Arbitration clauses contained in international commercial contracts – those involving parties domiciled in different countries and dealing with the cross-border supply and distribution of goods or services – are afforded more liberal construction by U.S. courts. Thanks to a United Nations Convention adopted by 144 countries, disputes arising out of or related to an international commercial contract containing a properly-drafted arbitration clause are highly likely to be arbitrated in the place specified in that clause, notwithstanding the creative legal maneuvers of an unwilling party. Surprisingly, the same cannot always be said of arbitration clauses in domestic commercial contracts.
Courts Engage in Limited Inquiry Under UN Convention
The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards1 (the “UN Convention”) was adopted by Congress in the Federal Arbitration Act and must be enforced by both U.S. federal and state courts according to its terms.2
To determine whether an arbitration agreement falls under the UN Convention, U.S. courts engage in a very limited inquiry based on the following four preliminary questions:3
- Is there a written agreement to arbitrate the subject of the dispute?4
- Does the agreement provide for arbitration in the territory of a signatory of the Convention?5
- Does the agreement arise out of a legal relationship which is considered as commercial?6
- Is a party to the agreement a foreign citizen, or does the commercial relationship have some reasonable relationship with a foreign state?7
If all of the above questions are answered in the affirmative, the court must compel arbitration and, in particular, it must do so at the situs set forth in the parties’ arbitration clause. This last requirement, unique to the UN Convention, is an important one.
UN Convention Mandates Arbitration Take Place at Location Set Forth in Clause, Even if Outside the U.S.
Several U.S. Circuits, narrowly interpreting Section 4 of the Federal Arbitration Act, hold that a district court may only compel arbitration in the district where that court sits, even if the contract provides otherwise.8 Thus, if a domestic commercial agreement provides for arbitration in New York and a contracting party commences an action in a California court, that court may only compel arbitration in California, and only in the particular district where that court is located.9 Therefore, a party to a domestic commercial contract seeking to avoid arbitration in a place contained in an arbitration clause it previously agreed to, usually because it deems that location undesirable, need only be the first to the courthouse door and commence a suit in a district it finds favorable to it or its position in the case. If the responding party moves to compel arbitration, the court will likely compel arbitration in the district where it sits. In international commercial disputes, the UN Convention, unlike the Federal Arbitration Act, specifically directs courts to compel arbitration only at the place set forth in the arbitration agreement, even if that place is outside the United States.10 The UN Convention also gives the court the option to either dismiss the international commercial dispute outright or stay the action pending a decision in arbitration.11 In domestic commercial disputes, the court can only stay the action pending the issuance of an arbitral award.
Arbitration Clauses in International Context Viewed More Liberally Than Those Applicable to Domestic Matters
In analyzing an arbitration clause contained in an international commercial agreement, the U.S. courts have consistently reiterated their strong policy in favor of upholding and enforcing agreements to arbitrate disputes, as well as the underlying principals and purposes of the UN Convention.12 U.S. courts have consistently held that this liberal and “emphatic federal policy in favor of arbitral dispute resolution . . . applies with special force in the field of international commerce.”13
Under the first prong of UN Convention analysis, the scope and application of the parties’ arbitration clause is governed by the federal substantive law of arbitrability.14 The existence of a written arbitration clause creates a presumption that disputes must be resolved in arbitration which is rebuttable only by showing a purpose exhibited by the contracting parties to exclude particular disputes from the scope of the clause.15 Where the parties’ controversy involves a contractual dispute, the Supreme Court mandates that it be sent to arbitration “unless it can be said ‘with positive assurance’ that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute.”16 All doubts as to the scope of an arbitration clause must be resolved in favor of arbitration.17 This policy preferring arbitration is particularly strong where the arbitration clause is broad.18
“Arising Out Of” and “In Connection With” Arbitration Clauses Afforded Broadest Interpretation Under UN Convention
