Key points

• In a major shift, the Eleventh Circuit has overruled prior jurisprudence and changed the grounds for vacatur (also called annulment or set-aside) of international arbitration awards, aligning with decisions of the Second, Third, Fifth, and Seventh Circuits.

• The grounds for annulment are now those for vacatur set forth in Chapter 1 of the Federal Arbitration Act, and not those listed for refusal of recognition and enforcement in Article V of the New York Convention (see comparison chart below).

Introduction

The Eleventh Circuit has joined other circuits in holding that in a case under the New York Convention where the arbitral seat is in the United States, or where U.S. law governs the conduct of the arbitration, it is the Federal Arbitration Act and not the New York Convention that sets the grounds to annul or vacate an award.

Background

The case originated from a dispute between two Guatemalan companies, Corporación AIC, S.A., and Hidroeléctrica Santa Rita, S.A. Under a contract signed in 2012, Corporación AIC agreed to build a hydroelectric power plant for Hidroeléctrica in Guatemala. In 2013, Hidroeléctrica issued a force majeure notice that forced Corporación AIC to stop work on the project. Hidroeléctrica later filed a claim in the International Court of Arbitration to recover advance payments it had made to Corporación AIC. Corporación AIC counterclaimed for damages, costs and other expenses.

The arbitration was held in Miami, Florida, and a majority of the arbitral panel ordered Corporación AIC to return about $7 million and €435,000 in advance payments, but allowed it to keep about $2.5 million and €700,000 earned for its work under the contract.

Dissatisfied with the arbitral award, Corporación AIC filed suit in federal court seeking to vacate the award. It asserted that the arbitral panel had exceeded its powers, a ground set out in Chapter 1 of the Federal Arbitration Act, or FAA (and not included in the grounds for refusal of recognition and enforcement under the New York Convention). 34 F.4th at 1293. There was no dispute that the arbitral award was a nondomestic award governed by the New York Convention.

The district court ruled that such a challenge was unavailable because under Eleventh Circuit precedent, specifically Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1445–46 (11th Cir. 1998), and Inversiones y Procesadora Tropical INPROTSA, S.A. v. Del Monte International GmbH, 921, F.3d 1291, 1301–02 (11th Cir. 2019), the grounds for vacatur of an arbitral award governed by the New York Convention can only be those listed in Article V of the Convention.

Thus, the district court did not analyze whether the arbitral panel had “exceeded its powers,” because this is a ground listed in the FAA and not in the New York Convention.

A panel of judges in the Eleventh Circuit affirmed the district court’s decision. The panel concluded that it was bound by Industrial Risk and Inversiones but opined that those “should be overruled by the full court.” The Eleventh Circuit then vacated the panel opinion and ordered rehearing en banc, i.e., with all judges in the court hearing the case.

The en banc Court, in a unanimous opinion, began by analyzing its 1998 decision in Industrial Risk, which provides that when a party seeks vacatur of an arbitral award rendered under the New York Convention a court can only consider the grounds set out in Article V of the Convention. The Eleventh Circuit acknowledged that in that case it had incorrectly equated the defenses to recognition and enforcement with the grounds for vacatur. The Court noted that its 2019 decision in Inversiones was also incorrect because Inversiones followed Industrial Risk.

Next, the Court observed that confirmation under the FAA is practically the same as recognition and enforcement under the New York Convention, (though it noted that recognition and enforcement are technically two different concepts because the first “adjudicates validity” and the second “reduces such award to a judgment.”)

The Court further observed that recognition and enforcement serve different purposes and seek different relief than vacatur. Recognition and enforcement aim to “give effect” to an arbitral award, while vacatur “challenges the validity of the award and seeks to have it declared null and void.”

