Will the Arbitration Fairness Act of 2009 Apply to Nondomestic Agreements and Awards Falling Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
In Parts I and II we discussed how the Arbitration Fairness Act of 2009 (the “Fairness Act”) will likely lead to litigation concerning whether, and if so, to what extent, Proposed Section 2(c) abrogates: (a) the severability doctrine; and (b) the rule that arbitrators may determine their own jurisdiction if the parties clearly and unmistakably agree, with that determination subject only to deferential judicial review (the “Own Jurisdiction Rule”). In Parts IIIA-C we discussed two constructions of Proposed Section 2(c): one that would abrogate severability and the Own Jurisdiction Rule in all cases falling under Chapter 1 of the FAA (the “Broad Construction”); and one that would limit the scope of Proposed Section 2(c) to Chapter 1 cases where one of the parties contends that the arbitration agreement requires arbitration of a consumer, employment, franchise or statutory civil rights dispute (the “Narrow Construction”).
In this Part IV we consider whether Proposed Section 2(c) of the Fairness Act applies to agreements and awards falling under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or the “Convention”), which are governed by Chapter 2 of the FAA. While the matter is not entirely free from doubt, Proposed Section 2(c) of the Fairness Act will probably be construed not to apply to awards and agreements falling under the New York Convention. Thus, the doctrine of severability and the Own Jurisdiction Rule will probably continue to apply in cases falling under FAA Chapter 2, even if courts adopt the Broad Construction of the Fairness Act in cases governed by Chapter 1.
What Agreements and Awards Fall Under the New York Convention?
FAA Section 202 broadly defines an agreement or award falling under the Convention as “[a]n arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title. . . .” FAA Section 202 exempts from the Convention “[a]n agreement or award arising out of such a relationship which is entirely between citizens of the United States. . . unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.”
Courts have interpreted FAA Section 202 to mean that the Convention applies not only to arbitration awards rendered in signatory states other than the United States, but also to arbitration awards and agreements “made within the legal framework of another country, e.g., pronounced in accordance with foreign law or involving parties domiciled or having their principal place of business outside the enforcing jurisdiction.” See Bergesen v. Joseph Muller Corp., 710 F.2d 928, 932 (2d Cir. 1983). Thus, the Convention also governs arbitration awards made in the United States, or agreements which provide for arbitration within the United States, provided there is some reasonable nexus between the agreement or award and a jurisdiction other than the United States.
Does Proposed Section 2(c) of the Fairness Act Apply to Arbitration Agreements That Fall Under the Convention but do not Require Arbitration of Consumer, Employment, Franchise or Statutory Civil Rights Disputes?
Proposed Section 2(c) provides that:
Except as otherwise provided in this chapter, the validity or enforceability of an agreement to arbitrate shall be determined by the court, rather than the arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement. . . .
Whether or not Proposed Section 2(c) applies to actions and proceedings falling under the New York Convention depends on whether it conflicts with Chapter 2 or the Convention. FAA Section 201 says that the Convention “shall be enforced in United States courts in accordance with this chapter [2 of the FAA].” Chapter 2 contains a “residual application” provision, which says that Chapter 1 of the FAA applies to actions and proceedings involving awards and agreements falling under the Convention “to the extent that chapter is not in conflict with this chapter or the Convention as ratified by the United States.” 9 U.S.C. § 208.
There is nothing in the Convention or Chapter 2 that expressly conflicts with Proposed Section 2(c), but that does not end the inquiry. Severability and the Own Jurisdiction Rule were developed in cases arising under Chapter 1 of the FAA, but have been found fully applicable to actions and proceedings falling under the Convention. See, e.g., Sarhank Group v. Oracle Corp., 404 F.3d 657, 661-62 (2d Cir. 2005) (Own Jurisdiction Rule); China Minmetals Materials Import and Export Co., Ltd. v. Chi Mei Corp., 334 F.3d 274, 289-90 (3rd Cir. 2003) (Own Jurisdiction Rule); Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310, 315 (2d Cir. 1998) (severability); Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 854 (2d Cir. 1987) (severability).
