also Pollux Marine Agencies v. Louis Dreyfus Corp., 455 F.Supp. 211, 219 (S.D.N.Y. 1978) (“something can be severed only from something else that exists. How can the Court ‘sever’ an arbitration clause from a non-existent charter party?”); Svernlöv, WhatIsn’t, Ain’t, 25 J. World Trade 37, 38 (1991) (“Where it is alleged that no agreement has been entered into, the application of the separability doctrine is more doubtful. If the principal agreement was never entered into, the arbitration agreement contained therein must be affected by the invalidity as well.”). Are these views persuasive? What response would the authors of JOC Oil and Standard Fruit give to the foregoing analyses?
(b) Authorities holding that arbitration clause has been validly formed although underlying contract has not. Despite the authorities cited in the preceding note, valid arbitration agreements have been found in a number of cases where no underlying contract had been concluded. See, e.g., Sphere Drake Ins. Ltd v. All Am. Ins. Co., 256 F.3d 587, 591-92 (7th Cir. 2001) (“if they have agreed on nothing else, they have agreed to arbitrate”); Colfax Envelope Corp. v. Local No. 458-3M, etc., 20 F.3d 750, 754-55 (7th Cir. 1994) (despite no meeting of minds on underlying contract “there was a meeting of the minds on the mode of arbitrating disputes between the parties” and “the parties had agreed to arbitrate their claims”); Judgment of 27 September 1985, O.P.A.T.I. v. Larsen, Inc., Case No. L 8169 (Paris Cour d’appel), described in M. de Boisseson, Le droit franqais de l’arbitrage interne et internationale 825 (2d ed. 1990) and E. Gaillard & J. Savage (eds.), Fouchard Gaillard Goldman on International Commercial Arbitration 933 (1999) (valid arbitration agreement where some provisions were noted “draft,” but not arbitration provision).
2. Rationales for concluding that parties formed valid arbitration agreement even if they did not validly conclude underlying contract. As already noted, the separability presumption provides that the parties may form a valid, separable agreement to arbitrate, even if they do not conclude a valid underlying contract. See supra pp. 215–17. The separability presumption has a number of consequences for formation of arbitration agreements.
(a) Intentions relevant to formation of arbitration agreement. One consequence of the separability presumption concerns the intentions that are relevant to formation of the arbitration agreement. Specifically, the relevant issue for contract formation purposes is whether the parties intended to form an agreement to arbitrate; these intentions are not necessarily identical to the parties’ intentions to form their underlying contract. Are there circumstances in which one might conclude that the parties intended to form an arbitration agreement, but did not intend to form the underlying contract? Or vice versa? Consider the facts in Standard Fruit and JOC Oil. Compare the facts in Kulukundis. How likely is it that parties would want to conclude an arbitration agreement, without concluding any underlying commercial contract?
Suppose Party A sends Party B a draft contract, containing an arbitration clause. Party B responds, without signing the draft, saying “No deal—your terms are not acceptable.” Is there any reason to think that the parties formed an agreement to arbitrate? Are Party B’s intentions, as to both the underlying contract and the arbitration clause, not clear? How does one determine what Party B’s intentions with regard to the arbitration agreement were?
Suppose that a party’s claim that no underlying contract exists rests on an alleged failure to agree on certain essential terms (such as price) or on an alleged intention of the parties that any agreement be consummated in a later formal contract. In these cases, might one conclude that an agreement to arbitrate was reached, even though other related agreements were not? Can it be that, in some cases, an agreement to arbitrate crystallizes out of precontractual negotiations before the overall agreement is consummated? Consider, in this regard, the facts of the Standard Fruit and Nokia cases. How would the Swiss court have decided Standard Fruit? How would the U.S. court have decided Nokia?
How do the issues regarding formation of arbitration agreements presented in Standard Fruit and Nokia differ? Did Nokia concern the validity of the underlying contract? Was there any question about the underlying contract’s validity in Nokia?
(b) Different national laws applicable to formation of arbitration agreement and underlying contract. As discussed above, it is not uncommon for different laws to be applied to the arbitration agreement and the underlying contract. See supra pp. 90–93, 287, 300–01. Would it not, therefore, be possible for the underlying contract to have not been properly formed (under one national law), but the arbitration agreement to have been properly formed (under identical facts, but a different national law)?
Recall Article 178 of the SLPIL and the validation principle, supra pp. 306–07. Also recall the possible application of uniform international substantive rules to the formation of arbitration agreements under Article II of the New York Convention, which might differ from the national law rules governing formation of an underlying contract. See supra pp. 307–12.
(c) Different substantive rules of contract formation applicable to arbitration agreement and underlying contract. It is also possible that different rules of contract formation would apply to the underlying contract and the arbitration agreement. This can be true even if the same national law applies to both issues. Consider JOC Oil, which concluded that different rules of contract law applied to the formation and validity of the arbitration agreement and underlying contract.
(d) Different standards of proof for formation of arbitration agreement and underlying contract. Suppose different standards of proof applied to the formation of arbitration agreements as compared to other agreements. Would there be any basis for requiring different standards of proof? For example, might the pro-enforcement policies of the New York Convention and modern arbitration legislation permit a conclusion that an arbitration agreement had been validly formed even if an underlying contract had not? Is it possible that in signifying their assent to international arbitration provisions, parties evince a particular desire that their “agreement” be recognized, without legal technicalities of national laws? Why? Is this (partially) an explanation for the result in Standard Fruit?
3. Standards of proof for establishing existence of arbitration agreement. What standard of proof should apply to the formation of international arbitration agreements? Suppose, for example, that one party adduces some evidence that an arbitration agreement was formed, which its counterparty partially rebuts. Should the same degree of clarity and certainty be required for arbitration agreements as for underlying substantive contracts? See supra pp. 361–63.
(a) Heightened standard of proof. Consider the analysis in Nokia. Does the Swiss court in effect adopt a heightened standard of proof for arbitration agreements, as compared to other types of contracts? See Final Award in ICC Case No. 7453, XXII Y.B. Comm. Arb. 107 (1997) (“consent of each party must be unambiguously demonstrable”); Schubtex, Inc. v. Allen Snyder, Inc., 424 N.Y.S.2d 133 (N.Y. 1979) (“a litigant ought not to be forced into arbitration and, thus, denied the procedural and substantive rights otherwise available in a judicial forum, absent evidence of an express intention to be so bound”); Judgment of 10 March 2000, XXVI Y.B. Comm. Arb. 816 (2001) (Italian Corte di Cassazione) (requiring “unambiguous intention of both parties to refer disputes … to foreign arbitrators” and “parties must sign the arbitral clause and … their unequivocal intention to refer the dispute to arbitrators must appear unambiguously”) (emphasis added).
What is the rationale for requiring a heightened standard of proof or certainty for arbitration agreements? Recall Article 6 of the European Convention on Human Rights, excerpted above at pp. 270–71. Note the importance attached to access to judicial remedies. Consider how this is relied upon in Nokia. Is it persuasive to argue that parties should be held to have given up their (important) rights of access to judicial protections only where they have clearly agreed to do so?
For a Swiss decision, more explicitly relying on the concept of constitutional access to public courts than Nokia, consider:
“Constitutional law (in Switzerland, Article 30(1) of the Federal Constitution applies) as well as treaty law (see Article 6(1) of the European Convention on Human Rights) afford each natural person and legal entity the right to be heard before a court established on the basis of statutory law. By submitting to arbitration a party waives such right. Since this constitutes a deviation of a constitutional right one must not conclude readily that the parties concluded an arbitration agreement if that issue is disputed. Rather, one has to make sure whether an arbitration agreement exists that binds the parties. Only where these prerequisites are satisfied, the parties can be required to bear the consequences of their choice (in particular the constraints on their rights to appeal).” Judgment of 16 October 2001, 2002 Rev. arb. 753, 756 (Swiss Fed. Trib.).