A contractual clause which calls for the arbitration of any disputes arising out of or in connection with an international commercial agreement, even further mandates the arbitration of any issues arising out of or in connection with the interpretation, validity, construction or performance of that agreement, is construed broadly by courts as encompassing any and all contractual claims, as well as any non-contractual, statutory and business tort claims, having any connection to the parties’ written agreement.19 As one district court stated: “…every court that has construed the phrase ‘arising in connection with’ within an arbitration clause has found it to be broad, ‘reaching every dispute between the parties having a significant relationship to the contract and all disputes having their origin or genesis in the contract.’”20 Arbitration is required in such cases even if the parties’ allegations merely “touch matters” covered by, or involve any examination of, a contract containing an arbitration clause.21 Accordingly, if an examination of the contract containing a broad arbitration clause must be undertaken to determine whether the parties’ activities at issue in the dispute are governed by the agreement, the matter must be sent to arbitration.22
In Bennett, 968 F.2d 969 (9th Cir. 1992), there was a dispute between the parties over the interpretation of a contractual provision. The plaintiff, suing to recover reinsurance and other payments, argued that the parties’ dispute over asset ownership did not arise out of the parties’ reinsurance contract. The defendants disagreed, claiming that the action for reinsurance payments must be arbitrated since, although the claims did not involve a breach of the reinsurance agreement, an examination and interpretation of that contract was required. The arbitration clause at issue was broad, calling for the arbitration of any disputes that arise as to “the interpretation of this Contract or the performance of the respective obligations of the parties”. Id. at 971. Even though it eventually could be found that the contract did not govern the parties’ dispute, the 9th Circuit Court of Appeals compelled arbitration since the arbitration clauses “focus on contract interpretation and performance” and the parties’ dispute could not be resolved without an examination and interpretation of the contract. Id. at 972.
Similarly, in Chloe Z, 109 F.Supp.2d 1236 (S.D.Cal. 2000) the court applied the four preliminary questions mandated by the UN Convention in connection with an arbitration clause contained in an international insurance agreement. In opposing a motion to compel, the plaintiff argued that its claims were unrelated to the contract, but instead were based on actions undertaken by the defendant outside of the contract. In granting the defendant’s motion to compel arbitration in London, the court held that its conclusion was consistent with the Supreme Court’s pronouncement requiring arbitration since it could not be said “with positive assurance” that the arbitration clause is not susceptible of an interpretation that covered the parties’ dispute. Id. at 1257.
The liberal view of the U.S. courts in analyzing broad arbitration clauses is also exemplified in cases involving a dispute between the parties as to whether the contract was terminated or expired. Under federal substantive law, such disputes must also be resolved in arbitration, even if it is eventually determined by the arbitrator that the contract, including the arbitration clause, terminated or expired and is of no further force or effect.23
In Flores, 2007 U.S.Dist.LEXIS 53127 (E.D.Ca. 2007), the plaintiff argued that the claims at issue arose after a release was signed by the parties which terminated the parties’ original agreement for the purchase and sale of crops and rendered that contract’s broad arbitration clause irrelevant to the claims plaintiff asserted based on the defendants non-payment for goods purchased after the release was signed and after the original contract was supposedly terminated. Id. at *2-7. The release did not contain an arbitration clause. The defendants disagreed, interpreting the release as only dealing with claims as to advances, fees and marketing services, and claiming that the original contract, including its arbitration clause, was not terminated and continued to govern the parties’ post-release purchase and sales activity. Id. Given the broad language of the arbitration clause in the original contract, the court granted the motion to compel arbitration, holding that the issue as to whether the original contract was terminated “is a question for the arbitrator and not for this court.” Id. at *22.
The cases interpreting and applying the UN Convention are instructive both for purposes of insuring that arbitration clauses in international commercial contracts are broadly drafted and in preparing motions to compel and to stay or dismiss a case commenced by the party attempting to avoid arbitration. Contracting parties must be aware that it is the policy of the U.S. courts to respect the parties’ intentions, especially in the international commercial context, and to require the parties to abide by their agreement to arbitrate any disputes touching matters attendant to the parties’ commercial agreement and in the exact place they set forth in their arbitration clause. Parties to a domestic commercial contract, on the other hand, must take that extra step to insure the arbitration proceeding
takes place at the location expressed in the agreement. If such a party anticipates a dispute, even one involving only claims advanced against it by the other party, it should consider commencing the arbitration sooner rather than later in order to avoid arbitrating in an unfavorable venue.
A.B. Makar, K.E. McMartin, M. Palese, and T.R. Tephly, “Formate assay in body fluids: application in methanol poisoning.”, Biochemical medicine, vol. 13.
