International Law

Second Circuit Requires Arbitrator To Determine Statute of Limitations

By: Louis M. Solomon


Bechtel Do Brasil Constucoes LTDA., et al. v. UEG Araucaria LTDA, 10-0341-cv (2d Cir. Mar. 2011), [enhanced version available to subscribers / unenhanced version available from lexisONE Free Case Law] decides whether, under federal arbitration law of the FAA as well as specific New York law principles, the court or arbitrator decides a statute of limitations defense. The decision holds that the arbitrator decides the issue given the language of the arbitration clause in this particular case (which, we will see below, may be seen as more court-empowering than standard arbitration language). The reasoning of the decision is in apparent conflict with New York law on the same subject and hence should be studied in connection with this important international practice issue.

Plaintiffs in the case sought a permanent stay of arbitration, arguing that defendant's claims for breach of contract, negligence, and fraud were time-barred under both Brazilian and New York law. The District Court decided the issue, and the Second Circuit found that the District Court had erred in taking the issue from the arbitrator.

The contracts at issue related to the construction of a power plant in Aaucaria, Brazil. The arbitration language was broad and called for arbitration of any claim "arising out of or relating to the Contract, or the breach, termination or validity thereof . . . shall be finally settled by arbitration in accordance with [ICC rules], except as these rules may be modified herein". The contracts also stated that "[a]ny arbitration proceeding or award rendered hereunder and the validity, effect and interpretation of this agreement to arbitrate shall be governed by" New York law. The contracts also contained a New York governing law provision. The contracts also had a specific "Procedural Law" clause stating that the "law governing the procedure and administration of any arbitration instituted pursuant to [the contracts] is the law of the State of New York".

Bechtel filed an action in state court to stay the arbitration once UEGA commenced same. Bechtel argued that CPLR 7502(b) had specific applicability. That Rule provides:

If, at the time that a demand for arbitration was made or 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.

In the federal District Court, to which the case was removed, the Court felt it needed to determine what "substantial completion" meant in order to apply the statute of limitations. The Court applied CPLR 7502(b).

In reversing, the Second Circuit found the issue a close one but that taken as a whole "the provisions in question do not modify the parties' fundamental and broad commitment to arbitrate any dispute relating to the agreement". The Court of Appeals found a "basic tension in the language" of the contracts:  a provision finally settling the dispute by arbitration on the one hand and the choice of law and "procedure and administration" provisions on the other hand. The Court of Appeals did not discuss the fact that this "tension" could well exist in almost every contract.

The Court distinguished an earlier Second Circuit case, PaineWebber Inc. v. Bybyk, 81F.3d 1193 (2d Cir. 1996), where the Court gave the court the power to decide the issue of arbitrability since the agreement contained the language "[t]his agreement and its enforcement shall be construed and governed by the laws of the State of New York" - and the "enforcement" language was missing from the contracts at issue here. The Court of Appeals found it significant that the contractual provisions here didn't specifically mention "timeliness" and that, as a result, "[w]e are presented with no clear statement that a statute of limitations defense should be withheld from the arbitrator".

The Second Circuit did note "subsequent decisions by the New York Court of Appeals reiterating the rule that '[a] choice-of-law provision, which states that New York shall govern both the 'the agreement and its enforcement,' adopts as 'binding New York's rule that threshold Statute of Limitations questions are for the courts'". E.g., Diamond Waterproofing Sys. v. 55 Liberty Owners Corp., 4 N.Y.3d 251 (2005). The Second Circuit relied both on the absence of "enforcement" language in the contracts before it as well as the position that it is not applying New York substantive law in arrogating the parties to an arbitrator to decide statute of limitations issues (and hence ignore CPLR 7502(b)) as it is relying on federal law, in particular Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52 (1995). The Second Circuit acknowledged that the New York Court of Appeals was also interpreting Mastrobuono but stated: "That the New York Court of Appeals has subsequently read Matrobuono more narrowly than we did [in Bybyk] does not relieve us of the obligation to follow our precedent". Because the language of the contracts was ambiguous, the ambiguity was resolved in favor of arbitration".

The Second Circuit did not address the question whether a party entering into a contract specifying New York law in the multiple and specific ways these contracts did would have assumed that the interpretation of those provisions would be accomplished as New York's highest court interpreted them or as a highly significant but in the end single federal appellate court did.

Visit  OneWorld International Practice Law Blog  for more analysis of international and foreign law issues.

For more information about LexisNexis products and solutions connect with us through our corporate site.