Today’s topic is the power of a US District Court, if any, to reconsider its recognition and enforcement of a foreign arbitral award governed by the New York Convention when, after giving a judgment confirming the award here in the U.S., the award is vacated by a competent court at the foreign seat of the arbitration. And if such power exists, when should it be exercised?

To set the stage, suppose the award creditor seeks confirmation in the US, and the award debtor opts at that stage not to commence vacatur (annulment) proceedings at the seat and not to request adjournment of the confirmation case pending a vacatur action at the seat (NY Convention Art. VI), but instead initially devotes its energy to an ultimately unsuccessful effort to convince the US District Court to deny confirmation on the basis that the Tribunal lacked jurisdiction over a non-signatory claimant (an issue the US court declines to review de novo, giving deference to the Arbitral Tribunal’s award). The vacatur action at the arbitral seat’s court then unfolds as Round Two of the match, and there the award debtor obtains de novo review of the non-signatory claimant issue, and wins an adjudication vacating the award entirely. Now the award has ceased to exist in two places for opposite reasons: in the US, it is merged into the confirmation judgment; at the seat, it has been annulled.

In Round Three, award debtor asks the US Court to set aside its confirmation judgment, and enter a new judgment refusing confirmation, and says (i) the post-judgment timing and prior history should make no difference, and (ii) that the outcome should be the same as it would have been if the annulment of the award at the seat had preceded initial confirmation. (See Convention Article V(1)(e)).

Strictly speaking, the issue does not arise under the Convention or FAA Chapter Two, but only under the Federal Rules of Civil Procedure. The Convention speaks to the ability of a court to refuse recognition and enforcement, but says nothing directly about revoking recognition and enforcement once given. It might be said the Convention treats the matter indirectly as a question of local procedure because, under Art. III, awards are to be enforced “in accordance with rules of procedure of the territory where the award is relied upon.” Federal Rule of Civil Procedure 60(b) concerning setting aside a judgment would seem to be such a rule.

Rule 60(b) offers two conceivable approaches for this proposed reconsideration. Under Rule 60(b)(5), a party may be relieved from a final judgment that is “based on an earlier judgment that has been reversed or vacated” or because applying the judgment prospectively “is no longer equitable.” Under Rule 60(b)(6) relief from a judgment may be obtained for “any other reason that justifies” it. The latter is considered (in case law) to be “an extraordinary remedy which may be invoked only upon a showing of exceptional circumstances.“

The argument can be made that Article VI of the Convention, alone or in combination with Article V, resolves the issue. Article VI provides that a court “may, if it considers it proper, adjourn the decision on enforcement of the award” but only if an annulment application at the seat “has been made….” (emphasis supplied). It follows that an award debtor who is contemplating but has not yet filed an annulment case has no right to an Article VI stay and indeed a Court giving a stay in such circumstances would be ignoring clearly selected words in the Convention, words presumably chosen because the drafters considered it important to an efficient confirmation regime that unhappy award debtors should decide quickly whether to pursue annulment.

It follows that an applicant for an Article VI stay who submits only that annulment proceedings are being considered has no right to the relief. Article V(1)(e) permits refusal of confirmation only as to an award that has been annulled — not one that might be annulled. And the Convention identifies no circumstance — post-confirmation annulment or otherwise — in which a confirmation order or judgment might be reconsidered and revoked.

So how should a court address the potential Rule 60 grounds for relief from a confirmation judgment. Rule 60(b)(5) seems unpromising. It provides for relief from a judgment that is “based upon” an “earlier judgment” that has been vacated. This Rule language dates from 1937, so there is little reason to think that Congress meant for foreign arbitral awards or foreign judgments to be among the “earlier judgments” to which the 60(b)(5) would apply. Moreover, a quick look at case law regarding 60(b)(5) reveals that “based upon” means that the prior judgment was a necessary element of the judgment from which relief is sought, in the sense that it gave rise to the cause of action of defense upon which the challenged judgment is based. (Lowry Dev., L. L. C. v. Groves & Assocs., 690 F.3d 382, 386 (5th Cir. 2012). The judgment confirming an arbitral award is not “based upon” the award in this sense; the judgment flows from the existence of the award and not from any substantive element of the award.

