September 13, 2019 Dispute Resolution Magazine

How we got here

Tracing the origins of the New York Convention and its interpretation by the US Supreme Court

Lionel M. Schooler

The New York Convention, which ensures that arbitral awards in one country will be honored by most of the world’s nations, was adopted more than 60 years ago. The Convention’s history and influence, however, stretch far more than just six decades. Its origins date back almost a century, and its meaning continues to be debated and refined today in jurisdictions all around the world. The story of how the convention came to be and an examination of how it has been viewed by the justices of the United States’ highest court are tales worth the attention of arbitrators, advocates, and everyone else who cares about this globally accepted process for settling disputes.

Even though arbitration has been enshrined through the Federal Arbitration Act (FAA) since 1925, the United States was not an early supporter of the Convention. It was not until US businesses’ international trade dramatically increased in the 1960s that President Lyndon B. Johnson urged Congress to approve the measure. In the five decades since, the US Supreme Court has been clear in recognizing the New York Convention through rulings in Mitsubishi, Peaseguros, and BG Group, cementing the Convention’s application in statutory and antitrust claims, maritime bills of lading, and disputes involving local litigation clauses.

The Predecessor: The Geneva treaties

In 1923, the League of Nations, prompted by the International Chamber of Commerce, established the Geneva Protocol to address demands to unify and liberalize international commercial arbitration. The Protocol was designed to guarantee the enforcement of arbitration awards in countries in which the awards were rendered. 

It stated as follows in Article I:

[Ratifying nations are required to recognize] the validity of an agreement whether relating to existing or future differences between parties subject respectively to the jurisdiction of different Contracting States by which the parties to a contract agree to submit to arbitration all or any differences that may arise in connection with such contract relating to commercial matters or to any other matter capable of settlement by arbitration, whether or not the arbitration is to take place in a country to whose jurisdiction none of the parties is subject. (Highlights added.)

However, as the highlighted phrases suggest, the Protocol had many gaps, including: 

  • individual national policies were permitted to govern the arbitration process;
  • member nations could adopt their own idiosyncratic interpretations of what constituted a “commercial matter”;
  • member nations could also adopt their own interpretations of “existing and future differences”; and
  • member nations could disagree on whether a dispute was “capable of settlement by arbitration.”

The most significant gap in the Geneva Protocol, however, was its inability to guarantee the enforceability of an award. Thus, even with arbitral proceedings that were conducted in a member nation, there was no guarantee of enforcement if the place of the award was not the place of enforcement. These shortcomings led to the adoption of the Geneva Convention of 1927, which provided for enforcement of an award outside the nation in which the award was made. Nevertheless, because of its structural deficiencies, this Convention did not meaningfully resolve the issue of enforcement of an award.

The New York Convention of 1958

Prompted by a groundswell of support for change initiated by the International Chamber of Commerce in 1953, the United Nations eventually drafted a protocol for a multilateral convention to effect a “pro-enforcement” arbitral process to protect the integrity of international arbitration awards. This led to the conference at UN headquarters in New York in 1958 that ultimately produced what we now call the New York Convention. The fundamental purpose of the Convention was to eliminate the limits under the Geneva Treaties and promote better award enforcement procedures. The Convention thus was drafted to apply to both commercial and non-commercial matters and allow for enforcement in a noncontracting country. As one commentator put it, the Convention had the effect of “confer[ring] legitimacy upon awards granted in any state, whether or not a contracting state, and whether or not the parties are subject to the jurisdiction of different contracting states.”

The United States sent a delegation to the 1958 New York Conference, but those representatives deliberately adopted a limited role in discussions about the format and wording of the proposed Convention and ultimately recommended that the United States not accede to the Convention. In its report, the delegation raised concerns about legal and policy objections to the Convention, specifically focusing upon the proposed so-called “federal state clause,” which required adherence to the Convention by a contracting state as well as the obligation of that state to only favorably recommend the Convention to its “member States.” The delegation, concerned about this clause’s feasibility within the US federal-state system and the possibility that states would not uniformly adopt arbitration rules under the Convention, expressed more support for bilateral treaties than multilateral treaties.

Over the next decade, as American businesses became involved in international commerce and international arbitration increased, US business leaders grew increasingly concerned about their ability to enforce arbitral awards outside the United States. American arbitration law also evolved, thanks in part to the Supreme Court’s trailblazing Prima Paint decision, which established what has become known as the “separability principle” in contracts with arbitration clauses. Following an appellate court ruling a decade earlier, it interpreted the 1925 FAA to require that any challenges to the enforceability of such a contract first be heard by an arbitrator, not a court, unless the claim is that the clause itself is unenforceable. President Johnson requested congressional approval of the Convention, which the Senate finally ratified in 1968, almost a decade after the Convention had been drafted. Congress thereafter enacted Chapter Two of the Federal Arbitration Act to implement the Convention, and the Convention took effect in the United States at the end of 1970.

