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Full 11th Circuit overturns precedent for vacating foreign arbitration awards

The en banc ruling adheres to the text of the Federal Arbitration Act and rejects past reliance on the so-called New York Convention’s grounds for vacating an award.

ATLANTA (CN) — The full 11th Circuit issued an opinion Thursday that overruled more than two decades of precedent and joined the majority of other federal appeals courts on which standards govern challenges to foreign arbitration awards.

The Atlanta-based court has long been an outlier in holding that a party’s ability to vacate such an award is exclusively controlled by the standards for nonenforcement under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, which regulates foreign and nondomestic arbitration awards for over 169 contracting nations.

However, the majority of other federal circuits have looked to the four factors set out in Section 10 of the Federal Arbitration Act. While both sets of standards for vacatur are similar in concept, they are textually different and have been interpreted and applied differently by various courts.

"We hold that in a New York Convention case where the arbitration is seated in the United States, or where United States law
governs the conduct of the arbitration, Chapter 1 of the FAA provides the grounds for vacatur of an arbitral award. To the extent that Industrial Risk and Inversiones are inconsistent with this holding, we overrule them," U.S. Circuit Judge Adalberto Jordan wrote for the en banc court, referring to prior decisions from 1998 and 2019, respectively.

The ruling explains how there are articles of the New York Convention that set out a limited number of grounds on which "a court can refuse to recognize and enforce an arbitral award," but it does not reference any specific procedures or sets grounds for vacatur in the primary jurisdiction where the award was made.

The court noted that arbitration awards, including international ones, "are not self-enforcing" and require a court judgment to be enforced. Based on a 2020 U.S. Supreme Court decision known as Outokumpu, and the New York Convention’s binary framework, the judges found that the "primary jurisdiction’s domestic law acts as a gap-filler and provides the vacatur grounds for an arbitral award."

"Stated differently, in a case like this one, § 208 of the FAA contemplates that the grounds for vacatur are the ones set out in Chapter 1 of the FAA. And because Article V of the Convention is 'simply silent' on the grounds for vacatur, there is no conflict if Chapter 1 is applied," wrote Jordan, a Barack Obama appointee.

He added, "This is how the Second, Third, Fifth, and Seventh Circuits have interpreted the Convention. Their decisions, which align with the language of Article V of the Convention and Chapter 2 of the FAA, are persuasive."

The appeals court also noted that the convention does not describe or place limits on the capacity of the jurisdiction where the award was rendered to apply its own law in vacating an award, meaning that where parties choose to seat an arbitration can have a significant impact on any judicial review of award.

The 11th Circuit granted a petition in October to rehear the case of Corporación AIC v. Hidroeléctrica Santa Rita en banc and vacated a three-judge panel's initial affirmation of a district court's refusal to vacate an arbitration award, after the panel could not reach the merits of whether vacatur was warranted based on the court's longstanding precedent.

AIC is a Guatemalan corporation that was hired by Hidroeléctrica Santa Rita in March 2012 to build a hydroelectric power plant along the Icbolay River. But they were ordered to suspend their work the following year in response to opposition from members of the local community, who blockaded access to the site and threatened construction workers.

After Hidroeléctrica terminated the construction contract in 2015, the companies commenced arbitration in Miami according to the Rules of Arbitration of the International Chamber of Commerce. A divided arbitration panel ultimately ordered AIC to return about $7 million plus 435,000 euros ($480,000) in advance payments but allowed it to keep what it had earned on the contract, about $2.5 million plus 700,000 euros ($773,000).

Dissatisfied with the decision, AIC sought to vacate the arbitration award in the Southern District of Florida. The lawsuit asserted that the arbitrators “exceeded their powers,” a domestic ground for vacatur that is listed under Section 10 of the Federal Arbitration Act but not explicitly under the New York Convention.

U.S. District Judge Robert N. Scola Jr. denied AIC’s motion to vacate in 2020, ruling that such a challenge was unavailable due to 11th Circuit precedent under Industrial Risk and Inversiones. Scola wrote that "the only potential grounds for vacating the arbitration award are the seven defenses enumerated in the New York Convention," and did not analyze whether the arbitral panel had exceeded its powers.

According to Thursday's ruling, "the district court correctly followed Industrial Risk and Inversiones, which constituted binding precedent at the time, and declined to address Corporación AIC’s argument that the arbitral award should be vacated because the panel exceeded its powers under 9 U.S.C. § 10(a)(4)."

The judges agreed to vacate the judgment in favor of Hidroeléctrica and remand for the district court to consider AIC’s contention under Chapter 1 of the Federal Arbitration Act.

During oral arguments in February, counsel for Hidroeléctrica argued that principles of stare decisis advise against overruling prior precedent because of the settled expectations and certain reliance interests they have created. But the 11th Circuit determined that those interests are likely "relatively minor."

"In deciding whether to overrule precedent, we consider 'the quality of the decision’s reasoning; its consistency with related decisions; legal developments since the decision; and reliance on the decision," Jordan wrote, citing the Supreme Court's 2020 decision in Ramos v. Louisiana. "Here these factors weigh in favor of overruling those aspects of Industrial Risk and Inversiones which hold that Article V of the New York Convention provides the vacatur grounds for an arbitral award."

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