In an American variation on the Dallah v. Pakistan fact pattern (an award enforcement proceeding against a foreign state that did not sign the arbitration agreement), the US Third Circuit Court of Appeals has affirmed a District Court order vacating a sister court’s earlier confirmation of a reinsurance arbitration award rendered against a non-signatory Brazilian state entity. (Aurum Asset Managers, LLC v. Bradesco Companhia de Seguros, 2011 WL 3562897, 3d Cir. Aug. 15, 2011)).
But unlike in Dallah, the non-signatory question faced by the District Court in the confirmation proceedings in Aurum involved the court’s ability to exercise the subject-matter jurisdiction over a New York Convention award ostensibly conferred by Chapter Two of the Federal Arbitration Act (FAA). If the respondent state-owned Brazilian financial services company was not a party to the arbitration agreement, then the District Court, while having ostensible award-enforcement jurisdiction under Chapter Two of the FAA, either had no such jurisdiction because jurisdiction was a function not only of the FAA but also the Foreign Sovereign Immunities Act (FSIA), or at least the court could not exercise the jurisdiction conferred by the FAA because the Brazilian state entity enjoyed sovereign immunity.
On a technical level, Aurum involved the legal standard for a District Court to grant relief setting aside its own prior judgment confirming an arbitration award, where the foreign state entity had preserved its objections to the jurisdiction of the arbitral tribunal and the District Court by declining to appear in either proceeding. The Third Circuit rejected claimant’s position that the original District Court order confirming the award should stand unless there was a “clear usurpation of power,” reasoning that such a narrow standard for vacating the award-confirming judgment was unjust to a foreign state entity that had neither waived sovereign immunity nor had a full and fair opportunity to litigate that issue, but instead had exercised its right, conferred by U.S. law, to resist jurisdiction by (i) not appearing in the proceedings, (ii) permitting judgment to be entered in absentia, and (iii) later attacking the judgment in a collateral proceeding. In such a case, the Third Circuit held in Aurum, the District Court in the collateral proceeding properly reconsidered de novo whether the District Court in the original award confirmation proceeding had subject-matter jurisdiction.
Curiously missing from the Third Circuit’s decision is any mention of the New York Convention or FAA Chapter Two. Viewed exclusively from a Convention/FAA perspective, the Court had subject-matter jurisdiction, as there was an arbitration award arising out of a trans-national commercial relationship (FAA Section 202), and therefore there was a proceeding to confirm that award was “deemed to arise under the laws and treaties of the United States” over which the District Courts “shall have original jurisdiction” (FAA Section 203).
However, Chapter Two of the FAA does not take explicit account of the circumstance that a party to the arbitration agreement or the award is a foreign state. Section 1330 of the Federal Judiciary Code (28 USC), the jurisdiction-conferring provision of the FSIA, provides that District Courts “shall have original jurisdiction” of all nonjury civil actions against foreign states where — and only where — “the foreign state does not enjoy immunity under the FSIA.”
Was the Third Circuit correct to cite lack of subject-matter jurisdiction as the proper basis for the District Court’s order vacating the original confirmation order? Or did the Brazilian entity merely enjoy sovereign immunity from the District Court’s exercise of the jurisdiction conferred by the FAA in Chapter Two? The answer lies in the US Supreme Court’s interpretation of 28 USC §1330 in the Verlinden case in 1983. (Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480). In Verlinden, the Supreme Court held that “[a]t the threshold of every action in a District Court against a foreign state… the court must satisfy itself that one of the [FSIA] exceptions [to sovereign immunity] applies,” and went further to say that despite legislative history calling sovereign immunity “an affirmative defense that must be specifically pleaded,” under the FSIA “subject matter jurisdiction turns on the existence of an exception to foreign sovereign immunity. 28 USC § 1330(a). Accordingly, even if the foreign state does not enter an appearance to assert an immunity defense, a District Court still must determine that immunity is unavailable under the Act.“
It seems useful, therefore, to take note that FAA Chapter Two, as a jurisdiction-conferring statute, contains this flaw. It is ineffective to confer on federal courts jurisdiction to confirm a Convention award against a foreign state unless there is subject-matter jurisdiction over the foreign state based on an exception to sovereign immunity under the FSIA. When there has been no waiver and the foreign state was not involved in commercial activity in the United States, the District Court must analyze whether the so-called “arbitration exception” to sovereign immunity applies, i.e. whether the award “is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.” (FSIA, Section 1605(a)(6)). In that event, the arbitral tribunal’s determination that it had jurisdiction over the foreign state is entitled to no deference, as the District Court to have jurisdiction to confirm the award must determine de novo whether the foreign state was a party to the arbitration agreement underlying the award. Whereas the FSIA’s arbitration exception to immunity in Section 1605(a)(6) applies to awards resulting from arbitration agreements “made by the foreign state,” it is an open and difficult question whether arbitral jurisdiction over the foreign state based on principles extending the duty to arbitrate to non-signatories is sufficient meet the FSIA’s requirements for federal court jurisdiction in a proceeding to confirm an arbitral award.