Articles / Alternative Dispute Resolution
An UNCITRAL Convention for the Mediated Settlement of International Disputes
The General Assembly of the United Nations is set to sign the Singapore Mediation Convention in August 2019, a potentially ground-breaking framework based upon the New York Convention. The Convention, if approved and ratified by member states, could at the least “greatly increase the appeal of mediation as a mechanism of resolving commercial disputes with a cross-border dimension,” similar to how the New York Convention “made international arbitration the pre-eminent process for the resolution of cross-border commercial disputes.” Once approved by the UN General Assembly, the Convention will take effect after three UN member states ratify it.
Because there is currently no international legal framework for directly enforcing settlement agreements of international disputes that are the result of a formal mediation procedure (a “Mediated International Settlement Agreement”), if one party breaches such an agreement’s terms generally the non-breaching party’s sole remedy is to sue for breach of contract in a new legal proceeding. If the Singapore Mediation Convention becomes law, then under certain circumstances the non-breaching party could enforce the terms of a Mediated International Settlement Agreements in courts with jurisdiction over the breaching party. Moreover, such courts would be bound to enforce the terms of the Mediated International Settlement Agreements through a judgment entered by such courts. Thus, the Singapore Mediation Convention would give Mediated International Settlement Agreements the same status as the New York Convention gives to arbitral awards, increasing the appeal of mediation for resolving cross-border commercial disputes.
The United Nations Commission on International Trade Law (UNCITRAL) devised the overarching legal framework, which includes two separate instruments:
(i) the Singapore Mediation Convention, or the “United Nations Convention on International Settlement Agreements” to give it its full title; and
(ii) the model legislative text amending the pre-existing UN Model Law on International Commercial Conciliation (2002) (the Model Law on Mediation).
Similar to the New York Convention, a country that chooses to sign the Singapore Mediation Convention will likely have to incorporate its terms into its domestic law, which could be done by adopting the Model Law on Mediation.
The Singapore Mediation Convention would apply to “international agreements resulting from mediation” and concluded “in writing” by parties to resolve a “commercial dispute”. It would exclude settlement agreements which:
(i) have been approved by a court or have been concluded in the course of court proceedings,
(ii) are enforceable as a judgment in the state of that court; or
(iii) that have been recorded and are enforceable as an arbitral award.
It is thought that such settlement agreements are governed by other widely accepted international instruments such as the New York Convention and the Hague Convention on the Choice of Court Agreements.
Under the Singapore Mediation Convention, parties seeking enforcement would provide the competent authority of a Contracting State, such as a court, with a signed Mediated International Settlement Agreement and evidence that such an agreement resulted from mediation
There are certain situations where enforcement could be refused. A court in a Contracting State could refuse to grant relief if it finds that:
(i) granting such relief would be contrary to the public policy of that Contracting State; or
(ii) the subject matter of the dispute is not capable of settlement by mediation under the law of that Contracting State.
Furthermore, a party against whom an application is made can request that the court refuse to grant the relief on a variety of factual grounds such as incapacity, the agreement is null and void, the agreement is not clear and comprehensible, or there was a serious breach by the mediator of applicable standards.
Notably, some of these possible exceptions are quite broad and could generate substantial litigation. However, there is indication that UNCITRAL has recognized this possible risk, so it remains to be seen if there are further changes before the document is signed next year.
Sam Stevens, Lexology, “The Singapore Convention: a bright new dawn for cross-border dispute resolution?,” Oct. 1, 2018.
The NutraSweet Decision: an analysis and strict limitation of the manifest disregard doctrine
In Daesang Corp. v NutraSweet Co., the New York’s Appellate Division, First Department, reversed a lower court’s decision to set aside a $100 million arbitral award because of a tribunal’s “manifest disregard” of the law.
The case arose out of the sale of Daesang’s aspartame business to NutraSweet in 2003. NutraSweet initially paid Daesang per the purchase/sale agreement, but before all sums were paid stopped making payments and informed Daesang that it was rescinding the purchase/sale contract because of antitrust class actions brought against Daesang. Daesang invoked the arbitration provisions of the purchase/sale agreement, and the matter proceeded to arbitration. The tribunal found for Daesang and awarded Daesang $100 million to Daesang. Daesang thereupon commenced the action in New York’s courts to enforce the award.
Arguing against enforcement, NutraSweet claimed that the tribunal had shown “manifest disregard” for state and federal law, that Daesang was an admitted antitrust violator, and that the agreements were induced by fraud and misrepresentation. The trial court agreed with NutraSweet and vacated the award.
The lower court’s decision was controversial because it was based upon the “doctrine of manifest disregard,” which no New York court had ever before used to vacate an international arbitration award.
Under the “doctrine of manifest disregard,” arbitral awards may be set aside if a tribunal manifestly disregards the applicable law. Currently, the Fifth, Eighth and Eleventh Circuits have ruled against applying the “manifest disregard standard,” while the Second, Fourth, and Ninth Circuits have held it is valid as a “judicial gloss” on the ground that the Federal Arbitration Act’s (“FAA”) sections 10(a)(3) and (4) authorize vacatur when the arbitrators are “guilty of misconduct” or “exceeded their powers.” State courts have also adopted their own views.