Just as the severability doctrine and Own Jurisdiction Rule are part of the judicial gloss placed on FAA Chapter 1, so it is part of the judicial gloss placed on FAA Chapter 2. But Proposed Section 2(c) does not (and could not) purport to remove that judicial gloss from Chapter 2 cases. The Fairness Act would have to amend Chapter 2 to accomplish that result. So a Court considering whether Proposed Section 2(c) conflicts with Chapter 2 and the Convention would probably conclude that it does. Under the Broad Construction Proposed Section 2(c) abrogates severability and the Own Jurisdiction Rule, but they arguably remain applicable in Chapter 2 cases.
There is at least one other reason why a court may find Proposed Section 2(c) in conflict with Chapter 2 and the Convention. The enforceability commands of Chapter 2 and the Convention are at least as broad as FAA Section 2, the provision from which severability and the Own Jurisdiction Rule are derived. FAA Section 201 says that the Convention “shall be enforced in United States courts. . . .” Convention Article II(1) provides that:
Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.
Article II(3) provides that:
The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
And Article III provides that:
Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles. . . .
Just as the United States Supreme Court has declared that severability and the Own Jurisdiction Rule implement FAA Section 2′s broad enforceability command, so do they arguably implement FAA Chapter 2′s and the Convention’s broad enforceability commands. Depriving that implementation mechanism from cases falling under the Convention would be inconsistent with Chapter 2 and Articles II and III of the Convention.
In any event, the Fairness Act does not amend FAA Chapter 2, which strongly suggests that the drafters did not intend Proposed Section 2(c) to change the status quo as respects the allocation of authority between arbitrators and courts in cases falling under the New York Convention. Had the drafters intended Proposed Section 2(c) to apply to agreements and awards falling under the Convention, then they could have amended Chapter 2 to abrogate severability and the Own Jurisdiction Rule.
Is Consideration of Chapter 2 and the New York Convention Relevant to the Construction of the Fairness Act in Cases Not Falling Under the Convention?
Consideration of FAA Chapter 2 and the New York Convention provides some additional support for the Narrow Construction of the Fairness Act discussed in Parts IIIB and IIIC of this post. Specifically, Premise 5 requires that Proposed Section 2(a) be construed as not being subject to Proposed Section 2(c)’s directive that courts decide questions that arbitrators would ordinarily decide under the doctrines of severability and the Own Jurisdiction Rule. One of the problems with Premise 5 is that it requires Proposed Section 2(a)’s broad proviso “Except as otherwise provided in this title” to be construed more narrowly than Proposed Section 2(c)’s narrower prefatory language “Except as otherwise provided in this chapter.”
FAA Chapter 2 and the Convention may help overcome this hurdle. Proposed Section 2(a), construed in conjunction with Proposed Section 2(b), provides that arbitration agreements falling within its scope — other than ones requiring arbitration of consumer, employment, franchise, and statutory civil rights disputes — are valid and enforceable. Proposed Section 2(a)’s broad proviso, however, renders it subject to provisions in the FAA (Article 9 U.S.C.), which “otherwise provide”. FAA Section 201 and Chapters II and III of the Convention arguably provide something “otherwise” than Proposed Section 2(a) in that they render valid and enforceable all arbitration agreements falling within their scope, including agreements that require arbitration of consumer, employment, franchise and statutory civil rights disputes. Interpreting Proposed Section 2(a)’s proviso as encompassing Chapter 201 and Articles II and III of the Convention gives effect to that broad proviso, and thus lends additional support to the Narrow Construction.
In part V we shall sum up and consider whether the Fairness Act represents sound legislative policy or whether it might more accurately be described as the ”The Full Employment for Lawyers Act of 2009.”