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Another Wrong Arbitration Decision in New Jersey

Fri, 2018-10-19 21:19

It’s not often that an excellent court simply misconstrues — or worse ignores — relevant state statutes and superseding federal law.  But the Superior Court Appellate Division of New Jersey seems to have done so.  We assume that it was trying to protect employees claiming age discrimination.  In fact, it accomplished the opposite and poorly served the utility of arbitration law in the State of New Jersey.

Plaintiff Marilyn Flanzman filed a complaint in New Jersey Superior Court alleging that her termination from her job constituted age discrimination, harassment and discriminatory discharge in violation of the New Jersey Law Against Discrimination.  Defendant employer, relying on an arbitration agreement executed by plaintiff, moved to compel arbitration.  Plaintiff resisted, claiming that the arbitration agreement was unenforceable as a matter of law because it do not set forth “the process for generally selecting an arbitration forum.”  The appellate court noted that plaintiff argued “that without that information communicated somehow in the agreement — whether it be by designating AAA, JAMS, or some other mechanism intended to replace her right to a jury trial — there exists no mutual assent.”

The Superior Court found for the employer.  The Appellate Division reversed, reasoning:

Selecting an arbitral institution informs the parties, at a minimum, about that institution’s arbitration rules and procedures.  Without knowing this basic information, parties to an arbitration agreement will be unfamiliar with the rights that replaced judicial adjudication.  That is, the parties will not reach a “meeting of the minds.”

Thus, in New Jersey, the parties to arbitration agreements (but no other types of agreements) must reflect, in drafting the agreement itself, “a clear mutual understanding of the ramifications” of agreement.  The agreement must identify “what rights replaced their rights to judicial adjudication.”  The court did not require that AAA be engaged, and held that simply setting forth an agreed method for appointing a panel of arbitrators might satisfy this requirement.  The point is that “the parties must mutually understand what rights replace those that they gave up.”

The court rendered this opinion without hindrance from — and indeed only a single citation to — the New Jersey Arbitration Act.  Former Presiding Judge of the Appellate Division William Dreier notes in his volume, New Jersey Arbitration Handbook,  that N.J.S.A. 2A:23B-6 makes enforceable any agreement “to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement” without that agreement’s reciting its consequences.  N.J.S.A.  2A:23B-4(b) provides that such agreements may not, with respect to subsequent controversies, purport to restrict such rights as notice of the initiation of arbitration or representation by a lawyer, but nothing in the statute requires that arbitration agreements must include consent of who should act as arbitrator, or what rules will be used.  Indeed, N.J.S.A. 2A:23B-11(a) provides that “if the parties to an agreement to arbitrate agree on a method for appointing an arbitrator, that method shall be followed, … [and] if the parties have not agreed on a method.. the court shall appoint the arbitrator,” thereby contemplating that an enforceable arbitration agreement may not include a provision for naming an arbitrator.  As for the process by which the proceeding shall be conducted, N.J.S.A. 2A:23B-15(a) provides that “an arbitrator may conduct an arbitration in such manner as the arbitrator considers appropriate for a fair and expeditious disposition of the proceeding.”  It this contemplates that the method of the arbitration shall be determined by the arbitrator in the course of the proceeding, not by the parties in the course of the arbitration agreement.

By rendering invalid arbitration agreements that do not contain “the ramifications” of the selection of arbitration, the Appellate Division not only amended the New Jersey Arbitration Act by judicial fiat.  It also required that arbitration contracts contain provisions unique to them and not required by any other contracts — thus treating arbitration contracts differently from others, in violation not only of N.J.S.A. 2A:23B-6, but the Federal Arbitration Act and all judicial decisions interpreting it, which constrain state courts through the Supremacy Clause.  Could a party to any other type of contract in New Jersey contest its validity on the ground that the party did not understand the consequences of certain of its provisions?

