What Makes an Arbitration “International”?

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or the New York Convention, is celebrated as one of the most successful modern treaties based on several key metrics, including the number of signatories. See, e.g., V.V. Veeder, “Is There a Need to Revise the New York Convention?,” 1 J. Int’l Disp. Settlement, no. 2, 499–506 (Aug. 2010). Part of what has made the convention so successful is its flexibility. Although the convention establishes a uniform framework for the recognition and enforcement of foreign arbitration awards, it largely defers to signatory states to define for themselves what qualifies as a foreign award under the convention. See Albert Jan van den Berg, “When Is an Arbitral Award Nondomestic Under the New York Convention of 1958?,” 6 Pace L.J., no. 1, 25–41 (1985).

In the United States, Congress attempted to fill this gap in section 202 of the Federal Arbitration Act (FAA), which has subsequently been interpreted by many U.S. courts—led initially by the Second Circuit Court of Appeals in Bergesen v. Joseph Muller, 710 F. 2d 928 (1983)—to include a wide range of arbitrations, including some arbitrations seated in the United States.

Although the initial question of interpreting the FAA would seem to be simple enough, it has triggered a number of more challenging questions for arbitration practitioners and the courts, including when to apply the New York Convention or the FAA when a party seeks to challenge an award. Many of these issues continue to play out in the courts, decades after Bergesen.

To grapple with these questions, though, it’s helpful to explore the reasoning behind the court’s interpretation in Bergesen, a view that was subsequently adopted by numerous other circuit courts of appeals, as well as the American Law Institute (ALI). See Restatement (Third) of U.S. Law of International Commercial and Investor-State Arbitration § 1.4 (Am. Law Inst., Proposed Final Draft 2019).

Defining the Problem: When Is an Arbitration “International”?

Article I of the convention establishes that it applies not only to “awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought” but also to “arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought.” N.Y. Convention art. I(1). The leading scholar of the New York Convention, Albert Jan van den Berg, narrated the extensive negotiations regarding this provision and explained that the latter language was largely a compromise between factions that preferred the territorial principle reflected in the first part of Article I and those that preferred the latter “nationality” principle, which argued that a strictly territorial award was too narrow and would exclude arbitrations that were subject to the procedural laws of a state other than that of the seat. See Van den Berg, supra, at 8–14. Professor Van den Berg highlights the example presented by West Germany in which “[t]wo German businessmen residing in the United Kingdom submitted a dispute to arbitration; for that purpose they selected an arbitral tribunal sitting in London which consisted of German nationals and which followed German procedure.”

The New York Convention was implemented by Congress through Chapter 2 of the Federal Arbitration Act in 1970. Concerning the scope of the convention’s application, Congress provided only the following in 9 U.S.C. § 202:

An agreement or award arising out of [a commercial] relationship which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.

Not surprisingly, this somewhat awkward language has been the subject of considerable analysis by the courts.

In the first U.S. federal circuit court decision on this issue, the Second Circuit Court of Appeals in Bergesen was confronted with an arbitration award made by an American Arbitration Association tribunal seated in New York, in a case between a Norwegian claimant and Swedish respondent. The claimant sought to confirm the award under the convention. As a result, the court first had to address the question of whether the convention applied at all, given the New York seat. The court noted that this issue had been decided by only two district courts and the district courts had reached opposite conclusions. See Transmarine Seaways Corp. of Monrovia v. Marc Rich & Co., A.G., 480 F. Supp. 352, 353 (S.D.N.Y. 1979) (Haight, J.) (finding the convention applicable); Diapulse Corp. of Am. v. Carba, Ltd., No. 78 Civ. 3263 (S.D.N.Y. June 28, 1979) (finding that the convention did not apply).

Pointing to this provision and its legislative history, the court noted that “[i]nasmuch as it was apparently left to each state to define which awards were to be considered nondomestic, . . . Congress spelled out its definition of that concept in section 202.” Bergesen, 710 F. 2d at 933. Legislative history has been the subject of criticism in the years since Bergesen was decided. See, e.g., INS v. Cardoza-Fonseca, 480 U.S. 421, 453 (1987) (Scalia, J., dissenting) (“Judges interpret laws rather than reconstruct legislators’ intentions. Where the language of those laws is clear, we are not free to replace it with an unenacted legislative intent.”). Regarding the case at hand, the court concluded “[h]ad Congress desired to exclude arbitral awards involving two foreign parties rendered within the United States from enforcement by our courts it could readily have done so. It did not.” Bergesen, 710 F. 2d at 933.

Broadly speaking, the view articulated by the court in Bergesen has been adopted by the key circuit courts of appeals throughout the country for international arbitration practice, including the Fifth (Todd v. S.S. Mut. Underwriting Ass’n (Berm.) Ltd., 601 F.3d 329 (5th Cir. 2010)), Sixth (Jacada Ltd. v. Int’l Mktg. Strategies, 401 F.3d 701 (6th Cir. 2005)), Seventh (Lander Co. v. MMP Invs., 107 F.3d 476 (7th Cir. 1997) (“We agree with the Second Circuit that there is ‘no reason to assume that Congress did not intend to provide overlapping coverage between the Convention and the Federal Arbitration Act.’”)), Ninth (Ministry of Def. of the Islamic Republic of Iran v. Gould Inc., 887 F.2d 1357, 1362 (9th Cir.1989) (“three basic requirements exist for jurisdiction to be conferred upon the district court: the award (1) must arise out of a legal relationship (2) which is commercial in nature and (3) which is not entirely domestic in scope.”)), and Eleventh (Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (11th Cir. 1998)).

