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Stolt-Nielsen Oral Argument Analysis: Part III

December 23rd, 2009 Arbitrability, Authority of Arbitrators, Awards, Class Action Arbitration, Class Action Waivers, Consolidation of Arbitration Proceedings, United States Supreme Court 2 Comments » By Philip J. Loree Jr.

On December 9, 2009 the United States Supreme Court held oral argument in Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Corp., 548 F.3d 85 (2d Cir. 2009), petition for cert. granted June 15, 2009 (No. 08-1198) (oral argument transcript here).  Stolt-Nielsen concerns whether class or consolidated arbitration may be imposed on parties whose contracts are silent on that point, and we have written extensively on it, including an ongoing series of guest-post articles for our friend Karl Bayer’s  Disputing blog.  (Posts available here,  here, here, here, here, here, here, here and here.)  

On December 16, 2009 we posted Part II of our analysis of the oral argument (Parts  I, here, Part II, here).   In this Part III we focus on what transpired with respect to the second of four key interrelated issues raised at oral argument and identified in Part I:  What exactly did the arbitrators decide? 

What Exactly did the Arbitrators Decide?

As discussed in Part II, it is the submission that defines and delineates arbitral authority.  But to determine whether an arbitration panel exceeded its authority, we must compare the submission (A) with what the arbitrators actually decided (B), and if B evidences an exercise of authority greater in scope than A, then the award must be vacated in whole or in part.

Our focus today is on B:   What did the arbitrators decide?   And just as the Stolt-Nielsen entities (“Stolt-Nielsen”) and AnimalFeeds dispute what was submitted to arbitration, so too do they disagree about what the arbitrators decided, and on what basis.   

Summary of the Parties’ Positions

Stolt-Nielsen argues that the arbitrators found – and the parties agreed — that the arbitration clauses were silent on class arbitration and that the arbitrators predicated their decision on extra-contractual considerations of public policy.  AnimalFeeds contends that the arbitrators construed the scope provision of the arbitration agreements — which requires the parties to arbitrate “Any dispute arising from the making, performance or termination of this Charter Party.  .  .  .”  — to mean that the parties consented to class arbitration.  Thus, says Animal Feeds, the arbitrators ruled the agreements were not silent on class arbitration, and that ruling is subject only to the very deferential review available under Section 10 of the Federal Arbitration Act. 

Stolt-Nielsen’s Argument

According to Stolt-Nielsen, the arbitrators said that “Even though there is no meeting of the minds objectively revealed, nonetheless we are going to apply a background rule that puts the burden on the party opposing arbitration to prove that there is an intent to preclude” class arbitration.  (Tr. at 6)  Justice John Paul Stevens asked whether Stolt-Nielsen “would agree that if [the arbitrators].  .  .  [had] phrased their order a little differently and said: We think that the best reading of this agreement is that the parties intended to authorize class arbitration, then you would have no case?”  (Tr. at 11)  In response, Stolt-Nielsen acknowledged that “we would have review only under the — I don’t know that I would characterize it this way, but what Justice Breyer characterized, the [‘]Mar[]s[’] standard of review.  .  .  .,” i.e., whether the arbitrators manifestly disregarded the law or contract.  (Tr. at 11-12)  But that was not the case here, because “the arbitrators in this case concluded that [the arbitration agreements] neither permitted nor prohibited [class arbitration], either by [their] express terms or by reference to other objective indicia.”  (Tr. at 12)  

Stolt-Nielsen referred the Court to “the reasons why [AnimalFeeds argued] they should win, in light of [AnimalFeed’s counsel’s].  .  .  statement that there was no meeting of the minds:”  

This is all that [AnimalFeeds] said: ‘The parties’ arbitration clause should be construed to allow class arbitration because, (a), the clause is silent on the issue of class treatment, and without express prohibition, class arbitration is permitted under Bazzle.’  The arbitrator[s] said: No, that’s not what Bazzle means.  Bazzle doesn’t mean that unless there is an express prohibition, it’s .  .  . permitted.  So that was [AnimalFeeds’].  .  . reason No. 1.

Let’s go to their reason No. 3.  .  .  . ‘Claimants argue that Bazzle requires clear language that forbids class arbitration in order to bar a class action.  The panel, however, agrees with Respondents that the test is a more general one.  Arbitrators must look to the language of the parties’ agreement to ascertain the parties’ intention, whether they intended to permit or to preclude class arbitration.’

(Tr. at 21)  

 As — as a background rule, that’s what [the arbitrators].  .  . said. What they said was,  .  .  . they acknowledge the force of the argument, quote, ‘that the bulk of international shippers would never intend to have their disputes decided in a class arbitration.” But they said: Well, we can deal with that later in deciding whether they can opt in or out.

I mean, the point is that if you have to opt in because it’s clear that you never agreed, there [was] no meeting of the minds.

(Tr. at 23)  

[AnimalFeeds said] the clause would be unconscionable and unenforceable if it forbade class arbitration.  The panel said: We aren’t reaching that; we are not deciding that question.

