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July 23, 2015 Practice Points

Second Circuit Refuses to Confirm Foreign Arbitration Award

By Michael S. Oberman

By summary order issued on July 1, 2015, the Second Circuit for the second time in the same case declined to confirm an award issued by an arbitral panel in Brazil. VRG Linhas Aereas S.A. v. MatlinPatterson Global Opportunities Partners II L.P., No. 14-3906-CV, 2015 WL 3971177 (2d Cir. July 1, 2015) affirming No. 11 Civ. 0198 (MGC), 2014 WL 4928929 (S.D.N.Y. Oct. 2, 2014).

The Second Circuit previously remanded the matter to the district court to determine if the parties had agreed to arbitrate the substantive liability issue that was resolved by the award as well as the issue of arbitrability. VRG, 2015 WL 3971177, at *1 (citing VRG Linhas Aereas S.A. v. MatlinPatterson Global Opportunities Partners II L.P., 717 F.3d 322 (2d Cir. 2013)). On remand, the district court found that the party against whom the award was issued (the defendant), did not agree to arbitrate—notwithstanding the fact that the arbitral tribunal in Brazil found otherwise and the Brazilian courts had refused to vacate the arbitral award. VRG, 2015 WL 3971177, at *1–2.

The matter came to the United States when the plaintiff sought to confirm the award in the Southern District of New York pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 201-08 (New York Convention). Id., at *2; VRG, 717 F.3d at 323. The district court refused to confirm the award—twice. On appeal from the district court, the plaintiff contended (originally and in its appeal after remand) that the district court erred by failing to enforce and give effect to the judgments of Brazilian courts. The Second Circuit, however, held that under the New York Convention, the threshold issue of arbitrability is to be determined under United States arbitration law. VRG, 2015 WL 3971177, at *2; VRG, 717 F.3d at 325.

In that regard, under United States law, the Second Circuit found that the district court properly examined the operative agreements to determine if and what the parties had agreed to arbitrate. Based on a review of the agreements, the court agreed with the district court that the defendant had not agreed to arbitrate. VRG, 2015 WL 3971177, at *2.

The underlying dispute arose out of the acquisition of the plaintiff, VRG, by a Brazilian corporation from two of the defendant’s indirect subsidiaries. A dispute arose over the purchase price adjustment in the Purchase and Sale Agreement (PSA), and the plaintiff referred the dispute to arbitration, naming the defendant, MatlinPatterson, over its objections. The arbitral tribunal in Brazil found that the defendant had agreed to arbitrate all issues arising under the PSA and found the defendant liable for fraudulent misrepresentations. Id., at *1.

Section 14 of the PSA contained an arbitration clause. Notably, however, the defendant did not sign the PSA. The defendant did sign a one-page noncompete agreement in which it agreed not to compete with the plaintiff for a certain period of time. The noncompete was executed at the same time as the PSA and was one of many addendums to the PSA—Addendum 5. Id. The noncompete mentioned the PSA (and incorporated and restated the PSA’s noncompete provision), but did not expressly incorporate all of its terms. Further, the noncompete did not contain an arbitration clause. Id., at *2; see also VRG, 2014 WL 4928929, at *2.

Based on the foregoing, on remand, the district court found that the defendant did not agree to arbitrate. The Second Circuit affirmed:

Because Addendum 5 contains no arbitration clause of its own, and because it does not incorporate the PSA’s arbitration clause within Section 14, we conclude, like the District Court, that MatlinPatterson did not agree to arbitrate. In the absence of any threshold arbitration agreement, and in accordance with the calculus set forth in our prior decision, we affirm the District Court’s judgment denying VRG’s petition to confirm the arbitral award.

VRG, 2015 WL 3971177, at *2.

In so holding, the Second Circuit followed the “well-established rule” of contract interpretation that “[w]here . . . the parties to an agreement choose to cite in the operative contract ‘only a specific portion’ of another agreement, . . . ‘a reference by the contracting parties to an extraneous writing for a particular purpose makes it part of their agreement only for the purpose specified.’” Id. (citations omitted).

This case is a reminder of the importance of the threshold questions when a matter is submitted to arbitration—did the parties agree to arbitrate and who shall decide a dispute’s arbitrability. VRG, 717 F.3d at 325. The answers to these questions turn on the language of the operative agreements as well as the applicable law.

Keywords: alternative dispute resolution, litigation, foreign arbitration, arbitrability, jurisdiction, Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. § 201-08, New York Convention, confirming awards, vacating awards

Michael S. Oberman is with Kramer Levin Naftalis & Frankel LLP in New York, New York.

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