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May 16, 2013

Vacatur of Convention Awards in U.S. Courts: Fresh Cases and Fresh Thoughts

One of the larger waves crashing on the shores of international arbitration as the result of the Restatement (Third) of the Law of International Arbitration is the position — clearly restating existing law — that the grounds stated in Article V of the New York Convention for refusal of recognition of an award should be the exclusive grounds for U.S. judicial annulment of an award made in the U.S. — notably to the exclusion of the doctrine of manifest disregard of the law, and, for that matter, all of the grounds in FAA Section 10. (This is Section 4-11 of the Restatement, Council Draft No. 3, approved by the American Law Institute on December 23, 2011).

Professor George Bermann in a 2011 article provided the general outline of the argument in favor of applying the Convention grounds for refusal of recognition and enforcement as the exclusive grounds for annulment of a Convention award made in the United States (“Domesticating” the New York Convention: The Impact of the Federal Arbitration Act, 2 J. Disp. Settlement, no. 2, 317-32  (2011)): that the United States in ratifying the Convention elected to treat as awards governed by the Convention those awards made in the United States but involving some substantial relationship with a foreign State, that in Convention terms such awards are “not considered as domestic” and therefore should be considered as “foreign,” or as if they were “foreign”; and therefore annulment proceedings in U.S. Courts with regard to such awards should proceed, analytically, as if they were enforcement proceedings with regard to foreign awards, i.e. exclusively according to the grounds in the Convention for refusal of recognition and enforcement.

Recently, this position seems to have gained some momentum in federal courts in America’s heartland. In March, we had the decision of the U.S. Seventh Circuit Court of Appeals in Johnson Controls, Inc. v. Edman Controls, Inc., 712 F.3d 1021, authored by Circuit Judge Diane Wood (an ALI Council member). Without citing the Restatement but with citation to Professor Bermann’s 2011 article, Judge Wood observed in dictum in Johnson Controls:

Chapters 2 and 3 of the FAA state that a Convention award may be vacated only on the grounds specified in the applicable Convention. … This could be important in some cases, because the Convention grounds for vacatur are slightly different from those in Chapter 1 of the FAA…. It is not clear whether a party may bring an action under Chapter 1 to vacate an award issued by an arbitrator in a U.S. jurisdiction, but governed by the Convention.  If it made any difference to our case, we would need to decide whether the district court erred by allowing this action to proceed under Chapter 1 of the FAA, or if the party who might have been advantaged by analysis under the proper Convention might have waived its arguments.

Johnson Controls was then followed (essentially in haec verba, but once again in dicta) only two weeks ago, in the decision of a federal district judge sitting amidst the corn silos of central Illinois, in Archer-Daniels-Midland Co. v. Paillardon, 2013 WL 1892675 (C.D. Ill. May 3, 2013), in which the Court rejected a motion to vacate a $35 million award that was made against the hometown agricultural giant by a famous arbitrator of Mexican nationality. Said the district court: “Chapter Two of the FAA states that a Convention award may be vacated only on the grounds specified in the New York Convention…. The Seventh Circuit has recognized that it is not clear whether a party may bring an action under Chapter 1 of the FAA to vacate an award issued in a U.S. jurisdiction, but governed by the New York Convention.” The Court then proceeded to find the proffered vacatur grounds insufficient even under FAA Section 10, so that it was not necessary to decide the question raised but not decided in Johnson Controls.

The textual purists among you might say Judge Wood had it wrong, and has inspired error in the lower courts, by daring to state that Chapters Two and Three of the FAA provide standards applicable to vacatur. In fact those Chapters say literally nothing, or nothing literally, about vacatur.  But I will venture the suggestion that Judge Wood very deliberately, and with evident persuasive force,  conflated vacatur and refusal of recognition — under the protective cover of dictum — — in service of advancing the Restatement position.

Let us consider further the basis for the Restatement position, and how the courts might implement it without demanding handstands and cartwheels from the statutory texts.

In the comments under the heading “Policy Considerations,” the Restatement drafters assert that Section 10 of the FAA only applies to domestic arbitration awards, i.e. those that do not involve any foreign element. But this perspective seems to be incomplete.  “Commerce” as described in FAA Section 1 includes commerce with foreign nations. And so Chapter One of the FAA provided a vehicle for the confirmation or vacatur of at least some international arbitration awards before 1970, i.e. those that involved foreign commerce of the United States.  Thus, if in 1965 there had been an international arbitration between a U. S. supplier and a foreign distributor concerning the distribution of U.S.-sourced goods in a foreign nation, Chapter One potentially provided jurisdiction (if the diversity statute was satisfied) for a U.S. court at the seat of the arbitration to confirm the award or to vacate it. The gap in coverage as to vacatur, if any, concerned awards made in the United States that involved commerce between non-U.S. parties over commerce that had no U.S. connection other than the chosen seat of arbitration.  With regard to international arbitration awards made in the United States that involved foreign commerce of the United States, the principal innovation of FAA Chapter Two was to allow agreements and awards to be enforced in the federal courts without an independent basis for subject matter jurisdiction.

