Much of this issue is dedicated to one case from the Eleventh Circuit. However, since it’s en banc and reverses significant precedent regarding the FAA and New York Convention, it needs your attention. There are also some Quick Hits and a preview of some upcoming events.
The FAA May Provide the Grounds for Vacatur under the New York Convention; Stare Decisis
The Eleventh Circuit issued a major en banc decision last Thursday on the interface between the New York Convention and the FAA, Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 2023 U. S. App. LEXIS 8887 (11th Cir. April 13, 2023). In the process, they reversed two Circuit precedents and held that the FAA provides the basis for vacatur of awards in U.S.-seated arbitrations which are subject to the New York Convention.
The case arises out of an ICA arbitration between two Guatemalan companies; the proceeding was seated in Miami. The parties agreed that, because it was a dispute between two foreign parties, the arbitration was a nondomestic award which was covered by the New York Convention. Plaintiff brought an action in federal District Court to vacate the award.
Under the New York Convention, the power to vacate an award rests with the “primary” jurisdiction, i.e., that which covers the seat of the arbitration. For purposes of the Convention, the seat is the location which the parties designate as the “legal situs” of the arbitration; it may or may not be where the panel is actually sitting. “Secondary” jurisdictions, which are other signatory nations to the Convention, only have the authority to decide whether they will recognize and enforce the award. Articles V(1) and V(2) set out the grounds for refusing such recognition and enforcement. What the Convention does not do, the Court holds, is “purport to regulate the procedures or set out the grounds for vacatur in the primary jurisdiction.” That is the question which the court addresses here. Does the FAA provide those grounds where the U.S. is the primary jurisdiction?
Prior Eleventh Circuit authority answered that question in the negative. In industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F. 3d 1434 (11th Cir. 1998), and Inversiones y Procesadora Tropical INPROTSA S.A. v. Del Monte International GmbH, 921 F. 3d 1291 (11th Cir. 2019)(following Industrial Risk as Circuit precedent), the Circuit held that the grounds for vacatur of an award which is subject to the New York Convention are only those that fall within Article V of the Convention itself. As the court stated in Industrial Risk, “The Tampa panel’s arbitral award must be confirmed unless appellants can successfully assert one of the seven defenses against enforcement of the award enumerated in Article V of the New York Convention,” 141 F. 3d at 1442. The en banc panel in Corporacion AIC, in an opinion written by Judge Jordan, explicitly overrules both Industrial Risk Insurers and Inversiones.
Section 207 of the FAA requires confirmation of an award unless the court finds “one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the . . . Convention. In that context, though, the court is acting within its jurisdiction as a secondary jurisdiction, i.e., it is “enforcing” and “recognizing” the award. What happens if, as here, the arbitration is held in the U.S., and its courts, therefore, are the primary jurisdiction? What if that court is asked to vacate the award? The panel’s opinion begins with a recognition that, while the Convention provides that the primary jurisdiction may set aside or vacate an award, see Article Vi(e), it does not provide the standards for such vacatur. As the court opines, “In sum, neither Article V of the Convention nor § 207 of the FAA provides the grounds on which a court in the primary jurisdiction can vacate an arbitral award.” Citing to GE Energy Power Conversion France SAS, Corp. v Outokumpu Stainless USA, LLC., 140 S.Ct. 1637 (2020), the Eleventh Circuit holds that “the primary jurisdiction’s domestic law acts as a gap-filler and provides the vacatur grounds for an arbitral award.” In the U.S., the FAA provides those grounds. In so holding, the Eleventh Circuit joins the Second, see Yusuf Ahmen Alghanim & Sons v. Toys “R” Us, Inc., 126 F. 3d 15 (2nd Cir. 1997); Third, Ario v. Underwriting Members of Syndicate 53 at Lloyds for 1998 Year of Account, 618 F. 3d 277 (3rd Cir. 2010); Fifth, see Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 335 F. 3d 357 (5th Cir. 2003); and Seventh Circuits, Lander Co. v. MMP Investments, Inc., 107 F. 3d 476 (7th Cir. 1997). Since the District Court held that, under Industrial Risk, it could not consider FAA-based grounds for vacatur, the Eleventh Circuit reverses and remands for a decision on the merits of the application to vacate.
