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Wednesday, August 29, 2012

The Case of the Non-Existent Arbitral Body

3d CirOn July 26th, the Third Circuit decided Control Screening LLC v. Technological Application and Prod. Co.  The case involved a dispute over the purchase of eight customized X-ray machines for a price of just over $1 million.  The transaction soured and both sides claimed breach.  Control Screening is a New Jersay Company; Techological Application and Production Company (Tecapro) is a state-owned Vietnamese company.  

Although the parties' agreement contained an arbitration clause, Tecapro initiated arbitral proceedings in Belgium under the Belgian Judicial Code.  Control Screening filed a motion to compel arbitration in the United States District Court of New Jersey and to enjoin proceedings in Belgium.    Here's where it gets interesting.  The arbitration clause reads as follows:

In the event all disputes are not resolved, the disputes shall be settled at International Arbitration Center of European countries for claim in the suing party's country under the rule of the Center. Decision of arbitration shall be final and binding [sic] both parties.

The problem is that there is no such thing as the International Arbitration Center of European countries.  

The district court determined that the “only reasonable interpretation of the arbitration clause" was that Taxapro could seek to arbitrate in Vietnam and Control Screening could seek to aribrate in New Jersey.  Since Control Screening exercised its contractual option first, arbitration in New Jersey was proper.  The district court granted Control Screening's motion to compel arbitration.

On appeal, the Third Circuit looked to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which binding in both the U.S. and Vietnam and is implemented in the U.S. through the Federal Arbitration Act (FAA).    Article II(3) of the New York Convention invalidates an agreement to arbitrate "only when it is subject to an internationally recognized defense such as duress, mistake, fraud, or waiver…”  Here, because the parties mistakenly designated arbitration to commence at a non-existent arbitral body, the forum selection clause of the arbitration agreement is inoperative.  However, the remainder of the agreement establishes an intent to arbitrate.  The Third Circuit treated the agreement as though it had no forum selection clause.  

The FAA provides that “arbitration hearings and proceedings shall be within the district in which the petition for an order directing such arbitration is filed.”  On that basis, the Third Circuit determined that New Jersey was the proper district for the commencement of arbitration.  Because Control Screening’s motion to compel arbitration was brought in the District of New Jersey, the New Jersey arbitration site was proper.

This resolution is not entirely satisifying, as Marc. J. Goldstein points out in his detailed discussion of the case on his Arbitration Commentaries blog.  The parties did not agree on a particular venue, but it was pretty clear that they wanted to arbitrate in Europe.  The Third Circuit acknowledges as much when it rejects (in a footnote) the district court's conclusion that the only reasonable interpretation of the agreement was that each party could initiate arbitration in their home countries.  

The opinion does not state what became of Control Screening's motion to enjoin the proceedings in Belgium.  If a U.S. court grants a motion to compel arbitration in the U.S., does it automatically enjoin foreign aribtral proceedings that had already commenced?  We can understand why that result would follow from the district court's reading of the agreement, but the Third Circuit rejected that reading.  Having acknowledged that the parties anticipated arbitration in Europe, why would the Third Circuit enjoin such a proceeding in favor of a venue to which the parties likely considered and rejected?

[JT and Christina Phillips]

 

 

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