The Supreme Court acknowledges and applies the New York Convention

The Supreme Court’s first mention of the New York Convention occurred in 1974, in Scherk v. Alberto-Culver Co., a dispute involving an international transaction. The majority in Scherk held that the claims in the dispute invoking the federal Securities Exchange Act, 15 U.S.C. § 78j(b) were covered within the scope of the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. and thus could be compelled to arbitration pursuant to the FAA. In reaching this decision, the majority reversed a previous decision and appended a footnote referencing the broad language of Article II(1) of the Convention that encouraged the obligation to recognize and enforce commercial arbitration agreements in international contracts.

The Supreme Court’s first opportunity to review and apply the New York Convention occurred 11 years later, in the 1985 landmark decision of Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614 (1985).

Mitsubishi: Summary of the Case

Soler Chrysler-Plymouth, a business situated in Puerto Rico, entered into a distributor agreement with Mitsubishi Motors to allow Soler to sell Mitsubishi vehicles within a designated area of San Juan, Puerto Rico. The parties simultaneously entered into a sales procedure agreement allowing the direct sale of Mitsubishi Motors’ products to Soler and providing a “minimum sales volume” that Soler had to achieve. This latter agreement contained an arbitration clause that called for arbitration in Japan of any disputes between the contracting parties pursuant to the rules of the Japan Commercial Arbitration Association.

In the second year of the agreement, Soler was not able to meet the minimum sales volume. Eventually, Mitsubishi Motors sued Soler in federal court in Puerto Rico, invoking the Federal Arbitration Act and the New York Convention. Mitsubishi Motors sought to compel arbitration of the dispute pursuant to the sales agreement and then filed a request for arbitration before the Japan Commercial Arbitration Association.

Soler filed counterclaims for, among other things, violation of the Sherman Antitrust Act.  When Mitsubishi Motors sought to compel arbitration of the issues raised by Soler’s counterclaims, the district court ruled that the international character of the arrangement between Mitsubishi Motors and Soler compelled arbitration of the counterclaims, including the antitrust claim. The court of appeals reversed this decision, holding that the Convention did not support arbitration of an American statutory antitrust claim despite the existence of an international transaction that otherwise fit within the framework established by the New York Convention.

The Supreme Court approvingly referred to provisions of the FAA and the New York Convention establishing that the Convention could be enforced in United States courts and that in furtherance of the purposes of the Convention, a US Court could, at the request of one of the parties, refer the parties to arbitration, “unless the agreement upon which arbitration was based was determined to be void, inoperative or incapable of being performed.” The Court noted that Section 203 of the Convention conferred jurisdiction on courts of the United States over an action falling under the Convention.

The Supreme Court further noted that the principle embedded in the arbitration clause pertaining to “choice of forum” was particularly worthy of support. It invoked the dictum enunciated in The Bremen v. Zapata Offshore Co. that courts could not insist upon a “parochial concept that all disputes must be resolved under our laws and in our courts” and that an advance agreement about a forum “is an indispensable element in international trade and commerce.”

The Mitsubishi decision noted that once the United States had acceded to adoption of the Convention in 1970, federal policy applied with special force in the field of international commerce. In response to the argument that antitrust claims typically trigger “monstrous proceedings that have given antitrust litigation an image of intractability,” the Court noted that arbitral rules, such as those invoked in the applicable agreement, could prove flexible enough to address complex issues. Picking up on a point submitted by the International Chamber of Commerce as amicus, the Court additionally noted that the arbitrators who had been selected to hear this dispute in Japan were all distinguished scholars, well versed in Japanese antitrust law and American legal training.

Finally, the Court drew specific comfort about compelling arbitration from the provisions of the Convention concerning the award enforcement process, including the right of signatory countries to refuse enforcement when contrary to that country’s public policy. It inveighed the judicial system to “shake off the old judicial hostility to arbitration” and discard their “customary and understandable unwillingness to cede jurisdiction of a claim arising under domestic law to a foreign or transnational tribunal.”

The Teachings of Mitsubishi

The Mitsubishi Court recognized that pursuant to the New York Convention, a broad range of claims could be submitted to arbitration in an international dispute conducted in another country, including American statutory claims. The Court reiterated the dignity to be accorded to “choice of forum” clauses in international arbitration agreements, eschewing insistence that such proceedings could only be conducted in the United States.

