I hope you noticed that “Highlights” has been off-line since January 10th. I was traveling to see family and came back to a busy schedule on my day job as an arbitrator. While I was gone, the Circuits issued some interesting and important decisions.
New York Convention; Enforcement of Vacated Award
Compania De Inversiones Mercantiles S.A. v. Grupo Cementos De Chihuahua S.A.B. De C.V., 2023 U. S. App. LEXIS 602 (10th Cir. January 10, 2023), may only be of interest to a limited audience, but should be required reading by international arbitration practitioners. It addresses the extent to which a District Court judgment enforcing an award under the New York Convention should be set aside when a court in the primary jurisdiction vacates the arbitral award after the U.S. judgment is entered.
The procedural background of the case is laid out in detail in the majority opinion. In summary, an arbitral panel in Bolivia entered an award against Grupo Cementos (GCC) and in favor of Compania de Inversiones (CIMSA) in the amount of $36 Million. Bolivia’s highest constitutional court confirmed the award in 2016. In 2019, CIMSA obtained an order from U.S. District Court confirming the award. Thereafter, in 2020, GCC apparently went judge-shopping and persuaded a different panel of Bolivia’s high court to invalidate the prior decision; a Bolivian trial judge thereafter vacated the arbitration award. GCC, then, moved to vacate the U.S. judgment under Fed. R. Civ. P. 60(b)(5). The District Court denied the motion; this appeal followed. The majority of the Tenth Circuit panel affirms the lower court in an opinion by Circuit Judge Matheson, joined by Chief Judge Holmes. Circuit Judge Rossman dissents.
The gist of each opinion centers on the interpretation of two documents, although each emphasizes a different one. The first is the New York Convention. The Convention provides that a “secondary jurisdiction,” i.e. the country where recognition of the award is sought, must enforce the award, unless one of seven defenses applies. One of those defenses provides that the “competent authority” in the secondary jurisdiction, in this case the U.S. courts, may refuse recognition and enforcement of the award, if finds that “the recognition or enforcement of the award would be contrary to the public policy of that country,” Article V(2)(b). The other source on which the opinions rely, with the majority giving it particular emphasis, is Federal Rule of Civil Procedure 60(b)(5), which allows a District Court, in its discretion, to open a judgment if the judgment upon which it is based was vacated.
The majority, in an opinion written by Circuit Judge Matheson, joined by Chief Judge Holmes, relies on the policy behind Rule 60(b). The holding focuses on the “public policy” of the United States, reflected in jurisprudence under that Rule. “[T]he district court determined that granting GCC relief would undermine the finality of the Confirmation Judgment [the earlier District Court judgment] and the arbitral award by ‘encourag[ing] an endless barrage of challenges to unfavorable arbitral awards or court orders.’” (citation omitted). In a footnote, it cites to nine cases in which “[t]he Supreme Court has recognized the importance of finality in a variety of contexts.” An interesting aspect of the opinion is that it adopts abuse of discretion as the standard of review – the same standard it uses in other Rule 60(b) appeals. Query – if the lower court had granted the motion to reopen, might the court have come out the other way? For those who may have Compania De Inversiones cited against them, the review standard may be important.
Contrary to the majority, which focuses on U.S. public policy favoring finality of judgments, Circuit Judge Rossman argues that the Convention’s “public policy” exception is limited to a consideration of whether the arbitral award itself is offensive. Rather than emphasizing the Federal Rule, the dissent looks to the language of the Convention, holding that “the arbitral seat alone has the authority and the jurisdiction to vacate an award.” Effectively, by failing to give effect to a primary jurisdiction’s vacatur, the U.S., as the secondary jurisdiction, would be undercutting that policy. Second, to do so here where, she opines, “there is no United States involvement,” is a particular affront to the doctrine of comity. Again, the standard of review is relevant. Unlike the majority, Judge Rossman views the decision below as an error of law; therefore, the review is de novo.
The case is worth reading for several reasons. First, it is essentially an excellent law review article wrapped into an opinion. The 154 pages of both the majority and dissent are full of citations, statutory history, and references to legal scholarship, addressing in depth the New York Convention and Rule 60(b). Anyone who enjoys good legal writing should savor these opinions just for the quality of the work – and any student looking for an opinion upon which to base his or her note just found it.
