by Andrew Flake
One of the questions that continues to come up in international arbitrations, where they touch U.S. courts, is how Sections 1 and 2 of the Federal Arbitration Act work together. Generally, Section 1 applies to domestic arbitrations — ones between U.S. parties with enforcement here — and Section 2 to non-domestic (or international) arbitrations. Section 2, which implements the New York Convention’s treaty provisions, also draws on Section 1, so long as Section 1 is not inconsistent.
And that has been the friction point, because Section 1 covering U.S. arbitrations, and Section 2 covering international arbitrations, differ in their language. They differ on issues of arbitration contract formation and, importantly, on issues of how the award is enforced.
In May of this year, an Eleventh Circuit panel, in Corporacion AIC, SA (“AICSA”) v. Hidroelectrica Santa Rita S.A, decided one of these thorny sets of problems: whether an arbitration panel’s “exceeding its powers” is a basis to challenge or “vacate” an international award. For domestic cases under Section 1 of the FAA, it plainly is. For international cases, since the Court’s 1998 Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH opinion, it has not been.
The AICSA panel’s overview of how Sections 1 and 2 can get tangled is useful:
…things get trickier when we start trying to figure out how the New York Convention and FAA work together. The New York Convention “must be enforced according to its terms over all prior inconsistent rules of law,” including Chapter 1 of the FAA applying to domestic arbitrations. Indus. Risk, 141 F.3d at 1440 (quoting Sedco, Inc. v. Petroleos Mexicanos Mexican Nat’l Oil Co. (Pemex), 767 F.2d 1140, 1145 (5th Cir. 1985)). At the same time, under Chapter 2 of the FAA, “Chapter 1 [i.e., domestic law] applies to actions and proceedings brought under” Chapter 2 “to the extent that” Chapter 1 “is not in conflict” with Chapter 2 or the New York Convention. 9 U.S.C. § 208; see GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, ––– U.S. ––––, 140 S. Ct. 1637, 1645, 207 L.Ed.2d 1 (2020) (explaining that domestic law doctrines “fill gaps” in the New York Convention).
So, we have three potential bodies of law here: 1) the New York Convention, the treaty itself; 2) Chapter 2 of the FAA, the domestic law implementing the New York Convention; and 3) Chapter 1 of the FAA, the domestic law usually governing domestic arbitrations, which may apply in international arbitrations to the extent it does not conflict with the New York Convention or Chapter 2 of the FAA.
Looking at the Corporacion AIC appeal, the Court went on to affirm the district court, which declined to even consider the “exceeding powers” argument; based on the Eleventh Circuit’s precedent in Industrial Risk, the panel felt it had no choice.
At the same time, however, the panel expressed a view that this precedent needs to be changed. Acknowledging that a three-judge panel cannot overrule binding circuit precedent, here’s what Judge Tjoflat wrote for the panel:
…we hope that this case will be taken en banc where this Court may overturn [Industrial Risk and a related opinion] … and hold that under a correct understanding of Supreme Court precedent the exceeding powers ground is a valid basis for vacatur under both the New York Convention and the FAA.
The Supreme Court precedent the panel is referring to is the Supreme Court’s 2020 opinion in GE Energy Power Conversion Fr. SAS, Corp. v. Outokumpu Stainless USA, LLC, dealing with the doctrine of equitable estoppel and non-parties to arbitration. GE Energy permitted application in a Section 2 international case of another domestic law concept.
Believing that the Court’s prior decision in Industrial Risk missed an important point, the panel cites Article V(1)(e) of the New York Convention as a place where an ability to rely on domestic defenses is “nestled” or “tucked.” That provision reads:
(1) Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: …
(e) The award has not yet become binding on the parties, or 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.
In a detailed and very helpful concurring opinion, Judge Jordan takes a different tack, focusing on the difference between primary and secondary jurisdiction under the New York Convention, as well as the need to be clear about the differences between simply opposing confirmation of an award, and actually moving to vacate.
However its members arrive there, though, the panel believes that even for international arbitrations, the “exceeding powers” argument is one — for international arbitrations based on U.S. law or to be enforced in a U.S. court — that parties should have available if they seek to vacate an arbitration award.
Consistent with that view, in an October 5 decision, the Eleventh Circuit vacated AICSA, meaning a majority of the Court’s judges agreed with the original panel and would like to hear more about whether, how, and why precedent should be changed.
If that happens, and it seems quite certain, when that happens, it will bring the Eleventh Circuit in line with the Second, Third, and Tenth Circuits, which have already considered the question, and will have major implications for the way arbitral challenges in the Circuit proceed.[The precedent at issue is Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1442 (11th Cir. 1998).] [The opinion that was vacated, and is now set for reargument, is Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 34 F.4th 1290, 1292 (11th Cir. 2022).]