It is occasionally the pleasant duty of Arbitration Commentaries to inform its readers that American trial judges do understand the New York Convention and Chapter 2 of the Federal Arbitration Act (“Convention Act”), and that they often apply the Convention and the Convention Act sensibly to advance international arbitration and the predictability and stability of American law that supports it.

This post is such an occasion. Within the past two weeks:

(1) A federal district judge in New York properly rejected the attempt of a party to an ongoing international maritime arbitration to get judicial relief from the arbitral tribunal’s procedural ruling staying the proceedings until the Claimant complied with a partial final award directing Claimant to post security for Respondent’s counterclaims. (SH Tankers Ltd. v. Koch Shipping, Inc., 2012 WL 2357314 (S.D.N.Y. Jun. 19, 2012); and

(2) A federal district judge in Dallas held that an action to confirm an award  in an arbitration in Texas between brothers who were Indian citizens residing in Texas, concerning their respective interests in a California corporation headquartered in Texas, was properly removed to the federal court from a Texas state court because the brothers’ foreign citizenship, not their Texas domicile, determined that the award in their arbitration was an award not considered as domestic in the United States, and therefore was an award to which the Convention applies. (Nanda v. Nanda, 2012 WL 2122181 (N.D. Tex. Jun. 12, 2012)).

The New York case is a tale of an unhappy arbitral litigant seeking an interlocutory judicial bailout. Claimant owned an oil tanker that it chartered to Respondent for shipment of $170 million worth of oil from Iraq to the U.S. En route, the tanker was hijacked by Somali pirates and held hostage for seven months until Claimant’s war-risk insurer paid a $9 million ransom. Claimant commenced arbitration to recover the ransom from its customer, the Respondent charterer, and the Respondent asserted counterclaims. Further, concerned that  Claimant could not, and that Claimant’s insurer would not, satisfy an award on the counterclaims, Respondent obtained a partial final award for security of $13 million. When that award was not complied with, Respondent, preferring not to expend resources to prove a claim it would be unable to collect, then obtained a procedural order from the Panel staying all proceedings pending compliance.

Claimant then opened its litigation front, asking the federal district court to compel Respondent to arbitrate its counterclaims, i.e. to proceed without Claimant first posting security.   Claimant thus presented the highly unusual question of whether a conditional refusal to proceed within an arbitration, based on a Tribunal’s order permitting such conditional refusal to proceed ,  is a “failure, refusal, or neglect” to proceed with arbitration covered by FAA Section 4. But the Court held that a refusal to proceed, based on the Panel’s granting that party a stay, was not a refusal to arbitrate within the meaning of the FAA, and presented no occasion for the Court to assist the aggrieved party by entering an order to compel arbitration. Claimant also asked the Court to vacate the Panel’s stay order, but the Court held that the stay order was not an award, even if its practical effect was to freeze the arbitration indefinitely, because the Panel was not functus officio as to that issue and retained power to lift the stay.

The Texas case concerned the “removal” provision, Section 205 of the FAA.  (Foreign readers will recall that “removal” is an idiosyncrasy of American law, concerning the allocation between US federal courts and courts of the individual states of cases over which there is subject matter jurisdiction in both). Following a final award made in Texas in arbitration between brothers who were each a citizen of India but a resident of Texas, the winner sought confirmation in a court of the State of Texas and the loser sought to remove the case to the US District Court in Dallas. The winner argued that case law had construed the Convention as establishing independent criteria of when an award made in the State (i.e. a nation that is a Convention Contracting State) where enforcement is sought falls under the Convention. But the Court rejected this view, holding that the language of Convention Article I (1) (Convention “shall also apply to arbitral awards not considered as domestic in the State where their recognition and enforcement is sought”) left it entirely up to the State (i.e. nation) in which enforcement is sought to define criteria of non-domesticity. The Court held that the FAA had clearly defined what the US regards as non-domestic, in Section 202, and accordingly an award between two foreign citizens residing in the US was a non-domestic award, and fell under the Convention, and the action for confirmation in a court of the State of Texas was therefore properly removed to US District Court.

Last week a respected federal district judge in New York denied a motion for a preliminary injunction in aid of arbitration. The motion had been made by the Claimant in a pending ICC arbitration seated in New York, in which the tribunal is now fully-constituted although it may not have been at the time the motion was filed. More interesting for the arbitration bar than the outcome was an issue mentioned but not resolved in the Court’s decision: Does Chapter Two of the FAA confer subject matter jurisdiction on the Court when the only relief sought is a provisional remedy in aid of arbitration, i.e. the movant has no occasion either to seek to compel arbitration or to confirm an award? (Emirates Int’l Inv. Co. v. ECP Mena Growth Fund, LLC, 2012 WL 2198436 (S.D.N.Y. June 15, 2012)). The issue is a pressing  one — notably in regard to the attractiveness of New York as a venue for international arbitrations — when, as in the Emirates International case,

there are no American parties and so there is no possible federal jurisdictional basis other than Chapter Two of the FAA.

The Emirates International Court states that the position of the US Second Circuit Court of Appeals on this issue is “somewhat unclear.” On the “no” side of the question, there is a Second Circuit affirmance in 1987 of a district court decision in which lack of subject matter jurisdiction was found because the case did not involve either an action to compel arbitration or a motion to confirm an award. But that case also did not involve a request for provisional relief, so it is inconclusive.  On the “yes” side, the Court refers to a decision in the district court from 2003, which did squarely hold that the Court had jurisdiction to grant interim relief, and which cited as controlling precedent a seminal Second Circuit decision: Borden, Inc. v. Meiji Milk, Inc., 919 F.2d 822 (2d Cir. 1990).