- 9 U.S.C. §§201 et seq.; 21 U.S.T. 6997 (1970). ↩
- 9 U.S.C. §§201 – 208; Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 681-619 n.3, 105 S. Ct. 3346, 3350 (1985); Chloe Z Fishing Co., Inc. v. Odyssey Re (London) Limited, 109 F.Supp.2d 1236, 1241 (S.D.Cal. 2000). ↩
- Bautista v. Star Cruises, 396 F.3d 1289, 1297 (11th Cir. 2005); Sedco, Inc. v. Petroleos Mexicanos Mexican National Oil Co., 767 F.2d 1140, 1145 (5th Cir. 1985); Ledee v. Ceramiche Ragno, 684 F.2d 184, 186-187 (1st Cir. 1983); Rogers v. Royal Carribean Cruise Lines, 2007 U.S. Dist. LEXIS 89088 ,*12-13 (C.D.Cal 2007) aff’d 547 F.3d 1140 (9th Cir. 2008), cert. den. 2009 U.S.LEXIS 4598 (2009); Chloe Z Fishing, 109 F.Supp.2d at 1243; Tennesee Imports, Inc. v. Filippi, 745 F.Supp. 1314, 1321 (M.D. Tenn. 1990); Corcoran v. Ardra Insurance Co., Ltd., 657 F.Supp. 1223, 1227 (S.D.N.Y. 1987). ↩
- UN Convention, Article II, §§1 and 2; 9 U.S.C. §201. ↩
- UN Convention, Article II, §§1 and 3; 9 U.S.C. §206. For a list of signatories to the UN Convention, see 9 U.S.C. §201 and 21 U.S.T. 2517 “Note by the Department of State” appearing after the text of the Treaty. ↩
- UN Convention, Article II, §3; 9 U.S.C. §202. ↩
- 9 U.S.C. §202. ↩
- The Fifth and Ninth Circuits interpret Section 4 of the Federal Arbitration Act as restricting the arbitration venue to the district where the suit was originally filed, regardless of the language of the parties’ arbitration agreement. Textile Unlimited, Inc. v. A.BMH and Co., Inc., 240 F.3d 781, 785 (9th Cir. 2001); Continental Grain Co. v. Dant & Russell, 118 F.2d 967, 968-969 (9th Cir. 1941); Dupuy-Busching Gen. Agency v. Ambassador Insurance Co., 524 F.2d 1275, 1276-1278 (5th Cir. 1975), cert. denied 537 U.S. 826, 123 S.Ct. 114 (2002). At least one district court in the Second Circuit follows this interpretation. Indian Harbor Insurance Co. v. Global Transportation Systems Inc., 197 F.Supp 2d. 1 (S.D.N.Y. 2002). The Seventh Circuit, however, noting the inequity of such a rule, does not subscribe to this narrow interpretation and will compel arbitration at the place agreed to by the parties in their arbitration clause. Snyder v. Smith, 736 F.2d 409, 419-420 (7th Cir. 1984), overruled on other grounds Feltzen v. Andreas, 134 F.3d 873 (7th Cir. 1998)(“any party to an arbitration agreement could avoid the effect of the agreed-to forum merely by filing suit in a different district. This in turn could lead to the parties racing to different courthouses to obtain what each thinks is the most convenient forum for it, in disregard of its contractual obligations”). ↩
- See also Homestake Lead Co. of Missouri v. Doe Run Resources Corp., 282 F.Supp. 1131 (N.D. Cal 2003). ↩
- There is a split in authority as to whether the UN Convention permits the courts to stay an action pending arbitration, or whether they are required to simply dismiss the action for lack of subject matter jurisdiction. Cf. McCreary Tire & Rubber Co., 501 F.2d 1032, 1037 (3d Cir. 1974)(dismissing action) and Borden Inc. v. Meiji Milk Products Co., Ltd., 919 F.2d 822, 826 (2d Cir. 1990) cert. denied 500 U.S. 953, 111 S.Ct. 2259 (staying action). The District Court for the Central District of California in Rogers recently dismissed an action simultaneously with its granting of a motion to compel arbitration in accordance with the Convention, whereas the California Court of Appeals in Metalclad and the District Court for the Southern District of California in Chloe Z Fishing stayed such an action pending arbitration. Metalclad, 109 Cal. App. 4th at 1711 and 1719 (arbitration compelled in Mexico); Chloe Z Fishing, 109 F.Supp.2d at 1261, n 24 (arbitration compelled in London). See also Ministry of Defense of the Islamic People of Iran v. Gould, Inc., 969 F.2d. 764, 770 (9th Cir. 1992)(arbitration in Iran); Rogers, 2007 U.S. Dist. LEXIS 89088 at *14 (arbitration compelled in Turkey). ↩
