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June 26, 2019 Practice Points

Settlement Agreements and the New York Convention

The world of international commercial dispute resolution is becoming increasingly complex.

By S.I. Strong

Castro v. Tri Marine Fish Co., 921 F.3d 766 (9th Cir. 2019), deals with the tricky question of whether and to what extent a settlement agreement can be "transformed" into an arbitral award for purposes of enforcement under the New York Convention. The decision demonstrates the increasing complexity of the world of international commercial dispute resolution.

Castro involved a citizen of the Philippines (plaintiff) who signed an employment agreement containing an arbitration agreement requiring any employment disputes to be decided by arbitration seated in American Samoa. A dispute arose and was settled amicably. The settlement included a waiver of all future liability of and claims against the defendants-appellees. Although no arbitral case had been filed, defendant filed a motion with the National Conciliation and Mediation Board to formalize the settlement and received an order issued by an accredited maritime voluntary arbitrator indicating that the settlement was “not contrary to law, morals, good customs and public policy” and dismissing the arbitral “case” with prejudice.

Plaintiff later found that his injuries were more extensive than was originally believed and brought suit in Washington state court to recover expenses associated with additional medical treatment. Defendant removed the case to federal court and sought to confirm the order of the voluntary arbitrator as a foreign arbitral award. The district court confirmed the order and plaintiff appealed. The Court of Appeals reversed the court below in part, vacated the decision below in part, and remanded the matter for further proceedings in accordance with its opinion.

In its decision, the Court of Appeals noted that Article I(1) of the New York Convention refers to “recognition and enforcement of arbitral awards.” Although the term “arbitral award” is not defined in the convention or in the Federal Arbitration Act implementing the convention into domestic law, the court relied on common meaning and common sense, supplemented by the Restatement (Third) U.S. Law of International Commercial Arbitration, which includes definitions of key terms such as “arbitral awards,” “arbitral tribunal,” and “arbitration.”

The court looked past the form of the document in question, focusing instead on matters of substance. In particular, the court noted that (1) there was no dispute to arbitrate pending at the time the parties met with the voluntary arbitrator; (2) the purported “arbitration” did not adhere to the procedures outlined in the arbitration agreement or required as a matter of Philippine law; and (3) the waiver signed by the plaintiff did not include a waiver of the parties’ various commitments to arbitrate in American Samoa. Thus, the court concluded that “the parties’ free-floating settlement agreement and order did not transform into an arbitral award simply because the parties convened with an arbitrator.” Castro at 13. The court also noted that although the defendant could seek to enforce the document as a matter of contract, it could not do so under the New York Convention.

The Court of Appeals was careful to distinguish this particular fact pattern from cases where settlement is reached during an arbitration and reflected in a consent award. According to the court, the timing of the settlement was critical to whether the resulting document fell within the terms of the New York Convention.

S.I. Strong is the Manley O. Hudson professor at the University of Missouri, School of Law in Columbia, Missouri.

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