The interplay between the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), 6/10/58, 21 U.S.T. 2517, 330 UNTS 3, and the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq., is not always a clear one. The Court of Appeals decision in Ario v. Underwriting Members of Syndicate 53 at Lloyd’s for the 1998 Year of Account, Nos. 09-1922, 09-2990, 09-2992 (3d Cir. 8/18/10), addresses that interplay in the context of reinsurance treaties and makes one ruling of potential significance in the area of international dispute resolution and international litigation. (A ruling on sanctions was also made but is of less importance to us.)

Plaintiff/Appellant Ario, as Insurance Commissioner for Pennsylvania, represented two primary insurance companies now in liquidation. The reinsurers of the two primary carriers attempted to rescind four reinsurance treaties on the grounds of material misstatements and nondisclosures. The reinsurance treaties contained arbitration clauses as well as service of suit clauses, which not only permitted suit in any court of competent jurisdiction in the U.S. but also preserved the reinsurers right to remove actions from state to federal court.

The arbitration panel rescinded three of the four policies at issue, and Ario moved in state court to confirm and vacate the award. The reinsurers removed the case to federal court.  Ario attempted to have the case remanded on the ground that the parties had selected the Pennsylvania Uniform Arbitration Act to govern the arbitration and had therefore opted out of the FAA.

The Third Circuit first determined that removal of the case was proper.  Parties to arbitration agreements can opt to choose state-law arbitration procedures and standards.  But they cannot opt out of the FAA.  Rather, said the Court, the opting for state procedures is a matter of invoking the FAA, not eschewing its applicability. This rule had previously been applied to purely domestic arbitrations; the Third Circuit now for the first time applied it to cases that also fell under the New York Convention – meaning that the “opt out” procedure of invoking state procedures no more “opted out” of the New York Convention’s application than it did to the FAA’s.

The Third Circuit next determined that the parties had not clearly and unequivocally waived the right to remove – the very service of suit clause at issue expressly preserved it.

Next, and significantly, the Court of Appeals held that the broader vacatur standards of the FAA applied to New York Convention awards “rendered and enforced in the United States”, not the narrower grounds of the New York Convention itself.  On this issue the Court reasoned that, under the New York Convention, U.S. courts are authorized to apply U.S. procedural arbitral law — i.e., the FAA — to “nondomestic” Convention awards rendered in the U.S.  “Nondomestic” here means an award that is subject to the New York Convention, not because it is made abroad, but rather  because it was made within the legal framework of another country, for example, it was pronounced in accordance with non-U.S. law or involved parties domiciled or having their principal place of business outside the enforcing jurisdiction.  (Following Yusuf Ahmed Alghanim & Sons v. Toys “R” Us, Inc., 126 F.3d 15, 19 (2d Cir. 1997).)

The Court of Appeals also ruled that the FAA standards applied rather than Pennsylvania’s, though the parties could have invoked Pennsylvania’s vacatur rules had they done so clearly.)

Having done all that, the Court nonetheless confirmed the awards under the FAA.