Free Initial Consultations 646.760.6493
Courts Take Hands-Off Approach to Arbitration Clauses

Courts Take Hands-Off Approach to Arbitration Clauses

Many business contracts have a clause requiring arbitration of disputes. Arbitration is an alternative to traditional litigation. One or more arbitrators conduct a private judicial proceeding and issue an award in favor of one of the parties. Arbitration awards are legally binding on the parties and may be enforced in court. But the role of courts in arbitration cases are necessarily limited, as demonstrated by a recent decision involving a breach-of-contract arbitration between two large companies.

Citigroup, Inc. v. Abu Dhabi Investment Authority

Abu Dhabi Investment Group had a multi-billion dollar investment agreement with Citigroup, Inc. The agreement contained an arbitration clause. This required arbitration of “any dispute” arising from the agreement.

Abu Dhabi invoked the arbitration clause in 2009, alleging Citigroup committed breach of contract and securities fraud. The arbitrators rejected Abu Dhabi's arguments and made an award in favor of Citigroup. A federal judge subsequently confirmed the arbitration award, rejecting Abu Dhabi's arguments the arbitrators acted “in manifest disregard of the law.”

In 2013, Abu Dhabi sought a second arbitration against Citigroup, again claiming breach of contract. Citigroup then asked the federal court that confirmed the first arbitration award to issue an injunction against the second arbitration. Citigroup argued Abu Dhabi was simply trying to re-litigate its previously rejected arbitration claims. And since the first arbitration decision was backed by the court, the judge had the authority to “protect the integrity” of its judgment.

The district court agreed and issued the injunction. The judge cited its authority under a federal law known as the All Writs Act, which allows any federal court to “issue all writs necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and principles of law.” This basically means a court can issue any order necessary to enforce a previous order.

But in this case, the district court abused this authority. The U.S. Second Circuit Court of Appeals in New York reversed the trial judge's injunction. The All Writs Act did not apply here, the appeals court said, because it is up to the arbitrators, not the federal courts, to deal with Citigroup's objections.

The district court's prior judgment, the appeals court said, merely “confirmed the arbitration award.” The court did not review the reasons for the arbitrators' decisions or conduct an independent judicial inquiry into the underlying dispute between Citigroup and Abu Dhabi. That means the district court is not a position to determine whether the second arbitration petition raises issues already decided during the first arbitration. Federal law prefers arbitration as a means of settling breach of contract disputes. Therefore, the Second Circuit said, the courts should make every effort not to usurp the proper role of a contractually mandated arbitrator.

Need Arbitration Advice?

Arbitration and other forms of alternative dispute resolution can help parties avoid more lengthy and expensive litigation. But avoiding litigation does not mean acting without competent legal advice. If you are negotiating a contract with an arbitration clause—or need to enforce such a clause in an existing contract—and you need advice from an experienced New York business attorney, contact our office today.

Categories:

Contact Us Today

All Consultations Are Free and Confidential
    • Please enter your first name.
    • Please enter your last name.
    • Please enter your email address.
      This isn't a valid email address.
    • This isn't a valid phone number.
    • Please make a selection.
    • Please enter a message.