How this came about, I am at a loss to speculate.  But this blog has previously noted instances where New Jersey courts have taken upon themselves what they seem to believe is a responsibility to protect consumers and employees from the perceived unfairness of agreements to arbitrate disputes.  The validity of such agreements, however regrettable they may be as a matter of policy, is well established — in the United States, if not in New Jersey.  In order to be enforceable in New Jersey, arbitration agreements now must feature certain provisions that arbitration agreements in neighboring states need not.   Were plaintiff Flanzman to have lived in neighboring Pennsylvania or New York, would her agreement to arbitrate have been rendered invalid on these grounds?

Two Valued Honors for Business Conflict Management LLC

Wed, 2018-10-17 19:10

I am pleased to report that Business Conflict Management has been the subject of two valued instances of recognition.

First, I am pleased to advise that I am the honoree of the James B. Boskey Award as “2018 ADR Practitioner of the Year.”  The Dispute Resolution Section  of the New Jersey State Bar Association presents the Boskey Award annually to a practitioner in recognition of achievements in (1) informing and educating the public about Alternative and Complementary Dispute Resolution techniques; (2) encouraging and promoting reform and modernization of our legal system; (3) improving the relationship between the legal profession and the general public; (4) exemplifying the goals and purposes of the Dispute Resolution Section; and (5) service to the residents of the State of New Jersey. The Award is widely recognized as the highest honor that an individual can achieve in the development and practice of ADR in New Jersey.  I am very grateful to the Section, to the Bar Association, and to my colleagues for this distinction.

The 2018 “Mediation” issue of Who’s Who Legal has also designated me as among 24 “Leading Individuals” in Canada and the USA, as a result of “nominations from peers, corporate counsel and other market sources this year.”  The editors noted that I was considered “a standout practitioner who is a well-respected authority on conflict management, especially in the case of franchise, employment and insurance disputes.”

Again, I am very grateful to those who expressed such confidence and I hope to continue to serve both clients and the field.

Concerns on the New Singapore Convention

Tue, 2018-10-09 10:52

The United Nations Commission on International Trade Law (UNCITRAL) has announced agreement on a “United Nations Agreement on International Settlement Agreements Resulting from Mediation.”  Informally named the “Singapore Convention,” the instrument has been hailed as a long-sought mechanism to give cross-border disputants the confidence that, if they engage in mediation of international commercial disputes, any resulting agreement will be enforceable by its terms.  The rational stated in the Preamble to the Convention is “that the establishment of a framework for international settlement agreements resulting from mediation that is acceptable to States with different legal, social and economic systems would contribute to the development of harmonious economic relations.”

A review of the provisions of the proposed Convention reveal, however, many aspects that are inconsistent with fundamental attributes of commercial mediation as practiced in Western jurisdictions, including the United States and the United Kingdom.  Moreover, the Convention’s clear reliance on the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) exposes fundamental confusion in the distinction between enforcing a contract and enforcing an award.

  1. Concerns of Mediator Attestation to the Settlement Agreement

It is the intention of the drafters that this treatment of “enforcement” be granted only as to “agreement[s] resulting from mediation.”  The question then arises how to verify that an agreement presented to the court of a country that is a party to the Convention is one that resulted from mediation.  Article 4.1(b) sets forth four possible ways that the party seeking enforcement may prove that it is such an agreement.  Two of them contemplate that the mediator attest to that fact by signing either the settlement agreement or another document “indicating that the mediation was carried out.”

Many mediators conscientiously refuse to sign a settlement agreement.  Most American mediators follow the practice that, consistent with their mediation agreements providing that they not be subpoenaed as a witness, they neither draft nor execute any written memorial that may be interpreted as witnesses its execution or – even worse – including them as a party to the rights and obligations set forth therein.

