An arbitration lawyer immersed in the U.S. jurisprudence of the New York Convention, but not necessarily versed in all of the nuances of the Supremacy Clause of the U.S. Constitution, might be tempted to conclude that international arbitration scored a remarkable upset victory, against long odds, in the U.S. Fifth Circuit Court of Appeals last week. (Safety Nat’l Cas. Corp. v. Certain Underwriters at Lloyd’s, 2009 U.S. App. LEXIS 24585 (5th Cir. Nov. 9, 2009)).

By a vote of 15 to 3, the judges of that Court sitting en banc ruled — sustaining the original decision of a three-judge Fifth Circuit panel — that the Convention preempts and nullifies a provision in the Louisiana state insurance law requiring that insurance disputes be resolved only by judges and juries.

To reach that outcome, the majority needed to overcome what is perhaps the most notorious “reverse preemption” statute in U.S. law, the McCarran-Ferguson Act. That Congressional enactment, from 1945 — 25 years before the United States implemented the New York Convention — provides that “No Act of Congress shall be construed” to invalidate any state law enacted “for the purpose of regulating the business of insurance” unless the impairment is by an Act of Congress that “specifically relates to the business of insurance.” In simplest terms, McCarran-Ferguson states that only federal statutes dealing specifically with insurance can preempt state insurance regulation.

Clearly the Convention in its inception was not an “Act of Congress,” it was an international treaty. Its implementing legislation, Chapter Two of the Federal Arbitration Act (sometimes called the “Convention Act”), surely is an “Act of Congress.” But is the Convention, once implemented, an Act of Congress for domestic law purposes, or does it have from that point forward the same force of law domestically as would a treaty that is “self-executing,” i.e. that did not require implementing legislation to have domestic legal effect?

The question before the Fifth Circuit was, in essence, this: To reach the conclusion that the Convention’s command to enforce arbitration contracts preempts Louisiana’s law denying enforcement of such contracts in the insurance industry, must the federal courts “construe” an Act of Congress, FAA Chapter Two, and thus collide with McCarran-Ferguson — or do they merely “construe” the Convention itself, such that McCarran-Ferguson does not come into play?

The dissenting opinion in Safety National methodically demonstrates that the New York Convention has the force of law in the United States only by virtue of its implementation by the Convention Act, and that courts, when they preempt state laws based on treaties that required implementation by Acts of Congress, have consistently stated that they were assigning the preemptive effect to the implementing statutes, not the treaties themselves. The dissent reasons further that the phrase “shall not be construed to invalidate,” in McCarran-Ferguson, does not refer to a process of interpreting the words of an Act of Congress, but rather means simply that Acts of Congress shall not be given legal effect to preempt state law (unless the Act regulates insurance explicitly).

This makes a great deal of sense. And so those of us inclined the handicap whether the Supreme Court of the United States might seize an opportunity here for an important New York Convention decision review carefully the majority opinion to see if its answers to the dissent are convincing.

The majority’s lead-off position is that implementation of the Convention by the Convention Act does not transform the Convention from a treaty into an “Act of Congress.” But this position would seem to beg the fundamental question: whether for McCarran-Ferguson purposes what is being “construed,” in case of a treaty implemented by Act of Congress, is the treaty as a stand-alone legal unit, or the treaty as an incorporated element of the implementing statute.

On this point, the majority declares that “it is the treaty (the Convention), not an act of Congress (the Convention Act), that we construe to supersede Lousiana law.” But one reads on in the majority opinion yearning to be convinced that “construed” in McCarran-Ferguson does not mean “to be assigned preemptive effect,” as the dissent convincingly posits. The majority relies heavily on the notion that the Convention Act merely declares that the Convention shall be enforced, and hence any “constru[ing]” is done in relation to the treaty not the statute. But this reasoning fails to address whether, when a treaty requires implementing legislation to have effect as domestic law, it retains or acquires a domestic legal status after implementation that is separate and distinct from the implementing statute.