But what about the 60(b)(6)? Is the post-confirmation foreign annulment an “exceptional circumstance”? Exceptionality would need to be based on giving effect to the mandate of the Convention that recognition should be refused to awards annulled by a court at the seat. But the more precise formulation of the Convention’s mandate is that (i) recognition should not be given to an award annulled at the seat prior to its recognition in a particular jurisdiction where recognition is sought, and (ii) recognition may in a court’s discretion be delayed if there is pending a proceeding in which such annulment might be obtained. Therefore the mandate of the Convention would seem to be that delay in commencing annulment proceedings carries with it the consequence that an annullable award will be confirmed and that the resulting judgment will be enforceable where rendered, and perhaps internationally, even if the underlying award loses its force and its direct enforceability elsewhere. And by extension no Rule 60(b)(6) exceptional circumstance exists unless the award debtor could not have timely commenced the annulment proceedings and requested the Article VI adjournment.

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At least a few readers will recognize that the issue discussed above is presented by a recent Rule 60(b) motion in a case in the Southern District of New York that has been a fertile ground for examination of international arbitration issues in recent years. See Thai-Lao Lignite (Thailand) Co. v. Government of the Lao People’s Democratic Republic, 2013 WL 1703873 (S.D.N.Y. April 19, 2013) (decision granting vacatur of post-judgment restraining notices against certain sovereign assets on sovereign immunity grounds). For readers interested in the motion, it can be found in the electronic docket for Case 10cv5256 at entry no. 203.

In its broader implications, Thai-Lao Lignite entailed the question whether a court reviews an arbitrator’s decision on her jurisdiction with deference (rather than de novo) when the parties agreed to arbitrate under rules such as the UNCITRAL Rules that give arbitrators power to rule on their own jurisdiction. The district court answered this question “yes, at least where the jurisdiction issue is raised by a signatory of the arbitration agreement who concedes its existence and questions only whether a particular non-signatory may invoke it.” The US Second Circuit affirmed that ruling in a summary order based on its decisions in Contec and Chevron, and on February 25, 2013 the Supreme Court of the United States denied certiorari. Whether that issue will eventually reach the Supreme Court will be much-watched, and in the meantime the wisdom and scope of application of the Second Circuit position will be much-debated.

Does an arbitrator exceed her powers when, as a remedy for fraud in the inducement of a limited-duration intellectual property license, she modifies the contract “as a matter of law” to provide the licensor with a perpetual royalty-free license? The U.S. Fifth Circuit Court of Appeals, reversing a Texas district court’s vacatur order, held that the arbitrator’s award should stand. (Timegate Studios, Inc. v. Southpeak Interactive, L.L.C., 2013 WL 1437710 (5th Cir. April 9, 2013)).

Even though the question presented was whether the arbitrator could rewrite the contract as a fraud remedy, the Court held that the relevant legal test under Section 10(a)(4) of the Federal Arbitration Act (permitting vacatur where an arbitrator exceeds her powers) is whether the award “draws its essence from the contract.”

So it is useful to understand where the “draws its essence” formula comes from. It source is in a very famous Supreme Court arbitration case: United Steelworkers of America v. Enterprise Wheel & Car Corp., 363 U.S. 593 (1960). That case involved a labor arbitration under a collective bargaining agreement, and the Supreme Court, referring not to the FAA but to the need for finality in the resolution of labor disputes under collective bargaining agreements, stated: “The arbitrator … does not sit to dispense his own brand of industrial justice; he may of course look for guidance from many sources, yet his award is legitimate only so long as it draws its essence from the collective bargaining agreement.” 363 U.S. at 597.

