Arbitration Justice in Absentia
April 10, 08A New York Diamond Dealers Club (DDC) arbitration panel rendered a $640,000 judgment against a member of the Israel Diamond Exchange (IDE) in
The by-laws of the World Federation of Diamond Bourses (WFDB) and of the DDC allow for an arbitration to take place without the presence of one of the parties. In the case of B. versus H., it was the defendant who was not present – and he claims that neither he nor his bourse (the IDE) had received an invitation to attend a hearing on the specific date it took place. The managing director of the New York club, Dr. Martin Hochbaum, assures us that “all of our procedures were properly followed under our By-Laws and all parties were notified in proper form with respect to the claim and hearing.”
Part of the problem is that the individual bourses have their own by-laws for arbitration and they are not necessarily international harmonized. In Israel, if a defendant doesn't show up at the agreed time and place, the hearing is (almost) automatically adjourned for another week. In New York's DDC, there is no such provision or custom. Its by-laws state that “an arbitration may proceed where a litigant fails to appear.”
It may be – but we don't know – that H. relied on the seven-day rule and mistakenly assumed that he would be notified if he had missed a hearing. These are troubling questions unrelated to the case in questions, but that identify understand
We have no view on the judgment itself. We are, however, extremely troubled by a situation where an arbitration panel makes a substantial award against a party that was not present or represented, especially when it was clearly known to the DDC that H., against whom the judgment was rendered, was ready to fly to New York and plead his case. Ostensibly, this isn’t a case where someone refuses to participate or tries to frustrate the arbitration process.
There is something else that troubles us. The very essence underlying - and even justifying - the WFDB’s existence is the mechanism of international arbitration. The mutual recognition of judgments rendered in one bourse by all other member bourses is based on trust between the respective justice systems. In recent years we have witnessed a serious erosion of this trust.
We are aware of bourse members who believe that an Israeli arbitration panel will always decide against a New York party and that a New York arbitration panel will always go against an Israeli party in the dispute. We do not know if this is the case now – and we hope it isn’t. But given the perception that there is a diminishing element of trust, it is in the best interest of the integrity of the international cross-bourses’ arbitration mechanism that bourses “go the extra mile” to ensure that justice is not only done – but is also clearly seen as having been done.
The Circumstances of the Case
The following facts are not in dispute: H. was invited by the DDC (through a registered letter dated January 16, 2008) to appear before an arbitration panel in New York on February 12, 2008. He received the letter on January 27, 2008, and immediately called the DDC’s managing director saying that he could not be avail
The DDC’s managing director invited H. to suggest more convenient dates for himself, and H. asked for a postponement until after the Passover (Pesach) holiday, i.e. after April 28, 2008. On January 29, 2008, H.’s request was also made by a fax message to the DDC.
As for what happens next, the parties hold different views. H. says he didn’t hear anything until March 18, 2008, when he suddenly found out that a default judgment had been rendered against him on March 6, 2008. When he called the DDC, he was informed that on January 31, 2008, a fax had been sent to him (with a copy to the Legal Advisor of the IDE) advising him that postponing the hearing until after Passover would mean that the case would be delayed by more than 2 and a half months.
“Our policy at the DDC is to adjourn a matter only in special circumstances, such as an emergency or other important commitment that cannot be changed. According to the WFDB by-laws [Article 4(D)], a case ‘shall commence within 60 days of its filing date….’ Consequently, we are rescheduling this arbitration hearing for Tuesday, March 4, 2008,” writes the DDC’s managing director.
A very upset H. says he never received the fax informing him of the new date. The legal advisor of the Israeli bourse, Ms. Shoshy Joskowicz, also denied receiving this letter. The legitimate dispute between two diamantaires on two sides of the ocean became a secondary problem: intercontinental phone calls, faxes, letters from Israeli and U.S. lawyers, are now pleading for the cancellation of the arbitration decision. The Israel bourse’s judicial committee, the secretary-general of the WFDB in Belgium, the presidents of the respective bourses, the president of the WFDB – they have all become part of the “fax delivery” question.
The DDC, in response to my questions, explains that “H. asked for 76 days adjournment (the original scheduled date was February 12 and he asked for an adjournment ‘from April 28th on’, or more than 100 days from the initial filing date.) This is far beyond the time allowed by the WFDB by-laws and also against the policy adhered to by the DDC of speedy resolution of any dispute in arbitration.”
I wonder whether bourse members are truly familiar with these time limits, but this didn’t become the essence of the current imbroglio. It now comes down to the question of whether the January 31, 2008 fax of the DDC was received by H. or not. There is the secondary question of whether a fax is an accepted medium of proper notice.
The DDC totally rejects the assertion that H. didn’t receive a proper notice. “We responded to Mr. H.’s faxed request [for postponement] promptly within two days by faxing to him at the same fax number which appeared on his written fax requesting an adjournment,” says DDC’s Hochbaum.
