Can a Federal Court Refuse Recognition of a Nondomestic Arbitral Award Issued in the United States on the “Exceeding Powers” Ground?
On February 14, the en banc Eleventh Circuit Court of Appeals will hear oral argument in Corporacion AIC, S.A. v. Hidroelectrica Santa Rita S.A. (AICSA v. HSR), a case with significant importance for the enforceability in the United States of nondomestic1 arbitration awards that are rendered in such busy arbitral seats as Miami and Atlanta. The three-judge panel that issued a May 2022 opinion in AICSA said it was constrained by the prior precedent in the Eleventh Circuit, holding that the Federal Arbitration Act’s (FAA) standards for vacating domestic awards are inapplicable when parties challenge nondomestic arbitral awards. The Eleventh Circuit will now decide whether to realign itself with the majority of other circuits holding that the FAA’s vacatur grounds2 apply when parties seek to set aside nondomestic awards that are either rendered within the United States or are decided under the United States law (i.e., where the U.S. is said to have “primary jurisdiction”).
Operative Law and the “Exceeding Powers” Ground
Under the 1958 New York Convention, United States courts must recognize arbitral awards issued in other countries unless one of the stated grounds for non-enforcement apply.3 The New York Convention was incorporated into United States law through Chapter 2 of the FAA.4 Chapter 1 of the FAA governs domestic arbitrations5 but also “applies to actions and proceedings brought under [Chapter 2] to the extent [Chapter 1] is not in conflict with [Chapter 2] or the Convention as ratified by the United States."6
The grounds for vacating a domestic award under Section 10 of the FAA7 include:
Where the award was procured by corruption, fraud, or undue means;
Where there was evident partiality or corruption in the arbitrators, or either of them;
Where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.8 (emphasis added).
Some of the grounds listed under Section 10 of the FAA (Chapter 1) are distinct from those enumerated in Article V of the New York Convention (Chapter 2) and therefore arguably are in conflict with the grounds stated in Chapter 2, which sets forth exclusive grounds for non-enforcement. Of particular importance is the “arbitrators exceeded their powers” ground because of its breadth and wide latitude for argument.9
Several circuit courts of appeal have concluded that where a nondomestic award is rendered in the United States or the proceeding was governed by U.S. law, the grounds for non-enforcement set forth in Section 10 of the FAA apply.10 These courts have largely adopted the Second Circuit’s decision in Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc.,11 in which the Second Circuit concluded Article V(1)(e) of the New York Convention12 contemplates that “the state in which, or under the law of which, the award is made, will be free to set aside or modify an award in accordance with its domestic arbitral law and its full panoply of express and implied grounds for relief.” The three-judge panel on the Eleventh Circuit agreed with this rationale in the May 2022 opinion in AICSA v. HSR but concluded it was not permitted to consider the FAA’s “exceeding powers” defense because of the contrary binding precedent in the Eleventh Circuit. The en banc Eleventh Circuit set aside the May AICSA decision and agreed to rehear the case.
Corporacion AIC, S.A v. Hidroelectrica Santa Rita S.A.
The underlying dispute between two Guatemalan entities, AICSA and HSR, relates to a construction contract for a hydroelectric power plant in Guatemala. The project sparked a backlash from Guatemalan citizens that included blockades of construction, leading HSR to issue a force majeure notice cancelling the project. HSR sought reimbursement of advance payments it made to AICSA and commenced arbitration in Miami. The panel ruled in HSR’s favor. Unsatisfied with the outcome, AICSA filed a petition in federal district court seeking to vacate the award on the basis that the panel had exceeded its powers. The district court denied AICSA’s petition, holding Eleventh Circuit precedent foreclosed AICSA’s claim that a party to a nondomestic arbitration could challenge the outcome on the “exceeding powers” ground of FAA Section 10(4).
The three-judge Eleventh Circuit panel affirmed the district court but argued its prior decisions on the issue were incorrect. Specifically, the panel took aim at the decision in Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH (Industrial Risk),13 where the court held that parties cannot raise any defenses against enforcement of arbitral awards other than those specified in Article V of the New York Convention. According to the AICSA v. HSR panel, the court improperly failed to consider whether defenses under FAA Section 10 are tucked into Article V(1)(e) of the New York Convention, which allows for non-enforcement when an “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.” (emphasis added). The AICSA v. HSR panel reasoned this language implicitly acknowledges “our domestic courts and law have some role to play” when the United States has primary jurisdiction over an arbitration. The panel also pointed to BG Grp., PLC v. Republic of Argentina (BG Group), a case where the Supreme Court evaluated (and rejected) an argument that arbitrators in a proceeding seated in Washington, D.C. “exceeded their powers” in concluding they had jurisdiction to hear the dispute.14 The AICSA panel explained that the holding in BG Group “implicitly contradicted our previous ruling in Industrial Risk” because the Supreme Court evaluated an international arbitration award on the “exceeding powers” ground, which is not an available ground for non-recognition of a nondomestic award under Article V of the New York Convention. However, the Eleventh Circuit had already held in a 2019 case15 that BG Group did not “clearly overrule” Industrial Risk, so the panel could not reach the merits of AICSA’s vacatur argument under binding precedent in the circuit.