- Metalclad, 109 Cal. App. 4th at 1719; Rogers, 2007 U.S. Dist. LEXIS 89088 , at *14; Chloe Z Fishing, 109 F.Supp.2d at 1261. ↩
- Id.; Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941 (1983) (“questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration”). ↩
- Mitsubishi Motors, 473 U.S. at 631, 105 S.Ct. at 3356 (emphasis added); Scherk v. Alberto-Culver Co., 417 U.S. 506, 516-517, 94 S.Ct. 2449, 2455-2456 (1974)(“a parochial refusal by the courts of one country to enforce an international arbitration agreement would not only frustrate these purposes, but would invite unseemly and mutually destructive jockeying by the parties to secure tactical litigation advantages”); Metalclad Corp. v. Ventana Environmental Organizational Partnership (2003), 109 Cal. App. 4th 1705, 1712. ↩
- Mitsubishi Motors, 473 U.S. at 626, 105 S.Ct. at 3353 (citing Moses H. Cone, 460 U.S. at 24, 103 S.Ct. at 941); Metalclad, 109 Cal. App. 4th at 1712. ↩
- Mitsubishi Motors, 473 U.S. at 631, 105 S.Ct. at 3356; Chloe Z Fishing, 109 F.Supp.2d at 1255 n.17. ↩
- Chloe Z Fishing, 109 F.Supp.2d at 1257 (quoting United Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582-583, 80 S.Ct. 1347, 1352-1353 (1960)). ↩
- Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 471 and 475 (9th Cir. 1991). ↩
- AT&T Techs., Inc. v. Communication Workers, 475 U.S. 643, 650, 106 S. Ct. 1415, 1419 (1986); Metalclad, 109 Cal. App. 4th at 1712; Homestake Lead Co. of Missouri v. Doe Run Resources Corp., 282 F.Supp. 1131, 1138 (N.D. Cal 2003). ↩
- Simula, Inc. v. Autoliv, Inc., 175 F.3d 716, 719 (9th Cir. 1991)(“in connection with” language in arbitral clause warrants broadest interpretation); Manetti-Farrow, Inc. v. Gucci America Inc., 858 F.2d 509 (9th Cir. 1988)(clause providing for resolution of controversies “involving interpretation or fulfillment of the contract” in Italy broadly enforceable). ↩
- Homestake Lead, 282 F.Supp. at 1138 (quoting Simula, 175 F.3d. at 721). ↩
- Mitsubishi Motors, 473 U.S. at 624 n13, 105 S.Ct. at 3353; Genesco, Inc. v. T. Kaliuchi & Co., Ltd., 815 F.2d 840, 846 (2d Cir. 1987); Bennett v. Liberty National Fire Insurance Co., Inc., 968 F.2d 969, 972 (9th Cir. 1992)(motion to compel arbitration granted where an examination and interpretation of the contract was necessary); Homestake Lead, 282 F.Supp. at 1138 (“the threshold for arbitrability is not high”). See also Chloe Z Fishing, 109 F.Supp.2d at 1257. ↩
- Id.; Seaboard C. L. R. Co. v. National Rail Passenger Corp., 554 F.2d 657, 660 (5th Cir. 1977)(applying broad policy favoring arbitration, motion to compel granted where clause provided that disputes dealing with the “interpretation, application, or implementation” of the contract shall be settled by arbitration, including non-movant’s argument that the contract does not apply to services at issue in parties’ dispute). ↩
- Brotherhood of Teamsters & Auto Truck Drivers Local No. 70 v. Interstate Distribution Co., 832 F.2d 507, 590-511 (9th Cir. 1987)(arbitration compelled where dispute was not over broad arbitration clause, but over proper interpretation of expiration and termination provisions); McKinney v. Emery Air Freight Corp., 954 F.2d 590, 593 (9th Cir. 1992) (dispute over whether contract was terminated is to be resolved in arbitration); Homestake Lead, 282 F.Supp. at 1140; Flores v. Jewels Marketing & Agribusiness, 2007 U.S.Dist.LEXIS 53127 (E.D.Ca. 2007). ↩