Invitation to Debate
International Arbitration Awards
Richard W. Hulbert
In 1970, the United States became a party to the New York Convention of 1958. The Convention applies not only to foreign awards but also to “arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.” I propose the desirability of a correction in the jurisprudence of the Second Circuit relating to international commercial arbitration and the New York Convention. Under current Second Circuit doctrine, an international award, if rendered in the United States, can be challenged on grounds not recognized by the Convention, although those non-Convention grounds cannot be raised against that same award, if it is rendered outside the United States. Eliminating this discrimination against geographically domestic international awards is consistent with the relevant statutory language that all awards “falling under the Convention” are to be given legal effect in the United States unless an objection permitted by the Convention is established. Eliminating this discrimination would enhance the competitive status of New York as a venue for international arbitration and would conform local practice to international practice elsewhere.
Chapter 2 of the Federal Arbitration Act was enacted to implement American accession to the New York Convention; it explicitly provided that the Convention “shall be enforced in United States courts in accordance with this chapter.” (Chapter 2, §201.) Congress took advantage of the optional “non-domestic” coverage of the Convention to define an award as “falling under the Convention” if it has “a reasonable relation with one or more foreign states.” (Chapter 2, §202.) The statute requires the district court to enter as a judgment of the court “an award falling under the Convention unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.” (Chapter 2, §207.) Other provisions of Chapter 2 confirm that the concept of awards falling under the Convention includes awards rendered in the United States. This was a key point of the 1970 legislation: the touchstone for application of the Convention was no longer the geography of the place of arbitration but the international character of the contract.
Yet the circuit in Yusuf Ahmed Alghanim & Sons v. Toys ’R Us, 126 F.3d (2d Cir. 1997), concerning a contract for the establishment of retail stores in the Middle East, established a precedent authorizing the losing party in an international arbitration, if the award was rendered in the United States, to challenge the award on grounds provided by Chapter 1 of the FAA. Toys ’R Us (“TRU”) had commenced arbitration in New York seeking a declaration that its contract with Alghanim, a Kuwaiti entity, had been terminated. Alghanim counterclaimed for breach of contract. The arbitrator held that TRU had no right to terminate and awarded Alghanim $46 million in damages for the breach. Alghanim applied to the district court for confirmation of the award under Section 207, and TRU counterclaimed under Chapter 1 of the FAA to vacate or modify the award as irrational and in manifest disregard of the law and the terms of the contract. The district court confirmed the award and denied the counterclaim. TRU appealed.
The circuit affirmed the confirmation of the award, holding that the terms of Section 207 were exclusive and that no other terms, such as manifest disregard of the law, could be added by implication. At the same time, however, it held that an application to vacate the award was authorized by Article V(1)(e) of the Convention. It reasoned that the Convention did not control what a signatory state might do with an award rendered on its territory, but left that to the state’s domestic law, which in the present case, without explanation, it took to mean Chapter 1 of the FAA. The court, however, affirmed the district court’s denial of TRU’s counterclaim.
No Useful Purpose
No federal appellate court decision in the 45 years since American accession to the New York Convention has refused legal validity to an international commercial arbitral award rendered in the United States on the ground of manifest disregard of the law or other judicial add-ons to Chapter 1. To be sure, the issue has occasioned more than a few lengthy proceedings at great burden to the courts and heavy legal expenses to the winning party in the arbitration, legal expenses not recoverable under the “American Rule,” but it has changed no results. The doctrine launched by the Toys ’R Us decision has served no useful purpose in international arbitration, whatever may be the argument in favor of merits review of domestic awards.
A Flawed Doctrine
The doctrine also lacks support in the Convention or the statute. There is no discernible purpose in designating awards as “falling under the convention” if they are subject to being set aside as if they were not. No sensible explanation has yet been offered as to why Congress would have desired so quixotic a result. The result cannot be squared with Section 208 of Chapter 2, which provides that provisions of Chapter 1 apply to “proceedings brought under this chapter to the extent that chapter is not in conflict with this chapter or the Convention as ratified by the United States.” Can there be results more in conflict than an award required to be confirmed (that is, made a judgment of the district court) under Section 207 of Chapter 2 but that is required to be vacated under Section 10 of Chapter 1? Just as in a contract case the validity of the contract does not depend on which party, buyer or seller, goes to court, so, too, the validity of an award should not depend on whether judicial proceedings are initiated by the winning part under Section 207 or by the losing party under Section 10. In its current project to restate the American law of international commercial arbitration, the American Law Institute in 2012, after a long study of the issue, rejected the doctrine of Toys ’R Us as in conflict with the Convention and the American statute.
There is no explicit provision of Chapter 2 authorizing the vacating of an award: Section 207 speaks of “recognition” and “enforcement,” although an award denied recognition and enforcement is of no more legal effect in the United States than if it had been vacated, unless and until the decision denying recognition and enforcement is reversed on appeal. The material difference is that under Convention Article V(1)(e) a decision by an American court “setting aside” an award rendered in the United States can serve as a sufficient basis to deny enforcement of that award in another Convention country. In any event, Section 208 makes applicable in Chapter 2 proceedings the provisions of Chapter 1 “not in conflict” with Chapter 2 or the Convention, so there should be no difficulty in importing from Chapter 1 the procedure to vacate, but to avoid conflict, applying the substantive standards of Chapter 2, that is, those of the Convention.
In thus aligning the grounds for refusal to enforce a foreign award with those for refusing to enforce (or vacating) domestic international awards, one would be giving effect to the evident intent of the framers of Chapter 2. In attempting to establish a new framework for dealing with “international awards,” wherever rendered, Chapter 2 took a course that has since become the commonplace standard in international arbitration. It is thus in the UNCITRAL Model law and in the many national statutes modeled on it or influenced by it.
The Second Circuit precedent denies to domestic Convention awards the effective protection that other Convention awards enjoy. New York has all the other attributes that make it a major center for international arbitration. In the current state of the law, however, prudent counsel may well prefer to initiate arbitration outside the United States and bring the foreign award for enforcement in New York where the doctrine of Toys ’R Us will have no application. One can hope that the circuit will soon have an opportunity to revisit the flawed doctrine it has proclaimed.
Editor’s Note: Richard W. Hulbert is a retired partner of Cleary Gottlieb Steen & Hamilton and a former vice chairman of the Court of Arbitration of the International Chamber of Commerce. This article is based on a longer article, “The Case for a Coherent Application of Chapter 2 of the Federal Arbitration Act,” 22 Am. Rev. Int’l Arb. 45 (2011).