As to the category of international arbitrations held at a U.S. seat to which Chapter One grounds for vacatur applied before 1970 — that is, cases involving foreign commerce of the United States —  it does not seem correct to conclude that Chapter Two’s enactment rendered those grounds no longer available. Chapter Two itself is silent about vacatur. And there are evidently no indications in the legislative history of Chapter Two that Congress considered that the Convention Article V grounds for refusal of recognition and enforcement would supplant the Section 10 grounds when vacatur was sought. Since the right to request judicial action to vacate an award continued to reside exclusively in Chapter One, it has until now been reasonable to conclude that Chapter One’s stated grounds for vacatur would apply. That conclusion is also reinforced by the fact that the subject matter jurisdiction created by Chapter Two of the FAA was not stated to be exclusive, i.e., Chapter Two does not preclude a party who could satisfy the diversity of citizenship requirement for federal subject matter jurisdiction from moving for confirmation or vacatur of an award under Chapter One.  Neither did Congress amend Chapter One to provide that when such proceedings involved foreign commerce of the United States, the permitted grounds for vacatur would be the Convention grounds for refusal of recognition and enforcement rather than the grounds in FAA Section 10.

With regard to U.S.-seated international arbitrations that involve only the commerce of foreign nations, not the foreign commerce of the United States, the analysis would seem to be quite different, and the position of the Restatement (or at least the result of that position) seems more compelling.  Parties involved in such U.S.-seated arbitrations have no express federal statutory basis for vacating an award. From a Chapter One perspective, they fail to satisfy the commerce requirement and fail to satisfy diversity of citizenship as a basis for jurisdiction when there are no U.S.-domiciled parties involved. Such parties are not aided by the “residual application” of Chapter One under Section 208 of the FAA. Section 208 provides for application of Chapter One to “actions and proceedings brought under this Chapter” but does not provide that actions and proceedings available only under Chapter One may be brought also under Chapter Two. Chapter Two does not provide for any action or proceeding to vacate an award, and thus there is no Chapter Two action or proceeding to which Section 10’s vacatur standards could, residually, apply. Such a party that initiates a proceeding for vacatur under Chapter Two of the FAA should have the proceeding dismissed under Federal Civil Procedure Rule 12(b)(6), for failure to state a claim upon which relief may be granted.

Where does Article V(1)(e) of the Convention fit into this scenario? (If you have read this far, you were about to ask).  Article V(1)(e) provides that recognition and enforcement may be (shall be) refused if the award has been set aside by a competent authority of the place at which, or under the law of which, the award was made. From the text, it can be inferred that Article V(1)(e) contemplates that the Convention Member State may have, but need not have, a legal regime for the annulment of awards. It is open to the United States, consistent with the Convention, to decline to provide any action or proceeding for the annulment of a certain category of Convention awards. And it is perfectly sensible to conclude that this was the course of action taken by the United States, in the enactment of FAA Chapter Two, with regard to Convention awards made in the United States that do not involve foreign commerce of the United States. Thus, if the arbitration winner, in a case involving only foreign foreign commerce,  seeks confirmation in a federal court at the U.S. seat, the loser may invoke the Convention grounds for refusal of recognition. But if the arbitration loser prevails in having recognition refused, the consequence is only the non-recognition of the award in the United States, and possibly some issue-preclusive effect against the arbitration winner if further confirmation proceedings are commenced in the courts of another State.  But the Award does not cease to exist, because there is no availability of vacatur (annulment) as a remedy under FAA Chapter Two (or Three).

Let us now consider briefly how the leading cases mentioned in the Comments of the Restatement would fare under this standard. Stolt-Nielsen involved foreign commerce of the United States, so consideration of vacatur according to Section 10 standards was appropriate. The same is true of Toys R Us v. Yusuf Alghanim in the Second Circuit and the Ario case in the Third Circuit. The Eleventh Circuit’s decision in Industrial Risk Insurers is wrongly decided, because the Court embraced a false dichotomy between Chapter One as governing “domestic arbitral proceedings” and Chapter Two as governing “international arbitral proceedings.” That shorthand gave short shrift to the U.S. foreign commerce dimension of Chapter One. Thus none of the leading cases is a correct outcome under existing law that would require a change of position under the approach proposed here. (The Eleventh Circuit will need to mend its error in a proper case).

From a policy perspective, this approach accomplishes some of what the Restatement drafters aspire to achieve. For foreign parties with foreign disputes (what I have called “foreign foreign commerce”) who have chosen the U.S. as a seat of arbitration only for its perceived advantages as a juridical seat, their hopes and expectations of being in a New York Convention jurisdiction without an overlay of idiosyncratic domestic arbitration law will be nourished. And this can be done without asking courts to stretch statutory language or legislative history to accomplish the policy goals of arbitration scholars (the Restatement drafters) and blogosphere pundits (your author).  For those who select a U.S. seat but are involved in foreign commerce of the United States, Chapter 1 vacatur remains possible if there is a basis for federal subject matter jurisdiction other than the Convention.  The jurisdiction requirement will eliminate a certain number of cases —  the motion to vacate an award in a contract dispute between Canadian and Mexican joint venture partners over a land development in the U.S. would satisfy the commerce requirement of Chapter One, but statutory diversity of citizenship would be lacking.  The motion to vacate in that case would be dismissed under Chapter One for lack of jurisdiction and under Chapter Two/Three for failure to state a claim.   This would leave the Restatement’s mission unachieved as to the category of cases that satisfy Chapter One in regard to both the commerce requirement and subject matter jurisdiction, because vacatur in such cases would remain proper under FAA Section 10 standards rather than New York Convention Article V standards.  But if the “problem” can be re-defined this narrowly, then perhaps legislative reform would be possible. Or perhaps the residual “problem” would be perceived — especially in light of the rarity of actual vacatur judgments for manifest disregard or exceeding powers in international arbitrations — as one that is no longer sufficiently widespread to justify the attention that is has recently attracted.