See also Judgment of 20 January 2006, Case No. LJN:AU4523 (Dutch Hoge Raad) (relying on Article 6 of ECHR to conclude that an arbitration agreement must be clear and unequivocal); Kloss v. Jones, 54 P.3d 1 (Mont. 2002), partial rehearing, 57 P.3d 41 (Mont. 2002) (relying on Montana state constitution to invalidate a domestic arbitration agreement, reasoning that arbitration “is at one and the same time an ‘open attack’ on the right of jury trial and a ‘secret machination’ causing forfeiture” of “sacred” and “inviolable” rights to judicial access protected by Montana Constitution).
Is this rationale of safeguarding access to courts persuasive in commercial matters? Are companies not sophisticated parties who require no protection in matters of forum selection? Is the rationale of safeguarding access to courts persuasive in international cases? In international cases, are there not by definition two sets of courts—whose access to which is to be safeguarded? In terms of ensuring a neutral dispute resolution forum, with equal access to justice, is arbitration less or more desirable than one party’s home courts?
(b) Reduced standard of proof. Alternatively, one might reason that the pro-arbitration policies of the Convention and national law warrant a lower standard of proof of formation of arbitration agreements, as compared to other contracts. The result in Standard Fruit is arguably representative of this view. Compare the Standard Fruit analysis (and result) to that in Nokia. Which is wiser?
(c) Neutral standard of proof. A third approach is to reject either an “anti-arbitration” or a “pro-arbitration” standard of proof for establishing the existence of an international arbitration agreement. Many authorities effectively adopt this approach by not considering issues concerning the standard of proof or by simply applying generally-applicable rules regarding contract formation. As one U.S. court declared: “[T]he purpose of the FAA was to make arbitration agreements as enforceable as other contracts, not more so” In re Kellogg Brown & Root Inc., 166 S.W.3d 732 (Tex. 2005) (quoting Bridas SAPIC v. Gov t of Turkmenistan, 345 F.3d 347, 354 n.4 (5th Cir. 2003)) (emphasis added). Some commentators endorse this approach, saying it is “inappropriate to resort to a general principle of interpretation in favorem validitatis or in favorem jurisdictionis,” because “there is no place here for the logic of principle and exception” and “it remains perfectly legitimate to choose to have one’s international disputes settled by the courts.” E. Gaillard & J. Savage (eds.), Fouchard Gaillard Goldman on International Commercial Arbitration ¶481 (1999). Is this analysis persuasive? Why not?
(d) Doubtful relevance of pro-arbitration approach to interpretation of arbitration agreements to disputes over formation of arbitration agreement. In Standard Fruit, there was a separate challenge to the existence of any agreement to arbitrate. The court appears to have decided the claim itself, but by applying the FAA’s presumption that all doubts as to interpretation of the scope of an arbitration agreement are to be resolved in favor of arbitration. See infra pp. 527–29. Is this analysis persuasive? Compare the analysis in First Options, which distinguished between the presumptions applicable to interpretation of an existent arbitration agreement and those applicable to the formation of an arbitration agreement. See supra pp. 230–33. See also Heinhuis v. Venture Assocs. Inc., 1991 U.S. Dist. LEXIS 8190, at *8-9 (E.D. La.) (refusing to apply presumption of arbitrability to question “whether the arbitration clause is part of the parties’ contractual agreement at all”); DeMarco Cal. Fabrics, Inc. v. Nygard Int’l, Ltd, 1990 U.S. Dist. LEXIS 3842, at *9 (S.D.N.Y) (“federal policy favoring arbitration is most applicable in determining the scope of arbitration agreements, rather than whether an arbitration agreement actually exists”); Astor Chocolate Corp. v. Mikroverk Ltd, 704 F.Supp. 30, 33 n.4 (E.D.N.Y. 1989) (pro-arbitration “policy argument would seem inapplicable” to dispute concerning “existence of the arbitration clause”).
Is it appropriate to apply a presumption that arbitration agreements will be interpreted broadly to the question whether an arbitration agreement actually exists? Would doing so mean that if there is any doubt concerning, for example, a claim that one party forged the other party’s signature on a submission agreement, arbitration must be compelled? If so, is that appropriate?
4. Standard of proof for establishing existence of arbitration agreement under FAA. What must be demonstrated under the FAA to establish the existence of an arbitration agreement? If there is a dispute over the formation or existence of an arbitration agreement, what presumptions (or default rules) should apply? That is, if it is unclear whether the parties have agreed to arbitrate, should doubts be resolved in favor of, or against, arbitration? Should the same standards of proof apply as those used for underlying commercial contracts?
(a) Generally-applicable state contract law. First Options indicates that the formation of arbitration agreements under the domestic FAA is governed by generally applicable contract law rules. See supra pp. 56–57, 232 & infra p. 366. These rules, almost by definition, would apply the same standards of proof to the formation of arbitration agreements as to the formation of other contracts. See, e.g., Kresock v. Bankers Trust Co., 21 F.3d 176, 178 (7th Cir. 1994) (“An agreement to arbitrate is treated like any other contract”); Singer v. Smith Barney Shearson, 926 F.Supp. 183, 187 (S.D. Fla. 1996) (“arbitration agreements are no more than contracts to which the usual rules of contract interpretation apply”).
(b) State law presumptions requiring clear evidence of existence of arbitration agreement. In some U.S. states, local law purportedly imposes unusually rigorous standards of proof with respect to arbitration agreements. That is, no agreement to arbitrate will be found in the absence of clear evidence of such an agreement. See, e.g., Computer Assocs. Int’l Inc. v. Com-Tech Assocs., 658 N.Y.S.2d 322, 381 (N.Y. App. Div. 1997) (A party who agrees to arbitration “waives in large part many of his normal rights under the procedural and substantive law of the State, and it would be unfair to infer such a significant waiver on the basis of anything less than a clear indication of intent”); Massey v. Galvan, 822 S.W.2d 309, 316 (Tex. App. 1992) (“No party is under a duty to arbitrate unless by clear language he has previously agreed to do so; and it must clearly appear that the intention of the parties was to submit their dispute to an arbitration panel and to be bound by the panel’s decision”); Matter of Doughboy Indus., 233 N.Y.S.2d 488, 492 (N.Y. App. Div. 1962) (“threshold for clarity of agreement to arbitrate is greater than with respect to other contractual terms”).
(c) Preemptive effect of domestic FAA on state law requirements of heightened evidence of arbitration agreement. Does the domestic FAA permit state (or foreign) law rules which require clear evidence of arbitration agreements? Recall the domestic FAA’s requirement that arbitration agreements be subjected to the same generally-applicable rules that apply to other agreements. See supra pp. 56–57, 232, 365. Does this preempt the application of state law presumptions which require heightened proof of an agreement to arbitrate as compared to other contracts? Lower courts have (correctly) held that the domestic FAA preempts such state law rules. See, e.g., PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1198 (2d Cir. 1996) (“[FAA] creates a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act”); Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nacional de Venezuela, 991 F.2d 42, 46, 48 (2d Cir. 1993).
(d) “Pro-arbitration” standard of proof of formation of arbitration agreement arguably applicable under domestic FAA. It could also be that the domestic FAA requires, as a matter of federal law, a lower standard of proof for the existence of an arbitration agreement than for other types of contracts. First Options makes no reference to any such rule (and likely suggests the contrary, by its reliance on state law rules of contract formation). Nonetheless, would the domestic FAA’s “pro-arbitration” policies not be advanced by a rule allowing arbitration agreements to be established more easily than other contracts? Is this consistent with the text of §2 of the FAA?
Lower U.S. federal courts have not clearly analyzed the question of what presumptions (if any) should apply to the existence of an agreement to arbitrate. Authority (usually unreasoned) can be found for both the view that arbitration agreements must be established by clear evidence and for the view that doubts will be resolved in favor of the existence of an arbitration agreement. Compare Kresock, 21 F.3d at 178 (“An agreement to arbitrate is treated like any other contract”) with Ins. Co. of North Am. v. ABB Power Generation, Inc. , 925 F.Supp. 1053, 1058 (S.D.N.Y. 1996) (“courts resolve ambiguities against finding the existence of an agreement to arbitrate”) and with Standard Fruit, 937 F.2d 469, 478 (9th Cir. 1991) (“the most minimal indication of the parties’ intent to arbitrate must be given full effect”).
(e) “Pro-arbitration” standard of proof arguably applicable to international arbitration agreements under second chapter of FAA. As we have seen, the formation of international arbitration agreements under the New York Convention and the second chapter of the FAA is ordinarily held to be governed by federal common law rules, formulated specifically for arbitration agreements. See supra pp. 56–57, 310–11. Do these federal common law rules impose less demanding rules of contract formation or a lower standard of proof for arbitration agreements than for other contracts? What rationale would support such a result?
Consider the U.S. authorities declaring that particularly weighty “pro-arbitration” policies are applicable under the New York Convention and the second chapter of the FAA. See supra pp. 189, 312. Don’t these policies argue for federal common law rules of contract formation that facilitate the entry into international arbitration agreements? Is Standard Fruit an example of such a rule? Does such a rule of “easy” formation of international arbitration agreements make the result (if not the stated rationale) of Standard Fruit more understandable?
(f) “Clear and unmistakable evidence” of agreement to arbitrate not required under domestic FAA. First Options arguably imposes a requirement that the existence of domestic arbitration agreements be established through “clear and unmistakable” evidence. Put differently, is First Options’ “clear and unmistakable” evidence test applicable only to agreements to arbitrate “questions of arbitrability” or does it extend to the existence of any arbitration agreement (including agreements to arbitrate substantive issues)?
Do you agree that the opinion will probably be interpreted as meaning: (a) the existence of any arbitration agreement is to be determined without resort to any presumptions, simply applying state-law (or otherwise applicable) contract rules; (b) the existence of an agreement to arbitrate disputes about the formation or validity of arbitration agreements (“arbitrability questions”) is determined in light of a requirement for “clear and unmistakable” evidence of such an agreement; (c) the scope of an existent arbitration agreement, as applied to substantive disputes, is determined in light of a “pro-arbitration” presumption; and (d) the scope of an existent arbitration agreement, as applied to disputes about jurisdiction or arbi-trability, may or may not be determined in light of a requirement for “clear and unmistakable” evidence? Why or why not?
If the foregoing analysis of First Options were applicable to international arbitration agreements, then how should Standard Fruit have been resolved? Was there sufficient evidence that a binding arbitration agreement applicable to the merits of the parties’ dispute existed to satisfy generally-applicable rules of contract law? Was there “clear and unmistakable” evidence of an agreement to arbitrate disputes over formation of the arbitration agreement?
5. Law applicable to formation of arbitration agreement. What substantive law applies to the formation of an international arbitration agreement? Consider what substantive law was applied to this issue in JOC Oil, Standard Fruit, Nokia, and ICC Case No. 6149.
Is there any reason that the law applicable to formation of the arbitration agreement would not be the same law that governs its validity? Suppose the putative arbitration agreement contains a choice-of-law provision providing that the agreement to arbitrate is governed by the law of State A. Under Article V(1)(a) of the Convention, is the parties’ choice of law entitled to effect? What about the fact that one party denies having concluded the agreement to arbitrate—given that, how can there be a valid choice of law?
6. Formation of arbitration agreements by conduct. Most legal systems recognize that a party’s assent to contractual terms may be established by its conduct or oral statements. For example, a party’s performance of its putative contractual obligations is often regarded as a basis for finding assent to a disputed contract. Similarly, a party’s conduct is sometimes argued to establish the existence of a valid arbitration agreement. (As discussed below, arbitration agreements are often subject to separate form requirements, infra pp. 375–92, which may render an agreement formed by conduct invalid.)
In particular, numerous authorities have relied on a party’s commencement of arbitral proceedings, or its participation without protest in such proceedings, as evidence of a valid arbitration agreement. Consider Article 16(2) of the UNCITRAL Model Law. See Thomson-CSF, SA v. Am. Arbitration Ass’n, 64 F.3d 773, 777 (2d Cir. 1995) (“party may be bound by an arbitration clause if its subsequent conduct indicates that it is assuming the obligation to arbitrate”); Manes Org., Inc. v. Standard Dyeing & Finishing Co., 472 F.Supp. 687, 691 (S.D.N.Y. 1979) (“Manes contends that there is no enforceable agreement between the parties for arbitration. However, Manes is estopped to deny the parties for arbitration, when it is served its own Demand for Arbitration upon Standard in May, 1978, it relied on the very arbitration provision it now argues is invalid.”); Furness Withy Pty Ltd v. Metal Distrib. Ltd, [1990] 1 Lloyd’s Rep. 236, 243 (English Ct. App.) (“There are enough hazards in the process of obtaining and enforcing an arbitral award without the additional prospect that the respondent, having taken part all along, without a murmur of protest, may at the end argue that there never was an arbitration agreement in the first place. Nor would I wish him to be allowed to do so half way through when time has elapsed and money has been spent on pleadings, discovery and such like. The rule ought to be that if a person wishes to preserve his rights by taking part in an arbitration under protest, he must make his objection clear at the start, or at least at a very early stage. Otherwise, he ought to be bound.”).
7. The Standard Fruit decision. Is it sensible to conclude, as the Standard Fruit court does, that the parties’ arbitration agreement is binding even if the underlying Memorandum of Intent is not? Suppose that Standard Fruit argued that the Memorandum of Intent was a forgery—that it had never discussed, much less signed, any such document. Would this really be irrelevant to Nicaragua’s motion to compel arbitration? See supra pp. 361–63. If the Memorandum is not a binding contract, then how can the arbitration provision contained in it be binding?
The standard answer, of course, is that the arbitration agreement is separable, and therefore that it is supported by separate consideration (the exchange of promises to arbitrate), proved by separate evidence as to its existence, and subject to different rules of formation. See supra pp. 215–17, 361–63. Is that answer persuasive in cases involving claims that no underlying contract was formed? If the very existence of any contract is challenged, is that not necessarily relevant to the existence of an agreement to arbitrate? In concrete terms, if Standard Fruit and Nicaragua had no intention to be bound by the Memorandum of Intent, would they have intended to be bound by the Memorandum’s arbitration clause? Does the Standard Fruit court address this difficulty?
Are the answers to the foregoing questions affected by the basis for the claim that no underlying contract exists? Compare a case where the parties have detailed negotiations and the issue is whether consent has been given to a binding contract with a case where one party denies any dealings at all with the other or claims that its signature was forged.
Even assuming that the binding character of the Memorandum is irrelevant to the existence of an arbitration agreement, Standard Fruit also specifically challenged the existence of the arbitration “agreement” itself. In particular, it argued that the arbitration clause was only a statement of intention to attempt to agree on an arbitration mechanism in the future. Did the Standard Fruit court offer any response to this argument? Consider the text of the clause. Note the parties’ subsequent statements regarding the clause.
What are the limits of the Standard Fruit rationale? Suppose the Memorandum of Intent had not been signed, but Nicaragua argued it had been orally agreed to. Suppose the arbitration clause was contained in a draft prepared by Nicaragua, but not included in the unsigned Memorandum of Intent. Suppose Standard Fruit said it never attended the “summit” meeting.
8. The Nokia decision. Was the Nokia case correctly decided? What was the alleged defect in the provision to which the parties agreed (providing “jurisdiction of the International Chamber of Commerce, Paris”)? What, other than an agreement to arbitrate, could this provision have been? Did the court attempt to give the provision any meaning? How does the issue presented in Nokia differ from cases, discussed above, where the parties’ forms contained different arbitration clauses (e.g., different seats, institutional rules, etc.)? See supra pp. 350–53.
Was there some other problem with the putative arbitration clause? Who agreed to it? Is there any suggestion that this vitiated the underlying contract?
9. Exchanges of contractual documentation containing differing terms relating to arbitration. As Lea Tai and Nokia illustrate, national courts have considered challenges to the existence of an arbitration agreement in a number of cases arising from the exchange of contractual documentation with differing dispute resolution terms. Such difficulties have been most common when merchants have exchanged differing sales and purchase forms, leading to what is sometimes referred to as the “battle of the forms.”
(a) Formation of arbitration agreement under U.C.C. §2-207. Under §2-207(1) of the U.C.C., lower U.S. courts have held that the mere presence of an arbitration clause in one of the party’s forms, but not the other’s, does not necessarily prevent formation of a contract. See, e.g., C. Itoh & Co. (Am.) Inc. v. Jordan Int’l Co., 552 F.2d 1228, 1235 (7th Cir. 1977); Dorton v. Collins & Aikman Corp., 453 F.2d 1161 (6th Cir. 1972). If a contract is formed, §2-207 of the U.C.C. deals with additional terms contained in one party’s form, providing generally that additional terms included in an expression of acceptance become part of the contract unless they either “materially alter” the offer or are objected to. Section 2-207(2) and (3) also provide that where the parties’ conduct recognizes the existence of a contract, but their writings differ over material terms, the contract is limited to the provisions common to both writings.
In cases involving one writing that provides for arbitration, and another writing that does not, lower U.S. courts have generally relied on §2-207 to deny arbitration. They have done so on the theory that the arbitration clause was a material term that, under U.C.C. §2-207(2), is not included in the parties’ contract. See, e.g., S.E. Enameling Corp. v. Gen. Bronze Corp., 434 F.2d 330 (5th Cir. 1970); Fairfield-Noble Corp. v. Pressman-Gutman Co., 475 F.Supp. 899 (S.D.N.Y. 1979).
Some courts have apparently taken a per se approach, reasoning that inclusion of an arbitration clause is always material, and that an arbitration clause is therefore never properly includible in the parties’ contract under §2-207(2). See, e.g., Marlene Indus. Corp. v. Carnac Textiles, Inc., 408 N.Y.S.2d 410, 413 (N.Y. 1978) (arbitration clause is always a material alteration; “unequivocal agreement” required before arbitration will be ordered); Supak & Sons Mfg Co. v. Pervel Indus., Inc., 593 F.2d 135, 136-37 (4th Cir. 1979). Other lower courts have taken a case-by-case approach. N&D Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d 722, 766 (8th Cir. 1977) (whether addition of arbitration clause is material alteration is “question of fact to be resolved by the circumstances of each particular case”); Dorton v. Collins & Aikman Corp., 453 F.2d 1161, 1169 & n.8 (6th Cir. 1972) (same).
Which approach is more consistent with the parties’ likely intentions? In international cases? Should the proposal of an arbitration clause be regarded, either per se or presumptively, as a material alteration to the proposed contract? Does the answer to the question depend on either (i) the terms of the arbitration clause that is proposed (i.e., is a “neutral” clause different from one that favors the proposing party); or (ii) what is standard or expected in the market at issue?
Does it make sense to apply §2-207 to the formation of arbitration agreements? Is it significant that §2-207 is contained in the U.C.C., applicable to sales agreements, not arbitration agreements? Does §2-207 nonetheless provide relevant rules governing the treatment of arbitration clauses contained in sales contracts?
How should one party’s alterations to the text of an arbitration clause proposed by the adverse party be treated under §2-207? Should competing proposals for different arbitral seats, institutions, or applicable law be regarded as material alterations? What about different numbers of arbitrators or arbitral procedures (like language)?
(b) Formation of arbitration agreement under other legal systems. Section 1031(2) of the German version of the UNCITRAL Model Law provides that an agreement in writing exists “if the arbitration agreement is contained in a document transmitted from one party to the other party … and—if no objection was raised in good time—the contents of such document are considered to be part of the contract in accordance with common usage.” Contrast this approach to that under §2-207. Which approach is more consistent with the status of arbitration as a normal or preferred mode of international dispute resolution?
10. Allocation of competence to decide disputes over formation of underlying contract. Although the concepts are closely related, it is important to keep the allocation of jurisdictional competence analytically distinct from the substantive validity of the arbitration agreement. The former question involves who decides disputes whether the underlying contract, containing an arbitration agreement, was validly formed—an arbitrator or a national court? The latter issue concerns the answer to this question—whether or not the underlying contract and the arbitration agreement were validly formed. As discussed above, different legal systems have adopted different approaches to the allocation of jurisdictional competence between arbitral tribunals and national courts. See supra pp. 273–84. These allocations of jurisdictional competence apply, among other things, to disputes over the formation of the underlying contract containing an arbitration clause.
Is there any reason to treat disputes concerning the formation of the underlying contract any differently, for purposes of allocating jurisdictional competence, from disputes concerning the validity or legality of the underlying contract? Consider the following observation of the House of Lords in Heyman v. Darwins Ltd [1942] AC 356, 366 (Viscount Simon LC):
“If the dispute is whether the contract which contains the clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract is thereby denying that he has ever joined in the submission [to arbitration].”
For similar observations, see Ashville Invs. Ltd v. Elmore Contractors Ltd [1988] 3 WLR 867, 873 (English Ct. App.) (“it … is a principle of law that an arbitrator does not have jurisdiction to rule upon the initial existence of the contract”); Svernlöv, What Isn’t, Ain’t, 25 J. World Trade 37, 49 (1991) (“carried to its extreme, … the separability doctrine … could give rise to a valid arbitral award even if two parties had never met, as long as one person alleged there was a contract between them containing an arbitration clause”).
What is the response to the foregoing arguments? If the parties never entered into a contract, how can they be said to have agreed to an arbitration clause in that contract? And, if one party denies that it ever entered into either the underlying contract or the arbitration clause, how can the arbitrators have competence to decide the party’s jurisdictional objection? As the following three Notes discuss, different legal systems have adopted different approaches to these questions.
11. Allocation of competence to decide disputes over formation of underlying contract under prima facie jurisdiction standard. As discussed above, some jurisdictions legislatively provide arbitrators with competence initially to consider all non-frivolous jurisdictional challenges, regardless of the character of these challenges. That is the approach adopted in France, as well as by some courts in India, Hong Kong and Canada. See supra pp. 274–75. Under this approach, the fact that a party denies concluding either the underlying contract or the arbitration agreement should be irrelevant to the tribunal’s competence; national courts will only consider jurisdictional objections, whatever their character, on a prima facie basis, leaving all other jurisdictional objections for the arbitrators initially to consider and decide. See supra pp. 221–23.
Is this a sensible way of dealing with claims that no underlying contract, and no arbitration agreement, was ever formed? Is there anything wrong with requiring a party, who denies ever having concluded any contract of any sort, to arbitrate this denial? Note that the prima facie jurisdiction approach also applies when a party specifically denies that it concluded any agreement to arbitrate. See supra pp. 274–77.
12. Allocation of competence to decide disputes over formation of underlying contract under FAA. Other states (including the United States and England) allocate competence to decide jurisdictional disputes based, in part, on the nature of the jurisdictional objection. As discussed below, these states have encountered difficulty allocating jurisdictional competence over claims that no underlying contract, or no arbitration agreement, was ever formed. See supra pp. 278–81. The approach adopted in these states is reflected in decisions such as Buckeye and Fiona Trust, which hold that national courts will generally only consider claims that are directed specifically at the putative agreement to arbitrate (and not at both the arbitration agreement and the underlying contract). See supra pp. 201–05, 205–11.
(a) Buckeye revisited. In the United States, the allocation of power between courts and arbitrators to decide disputes over the formation of the underlying contract under the FAA remains unclear, with divided lower court authority. See also supra pp. 278–81. As discussed above, the U.S. Supreme Court held in Buckeye that challenges to the validity of the underlying contract are generally for initial resolution by the arbitrators: “because respondents challenge the [underlying] Agreement, and not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract,” and “should therefore be considered by an arbitrator, not a court.” 546 U.S. at 446; supra p. 203. The Court also held that “a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator.” 546 U.S. at 449; supra p. 205. In addition, however, the Supreme Court reserved decision in Buckeye on the applicability of the separability presumption in cases where the presumption is “whether any agreement between the alleged obligor and obligee was ever concluded.” 546 U.S. at 444 n. l; supra p. 202, n. 18. The Court went out of its way to note that its decision did not address the correctness of cases “which hold that it is for courts to decide whether the alleged obligor ever signed the contract, whether the signer lacked authority to commit the alleged principal and whether the signor lacked the mental capacity to assent.” Ibid.
How should jurisdictional competence be allocated under the FAA in cases where a party claims that no underlying contract was ever formed? Should parties be required to arbitrate claims that they never signed, or otherwise concluded, any agreement at all? What about claims that their signature on the putative underlying contract was forged? In fact, as discussed below, U.S. lower courts have arrived at widely varying answers to these questions.
(b) Lower U.S. court decisions holding that arbitrators must resolve claim that no underlying contract exists. The court in Standard Fruit holds that the arbitrators must decide whether the Memorandum (containing the alleged arbitration clause) is a binding contract. For other decisions requiring arbitration of challenges to the formation of the underlying contract, see Alexander v. U.S. Credit Mgt, Inc., 384 F.Supp.2d 1003, 1007 (N.D. Tex. 2005) (“challenges claiming that—as a whole—a contract is illegal, is void as a matter of law, contains forged signatures, or was induced by fraud will generally not serve to defeat an arbitration clause”); AmSouth Bank v. Bowens, 351 F.Supp.2d 571, 575 (S.D. Miss. 2005) (“since the Bowenses’ forgery allegation regards the customer agreement as a whole and not just the arbitration clause of the customer agreement, it is an issue that must be submitted to the arbitrator as part of the underlying dispute”).
(c) Lower U.S. court decisions holding that courts must resolve claim that no underlying contract exists. In contrast, other lower U.S. court decisions have required judicial resolution of claims that there was never any underlying contract. According to one court: “There are, of course, certain issues, such as the existence of any agreement at all between the parties, which by their very nature cannot fall within the scope of arbitration.” Merritt-Chapman & Scott Corp. v. Penn. Turnpike Comm’n, 387 F.2d 768, 771 n.5 (3d Cir. 1967). See Opals on Ice Lingerie v. Bodylines, Inc., 2002 WL 718850, at *3 (E.D.N.Y.) (“if a party’s signature were forged on a contract, it would be absurd to require arbitration if the party attacking the contract as void failed to allege that the arbitration clause itself was fraudulently obtained”); Interocean Shipping Co. v. Nat’l Shipping & Trading Corp., 462 F.2d 673, 676 (2d Cir. 1972) (“There can be no doubt that the question of the very existence of the charter party which embodies the arbitration agreement requires judicial resolution under §4….”). (d) Effect of First Options on resolution by U.S. courts of claims that no underlying contract exists. What effect, if any, does First Options have on the allocation of power under the FAA to resolve claims that no underlying contract exists? As discussed elsewhere, the Court held that the parties could agree that disputes about the “arbitrability question” would be submitted to arbitration and that, if they did, this agreement would be entitled to effect. See supra pp. 280–81. In addition, however, First Options requires “clear and unmistakable” evidence of an agreement to submit “questions of arbitrability” to arbitration. See supra pp. 230–33. How does the First Options standard apply (if at all) to questions regarding the formation of the parties’ underlying contract? How is it that a party could demonstrate clear and unmistakable evidence of an agreement to arbitrate jurisdictional disputes—when its counterparty denied ever concluding any agreement at all?
Most lower U.S. courts have concluded that First Options’ “clear and unmistakable” evidence exception to the general rule that jurisdictional disputes are for judicial resolution is not available in disputes involving challenges to the formation of the underlying contract. See Sanford v. MemberWorks, Inc., 483 F.3d 956 (9th Cir. 2007) (question of “existence” of arbitration agreement, as distinguished from “validity,” is for court, rather than arbitrator); Bank of Am., NA v. Diamond State Ins. Co., 38 F.Appx. 687, 689 (2d Cir. 2002) (“While the arbitration provisions state that issues concerning the ‘formation and validity’ of the contracts ‘shall be submitted to arbitration,’ it is not clear that this includes the question of the very existence of the contract”); A.T. Cross Co. v. Royal Selangor(s) Pte, Ltd, 217 F.Supp.2d 229, 234 (D.R.I. 2002) (“when plaintiff contends that no arbitration agreement was reached, the court, not an arbitrator, must determine the validity of the arbitration agreement”).
Consider again Article 23 of the UNCITRAL Rules, Article 6 of the ICC Rules and Article 23 of the LCIA Rules, excerpted at pp. 170, 184–85 & 269-70 of the Documentary Supplement. How does each provision purport to deal with the allocation of jurisdictional competence to decide disputes over the formation of the underlying contract and the arbitration agreement? Note that most of these provisions grant the arbitrators power to resolve disputes over the “existence” and “validity” of arbitration agreements. What effect do these provisions have, under First Options, when a party denies that it ever entered into the arbitration agreement that incorporates them? See also supra pp. 281–82. How can parties have “agreed”—much less “clearly and unmistakably” agreed—to give an arbitrator power to determine whether the agreement vesting him with authority was properly formed?
Some have suggested that this is akin to the fable of Baron Munchhausen, who lifted himself from a swamp by his own pigtail. Less picturesquely, in order to decide that there is “clear and unmistakable” evidence of an agreement to arbitrate disputes over the formation of arbitration agreements, mustn’t the court first decide that the parties in fact entered into an arbitration agreement? Doesn’t this decision result in (and require) judicial resolution of the dispute over the formation of the arbitration agreement? (e) Wisdom of current approach to allocation of jurisdictional competence under FAA. Consider the complexities and uncertainties that arise under Buckeye and First Options in cases involving disputes about formation of the underlying contract and arbitration agreement. Do these uncertainties contribute to the arbitral process? Compare the approach adopted under the FAA to that under French law. Which is preferable? Is there another approach that would be better?