With respect to judicial remedies, the Court held that under the New York Convention the “primary” jurisdiction is the country which is the legal seat of the arbitration, or whose law governs the conduct of the arbitration, (also known as the lex arbitri or law of the seat), and all other countries which are signatories to the Convention are considered “secondary” jurisdictions. (The Eleventh Circuit also distinguished the law of the seat from the substantive law governing the commercial relationship between the parties).

The Eleventh Circuit then noted that under the New York Convention, only courts in the primary jurisdiction can vacate an arbitral award. And it observed that courts in secondary jurisdictions can only decide whether to recognize and enforce an arbitral award, noting that the legal effect of the recognition and enforcement (or the denial of recognition and enforcement) of an award is limited to the secondary jurisdiction that rules on the request.

With respect to the text of the New York Convention, the Court explained that the only reference to vacatur (or set aside or annulment or “suspen[sion]”) is in Article V(1)(e), which allows a court to deny recognition and enforcement on the ground that it has been vacated by a court in the jurisdiction in which, or under the law of which, that award was made. There are no others.

Finally, the Eleventh Circuit analyzed Chapter 2 of the FAA, which implements the New York Convention and provides that, “Chapter 1 applies to actions and proceedings brought under [Chapter 2] to the extent that [Chapter 1] is not inconsistent with [Chapter 2] or the Convention as ratified by the United States.”

Based on the Supreme Court’s discussion in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637 (2020) and the New York Convention’s “binary framework,” the Eleventh Circuit held that the primary jurisdiction’s domestic law acts as a “gap-filler” and provides the vacatur or annulment grounds for an arbitral award. It noted that the Second, Third, Fifth, and Seventh Circuits have interpreted the Convention similarly. It also noted that the Restatement of International Arbitration and “most” international arbitration scholars read the Convention the same way.

Notably, the Eleventh Circuit dismissed an argument by Hidroeléctrica that applying domestic grounds to the vacatur of international arbitral awards would run counter to the New York Convention’s objective of standardizing the treatment of such awards. The Eleventh Circuit said that while the argument “may have some appeal on policy grounds,” it wrongly presumes that the Convention seeks to prescribe standards for annulment or vacatur. The Convention “cannot attempt to make uniform that which it does not address.”

The Eleventh Circuit also dismissed an argument by Hidroeléctrica that overruling prior jurisprudence is not advisable because it upsets the expectations of arbitral parties at the moment of negotiating the arbitration agreement. The Court recognized the argument, but explained that here, it is warranted because its prior jurisprudence was “plainly and palpably wrong” and in “significant tension” with the Supreme Court’s understanding of the Convention in Outokumpu and other circuits. Further, although prior jurisprudence “may have created certain reliance interests,” those interests are “relatively minor” because there is no way of knowing which if any parties have relied on prior jurisprudence when negotiating arbitration clauses.

Analysis

The Eleventh Circuit’s decision overhauls the grounds under which an international arbitration award seated in the U.S. (and in particular in the Eleventh Circuit, comprised of Florida, Georgia, and Alabama) can be annulled. Although there may be some overlap, the grounds for vacatur or annulment under the FAA are markedly different from the grounds for refusing recognition and enforcement of an arbitral award under the New York Convention. The language in the FAA vacatur grounds arguably includes grounds not enumerated in Article V of the New York Convention, and it does not list grounds listed in Article V. For comparison purposes, the two lists of grounds are set forth in the table below (emphasis added):  

Conclusion

With this decision, the Eleventh Circuit has joined the mainstream interpretation of the New York Convention on the difference between vacatur and recognition and enforcement. The decision should not affect the selection of an arbitral seat in the Eleventh Circuit since venues there remain attractive locations for an international arbitration seat, particularly Miami. Nonetheless, parties considering arbitration seats, or contemplating or undergoing international arbitration proceedings seated in the Eleventh Circuit should be mindful of the implications of the opinion. Should you wish to discuss what this opinion means to you or your company, please feel free to contact any one of Shook Hardy’s team of Board-Certified Specialists in International Arbitration and Litigation.