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June 10, 2009

Setting Aside New York Convention Awards

Does Chapter 1 of the Federal Arbitration Act – the “domestic FAA” – provide the legal standards applicable to a motion to vacate an international arbitration award made in the United States? Just when many arbitration practitioners may have thought the settled answer was “yes,” along has come a new federal district court decision in Virginia taking the opposite view. RZS Holdings AVV v. PDVSA Petroleos, S.A., 2009 U.S. Dist. LEXIS 47126 (E.D. Va. Feb. 5, 2009). The Court in RZS held that the Chapter 1, Section 10 standards to vacate an award do not apply to a motion to vacate a Convention award because they are “in conflict with” the standards for refusing enforcement of an award under Article V of the New York Convention.

The decision is in direct conflict with a consistent line of cases in the U.S. Court of Appeals for the Second Circuit, and decisions in the Fifth and Sixth Circuits, that clearly hold that Section 10 of the FAA provides the standards for a motion to set aside a Convention award made in the United States. The rationale of those cases is that Article V(1)(e) of the Convention provides express authority for the courts at the place of arbitration to apply domestic arbitration law to a motion to set aside the award. Article V(1)(e) provides that a court asked to recognize and enforce an award may refuse to do so if the award has been “set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.”

The RZS Court, finding no controlling Fourth Circuit decision, elected to rely principally on the Eleventh Circuit’s decision in Industrial Risk Insurers v. M.A.N. Gutenhoffnungshutte, 141 F.3d 1434 (11th Cir. 1998), cert. denied, 525 U.S. 1068 (1999) and the Sixth Circuit’s decision in M&C Corp. v. Erwin Behr, 87 F.3d 844 (6th Cir. 1996). This commentary will demonstrate that such reliance was misplaced.

The potential for misunderstanding concerning the intersection of the FAA’s “domestic” (Chapter One) and “international” (Chapters Two and Three) rules is considerable. The framers of the New York Convention elected not to create a uniform regime governing motions to set aside awards to which the Convention applies. Congress in enacting Chapter 2 to implement the Convention also created no regime concerning motions to set aside Convention awards. One reason for this is that it may not have been well-understood, at the time of adoption of Chapter Two, that the Convention’s coverage could extend to awards made in the United States that are “not considered as domestic” under U.S. law.

The Convention’s drafters elected to address directly only the grounds to enforce, or refuse to enforce, arbitration agreements and awards. They did not seek to establish a uniform international standard for motions to vacate awards. But the Convention’s drafters did include Article (V)(1)(e), providing that recognition and enforcement may be refused if the award has been “set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made.”

In so doing, the Convention’s drafters indirectly endorsed then-existing domestic law regimes governing motions to set aside international arbitration awards, and encouraged the evolution of such regimes. The variety of such regimes motivated the drafters of the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”) to provide in Article 34 that an award may be set aside only on one of the grounds for refusing enforcement under the New York Convention (omitting Article V(1)(e) as redundant).

The United States has elected not to adopt the Model Law, and when Chapter 2 was added to the FAA in 1970 as legislation implementing the New York Convention, its relationship to the “domestic FAA” was addressed through Section 208. That Section provides that Chapter 1 applies to the extent it is not in conflict with express provisions of Chapter Two or of the Convention.

Is Section 10 of the FAA, stating the grounds to set aside an award, in conflict with Chapter 2 and the Convention? Insofar as a party opposing recognition by an American court of a foreign-made award might argue that recognition should be refused on a ground stated in Section 10, a conflict does exist: The Article V regime is exclusive — in the realm of motions to recognize and enforce awards.

But if the award whose recognition is sought was made in the United States, then a cross-motion to set aside the award is permitted by Chapter Two and the Convention to the extent it is permitted by the FAA. Neither the Convention nor FAA Chapter Two purports to prohibit a set-aside motion at the place of arbitration (or, in the unusual circumstance, where the award was made elsewhere but by agreement U.S. arbitral procedural law applied) and Article V(1)(e), as noted, indirectly authorizes such a motion. So Section 10 of the FAA, permitting a motion to vacate to be brought in the federal district court at the place of arbitration, applies in a Convention case where the award was made in the United States, introduced through Section 208.