Besides its important holding, there are other interesting aspects to the case. First, the Court was faced with an argument that it should honor its previous rulings under the doctrine of stare decisis because of the “settled expectations they created.” In applying the factors in Ramos v. Louisiana, 140 S.Ct. 1390 (2020), for overruling prior precedent, the Court pulls no punches. “For starters, Industrial Risk and Inversiones are wrong, and clearly so.” (Emphasis added). One of the Circuit Judges who sat en banc is Judge Tjoflat – the author of Industrial Risk. As a panel member, he faced up to one of the most difficult tasks for any judge – he admitted he had been wrong in his prior opinion. He was even more explicit in the earlier Eleventh Circuit panel opinion which the full court reconsiders here. “For these reasons, we think we’ve gotten it wrong in Industrial Risk and Inversiones, and an en banc panel of this Court should hold that we can review international arbitration awards based on Chapter 1 of the FAA under Article V(1)(e) of the New York Convention when the United States has primary jurisdiction. But for now, we affirm,” Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 34 F.4th 1290, 1301 (11th Cir. 2022). This willingness to admit error, learned in six decades on the bench, may be why Judge Timothy Corrigan wrote, “From his unusual name, to his extraordinary intellect, to his unparalleled love for the law, to the unique way he can deconstruct a problem — ‘strip it bare,’ as he calls it — to his many quirks, there’s no one quite like the Hon. Gerald Bard Tjoflat,” The ‘Duke’ of the Federal Court: Celebrating Gerald B. Tjoflat’s 50 Years as a Federal Judge, 104 Judicature No. 3 (2020-21).
There are two significant dicta in this opinion. First, the court makes it clear that it will apply the same standards to applications to set aside awards governed by the Panama Convention. “Although we do not address the Panama Convention today, we note that its enforcement and recognition provisions are ‘substantively identical’ to those in the New York Convention.” Second, they strongly indicate that any attempt to reopen previous refusals to vacate awards, which a court denied under the Industrial Risk standard, will be unsuccessful. In describing the interests which are affected by abandoning Industrial Risk, the lists two sets of parties “who might be detrimentally affected by our decision today[:] (a) those whose arbitral proceedings under the New York Convention (i) are seated somewhere within the Eleventh Circuit and (ii) are currently ongoing; and those whose agreements stipulate to an arbitral location within the Eleventh Circuit but have not yet initiated arbitration proceedings.” (Emphasis added). There is no reference to those who were prejudiced by the previous improper application of the law or any implicit invitation to take another bite at the apple.
Finally, a reminder that this decision does not affect only some niche group of practitioners who are litigating disputes among foreign sovereigns or only between non-US companies. The Convention applies to arbitration agreements that arise out of commercial relationship that are not “entirely between citizens of the United States.” Among the cases decided last week, for example, was a New York Convention dispute arising out of Hurricane Ida in which the plaintiff’s properties were insured by both domestic and foreign insurers, Goux Enterprises, Inc. v. Indian Harbor Insurance Co., 2023 U.S. Dist. LEXIS 65547 (E.D. La. April 14, 2023)(Vance, J.).
The lesson to those entering into arbitration agreements to which foreign entities will be one of the parties is to be very thoughtful in picking the seat of arbitration. If you are picking a locus in the U.S., take a look at the Circuit’s case law before deciding in what state you are going to venue the arbitration. Remember, you might need to invoke that precedent in the event of an adverse award. Among those considerations, for example, think about whether the Circuit recognizes any judicially created grounds for vacatur, such as the violation of public policy or manifest disregard. Despite the presence of the Convention, the FAA will be your life raft.
What Is a Written Agreement under the Convention?
