Marc J. Goldstein Arbitrator & Mediator NYC
September 30, 2010

Ninth Circuit Refuses Confirmation of Convention Award, Calling Arbitrator Interpretation “Completely Unreasonable”

The U.S. Ninth Circuit Court of Appeals, in a sharply divided 2-1 panel decision, has overturned a San Francisco federal district court’s confirmation of a New York Convention award, made in California, between a Belarus claimant and a California respondent-counterclaimant. The award dismissed the Belarus company’s claims and awarded the U.S. party more than $4.2 million in damages and costs on its counterclaims. The position of the panel majority was that confirmation of the award should have been refused, under Article V (1)(d) of the New York Convention, because the arbitral procedure was not in accordance with the agreement of the parties — whose arbitration clause required that arbitration take place “at the defendant’s site.” The panel majority — rejecting as “simply not reasonable” the interpretation given to the arbitration clause by the arbitrator, the district court judge, and the dissenting Ninth Circuit judge — held that “at the defendant’s site,” as applied to counterclaims, unambiguously required that counterclaims be brought in a separate arbitration in the home jurisdiction of the counterclaim defendant. Polimaster Ltd. v. RAE Systems, Inc., 2010 U.S. App. LEXIS 19990 (9th Cir. Sept. 28, 2010).

The agreement at issue contained a two-paragraph dispute resolution clause. The first paragraph provided that the parties should exert every effort to resolve their dispute by negotiation. The second paragraph stated: “In case of failure to settle the mentioned disputes by means of negotiations they should be settled by means of arbitration at the defendant’s site.

The Ninth Circuit panel majority provides little explanation of its position that the clause is not ambiguous. Most of the majority opinion consists of an attack on the reasoning of the dissent. Insofar as the majority’s position is discernible, it is that the term “defendant” could only be construed to refer to a defendant on a claim made by either party, including a claim first raised by a party that had been already named as a defendant in an arbitration commenced by the other side. Thus, the majority reasons, the gist of the agreement was to preclude the assertion of counterclaims, and to require each party to assert any claims in an arbitration commenced in the geographic location of the opposing party. The dissent takes the position that it is at least arguable that the parties used the term “defendant” to mean only the party identified as the defendant in an arbitration initially filed. The dissent further observes that the existence of even a plausible alternative construction should preclude the conclusion that the agreement is unambiguous.

Overlooked entirely in the cross-fire between the majority and the dissent is the relevance of Chapter 1 of the Federal Arbitration Act (“FAA”), and its interplay with the New York Convention and Chapter 2 of the FAA in a case involving a Convention award made in the United States. In the District Court, the prevailing U.S. party moved to confirm the award, and the losing Belarus party cross-moved to vacate the award. The motion to vacate was (or should have been) governed by Chapter 1 of the FAA, which provides in Section 9 that an award “shall be confirmed unless” one of the grounds for vacatur set forth in Section 10 is established. Article V of the Convention, implemented by Chapter 2 of the FAA, states that confirmation of a Convention award “may be refused” if one of the grounds for refusing confirmation, identified in Article V, is found to be present. Whereas FAA Chapter 1 applies to a Convention award only to the extent that it is not in conflict with Chapter 2 and the Convention (this is the mandate of FAA Section 208), one might suppose that, in an unusual case, an award that does not qualify for vacatur under Chapter 1, Section 10, might still be refused confirmation if a ground for such refusal identified in Convention Article V exists. If any U.S. case law has produced such an award-in-limbo — refused vacatur under Section 10, yet also refused confirmation under the Convention — I am unaware of it. And indeed Article VII (1) of the Convention would appear to prevent this from happening. This so-called “most favored nation” clause in the Convention provides that “the provisions of the present Convention shall not . . . deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the laws and treaties of the country where such award is sought to be relied upon.” That would seem to mean that if the winning side on a Convention award made in the United States seeks confirmation of the award in the United States, and is entitled to confirmation under U.S. law other than the Convention (i.e. FAA Chapter 1), then the Convention does not — may not — prevent confirmation. I do not believe any U.S. case has clearly held that this is the impact of Article VII, but this certainly follows logically from its text.