“In addition,” says Hochbaum, “a copy of our response fax was sent to Mr. H. at the following four different locations,” continuing to list H.’s offices in Israel, New York and Hong Kong. “We have confirmation proof of all the
Arbitration Decisions by Default
There are instances – in regular court situations as well as in arbitrations – where the facts are so clear that the
H., the defendant, maintains that he has no ownership relationship with D Company. “D company is owned by one of my brothers.” says H., who categorically states that there is a “mistaken identity” here – that he is not a principal, not a shareholder and not an officer of that firm. The legal advisor of the IDE apprised the DDC of this situation when the initial invitation for H. to appear in New York was received.
Hochbaum believes that it is not up to the legal advisor of the IDE to decide whether H. is, or is not, a principal of D Company. He maintains that the plaintiff (B.) has the right to show to the arbitrators his proof that H. is a principal of the company, which owes money to the plaintiff, and that the decision is in the hands of the arbitrators whether to accept or reject that contention.
Indeed, while preparing this article, we asked Hochbaum whether the arbitrators had been made aware of the prior correspondence on this issue when they decided to render a judgment by default. He says that communications “from the Legal Department of Mr. H.’s Bourse that ‘Mr. H. was not a principal, nor director, nor member of the company from which the plaintiff was seeking money’ was not binding on the arbitrators who heard and decided the case.” One should respect and accept that this is the arbitrator’s prerogative.
We would say, however, that when a panel of arbitrators knows well in advance that the defendant believes that he has erroneously become a party to arbitration, because of a mistaken identity, it is even more crucial for the DDC to assure that H. had received the revised hearing date and to make sure that H. was
The officers of the DDC briefly considered – which we think would have been the right thing – to vacate (void) the arbitration decision of March 6, 2008, based on the fact that there might have been faults in the procedures around the sending of notices. But at the end, the officers decided to leave the arbitration decision as is. They consider the notification process to have been legally robust.
Legal Mess: Unintended Consequences
What will happen next? We believe that in the case of an arbitration involving a foreign bourse member, the hosting bourse should avoid “in
The (standard) opening sentence of DDC arbitration decisions reads that the judgment was rendered after the “arbitration panel heard all of the evidence and fully considered all of the facts.” Hochbaum assures me that “all of the factual matters involved in the arbitration were decided upon by the arbitrators.” How can a panel claim in good faith having heard all the facts if the defendant to the arbitration was not present nor represented? Who was there to argue that H. has no legal li
Even if all the proper procedures were followed – and that may well be the case but we don’t know – is it wise to render a judgment in a cross-boundary situation involving parties of different bourses when the defendant is
How this specific imbroglio will evolve – we don’t know. H. has the option to petition the Supreme Court in New York to vacate the arbitration award against him. That may, or may not, be successful. Generally, courts endeavor to support arbitration arrangements, which reduce the case loads of the courts and provide a swifter way to dispute resolution. If the court would agree to cancel the judgment, this would, however, be a blow to the DDC’s arbitration mechanism. In any case, it will bring the management and operations of the Arbitration Tribunals of the DDC into the limelight.
Hochbaum advised me that “a party who feels aggrieved by an arbitration decision has a right to appeal de novo and have a complete new hearing before a new panel consisting of five arbitrators (as opposed to three arbitrators) in which three of such arbitrators are Chairmen. This is a new hearing before a new panel in which all evidence is heard afresh and the prior decision is not considered. So it truly gives the aggrieved party another ‘bite at the apple’.”
In this instance, the DDC rules may be different from those in other bourses. The arbitrators would, at least in theory, not know what happened before. “The DDC appeal process requires further that the appealing party post with the Club, security for the payment of the Award in the event the appealing party does not prevail,” says Hochbaum.
The dilemma of an appeal is that it protests the result, the verdict of an arbitration, while at this point, the legality of the circumstances around the convening of the very arbitration panel itself is being challenged. We doubt that H. will go for an appeal – and I understood that the period for filing an appeal has expired, though Hochbaum graciously advised me that “Mr. H. was given an extended time to appeal.” That certainly shows good will to allow H. to consider all options.
Looking in from the outside – and focusing on the media and image perspectives – the best thing for the DDC’s board would be to void the arbitration – and give the foreign party the benefit of the doubt. If a new arbitration (before three arbitrators) is convened, and that panel reaches the same verdict in a hearing in which H. was actually present or represented, there will not be a cloud around the findings – and it will be more readily accepted (and enforced) by all members of the WFDB. If anyone will be unhappy with the verdict, then the opportunity to appeal will still be open.
It is troublesome and prob
These are, however, technical or administrative "system" impediments, which can and should be addressed. If the current imbroglio will become a catalyst to solving these impediments – something "good" would have come from an otherwise rather unfortunate situation that is still evolving. And if I may have, one final thought: in general, bourses ought to avoid allowing cases involving substantial amounts of money to proceed with defendants in