The Convention is also the subject of Ishwar Krupa, LLC v. Independent Specialty Insurance Company, 2023 U.S. Dist. LEXIS 64533 (E.D. La. April 12, 2023)(Fallon, J). Plaintiff sought to recover under property insurance policies for damage allegedly caused by Hurricane Ida, which were written by both domestic and non-domestic carriers. Independent moved to compel arbitration under a provision in the insurance policy covering “all matters in difference.” Article II of the New York Convention requires the court to recognize “an agreement in writing” mandating arbitration. As relevant here, it defines an “agreement in writing” as “an arbitral clause in a contract or an arbitration agreement, signed by the parties. . . . “ Plaintiff argued that it had not signed the “arbitral clause” and, accordingly, that there was no “agreement in writing.” Citing Sphere Drake Insurance PLC v. Marine Towing, Inc., 16 F. 3d 666 (5th Cir. 1994), the court holds that the inclusion of the arbitral provision in a contract obviates the need for signing. Although Judge Fallon “acknowledges” that the Fifth Circuit’s holding is the minority, he opines that he is bound thereby and grants the motion to compel.
Waiver of Arbitration
Hartwick v. Hoovestal, Inc,, 2023 U.S. Dist. LEXIS 65984 (C.D. Cal. April 14, 2023)(Gee, J.), is a routine waiver case. In May 2020, Plaintiff brought this class action alleging violations of the California Labor Code. Two and a half years later, the Court approved a Class Notice and distributed it. Finally, in February 2023, approximately three years after the case was brought, Hoovestal moved to compel arbitration as to class members who signed arbitration agreements. The court denies the motion, finding a waiver. Judge Gee rejects Hoovestal’s argument that it could not seek to enforce the arbitration agreements until after the class was certified, and, therefore, that the clock for waiver did not begin to run until that time. The court holds that the focus of a waiver question is not whether particular individuals had become parties; rather, the court should look at the “actions of the person who held the right. . . ,” quoting Morgan v. Sundance, Inc., 142 S. Ct. 1708, 1713 (2022). Since defendant knew that it had signed arbitration agreements with “many putative class members,” it is irrelevant whether the issue was ripe for motion practice prior to the Court’s decision to certify the class.” So, what actions does the court find were “inconsistent with the right to arbitrate?” Several are those regularly seen in cases addressing this issue – filing an answer without alleging arbitration as an affirmative defense, conducting discovery and multiple mediations, presenting a witness for a Rule 36(b)(6) deposition, and briefing class certification without mentioning the arbitration agreements. The more unusual waiver claim arises from the removal of the case from state to federal court. The parties’ arbitration agreement, the court opines, contained a “forum selection clause that would preclude litigation in federal court. . . .” In the face of that provision, the Court holds that removal of the case to federal court was “an act inconsistent with its right to arbitrate.” While Judge Gee cites cases demonstrating “guidance as to how the defendants preserved their right to arbitrate after removing a case from state court to federal court,” she cites no authority for this apparently absolute waiver rule, nor does she quote the arbitration provision. However, for those opposing arbitration in the context of a removed case, it may be worth a trip to the courthouse or a search on-line to check the exhibits and see if your forum selection clause might make this case useful.
Frederick Goldsmith has written a valuable article on techniques for making a mediation successful. Although, the article purports to be written from “the defense perspective,” its thirteen recommendations will increase settlement rates for either side, Goldsmith, Article: Mediation Preparation, Part Two: The Defense Perspective, 25 Lawyers Journal 9. It is available on Lexis at ARTICLE: MEDIATION PREPARATION, PART TWO: THE DEFENSE PERSPECTIVE (lexis.com)
Boston International Arbitration Council
The BIAC is sponsoring Boston Arbitration Day on May 8th at the offices of Ropes and Gray. The educational program looks strong, and the keynote is by George Bermann of Columbia Law School. Registration closes on April 24th, so act now. You can register at the Council’s website, Boston International Arbitration Council (biac.us).
ABA Section of Dispute Resolution
The Section’s Conference, the largest gathering of ADR practitioners in the U.S., will be held in Las Vegas from May 10th to May 13th. There will be a flood of continuing education, programming, and networking. You can register at Section of Dispute Resolution (americanbar.org)
Enjoy your week. I’ll be at a conference this evening at New York Law School on “Cutting Edge Topics in Commercial Arbitration.” If you see this issue before then and are attending, let’s meet each other in real life.
David Reif, FCIArb