The following commentary has been prepared for publication in Canada and will shortly be published there in both English and French. However, the discussion of U.S. law in this commentary is certainly not limited to enforcement of awards involving Canadian parties.

Enforcement of Foreign Arbitral Awards in the U.S.: A Primer

by Marc J. Goldstein

Introduction

As Canadian companies, and Canadian arbitrators, participate more often in international arbitrations, they have naturally become eager to know more about enforcement of awards outside Canada, and particularly in the United States.

The reasons for this interest in the procedures for award enforcement are apparent. Counsel in an international arbitration must consider, from the earliest stages of the case, not only the prospects of the client obtaining or being responsible to satisfy an award for substantial money damages, but also the difficulty and expense likely to be involved in litigation over the enforceability of the award if voluntary compliance is not anticipated. Arbitrators, for their part, focus from the outset on conducting the case in a fashion that will ensure the enforceability of the award, and often must balance that objective with their desire to streamline and expedite the proceedings.

The American legal framework for enforcing arbitration awards, viewed from a distance, may seem daunting and confusing. There are federal courts and state courts, federal and state arbitration statutes. And within the federal statute, there are apparently separate regimes governing domestic and international awards, but in practice the line of demarcation between those regimes may become blurred. And finally, there is the notorious brooding omnipresence of American arbitration law — the judge-made doctrine of “manifest disregard of the law.”

Any primer on a complex subject like enforcement of arbitral awards risks stating matters too simply, as the mission is to set forth the fundamentals in a clear and succinct way. This article, readily accepting that risk, attempts to outline the essential elements of award enforcement in the United States.

I. Status of the New York Convention in the U. S.

The United States is of course a member state of the U. N. Convention on Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”).
The New York Convention is implemented by Chapter Two of the Federal Arbitration Act (“FAA”).

The FAA, and the Convention, apply in federal and state courts. An action to enforce an international arbitration award may be brought in a state or a federal court. But the enforcement of a Convention award is a “federal question” triggering federal subject-matter jurisdiction, and so such an action may be brought in federal court and, if initially brought in a state court, may be (and more often than not will be) be removed to the federal court by the award-losing respondent.

Federal courts also generally require that the respondent be subject to personal jurisdiction in the forum state. This is controversial among some arbitration scholars, who argue with considerable force that U. S. adoption of the New York Convention implies an obligation to recognize and enforce any Convention award. But federal courts generally have not embraced this view, and award enforcement proceedings are subject to dismissal if the respondent lacks any meaningful contacts with the U. S. judicial district in which the proceeding is brought.

Proceeding in a state court adds uncertainties that many clients may wish to avoid. While the FAA applies in state court, as noted above, the FAA does not fully pre-empt state arbitration statutes. In principle the FAA pre-empts state arbitration statutes to the extent that the state laws create additional grounds to refuse recognition of an award, or create procedural obstacles that make enforcement materially more difficult than in federal court. But that test can be difficult to apply, and may lead to regrettable litigation delay and expense.

2. Nature of the Proceedings

Federal court proceedings to enforce arbitration awards are intended to be plenary, and expedited. Thus, the proceeding unfolds according to the procedures for a motion, not those that govern a lawsuit. In principle there should be a motion, with supporting brief, an opposing brief if any, a reply brief, perhaps oral argument, and a decision followed by entry of judgment. There should be no pleadings, and no discovery.

An application to vacate, modify, or correct an award should also follow the procedure for motions. Such a motion is only appropriate in relation to an award made in the United States. Under United States law, the proper forum for a motion to set aside an international arbitration award made outside the United States is the competene court of the country in which, or under the arbitration procedural law of which, the award was made. The subject of such motions to vacate introduces complications to be avoided in the present discussion, focused on enforcement of awards made in the territory of another New York Convention member state. Motions to vacate awards made at a U.S. place of arbitration are the subject matter of Section 4 below.

Section 207 of the FAA provides that the proceeding seeking recognition and enforcement must be brought within three years after the date of the award.