The U.S. Court of Appeals for the Fifth Circuit re-affirmed in Gulf Petro Trading Co. v. Nigerian Nat’l Petroleum Corp., 512 F.3d 742 (5th Cir. 2008) that the New York Convention confers “primary jurisdiction” to review the award upon courts of the country “in which, or under the law of which, the award was made.” While Gulf Petro dealt with a Swiss award, and thus was not concerned with Chapter 1 and Section 10 of the FAA, the Court held that “’the
Convention does not restrict the grounds on which primary-jurisdiction courts may annul the award, thereby leaving to a primary jurisdiction’s local law the decision whether to set aside an award.’” (quoting from the Fifth Circuit’s opinion in Karha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 335 F.3d 357, 368 (5th Cir.), cert. denied, 539 U.S. 904 (2003). The Fifth Circuit in Gulf Petro went on to say — quoting from the Second Circuit’s decision in Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc., 126 F.3d 15, 23 (2d Cir. 1997), cert. denied, 522 U.S. 1111 (1998) (“Yusuf”) – that such “primary jurisdiction” courts are “’free to set aside or modify an award in accordance with [the country’s] domestic arbitral law and its full panoply of express and implied grounds for relief.’” 512 F.3d at 747.

The Court in the recent RZS Holdings case failed to consider the Fifth Circuit decisions, and declined to follow and purported to distinguish the Second Circuit’s decision in Yusuf. The Court purported to “note the negative history associated with this case, in that several other circuits have declined to follow this case, and its holding has been called into question by the Second Circuit itself.” 2009 U.S. Dist. LEXIS 47126 at *12-13. But the Court did not cite any cases as examples of circuits that had rejected Yusuf’s holding concerning the interface of Chapters 1 and 2 of the FAA. In support of the position that the Second Circuit itself had called Yusuf into question, the Court cited Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304 F.3d 200 (2d Cir. 2002). But the holding in Yusuf that was questioned in Westerbeke was not its holding concerning the New York Convention, but its holding that the “manifest disregard” doctrine includes the concept of “manifest disregard of the agreement.” 304 F.3d at 222. The Yusuf Court’s holding that a federal district court in the district where a Convention award was made may consider a motion to vacate the award under Section 10 has been re-affirmed (expressly or by implication) in the Second Circuit several times. (E.g., Zeiler v . Deitsch, 500 F.3d 157, 164 (2d Cir. 2007); Sole Resort S.A. de C.V. v. Allure Resorts Management, LLC, 450 F.3d 100, 102 n.1 (2d Cir. 2006); Lucent Technologies, Inc. v. Tatung Co., 379 F.3d 24 (2d Cir. 2004); Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255 (2d Cir. 2003). Yusuf was also followed by the Sixth Circuit in Jacada (Europe), Ltd. v. International Marketing Strategies, Inc., 401 F.3d 701 (6th Cir.), cert. denied, 126 S. Ct. 735 (2005).

The Court in RZS purported to find support for its position in another Sixth Circuit case, M&C Corp. v. Erwin Behr, 87 F.3d 844 (6th Cir. 1996), but the award at issue in Behr was a foreign award, and the Court properly held that the exclusivity of Article V of the Convention prevents the grounds for setting aside an award, enumerated in FAA Section 10, from becoming additional grounds to refuse recognition of a foreign award. More difficult to distinguish is the other principal case relied upon in RZS, Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte, 141 F.3d 1434 (11th Cir. 1998), cert. denied, 525 U.S. 1068 (1999). The Court in Industrial Risk Insurers held – without consideration of the effect of Article V(1)(e) — that the Convention grounds for denying recognition of an award are also the exclusive grounds for setting aside a Convention award made in the United States. The RZS court did not misinterpret Industrial Risk Insurers. Its holding is in conflict with the holdings of the Second, Fifth and Sixth Circuits.

The fundamental error in both RZS and Industrial Risk Insurers is the conflation of the concepts of “vacatur” of a Convention award and denial of recognition of a Convention award, and the consequent failure to give effect to dual legal regime governing Convention awards made in the United States. American courts should be mindful to keep distinct the concepts of vacatur and denial of recognition, and to be mindful of the overlapping coverage of Chapters 1 and 2 of the FAA in the context of review of international arbitration awards made in the United States. Should another federal circuit court of appeals follow Industrial Risk Insurers, widening the conflict among circuits, the issue may be suitable for review and clarification by the U.S. Supreme Court.