So what’s left?  The only other argument that AnimalFeeds made was B: The clause should be construed to permit class arbitration as a matter of public policy. And that is exactly what the arbitrators did.

What they said was.  .  .  that if they followed a strict contractual theory, quote, ‘There would appear to be no basis for a class action, absent express agreement among all parties and putative class members.’

And they then, lower down on the page, then said that we were required to prove that the parties, quote, ‘intended to preclude arbitration.’  That is, they applied a background rule that they thought was desirable from a public policy sense.

And our sole submission here, the only question presented in this case, is that that decision is.  .  .  precluded by the Federal Arbitration Act, which requires that contracts to arbitrate be construed only in accordance with their terms and what the parties agreed with.  And Section 4 of the Arbitration Act couldn’t be clearer that they — they can only proceed, quote, ‘in accordance with the terms of their agreement.’

(Tr. at 27-28)   

AnimalFeeds’ Argument

AnimalFeeds placed a different spin on what the Panel ruled.  They focused on the arbitrators’ reference to the scope provisions of the arbitration agreements, which require arbitration of “any dispute” arising out of the Charter Party: 

 Petitioners’ position rests on a misinterpretation of what the arbitrators did.  .  .  .  Mr. Waxman already read to you the language that the arbitrators understood they must look to the language of the parties’ agreement to ascertain the parties’ intention.

.  .  .  .  [W]hat they relied on was the broad language of the agreement, the language “any disputes.” And in particular, they drew on the breadth of that language and on the fact that many other arbitrators had read similar language to permit class arbitration.  .  .  .  

(Tr. at 30-31) 

Chief Justice John G. Roberts, Jr. expressed skepticism about AnimalFeeds reliance on the scope provisions of the arbitration agreements: 

CHIEF JUSTICE ROBERTS: .  .  .  .This is what I was wondering. It is, of course, any dispute arising from — blah, blah — performance, termination of this charter party shall be settled in New York.

Now, there’s — the class is not a party to this charter party. So disputes arising from this charter party doesn’t involve the class. So they did not agree to arbitrate with the class.

Now, as I understand what the arbitrators did, they said: Well, they didn’t preclude it, and so we get to decide how far our authority goes.

(Tr. at 31-32) 

AnimalFeeds response again attempted to focus the Court’s attention on the “any disputes” language, pointing out that the arbitrators rejected AnimalFeeds’ argument that class arbitration was permitted if not clearly excluded: 

The arbitrators specifically rejected the notion that they should adopt this as a default rule.  .  .  Where we had actually argued that they should, they rejected our argument.

[‘]Claimants argue that Bazzle requires clear language that forbids class arbitration in order to bar it; the panel, however, agrees with Respondent.[’]

So they are saying: We are not going to do this based on a default rule; we are going to do this based on the language and intent.  .  .  .

(Tr. at 32) 

.  .  .  .  They go on and they read any disputes to authorize –now, it’s not to require class action. I think it’s important that that be clear.

It’s to put the class action mechanism –or, to read the contract, that the class action mechanism is in the arbitrators’ toolbox.  It’s something that’s available.  It’s not necessarily going to happen, but it’s something that’s available. So it’s part of the delegation to the arbitrators of authority to choose procedures.  Now —

CHIEF JUSTICE ROBERTS: .  .  .  .[W]hen you say “arbitrators’ toolbox,” I’m trying to figure out if that is something different than what the parties agreed to.

MS. PILLARD: No, by agreeing to arbitrate any disputes, the arbitrators found that they were given the authority to use class arbitration, among other procedures, if they were appropriate in a particular case.

.  .  .  .

(Tr. at 33)

[T]he panel is.  .  . talking about the [“any disputes”] language in the context of the other arbitration precedent, or the other arbitration opinions that had developed at that point under the AAA arbitration scheme.  And they are saying the — they find that the broad wording “any dispute” to be significant, and the fact that other arbitrators looking at that language also found “any dispute” to encompass the choice of this procedure.

.  .  .  .

(Tr. at 34)  

[The Panel has] .  .  . expressly.  .  .rejected the notion that they are supposed to [find class arbitration permissible] as a matter of default.

And then I just want to address this language, which I think could be confusing, .  .  .  where they say .  .  .  Respondents’ evidence “does not establish that the parties intended to preclude class arbitration.”

You might read that as supporting the argument that you are proffering. However, I believe that the arbitrators meant that that once they had established under the “any disputes” language that there was affirmative general authorization on the part of the arbitrators to choose any procedures, to have this in their toolbox, then in order to overcome that, you would need to — and the Petitioners were trying with their maritime experts [–].  .  . show an intent to preclude.