3. Grounds to Oppose Recognition and Enforcement of a Convention Award

Federal courts have stated consistently that the grounds identified in Article V of the New York Convention for denying recognition and enforcement are exclusive.

Those grounds, here paraphrased but found in full text in Article V of the Convention, are familiar to arbitration practitioners worldwide: lack of capacity of the parties, lack of a legally valid agreement to arbitrate, irregular constitution of the tribunal, arbitral procedure not conforming to the agreement, lack of due process, non-arbitrability of the subject matter under the law of the enforcing jurisdiction, violation of public policy of the enforcing jurisdiction, and vacatur at the place of arbitration or under the governing arbitration procedural law.

For this primer, the important points are these:

(1) Courts are often asked to deny recognition and enforcement based on a ground provided in the FAA for vacating an award. But most courts now recognize that the New York Convention vests power to set aside an award only in the competent court at the place of arbitration or, if different, the place whose arbitration law was agreed upon by the parties. Thus, the FAA grounds for vacating an award only apply if the place of arbitration was in the U.S. and a timely motion to vacate the award is made in the district court at the place of arbitration.

(2) Under the principle just stated, the doctrine of “manifest disregard of the law”, as a ground to set aside an award, has no proper place in a U. S. proceeding to recognize and enforce a foreign-made award. But if the award was made in the U.S., and a timely motion to vacate the award is made, Courts may continue to consider “manifest disregard of the law” as a possible ground to vacate the award, even though the vitality of this doctrine has been called into question by a recent decision of the U.S. Supreme Court. (Hall Street Assocs. v. Mattel, Inc., 128 S. Ct. 1396 (2008)).

(3) Courts will review de novo the arbitrators’ determination that the matter was arbitrable — unless the parties clearly and unmistakably agreed that the arbitrators should decide arbitrability. In the latter case, courts properly applying U. S. law will defer to the arbitral determination of arbitrability. Most courts accept that an agreement to arbitrate under rules that give arbitrators power to decide upon their own jurisdiction — i.e. essentially all institutional international arbitration rules and the UNCITRAL rules — is evidence prima facie of an agreement to arbitrate arbitrability. When there is such an agreement, and arbitrability is in fact arbitrated and decided in the award, a party contesting that arbitral determination by asking a U.S. court to deny recognition could rely upon, for example Article V(1)(a) of the Convention (agreement to arbitrate invalid under the applicable law) or Article V(1)(c) (award decided issues outside the scope of what the parties agreed to arbitrate). But U.S. law in this situation mandates that thr courts give the same degree of deference to the arbitrators’ arbitrability determinations that they give to all other issues of fact and law decided by the arbitrators.

(4) Claims that a party was denied due process are almost invariably denied unless a party truly did not have notice and an opportunity to present evidence and argument. Claims that the arbitrators limited the number of witnesses or cut short cross-examination are viewed with extreme disfavor.

(5) Claims that recognition and enforcement should be denied because the award has been or may be set aside at the place of arbitration are given serious consideration. U. S. courts generally regard the court at the seat of arbitration as having “primary” jurisdiction over the award, and will give effect to a foreign judgment annulling an award, rendered by such a court, unless that judgment would not meet U.S. standards for recognition (i.e. proceedings in the rendering court did not meet U.S. minimum due process standards). In this regard, U.S. jurisprudence differs from that of some civil law systems, particularly France. It seems possible that in the future U.S. courts may consider whether federal policy favoring enforcement of awards suggests that in most circumstances a judgment of a foreign court setting aside an award should be viewed as having effect only within the country where that judgment is rendered.

4. Proceedings Involving Awards Made in the U. S.

If the award has been made in the United States (or, unusually, outside the U.S. but with an agreement that U. S. arbitration law should apply), then the U. S. District Court at the place of arbitration has dual jurisdiction: to recognize and enforce the award, and to set it aside.

Thus if the Canadian award-winner in a New York arbitration files a motion to confirm the award in the U. S. District Court in Manhattan, the award-loser may (i) oppose recognition on any ground set forth in the New York Convention for refusal of recognition, and (ii) cross-move to vacate, modify, or correct the award on any of the grounds for such relief that are enumerated in Sections 10 and 11 of the FAA.

