Arbitrator and ICC Immunity confirmed by the New York District Court which strongly sanctioned the counsel for frivolous claim

United States District Court – Southern District Court of New York, “Landmark Ventures, Inc. v. Stephanie Cohen & ICC”, 25 November 2014, 13 Civ. No 9044 (JGK)

In a judgment of 25 November 2014, the United States District Court of the Southern District of New York (“NY District Court”) dealt with the issue of both arbitrators’ and arbitral institutions’ liability. In this ruling, the NY District Court granted a motion to dismiss and sanctioned the losing party’s counsel for making a frivolous claim.

The facts were as follows. On 5 July 2012, Landmark Ventures Inc. (“Landmark”) a company incorporated under the laws of the New York State, submitted a request for arbitration to the ICC in order to solve a dispute with InSightec Ltd. (“InSightec”), an Israeli corporation, arising out of the interpretation of the parties’ Partnership Agreement, itself governed by the laws of the State of New York.

Following the parties’ failure to jointly appoint the arbitral tribunal, the International Court of Arbitration of the ICC appointed a sole arbitrator in accordance with Article 12.3 of the ICC Rules. On 8 October 2013, the sole arbitrator rendered its final award dismissing Landmark’s claims and ordering it to pay for the costs of the proceedings.

On 7 November 2013, Landmark filed an action in liability before the NY District Court against (i) the sole arbitrator, for rendering the award, and (ii) the arbitral institution, for being involved in its drafting process.

Landmark reproached the arbitrator to have made unfair procedural decisions by:

  • Limiting its discovery request;
  • Failing to grant it an extension of time to call an expert witness, whereas InSightec was allowed to call its own;
  • Considering an unauthorized brief by InSightec;
  • Assessing attorney’s fees and costs against it, all the more since a portion of these fees and costs were incurred prior to the commencement of the arbitration; and
  • Incorrectly interpreting the Partnership Agreement.

Landmark also blamed the ICC for:

  • Refusing to correct the award; and
  • Assessing legal costs against Landmark.

On 15 January 2014, the sole arbitrator and the ICC objected that this claim was barred for two main reasons:

  • Under Article 40 of the ICC Rules, neither arbitrators nor the ICC can be held liable;
  • The doctrine of arbitral immunity – which is clearly established -, prevents a party from holding an arbitrator or an arbitral institution liable, for acts or omissions within the scope of the arbitral process.

In addition, the two defendants threatened to seek sanctions if Landmark did not withdraw its claim as it clearly lacked merits, being barred by a Federal law and Article 40 of the ICC Rules. As Landmark refused to withdraw its claim, the defendants finally filed their motion to sanction on 17 April  2014.

The ground for their claim was Article 11 of the Federal Rules of Civil Procedure which provides that a party can ask the Court to fine the opposing counsel for raising a frivolous claim, through a motion to sanction. A claim is reputed frivolous when it is clear: “under existing precedents that there is no chance of success and no reasonable argument to extend, modify or reverse the law as it stands” (Simon DeBartolo Group L.P. v. Richard E. Jacobs Group Inc. – 186 F.3d 157,167 – 2nd Circuit. 1999).

The NY District Court dismissed Landmark’s claim and granted the sole arbitrator and the ICC’s motion to sanction, deciding that:

  • Article 40 of the ICC Rules, pursuant to which the arbitrators and the ICC “shall not be liable to any person for any act or omission in connection with the arbitration” was binding;
  • The arbitral immunity doctrine is “well established” in Federal common law, as “The Court of appeals for the Second Circuit has found such absolute immunity in the most unequivocal terms”; and
  • Since neither the arbitrator nor the ICC had acted beyond the scope of the arbitral process, the case had no merits.

Therefore, the NY District Court ruled not only that Landmark’s claim was rejected, but also that the counsel – and not the party – and his law firm who filed the action, was sentenced to pay a USD 20.000 fine to the defendant’s counsel in order to “deter repetition of the conduct”.

This case is interesting in that it deals with:

  • The liability and the immunity of the arbitrators: the Court clearly confirmed that article 40 of the ICC Rules barred all liability claims against both arbitrators and the arbitral institution;
  • A sanction to be applied to the party’s counsel who acted contrary to the established authority of arbitrator and institution immunity: this is a clear sanction of the lawyers who filed a frivolous lawsuit.

The Court characterizes Landmark’s action as “a clear attempt to circumvent the exclusive means to challenge an arbitration award”. This sanction is to be noted since it sentences the party’s counsel and not the party itself, to an important fine.

This is of particular notice since, under French law, counsel cannot be directly sanctioned for raising frivolous claims.  Indeed, Article 32-1 of the French Civil procedure Code provides that a party may be fined – and not the counsel – for filing a frivolous claim. The French Cour de Cassation, for example, decided that a party was to pay € 2,000 for filing a frivolous petition to set aside an award, in pure bad faith when the party knew its challenge lacked merits [1st civ. Ch. 24 April 2013, No 11-26597].

The decision is available here.

The petition to set aside the award in this case was also dismissed on a judgment issued the very same day by the same court, available here.

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