13. Fiona Trust revisited. Consider again the House of Lords’ decision in Fiona Trust. How does it deal with the allocation of jurisdictional competence in cases involving claims that no underlying contract was ever formed? For example, how does the House of Lords indicate that claims of forgery, or lack of authority of an agent, should be handled? Compare this to the approach in Buckeye. To the approach under a prima facie jurisdiction standard, such as in France.
14. Formation of arbitration agreements by incorporation from other instruments. International contracts frequently incorporate arbitration agreements or rules from other sources (i.e., other contracts, trade association rules). This process of incorporation raises legal issues under applicable law.
(a) Enforceability of incorporated arbitration agreements under UNCITRAL Model Law. Consider Article 7(2) of the UNCITRAL Model Law, excerpted at p. 88 of the Documentary Supplement. What does it provide with regard to the formation of an arbitration agreement through incorporation by reference where “the reference is such as to make that clause part of the contract.” Does Article 7(2) make any effort to address the question of what conditions must be satisfied to “make [the arbitration] clause part of the contract”?
Applying Article 7(2), most national courts have sought, in commercial settings, to give effect to both specific and general references to either arbitration provisions or to other contracts containing arbitration clauses. See, e.g., Nanisivik Mines Ltd v. F.C.R.S. Shipping Ltd, [1994] 2 FC 662, 667-68 (Ottawa Ct. App.) (arbitration clause in charter incorporated into bill of lading); Guangdong New Tech. Imp. & Exp. Corp. v. Chiu Shing t/a B.C. Pty & Trading Co., XVIII Y.B. Comm. Arb. 385 (1993) (H.K. Ct. First Inst.) (upholding arbitration agreement where “there was a reference in a written contract to a document containing an arbitration clause,” in compliance with Article 7(2) of Model Law); Owners of the Annefield v. (Owners of Cargo etc., [1971] 1 All ER 394, 406 (English Ct. App.) (where specific reference to arbitration clause exists, court will entertain “manipulation” of language to accommodate it to parties’ transaction).
(b) Enforceability of incorporated arbitration agreements under FAA. It is also well-settled under the FAA in the United States that an agreement may validly incorporate an arbitration clause from another document. R.J. O’Brien & Assoc. v. Pipkin, 64 F.3d 257, 260 (7th Cir. 1995) (“A contract … need not contain an explicit arbitration clause if it validly incorporates by reference an arbitration clause in another document”); Gingiss Int’l, Inc. v. Bormet, 58 F.3d 328, 331 (7th Cir. 1995) (“a sub-contract with a guarantor or surety may incorporate a duty to arbitrate by reference to an arbitration clause in a general contract”); Cont’l U.K. Ltd v. Anagel Confidence Compania Naviera, SA, 658 F.Supp. 809, 813 (S.D.N.Y. 1987) (if “party’s arbitration clause is expressly incorporated into a bill of lading, non-signatories … who are linked to that bill through general principles of contract law or agency law may be bound”); State Trading Corp. of India v. Grunstad Shipping Corp., 582 F.Supp. 1523 (S.D.N.Y. 1984) (arbitration clause in charter was incorporated into bill of lading).
(c) Requirement of clarity or specificity regarding incorporated arbitration agreement. Some national courts have required relative clarity from language incorporating an arbitration clause in another document. See, e.g., PaineWebber, Inc. v. Bybyk, 81 F.3d 1193 (2d Cir. 1996) (no incorporation of arbitration clause “unless it is clearly identified in the [principal] agreement”); Weiner v. Mercury Artists Corp., 130 N.Y.S.2d 570, 571 (N.Y. App. Div. 1954) (one-page contract did not validly incorporate arbitration clause in 200-page pamphlet); Fed. Bulk Carriers Inc. v. C. Itoh & Co. [1989] 1 Lloyd’s Rep. 103, 108 (English Ct. App.) (“it is clear that an arbitration clause is not directly germane to the shipment carriage and delivery of goods.… It is, therefore, not incorporated by general words in the bill of lading. If it is incorporated, it must either be by express words in the bill of lading itself … or by express words in the charterparty itself If it is desired to bring in an arbitration clause, it must be done explicitly in one document or the other”); Judgment of 11 October 1989, XV Y.B. Comm. Arb. 447, 448 (1990) (French Cour de Cassation) (requiring that “the existence of the [arbitration] clause be mentioned in the main contract, unless there exists between the parties a longstanding business relationship which ensures that they are properly aware of the written conditions normally governing their commercial relationships”). Compare Century Indem. Co. v. Certain Underwriters at Lloyd’s, 584 F.3d 513 (3d Cir. 2009); Sea Trade Maritime v. Hellenic Mut. War Rules Ass’n (Bermuda) Ltd [2007] 1 Lloyd’s Rep. 280, ¶65 (QB) (English High Ct.) (“English law accepts incorporation of standard terms by the use of general words…, particularly so when the terms are readily available and the question arises in the context of established dealers in a well-known market”); Judgment of 4 May 2000, XXVI Y.B. Comm. Arb. 277 (2001) (Italian Corte di Cassazione) (acceptance of arbitration clause, contained in annex referred to in main contract, was valid; no need for “specific approval” of clause).
3. Formal Validity of International Arbitration Agreements
The pro-arbitration legislative regimes of all leading international commercial arbitration conventions (including the New York, European and Inter-American Conventions) are limited to “written” agreements to arbitrate.14 Article II of the New York Convention limits the Convention’s coverage to arbitration agreements that are in “writing,” while Article II(2) of the Convention defines an “agreement in writing” to include “an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.”15 The ICSID Convention is similar, in the investment context, requiring that agreements to arbitrate under ICSID auspices be in “writing.”16
SPHERE DRAKE INSURANCE PLC v. MARINE TOWING, INC.
16 F.3d 666 (5th Cir. 1994)
DUHE, Circuit Judge. Sphere Drake Insurance Plc sued Marine Towing, Inc. to stay litigation and compel arbitration of certain claims under a protection and indemnity policy. Defendant-Appellant Marine Towing, Inc. moved to dismiss for lack of jurisdiction. The district court denied Marine Towing’s motion and ordered arbitration. Marine Towing appeals….
Marine Towing contracted Schade & Co. to acquire protection and indemnity insurance for its vessels. Schade eventually secured a policy from Sphere Drake, a London marine insurer. Before Schade delivered the policy to Marine Towing, but during the policy period, an insured vessel sank. Upon receiving the policy, Marine Towing discovered a provision requiring arbitration of coverage disputes in London. Marine Towing nevertheless sued Sphere Drake and Schade in state court for a declaration of rights under the policy and coverage. Sphere Drake removed the case to federal court and moved to compel arbitration and stay the litigation pending arbitration.… The court … ordered arbitration, and stayed all litigation between the parties….