Section 10 states the grounds upon which the court may vacate the award: (i) where it was procured by “corruption, fraud or undue means”, (ii) “evident partiality or corruption” in the arbitrators; (iii) “misconduct” or “misbehavior” of the arbitrators that prejudiced the party, including (prejudicial) refusal to hear evidence or refusal to postpone a hearing; and (iv) where the arbitrators “exceeded their powers” or “so imperfectly executed them that a mutual, final, and definite award upon the subject matter was not made. ”

It is interesting to note that the enumerated grounds to vacate do not refer in terms to the absence of a valid agreement to arbitrate. But clearly an arbitrator “exceeds…powers” if there was no valid agreement to arbitrate the issues resolved by the award.

Of course the controversial doctrine of “manifest disregard of the law” does not appear among the enumerated grounds to vacate an award. Before the 2008 U. S. Supreme Court decision in Hall Street Assocs v. Mattel, Inc., 128 S. Ct. 1396 (2008), federal courts had widely accepted “manifest disregard” as a non-statutory judge-made doctrine supplementing Section 10 of the FAA. This conception of manifest disregard, if not necessarily the doctrine itself, has been rendered untenable by the Supreme Court’s holding in Hall Street that the grounds to vacate an award enumerated in Section 10 are exclusive. The U. S. Court of Appeals for the Second Circuit, whose decisions bind federal district courts in New York, has held that “manifest disregard” may now be viewed as a one way that arbitrators may exceed their powers if, based on the agreement of the parties, they have been charged to decide the case based on particular governing law.

In its application by courts, “manifest disregard” will not ordinarily result in setting aside an award for legal error. Rather, it is a basis to vacate an award in the exceedingly rare instance that the arbitrator willfully refuses to apply a rule of law that she accepts or must accept to be controlling and dispositive.

The primary significance of “manifest disregard” is its use as a dilatory tactic and bargaining chip by recalcitrant award losers. If each party must bear its own costs for post-award litigation — as is the case under the “American Rule,” barring agreement, a claim under a statute providing for recovery, or a finding that the position taken is frivolous -– then successive applications to the district court and the court of appeals based on “manifest disregard” can delay award compliance for two or more years, and perhaps result in the award-winner capitulating to a settlement for less than the sum that is due under the award.

Countries that have adopted the UNCITRAL Model Law have essentially eliminated any difference between the New York Convention standards for denying recognition of an award and their domestic law standards for a motion to set aside an award – as Article 34 of the Model Law provides for awards to be set aside only on one of the grounds that would permit denial of recognition under the Convention. But the United States has not adopted the Model Law. In regard to international arbitration awards made in the United States, the U.S. must be thought of in the same terms as any other country that has not adopted the Model Law, i.e. that its domestic arbitration law must be consulted to ascertain the conditions for setting aside an award.

Conclusion

In general Canadian parties may expect a highly favorable attitude of U. S. courts toward recognition and enforcement of foreign arbitral awards and international awards made in the U. S. and governed by the New York Convention.

The overlapping jurisdiction of state and federal courts to enforce awards, and the potentially overlapping coverage of the enforcement regimes for domestic and international awards add procedural complexity. And the absence of a statutory provision for the award-winner to recover its fees for enforcement litigation creates incentives for award-losers to manufacture attenuated if not frivolous arguments.

But Canadian award-winners can generally expect that their award will be confirmed and will thereby become U. S. judgments enforceable by all of the same coercive means as if the judgment had resulted from litigation on the merits in the same court.

Does Chapter 1 of the Federal Arbitration Act – the “domestic FAA” – provide the legal standards applicable to a motion to vacate an international arbitration award made in the United States? Just when many arbitration practitioners may have thought the settled answer was “yes,” along has come a new federal district court decision in Virginia taking the opposite view. RZS Holdings AVV v. PDVSA Petroleos, S.A., 2009 U.S. Dist. LEXIS 47126 (E.D. Va. Feb. 5, 2009). The Court in RZS held that the Chapter 1, Section 10 standards to vacate an award do not apply to a motion to vacate a Convention award because they are “in conflict with” the standards for refusing enforcement of an award under Article V of the New York Convention.