Borden, many will recall, was in the vanguard of US decisions rejecting the older and much-criticized view that judicial interim measures in aid of arbitration were unattainable because the New York Convention completely ousted the courts of jurisdiction in an arbitrable dispute.

But the Borden case is of limited value in answering the question presented here.  First, the Borden company when it commenced the action relied for subject matter jurisdiction both on diversity of citizenship and the Convention/FAA. Second, when commencing the action, Borden pleaded its arbitrable claims and moved to compel arbitration of them. The Japanese defendant Meiji moved to dismiss, both on grounds that the Court lacked subject matter jurisdiction to grant provisional relief if the case was arbitrable, and on the basis of forum non conveniens. The District Court adopted the latter ground, but the Second Circuit considered that subject matter jurisdiction was a threshold issue and so it took up that question. The Borden Court’s decision was that jurisdiction, having been properly lodged in the district court under the Convention based on the Plaintiff’s motion to compel arbitration of its own claims, was not ousted for purposes of considering provisional relief once the matter was determined to be arbitrable. Indeed the specific holding was that granting provisional relief was consistent with the district court’s power under the Convention to compel arbitration. The Second Circuit in Borden had no occasion to discuss whether provisional relief could be granted even if there was had been no occasion for the Plaintiff to file a motion to compel arbitration.

Recently the US Fourth Circuit Court of Appeals held that the district court “was not obliged to deny the injunction request as moot when it deemed [the] claims to be arbitrable,” and the Court cited Borden in support of this result. (Aggaro v. Mol Ship Management Co., Ltd., 675 F.3d 355 (4th Cir. 2012)). But here Plaintiff was a seaman who based jurisdiction on another federal statute, the Jones Act, not on the Convention. His employer moved to compel arbitration and the seaman responded, unsuccessfully, that his claims were not arbitrable. So the case suffers from the same limitations as Borden in terms of answering the unanswered question of last week’s Emirates International case.

When one parses the text of FAA Chapter Two, the view that an action for an injunction in aid of arbitration is within the grant of subject matter jurisdiction can be well-supported. Section 202, of course, tells us when an arbitration agreement or an arbitration award is one that “falls under the Convention.” But then Section 203 states that “[a]n action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States.” There is a connection from Section 203 back to Section 202, but it is not completed loop, because Section 202 does not say, indeed there is no section of Chapter Two that purports to say, precisely what are the actions or proceedings that “fall under the Convention.” Presumably the connection between Sections 202 and 203 is that those actions or proceedings must somehow involve a Convention agreement or award. But is it inferable that the only possible proceedings are to compel arbitration or confirm an award? The textual evidence is against such an inference. There is Section 205, which provides for removal to federal court of a state court action that “relates to” a Convention agreement or award. It would seem counterintuitive that Congress would have created a grant of removal jurisdiction broader than the grant of original jurisdiction; presumably the two are intended to be co-extensive. On that basis, whatever is the scope of “relates to” under Section 205, it seems sensible that the Section 203 actions that “fall under the Convention” are at least those that, in the same sense as Section 205, “relate to” a Convention award or agreement. Section 206 provides for an action to compel arbitration and Section 207 for an application to confirm an award. If those were the only “actions or proceedings” that “fall under the Convention,” it would have been easy enough to for the drafters to say so.  But we know these are not the only such actions, because Section 208 provides for the residual application of FAA Chapter 1 to the extent not in conflict with Chapter Two or the Convention. Accordingly an action to vacate or modify or correct a Convention award made in the United States is within the jurisdiction granted by Chapter Two. (FAA Section 10) An action to compel attendance of a non-party witness under subpoena, or to punish non-appearance by contempt, is also a Chapter Two “action or proceeding.” (FAA Section 7).

One sensible path in view of the foregoing is to test how a federal court in New York might regard a petition for removal from state court of an action , involving a pending arbitration subject to the Convention, brought solely to obtain a provisional remedy.  Recently a federal district court in New York, considering a removal petition under Section 205 of the Convention that did not involve provisional relief, noted that the Second Circuit had not taken a position on the scope of what matters “relate to” a Convention arbitration agreement, and elected to follow Fifth Circuit case law holding that Section 205 is extraordinarily broad and the “relates to” test is satisfied when “the subject matter of the litigation has some connection, has some relation, has some reference to the arbitration clauses.'”(Goel v. Ramachandran, 823 F.Supp.2d 206 (S.D.N.Y. 2011)(internal citation omitted)).

Reading the same “relates to” test back into Section 203, and applying it in view of federal policy to ensure the effectiveness of agreements to arbitrate, the case for finding that the Convention provides subject matter jurisdiction over a cause of action seeking a provisional remedy in aid of a pending arbitration is compelling. To view the matter otherwise would yield the surprising conclusion that despite the broad grant of federal jurisdiction, Congress intended that in Convention arbitrations between two foreign parties, their rights to provisional relief would be primarily in the domain of state courts. All the evidence of legislative intent would seem to be to the contrary, and strong considerations of policy support the recognition of such jurisdiction.

This is yet another corner of US New York Convention jurisprudence where useful clarification from the Second Circuit would be welcome in the very near future.