The Court of Appeals for the Second Circuit reversed the trial court’s decision and reinstated the award. The Appellate Court noted that the scope of judicial review for arbitration awards is “extremely limited,” and concluded that NutraSweet’s fraud counterclaim “does not meet the high standard required to establish manifest disregard of the law, namely, a showing that ‘the arbitrator[s] knew of the relevant principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.” Moreover, the Appellate Court rejected the lower court judge’s review of the tribunal, noting “[a] court is not empowered by the FAA to review the arbitrators’ procedural findings, any more than it is empowered to review the arbitrators’ determinations of law or fact.”
The Second Circuit clarified the issue, stating: the “manifest disregard” doctrine requires “more than a simple error in law” and not a mere mistake by the arbitrator, noting that “[e]rrors, mistakes, departures from strict legal rules, are all included in the arbitration risk” and do not justify setting aside an arbitral award. Rather, per the Second Circuit, the standard is that there must be an intentional, blithe disregard for the law — “a showing that ‘the arbitrators knew of the relevant principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it.’”
Many welcomed the decision for confirming that the manifest disregard doctrine is only available in international arbitration in the most extreme cases where arbitrators knowingly refuse to apply clearly applicable legal principles. Claudia T. Salomon, global co-chair of Latham & Watkins LLP’s international arbitration practice noted that “[t]his decision makes clear that arbitration is not a prelude to the judicial review process . . . In arbitration, finality is a two-edged sword, but this decision makes clear that the court process is not an avenue for appeal.”
Overall, the decision provided added certainty that awards from arbitrations seated in New York will be affirmed. This will help New York maintain its position as a preeminent place of arbitration, which has become increasingly important in light of growth competition for cities and countries to position themselves as favorable arbitral seats, because of the vital importance of knowing that the judiciary in the seat of arbitration is unlikely to set aside an award.
Caroline Simson, Law360, “Revived $100M Award Boosts NY’s Pro-Arbitration Reputation,” October 5, 2018.
Derek A. Soller and Grant Hanessian, Thomson Reuters, “New York Appellate Division, First Department, reverses Supreme Court decision vacating ICC arbitration award for ‘Manifest Disregard of the Law’,” October 4, 2018.
Jeremy Heep, Lexology, “NY Appellate Court Weakens ‘Manifest Disregard’ Exception to Arbitration Enforcement,” October 19, 2018.
Daesang Corp. v NutraSweet Co., New York Appellate Division, First Department, 2018 NY Slip Op 06331, September 27, 2018.
The Outokumpu Stainless Decision: compelling arbitration
In Outokumpu Stainless USA, LLC v. Converteam SAS, the Eleventh Circuit held that it could not compel arbitration demanded by a non-signatory to an arbitration agreement when the New York Convention applied.
The case involved an arbitration agreement between a buyer (Outokumpu) of three mills from a seller (FLI), where the seller’s sub-contractor (GE Energy) invoked the arbitration clause. FLI subcontracted with GE Energy to supply motors for the three mills, which failed. After Outokumpu filed suit in Alabama state court, GE Energy removed to federal court and then moved to dismiss the suit and compel arbitration. The District Court granted the motion to dismiss and compel arbitration. The Eleventh Circuit Court of Appeals reversed, holding that arbitration could not be compelled.
The Eleventh Circuit first determined that the New York Convention and Chapter 2 of the FAA implementing the New York Convention governed because GE Energy was a foreign corporation.
The court then inquired whether the parties before the court had agreed to arbitrate their dispute. The court applied the four-factor test from Bautista v. Star Cruises, 396 F.3d 1289 (11th Cir. 2005) for determining when a party may compel arbitration under the New York Convention, focusing on the first requirement that “there is an agreement in writing within the meaning of the Convention.” Here, there was no agreement in writing between the parties before the court. GE Energy, while relying on an arbitration agreement in contracts between Outokumpu and FLI, was “undeniably not a signatory” to those contracts, but instead “was a stranger to the Contracts, and, at most a potential subcontractor.”
Notably, the decision turned on the applicability of the New York Convention and Chapter 2, not Chapter 1, of the FAA. Under Chapter 2, GE Energy could not assert theories such as estoppel and third-party beneficiary to compel arbitration because “Congress has specified that the [New York] Convention trumps Chapter 1 of the FAA where the two are in conflict,” and the Convention’s requirement that the agreement in writing be signed by the parties trumps the potentially broader Chapter 1 of the FAA, which “does not expressly restrict arbitration to the specific parties to an agreement.”
Gilbert A. Samberg, Lexology, “Non-Signatory to Arbitration Agreement Cannot Compel Arbitration When New York Convention Applies,” August 30, 2018.
Outokumpu Stainless USA, LLC v. Converteam SAS (c/k/a GE Energy Power Conversion France SAS, Corp., Court of Appeals for the Eleventh Circuit, No. 1:16-cv-00378, August 30, 2018.