The Court rejected the notion that an international arbitration tribunal would be incapable of adequately applying American statutory law, even a law as complex as American antitrust laws. The Court also endorsed the vitality of the award enforcement provisions in the New York Convention and rejected limitations on those provisions grounded in “the old judicial hostility to arbitration.”

Mitsubishi thus sent a clear message to American federal judges to discard outdated notions of the predominance of courts over arbitral tribunals as adequate forums for resolving international disputes covered by the New York Convention and to abandon a restrictive philosophy in evaluating and enforcing arbitration agreements pursuant to the Convention.

The second application

The Supreme Court next applied the New York Convention in 1995, in Vimar Seguros Y Peaseguros v. M/V Sky Reefer, which involved the enforceability of foreign arbitration clauses in maritime bills of lading. 

Vimar Seguros Y Peaseguros: Summary of the Case

An American company’s shipment of produce was damaged in transit on a vessel owned by a Panamanian company and chartered to a Japanese carrier. The bill of lading for the transaction called for Japanese law to govern the relationship of the parties and for any dispute arising from the relationship to be referred to arbitration in Tokyo, administered by the Tokyo Maritime Arbitration Commission according to its rules. The producer sued for the destruction of its goods, and the carrier sought arbitration of the dispute pursuant to the foreign arbitration clause and the Federal Arbitration Act. 

The Supreme Court upheld the arbitration clause and rejected the claimant’s assertion that the terms of the Convention applicable to the Carriage of Goods by Sea Act (COGSA) had the effect of diminishing or nullifying the value of its claim. The Court noted that the petitioner was basing its argument on Chapter Two of the FAA, which to the Court was based in part on the New York Convention. Noting that relationship as well as the specific provisions of the FAA that require enforcement of arbitration agreements in contracts in maritime transactions, the Court opined: “If the United States is to be able to gain the benefits of international accords and have a role as a trusted partner in multilateral endeavors, its courts should be most cautious before interpreting its domestic legislation in such manner as to violate international agreements. That concern counsels against construing COGSA to nullify foreign arbitration clauses because of inconvenience to the plaintiff or insular distrust of the ability of foreign arbitrators to apply the law.

The Teachings of Vimar Seguros Y Peaseguros

Confronted with a challenge to an arbitration clause contained in an international trade Convention, a challenge mounted in part on the basis of Chapter Two of the FAA, the Court pointedly noted that the principal thrust of the New York Convention was to legitimize enforcement of arbitration as a means of dispute resolution in international transactions.  It further emphasized to domestic courts the wisdom of incorporating this multilateral approach to adjudicating arbitrability in international agreements, and to be supportive, rather than distrustful, of such agreements.

The third foray

The Supreme Court’s most recent consideration of the New York Convention occurred in 2014, in BG Group PLC v. Republic of Argentina.

BG Group: Summary of the Case

Based upon an investment treaty between the United Kingdom and the Republic of Argentina, BG Group PLC, representing a consortium, was awarded an exclusive license to distribute natural gas in Buenos Aires. Argentine law dictated that gas tariffs would be calculated in US dollars, set at a level to assure a reasonable return. Argentina later changed the calculation basis to pesos (on a 1-to-1 basis with the dollar), which caused financial losses for BG Group. 

Accordingly, BG Group sought to invoke Article 8 of the investment treaty to require arbitration of this dispute. The treaty called for submitting a dispute to the “competent tribunal” in whose territory the investment was made, i.e., a local court in Argentina; the treaty also allowed arbitration of the dispute “after a period of 18 months” from submission of the dispute to the local tribunal if the local tribunal had not by then rendered a final decision. At about the same time, Argentina’s president issued a decree staying the execution authority of Argentinian courts to allow “renegotiation” of existing contracts (such as the one in which BG Group was involved). The decree also barred companies that were currently litigating complaints from renegotiating. The practical effect of this decree was to hinder indefinitely BG Group’s recourse to the local judiciary and thus to an arbitral forum.

In response to being exiled to this legal dead end, BG Group then sought to initiate arbitration of its claims. The parties appointed arbitrators and agreed to Washington, DC, as the site of the arbitration. BG Group’s claim was that the new Argentinian law violated the treaty, which forbade “expropriation” of investments. Argentina contested such claims and further contested the jurisdiction of the arbitration tribunal because: (1) BG Group was not an investor covered by the treaty; (2) BG Group’s investment in the consortium was not an investment covered by the treaty; and (3) BG Group had improperly bypassed Argentina’s courts when invoking arbitration.