The decision is in direct conflict with a consistent line of cases in the U.S. Court of Appeals for the Second Circuit, and decisions in the Fifth and Sixth Circuits, that clearly hold that Section 10 of the FAA provides the standards for a motion to set aside a Convention award made in the United States. The rationale of those cases is that Article V(1)(e) of the Convention provides express authority for the courts at the place of arbitration to apply domestic arbitration law to a motion to set aside the award. Article V(1)(e) provides that a court asked to recognize and enforce an award may refuse to do so if the award has been “set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.”

The RZS Court, finding no controlling Fourth Circuit decision, elected to rely principally on the Eleventh Circuit’s decision in Industrial Risk Insurers v. M.A.N. Gutenhoffnungshutte, 141 F.3d 1434 (11th Cir. 1998), cert. denied, 525 U.S. 1068 (1999) and the Sixth Circuit’s decision in M&C Corp. v. Erwin Behr, 87 F.3d 844 (6th Cir. 1996). This commentary will demonstrate that such reliance was misplaced.

The potential for misunderstanding concerning the intersection of the FAA’s “domestic” (Chapter One) and “international” (Chapters Two and Three) rules is considerable. The framers of the New York Convention elected not to create a uniform regime governing motions to set aside awards to which the Convention applies. Congress in enacting Chapter 2 to implement the Convention also created no regime concerning motions to set aside Convention awards. One reason for this is that it may not have been well-understood, at the time of adoption of Chapter Two, that the Convention’s coverage could extend to awards made in the United States that are “not considered as domestic” under U.S. law.

The Convention’s drafters elected to address directly only the grounds to enforce, or refuse to enforce, arbitration agreements and awards. They did not seek to establish a uniform international standard for motions to vacate awards. But the Convention’s drafters did include Article (V)(1)(e), providing that recognition and enforcement may be refused if the award has been “set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made.”

In so doing, the Convention’s drafters indirectly endorsed then-existing domestic law regimes governing motions to set aside international arbitration awards, and encouraged the evolution of such regimes. The variety of such regimes motivated the drafters of the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”) to provide in Article 34 that an award may be set aside only on one of the grounds for refusing enforcement under the New York Convention (omitting Article V(1)(e) as redundant).

The United States has elected not to adopt the Model Law, and when Chapter 2 was added to the FAA in 1970 as legislation implementing the New York Convention, its relationship to the “domestic FAA” was addressed through Section 208. That Section provides that Chapter 1 applies to the extent it is not in conflict with express provisions of Chapter Two or of the Convention.

Is Section 10 of the FAA, stating the grounds to set aside an award, in conflict with Chapter 2 and the Convention? Insofar as a party opposing recognition by an American court of a foreign-made award might argue that recognition should be refused on a ground stated in Section 10, a conflict does exist: The Article V regime is exclusive — in the realm of motions to recognize and enforce awards.

But if the award whose recognition is sought was made in the United States, then a cross-motion to set aside the award is permitted by Chapter Two and the Convention to the extent it is permitted by the FAA. Neither the Convention nor FAA Chapter Two purports to prohibit a set-aside motion at the place of arbitration (or, in the unusual circumstance, where the award was made elsewhere but by agreement U.S. arbitral procedural law applied) and Article V(1)(e), as noted, indirectly authorizes such a motion. So Section 10 of the FAA, permitting a motion to vacate to be brought in the federal district court at the place of arbitration, applies in a Convention case where the award was made in the United States, introduced through Section 208.

