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Second Circuit Finds That Arbitrators Should Decide Claim Preclusion Of Confirmed Award

In its recent decision Citigroup, Inc. v. Abu Dhabi Investment Authority, No. 13-4825-cv, 2015 WL 161745 (2d Cir. Jan. 14, 2015), the U.S. Court of Appeals for the Second Circuit found that the question of whether a federal judgment confirming a prior arbitral award precludes subsequent arbitration of claims, is ordinarily for the arbitrators to decide, not the federal courts.

The dispute centered on an investment agreement between Citigroup, Inc. (“Citi”) and the Abu Dhabi Investment Authority (“ADIA”). The agreement contained a broad arbitration clause, providing that “any dispute that arises out of or relates to” the contract was to be decided by arbitration. In 2009, a dispute arose, and an arbitral panel issued an award in favor of Citi. The award was confirmed by the U.S. District Court for the Southern District of New York. ADIA appealed, and the Second Circuit eventually affirmed. But while the appeal was pending, ADIA served Citi with a new notice of arbitration under the same agreement, asserting causes of action fairly similar, if not identical to those asserted in the first arbitration.

In response, Citi sought to enjoin ADIA from pursuing the second arbitration, arguing that the claims were barred by the doctrine of res judicata. ADIA moved to compel arbitration. The Southern District of New York granted ADIA’s motion, finding that Citi’s res judicata defense was for the arbitrators to decide. The District Court pointed to the broad arbitration clause and the Second Circuit’s decision in National Union Fire Insurance Co. of Pittsburgh, PA v. Belco Petroleum Corp., 88 F.3d 129 (2d Cir.1996), which held that the preclusive effect of a prior arbitration confirmed by a state court was to be decided by the arbitrators, not the court.

On appeal, the Second Circuit agreed. In addition to Belco, the appellate court also pointed to United States Fire Ins. Co. v. National Gypsum Co., in which it held that the arbitrators, not the court, were also to decide whether the doctrine of issue preclusion, or collateral estoppel, barred a party from arbitrating certain issues previously resolved in litigation resulting in a federal judgment. 101 F.3d 813, 816–17 (2d Cir. 1996).

The Federal Arbitration Act’s policy strongly favoring arbitration and its own precedents in Belco and National Gypsum interpreting such policy, led the Second Circuit to decide that it is the arbitrators, not the federal courts, who ordinarily should determine the claim-preclusive effect of a federal judgment confirming an arbitral award.

Parties seeking confirmation of an arbitral award in the Second Circuit should be aware that the claim-preclusive effect of such an award (and the confirming judgment) on a following arbitration will be determined by the arbitrators (of that second arbitration) – not the confirming court. In order to avoid unnecessary litigation (and to streamline the confirmation process), the petition to confirm should thus refrain from addressing any res judicata issues or making similar arguments regarding the scope of the second arbitration.

For further questions please contact Thomas N. Pieper or Diego Perez Ara