The Supreme Court has not seen fit in 53 years to incorporate the “draws its essence” phrase into the lexicon of commercial arbitration and the FAA. Not a single instance of reference to the “draws its essence” phrase is found in any FAA case in the Supreme Court.  That might be due to some key differences between collective bargaining agreements and commercial contracts, and between disputes under the two types of agreements. Perhaps most significantly, when a dispute arises under the collective bargaining agreement, that agreement is in practical terms the applicable law.  In the particular dispute, the labor arbitrator decides the respective rights and duties of employee and employer under a collective agreement which is likely to be a lengthy and self-contained charter. Certainly the steel industry agreements circa 1960 fit that mold.

But the commercial agreement with an arbitration clause typically requires the arbitrator to apply the contract law of a particular geopolitical unit, and typically does not limit the remedies of either side to those enumerated in the contract but leaves the arbitrator free to impose the contract remedies permitted by the applicable law. In that context, judicial deference to an award whose remedy “draws its essence” from the contract risks becoming formula for the arbitrator and the deferential reviewing court to disregard the applicable law in service of a generous construction of the contract’s commercial terms. This strengthens but also possibly transforms the arbitral process, inviting the process to become less of an adjudication and more of a binding form of conciliation.

Does a “binding conciliation” vision of arbitral power explain the Fifth Circuit’s decision? Nothing explicit in the decision suggests this. The Court seems to have been less attentive to the implications for arbitral power, and mainly attuned to the injury sustained by this particular licensee. The Court’s opinion does not suggest that the applicable Texas law of contracts provided that a court or arbitrator may rewrite the parties’ agreement “as a matter of law.”  Indeed the Court’s opinion does not discuss Texas contract law. The sole reference to Texas law is the statement that where there is fraud in the inducement of the contract, the remedy granted may “void contract provisions.”  But here the Court cited only to a case where punitive damages for fraud were awarded in conjunction with declaring null and void a contract, induced by fraud, that forbade punitive damages as a breach of contract remedy.

By using the “draws its essence” test to uphold the award, the Court in effect holds that even a remedy not allowed by the applicable law is not an excess of arbitral power where it plausibly advances the original contractual objectives of the prevailing party. But doesn’t that approach dislodge the applicable law as a defining and confining source of arbitral power?

Another drawback of transposing the “draws its essence” formula to commercial arbitration jurisprudence is that the commercial arbitrator routinely is invited to resolve non-contractual causes of action, and yet the “draws its essence” formula is focused on the contract. The fraud claim in the Timegate case is typical.

When the arbitrator is alleged to have exceeded her powers in providing a re-written perpetual license as a remedy for fraudulent inducement of the negotiated license , it seems the proper question to ask, about the scope of arbitral power, is not whether that remedy “draws its essence from the contract,” but whether the remedy is permitted by the law applicable to the fraud claim that the arbitrator was required to apply (or possibly by a more specific agreement of the parties about remedies). If the remedy of contract revision is allowed by (suppose) Oklahoma law, but the contract specifies that the arbitrator shall apply Texas law and the arbitrator is informed that Texas law permits rescinding the contract entirely but not rewriting it, as a remedy for fraud in the inducement, and the arbitrator invokes Oklahoma law on the basis that it strikes her as a more desirable remedial scheme, the arbitrator exceeds her powers, as she was given no power in the contract to invoke any other than Texas law.

The Supreme Court in the 2010 Stolt-Nielsen case gave renewed vitality in “exceeds powers” jurisprudence to the phrase from the 1960 Steelworkers’ case that immediately adjoins the “draws its essence” language, i.e. that an arbitrator exceeds her powers when she dispenses her “own brand of industrial justice.” In Stolt-Nielsen, this label was pinned on an arbitral award that construed an arbitration clause to allow for class arbitration, doing so (according to Justice Alioto and the majority) without reference to any body of law arguably applicable to that clause, but instead by reference to other AAA clause construction awards that had allowed class arbitration.

Whether one agrees or not that this is what the arbitrators did in Stolt-Nielsen, the “own brand of industrial justice” phrase is a sensible practical shorthand for adjudication unhinged from the applicable law that the arbitrator is bound to apply. To sustain, as the Fifth Circuit did, an arbitral revision of the parties’ contract on the basis that the revision “draws its essence” from the contract, would seem to sanction the same unhinging as a legitimate exercise of arbitral power but without adequately justifying how the contract functions as a source for that power.

