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"Do Awards From Expert Determination And Other Private Summary Dispute Resolution Mechanisms Fall Within The New York Arbitration Convention?" by Marcin Tustin


Do Awards From Expert Determination And Other Private Summary Dispute Resolution Mechanisms Fall Within The New York Arbitration Convention?

by Marcin Tustin

Expert determination, together with related mechanisms such as dispute resolution boards, are private summary dispute resolution mechanisms intended to provide faster resolution than the quasi-judicial process of arbitration, in part because they usually escape the local supervisory mechanism for arbitration. This paper examines how several jurisdictions have drawn the distinction between arbitration and non-arbitral procedures in the enforcement of awards under the New York Convention, to determine the extent to which successful parties in expert determination may benefit from the New York Convention enforcement regime.

What Is Expert Determination?

A. According To The Commentators

The type of expert determinations this paper addresses are described by Douglas Jones, Expert Determination and Arbitration, 67 ARB. 17 (2001):

[A] new and distinct category of expert determination has emerged. Here, expert determination is used as a mechanism for resolving all or particular categories of disputes arising under a contract, a role previously played by arbitration.

Jones provides in the same paper an overview of the relative practical merits of expert determination, and an indication of the growing significance of the procedure. It is these cases which motivate this paper: awards which finally resolve the dispute, rather than solely consisting of findings of fact.

Unhelpfully, the New York Convention itself provides no definition of an award for experts' awards to comply with, although final resolution is generally considered a requirement. Judith Gill, The Definition of Award Under the New York Convention, 2 DISP. RESOL. INT'L 114, 120 (2008).

i. Approaches To Distinguishing Expert Determination From Arbitration

This paper uses the term "substantive approach" to denote approaches which focus on elements of the substantive nature of the dispute resolution process (such as the question asked, the manner in which the procedure is carried out, and the nature of the award produced). The term "formalist approach" denotes a focus on the consequences of the categorization, and the juridical nature and status of the dispute resolution process, rather than its actual contents. Under a formalist approach, processes carried out otherwise identically may attract a different categorization, for instance because of party intention.

ii. Substantive Definitions

The major commentators on arbitration have generally drawn their substantive definitions to define away the category of expert determination with which this paper is concerned. Fouchard, Gaillard, Goldman states "If the parties confer a power of decision [...] on a third party to whom they refer to as an expert, that third party is in fact either an arbitrator, or in the absence of a dispute, an agent of the parties". FOUCHARD, GAILLARD, GOLDMAN ON INTERNATIONAL COMMERCIAL ARBITRATION para. 26 (Emmanuel Gaillard & John F. Savage, eds., 1999) (cf. JEAN-FRANÇOIS POUDRET & SÉBASTIEN BESSON, COMPARATIVE LAW OF INTERNATIONAL ARBITRATION 15 (Stephen V. Berti & Annette Ponti trans.,Sweet & Maxwell Ltd 2d ed. 2007) (2002)). Park gives the following illustration:

For example, a building contractor and his customer, fighting over the non-payment of a bill, might ask the decision-maker "Was the roof completed?" Or they might ask, "Does Customer owe $10000 to Contractor?" An expert would be more likely to answer the first question, while the second would normally be for an arbitrator.

WILLIAM W. PARK, ARBITRATION OF INTERNATIONAL BUSINESS DISPUTES: STUDIES IN LAW AND PRACTICE 437 (2006) (cf. 1 GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 225 (2009)).

It follows that what these commentators consider expert determination can never be enforceable under the New York Convention because courts enforce orders and rights, rather than facts. Likewise, expert determinations which ask the expert to determine "what are the legal rights of the parties?" fall within these authors' definition of arbitration.

iii. Formalist Definitions

Kendall offers the following summary of the formalist distinction:

The crucial difference between expert determination and arbitration lies in the procedure and the absence of remedies for procedural irregularity in expert determination. An arbitration award may be set aside because the procedure fails to conform to the statutory standard of fairness which is closely derived from the principles of natural justice: no such remedy is generally available to invalidate an expert's decision. An expert can adopt an inquisitorial, investigative approach, and need not refer the results to the parties before making the decision. An arbitrator needs the parties' permission to take the initiative, and must refer the results to the parties before making the award.

JOHN KENDALL ET AL., DISPUTE RESOLUTION: EXPERT DETERMINATION para. 1.1 (4th ed. 2008). The entirety of chapter 16 is also devoted to the distinction.

But note that the substantive elements mentioned may be dispensed with in look-sniff arbitrations (see below), and, for example, under the CIETAC Rules, arbitral tribunals may adopt an inquisitorial approach. China International Economic and Trade Arbitration Commission (CIETAC) Arbitration Rules, Feb. 3, 2012, Art 33(3), available at http://www.cietac.org/index/rules/47607adcbb68427f001.cms.