The U.S. Court of Appeals for the Fifth Circuit re-affirmed in Gulf Petro Trading Co. v. Nigerian Nat’l Petroleum Corp., 512 F.3d 742 (5th Cir. 2008) that the New York Convention confers “primary jurisdiction” to review the award upon courts of the country “in which, or under the law of which, the award was made.” While Gulf Petro dealt with a Swiss award, and thus was not concerned with Chapter 1 and Section 10 of the FAA, the Court held that “’the
Convention does not restrict the grounds on which primary-jurisdiction courts may annul the award, thereby leaving to a primary jurisdiction’s local law the decision whether to set aside an award.’” (quoting from the Fifth Circuit’s opinion in Karha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 335 F.3d 357, 368 (5th Cir.), cert. denied, 539 U.S. 904 (2003). The Fifth Circuit in Gulf Petro went on to say — quoting from the Second Circuit’s decision in Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc., 126 F.3d 15, 23 (2d Cir. 1997), cert. denied, 522 U.S. 1111 (1998) (“Yusuf”) – that such “primary jurisdiction” courts are “’free to set aside or modify an award in accordance with [the country’s] domestic arbitral law and its full panoply of express and implied grounds for relief.’” 512 F.3d at 747.

The Court in the recent RZS Holdings case failed to consider the Fifth Circuit decisions, and declined to follow and purported to distinguish the Second Circuit’s decision in Yusuf. The Court purported to “note the negative history associated with this case, in that several other circuits have declined to follow this case, and its holding has been called into question by the Second Circuit itself.” 2009 U.S. Dist. LEXIS 47126 at *12-13. But the Court did not cite any cases as examples of circuits that had rejected Yusuf’s holding concerning the interface of Chapters 1 and 2 of the FAA. In support of the position that the Second Circuit itself had called Yusuf into question, the Court cited Westerbeke Corp. v. Daihatsu Motor Co., Ltd., 304 F.3d 200 (2d Cir. 2002). But the holding in Yusuf that was questioned in Westerbeke was not its holding concerning the New York Convention, but its holding that the “manifest disregard” doctrine includes the concept of “manifest disregard of the agreement.” 304 F.3d at 222. The Yusuf Court’s holding that a federal district court in the district where a Convention award was made may consider a motion to vacate the award under Section 10 has been re-affirmed (expressly or by implication) in the Second Circuit several times. (E.g., Zeiler v . Deitsch, 500 F.3d 157, 164 (2d Cir. 2007); Sole Resort S.A. de C.V. v. Allure Resorts Management, LLC, 450 F.3d 100, 102 n.1 (2d Cir. 2006); Lucent Technologies, Inc. v. Tatung Co., 379 F.3d 24 (2d Cir. 2004); Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255 (2d Cir. 2003). Yusuf was also followed by the Sixth Circuit in Jacada (Europe), Ltd. v. International Marketing Strategies, Inc., 401 F.3d 701 (6th Cir.), cert. denied, 126 S. Ct. 735 (2005).

The Court in RZS purported to find support for its position in another Sixth Circuit case, M&C Corp. v. Erwin Behr, 87 F.3d 844 (6th Cir. 1996), but the award at issue in Behr was a foreign award, and the Court properly held that the exclusivity of Article V of the Convention prevents the grounds for setting aside an award, enumerated in FAA Section 10, from becoming additional grounds to refuse recognition of a foreign award. More difficult to distinguish is the other principal case relied upon in RZS, Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte, 141 F.3d 1434 (11th Cir. 1998), cert. denied, 525 U.S. 1068 (1999). The Court in Industrial Risk Insurers held – without consideration of the effect of Article V(1)(e) — that the Convention grounds for denying recognition of an award are also the exclusive grounds for setting aside a Convention award made in the United States. The RZS court did not misinterpret Industrial Risk Insurers. Its holding is in conflict with the holdings of the Second, Fifth and Sixth Circuits.

The fundamental error in both RZS and Industrial Risk Insurers is the conflation of the concepts of “vacatur” of a Convention award and denial of recognition of a Convention award, and the consequent failure to give effect to dual legal regime governing Convention awards made in the United States. American courts should be mindful to keep distinct the concepts of vacatur and denial of recognition, and to be mindful of the overlapping coverage of Chapters 1 and 2 of the FAA in the context of review of international arbitration awards made in the United States. Should another federal circuit court of appeals follow Industrial Risk Insurers, widening the conflict among circuits, the issue may be suitable for review and clarification by the U.S. Supreme Court.

