S.D.N.Y. Clarifies that U.S Courts Lack Jurisdiction to Vacate Foreign Awards

In  Molecular Dynamics, Ltd., SDBM Limited, & Chauncey Capital Corp. v. Spectrum Dynamics Medical Limited & Biosensors International Group Ltd., No. 22-5167, 2024 WL 3523414 (S.D.N.Y. July 23, 2024), the U.S. District Court for the Southern District of New York refused to vacate a Swiss arbitration award, finding that federal courts lack jurisdiction to vacate the award.

U.S. courts generally do not possess subject matter jurisdiction to vacate foreign arbitral awards. This principle is grounded in international arbitration law and practice, which typically confers the authority to annul or vacate an arbitral award on the courts of the country where the arbitration took place or under whose laws the arbitration was conducted. This approach aligns with the doctrine of territoriality in arbitration, ensuring that the legal framework and judicial oversight of the arbitration process are consistent with the local laws and procedures governing the arbitration.

The Molecular Dynamics court explained that under the New York Convention, a “competent authority” in a country under the laws of which the award is “made” “is said to have primary jurisdiction over the arbitration award," meaning that the state in which, or under the law of which, an 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. Under the New York Convention, all other signatory states become secondary jurisdictions, where "parties can only contest whether that State should enforce the arbitral award." Thus, under the New York Convention, courts in countries with secondary jurisdiction may only decline to enforce an arbitral award, and do so based “only on the limited grounds specified in Article V [of the New York Convention].” This is implemented in the Federal Arbitration Act in Section 207.

The Southern District opened its analysis of respondents' argument that it lacks subject matter jurisdiction to vacate the award by recognizing that the Second Circuit has held in Zeiler v. Deitsch, 500 F.3d 157, 165 n.6 (2d Cir. 2007), that “[n]either the [New York] Convention nor its enabling statute, 9 U.S.C. §§ 201-08, grant[s vacatur] power with regard to [awards governed by the New York Convention].” The Seventh and Eleventh Circuits have similar holdings. The Court explained:

Under the New York Convention, only a “competent authority” of the country in which, or under the law of which, an award was made, may vacate or annul the award under domestic law. See N.Y. Conv., art. V(1)(e). Thus, while “courts of a primary jurisdiction may apply their own domestic law” — such as the FAA — “when evaluating an attempt to annul or set aside an arbitral award,” “courts in countries of secondary jurisdiction may refuse enforcement only on the limited grounds specified in Article V.”

The Court then found that Switzerland was the primary jurisdiction in this case because the Arbitration was seated in Switzerland and governed by Swiss law, both procedurally and substantively. The Court rejected petitioners' argument that the United States is the primary jurisdiction because the forum selection clause in an underlying agreement confers jurisdiction to vacate the Swiss awards in U.S. courts. That clause stated that "the seat of the [arbitration] shall be Geneva Switzerland,” and that “on matters concerning the [arbitration], the courts of New York, New York will have exclusive jurisdiction thereupon.” Nevertheless, the Court was not persuaded that this is a proper way to circumvent the New York Convention. Indeed, the Court found that this reading of the forum selection clause contravenes the New York Convention which reserves the power to vacate foreign awards to courts sitting in primary jurisdiction alone. The Court explained that it is not within the parties' power to "expand[] the powers of a court beyond the confines set by the New York Convention," "as there is a 'basic difference between the court's power and the litigant's convenience,' and no contract can convey to the court the 'power to adjudicate' matters which it otherwise could not."

The rationale behind limiting the jurisdiction to vacate arbitral awards to the courts of the seat of arbitration is to maintain coherence and predictability in the arbitration process. When parties choose a specific jurisdiction for arbitration, they implicitly accept the legal and procedural standards of that jurisdiction, including the grounds and procedures for challenging the award. Allowing U.S. courts to vacate foreign arbitral awards would create a risk of conflicting decisions and undermine the stability of the international arbitration system. Instead, U.S. courts focus on the recognition and enforcement of foreign arbitral awards under frameworks such as the New York Convention, which provides a uniform standard for enforcing awards while respecting the jurisdictional boundaries.

In practice, U.S. courts can refuse to enforce a foreign arbitral award on limited grounds, such as if the award violates public policy or if due process was not observed during the arbitration. However, these are exceptions rather than the norm, and they do not equate to a broad authority to vacate the award. By adhering to this jurisdictional limitation, U.S. courts contribute to the global predictability and reliability of the arbitration process, fostering an environment where international parties can resolve disputes with confidence that the agreed-upon legal framework will be respected and enforced.