Marine Towing … argues that the district court lacked jurisdiction under the Convention22 because Marine Towing and Sphere Drake had no “agreement in writing” to arbitrate.23 The Convention provides that the phrase “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained Although there are exceptions, many national arbitration statutes also contain “writing” requirements, sometimes expressed as rules regarding the formal validity of arbitration agreements.17 Article 7(2) of the 1985 UNCITRAL Model Law provides that the “arbitration agreement shall be in writing,”18 while §2 of the FAA applies the domestic U.S. arbitration statute to “written provision[s]” for arbitration.19 These “writing” requirements have deep historical roots in most national legal systems,20 as well as in many international instruments (although there are exceptions21). The materials excerpted below explore the “writing” requirements of the New York, Inter-American and ICSID Conventions and leading contemporary arbitration statutes.
in an exchange of letters or telegrams.” Marine Towing contends that, because it did not sign the insurance contract, the policy cannot provide the agreement in writing. Marine Towing would define an “agreement in writing” only as 1) a contract or other written agreement signed by the parties or 2) an exchange of correspondence between the parties demonstrating consent to arbitrate. We disagree with this interpretation of the Convention. We would outline the Convention definition of “agreement in writing” to include either (1) an arbitral clause in a contract or (2) an arbitration agreement, (a) signed by the parties or (b) contained in an exchange of letters or telegrams.
The insurance contract indisputably contains an arbitral clause. Because what is at issue here is an arbitral clause in a contract, the qualifications applicable to arbitration agreements do not apply. A signature is therefore not required. But see Sen Mar, Inc. v. Tiger Petroleum Corp., 774 F.Supp. 879, 882 (S.D.N.Y. 1991) (requiring that arbitration clause be found in a signed writing or an exchange of letters to be enforceable). The district court properly did not require that the contract containing an arbitral provision be signed to constitute an agreement in writing under the Convention….
KAHN LUCAS LANCASTER, INC. v. LARK INTERNATIONAL LTD
186 F.3d 210 (2d Cir. 1999)
PARKER, Circuit Judge. Defendant-Appellant Lark International, Ltd (“Lark”) appeals from a judgment of the U.S. District Court for the Southern District of New York (Denise L. Cote, Judge) … granting Plaintiff-Appellee Kahn Lucas Lancaster, Inc.’s (“Kahn Lucas”) motion under 9 U.S.C. §206 and the [New York] Convention, as implemented, 9 U.S.C. §§201-08, to compel arbitration. The judgment was entered in accordance with an Opinion and Order of the district court, which held that arbitration clauses in certain purchase orders sent by Kahn Lucas to Lark were enforceable under the Convention and bound Lark, despite the fact that Lark had not signed the purchase orders. We reverse.
Lark is a Hong Kong corporation which acts as a purchasing agent for businesses seeking to buy and import clothing manufactured in Asia. Kahn Lucas is a New York corporation, with its principal place of business in New York, NY, engaged in the children’s clothing business.… Kahn Lucas and Lark enjoyed a business relationship which began in 1988 and pursuant to which Lark would assist Kahn Lucas in arranging for overseas manufacturers to make garments ordered by Kahn Lucas. As part of this relationship, Lark processed Kahn Lucas’s purchase orders and invoices. Pursuant to the terms of the purchase orders, as well as the parties’ standing practice, the manufacturers would issue Kahn Lucas a seller’s invoice for payment once the ordered garments were completed. Lark would then issue a separate invoice to Kahn Lucas for its commission, usually a set percentage of the amount charged by the manufacturer, on the order. Kahn Lucas paid both of these invoices through draw-downs on an existing letter of credit on which Lark was the named beneficiary. Lark would then remit payment to the manufacturer.
The dispute in this case arises from two purchase orders Kahn Lucas issued in early 1995 for children’s fleece garments, manufactured in the Philippines, that it was to resell to Sears Roebuck, Inc. (the “Purchase Orders”). The Purchase Orders stated that the garments were “ordered from” Lark, listed “Lark International (Agent)” as seller, and were signed by Kahn Lucas. They were not signed by Lark. The Purchase Orders also clearly indicated that they contained a number of additional terms printed on the reverse side, and were made conditional upon the seller’s acceptance of those terms. Included in these terms were clauses relating to arbitration [(the “Arbitration Clauses”)], which stated:
“Any controversy arising out of or relating to this Order … shall be resolved by arbitration in the City of New York…. The parties consent to application of the New York or Federal Arbitration Statutes and to the jurisdiction of the Supreme Court of the State of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with said arbitration….”
Lark accepted the Purchase Orders without objection. In July 1995, the manufacturers issued final invoices relating to the ordered garments, and Lark issued its commission invoice. But citing defective garments and failed deliveries, Kahn Lucas refused to release funds to Lark to pay either the seller’s invoices or Lark’s commission invoice. Unable to achieve a satisfactory settlement with Lark and the manufacturers, Kahn Lucas sued Lark in the … Southern District of New York, … alleging breach of contract, breach of warranty, negligence, and breach of fiduciary duty…. [The U.S. District Court held that it lacked] personal jurisdiction over Lark to adjudicate the then-pending claims, but also held that, given the Arbitration Clauses, it would have personal jurisdiction over Lark if Kahn Lucas were to seek to compel arbitration. See Kahn Lucas Lancaster, Inc. v. Lark Int’l Ltd., 956 F.Supp. 1131, 1139 (S.D.N.Y. 1997) (“Kahn Lucas I”)….
By motion brought pursuant to 9 U.S.C. §206 and the Convention, Kahn Lucas converted its complaint into a motion to compel Lark to arbitrate the dispute in accordance with the Arbitration Clauses. Kahn Lucas also filed a demand for arbitration with the [AAA]. Lark opposed the motion to compel arbitration. Lark argued that it was not bound by the provisions of the Purchase Orders because the Purchase Orders were directed towards the sellers of the garments to which they related, namely the manufacturers, and not towards Lark. Lark also argued that the Arbitration Clauses were not enforceable under the Convention because Lark had not signed the Purchase Orders….
[T]he district court granted Kahn Lucas’s motion to compel arbitration. Kahn Lucas Lancaster, Inc. v. Lark Int’l Ltd., 1997 WL 458785 (S.D.N.Y.) (“Kahn Lucas IF)…. The court … focused on whether the Arbitration Clauses were enforceable under the Convention so as to vest the court with jurisdiction under §203 …. Although Lark had not signed the Purchase Orders, the district court held that the Purchase Orders represented an “arbitral clause in a contract,” and therefore an “agreement in writing” to arbitrate sufficient to bring the dispute within [Articles II(1) and II(2) of] the Convention. In holding that an arbitral clause in a contract need not be signed by the parties to be enforceable under the Convention, the district court relied on the only appellate case interpreting this section of the Convention, Sphere Drake Ins. plc [supra pp. 376–77] (outlining, without much analysis, Article of the Convention as including “(1) an arbitral clause in a contract or (2) an arbitration agreement, (a) signed by the parties or (b) contained in an exchange of letters or telegrams”), and declined to follow Sen Mar, Inc. v. Tiger Petroleum Corp., 774 F. Supp. 879, 882 (S.D.N.Y. 1991) (“An arbitration clause is enforceable only if it is found in a signed writing or an exchange of letters.”).
The district court then turned to Lark’s argument that it should not be bound by the Arbitration Clauses because it was not the seller of the garments. The district court held that the Purchase Orders embodied “an agreement between Kahn Lucas and Lark for the sale of goods, as opposed to an agreement between Kahn Lucas and the manufacturers.” Kahn Lucas II, 1997 WL 458785 at *5. The district court relied on the fact that Kahn Lucas and Lark were the only parties mentioned on the Purchase Orders, and on the fact that Kahn Lucas was to pay Lark directly for the garments ultimately delivered under the Purchase Orders. Finally, the district court found that Lark was bound to the terms of the Purchase Orders despite the fact it did not sign them because it manifested assent to the Purchase Orders by performing under them, and that the subject of the dispute was therefore within the scope of the Arbitration Clauses…. Lark timely appealed.