(Tr. at 35-36)  

Justice Antonin Scalia expressed doubt about AnimalFeeds’ contractual interpretation argument, asking “ You are hanging your whole — your whole assertion that — that these arbitrators not only found that the contract did not prohibit it, but found that the contract positively authorized class action, upon that [“any disputes”].  .  .  language.  .  .?”  (Tr. at 36)  AnimalFeeds responded: “Together with the language on 49a where the panel expressly rejects the idea that all you need is the absence of language forbidding it.”   (Tr. at 36)  Chief Justice Roberts again expressed skepticism, again pointing out that “the ‘any dispute’ language that you’re, you know, quite understandably relying on refers to any dispute arising from the — making performance or termination of “this charter party.” “This charter party” says nothing about arbitrating with C [a hypothetical non-party to a charter party between A and B].”  (Tr. at 38)   

In a brief rebuttal, Stolt-Nielsen — referring to the undisputed evidence on custom and practice it submitted to the arbitrators – added:     

[L]et me just say that when Ms. Pillard says.  .  .  we don’t know whether the parties in this industry agreed or disagreed, all of the — the evidence was undisputed that since the days of Marco Polo the background principle in maritime law has been bilateral, rigorously bilateral.

(Tr. at 59)   

Analysis

Five key points concerning the scope and basis of the arbitration panel’s ruling can be distilled from the oral argument .  First, prior to the Supreme Court appeal, the parties’ agreed that the arbitration agreements were silent on whether class arbitration was permitted or precluded.  Second, the arbitrators acknowledged “‘that the bulk of international shippers would never intend to have their disputes decided in a class arbitration’”  (Tr. at 23), and “[t]here would appear to be no basis for a class action, absent express agreement among all parties and putative class members.”  (Tr. at 27)  Third, the arbitrators, at least in passing referred to the “any disputes” language in the scope provisions of the arbitration agreements.  Fourth, the arbitrators concluded that class arbitration was permitted because a number of other arbitration panels that had interpreted arbitration clauses having a similarly broad scope had reached the same conclusion.  Fifth, the arbitrators’ decision effectively ignored the undisputed evidence of custom and practice that federal maritime law required them to consider (before the arbitrators, the Stolt-Nielsen argued that New York law also required consideration of custom and practice in the circumstances).  That undisputed evidence, as the District Court observed, conclusively established that class actions or class arbitrations were unheard of in the maritime law context. 

The key is that the arbitrators, if only in passing, concluded that the scope provisions of the parties’ arbitration agreements was broad enough to permit the arbitrators to impose class arbitration if they deemed it appropriate in the circumstances.  So, from a strictly linguistic perspective, the arbitrators have said the agreement was not silent on class arbitration. 

The substance of that conclusion is dubious because the arbitrators did not really interpret the contract, found no specific, objective intent concerning class arbitration, and effectively acknowledged that all available evidence of the parties’ objective intent supported a contrary conclusion.  What the arbitrators did in essence was conclude:  (a) the scope of the arbitration clause was broad; (b) the parties did not expressly exclude class arbitration; and (c) therefore the parties intended to authorize class arbitration.  But premise (a) was not so much an interpretation of the contract as a legal truism; premise (b) was entirely undisputed; and conclusion (c) is, as the arbitrators appeared to recognize, at odds with the only available extrinsic evidence of the parties’ intent. 

As Stolt-Nielsen argued, what the arbitrators really did was formulate and apply a “background rule:”:  If the scope of the arbitration agreement is broad, then class action arbitration is authorized unless the parties expressly prohibit it.  That’s not really contract interpretation; if anything it is an interpretation of what the arbitrators believed was permitted by the Federal Arbitration Act.  And the rules governing the allocation of power between arbitrators and courts say courts get to make and apply those rules.  

But in AnimalFeeds’ view, the arbitrators’ decision should be immune not only from deferential review under Federal Arbitration Act Section 10, but from any review at all.  And it may have a point.  The arbitrators grounded their decision in the contract — however tenuously — and Stolt-Nielsen did not request that certiorari be granted on whether the award was in manifest disregard of the law or contract.   

If five justices are satisfied with the uncertain status quo concerning class arbitration under the Bazzle regime, and believe that the best course as a matter of public policy is to allow class arbitration to continue (and even flourish), then AnimalFeed’s argument may provide an interpretive path for a ruling that the predicate on which certiorari was granted – the agreements’ silence on class arbitration — has not been established, and accordingly, the question on which certiorari was granted is not properly before the Court.   But we believe that following that path would be detrimental to arbitration as an institution and lead to more litigation and confusion.      

In Part IV we shall discuss why that is so and whether there is an alternative path that would permit the Court to reach the merits of the question effectively decided by the arbitrators.  As we shall see, that discussion implicates the third of the four issues identified in Part I:  Whether the parties’ agreements were in fact silent on class arbitration.   And it shows that the overarching issue in Stolt-Nielsen is the allocation of power between arbitrators and courts.

         

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2 Responses to “Stolt-Nielsen Oral Argument Analysis: Part III”

  1. […] at the Loree Reinsurance and Arbitration Law Forum, Philip J. Loree, Jr. offers a detailed analysis of the oral argument in Stolt-Nielsen S.A. v. […]

  2. […] is or should be.  It assumes the Court reaches the merits; as explained in Parts III and IV (here and here), the United States Supreme Court may take another “pass” on the question presented […]