The arbitration tribunal proceeded to consider the case and rendered a final decision in 2007. It declared that it had jurisdiction to consider the merits, based upon its determinations that BG Group was an investor covered by the treaty and that its investment was protected by the treaty. The tribunal further determined that Argentina’s own conduct had waived or excused the local litigation requirement. On the merits, the tribunal found that Argentina had not expropriated BG Group’s investment but that Argentina had also denied BG Group “fair and equitable treatment” in its devaluation process. It thus awarded BG Group $185 million.

BG Group sought to enforce the award under the FAA and the New York Convention in federal court in Washington, DC, pursuant to Sections 204 and 207 of the Convention (pertaining, respectively, to venue and to the timetable and basis for seeking and obtaining confirmation of an award). In response, Argentina sought vacatur of the award for lack of jurisdiction pursuant to FAA §10(a)(4) on the basis that the arbitration tribunal had exceeded its powers. The district court confirmed the award and denied Argentina’s claims. The United States Court of Appeals for the DC Circuit reversed, holding that the issue of the local litigation requirement had to be resolved by the courts, not the tribunal. It further held that BG Group’s failure to commence a lawsuit in Argentina’s courts deprived the tribunal of authority to decide the dispute. It therefore vacated the award.

The Supreme Court’s majority decision considered whether the appropriate standard for judicial review of an arbitration should be de novo review of the local court litigation clause or deferential review of arbitral decisions. The Court opted to treat the clause as a matter of contract interpretation, an arbitral decision thus subject to deferential review by the courts. It determined that the wording of this agreement indicated the parties’ decision to have arbitrators decide arbitrability. It further held that the local litigation requirement was a procedural condition, susceptible to arbitral interpretation in the first instance.

Proceeding to the wording of the treaty itself, the Court then stated that a United States court was authorized, pursuant to the New York Convention, to interpret such intent applying the presumptions supplied by American law. In so doing, it rejected the claim that the use of the term “consent” in the treaty justified blocking access to the arbitration tribunal under the circumstances presented in this case. It thus concluded that the American principle of authorizing arbitrators to interpret and apply procedural provisions governed. The Court further stated that it was unwilling to deviate from the ordinary interpretive approach permitted by the New York Convention and therefore would not construe the wording of the treaty as a substantive provision requiring completion before any arbitration could commence.

In considering Argentina’s contention that the arbitration tribunal had exceeded its powers in violation of FAA §10(a)(4), the Court found that contention was without merit.  It concurred with the tribunal’s decision that the local litigation clause was not an absolute impediment to arbitration and that Argentina’s subsequent “renegotiation” laws hindered access to the domestic judiciary. The Court likewise upheld the tribunal’s conclusion that such laws created an absolute impediment to access to the local judiciary. The Court stated that this conclusion was appropriately based upon interpretation and application of the Agreement and justified BG Group’s directly proceeding to an arbitral tribunal.

The Teachings of BG Group

Sovereign nations are not able to invoke the New York Convention as a means of entirely thwarting the arbitral process. The Court made clear that the issue of arbitrability was for the arbitrators, as was the “procedural” issue of local litigation requirements.

Under the New York Convention, American courts are empowered to apply American law in investor-state disputes when discerning the intent of the parties. The Court makes clear that the New York Convention endorses a straightforward interpretive approach, precluding a party’s post hoc attempt to embellish as “substantive” a clause such as a local litigation requirement in the absence of explicit language to the contrary.

The Court endorsed the interplay between the FAA and the New York Convention when considering an issue such as a tribunal’s exceeding its powers, validating the use of such principles to override impediments to access to a sovereign country’s local judiciary.

What lies ahead

In the 49 years since the United States’ accession to the New York Convention, the pace of judicial review of international arbitration awards in American courts has increased dramatically, reflecting the global economy and the rapid acceleration of the popularity of international arbitration as a means of resolving disputes encompassed by the Convention.

As the number of cases continues to grow, the challenges for courts are also increasing, with wide-ranging issues such as the New York Convention matter of non-signatories compelling international arbitration, an issue that the Supreme Court has accepted for review during its 2019 term.

We know that this briskly evolving arbitral environment will continue to pose challenges to practitioners and parties alike, but we can also hope that it will promote and encourage the effective resolution of international disputes.

Download the PDF

    Dispute Resolution Magazine Digital Extras

    1. Further readings on How We Got Here:
      Recent Application of BG Group by Lionel M. Schooler
    2. Video examples for Beyond Abstinence 
    Entity:
    Topic: