TREATY OBLIGATIONS AND NATIONAL LAW: EMERGING CONFLICTS IN INTERNATIONAL ARBITRATION*
Pacta sunt servanda1
In determining the effect of treaties, the adage pacta sunt servanda (“agreements are to be kept”)2 remains a foundation of international law.3 By contrast, when American courts consider international conventions, the principle barely rises to the rank of analytic starting point.
In the United States, the application and interpretation of international treaty obligations implicate an intricate interplay with Constitutional mandates and federal statutes.4 As a matter of domestic law, the Constitution trumps treaties.5 However, the same may not be true of other sources of law. Although not free from scholarly debate,6 Acts of Congress remain on a par with treaties, prevailing over inconsistent treaty provisions only pursuant to either (i) the “later in time” rule7 or (ii) an explicit congressional pronouncement.8
According to rules of international law, however, neither a Constitutional mandate nor the enactment of a statute provides an excuse for a treaty violation.9 Prevailing opinion holds that an act wrongful under the law of nations remains so even if a nation’s internal law deems otherwise.10
Moreover, it remains settled law in the United States that courts should not construe a statute to violate international law if any other plausible construction presents itself.11 Thus, American judges remain under a duty to avoid, if at all possible, placing the United States in breach of its international obligations.12
Three controversial Court of Appeals decisions on arbitration highlight the contours of these conflicts.13 The cases also serve as a springboard from which to explore several vexing questions related to private dispute resolution. In each instance, the court dismissed a petition to confirm a foreign arbitral award subject to the United Nations Arbitration Convention, commonly known as the “New York Convention.”14 The Convention obligates the United States and one hundred and thirty-six other signatory countries to enforce foreign arbitration awards, subject to a limited litany of defenses related principally to procedural fairness.15
In two of these decisions, Base Metal16 and Glencore Grain,17 the courts concluded that they lacked personal jurisdiction over the foreign respondent, and thus could not enforce the awards. The third case, Monégasque de Réassurance,18 decided that award confirmation had been sought in an unsuitable forum, and thus must be refused.19 In Base Metal, the respondent allegedly owned assets within the forum, while such was apparently not the case in Glencore Grain or Monégasque de Réassurance.
The decisions came as a surprise to an arbitration community that had been accustomed to the judicial emphasis on the pro-enforcement policy created by the Federal Arbitration Act (FAA) and the New York Convention. Under the tutelage of a line of U.S. Supreme Court cases,20 American courts have found arbitration agreements and awards to trump vital public interests related to antitrust,21 securities regulation,22 maritime transport,23 RICO,24 the Bankruptcy Code,25 consumer protection26 and even foreign policy.27
The reasoning of these cases has been subject to considerable scholarly comment.28 Moreover, a report by the Association of the Bar of New York City suggests that a sound basis exists for enforcement of New York Convention awards solely on the basis of assets within the forum.29
One line of argument, supported by this chapter, suggests that the cases place the United States in breach of its treaty obligations under the New York Convention, which limits non-recognition of foreign awards30 to a narrowly drafted litany of defenses.31 The other principal concern is that the decisions incorrectly applied United States law concerning constitutionally sufficient contacts with the respondent.32
Critical to the first issue (whether the decisions put the United States in breach of its treaty obligations) is the construction of the Convention itself, which provides for award recognition “in accordance with the rules of procedure of the territory where the award is relied upon.”33 Until recently, most observers considered that this provision related to the form of enforcement,34 not the conditions for enforcement. Contracting states certainly possess discretion with respect to minor ministerial matters, such as the amount of filing fees or rules about where enforcement motions must be brought. However, no support exists for the proposition that the “procedure where relied upon” language was intended to serve as a backdoor escape from the recognition of legitimate foreign awards.
To illustrate, in the United States an action to enforce a Convention award may be brought in federal district courts by the claimant, or may be removed by the defendant from state to federal court.35 This is clearly a matter within the province of local (i.e. American) procedure, not subject to any supra-national treaty norm. Neither claimant nor respondent can complain that it would rather have the case heard in a state court.
Other Convention countries, of course, are free to create their own rules designating who shall hear enforcement actions. The fact that in Switzerland a similar action might be heard before a cantonal tribunal (the equivalent of an American state court) is irrelevant. The rule relates simply to enforcement modalities, not conditions that serve to bar recognition itself.
Read in context, the “rules of procedure” language in Article III of the Convention gives contracting states latitude in fashioning the practical mechanics of award enforcement. The provision indicates that the process for obtaining award enforcement or recognition is flexible, to be determined by the local procedures.
This language relates to how recognition will be granted, not whether recognition will be granted at all. To suggest an admittedly imperfect analogy, most universities have procedures whereby admitted students must register and pay tuition before they begin their studies. Individuals failing to follow these procedures will not normally receive instruction. However, registration formalities are not intended to include a second set of entrance requirements. A student having already met standards for admission would be understandably perplexed to find, on arrival at the registrar’s office, that she was required to sit for a set of entrance exams.
The treaty text gives not a hint of a suggestion that a contracting state has the right to create roadblocks to award recognition. In consequence, therefore, courts should be extremely reticent in establishing procedural hurdles to award confirmation.36
In addition to suggesting that these cases may put the United States in breach of its treaty obligations, the Article questions whether Base Metal or Glencore Grain properly assessed the constitutional requirements of due process within the context of award confirmation. The U.S. Supreme Court has distinguished clearly between the jurisdictional predicates for a court purporting to decide the merits of a controversy, and those for a court asked to enforce a judgment already rendered in a forum of competent jurisdiction.37
In the international arena, American projection of the qualities of fair play and even-handedness compels a robust respect for American treaty commitments. As a general matter, this means that the process by which the Convention is implemented must err on the side of facilitating, rather than impeding, award recognition.
Beyond cavil, the New York Convention is one of the most successful commercial treaties in history.38 The treaty creates what might be described as a form of “full faith and credit” obligation toward foreign arbitral awards. However, unlike the constitutional duty toward sister state judgments, a court’s duty to recognize foreign awards is subject to a defined set of expressly enumerated defenses to award recognition.39 Moreover, Convention obligations do more than merely signal national acceptance of a general norm.40 Rather, its provisions create rights to be invoked by private beneficiaries of arbitration clauses, and are routinely enforced by national courts.
Intended to make arbitration awards transportable from one country to another, the New York Convention was conceived more than a half century ago in a report issued by the International Chamber of Commerce (ICC),41 underscoring the commercial community’s need for a process streamlining award enforcement by shifting key burdens of proof from the party seeking enforcement to the party resisting recognition.42 Under the Convention as adopted, an award rendered in Boston is enforceable in Paris or London, regardless of whether it has been confirmed by a court in Massachusetts.
When a dispute is subject to a written arbitration agreement, the New York Convention requires courts to refer parties to arbitration and to recognize the resulting foreign award.43 Recognition or enforcement may be refused only for a restricted number of clearly defined defenses, related to procedural fairness and public policy.44
Divided into two groups, these protections against abusive arbitration allow courts to avoid lending their power to support proceedings that lack integrity or awards inimical to basic public interests. The first set of defenses, which must be proved by the party resisting the award, includes matters such as an invalid arbitration agreement, lack of opportunity to present one’s case, arbitrator excess of jurisdiction, and irregular composition of the arbitral tribunal.45 The second set of defenses allows a court, on its own motion, to refuse to enforce an award whose subject matter is not arbitrable or whose substance violates the forum’s public policy (ordre public),46 which the United States has construed narrowly to include only our “most basic notions of morality and justice.”47 While the first set of Convention defenses are intended to safeguard the parties against private injustice, the second set serves as an explicit catch-all for the enforcement country’s own vital interests.
The Convention’s cornerstone lies in Article III, which 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.”48 This language has been understood as generating what is sometimes called “a pro-enforcement bias” for arbitration awards.49
Geography is the principal trigger for application of the Convention, which covers primarily foreign arbitral awards.50 For example, an award rendered in Boston would be covered by the Convention when presented for enforcement against assets in Zürich, Paris or London, but not when recognition is sought before courts in Atlanta or Los Angeles. Inability to meet the geographical test, however, does not mean the award creditor is entirely out of luck. The Convention will also apply to “awards not considered as domestic,” a subtle and multi-faceted notion. Thus, a Boston award might be considered by a United States court as “not domestic” if the factual configuration of the case contained foreign parties or other significant cross-border elements.51
Taxonomy: recognition without enforcement
At the outset, a critical distinction must be made between an award’s enforcement and its recognition. Enforcement would normally be sought by the winning claimant, looking to attach the respondent’s assets. By contrast, a winning respondent would ask for award recognition in order to obtain res judicata effect against competing litigation brought by the claimant in disregard of the award.
In an international context, a prevailing claimant might also seek a judgment recognizing the arbitrator’s decision, even absent the identification of assets in the forum belonging to the respondent at that time. The FAA provides a limited period for award confirmation. Thus, any delay might prevent a later attempt to seize property.52 In more than one case, the victor in an arbitration has found assets justifying jurisdiction, but too late. Enforcement was refused because too many years had elapsed between the arbitrator’s decision and the motion to enforce.53
This is particularly important in an international context, where a debtor may have several places in which to keep its property. For multinational actors, the absence of assets within one nation’s borders need hardly be a perpetual state of affairs, particularly when that nation is the United States, whose markets play so central a role in global financial and commercial life that few large enterprises can ignore them for very long.
In practice, a winning claimant may seek confirmation by an American court in order to be ready to enforce its award if the foreign debtor later brings assets into the United States. In some cases, the claimant may need to move against assets on an ex parte basis to prevent them from being sent abroad with the push of a computer button.
The Convention text
In Monégasque de Réassurance, the Second Circuit seized upon the reference in Article III to “rules of procedure of the territory where the award is relied upon.” The court found procedural doctrines such as forum non conveniens to be permissible grounds for non-enforcement of otherwise valid New York Convention awards, provided the awards were not subject to discrimination when compared with the treatment of domestic arbitral decisions.54 This line of reasoning does not seem to have been relevant in Base Metal and Glencore, since both cases purported to see a conflict between the New York Convention and the Constitution itself.
In taking this approach, the court included an extended discussion of the U.S. Supreme Court characterization of forum non conveniens as “procedural rather than substantive,” emphasizing that the doctrine is applied in the enforcement of domestic awards as well. The conclusion in Monégasque was that the Convention’s only limitation on procedural rules was “the requirement that the procedures applied in foreign cases would not be substantially more onerous than those applied in domestic cases.”55
As a practical matter, one might question whether the effects of forum non conveniens and “minimum contacts” are indeed more onerous for awards rendered abroad. In a purely domestic context, when both sides are American and have all of their property within the United States, a dismissal in one forum usually does no more than send the award creditor to another state.
By contrast, dismissal may have more disagreeable results in cases that implicate more than one country. In multinational transactions with parties from different countries, assets may be spread throughout the world, sometimes in jurisdictions with financial secrecy statutes. Any attempts to secure enforcement in the United States require that a motion for confirmation be made during the three-year window provided by the FAA.56 Otherwise, the award may not be recognized in the event that the award loser later brings assets into the country.57 Refusal to recognize the award could prove fatal to the winner’s chances of making the award effective, since at that time there may be no other options inside the United States. The property hidden in foreign jurisdictions will be safely kept outside the country until the fourth year after the award was made.
In concluding that the New York Convention imposes no limitations (other than non-discrimination) on procedural rules at the enforcement forum, the Second Circuit seems to have gone astray as a matter of both logic and history. In relying on the drafting history of the New York Convention, the court suggested that the non-discrimination language was proposed by Belgium, and supported by the United States, only after efforts to establish uniform standards had failed.58
However, history does not support the Second Circuit’s conclusions. To the contrary, the debate on Article III confirms that the reference to “rules of procedure” relates simply to formalities for an application to confirm or enforce, including fees and the pro forma structure of the request. There is no evidence that the language was intended to incorporate doctrines that permit or require courts to prune their dockets in normal commercial litigation.
As an initial matter, it is important to remember that the relevant language in Article III of the Convention originated not with the Belgian delegate,59 or any other delegate, but was taken verbatim from the predecessor to the New York Convention.60 Article 1 of the 1927 Geneva Arbitration Convention provided that “an arbitral award …shall be recognized as binding and shall be enforced in accordance with the rules of procedure of the territory where the award is relied upon.”61 In contrast, the Belgian proposal that the Second Circuit referred to would have resulted in a substantially different version of the New York Convention. Each country would have enforced foreign arbitral awards in the identical manner as for domestic awards.62
More significantly, the comments from delegates most closely involved with the adoption of the present Convention wording show an expectation at odds with the Second Circuit’s interpretation of that article. For example, the representative from the United Kingdom (author of the prohibition on fees more onerous than those applicable to domestic awards) explained that the purpose of his proposal was to ensure that a foreign award that met the conditions of the Convention should be “enforceable without unnecessary inconvenience.”63 Similarly, the report of the Secretary-General of the United Nations’ Economic and Social Council highlights that reference to “rules of procedure” was not an attempt to incorporate by reference all of the arcane rules of procedure applicable in each jurisdiction in which the Convention would be applicable, but rather to refer to the basic method by which a party must file an application to have an arbitral award recognized or enforced.64
Thus, the Convention’s drafting history indicates that it was not meant to authorize courts to provide open-ended grounds on which to dismiss recognition of otherwise valid awards. To the contrary, the prevailing view supports the exclusivity of the reasons for refusal of recognition as set forth in Articles V and VI of the Convention, which relate to basic procedural fairness, substantive public policy and adjournment in deference to foreign court proceedings.65 Although a Convention country can certainly set up ministerial conditions for award enforcement, such as making the application to the correct court or paying a reasonable filing fee, the Convention drafters did not expect the recognition forum would establish outright procedural bars to award confirmation.
The United States implementing legislation
Chapter 2 of the FAA, which implements the New York Convention, supplies an additional element in understanding the scope of any latent exceptions to award recognition based on domestic procedural rules.66 As discussed later, the most sensible conclusion to be drawn from this legislation is that the “rules of procedure” language in Article III of the Convention was not intended to serve as a tool for escape from the duty to recognize otherwise valid arbitration awards.
In adopting the Convention, the United States added a second chapter to the FAA, which states explicitly that a federal court “shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award” specified in the New York Convention.67 The Convention’s grounds for non-recognition include basic procedural fairness and public policy, but not local rules of civil procedure applicable in normal commercial litigation. Even absent this legislation, however, good arguments exist for reading the Convention to exclude invocation of national procedural rules that vitiate arbitration awards. To allow an open-ended escape hatch creates the anomalous situation of a nation obtaining treaty benefits for its own awards abroad, while denying enforcement to foreign awards simply by maintaining national rules that refuse to enforce any awards, whether foreign or domestic.
Possibly for this reason, the treaty contains its own explicit provision on non-recognition of awards.68 The enumerated defenses have traditionally been considered to be exhaustive.69 Had the Convention wished to provide the debtor with an option to raise additional roadblocks to implementation of the award, this would normally have been done with the addition of another line in the litany of Article V defenses, one providing for the invalidity of awards not in conformity with the law of the recognition forum.
Analogies to federalism consideration
Analogies to the interaction of federal and state arbitration law are interesting, but inconclusive. The FAA treats an arbitration agreement like any other contract provision, by making it valid “save upon such grounds as exist at law or in equity for the revocation of any contract.”70 Since no federal common law of contracts exists,71 this requires validity determinations according to state law principles.
Federal case law, however, has consistently held that enforcement of arbitration agreements may not be circumvented by state rules designed to invalidate arbitration clauses.72 A state might perhaps require that all contracts be written in capital letters and underlined, but could not enact a statute providing that only arbitration clauses must be in capitals.
Admittedly, nothing in the rules related to forum non conveniens or personal jurisdiction aims specifically at arbitration awards. In practice, however, the application of these doctrines to arbitration conducted abroad has the effect of making such awards less reliable than awards rendered in the United States.
The three-year rule
As mentioned earlier, the FAA requires confirmation within three years of the date an award is made.73 Normally, this condition serves sensible ends. Court scrutiny relatively soon after arbitral proceedings permits the creation of a record when documents and witnesses are still available and before recollections become stale, thus increasing the commercial community’s confidence that arbitration will not be a lottery of erratic results.
In some instances, however, this timing prerequisite could yield untoward results if courts persist in denial of recognition for lack of “minimum contacts” or by reason of forum non conveniens. Non-recognition creates the peril that the winner in the arbitration may find attachable property only when it is too late,74 after the loser has kept its assets out of the United States for a safe period. In such instances, the winner will need a confirmed award in advance of the moment when property is present.
To meet such legitimate commercial concerns, the award enforcement should be modified to include a two-step process. First, confirmation hearing should be available in a centralized national forum such as the Court of International Trade. Thereafter, federal district courts would exercise their present enforcement functions, as long as the creditor had obtained a judicial imprimatur on the foreign award within the three-year statutory period.