Part III: Background and Procedural History of the Stolt-Nielsen Case
By Philip J. Loree Jr.
Back when the buzz about Stolt-Nielsen focused on how the court breathed new life into the “manifest disregard of the law” standard, the facts of the case were not nearly as important as its discussion of the law. Ordinarily, though, the practice of law is the practice of facts, and as respects the question whether the Second Circuit’s holding was consistent with the Federal Arbitration Act, the facts and procedural history of the case are extremely important, just as they were in Bazzle.
In this Part III (See Part I and Part II) we delve into the background and procedural history of Stolt-Nielsen to: (a) show how it differs from that of Bazzle; and (b) help define the key issues that the Supreme Court will face. We also briefly note those issues, setting the background for Part IV, which will discuss and critically analyze them.
Stolt-Nielsen: Background and Procedural History
The background and procedural posture of Stolt-Nielsen is very different from that of Bazzle. Unlike Bazzle, Stolt-Nielsen: (a) is venued in federal court; (b) involves international maritime contracts, not domestic consumer ones; (c) concerns federal maritime and New York state law, rather than South Carolina arbitration law; (d) features a reasoned, “Class Construction” arbitration award concluding that the pertinent arbitration agreements were silent on class arbitration; and (e) presents no dispute about whether the arbitration agreements are in fact silent on class relief, because the parties are in agreement on that point. Let’s have a look at the pertinent facts and Second Circuit rulings.
AnimalFeeds alleged that Stolt-Nielsen, S.A., Stolt-Nielsen Transportation Group Ltd., Odfjell ASA, Odfjell Seachem AS, Odfjell USA, Inc., Jo Tankers, BV, Jo Tankers, Inc. and Tokyo Marine Co. Ltd. (collectively “Stolt-Nielsen”) are engaged in a “global conspiracy to restrain competition in the world market for parcel tanker shipping services in violation of federal antitrust laws.” AnimalFeeds brought an action in the United States District Court for the Eastern District of Pennsylvania, which was subsequently transferred to the District of Connecticut pursuant to an order of the Judicial Panel on Multidistrict Litigation, which consolidated “actions shar[ing] factual questions relating to the existence, scope and effect of an alleged conspiracy to fix the price of international shipments of liquid chemicals in the United States.” Stolt-Nielsen, S.A. v. AnimalFeeds Int’l Co., 548 F.3d 85, 87-88 (2d Cir. 2008), petition for cert. granted June 15, 2009 (No. 08-1198). Stolt-Nielsen moved to compel arbitration because the parties’ transactions were governed by agreements containing arbitration clauses.
In light of Bazzle the parties agreed that the determination whether the agreements permitted or precluded class arbitration would be made pursuant to Rules 3 through 7 of the American Arbitration Association’s Supplementary Rules for Class Arbitrations (as effective October 8, 2003) (the “Class Arbitration Rules”) The AAA promulgated these rules in response to the Supreme Court’s plurality decision in Bazzle. They require arbitrators to determine “in a reasoned partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class. . . .” They also required the arbitrators to stay the proceedings for at least 30 days “to permit any party to move a court of competent jurisdiction to confirm or to vacate the Class Construction Award. . . .” American Arbitration Association Supplementary Rules for Class Arbitrations, Rule 3 (Eff. October 8, 2003).
Pursuant to the parties’ agreement concerning class arbitration, AnimalFeeds and several co-plaintiffs demanded arbitration on behalf of a class consisting of “[a]ll direct purchasers of parcel-tanker transportation services globally for bulk liquid chemicals, edible oils, acids, and other specialty liquids from [Stolt-Nielsen] at any time during the period from August 1, 1998, to November 30, 2002.” 548 F.3d at 87 (citation and quotation omitted) The parties selected an arbitration panel and submitted the class arbitration issue for determination.
The District Court and Second Circuit opinions do not explain whether Stolt-Nielsen reserved its rights to argue that: (a) the interpretive question submitted to the arbitrators was one of arbitrability for the court to decide; or, at least, (b) in the event the panel ruled the contracts were silent, the court must decide whether the contracts’ silence meant that class action was permitted or precluded. But Stolt-Nielsen appears to have reserved its rights to raise these arbitrability questions. The agreement to submit the interpretation of the arbitration agreements to arbitration contained the following proviso:
[N]either the fact of this Agreement [which included the parties’ submission to arbitration] nor any of its terms may be used to support or oppose any argument in favor of a class action arbitration . . . and may not be relied upon by the [p]arties, any arbitration panel, any court, or any other tribunal for such purposes.