The Second Circuit has affirmed its approach on numerous occasions as well. See, e.g., CBF Industria de Gusa v. AMCI Holdings Inc., 850 F.3d 58 (2d Cir. 2017); Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc., 126 F.3d 15 (2d Cir. 1997). The District Court for the District of Columbia has also adopted the standard set forth in Bergesen. Republic of Argentina v. BG Grp. plc, 715 F. Supp. 2d 108, 119 (D.D.C. 2010). As a consequence, most of the key arbitral seats in the United States for international arbitration proceedings—including Atlanta, New York, Miami, Texas, and California—have adopted the broad interpretation of section 202 as well as the Second Circuit’s view of how this section interacts with Article 1 of the New York Convention.

Based on this broad acceptance of the Second Circuit’s analysis, the ALI is poised to adopt this view in its forthcoming Restatement of the Law, The U.S. Law of International Commercial and Investor-State Arbitration, which is currently in final draft form and is expected to be finalized in late 2021. The ALI summarized its view as follows:

[T]he agreement must have a reasonable relationship with one or more foreign States. FAA § 202 defines what constitutes such a relationship. By implication from § 202, an arbitration agreement not “entirely between citizens of the United States” has a reasonable relationship with one or more foreign States and thus falls under the Convention. Further, under § 202, an agreement solely between citizens of the United States falls under the Convention only if it “involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.”

Restatement (Third) of U.S. Law of International Commercial and Investor-State Arbitration § 1.4 (Am. Law Inst., Proposed Final Draft 2019).

As a consequence, and as reflected by the ALI’s current language, there is a broad consensus among U.S. federal courts that section 202 of the FAA encompasses a wide range of arbitration proceedings that have some “reasonable relation with one or more foreign states.” Various criteria are considered in reaching this conclusion, including “[t]he location of property, or designation of performance or enforcement . . . in a foreign jurisdiction.” Id.

Criticism and Consequences

Notwithstanding this seeming consensus among U.S. courts, the broad view of section 202 is not without critics, including eminent commentators such as Professor Van den Berg, who criticized Bergesen, asserting that “[n]either the text nor the legislative history of the Convention [or the FAA] indicate that recognition and enforcement of an award made between two foreign parties under the arbitration law of the country in which recognition and enforcement are sought should be deemed to fall under the Convention.” See Van den Berg, supra, at 26. Professor Van den Berg’s criticism is largely rooted in the perceived incompatibility of the New York Convention framework with the broader concept of what constitutes an international award adopted by the Second Circuit. In his 1985 article, he predicted several consequences, at least one of which may have come to pass.

In the context of recognition and enforcement, however, Bergesen created a new and even more challenging tangle. The grounds for vacating an arbitration award under the FAA are found in 9 U.S.C. § 10. The Supreme Court has held that these grounds are exclusive. See Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008). Conversely, the grounds for opposing recognition and enforcement of an arbitration award under the New York Convention are enumerated in Article 5. Importantly, these are not the grounds for vacating an arbitration award. Article 5 of the New York Convention does not contemplate vacatur; it contemplates merely opposition to efforts to confirm. This leads to a question that is obvious (in retrospect, at least): Which grounds apply to challenges to nondomestic arbitration awards made in the United States?

The Second Circuit, in Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc., held that in these circumstances, the courts should rely on the grounds enumerated in section 10 of the FAA. After all, “[t]he Convention specifically 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,” but “the Convention is equally clear that when an action for enforcement is brought in a foreign state, the state may refuse to enforce the award only on the grounds explicitly set forth in Article V of the Convention.” Yusuf, 126 F.3d at 23. However, just one year later, the Eleventh Circuit Court of Appeals, in Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, took the opposite position, concluding that because the award itself was subject to the convention—under the Bergesen analysis—the grounds set forth in Article 5 of the convention should apply to the vacatur petition. The fundamental inconsistency of this position has been highlighted in commentary regarding Industrial Risk, including by this author. See Harout Jack Samra, “Two to Tango: Domestic Grounds for Vacatur Under the New York Convention,” 20 Am. Rev. Int’l Arb., no. 3, 367 (2009). See also Juan C. Garcia & Ivan Bracho Gonzalez, “Interpretation of Article V of the New York Convention in the Eleventh Circuit: Industrial Risk Insurers,” 74 U. Miami L. Rev. 1080 (2020).

Another potential consequence has arisen more recently. In March 2021, the U.S. Supreme Court decided to rehear Servotronics Inc. v. Rolls-Royce PLC, No. 19-1847 (7th Cir. 2020), in which it is expected to settle the question of whether 28 U.S.C. § 1782, which permits U.S. district courts to compel testimony or the production of documents by persons in the United States in aid of foreign proceedings, extends to international commercial arbitration. If the Court adopts the more expansive view of 28 U.S.C. § 1782 taken by the Fourth and Sixth Circuits, which concluded that the statute indeed does apply to international commercial arbitration (see Abdul Latif Jameel Transp. Co. Ltd. v. FedEx Corp., 939 F.3d 710 (6th Cir. 2019); Servotronics, Inc. v. Boeing Co., 954 F. 3d 209 (4th Cir. 2020)), the courts will be confronted with the question of whether an arbitration agreement or award that is considered nondomestic under 9 U.S.C. § 202 also arises from a “foreign or international tribunal” under 28 U.S.C. § 1782.

Although Bergesen may largely be settled, particularly with the ALI’s recent adoption of its rationale in the forthcoming Restatement, its consequences continue to play out on different and frequently unanticipated fronts.