Evidently undaunted by the Second Circuit’s dismissal of an award confirmation case on grounds of forum non conveniens (Figueiredo Ferraz E Engharia de Projeta Ltda. v. Republic of Peru, 665 F.3d 384 (2d Cir. 2011)) — or at least convinced of the Figueiredo panel majority’s idiosyncratic take on the “public interest” factor in forum non analysis — a federal district judge in New York recently denied a forum non conveniens motion to dismiss a confirmation action between Antiguan parties on both sides, arising from an arbitration that took place in Puerto Rico. (Leeward Constr.  Co. v. American Univ. of Antigua,  2013 WL 1245549 (S.D.N.Y. Mar. 26, 2013)).

But what may be most significant to award confirmation jurisprudence in the Leeward case is that the Court granted the motion to dismiss the confirmation petition, without prejudice, made by a non-party to the arbitration, and non-signatory to the arbitration agreement, against whom confirmation was sought via piercing of the corporate veil. Citing a Second Circuit decision from 1963 — predating the US accession to the New York Convention — the Court held that an award confirmation action against the award debtor is not the proper time to raise, for the first time, whether a putative alter ego of the award debtor is also legally responsible to satisfy the award. The Court then hastened to add that the award creditor was free to bring a “separate plenary action” to enforce the award against the putative alter ego.

The Court did not refer to any of the grounds for refusal of recognition in Article V of the New York Convention as a basis for this decision. But if Judge Kaplan considered (as he presumably did) that no such ground was needed, he would appear to have been fully justified. This decision should be classified not as a refusal to recognize the award, but as only a docket-management decision reflecting the application of a sound procedural principle: if confirmation depends upon an initial determination that the defendant consented to arbitrate and did indeed participate in the arbitration (because, as a matter of law, it is one entity with the nominal award debtor), that issue must be litigated in a separate case. The pro-arbitration logic of such a principle is that confirmation proceedings are intended to be “summary,” which is to say resolvable quickly by motion practice without discovery or trial, while issues of consent to arbitrate (such as veil piercing) may well require discovery and trial and therefore should be handled separately. It would seem that such a rule is a “rule of procedure” within the meaning of New York Convention Article III which requires that awards be recognized and enforced “in accordance with the rules of procedure of the territory where the award is relied upon.”

Aficionados of Figueiredo and its main antecedent, the Monde Re case (In the Matter of Arbitration between Monegasque de Reassurances S.A.M.(Monde Re) v. NAK Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002)), will see the close parallel between the Leeward case and Monde Re — where, in the confirmation action,  the award creditor sought conformation against the Republic of Ukraine as alleged alter ego of the award state agency Naftogaz. The solution endorsed by the Second Circuit in Monde Re was to dismiss the entire confirmation action on forum non grounds because the law and fact questions raised by the alter ego claim were better suited to resolution in a court in the Ukraine.

Perhaps the Second Circuit will soon have occasion to endorse Judge Kaplan’s approach in Leeward, which should render Monde Re if not overruled then at least recognized as less helpful solution to the tensions injected into confirmation cases when they are brought against defendants who were not participants in the arbitration.

What then should a court do when, in a separate “plenary action” like the one invited by Judge Kaplan, against only the non-signatory/non-party/alleged alter ego, forum non conveniens is raised as a basis to ship the case abroad? Here it may be useful to view the “plenary action” as a hybrid. It is in its main part an action to recognize an agreement to arbitrate, and as such is governed by Article II of the New York Convention. Article II commands that Contracting States “shall recognize” an arbitration agreement, and lacks the “rules of procedure” language of Article III that the Second Circuit relied upon in Monde Re and Figueiredo to apply forum non conveniens.  It seems correct therefore to suppose that the Court has a categorical duty under the Convention, as a treaty of the United States, to decide whether the non-party is bound by the arbitration agreement even if this involves issues of foreign law, depends on evidence located abroad, and perhaps even implicates issues of public policy of the foreign State.