The following commentary has been prepared for publication in Canada and will shortly be published there in both English and French. However, the discussion of U.S. law in this commentary is certainly not limited to enforcement of awards involving Canadian parties.
Enforcement of Foreign Arbitral Awards in the U.S.: A Primer
by Marc J. Goldstein
As Canadian companies, and Canadian arbitrators, participate more often in international arbitrations, they have naturally become eager to know more about enforcement of awards outside Canada, and particularly in the United States.
The reasons for this interest in the procedures for award enforcement are apparent. Counsel in an international arbitration must consider, from the earliest stages of the case, not only the prospects of the client obtaining or being responsible to satisfy an award for substantial money damages, but also the difficulty and expense likely to be involved in litigation over the enforceability of the award if voluntary compliance is not anticipated. Arbitrators, for their part, focus from the outset on conducting the case in a fashion that will ensure the enforceability of the award, and often must balance that objective with their desire to streamline and expedite the proceedings.
The American legal framework for enforcing arbitration awards, viewed from a distance, may seem daunting and confusing. There are federal courts and state courts, federal and state arbitration statutes. And within the federal statute, there are apparently separate regimes governing domestic and international awards, but in practice the line of demarcation between those regimes may become blurred. And finally, there is the notorious brooding omnipresence of American arbitration law — the judge-made doctrine of “manifest disregard of the law.”
Any primer on a complex subject like enforcement of arbitral awards risks stating matters too simply, as the mission is to set forth the fundamentals in a clear and succinct way. This article, readily accepting that risk, attempts to outline the essential elements of award enforcement in the United States.
I. Status of the New York Convention in the U. S.
The United States is of course a member state of the U. N. Convention on Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”).
The New York Convention is implemented by Chapter Two of the Federal Arbitration Act (“FAA”).
The FAA, and the Convention, apply in federal and state courts. An action to enforce an international arbitration award may be brought in a state or a federal court. But the enforcement of a Convention award is a “federal question” triggering federal subject-matter jurisdiction, and so such an action may be brought in federal court and, if initially brought in a state court, may be (and more often than not will be) be removed to the federal court by the award-losing respondent.
Federal courts also generally require that the respondent be subject to personal jurisdiction in the forum state. This is controversial among some arbitration scholars, who argue with considerable force that U. S. adoption of the New York Convention implies an obligation to recognize and enforce any Convention award. But federal courts generally have not embraced this view, and award enforcement proceedings are subject to dismissal if the respondent lacks any meaningful contacts with the U. S. judicial district in which the proceeding is brought.
Proceeding in a state court adds uncertainties that many clients may wish to avoid. While the FAA applies in state court, as noted above, the FAA does not fully pre-empt state arbitration statutes. In principle the FAA pre-empts state arbitration statutes to the extent that the state laws create additional grounds to refuse recognition of an award, or create procedural obstacles that make enforcement materially more difficult than in federal court. But that test can be difficult to apply, and may lead to regrettable litigation delay and expense.
2. Nature of the Proceedings
Federal court proceedings to enforce arbitration awards are intended to be plenary, and expedited. Thus, the proceeding unfolds according to the procedures for a motion, not those that govern a lawsuit. In principle there should be a motion, with supporting brief, an opposing brief if any, a reply brief, perhaps oral argument, and a decision followed by entry of judgment. There should be no pleadings, and no discovery.
An application to vacate, modify, or correct an award should also follow the procedure for motions. Such a motion is only appropriate in relation to an award made in the United States. Under United States law, the proper forum for a motion to set aside an international arbitration award made outside the United States is the competene court of the country in which, or under the arbitration procedural law of which, the award was made. The subject of such motions to vacate introduces complications to be avoided in the present discussion, focused on enforcement of awards made in the territory of another New York Convention member state. Motions to vacate awards made at a U.S. place of arbitration are the subject matter of Section 4 below.
Section 207 of the FAA provides that the proceeding seeking recognition and enforcement must be brought within three years after the date of the award.
3. Grounds to Oppose Recognition and Enforcement of a Convention Award
Federal courts have stated consistently that the grounds identified in Article V of the New York Convention for denying recognition and enforcement are exclusive.
Those grounds, here paraphrased but found in full text in Article V of the Convention, are familiar to arbitration practitioners worldwide: lack of capacity of the parties, lack of a legally valid agreement to arbitrate, irregular constitution of the tribunal, arbitral procedure not conforming to the agreement, lack of due process, non-arbitrability of the subject matter under the law of the enforcing jurisdiction, violation of public policy of the enforcing jurisdiction, and vacatur at the place of arbitration or under the governing arbitration procedural law.
For this primer, the important points are these:
(1) Courts are often asked to deny recognition and enforcement based on a ground provided in the FAA for vacating an award. But most courts now recognize that the New York Convention vests power to set aside an award only in the competent court at the place of arbitration or, if different, the place whose arbitration law was agreed upon by the parties. Thus, the FAA grounds for vacating an award only apply if the place of arbitration was in the U.S. and a timely motion to vacate the award is made in the district court at the place of arbitration.
(2) Under the principle just stated, the doctrine of “manifest disregard of the law”, as a ground to set aside an award, has no proper place in a U. S. proceeding to recognize and enforce a foreign-made award. But if the award was made in the U.S., and a timely motion to vacate the award is made, Courts may continue to consider “manifest disregard of the law” as a possible ground to vacate the award, even though the vitality of this doctrine has been called into question by a recent decision of the U.S. Supreme Court. (Hall Street Assocs. v. Mattel, Inc., 128 S. Ct. 1396 (2008)).