Common law concepts such as agency and estoppel often come into play when arbitral jurisdiction determined under U.S. law. An intriguing recent example is Leff v. Deutsche Bank AG, 2009 U.S. Dist. LEXIS 41713 (N.D. Ill. May 14, 2009). The case arose from the marketing of allegedly abusive tax shelter schemes. Deutsche Bank allegedly assisted a law firm in creating and marketing the schemes, but apparently was unaware that the contract between investors and investment entities provided for arbitration. The investors sued Deutsche Bank for fraud in the federal district court in Chicago. The bank learned of the arbitration clauses in the early stages of discovery, and moved to compel arbitration.

The court agreed that Deutsche Bank could require arbitration, even though it was a non-signatory of the arbitration agreement, under a theory of equitable estoppel — specifically, that the plaintiff-investors’ claims involved “substantially interdependent and concerted misconduct by both the non-signatory and one or more of the signatories.” While this formulation of equitable estoppel was resisted by the plaintiffs, and was acknowledged by the Court to be less that settled law, the Court was satisfied that this was an appropriate legal standard. And it was clear that the plaintiffs broadly alleged a conspiracy to defraud by Deutsche Bank acting in concert with the entities that had signed the arbitration agreements.

The complaint in this case alleged that plaintiffs were Deutsche Bank clients, or at least that they had engaged in tax-avoidance trading strategies in reliance on the bank’s advice. But suppose the bank’s role had been behind the scenes and the plaintiffs had been clients of the law firm, but had no privity with the bank nor even awareness of its role? To compel arbitration in such a case would seem to put arbitrability on par with rules governing joinder of parties and claims in the federal courts –e.g. a “same transaction or occurrence” test – and to drift away from the consensual nature of arbitration.

Courts continue to struggle with the question of how to allocate, between judges and arbitrators, power to decide questions of arbitrability (including the existence, vel non, of a valid agreement to arbitrate). The difficulty is acute in international arbitration cases where recognition and enforcement are sought under the New York Convention and its statutory implementing legislation in the U. S. , Chapter Two of the Federal Arbitration Act.
A recent case in point is Four Seasons Hotels and Resorts v. Consorcio Barr, S.A., 2009 U. S. Dist. LEXIS 39802 (S. D. Fla. May 12, 2009). In this case, the Court refused to confirm that portion of a final award, made by an ICDR tribunal sitting in Miami, that awarded $9 million of money damages, interest, and costs to Four Seasons Hotels. The Court found that the claim arose under a contract that did not contain an arbitration clause, rejecting the completely opposite conclusion that had been reached by the arbitral tribunal in a carefully reasoned section of its final award.
But the Court did not even pause to consider what effect, if any, it was required to give to the arbitrators’ decision on the arbitrability issue.
One might have expected the Court to begin (but it did not) with reference to the Supreme Court’s decision in First Options, Inc. v. Kaplan, 514 U. S. 938 (1995), where the Court held that if there is clear and unmistakable evidence that the parties agreed to arbitrate issues of arbitrability, then the arbitrators’ arbitrability decisions are entitled to the same high level of judicial deference that is normally accorded arbitral determinations of the merits. In those circumstances, “the court’s standard for reviewing the arbitrator’s decision about that matter should not differ from the standard courts apply when they review any other matter that the parties have agreed to arbitrate. ”
One would have further expected the Court to consider (but it did not) the First Options jurisprudence of the Eleventh Circuit federal appellate court, whose decisions were binding precedent for this federal district court in Miami. That Court’s decisions have held that there is indeed “clear and unmistakable evidence” of an agreement to arbitrate arbitrability when the parties in their contract adopt arbitration rules that give arbitrators power to rule on challenges to their own jurisdiction. (E.g., Terminix Intl Co. v. Palmer Ranch Limited Partnership, 432 F.3d 1327 (11th Cir. 2005). Here the parties had agreed, in one of the contracts involved in the case, to arbitrate under AAA/ICDR rules, and those rules of course do give arbitrators such powers.
Application of these principles to the facts of the Four Seasons case should have resulted in enforcement of the tribunal’s final award. The arbitration clause was found in a Hotel Management Agreement between Four Seasons and Consorcio. Certain claims in the arbitration arose directly under that Agreement. Initially that Agreement contained a provision concerning a credit facility made available to the hotel manager by Four Seasons. Later, that provision was superseded by a Loan Agreement that did not contain an arbitration clause.
Thus, the question of arbitrability addressed by the tribunal was not whether a valid agreement to arbitrate existed, but whether the Loan Agreement was (i) separate and independent from the Management Agreement, or (ii) in effect a modification of the Management Agreement, such that arbitration clause of the Management Agreement applied.
The arbitral tribunal adopted the latter construction. It seems quite remarkable that the district court judge would have simply rejected this conclusion and substituted a different view, as he did, without examining the scope of his power to do so.
This would seem to have been an instance where deference to the arbitrators’ arbitrability determination was in order: the arbitrability decision involved a factual determination of the relationship between a contract that clearly provided for arbitration, and another agreement that at least arguably was an amendment of the first one.
Perhaps this decision will be corrected on further appeal to the Eleventh Circuit. But final determnation is already long overdue — the tribunal having rendered its final award in March 2004. (The reasons for this delay apparently relate to prior US court proceedings concerning the effect, upon an earlier Partial Award in the case, of a Venezuelan court decision that purported to nullify that award).

