The US Supreme Court will soon decide whether the Federal Arbitration Act (FAA) bars class arbitration where the arbitration agreement is silent in Stolt-Nielsen, et al. v. AnimalFeeds International Corp., 548 F.3d 85 (2d Cir. 2008), cert. granted 129 S. Ct. 2793 (U.S. 2009). This follows the Supreme Court’s decision in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), which failed to reach this issue under the FAA, not simply because it was a matter of state law, but because an arbitrator should first decide, as a matter of interpretation, whether a contract is indeed silent about class arbitration. This decision could have important implications in the growing internationalization of class arbitrations.
The Stolt-Nielsen case involves contracts for parcel tanker shipping services with Stolt-Nielsen SA. AnimalFeeds alleged that Stolt-Nielsen, along with other firms, conspired to fix the price of international shipments of liquid chemicals in the United States and restrain competition in the world market. On the basis of a standard maritime arbitration clause that was silent as to class arbitration, AnimalFeeds initiated class arbitration proceedings on behalf of a class of “all 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.”1 The contracts at issue contained two standard maritime arbitration clauses providing for arbitration in New York, but were silent as to whether class arbitration was permitted. The arbitrators permitted the class arbitration. Significantly, this was an international arbitration as Stolt-Nielsen is a non-US company.
Stolt-Nielsen moved to vacate the arbitral award allowing for class arbitration before the United States District Court for the Southern District of New York (the SDNY), arguing that the arbitral tribunal acted in manifest disregard of the law in reaching its decision. The District Court agreed with Stolt-Nielsen, finding that “if, instead, the Panel had made the choice-of-law analysis that it was mandated to make but chose to ignore, it would have had to recognize that what Stolt presented was tantamount to an established rule of maritime law.” 2 The SDNY also attached weight to the silence of the arbitration clause with regard to class arbitration and “New York’s historically narrow view of what can be read into a contract by implication.” 3 Because the panel’s decision would “impermissibly fashion a new contract under the guise of contract interpretation,” 4 the court vacated the arbitral decision. AnimalFeeds appealed.
The Court of Appeals for the Second Circuit (the Second Circuit) undertook a de novo review of the vacatur decision under the manifest disregard standard. The Second Circuit’s analysis traced the evolution of manifest disregard, the limited nature of the doctrine, and its relationship to Sections 9 through 11 of the FAA. The court stressed that an arbitral tribunal’s decision is to be accorded great deference.5 The court also invoked a recent Seventh Circuit decision describing parties that have agreed to arbitration as having opted out of the court system in order to pursue contractual remedies and suggesting, moreover, that the court cannot disturb an award on the basis of a misinterpretation of the law but can only do so when the arbitrators did not execute their contractual role by failing to interpret the contract at all.6
Concluding that the arbitral panel’s granting of class arbitration was “colorable” given the contract’s silence on the issue, the Second Circuit concluded that the arbitral award was not in manifest disregard of the law. Moreover, following Bazzle, the Second Circuit held that when parties agree to arbitrate, the question of whether the agreement permits class arbitration is generally one of contract interpretation to be determined by the arbitrators, not a court.7 A lower court’s order of vacatur based on manifest disregard should apply only to severely limited and highly deferential instances of egregious arbitral impropriety.8
The question on which certiorari was granted was: “Whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.” The petitioners have argued that when arbitrators recognize a class when the contract is silent they have either acted in manifest disregard of the law (the lens through which the district and appellate courts primarily analyzed the issue) or “exceeded their powers” within the meaning of Section 10 of the FAA.
If the Supreme Court concludes that allowing a class where the parties are silent is either manifest disregard of the law or in excess of the tribunal’s powers, then it is possible that the many clauses that do not mention class actions will be a sufficient basis on which to avoid class action arbitrations. However, if the court reaches the opposite conclusion, parties arbitrating in the US, or under US law, who wish to avoid class arbitration will have to record their agreement explicitly not consenting to class arbitration or accept the risk that tribunals will permit them. Indeed, parties may still want to provide for an explicit anti-class action provision even if the Court finds “silence” an insufficient basis on which to permit class arbitrations. This will ensure that an opportunistic litigant does not attempt to infer consent through some other provision.
In any case, arbitration users with commercial contracts used with counter-parties that could be assembled as a class would be wise to monitor developments in this field