Additionally, many mediators decline to comment on whether a mediation was carried out, and among what parties, in the exercise of their obligation of confidentiality.  My own mediation agreement, by which parties engage my services, provides in part: “The Mediator will maintain in strict confidence all information arising out of or in connection with this mediation regardless of the form that information might take.”  I understand this to embrace the fact that a particular party engaged in a mediation with another particular party on a particular date concerning a particular issue.  Although I sometimes refer to a mediation (for example, in the course of my teaching or training), I never reveal the names of the parties and often disguise the information by, for example, changing the date, gender, or substantive issue involved.  (See Standard V(A)(3) of the Model Standards of Conduct for Mediators (2005)).  To my knowledge, this is common practice in both the UK and the United States.  To not only permit but, in some cases, to require a mediator to reveal that information is inconsistent with both contractual and statutory provisions that are broadly recognized.

2. Concerns of Refusal to Enforce Grounded on Mediator Conduct

Article 5 sets forth grounds upon which a court in a subscribing State may refuse to enforce a settlement agreement arising from mediation.  Article 5.1(e) provides that an authority may refuse to grant the relief sought against a party to an agreement if that party furnishes proof that “[t]here was a serious breach by the mediator of standards applicable to the mediator or the mediation without which breach that party would not have entered into the settlement agreement.”

This provision can be interpreted as a map for counsel to relieve its client of its obligations under a settlement agreement, by focusing on the conduct of the mediator.  Even the most superficial review of the body of case law in the United States arising from FAA Section 10(a)(3) – authorizing the vacatur of arbitral awards for arbitral “misbehavior”, frequently arbitral failure to provide timely and sufficient disclosure – leads one to shudder at the mini-trials to which this provision is likely to arise.  What standards are applicable to this mediator and this mediation?  What conduct of the mediator constituted violation of those standards?  What witness to the alleged conduct is competent to testify as to the alleged violation?  Shall the mediator be called to explain why the contested conduct does not constitute a violation of the applicable standards?

And what of the deeply entrenched principles – subsisting (in my jurisdiction of New Jersey) in statute, court rule and private contract — that no party will subpoena the mediator to testify in any proceeding; that mediation communications are confidential; and that such communications are also privileged and may not be introduced in any proceeding?  Shall we have contested motion practice on whether proffered evidence of mediator misbehavior shall be admitted before the trier of fact in an action to deny “enforcement” of the settlement agreement?

3.  Holistic Concerns Regarding “Enforcement” of Mediated Settlement Agreements Generally

There is also the more holistic concerns about the entire idea that an agreement arising from mediation is “enforceable.”  Arbitrations result in awards – drafted by tribunals with authority – imposing obligations on the “losing” party that can certainly be enforced by their terms.  By contrast, settlements (whether mediated or not) result in agreements, with mutual obligations whose authority derives from the parties’ consent, and often they are incapable on their face of being merely “enforced.”

Take, for example, a cross-border mediated settlement in which one party agrees to supply the counterparty with such quantity of material as the counterparty “may reasonably require,” and to do so in a “commercially reasonable” period of time after notice.   The counterparty now complains that it did not receive the material when it was needed, and seeks to “enforce” the agreement.   What notice was given, by whom and to whom?  Was the amount required reasonable?  And was the time period “commercially reasonable”?

Or, as another example, by way of compromise in the course of a negotiation, a arty agrees to supply a store with chocolate cake at a lower price, and also to supply cakes that are “ethically sourced.”  It turns out that, unknown to anyone, the ingredients of the cakes were not ethically sourced and the store seeks to “enforce” the mediated settlement agreement, by holding the defrauded supplier strictly liable for its “breach” of the settlement agreement.  Under commercial practices, the Convention on the International Sale of Goods, or other standards, is the supplier in breach?  And is it a fundamental breach?  And does the agreement support lost profits?  Exemplary damages?

In both these cases, an arbitration tribunal may interpret the contract, resulting in an award that is enforceable by means of the New York Convention.  But may a court “enforce” the settlement agreement on its terms by means of the Singapore Convention?