(Stolt-Nielsen’s Petition for Certiorari filed March 26, 2009 (copy here), at 6 n.2.)
The arbitration agreements between the Stolt-Nielsen petitioners, AnimalFeeds and the putative class members were contained in charter-party agreements, each of which was a form contract based on one of two forms – the Vegoilvoy charter party and the Asbatankvoy charter-party. It is undisputed that the arbitration agreements in both forms “are silent as to whether arbitration is permissible on behalf of a class of contracting parties.” 548 F.3d at 87.
The Vegoilvoy charter-party arbitration agreements between Stolt-Nielsen and AnimalFeeds, provide:
Any dispute arising from the making, performance or termination of this Charter Party shall be settled in New York, Owner and Charterer each appointing an arbitrator, who shall be a merchant, broker or individual experienced in the shipping business; the two thus chosen, if they cannot agree, shall nominate a third arbitrator who shall be an Admiralty lawyer. Such arbitration shall be conducted in conformity with the provisions and procedure of the United States Arbitration Act, and a judgment of the Court shall be entered upon any award made by said arbitrator. Nothing in this clause shall be deemed to waive Owner’s right to lien on the cargo for freight, dead freight or demurrage.
The arbitration agreements governing certain transactions between Stolt-Nielsen and putative class members (which were not parties to the Second Circuit appeal), were contained in the Asbatankvoy charter-party agreement. These agreements provided:
Any and all differences and disputes of whatsoever nature arising out of this Charter shall be put to arbitration in the City of New York or in the City of London whichever place is specified in Part I of this charter pursuant to the laws relating to arbitration there in force, before a board of three persons, consisting of one arbitrator to be appointed by the Owner, one by the Charterer, and one by the two so chosen. The decision of any two of the three on any point or points shall be final.
The arbitrators interpreted the clauses’ silence on the issue of class arbitration to mean that the agreements permitted class arbitration. The panel’s decision was principally based on the fact that all twenty-one published awards made pursuant to the AAA Class Arbitration Rules had interpreted an arbitration agreement’s silence on class arbitration as permitting it. The Panel also distinguished pre-Bazzle Second Circuit cases that held that a court did not have the power to consolidate arbitration proceedings where the parties’ agreement was silent on consolidation. The Panel reasoned that “consolidation of two distinct arbitrations under two distinct arbitration clauses raises a different situation from a class action.” 548 F.3d at 90.
The panel observed that the clauses at issue “are part of a long tradition of maritime arbitration peculiar to the international shipping industry,” but rejected Stolt-Nielsen’s arguments concerning the negotiating history and commercial context of the agreements, finding that these arguments did not establish that the parties intended to preclude class arbitration. Stolt-Nielsen moved the United States District Court for the Southern District of New York to vacate the award.
The District Court (Rakoff, J.) vacated the award on the ground that the arbitrators had manifestly disregarded federal maritime law and New York state contract law because: (a) both bodies of law required the panel to interpret the contracts in light of industry custom and practice; (b) Stolt-Nielsen had demonstrated conclusively that maritime arbitration clauses are never subject to class arbitration; and, in any event, (c) New York law does not permit courts to add terms to a parties’ agreement based solely on the agreement’s silence, including an implied consent to class or consolidated arbitration. The District Court did not reach Stolt-Nielsen’s argument that arbitrators manifestly disregarded federal law under the Federal Arbitration Act holding, pre-Bazzle, that courts could not order consolidated arbitration where the parties’ contract was silent on whether or not consolidation was permitted.
On appeal, the United States Court of Appeals for the Second Circuit reversed. The Court held that, notwithstanding the Supreme Court’s decision in Hall Street, “manifest disregard of the law” was a permissible ground for vacatur because it fell within the ambit of Federal Arbitration Act Section 10(a)(4), which authorizes vacatur where the arbitrators “exceed their powers. . . .” 548 F.3d at 95 (citations and quotations omitted). And the Second Circuit held that the arbitrators did not manifestly disregard state contract law, federal maritime law, or pre-Bazzle Federal Arbitration Act decisions, which held that courts cannot compel class or consolidated arbitration unless the parties’ agreements expressly authorize it. See 548 F.3d at 100.