Liebscher offers that expert determinations are those binding processes conducted by a third party which lead to an award not having the effect of a judgment. CHRISTOPH LIEBSCHER, THE HEALTHY AWARD: CHALLENGE IN INTERNATIONAL COMMERCIAL ARBITRATION 137 (2003).

B. According To The Courts

The majority of jurisdictions which are significant in international arbitration take an approach which assimilates to arbitration expert determination of the type considered here. Those jurisdictions include France, Switzerland, Italy (in relation to international, but not domestic awards) and arguably the USA (under the Federal Arbitration Act), applying a substantive criterion to identify arbitration. Germany applies a formalist approach and does not allow enforcement of experts' awards. The UK applies a formalist approach, and would seem likely to allow enforcement, although no case in point has come before the courts for decision.

i. France And Switzerland

The approach taken in France and Switzerland is to distinguish between arbitration, which finally determines the rights and obligations of the parties, and expert determination, which rules on a point of fact, notwithstanding that that fact may be fully determinative of the disputed obligations between the parties. See, e.g., i.S. Nachmann gegen German und Mitb. Bundesgericht [BGer] [Federal Supreme Court] Dec. 9, 2003, 130 Entscheidungen des schweizerischen Bundesgerichts [BGE] III 125; Mutuelle Fraternelle d'Assurances v Chetouane, Cour d'Appel [CA] [regional court of appeal] Paris, 1e ch., Dec. 21, 2000, 2001 Revue de l'Arbitrage 178. This is a substantive approach because it addresses the features of the procedure as actually undertaken in the case in order to draw the classification.

The Swiss Bundesgericht puts it thus in a case where a contract provided for a third party to determine whether termination of that contract was reasonable:

The expert may rule only on whether the termination is justified or not, he is not entitled to certify the mutual obligations of the parties. [. . .] Under these rules the decision so provided is certainly not comparable to a judgment pronounced and the contractual clause is therefore not an arbitration agreement.

Garage A. et fils v. Z. AG, BGer Dec. 14, 2006, 4P.299/2006, 29 ASA Bulletin 391 (2011). Translation by author.

The Swiss Bundesgericht has applied the same approach to decide what is an international arbitration in i.S. Nachmann gegen German und Mitb. The Bundesgericht upheld enforcement of a German award in Switzerland (in part) on the basis that it was an arbitral award because it provided a binding determination of the parties' rights.

The French Cour d'Appel de Paris, applying almost identical reasoning to that quoted above, has held that a decision of a doctor fixing the proportion of damages to be paid by an insurance company was an expert determination, because the doctor was not asked to draw a legal conclusion from his factual conclusions; and that a procedure to determine the value of a car (which would then be the amount owed by one party, being an insurer, to the other, being the insured) was an expert determination because the decision was one of pure fact, and could not function as a judgment. Mutuelle Fraternelle d'Assurances v Chetouane, Cour d'Appel; Thouzery v AXA Assurances CA Paris, Mar. 14, 2002, 2002 Revue de l'Arbitrage 772.

Courts following this approach have regard to both the agreement, to ascertain the nature of the question that the third party should be answering, and to the form of the answer given, to ascertain whether the answer amounts to an order determining the legal rights and obligations of the parties, or a pure determination of fact. It can be seen that this maps neatly to the distinction drawn by Park, and Poudret and Besson, above.

This analysis is also supported by Fouchard, Gaillard, Goldman, who state that a defining characteristic of an arbitration is that it resolves disputes, relying on the New York Convention Art II(1) that "parties submit 'differences' to arbitration", and on Art. 1496 of the French New Code of Civil Procedure, "stating that '[t]he arbitrator shall resolve the dispute.'" GAILLARD & SAVAGE, supra, at para. 30. They go on: "experts will only be acting as the parties' agents where they confine themselves to making comments and leave the parties or arbitrators to review the contract or to resolve the dispute themselves." ID. at para. 32.

ii. The U.S. Approach

It appears that the U.S. takes the French-Swiss approach domestically, and would almost certainly take the same approach internationally. Born describes the approach: "a defining and distinguishing characteristic of arbitration is its mandatory use of adjudicatory procedures to resolve the disputes and claims presented by the parties." 1 Born, supra, at 229. Under this approach, "what is important is that the parties clearly intended to submit some disputes to their chosen instrument for the definitive settlement of [their] grievances." McDonnell Douglas Fin. Corp. v. Pennsylvania Power & Light Co., 858 F.2d 825, 830-31 (2d Cir. 1988) (internal punctuation omitted). Likewise Rau: "So it should not be too surprising to find many American courts simply unable to find any reason at all why the legal regime of arbitration should not now extend equally to appraisals or expert determinations." Alan Scott Rau, The Culture of American Arbitration and the Lessons of Adr, 40 TEX. INT'L L.J. 449, 487 (2005) (internal punctuation omitted).

