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December 01, 2009

Exclusive State Court Jurisdiction Over Motions to Vacate Convention Awards?

Does Chapter Two of the Federal Arbitration Act confer federal subject matter jurisdiction, in a federal district court at the seat of the arbitration, over a motion to vacate a Convention award?

A senior federal district judge in Chicago has raised this issue, sua sponte, in an action to vacate a Convention award that was brought to the federal court from an Illinois state court by a Notice of Removal. In a published order, the Court expressed doubt that federal subject matter jurisdiction exists, and invited the parties to brief the issue by December 9. Virginia Surety Co. v. Certain Underwriters at Lloyd’s, 2009 U. S. Dist LEXIS 110320 (N.D. Ill Nov. 25, 2009).

It may be assumed that the issue arises because the underlying arbitration, and the action for vacatur brought in the Illinois court, are between two parties of non-U.S. nationality. Thus the case falls within that anomalous lacuna of federal diversity jurisdiction: that an action between a French corporation and a German corporation, for example, must be brought in a state court unless a federal statute or treaty, or the U.S. Constitution, is involved.

Chapter Two of the FAA, enacted in 1970, was motivated by the desire to pass enabling legislation to adopt the New York Convention as a fully effective treaty of the United States within the body of domestic law. Section 201 of the FAA states that the Convention “shall be enforced in accordance with this Chapter.” But does this mean that Chapter Two’s jurisdiction-conferring sections only operate to confer jurisdiction over an action or proceeding that the Convention and/or Chapter Two recognizes expressly, i.e. an action to enforce an agreement to arbitrate or to recognize and enforce an award?

Parsing of the text of Chapter Two suggests that it is not so limited. Section 202 sets about to define when an arbitration agreement or award — not an action or proceeding — “falls under the Convention.” These are defined to be arbitral agreements and awards “arising out of a legal relationship…which is considered as commercial,” but excluding those relationships that are entirely between U.S. citizens unless that relationship involves property located abroad or some other substantial relationship with a foreign state.

Section 203 then confers subject matter jurisdiction on federal courts by stating that “any action or proceeding falling under the Convention” shall be deemed to arise under the laws and treaties of the United States.” There is no definition given of “action or proceeding falling under the Convention.” Had the drafters intended “falling under the Convention” in Section 203 to have a more limited scope than what “falls under the Convention” in Section 202 — i.e. had they meant only actions to enforce agreements or awards — one would think Section 203 would have been written in a different way. It could have referred, narrowly, to the actions and proceedings authorized by Chapter Two. The compelling inference from the consecutive repetition of “fall[…] under the Convention” in Sections 202 and 203 is that any action or proceeding authorized by law that involves a Convention agreement or award is within the subject matter jurisdiction conferred on the federal courts by Section 203 — and it would be for a federal court also to decide whether a particular action or proceedings relating to a Convention agreement or award does in fact exist as a matter of law.

The Court in Virginia Surety points out that Section 207 of the FAA expressly provides for an application in federal court to confirm a Convention award. The Court then goes on to note the absence of any similar express reference to an application to set aside an award.

The piece missing from the Court’s discussion is Section 208. It provides that Chapter 1 of the FAA shall apply “to actions and proceedings brought under this chapter” to the extent Chapter One is not in conflict with Chapter Two or the Convention.

But Section 208 is not necessarily dispositive. Strictly construed, Section 208 could be interpreted not as folding into Chapter Two the “actions and proceedings” mentioned only in Chapter One, but only as applying Chapter One procedures, residually, to actions and proceedings authorized by Chapter Two. But this interpretive dilemma perhaps does not need to be resolved. Instead, one may refer back to the jurisdiction-conferring Section 203. Notably, it speaks in terms of “actions and proceedings falling under the Convention” and not merely those actions and proceedings authorized by Chapter Two. If, as seems evident, Section 203 “actions and proceedings” includes more than the Section 206 motion to compel arbitration and the Section 207 motion to confirm an award, then the “more” almost certainly includes a motion to vacate, modify, or correct an award. And Section 208 would seem to be corroborative of that construction of Section 203, even if it is not unambiguously and autonomously the source of the incorporation of Sections 10 and 11 into Chapter Two.

