Well, somebody in Arbitration World has to write about a subject other than Section 1782, so here we go….
The US 11th Circuit Court of Appeals, after nearly 25 years of living on the dark side of international arbitration, seems prepared to confess its sins and seek redemption. It appears poised to recognize that the New York Convention provides the limited grounds for a US court to refuse recognition and enforcement of an international arbitration award made at a US arbitral seat, but that US domestic arbitration law (especially Chapter 1 of the Federal Arbitration Act) supplies the grounds for judicial annulment (a/k/a set aside, vacatur) of such an award. This important leap forward into the mainstream is the anticipated end game of a case recently decided, and which supplies the text for today’s sermon:
Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 2022 WL 1698350 (11th Cir. May 27, 2022), petition for rehearing en banc filed, June 17, 2022.
There are many reasons why we care about this. For starters, we all like Miami. For almost 25 years, when friends have asked “What’s not to like?”, we’ve had to answer candidly: “The 11th Circuit’s misconception of the New York Convention.” A second reason is related to the first: With Covid now more or less in the rear-view mirror, we want to make more hibernal hearing visits to Miami. If the local federal courts there can (like their counterparts in the Shivering North) vacate our awards when we exceed our powers, when we act with evident partiality, and even maybe when we manifestly disregard a law here and there, we will have more chances of having more do-overs in Miami!
Great stuff, right? Sit with me on a Miami case, and I will take you to my surf-less, shark-less, shimmering swimming beach just off the Key Biscayne Causeway. 🏊♂️
A third reason we care is that a lot of people we admire and respect have spent a lot of time for a few decades sorting out for US arbitration law the domains of “primary” and “secondary” jurisdiction in relation to New York Convention awards, and we feel for them, in their protracted wonderment at why the 11th Cir. just could not seem to “get it.” That includes your judge-friends in the 2d Circuit (remember the Toys R Us case!) and the 5th Circuit (remember the Karaha Bodas case!) and the drafters of the Restatement of the US Law of International Commercial and Investment Arbitration (and all of us who tagged along in its drafting process, to learn from the drafters without paying tuition!).
A fourth reason we care is that a big chunk of Western Hemisphere international arbitration business is going to be seated in Miami whether or not the law there makes sense, precisely because Miami* has so many other things going for it that arbitration clause-drafters will look the other way about US arbitration law as applied there. So having that law cycle forward into the present (really, into the New York Convention world created in 1958) would be a nice bonus.
A fifth reason we care (and here I get sort of semi-serious and preach-y ⚠️ ☠️ ) is that it’s good for all of us to re-visit and re-appreciate the role of “lex arbitri” in the work of arbitrators (and the work of counsel in persuading arbitrators). For those of you born in or after 1958, or at least born to international arbitration after that, it is worthwhile to remember that the significance of the seat of arbitration as the source of the arbitration law that regulates the proceeding, and thus the fundamental integration of international arbitration into the national legal system of the place where it happens, is baked into the New York Convention at Article V(1)(e). That sub-section permits a court at the place where recognition and enforcement of an award is sought to refuse such relief if the award has been suspended or set aside by a competent court of the place at which, or under the [arbitration] law of which, the award was made. Where the 11th Circuit went astray, 24 years ago, was in thinking that the impact of Article V(1)(e) was to make the vacatur (annulment, set aside) of a US-made Convention award depend entirely on whether the applicant could demonstrate that one of the Convention grounds for refusal of recognition and enforcement was present.
As 11th Circuit Judge Jordan observes, in his scholarly tour de force of a special concurrence in the Hidroelectrica case, Article V(1)(e) of the Convention, far from creating a regime of Convention hegemony in vacatur actions, was a multinational embrace of the concept of “lex arbitri” and the principle, already then well-established in European international arbitration practice, that the domestic arbitration procedural law at the seat governs the procedure in the case (alongside the particular rules agreed by the parties, which usually but not invariably take precedence and push domestic arbitration law to the sidelines). That understanding informs so much of what we do in managing our cases day-by-day, skirmish by procedural skirmish. (Arbitration World has become more complex since 1958 in so many ways, including the adoption by many States, aspirants to hosting more international arbitrations, of domestic versions of the UNCITRAL Model Law as national statutory law governing international arbitration. Under such laws, the Convention grounds for refusal of recognition and enforcement have been expressly adopted into domestic law as the exclusive grounds for vacatur of international arbitration awards made locally. The USA is an outlier, having no customized national law on international arbitration, but instead retaining the regime that has existed since 1970, when FAA Chapter 2 was added to the one-chapter FAA to give effect to US ratification of the New York Convention).
A few gory details about the Hidroelectrica case.
First and foremost: The most curious aspect of this case is that it is a stare decisis ruling adhering reluctantly to what the three-judge panel unanimously declares to have been wrongly-decided 11th Cir. precedent, notably a case from 1998 that held that in a US-seated international arbitration the New York Convention and not FAA Section 10 is the exclusive source of grounds to set aside the award. (Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (11th Cir. 1998)). The Hidroelectrica panel urges en banc review in the 11th Circuit — a fresh consideration of the appeal by the full complement of 11 Active Judges of that Court — to rule that the 1998 case is no longer good law and to allow the District Court to consider on remand whether the award in this case should be set aside under FAA Section 10(a)(4) on the ground that the tribunal exceeded its powers.