Mediation Summit in Changsha, China

Mon, 2018-09-17 04:46

The China Council for Promotion of International Trade (CPPIT) in conjunction with its Hunan Province Sub-Council convened a dynamic Mediation Summit in Changcha, China, on 12-13 September 2018.

The first panel discussed implications of the Belt/Road Initiative, announced five years ago.

GAO Xiaoli, Deputy Chief Judge of the Civil Tribunal of the Supreme People’s Court, addressed how Chinese courts can provide assistance in international disputes, particularly international commercial mediation.  She noted that increased engagement in international trade has challenged China’s capacity to resolve commercial trading disputes efficiently and in line with disputants’ interests.  She rejected the model of mediation as a substitute for litigation, and suggested that there is no need to approach the challenge with an “either/or” attitude.  It does require that mediated agreements be enforceable (either judicially or through the notary process), strengthening the effectiveness of the international mediation process.  Enforcement proceedings should also be quick and not protracted, and sensitive to commercial demands.  She proposed certain procedural administrative improvements to support the growth of mediated resolutions.  Some of these – such as court-appointed mediation — were promulgated already by decree dated 27 June 2018.    (A later panel, which I moderated, addressed enforcement of mediated settlement agreements through the newly promulgated Singapore Convention.)

Pasit ASAWAWATTANAPORN, Managing Director of the Thailand Arbitration Center, noted that his country is an important trade and investment partner with China.  It has benefited from China’s aggressive investment activities in connection with Belt/Road, resulting in a 10% growth in Chinese trade.  Thailand’s own infrastructure plans are heavily influenced by Belt/Road, for example the high-speed train from China through Laos to Thailand.  These public and private investments amount to at least 1.5 trillion baht (USD 45 billion) in the past five years, including roads, airports, hospitals, ports and tourism.  In acknowledgement of the critical nature of the success of these projects, the Thai government has eased restrictions on foreign workers, loosened regulations of procurement laws, and – in the case of the high-speed train project – taken actions to anticipate and forestall disputes.  He noted that arbitration is not the ideal approach inasmuch as disputes in this area are best addressed early, inexpensively, and with the goal of a consensual outcome.

CHEN Fuyong, Deputy Secretary General of the Beijing Arbitration Commission, offered several case studies of disputes that have arisen from activities associated with Belt/Road.  One was a construction dispute between a Hong Kong and Beijing corporations to complete a construction located in Russia, featuring an arbitration clause before the Beijing Arbitration Center.  Claimant initiated such an action, but Respondent sought to enforce the requirement of mediation prior to arbitration.  The arbitral tribunal interpreted the Russian “Development Project General Contract” to be too general to enforce, and permitted the arbitration to go ahead.  In another case involved a purchase agreement providing for payment by the acquired company of contingent debt or outcomes of lending legal proceedings.  Dispute resolution proceedings were sufficiently vague as to be commercially ineffective.  The lesson is a general one – clarity matters when drafting dispute resolution agreements and when transferring risk through contracts of insurance.

Prachant KUMAR, of the Bar Association of India, noted you can choose friends and enemies but not neighbors, and the close regional reliance with China has dictated consensual, non-confrontational dispute resolution processes between Chinese and Indian businesses.  Cultural traditions such as frugality, efficiency, and attention to elders inform the use of consensual resolution processes in the region; it is simpler and more cost-effective than alternatives.  He warned of the risk that, as happened with international arbitration, the simple features of mediation may be made obscure, legalistic and expensive if appropriated by the legal community.  He used an iPhone as an example of something that contains much expertise, but is designed to be very simple for the user of the device.  He urged that companies engaging in cross-border deals opt for simple agreement language, close monitoring of local advisors, and early attention to operational issues that, if left unattended, could develop into formal, disruptive disputes.  He reported on a 2018 initiative in Indian courts that commercial disputes be mandatorily referred to mediation – an effort that, if successful, could have a substantial and welcome impact on the state of civil justice in India.