Sections 10 and 11 of the FAA, providing the procedures and grounds to vacate, modify, or correct an award are not in conflict with Chapter Two or the Convention. Neither Chapter Two nor the Convention prohibits such a motion in regard to a Convention award. Indeed the Convention, while it does not state grounds or procedures for a motion to vacate, does provide in Article V(1)(e) that recognition and enforcement may be refused if an award has been set aside by a competent court of the country in which, or under the law of which, an award was made.

Chapter One of the FAA does not provide for federal subject matter jurisdiction over a motion to vacate, and so in a non-Convention case the motion may be made in federal court only if the parties to the vacatur proceeding have diverse citizenship under the diversity statute, or if a federal question claim was adjudicated in the award and thus could have appeared on the face of a well-pleaded federal complaint had there been no agreement to arbitrate. But in a non-Convention case this allocation of jurisdiction is simply one aspect of a Congressional judgment made when the FAA was enacted in 1925, to overcome hostility to arbitration in state courts not by divesting them of jurisdiction, but only by requiring them to apply federal law where the “commerce” requirement is met.

Chapter Two’s jurisdiction-conferring provisions reflect a policy choice to ensure uniform national application of the Convention and of its core undertaking to secure enforcement of international arbitral awards except of the very limited grounds for refusal or recognition and enforcement that are stated in the Convention. The policy decision very decidedly was the opposite of the one made in 1925 — uniformity is to be achieved by application of federal law by federal judges. Whereas vacatur of an award by a competent court at the seat of the arbitration is one of the grounds for denial of recognition and enforcement stated in the Convention, a construction of Chapter Two that places motions to vacate an award within the federal subject matter jurisdiction conferred by Section 203 is entirely consistent with the underlying goal of uniformity of treatment.

Further, a decision to the contrary could have serious practical consequences. Suppose a motion to vacate a Convention award is brought in state court and may not be removed under Chapter Two. The winning side may feel pressure to seek recognition and enforcement in the state court, to avoid multiple actions. Alternatively the winning side might move in federal court for recognition and enforcement. The state court vacatur movant then would ask the federal court to stay the proceedings until the vacatur action runs its course. If the stay is granted, the federal court effectively cedes control over the pace and the substance of the enforcement process to the state court. If the stay is denied, the federal court effectively adjudicates the vacatur action by permitting the award to become an enforceable federal judgment while the vacatur action may still be in the starting gate. Possibly this situation could be addressed by removal of the vacatur action based on principles of Supplementary Jurisdiction. But this is relatively uncharted territory: Removal would have to be under the general removal statute, not Section 205 of the FAA, and 28 USC 1441(a) permits removal of state court actions over which federal courts would have “original” (not Supplementary) jurisdiction.

Perhaps a bit of common sense helps to solve the problem as well. A motion to vacate a Convention award made by a losing U.S. party against a French party may be adjudicated in federal court, based on diversity if not on the jurisdiction conferred by Chapter Two. If the award is instead against a Canadian party and in favor of a French party, it simply makes no sense that the Canadian party should have lesser access to the federal courts on a matter related to the effectiveness of a Convention award than would a U.S. party. Indeed that outcome discriminates against the foreign party that consented to arbitrate in the United States, giving it different (if not necessarily less favorable) procedural rights under the New York Convention than a U.S. party would have. In this situation, then, the operative principle of statutory construction should be that legislation implementing a multilateral treaty like the New York Convention should be construed where possible so as not to accord different treatment to U.S. nationals and nationals of our treaty partners. This principle should trump the more general principle that grants of federal subject matter jurisdiction should be narrowly construed.