When the arbitration agreement states that each party shall bear its own legal fees, do the arbitrators have authority to award legal fees as a sanction for bad faith conduct in the arbitration? In a recent case in New York, two federal judges said yes, and two said no.

But the two votes in favor formed the majority on a three-judge panel of the Second Circuit Court of Appeals, and so that prominent Court has now held, apparently for the first time, that arbitrators do not exceed their powers by awarding fees as a sanction for bad faith conduct in the proceedings when the contract states that each party shall pay its own legal fees. Reliastar Life Ins. Co. v. EMC National Life Co., 2009 U.S. Dist. LEXIS 7647 (2d Cir. April 9, 2009).

For the panel majority, it was self-evident that arbitrators have “inherent authority” to award fees as sanctions if the parties have conferred broad authority on the arbitrators to resolve disputes. Rejecting the position that the specific contract language negated this authority, the majority construed that language as merely a declaration that the “American Rule” on attorneys’ fees would apply. The American Rule of course provides that ordinarily each party shall bear its own fees, with certain exceptions including, notably, fee-shifting as a sanction for bad faith conduct during the proceedings. The parties’ declaration that each would bear its own fees, taken to mean “the American Rule applies,” meant, to the panel majority, that the bad faith exception also applies unless the parties excluded it in specific terms.

For the dissenting judge on the Second Circuit, and the federal district judge whose decision was reversed, the issue was as simple and the answer as clear as the words in the agreement. The parties had made a clear decision to bear their own legal costs without exception, and the interpolation of the “American Rule,” including its exceptions, into those unambiguous words was a contradiction of the parties’ intent as expressed in the contract.

Which side has the better argument? The panel majority’s approach to contract interpretation seems flawed. It is certainly true, as the majority states, that providing arbitrators with power to sanction bad faith conduct by awarding legal fees and costs fee-shifting will promote efficient arbitrations. But the majority seems to engage in creative contract interpretation to make its own conception of good arbitration procedure to match the intent of the parties as reflected what they wrote in the agreement. According to the majority, the contract’s declaration that each party shall bear the legal fees of its own counsel is to be construed as an adoption of the “American Rule” on attorneys’ fees. But there is no objective evidence in the words of the contract that the drafters and signers of the contract were even familiar with the American Rule. Further, if simple language that “each party shall bear its own legal costs” is construed as an adoption of the American Rule, then the words mean, among other things, that each party shall bear its own legal costs unless the claims in the arbitration arise under a statute that provides for recovery of such costs by the prevailing party. That would seem to be a fundamental departure from what the parties said. The majority did not deal with that conundrum, as it was concerned only with an exception for sanctions in case of bad faith procedural conduct.