And if the foregoing analysis is correct, then one may ask, was it not entirely improper for the Ninth Circuit to analyze the Polimaster case, as it did, in terms of whether, under Article V(2)(d) of the Convention, confirmation should be refused because the arbitral procedure varied from what the parties had agreed (because counterclaims were allowed in the same case at the same place)? If a court begins analysis of confirmation a U.S.-made Convention award with Article V, and finds that a ground permitting refusal of confirmation exists, then Article VII would seem to require that the Court go further, determine if the award must be vacated under Section 10, and if no vacatur is so mandated, confirm the award despite a permissible ground for refusing confirmation under Article V. More simply stated, analysis of vacatur under Section 10 would seem to be the whole ball of wax as to confirmation of a U.S.-made Convention award.

If the Ninth Circuit had taken that tack, would the outcome have been any different? Maybe not. But using the Section 10(a)(4) formulation of whether the tribunal exceeded its powers (or manifestly disregarded the law) would have required the Court to be faithful to a well-developed body of its own case law.

First, whereas the parties had evidently agreed to arbitrate the disputed issue of counterclaims jurisdiction, by signing a submission agreement for arbitration in California under the JAMS Rules, the arbitrator’s decision on that issue was entitled to the same deference as is given to any other issue submitted to arbitration.[1]

Second, Ninth Circuit jurisprudence gives a very wide berth to arbitral interpretive discretion when it is claimed that the arbitrator exceeded her powers in construing a provision of the contract. The Ninth Circuit has repeatedly held that the arbitrator does not exceed her powers if she is even “arguably construing” the arbitration agreement. The Ninth Circuit has construed the “exceeding powers” ground for vacatur, FAA Section 10(a)(4), to mean “complete irrationality.” And it has held that an award is only “completely irrational” if it “fails to draw its essence from the agreement,” or if the arbitrators “act outside the scope of the … agreement.” According to the Ninth Circuit, the courts have “no authority to vacate an award solely because of an alleged error in contract interpretation,” and they “need only determine whether the arbitrators’ interpretation was ‘plausible.‘” Langstein v. Certain Underwriters at Lloyd’s, 607 F.3d 634 (9th Cir. June 10, 2010) (internal citations and quotation marks omitted).

The majority in Polimaster insisted that the arbitration clause was unambiguous in requiring separate arbitrations, in separate venues, of claims by each party aginst the other. But that was more easily said, one might think, because the Court thought its scope of review was de novo where the question presented was the existence vel non of an Article V ground for refusing confirmation under the Convention. Had the Court framed the issue as whether the arbitrator’s interpretation of the clause was “plausible,” it might have been able to reach the same result, but it would have had to struggle much more than it did with the evident interpretive tensions in the parties’ agreement on the place(s) of arbitration(s).



[1] The arbitration agreement as originally written did not provide for arbitration under a particular set of rules. The parties did ultimately agree in writing, after the dispute had arisen, to arbitrate the Belarus company’s claims in California under JAMS Rules (presumably its International Rules). At the time of that submission agreement, the Belarus party made a written reservation to the effect that it maintained that the arbitration clause meant that any claims by the California company had to be brought in Belarus in a separate case, and not as counterclaims in the California case. At least two provisions of the JAMS International Arbitration Rules, not mentioned by either the majority or the dissent, appear to be relevant. First, Article 17.2 of the JAMS Rules provides that a party objecting to the jurisdiction of the arbitration tribunal must make its objection to the tribunal not later than in the Statement of Defense or the Reply to Counterclaim. Second, Article 17.3 provides that by agreeing to arbitrate under the JAMS Rules, a party will be deemed to have agreed not to apply to any court for relief as to the tribunal’s jurisdiction, except (i) by agreement of all parties, (ii) by authorization of the tribunal, or (iii) after the tribunal’s ruling on the jurisdiction objection.


One Response to “Ninth Circuit Refuses Confirmation of Convention Award, Calling Arbitrator Interpretation “Completely Unreasonable””

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