Does a federal court have the authority to consolidate separate arbitrations without the consent of all parties? Since 1975, as a result of Compania Espanola de Petroleos, S.A., v. Nereus Shipping, S.A., courts in the Second Circuit and other circuits that followed its lead have ruled that a federal court may impose consolidation notwithstanding the parties’ objections. Although courts in most circuits have rejected Nereus, for nearly two decades this seminal case retained vitality as a source of judicial conflict and innovation. On June 29, however, Nereus was substantially undercut, if not over-turned, when the Second Circuit decided the Government of the United Kingdom of Great Britain and Northern Ireland v. Boeing Co.

Nereus and Its Progeny

It was in the adjudication of a maritime contract dispute that the Second Circuit devised federal court-ordered consolidated arbitration. A shipowner, Nereus, had made two contracts. The first was a contract of affreightment with a charterer, Hideca, for the transportation of petroleum products from the Persian Gulf to various ports in Europe and the Mediterranean. The second contract was with the guarantor, Compania Espanola de Petroleos, S.A. (Cespa), which agreed to assume any obligations left unfulfilled by Hideca. Each contract contained a provision providing for a panel of three arbitrators. In the words of the Second Circuit’s opinion in Nereus, “all went well until the Arab oil embargo in October, 1973, when the market rate for oil cargoes fell precipitously,” and a multimillion-dollar dispute arose. Nereus alleged that Hideca committed a breach of its agreement, and that Cespa therefore was obligated to perform the balance of the contract. Through procedural machinations, Nereus managed to schedule the arbitration with Cespa before the arbitration with Hideca.

The court observed that Nereus’s strategy to secure the scheduled sequence of proceedings, if successful, would be prejudicial to Hideca and Cespa because critical questions of liability would first be decided in a hearing to which Hideca was not a party, despite Hideca’s exclusive access to evidence relevant to the alleged fault. The court found that “consolidation . . . obviate[d] any possibility that Cespa might prematurely be held liable to Nereus without first assessing Hideca’s liability.” In addition, the court noted that a joint hearing would eliminate unnecessary repetition that would inhere in separate proceedings. Thus, rather than enforcing the agreements for separate arbitrations, the Court of Appeals consolidated the two arbitrations to achieve fairness and efficiency.