Further, the Court’s construction depends on the assumption that parties of Amercian nationality are aware of the American Rule on attorneys’ fees. But if the same language appears in a contract between parties at least one of whom is not American, the slender justification for this assumption falls away.

The majority proceeds from the premise that arbitral authority to award fees as a sanction is an “inherent power” of arbitrators resulting from the parties’ conferral of power to resolve disputes without making specific limitations on their remedial powers.
But calling the conferral of power to award sanctions “inherent” seems transparently to be a device to interpolate a judicial view of sound arbitral procedure into the terms of a private contract. In fact, what the parties stated in this contract was that the arbitrators should (i) consider customary and standard practices in the life or health reinsurance business, and (ii) apply New York law and the Federal Arbitration Act.

On this point, the dissenting judge seems to have it right when she writes: “Inherent authority is authority which is not conferred; inherent authority is possessed regardless of the intentions of those who have power to confer authority….[T]he notion of authority inhering in an arbitral panel, whose authority is derived from the agreement of the parties before it, is problematic.”

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Much more can and should be said about this provocative and important decision. I offer the foregoing as an introduction to the issues raised, and hope to have more to say in the coming days.

A U.S. District Court judge in San Francisco recently granted an order of attachment, in aid of enforcement of the award of the ICC tribunal seated in Stockholm. Recognition and enforcement in the U.S. court were therefore governed by the New York Convention and Chapter Two of the Federal Arbitration Act. The Court’s opinion is a useful guide to many of the essential elements of recognition and enforcement of a Convention award in the U.S. federal courts. The case is Sony Ericsson Mobile Communications AB v. Delta Electronics (Thailand) Public Company Limited, 2009 U.S. Dist. LEXIS 36497 (N.D. Cal. April 15, 2009).
Here, rather than provide a conventional case comment, I propose to identify the generally-applicable legal principles underlying the Court’s decision. These will be familiar to most experienced U.S. arbitration practitioners, but perhaps instructive for others:
1. An award falls under the Convention, and therefore may be enforced in a court of the United States, if (inter alia) it is made in the territory of a Convention Member State. This award was made in Stockholm, Sweden, and therefore the award was subject to recognition and enforcement in the U.S., even though the parties were of Swedish and Thai nationality.
2. That the Convention confers subject matter jurisdiction does not preempt inquiry into in personam jurisdiction, under well-developed due process principles. (Thus Sony Ericsson’s initial U.S. confirmation action, in the Southern District of New York, had been dismissed for lack of in personam jurisdiction over the Thai Defendant).
3. The fact that parallel proceedings to enforce an award are pending abroad (here, in Thailand) will not ordinarily prevent the U.S. court from hearing the case. The general principle, applicable to all cases not only arbitration award enforcement, is that there must be “exceptional circumstances” to justify a federal court declining jurisdiction on the basis of a parallel proceeding abroad. Further, simultaneous proceedings to enforce the same award are consistent with the New York Convention.
4. The issuance of “prejudgment” remedies such as writs of attachment, is, in the federal courts, determined under the standards and according to the procedures established by the law of the state where the U.S. District Court seized of the action is located. Here, the availability of a writ of attachment was determined by California law.
4. State provisional remedy law and New York Convention enforcement law intersect, because the Court must determine whether the Petitioner has a “probably valid” claim for recognition and enforcement. The Petitioner will have a probably valid claim unless it is probable that the Court will find that one of the Convention grounds for refusal or deferral of recognition or enforcmeent exists. The burden is on the Respondent to show that such a ground exists.
5. If the Respondent asserts, as a ground for refusal of recognition and enforcement, that the arbitral tribunal lacked jurisdiction, the Court must decide what degree of deference is due to the arbitral tribunal’s determination, in the award, that it did indeed have jurisdiction. If the parties have clearly agreed to submit questions of arbitrability to the arbitrators, the court will defer to the arbitrators’ arbitrability determination. If not, the court considers the arbitrability issue de novo.