(3) Courts will review de novo the arbitrators’ determination that the matter was arbitrable — unless the parties clearly and unmistakably agreed that the arbitrators should decide arbitrability. In the latter case, courts properly applying U. S. law will defer to the arbitral determination of arbitrability. Most courts accept that an agreement to arbitrate under rules that give arbitrators power to decide upon their own jurisdiction — i.e. essentially all institutional international arbitration rules and the UNCITRAL rules — is evidence prima facie of an agreement to arbitrate arbitrability. When there is such an agreement, and arbitrability is in fact arbitrated and decided in the award, a party contesting that arbitral determination by asking a U.S. court to deny recognition could rely upon, for example Article V(1)(a) of the Convention (agreement to arbitrate invalid under the applicable law) or Article V(1)(c) (award decided issues outside the scope of what the parties agreed to arbitrate). But U.S. law in this situation mandates that thr courts give the same degree of deference to the arbitrators’ arbitrability determinations that they give to all other issues of fact and law decided by the arbitrators.
(4) Claims that a party was denied due process are almost invariably denied unless a party truly did not have notice and an opportunity to present evidence and argument. Claims that the arbitrators limited the number of witnesses or cut short cross-examination are viewed with extreme disfavor.
(5) Claims that recognition and enforcement should be denied because the award has been or may be set aside at the place of arbitration are given serious consideration. U. S. courts generally regard the court at the seat of arbitration as having “primary” jurisdiction over the award, and will give effect to a foreign judgment annulling an award, rendered by such a court, unless that judgment would not meet U.S. standards for recognition (i.e. proceedings in the rendering court did not meet U.S. minimum due process standards). In this regard, U.S. jurisprudence differs from that of some civil law systems, particularly France. It seems possible that in the future U.S. courts may consider whether federal policy favoring enforcement of awards suggests that in most circumstances a judgment of a foreign court setting aside an award should be viewed as having effect only within the country where that judgment is rendered.
4. Proceedings Involving Awards Made in the U. S.
If the award has been made in the United States (or, unusually, outside the U.S. but with an agreement that U. S. arbitration law should apply), then the U. S. District Court at the place of arbitration has dual jurisdiction: to recognize and enforce the award, and to set it aside.
Thus if the Canadian award-winner in a New York arbitration files a motion to confirm the award in the U. S. District Court in Manhattan, the award-loser may (i) oppose recognition on any ground set forth in the New York Convention for refusal of recognition, and (ii) cross-move to vacate, modify, or correct the award on any of the grounds for such relief that are enumerated in Sections 10 and 11 of the FAA.
Section 10 states the grounds upon which the court may vacate the award: (i) where it was procured by “corruption, fraud or undue means”, (ii) “evident partiality or corruption” in the arbitrators; (iii) “misconduct” or “misbehavior” of the arbitrators that prejudiced the party, including (prejudicial) refusal to hear evidence or refusal to postpone a hearing; and (iv) where the arbitrators “exceeded their powers” or “so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made. ”
It is interesting to note that the enumerated grounds to vacate do not refer in terms to the absence of a valid agreement to arbitrate. But clearly an arbitrator “exceeds…powers” if there was no valid agreement to arbitrate the issues resolved by the award.
Of course the controversial doctrine of “manifest disregard of the law” does not appear among the enumerated grounds to vacate an award. Before the 2008 U. S. Supreme Court decision in Hall Street Assocs v. Mattel, Inc., 128 S. Ct. 1396 (2008), federal courts had widely accepted “manifest disregard” as a non-statutory judge-made doctrine supplementing Section 10 of the FAA. This conception of manifest disregard, if not necessarily the doctrine itself, has been rendered untenable by the Supreme Court’s holding in Hall Street that the grounds to vacate an award enumerated in Section 10 are exclusive. The U. S. Court of Appeals for the Second Circuit, whose decisions bind federal district courts in New York, has held that “manifest disregard” may now be viewed as a one way that arbitrators may exceed their powers if, based on the agreement of the parties, they have been charged to decide the case based on particular governing law.
In its application by courts, “manifest disregard” will not ordinarily result in setting aside an award for legal error. Rather, it is a basis to vacate an award in the exceedingly rare instance that the arbitrator willfully refuses to apply a rule of law that she accepts or must accept to be controlling and dispositive.
The primary significance of “manifest disregard” is its use as a dilatory tactic and bargaining chip by recalcitrant award losers. If each party must bear its own costs for post-award litigation — as is the case under the “American Rule,” barring agreement, a claim under a statute providing for recovery, or a finding that the position taken is frivolous -– then successive applications to the district court and the court of appeals based on “manifest disregard” can delay award compliance for two or more years, and perhaps result in the award-winner capitulating to a settlement for less than the sum that is due under the award.
Countries that have adopted the UNCITRAL Model Law have essentially eliminated any difference between the New York Convention standards for denying recognition of an award and their domestic law standards for a motion to set aside an award – as Article 34 of the Model Law provides for awards to be set aside only on one of the grounds that would permit denial of recognition under the Convention. But the United States has not adopted the Model Law. In regard to international arbitration awards made in the United States, the U.S. must be thought of in the same terms as any other country that has not adopted the Model Law, i.e. that its domestic arbitration law must be consulted to ascertain the conditions for setting aside an award.
In general Canadian parties may expect a highly favorable attitude of U. S. courts toward recognition and enforcement of foreign arbitral awards and international awards made in the U. S. and governed by the New York Convention.
The overlapping jurisdiction of state and federal courts to enforce awards, and the potentially overlapping coverage of the enforcement regimes for domestic and international awards add procedural complexity. And the absence of a statutory provision for the award-winner to recover its fees for enforcement litigation creates incentives for award-losers to manufacture attenuated if not frivolous arguments.
But Canadian award-winners can generally expect that their award will be confirmed and will thereby become U. S. judgments enforceable by all of the same coercive means as if the judgment had resulted from litigation on the merits in the same court.