On appeal, Lark … [first] argues that in order to be enforceable under the terms of the Convention, any agreement to arbitrate, be it an “arbitral clause in a contract” or an “arbitration agreement,” must be signed by the parties or contained in an exchange of letters or telegrams. Because the Purchase Orders were not signed by both parties, the argument continues, they are not “agreements in writing” enforceable under the Convention. Second, Lark argues that the district court erred in finding that it was bound by the terms of the Purchase Orders, including the Arbitration Clauses, because it was not the seller of the garments.
For the reasons that follow, we hold that the definition of “agreement in writing” in the Convention requires that such an agreement, whether it be an arbitration agreement or an arbitral clause in a contract, be signed by the parties or contained in a series of letters or telegrams. Therefore, the Arbitration Clauses are not enforceable under the Convention, and both the district court and this Court lack subject matter jurisdiction over the dispute. Because of this holding, we need not consider Lark’s second argument, and we accordingly reverse the judgment of the district court and dismiss Kahn Lucas’s motion to compel arbitration….
Treaties are construed in much the same manner as statutes.… [T]he obvious starting point in construing a treaty is its text. And the plain meaning of a text “will typically heed the commands of its punctuation.” United States Nat’l Bank, 508 U.S. at 454; see United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241-42 (1989) (holding that the “grammatical structure of the statute,” specifically the placement of commas, mandated a specific construction). Among the rules of punctuation applied in construing statutes is this: When a modifier is set off from a series of antecedents by a comma, the modifier should be read to apply to each of those antecedents. See Bingham, Ltd. v. United States, 724 F.2d 921, 925-26 n. 3 (11th Cir. 1984). As stated by the Eleventh Circuit, this rule is a “supplementary ‘rule of punctuation,’” to the “doctrine of the last antecedent,” which states that a modifier generally applies only to the nearest, or last, antecedent. 24 See Bingham, 724 F.2d at 925-26 n. 3. Of course, “these doctrines are not absolute rules,” id. at 926 n. 3, and in applying them we are mindful of the Supreme Court’s admonition that “a purported plain-meaning analysis based only on punctuation is necessarily incomplete and runs the risk of distorting a statute’s true meaning.” United States Nat’l Bank, 508 U.S. at 454.
In addition to utilizing rules of punctuation, we are aided in our plain-meaning analysis by the fact that the Convention exists in five official languages—French, Spanish, English, Chinese and Russian—of equal authenticity. Because one purpose of the Convention is to unify the standards under which international agreements to arbitrate are observed, Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15 (1974), we should, if possible, adhere to an interpretation consistent with all of the official languages. That said, some of the official languages provide more insight into the drafters’ intent than others: Of the five official languages, English, French, and Spanish were the working languages of the United Nations Conference on International Commercial Arbitration, which drafted the Convention. All records of Conference meetings were kept in these working languages.
Finally, to the extent the drafters’ intent is unclear from the text of the multiple versions of the Convention, we may turn to the Convention’s legislative history for guidance. As noted above, Article of the Convention provides that each contracting state … “shall recognize” an “agreement in writing” to arbitrate a given dispute. Article II(2), in turn, defines the term “agreement in writing” to include “an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.” Lark contends that the modifying clause “signed by the parties or contained in an exchange of letters or telegrams,” modifies both: (1) “an arbitral clause in a contract” and (2) “an arbitration agreement” and, as a result, the dispute between the parties is not arbitrable due to the absence of Lark’s signature on the Purchase Orders. Kahn Lucas contends, and the district court held, that “signed by the parties” modifies only the clause immediately preceding it, “an arbitration agreement,” and not the previous clause. Thus, in Kahn Lucas’s view, the unsigned Purchase Orders constitute an “agreement in writing” to arbitrate enforceable under the Convention.
As an initial matter, we must determine the meaning of the two elements in the series, namely “an arbitral clause in a contract” and “an arbitration agreement.” We find the meaning of “an arbitral clause in a contract” to be self-evident. We also find that the phrase “an arbitration agreement,” because it is used in conjunction with the phrase “an arbitral clause in a contract,” refers to any agreement to arbitrate which is not a clause in a larger agreement, whether that agreement is part of a larger contractual relationship or is an entirely distinct agreement which relates to a non-contractual dispute. The parties agree that the Arbitration Clauses each constitute “an arbitral clause in a contract” and not “an arbitration agreement” under the Convention.
We turn, then, to the plain meaning of the English-language version of the Convention. Taking its lead from the Fifth Circuit’s analysis in Sphere Drake, Kahn Lucas argues that the grammatical structure of §2 compels the conclusion that its dispute with Lark falls within the Convention. We disagree. Section 2 takes the structure “A or B, with C.” This structure is exactly that to which the “supplementary rule of punctuation” expressed in Bingham applies. Grammatically, the comma immediately following “an arbitration agreement” serves to separate the series (“an arbitral clause in a contract or an arbitration agreement”) from the modifying phrase (“signed by the parties or contained in an exchange of letters or telegrams”), and suggests that the modifying phrase is meant to apply to both elements in the series. Indeed, this comma can serve no other grammatical purpose. As a result, Kahn Lucas’s reading of the statute would render the comma mere surplusage, a construction frowned upon.… [O]ther available interpretive tools strongly support the conclusion the punctuation suggests.
First, the plain language of the other working-language versions of the Convention compels the conclusion that, in order to be enforceable under the Convention, both an arbitral clause in a contract and an arbitration agreement must be signed by the parties or contained in an exchange of letters or telegrams. In the French and Spanish-language versions, the word for “signed” appears in the plural form, “signes” and “firmados” respectively. Because each of the two antecedents is couched in the singular, the modifier unambiguously applies to both of them. If … only an arbitration agreement need be signed by the parties, the French-language version would utilize the verb “signe” and the Spanish “firmado.”
[The court concluded that Chinese language text was similar to the French and Spanish; the Russian language text pointed to an opposite conclusion, but was dismissed by the court as anomalous.] … Finally, to the extent the plain meanings of the non-English language versions of the Convention do not resolve any ambiguity that exists in the English-language version, the legislative history of Article II puts the matter to rest….
Accordingly, although we are cognizant that the Convention “should be interpreted broadly to effectuate its recognition and enforcement purposes,” Bergesen v. Joseph Muller Corp., 710 F.2d 928, 933 (2d Cir. 1983), the rules governing our construction do not allow us to follow the Fifth Circuit’s interpretation of Article II(2) as expressed in Sphere Drake.… [W]e hold that the modifying phrase “signed by the parties or contained in an exchange of letters or telegrams” applies to both “an arbitral clause in a contract” and “an arbitration agreement.”
Having determined that the Convention requires that “an arbitral clause in a contract” be “signed by the parties or contained in an exchange of letters or telegrams,” we turn to the application of the Convention to the facts of this case. As noted above, the Arbitration Clauses were contained in the Purchase Orders which were signed only by Kahn Lucas, and not by Lark. There is therefore no “arbitral clause in a contract … signed by the parties.” Further, Kahn Lucas does not contend that the Purchase Orders, even together with Lark’s Confirmation of Order forms, represent “an arbitral clause in a contract … contained in an exchange of letters or telegrams.” As a result, there is no “agreement in writing” sufficient to bring this dispute within the scope of the Convention…. The judgment of the district court is reversed, and Kahn Lucas’s motion to compel arbitration is dismissed with prejudice.
JUDGMENT OF 5 NOVEMBER 1985