06.29US Trial Judges Shine in Recent Convention Cases
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.