Who has Jurisdiction in U.S. International Arbitration?

The Honourable J. Edgar Sexton, Q.C. served as a judge in the Federal Court of Appeal in Canada for 13 years before joining JAMS.  Prior to his time on the bench, Justice Sexton served as either client counsel or arbitrator in a host of domestic and international arbitration matters.

A quick glance through any recent issue of the Wall Street Journal reveals that most of today’s deals and transactions have some type of international component. Many involve companies or individuals based in different countries signing a contract under the laws of yet another nation. These contracts also likely include some type of arbitration clause should things not proceed as smoothly as expected. With so many legal jurisdictions involved, it’s difficult to sort out jurisdictional issues, especially if one party asks a court to overrule an arbitrator.

Already U.S. companies begin to face this issue on a regular basis. So it begs the question, how should such a situation be handled? What can the parties expect from the courts and arbitrators?

Arbitrations are governed by two sets of rules: the terms of the contract between the parties and the relevant legislation. Where the arbitration clause between the parties specifically addresses the role of courts in providing interlocutory relief, the court need only hold the parties to their agreement. When the terms of the arbitration agreement are not clear, courts look at the relevant legislation. In the U.S., most international arbitration falls under the jurisdiction of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, better known as the New York Convention.

Courts are divided as to whether the New York Convention implicitly addresses their power to issue interim measures in support of international arbitrations. As for arbitrators, courts have held that they have the inherent authority to order injunctions or other interim relief unless the parties agree to the contrary. This amounts to a significant overlap in authority between courts and arbitrators.

Faced with this, courts have taken at least three different approaches to applications for injunctions in the face of an arbitration clause. Under the first approach, courts simply deny that they have any jurisdiction to grant interim relief. This line of cases has been roundly criticized by academics and courts. The second approach goes to the other extreme, holding that the presence of an arbitration clause does not in any way limit the court’s authority to order interim relief. This has its own problems, as it undermines the effectiveness and predictability of the arbitration agreement, diminishing the parties’ autonomy. The third approach views arbitrators as the primary source for interim relief, but does not block parties’ access to the courts. Under this approach, courts only assume jurisdiction in cases where the arbitrator cannot grant the relief sought. It provides a more balanced approach to the issue that takes into consideration the unique roles arbitrators and courts play in these disputes, and how they can best be used.

Given the differences among the courts, this may ultimately be an issue only the United States Supreme Court can resolve. In the meantime, however, the prudent course of action is to seek interlocutory relief from the arbitrator whenever possible. This avoids the possibility that a court will decline jurisdiction, wasting time and money.