Second: Arbitration law junkies (some of you, and you know who you are!) will note with interest that Judge Tjoflat (a Senior Judge, who as the author of the panel decision in Hidroelectrica may, under 11th Cir. Rules, join his Active Judge colleagues in the en banc review), in doing his personal mea culpa in Hidroelectrica for his authorship of Industrial Risk Insurers — invokes the Supreme Court’s 2014 decision in BG Group v Argentina, 572 U.S. 25 (2014). You will not necessarily remember BG Group as a case concerning whether the Convention or FAA Section 10 governs vacatur of US-made Convention awards. But it was a case in which the Court expressly assumed — citing Article V(1)(e) of the Convention, and two commentators — that the FAA Section 10 framework did apply to a motion to vacate the award made in a DC-seated investment arbitration under a bilateral investment treaty. 572 U.S. 25 at 38. Judge Tjoflat points out that the 11th Cir. stood by its 1998 mistake in Industrial Risk Insurers in a 2019 case, despite BG Group, because BG Group did not expressly overrule or abrogate the 1998 11th Circuit decision. But his invocation of BG Group in Hidroelectrica looks like a message to the 11th Circuit Active Judges who would sit en banc that BG Group should be a strong influence in favor of correcting the 11th Circuit law. (The relevant 11th Circuit procedural rule concerning en banc review states as a guideline that the 11th Circuit precedent should be in direct conflict with Supreme Court precedent, a standard that the Hidroelectrica panel views as being met even though no Supreme Court decision has expressly abrogated or overruled Industrial Risk Insurers).
Third: While Judge Tjoflat is doing a commendable mea culpa, there are elements of his conceptual framework that still potentially obstruct the path to correct analysis. Maybe this is a function of history. Only a few of you are old enough to have been practicing law when the FAA was just one chapter. And maybe that is the source of the dichotomy, drawn in Judge Tjoflat’s opinion, between the FAA and the New York Convention. (1) Is it not more useful, as a starting point, to think of the FAA as a three-chapter statute, with points of separation and points of integration, and two incorporated multilateral treaties (New York and Panama Conventions)? (2) Why must we think of FAA Chapter 1 as the “domestic FAA”? Before there was a Chapter 2, if you had an international arbitration award that was made in Miami and you wanted to confirm or vacate it, you used Chapter 1 if you could get federal subject matter jurisdiction (and maybe in state court, if you couldn’t). Nothing in Chapter 2 expressly confines Chapter 1 to domestic arbitrations, but instead Chapter 2 adjusts the FAA framework in two fundamental ways: to make a dispute over a Convention award or arbitration agreement a basis for federal subject-matter jurisdiction, and to make the Convention’s recognition and enforcement regime mandatory and exclusive. Beyond that, Congress said in 1970, Chapter 1 is still kicking (“Chapter 1 applies to actions and proceedings brought under this chapter to the extent that chapter is not in conflict with this chapter or the [New York] Convention as ratified by the United States.” 9 U.S.C. 208). For these reasons, I squirm to read in Judge Tjoflat’s Hidroelectrica opinion that “Chapter 1 of the FAA applies to domestic arbitrations, and Chapter 2 of the FAA applies to non-domestic arbitrations.” 34 F.4th at 1293. For starters, “non-domestic” is Convention terminology, not FAA Chapter Two terminology: Article 1(1) of the Convention said the Convention applies inter alia to “arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.” That language should tell judges at least two things: the Convention is concerned with recognition and enforcement (“R&E”), not vacatur; and whether an award is domestic or not is determined by the law of the State where R&E is sought. In US federal law, that definition is furnished in FAA Section 202, which I paraphrase here for simplicity: An arbitration agreement or award “falls under the Convention,” and thus gives rise to federal subject matter jurisdiction (Section 203), except that an agreement or award entirely between US citizens only “falls under the Convention” if the underlying subject matter has a significant foreign element. Going back to what is said above about points of separation and integration, it’s helpful, I think, to getting it right, to appreciate that the domestic/international distinction is settled within US domestic law, the FAA, and entails no requirement to reconcile the “domestic FAA” with the Convention itself. This is a big step toward getting it right: “fall[ing] under the Convention” in FAA Chapter Two terms gets a motion/petition to vacate a US-made international award into federal court jurisdictionally, even when the winning side has not sought R&E in that court. (4) And, alas, this Treaty-toting Sermonizer, and maybe some of You the Faithful, will resist Judge Tjoflat’s assertion that: “Rightly, Industrial Risk acknowledge that Article V provides the exclusive grounds for vacating an arbitral award under the New York Convention. But, wrongly, the Industrial Risk court … failed to consider that domestic defenses to enforcement of arbitration awards were nestled in Article V(1)(e).” 34 F.4th at 1298. In this pulpit, and maybe elsewhere, Article V of the Convention concerns what it says it concerns: “[r]ecognition and enforcement of the award” and the grounds on which R&E “may be refused” by “the competent authority where the recognition and enforcement is sought.” Vacatur is not “nestled” in Article V(1)(e) under this view. Article V does not come into play if the only motion before the Court is a motion to vacate and the Court sits at the seat of the arbitration. Article V(1)(e) is mainly a sign at a border crossing (or maybe even on the Key Biscayne Causeway): “NOW LEAVING NEW YORK CONVENTION. WELCOME TO DOMESTIC ARBITRATION LAW. DRIVE CAREFULLY” Sigh.
Finally: An eminent law firm in our field (well-represented in the drafting of the Restatement of the US Law of International Commercial and Investment Arbitration!) finds itself on the wrong side of the stare decisis issue here, but doing what’s right for its client, getting the benefit at least for now of the Hidroelectrica panel’s adherence to bad law. But the formidable advocate on the front line for the firm stands a good chance to have a return visit to the US District Court in Miami, to defend the Tribunal’s award on the basis that the Tribunal acted within its powers under case law applying FAA Section 10(a)(4).
* US readers will appreciate that there are some big cities other than Miami in the 11th Circuit – Atlanta, Tampa, Orlando, Jacksonville, to name a few – but you go to those places mostly for other types of fun. The CEOs of Central and South American clients are most likely to have their US condos in Miami!