Unfortunately, the question of the appropriate international approach has been directly addressed only once in the US, in the case (well known in the literature, but never cited by another US court, according to the Westlaw online citator at the time of writing) of Frydman v. Cosmair, Inc. 1995 WL 404841 (S.D.N.Y. July 6, 1995). In that case, the court suggested that it would not enforce an "award" from a French price appraisal, both because the procedure supplied a term of a contract, rather than resolving a dispute, and also because of the juridical status of the procedure in France (which, as above, also does not have the status of arbitration there):

First, while general arbitrations are conducted as a means of resolving disputes, Article 1592 price arbitrations are conducted as a means of providing the price term for contracting parties. Second, and more importantly, a general arbitral award, under normal circumstances, takes on the status of a judgment; the same is never true for an Article 1592 price appraisal. It is for these two primary reasons that an Article 1592 appraisal cannot be recognized as falling under the Convention.

It is submitted that the juridical status in France is a red herring, as the same substantive criterion is applied in France as in the US in order to decide that the procedure does not produce an award having the effect of a judgment. It is to be hoped that this decision will not be received by subsequent American courts as laying down that the true test for enforceability under the New York Convention is that a foreign procedure must both meet the US substantive test for an arbitration, and also have the status of a judgment in its home country. Instead it should be understood as applying a single substantive test, which exists in both American and French domestic law to identify an arbitration.

At the appellate level, the enforcement of awards from Italian arbitrato irrituale (a summary dispute resolution process provided for in Italian legislation, and domestically not considered equivalent to arbitration) proceedings have twice come before the US courts in relation to motions to stay enforcement proceedings until such time as set aside proceedings have been completed in Italy. Europcar Italia, S.p.A., v. Maiellano Tours, Inc., 156 F.3d 310 (2d Cir. 1998); Spier v. Calzaturificio Tecnica S.p.A., 663 F. Supp. 871 (S.D.N.Y. 1987). In each case, the appellate court was able to avoid directly addressing the issue of enforceability, remanding the question of a stay to the lower court. Crucially, in both cases, the appellate court rejected the defendants' argument that the federal courts lacked subject matter jurisdiction to hear the case because arbitrato irrituale falls outside the ambit of the New York Convention.

It follows as a matter of logic that if arbitration is defined in the U.S. substantively, and federal courts have subject matter jurisdiction over enforcement under the Federal Arbitration Act, that there is no reason in principle why awards from foreign expert determinations should not be capable of enforcement as if arbitral awards, unless some other definition of arbitration is adopted in international cases.

iii. The German Approach

The distinction drawn by the German courts is that arbitral procedures are those which by definition result in an award having equivalent status to a court judgment under the legal system of the seat of the arbitration; expert determinations are seen as merely being binding in contract. Bundesgerichtshof [BGH] [Federal Court of Justice] Oct. 8, 1981, VIII Y.B. Com. Arb. 366; 1982 Eur. Com. Cases 516; see Stefan M. Kröll, Recognition and Enforcement of Foreign Arbitral Awards in Germany, 5(5) INT'L ARB. L. REV. 160 (2002). This same approach was formerly applied by Swiss courts, and remains the correct approach in Italian domestic (but not international) cases. Zanetta & Moretti c. Comune di Vacallo, BGer May 13, 1981, 107 BGE Ia 318; Gaetano Butera c. Pietro e Romano Pagnan, Cass., sez. un., 18 settembre 1978, n. 4167, IV Y.B. Com. Arb. 296. According to Born, this insistence that the juridical nature is judicial also determines certain substantive aspects of German arbitrations, such as that they cannot be limited to certain issues, and that the proceedings must have a judicial-style process. 1 Born, supra, at 226, 226 n.119.

The quite extraordinary reasoning given by the German Bundesgerichtshof ("BGH") for this rule is: (a) the word "arbitration" in the English text of the New York Convention should be analogized to the German Schiedsverfahren procedure; (b) accordingly foreign arbitral awards should also have the effect of a judgment, as do Schiedsverfahren awards; and (c) the prior Geneva Convention of 1927, by dint of requiring so-called double exequatur, required awards to have the status of a judgment, and that the New York Convention was not intended to apply to any wider class of awards than the Geneva Convention. BGH Oct. 8, 1981, VIII Y.B. Com. Arb. 366,367; United Nations (Secretariat of the League of Nations), Convention on the Execution of Foreign Arbitral Awards, 26 September 1927, 92 L.N.T.S. 301 [hereinafter the Geneva Convention of 1927].

