Marc J. Goldstein Arbitrator & Mediator NYC
August 25, 2010

Third Circuit Court Joins Others In Holding That Domestic Standards for Vacating Award Apply to Convention Awards Made in the US

Article (V)(1)(e) of the New York Convention provides that a Court asked to confirm a Convention award may refuse to do so on the ground that the award has been or may be set aside by a competent court of the country in which, or under the law of which, the award was made. While it is sometimes said that the Convention does not concern itself with vacatur of awards but only with grounds for a court to refuse to confirm an award, Article (V)(1)(e) is widely understood to have the effect of incorporating domestic law vacatur standards at the seat of arbitration when they are applied by courts at that arbitral seat in a proceeding brought to obtain vacatur.

The US Third Circuit Court of Appeals last week joined the neighboring Second Circuit (and others it did not cite) in adopting this view of Article V(1)(e) with regard to Convention awards made at a seat of arbitration in the United States. Ario v. Underwriting Members of Syndicate 53 at Lloyd’s, 2010 U.S. App. LEXIS 17195 (3d Cir. Aug.18, 2010). The Second Circuit was the first of the federal appellate courts to expound this position, in Yusuf Ahmed Alghanim v. Toys “R” Us, Inc., 126 F.3d 15 (1997).

In another aspect of the Third Circuit case that will be of broad interest to practitioners, the Court held that the parties had not clearly agreed to substitute the grounds for vacatur provided by state law, in place of the Federal Arbitration Act grounds, by providing in their agreement that the arbitration would be governed by the Pennsylvania Uniform Arbitration Act. How parties may accomplish by agreement an “opting out” of federal vacatur standards in favor of state law standards has been a subject of considerable attention since the Hall Street decision, in which the U.S. Supreme Court remarked that one way the parties may successfully vary the federal regime of grounds to vacate an award is simply to agree that state law vacatur standards will control.

For international arbitrators and international arbitration counsel, however, this Third Circuit case is more memorable for its affirmation of the widely-accepted view of the relationship between the Convention and US federal law standards for vacating an award. Thus, district courts in both the Second and Third Circuits must follow the rule that when an international arbitration takes place in the United States, the resulting award may be (i) refused confirmation for a reason stated in the Convention, and/or (ii) vacated, modified, or corrected according to the standards stated in Chapter 1 of the Federal Arbitration Act.

This position is now relatively freeĀ from controversy in the United States, and may be expected to be applied by federal district courts in major centers of international arbitration activity. The Fifth Circuit Court of Appeals embraced this view of the relationship of the Convention and the FAA in Gulf Petro Trading v. Nigerian Nat’l Petroleum Corp., 512 F.3d 742 (2008).The Sixth Circuit concurred in Jacada, Ltd. v. Int’l Marketing Strategies, Inc., 401 F.3d 701 (2005). An Eleventh Circuit decision might appear to suggest the contrary, but in that case the Court simply equated certain arguments for vacatur made under FAA Chapter 1 with grounds to refuse confirmation under the Convention and Chapter 2. Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (1998). It is reasonable to expect that in a suitable case the Eleventh Circuit would line up with the others herein mentioned.

For foreign arbitrators sitting in the United States, it is therefore useful to have a working knowledge of the FAA Chapter 1 grounds for vacating, modifying or correcting an award, found in Sections 10 and 11 of the FAA. For example the U.S. case law on “evident partiality” of the arbitrator as a ground to vacate the award is well developed as to the circumstances that may give rise to a reasonable impression of arbitrator bias. This is in contrast to the Convention, which in Article V makes no specific reference to arbitrator corruption, bias, or lack of independence, but rather more generally permits an award to be refused confirmation if “the arbitral procedure was not in accordance with the agreement of the parties,or, failing such agreement, was not in accordance with the law of the country where the arbitration took place.”

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