 

Supreme Court Grants Cert Addressing Delegation of Arbitrability

Thu, 2018-07-05 13:46

Upon reconvening in October 2018, the Supreme Court will take up  an interesting question involving the familiar rules of First Options v. Kaplan:  Who is to decide whether a claim is subject to arbitration — a court or the arbitrator?  The peculiar facts giving rise to that concern in Archer and White Sales Inc. v. Henry Schein Inc. broaden, rather than limit, the case’s interest.

Archer, a distributor and seller of dental equipment, brought a suit against Schein, a manufacturer, alleging violations of the Sherman Antitrust Act through a pattern of conduct including price-fixing and anti-competitive agreements that were continuing.  The suit sought both money damages and an injunction prohibiting the continuing conduct.

Schein moved to compel arbitration pursuant to an arbitration agreement that required the application of AAA Rules and that carved out of its scope “actions seeking injunctive relief.”  The Magistrate Judge granted the defendants’ motion to compel arbitration on the grounds that (a) the choice of AAA Rules evince an intention to delegate arbitrability to the arbitrator, and that (b) the arbitration agreement can be reasonably construed as contemplating the inclusion of this dispute.

(AAA Rule 7(a) provides that an “arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”)

The district court vacated the Magistrate Judge’s order and held that the dispute was not arbitrable  pursuant to the arbitration agreement, because it expressly carved out any claim for the injunctive relief sought by the plaintiff in the action.

Upon appeal to the Fifth Circuit, the parties agreed to the existence of an arbitration agreement, but not to whether its scope included the filed action.  Following its precedent in Douglas v. Regions Bank, the court entered into a two-step analysis, asking first whether the parties “clearly and unmistakably” intended to delegate the question of arbitrability to an arbitrator, and second whether there is a plausible argument for the claim’s being arbitrable.  This is so because, according to the Douglas analysis, if the argument of arbitrability is “wholly groundless,” it made no sense to send to an arbitrator a dispute as to which there are no grounds whatsoever for arbitration.

As to the first step — whether the parties unmistakably agreed to delegate arbitrability — the court skirted the question of whether AAA Rule 7(a) delegated the question of arbitrability to claims that are subject to the carve-out in the arbitration agreement.  Instead, it held that the second Douglas step was dispositive irrespective of the resolution of that first inquiry.  That second-step analysis was straightforward, according to the Fifth Circuit.  The arbitration agreement “expressly excludes certain types of disputes,” and among them are claims for injunctive relief.  Here we have a dispute where the claimant seeks injunctive relief.  Any conclusion  that the claim is subject to arbitration is therefore “wholly groundless,” and the court could see “no plausible argument that the arbitration clause applies” to it.  The district court therefore properly determined that the action was not subject to arbitration, and its order denying defendants’ motion to compel was affirmed.  “The mere fact that the arbitration clause allows [plaintiff] to avoid arbitration by adding a claim for injunctive relief does not change the clause’s plain meaning.”

[Note to Self:  Revise slide 19 of the “Drafting Arbitration Clauses” Power Point!]

So we have several interesting questions.  Does a clause carving out “actions seeking injunctive relief” carve out that portion of an action that seeks an injunction, but preserve that portion that seeks monetary damages?  Is the idea of booting “wholly groundless” claims of arbitrability properly applicable only to claims having nothing whatsoever to do with the contract at issue (say, a claim for an unrelated, non-contractual injury)? In determining the “wholly groundless” nature of the assertion of arbitrability, is the court improperly construing the arbitration agreement, in derogation of the parties’ determination that the arbitrator should do so pursuant to AAA Rule 7(a)?  Is there an at-least-colorable construction of the carve-out language that would hold that the parties may come to court to seek injunctive relief, but must arbitrate claims for money damages?

At least we will have no doubt about “who decides” these questions — the Supreme Court will.