The majority defends its position with extensive and rather speculative discussion about what the Congress might have intended, concerning treaties implemented by statute, when McCarran-Ferguson was enacted. But it seems most probable that Congress thought the term “Act of Congress” was not ambiguous and that, treaty implementation having long been a familiar species of legislation, such statutes were among those to which McCarran-Ferguson makes reference.

The majority then states that “[o]ur conclusion that referral to arbitration is proper in this case is bolstered by the congressionally sanctioned national policy favoring arbitration of international commercial agreements.” Indeed. “Bolstered” puts the case mildly; one might well say the majority’s analysis is driven by that policy. But as there is no jurisprudentially-sound basis to say that the pro-arbitration policy of the Convention has priority over the pro-state regulation of insurance policy of McCarran Ferguson, this statement on the majority opinion adds little to its persuasive force.

The persuasive force of the dissent in Safety National, coupled with an apparent split in the Circuits based on a Second Circuit decision in 1995, makes this case a ripe prospect for the grant of certiorari by the Supreme Court. The case will surely be closely-watched for the filing of a certiorari petition and the disposition of that petition.

It will be interesting to see whether the Lloyd’s underwriting syndicate that prevailed in the Fifth Circuit would elect to rely mainly on the majority’s rationale if the case does reach the Supreme Court. The majority opinion did include an elaborate footnote indicating that a strong case could be made that the forum-selection provision of the Louisiana statute is simply not a regulation of insurance within the meaning of McCarran-Ferguson. This could be the path of less resistance to a pro-arbitration solution in the Supreme Court.

Our U.S. Court of Appeals for the Fifth Circuit has issued an important en banc decision, refusing to enforce a Louisiana state insurance law whose effect is to prohibit arbitration of international insurance disputes, on the basis that the Louisiana law is pre-empted by the New York Convention and Chapter Two of the Federal Arbitration Act.

This outcome might on the surface appear to be unsurprising. But the federal McCarran-Ferguson Act provides that no Act of Congress shall interfere with the rights of the states to regulate the business of insurance. Therefore the Court had to struggle with the question whether there was a “reverse pre-emption” of the New York Convention, if it were concluded that the Convention’s implementing legislation, FAA Chapter Two, is an “Act of Congress” that “interferes with” state regulation of insurance insofar a state regulates insurance by requiring a judicial forum to resolve disputes.

Useful analysis of the main opinion, concurrence, and dissent in the case will require some time. I will post a full commentary to Arbitration Commentaries in a day or two. But given the importance of the decision I did not want to delay reporting it to you. The case is: Safety National Casualty Corp. v. Certain Underwriters at Lloyd’s, 2009 U. S. App. LEXIS 24585 (5th Cir. Nov. 9, 2009).

According to a recent decision of the U.S. Court of Appeals for the Third Circuit, a retrocession agreement (reinsurance of reinsurance) that incorporates by reference all terms of a reinsurannce contract that contains an arbitration clause, does provide for arbitration of disputes under the retrocession contract. Further, the Court held, courts must address the question of incorporation-by-reference of an arbitration clause just as they would address the incorporation of any other contract term. To impose a more stringent legal standard for incorporation of an arbitration clause, as compared to other commercial terms, would violate the command of the Federal Arbitration Act (“FAA”) that arbitration agreements be enforced “save upon such grounds as exist in law or in equity for the revocation of any contract.” (Century Indem. Co. v. Certain Underwriters at Lloyd’s, 2009 U. S. App. LEXIS 22619 (3d Cir. Oct. 15, 2009)).

Incorporation-by-reference is a pervasive arbitrability problem in complex, multi-layered commercial relationships. Reinsurance and large-scale construction projects are typical contexts in which the issue may arise.

In reaching the conclusion that the retrocession agreement did indeed incorporate the reinsurance contract’s arbitration clause, the Third Circuit had occasion to work through and clarify two relatively murky issues in the federal law of arbitrability.

First, the Court examined Supreme Court arbitrability jurisprudence to ascertain if federal policy favoring arbitration fosters any presumption in favor of the existence or validity of an arbitration agreement. The Court found little support for such a presumption, as the federal policy favoring arbitration would seem to be triggered only once parties are found — according to applicable state-law principles governing formation of any contract — to have made an agreement to arbitrate.
The presumption of arbitrability, the Court stated, probably applies only in determining the scope of arbitrable issues under a valid arbitration agreement. But the Court, acknowledging some ambiguities in its own decisions, found it unnecessary to make a definite ruling on this point because a valid arbitration agreement could be found here without the benefit of a presumption.