As respects the pre-Bazzle decisions — Glencore, Ltd. v. Schnitzer Steel Products, 189 F.2d 264 (2d Cir. 1999); United Kingdom v. Boeing Co., 998 F.2d 68 (2d Cir. 1993); Champ v. Siegal Trading Co., 55 F.3d 269 (7th Cir. 1995) — the Second Circuit acknowledged that “[t]hese cases do lend support to Stolt-Nielsen’s underlying argument regarding the correct interpretation of the arbitration clauses at issue. . . .,” but the Court concluded that they did not “establish law that is so clearly and plainly applicable that we are compelled to conclude that the arbitration panel willfully ignored it. . . .” 548 F.3d at 100. The Court explained:
These decisions are not binding in this case. After they were decided, the Supreme Court ruled in [Bazzle] that when the parties agree to arbitrate, the question whether the agreement permits class arbitration is generally one of contract interpretation to be determined by the arbitrators, not the court. Boeing, Glencore, and Champ had been grounded in federal arbitration law to the effect that the FAA itself did not permit consolidation, joint hearings, or class representation absent express provisions for such proceedings in the relevant arbitration clause. [Bazzle] abrogated those decisions to the extent that they read the FAA to prohibit such proceedings. After [Bazzle], arbitrators must approach such questions as issues of contract interpretation to be decided under relevant substantive contract law.
Boeing, Glencore, and Champ are instructive insofar as they view the silence of an arbitration clause regarding consolidation, joint hearings, and class arbitration as disclosing the parties’ intent not to permit such proceedings. But they do not represent a governing rule of contract interpretation under federal maritime law or the law of New York. And it is the governing rules of contract interpretation that arbitrators must consult according to [Bazzle].
548 F.3d at 100-01 (citations and parenthetical quotations omitted).
The Second Circuit also rejected Stolt-Nielsen’s claim that the arbitration panel exceeded its authority by even ruling on the class action issue:
Here, the arbitration panel clearly had the power to reach the issue of whether the Vegoilvoy agreement permitted class action. The parties expressly agreed that the arbitration panel ‘shall follow and be bound by Rules 3 through 7 of the American Arbitration Association’s Supplementary Rules for Class Arbitrations. . . .’ Rule 3 of the Supplementary Rules provides that ‘the arbitrator shall determine as a threshold matter, in a reasoned, partial final award on the construction of the arbitration clause, whether the applicable arbitration clause permits the arbitration to proceed on behalf of or against a class.’ Because the parties specifically agreed that the arbitration panel would decide whether the arbitration clauses permitted class arbitration, the arbitration panel did not exceed its authority in deciding that issue — irrespective of whether it decided the issue correctly.
548 F.3d at 101.
Stolt-Nielsen: Key Issues Presented
Set forth below are the principal issues that the Court will likely need to consider in deciding the Stolt-Nielsen case:
- Was the Question Whether the Arbitration Clauses’ Silence on Class Arbitration Authorized Class Arbitration One of Procedural Arbitrability for the Arbitrators or Arbitrability for the Court?
- Assuming the Question was for the Court to Decide, Does the Party’s Silence on Class Arbitration Mean, in the Circumstances of this Case, that the Parties Agreed to Class Arbitration?
- Assuming the Question was for the Arbitrators to Decide, Does Section 10 of the Federal Arbitration Act Authorize the Court to Vacate the Award if it was in Manifest Disregard of the Law or Manifest Disregard of the Agreement?
- Assuming Section 10 of the Federal Arbitration Act Authorizes Vacatur on the Ground that the Award was in Manifest Disregard of the Law or the Agreement, Should the Class Construction Award be Vacated?
We shall discuss and analyze these issues in detail in Part IV, and offer our thoughts on how the Supreme Court might resolve them. Part IVA shall address the arbitrability issue (issue one) and Part IVB shall address issues two through four. So stay tuned for more. . . .
Philip J. Loree Jr. is a partner in the boutique law firm of Loree & Loree, which focuses its practice on reinsurance dispute resolution and commercial and industry arbitration. Prior to forming Loree & Loree, Mr. Loree was a partner in the Litigation Departments of Cadwalader, Wickersham & Taft LLP and Rosenman & Colin LLP. He was also a Shareholder in Stevens & Lee, P.C.’s Litigation Department.
Mr. Loree is also blogmaster of the Loree Reinsurance and Arbitration Law Forum, where he frequently comments on issues pertinent to reinsurance, and commercial and industry ADR. He is owner and co-founder (with Disputing’s Victoria VanBuren) of LinkedIn’s Commercial and Industry Arbitration and Mediation Group, which provides an open forum for the discussion of commercial, industry and consumer ADR.