Second, in a day when even SCOTUS opinions sometimes include veiled ad hominem attacks on those in opposition, the majority and dissenter are respectful. Each of the opinions specifically addresses head-on the views of the other and discusses in depth how they disagree. In fact, the majority has separate subheadings for each of the dissent’s positions.
Third, while the doctrine of functus officio means that the procedural timing here – a reopening of the arbitration award after judicial confirmation – is unlikely to arise in a domestic arbitration, commercial and arbitration litigators should stick this case in their reptilian memory just in case.
Finally, keep an eye on the SCOTUS docket. This is an important case in international arbitration, and, at least in the view of Judge Rossman, there is now a Circuit split.
Reasoned Awards; Functus Officio
In what it calls a case of first impression in that court, the Second Circuit addresses whether a District Court may remand an award to an arbitrator with instructions to issue a reasoned award, Smarter Tools, Inc. v. Chongqing SENCI Import & Export Trade Co., Ltd., 2023 U.S. App. LEXIS 986 (2nd Cir. January 17, 2023)(Opinion by Circuit Judge Pooler). The dispute relates to an award in favor of Chongqing for approximately $2.4 Million. The parties had agreed that the arbitrator should issue a reasoned award. Upon an application from STI to vacate, the District Court held that the award was too bareboned to comply with that agreement. However, rather than vacating, the court remanded the matter to the arbitrator for “clarification of his findings.” Following that remand, the arbitrator issued a final amended award. The District Court found that the new award was adequately “reasoned,” and it denied the application to vacate and confirmed. On appeal, STI argued that, under the doctrine of functus office, once the arbitrator issued the first award he had no further authority to act. The Second Circuit rejects the argument and affirms the decision below. “It simply makes no sense to redo an entire arbitration proceeding over an error in the form of the award issued after the hearing.” Nor does remand in these circumstances violate the policy behind functus officio. Quoting Colonial Penn Insurance Co. v. Omaha Indemnity Co., 943 F. 2d 337 (3rd Cir. 1991), Judge Pooler opines that the purpose of the doctrine is to avoid “the potential evil of outside communication and unilateral influence which might affect a new conclusion.” The remand in this case did not involve that risk, as there could be no change in the ultimate result, merely a fuller description of how the arbitrator got there. Such a remand, the court holds, is consistent with Section 11 of the FAA, which allows the court to “modif[y] or correct the award. . . [w]here the award is imperfect in matter of form not affecting the merits of the controversy.”
STI also argued that the second award was not itself “a reasoned award.” Both the District Court and the Second Circuit reject that claim, since the award set forth the evidence upon which the arbitrator reached his conclusions. (The opinion does not cite at length from the award, so the extent to which the award referenced specific pieces of that evidence is not clear).
FAA Overrides Contractual Periods for Vacatur
Bachman Sunny Hill Fruit Farms, Inc. v. Producers Agriculture Insurance Co.,, 2023 U.S. App. LEXIS 606 (6th Cir. January 11, 2023) and NAU Country Insurance Co. v. Alt’s Dairy Farm, LLC., 2023 U.S. App. LEXIS 867 (6th Cir. January 11, 2023)(both opinions by Circuit Judge Bush, with Circuit Nalbanian on both cases, Circuit Judge Kethledge on Bachman, and Circuit Judge Donald on NAU Country), address a nuanced issue under the federally reinsured crop insurance program, but stand for a more common question. The program, which to those outside the crop belt is complex, requires that, in connection with an arbitration under a policy governed by the program, the arbitrator must seek and be bound by certain interpretations by the Federal Crop Insurance Corporation. The common insurance policy in both cases provided that “suit must be filed not later than one year after the date the arbitration decision was rendered.” However, Section 12 of the FAA requires that the party seeking to vacate an award must do so within three months of the award. Neither challenger did so here. One filed five months and the other eight months after their respective awards. In opposing a claim that their petitions were time-barred, each relied upon the cited contractual language. The Sixth Circuit rejects that position, holding that the FAA’s shorter limitation governs. “[T]he FAA ‘provides the exclusive remedy for challenging acts that taint an arbitration award.’” (Citations omitted)(Emphasis in the opinion). The Court affirms both judgments dismissing the petitions.
Outside of the area of crop insurance, the cases are an important warning to both the drafters of arbitration agreements and the litigators applying them. Whatever may appear in the agreement as to the timing for challenging or confirming awards, the time frames set forth in the FAA – and, where applicable, perhaps, state arbitration legislation – will govern.
Have a good weekend.
David A. Reif, FCIArb