The second issue addressed involved the effect of prior Third Circuit case law requiring an arbitration agreement to be “express” and “unequivocal” to merit enforcement. Did such language refer to a substantive standard? And if so, was the standard at odds with the FAA’s basic command to enforce arbitration agreements on the same basis as other contracts? Alternatively, did this “express” and “unequivocal” language merely refer to the circumstances in which an arbitration clause would be enforced by summary judgment despite one party’s claim that factual disputes about the formation of the agreement required a trial
of that question?

The Court rejected use of these terms as a substantive standard, on the basis that both the text of the FAA and decisions of the Supreme Court require that the validity of an arbitration agreement be decided upon ordinary state law contract principles generally applicable to all
contracts.

On my website I have posted two new commentaries on recent federal appellate cases. One involves the assertion of jurisdiction over the Kingdom of Spain under the Foreign Sovereign Immunities Act. The other involves rejection of alleged personal jurisdiction over DaimlerChrysler AG in a case brought under the Alien Tort Claims Act. The orange box on the left margin of this page is a link to my website.

Dear Readers:
I am en route to Vienna to attend the UNCITRAL Arbitration Working Group Session, in the status of an observer on behalf of the Association of the Bar of the City of New York. The Working Group is in advanced stages of a proposed revision of the UNCITRAL Arbitration Rules. I have been asked by the editors of Transnational Dispute Management (TDM) to post reports on the proceedings to its website. I hope you will look for those reports. www.transnational-dispute-management.com.

Dear Readers: A posting on the Kluwer Arbitration Blog by Francesca Richmond discusses some recent UK case law on merits review of arbitration awards in the courts, and alludes briefly to a pending US enforcement case in which a District Court in Washington is asked to deny recognition out of respect for a judgment of a Qatari court under Qatari law, notwithstanding that the seat of the arbitration was Paris. Reproduced below is the comment I have posted on the Kluwer website.

Francesca —

Your posting inspired me to look at the brief for Respondents in the IITIC/Dyncorp enforcement case, to ascertain on what basis the federal district court in Washington is asked to deny recognition of a French award on the basis of merits review in Qatari courts.

The fulcrum of the DynCorp Respondents’ argument is that ITIIC “is estopped from contesting that the Qatari Court of Cassation was competent to set aside the award.”. That may be a correct legal conclusion based on IITIC’s efforts in the Qatari courts.

But how does this proposition sustain Respondents’ burden to show that one of the Convention grounds for denying recognition and enforcement exists?

Respondents invoke Article V(1)(e) of the Convention, and thus it is their burden to show that the Qatari courts were a “competent authority of the country in which, or under the law of which, the award was made.”. All agree that the ICC validly designated Paris as the seat of arbitration — no seat having been designated in the arbitration agreement. Thus, the award was made in France.

There remains the possibility that the parties might have agreed to proceed before the Paris-seated tribunal under the arbitral procedural law of Qatar. But Respondents do not argue this. And there is no indication in Respondents’ papers that this was agreed or that the Sole Arbitrator understood that he was governed by Qatari lex arbitri.

Respondents argue that the Qatari courts had jurisdiction to review the merits of the award because the controlling Arabic version of the arbitration agreement did not state that the award shall be “final and binding,” and that, under Qatari arbitration law, the omission of these words opens the door to full-bore merits review in the Qatari courts.

But if the lex arbitri in the case was the French law, the significance (if any) of the omission of “final and binding” from the clause is an issue of French arbitration law, at least as far as a U.S. court applying Article V(1)(e) is concerned.

No authority cited by Respondents permits a party to sustain its burden of establishing a defense to enforcement under the New York Convention solely by invoking estoppel principles against the party seeking recognition. Here it is still Respondents’ burden to show prima facie that the lex arbitri was the law of Qatar, and they have not even attempted this.