Key Takeaways and Conclusions
The FAA’s Section 10 grounds for vacating arbitral awards are presently unavailable within the Eleventh Circuit for parties dealing with nondomestic awards, even those that were rendered in the United States or under the laws of the United States. However, the Eleventh Circuit may soon realign itself with all other circuits that have considered the issue.16 If the Eleventh Circuit reverses course, it would join its sister circuits in recognizing two distinct regimes for the review of arbitration awards under the New York Convention, dependent on whether the country has primary jurisdiction over the proceeding.17 According to the AICSA v. HSR panel, the Industrial Risk court erred in treating alike secondary jurisdiction cases — that is, cases where the awards were rendered outside the United States or decided under non-U.S. law — and primary jurisdiction cases — those where the awards were rendered in the United States or under the laws of the United States. Those who consider the current Eleventh Circuit law as incorrectly decided have a compelling argument, that review of awards issued outside the United States and not under the laws of the United States is necessarily more limited and helps further the New York Convention’s goal of efficient enforcement of arbitral awards, whereas with respect to the awards issued in the United States or under the laws of the United States, our federal courts have primary jurisdiction and thus an ability to use the full plethora of grounds in FAA Section 10 to review the awards. If the Eleventh Circuit holds that FAA Section 10 grounds are available for review of awards issued in the United States or under the laws of the United States, the parties that have contracted (or are considering) arbitration in such popular cities as Miami or Atlanta (both in the Eleventh Circuit) should review their decisions and assess if the grounds for setting aside awards meet their expectations.
AICSA v. HSR is an important case to watch for users of international arbitration, not only because it will determine the grounds available to challenge awards issued in the Eleventh Circuit but because it could serve as a bellwether for other circuits that consider the issue in the near future.
1 A “nondomestic” award is one that is rendered by a tribunal outside the United States or is rendered by a tribunal in the United States in an arbitral proceeding involving non-U.S. parties.
2 9 U.S.C. § 10.
3 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art. 5, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 4739. Article V(1) states:
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:
- The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or
- The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or
- The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or
- The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or
- 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.
4 See 9 U.S.C. §§ 201-208.
5 9 U.S.C. § 202.
6 9 U.S.C. § 208.
7 9 U.S.C. § 10.
9 To obtain relief on this basis, a party must establish that the arbitrator's award “simply reflects his own notions of economic justice” rather than “drawing its essence from the contract.” Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569 (2013).
10 See Goldgroup Res., Inc. v. DynaResource de Mexico, S.A. de C.V., 994 F.3d 1181, 1188–89 (10th Cir. 2021) (compiling cases); Ario v. Underwriting Members of Syndicate 53 at Lloyds for 1998 Year of Acct., 618 F.3d 277, 291–92 (3d Cir. 2010); Gulf Petro Trading Co., Inc. v. Nigerian Nat'l Petroleum Corp., 512 F.3d 742, 746 (5th Cir. 2008); Jacada (Eur.), Ltd. v. Int'l Mktg. Strategies, Inc., 401 F.3d 701, 709 (6th Cir. 2005); Yusuf Ahmed Alghanim & Sons v. Toys "R" Us, Inc., 126 F.3d 15, 23 (2d Cir. 1997); TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928, 935 (D.C. Cir. 2007).
11 126 F.3d 15, 23 (2d Cir. 1997).
12 Article V(1)(e) provides: “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.”
13 141 F.3d 1434 (11th Cir. 1998).
14 572 U.S. 25, 44 (2014).
15 Inversiones y Procesadora Tropical INPROTSA, S.A. v. Del Monte Int'l GmbH, 921 F.3d 1291 (11th Cir. 2019).
16 See, e.g., Hawaiian Host, Inc. v. Citadel Pac. Ltd., No. 22-00077, 2022 U.S. Dist. LEXIS 197950, 2022 WL 16554080, at *12 n.7 (D. Haw. Oct. 31, 2022) (“Only the Eleventh Circuit . . . has precluded the FAA’s standards for vacatur from applying in reviewing any award falling under the New York Convention.”).
17 See, e.g., Karaha Bodas Co., L.L.C. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Karaha II), 364 F.3d 274, 287 (5th Cir. 2004) (noting that the New York Convention “mandates very different regimes for the review of arbitral awards (1) in the [countries] in which, or under the law of which, the award was made, and (2) in other [countries] where recognition and enforcement are sought.”).