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Legal Update

Second Circuit’s Expansive Reading of Arbitration Clause Commits Question of Timeliness to Arbitral Panel

7 April 2011
Mayer Brown Legal Update

A question that often arises in arbitration is whether a defense that goes to the procedural viability of the action itself, rather than to the merits—such as whether the claim is barred by a statute of limitations—must go to the arbitrator in the first instance. In Bechtel do Brasil Construções Ltda. v. UEG Araucária Ltda., No. 10-0341 (Mar. 22, 2011), the US Court of Appeals for the Second Circuit has given a broad construction to a clause calling for arbitration under International Chamber of Commerce (ICC) rules, and has determined that the question of timeliness should, in the first instance, have gone to the ICC arbitral panel.

In Bechtel, a dispute arose over a contractor’s construction of a $210 million gas-turbine generating station. The purchaser accepted delivery of the plant in 2002, but for reasons unrelated to the dispute did not begin operating the plant until late 2006. In 2008—almost six years after delivery, but only a little more than one year after the plant become operational—the generator’s steam-turbine failed. UEG Araucária, the purchaser, filed with the ICC a demand for arbitration; Bechtel do Brasil, the contractor, filed a motion in New York state court to permanently stay the arbitration as time-barred. The relevant agreements adopted New York law, and Bechtel do Brasil pointed to NY CPLR § 7502(b), which provides in part:

If, at the time that a demand for arbitration was made or a notice of intention to arbitrate was served, the claim sought to be arbitrated would have been barred by limitation of time had it been asserted in a court of the state, a party may assert the limitation as a bar to the arbitration on an application to the court….

Following removal to the Southern District of New York, the federal court (Barbara S. Jones, J.) granted the stay. The court held that, while the “scope of arbitrable issues” is normally one reserved for the arbitrators themselves, the choice of law clause in the party’s contract evidenced their selection of New York law, which permits the court, in the first instance, to decide the timeliness of an action.

On appeal, the Second Circuit was unpersuaded and reversed the stay. The court drew a distinction between “a dispute over the power to decide arbitrability—i.e., whether the power to decide the scope of the arbitration clause rest[s] with a court or the arbitrator,” and “whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement.” With respect to this not-entirely-clear formulation, the former questions are subject to a “pro-court presumption.” When deciding the latter question, however, the presumption is reversed.

Turning to the analysis of the ICC arbitration clause, the court asked whether the parties had evinced an intent to submit all questions—including the question of timeliness—to the ICC panel notwithstanding § 7502(b). Relying on Mastrobuono v. Shearson Lehman Hutton, Inc.1 and PaineWebber Inc. v. Bybyk,2 the court concluded that it was “at least ambiguous” whether the parties “intended to permit recourse to C.P.L.R. 7502(b).” Further, the court noted that general choice-of-law language may be read to address only substantive rights and duties, rather than procedural rules governing the allocation of responsibilities between courts and arbitrators. In sum, the court concluded that while the agreements “could be read to include C.P.L.R. 7502(b)” that conclusion was not “without doubt,” especially since the agreements did not expressly commit issues related to “enforcement” to the courts. An ambiguity of this sort “must be resolved in favor of arbitration.”

Although Bechtel do Brasil does not alter the law in any substantial way, it does point to an important lesson for businesses that rely on arbitration clauses: regardless of what the procedural law at the seat of arbitration may appear to say, any desire to exclude a claim or defense from arbitration should be made express in the agreement to arbitrate.

For more information about this decision or any other matter raised in this Legal Update, please contact at +1 212 506 2695 or at +1 212 506 2562.

Learn more about our International Arbitration practice.

  1. 514 U.S. 52 (1995).
  2. 81 F.3d 1193 (2d Cir. 1996).

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