The arguments given by the BGH for this chain of reasoning were, first that they considered that to analogize between the term in the text and the local procedure promotes autonomous interpretation of the New York Convention. That appears to this author to be the very definition of a contradiction.

Secondly, the BGH considered that the purpose of the New York Convention is to harmonize the law of enforcement of foreign arbitral awards. In this case, an Italian award lacked the status of a judgment in Italy, and granting enforcement would have conferred the status of a judgment in Germany. This argument has found some academic support. Poudret and Besson consider (attributing the position to Van den Berg) that to give the award the status of a judgment in the foreign country would be "paradoxical". POUDRET & BESSON, supra, at para. 21.

The New York Convention appears explicitly to contemplate diversity of effect. The Arts. V(1),(2) criteria for refusing enforcement allow a state to enforce an award which is set aside or not binding. Art. III explicitly states that the purpose of the convention is to assimilate the treatment of foreign awards to the treatment of local awards on enforcement ("Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied on"). Art. III prohibits discrimination against foreign awards, but does not refer to parity with, or status in, the legal system at the seat of the arbitration.

The only reference to the status of the award in the seat legal system is in Art. V(1)(e) that "Recognition and enforcement of the award may be refused [. . .] if [. . .] (e) [t]he award has not yet become binding on the parties"). Even this is optional. No particular juridical doctrine creating that binding effect, nor any requirement that the binding effect has any particular content (for instance that the subject of the award be res judicata) is specified.

To treat the language and scope of the New York Convention as being restricted by a requirement of the previous international instrument, which prior requirement the New York Convention has explicitly abandoned, is a quite extraordinary approach to construction.

Kröll considers that the restriction to arbitration arises from Art. 101 of the German Grundgesetz (which provides that "[n]o one may be removed from the jurisdiction of his lawful judge"), that no-one can be deprived of access to the courts without a valid arbitration agreement. If that is so, the public policy ground under New York Convention Art. V(2)(b) would be available. Stefan M. Kröll, Recognition and enforcement of foreign arbitral awards in Germany, 5 INT'L ARB. L. REV. 160, 165 (2002). It is unfortunate that the Bundesgerichtshof did not articulate this argument as part of its reasoning, rather than importing this policy into its construction of Art. V(1)(e).

iv. The Italian International Approach

The approach taken by the Italian Corte di Cassazione in relation to foreign awards is simply to address whether or not the award is final and binding. The court's reasoning is that, first, the language of a multilateral treaty such as the New York Convention is intended to operate in a variety of different legal systems, and so cannot be read restrictively. Gaetano Butera c. Pietro e Romano Pagnan, supra.

Secondly, a literal reading of the treaty does not disclose any requirement that the award have the status of a judgment, only that the award be final and binding, and that the agreement comply with the New York Convention Art. II(2) formality requirements. The finality requirement seems inferred from the ground permitting refusal in case the award is "not yet binding on the parties."

Thirdly, the court inferred that the abandonment of the Geneva Convention of 1927 requirement of double exequatur indicates an intent that awards not capable of obtaining exequatur can still be enforced under the Convention.

This formalist approach is quite different from that taken by the German courts - it focuses solely on a single legal factor, whether the award is binding (and final). It appears equivalent to Poudret and Besson's articulation of the criterion for (non-)vulnerability under Art. V(1)(e) of the New York Convention, that there must no longer be the possibility of "a complete judicial review of the award on the merits by a judge or a superior arbitral authority". POUDRET & BESSON, supra, at para. 918.

Conclusion

The weight of judicial support in Switzerland, France, Italy, and the United States supports making the New York Convention's enforcement procedures available to any foreign award, no matter how categorized in the seat legal system, as long as the purpose of the award is to finally resolve a legal dispute. Only Germany stands apart, and requires that awards be capable of double exequatur as a prerequisite to recognition in Germany. The German position appears to be based on a desire to give effect to certain constitutional provisions without explicitly relying on the public policy provisions of the New York Convention.

This is a positive position for the use of expert determination (and similar mechanisms) for dispute resolution in international contracts, as the jurisdictions surveyed are major centers of international commerce where enforcement of awards is likely to be sought.

Marcin Tustin is a qualified English solicitor who formerly worked in the area of international arbitration and bankruptcy in England, and has now completed the LL.M. in Dispute Resolution and Advocacy at Benjamin N. Cardozo School of Law. He is the 2013 recipient of the Louis Henkin Award for academic achievement and superior scholarship in the LL.M. program. Marcin plans to remain in New York and pursue his career here. Marcin has a number of papers from his LL.M. which he is seeking to publish. He can be reached by email at marcin.tustin@gmail.com.


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