Commercial Litigation and Arbitration

When International Arbitration Agreement Designates a Non-Existent Forum, New York Convention and Federal Arbitration Act Mandate that District Court Compel Arbitration in Its District

Control Screening LLC v. Technological Application & Prod. Co. (TECAPRO), HCMC-Vietnam, 2012 U.S. App. LEXIS 15418 (3d Cir. July 26, 2012):

This dispute involves New Jersey-based Control Screening, LLC and Vietnam-based Technological Application and Production Company, HCMC-Vietnam ("Tecapro"). Control Screening and Tecapro disagree about the proper interpretation of an arbitration forum selection clause in their contract. The District Court granted Control Screening's motion and petition to compel arbitration in New Jersey, and Tecapro appealed. ***In April 2010, Tecapro entered into a contract with Control Screening for the purchase of twenty-eight customized AutoClear X-ray machines with a total purchase price of $1,021,156. Each party now alleges that the other party has breached its obligations under the contract. The contract provides that:

In the event all disputes are not resolved, the disputes shall be settled at International Arbitration Center of European countries for claim in the suing party's country under the rule of the Center. Decision of arbitration shall be final and binding [sic] both parties.

*** Tecapro initiated arbitration proceedings in Belgium under the Belgian Judicial Code in November 2010. In December 2010, Control Screening notified Tecapro of its intention to commence arbitration proceedings in New Jersey. B. Arbitration Forum

The parties agree that their contract dispute should be arbitrated but do not agree on where arbitration should take place. The arbitration clause at issue provides in relevant part that "disputes shall be settled at International Arbitration Center of European countries for claim in the suing party's country under the rule of the Center." ... The "International Arbitration Center of European countries" does not exist. The central question in this case, therefore, is how to interpret this clause in order to determine the appropriate arbitration forum.

In 1958, the United Nations Economic and Social Council adopted the New York Convention. In 1970, the United States acceded to the treaty, and Congress passed Chapter 2 of the FAA, 9 U.S.C. § 201-208, implementing the Convention. The Convention requires contracting states to recognize written arbitration agreements concerning subject matter capable of arbitration. See Art. II(1). The United States, where Control Screening is a citizen, is a signatory to the Convention as is Vietnam, where Tecapro is a citizen.

Section 201 of the FAA provides that the Convention shall be enforced in United States courts. See 9 U.S .C. § 201. Chapter 2 of the FAA creates two causes of action in federal court: (1) an action to compel arbitration in accord with the terms of the arbitration agreement, see 9 U.S.C. § 206, and (2) an action to confirm an arbitral award made pursuant to an arbitration agreement, see 9 U.S.C. § 207. Article II(3) of the New York Convention contains the "null and void" defense which is available in actions to "refer the parties to arbitration":

The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

Art. II(3).

"[A]n agreement to arbitrate is 'null and void' only (1) when it is subject to an internationally recognized defense such as duress, mistake, fraud, or waiver, or (2) when it contravenes fundamental policies of the forum state." Rhone Mediterranee Compagnia Francese di Assicurazioni E Riassicurazoni v. Lauro, 712 F.2d 50, 53 (3d Cir. 1983) (citation omitted) (interpreting Article II(3) of the New York Convention). However, "[t]he 'null and void' language must be read narrowly, for the signatory nations have jointly declared a general policy of enforceability of agreements to arbitrate." Id.

In this case, the parties mistakenly provided that disputes were to be settled at "International Arbitration Center of European countries," which is non-existent. "At" is a preposition defined, in part, as "presence or occurrence in a particular place." See Webster's Third New International Dictionary Unabridged 136 (1993). Thus, the parties agreed to arbitrate in a particular place — namely the "International Arbitration Center of European countries" —that does not exist; a result that could have come about only through mistake.

Footnote 5. Both the District Court and Control Screening conclude that the phrase "for claim in the suing party's country" can only reasonably be interpreted as authorizing arbitration in the suing party's country. When read in isolation, that language is susceptible to such an interpretation. However, when read in the context of the arbitration clause as a whole, the District Court's interpretation is in direct conflict with the preceding language -- "the disputes shall be settled at International Arbitration Center of European countries." Furthermore, the record indicates that both parties understood that arbitration would take place in Europe. For instance, in an email to Vu Khac Tien, Control Screening President and CEO Brad Conway stated: "We remain patient as always, and awaiting your choice from among the above not-so-bad alternatives to get this long delayed and thin-margin deal completed, or to move on we suppose to elaborate, costly and unfortunate dispute resolution ultimately in Western Europe." ... Though the parties apparently intended to arbitrate in Europe, those intentions were nullified by virtue of their mutual mistake in selecting a non-existent arbitration forum.

Since the parties mistakenly designated an arbitration forum that does not exist, the forum selection provision of the arbitration agreement is "null and void" under Article II(3). See Rosgoscirc v. Circus Show Corp., No. 92-Civ.-8498, 1993 U.S. Dist. LEXIS 9797, 1993 WL 277333, at *4 (S.D.N.Y. July 16, 1993) (invalidating an arbitration forum selection provision as "null and void" under Article II(3) of the New York Convention where the parties agreed to arbitrate at "the International Arbitration in the Hague (the Netherlands)," a non-existent entity). Even though the forum selection portion of the arbitration clause is "null and void," there is sufficient indication elsewhere in the contract of the parties' intent to arbitrate, meaning that the parties' agreement to arbitrate remains in force. See, e.g., Great Earth Cos., Inc. v. Simons, 288 F.3d 878, 890 (6th Cir. 2002) ("The validity of the arbitration agreement, therefore, turns on whether the agreement to arbitrate all disputes was separate and severable from the [invalid] forum selection clause."). Section 11.0 of the contract is entitled "ARBITRATION." App. at 50. The second sentence of Section 11.2 of the contract states that: "Decision of arbitration shall be final and binding [sic] both parties." App. at 51. Finally, Section 11.3 of the contract provides that the losing party shall bear "[a]ll expenses in connection with the arbitration." Id. Furthermore, both parties have expressed a willingness to arbitrate their dispute notwithstanding the uncertain meaning of the forum selection provision. Thus, we find that the invalid forum selection provision is severable from the rest of the arbitration agreement.

Because the forum selection provision is "null and void," the otherwise valid arbitration agreement is treated as if it does not select a forum. Under Section 206 of the FAA, a district court is empowered to "direct that arbitration be held in accordance with the agreement at any place therein provided for, whether that place is within or without the United States." 9 U.S.C. § 206. To the extent that it does not conflict with Chapter 2, Chapter 1 of the FAA applies to international arbitration agreements. See 9 U.S.C. § 208. Section 4 of Chapter 1 provides that the arbitration hearings and proceedings "shall be within the district in which the petition for an order directing such arbitration is filed." 9 U.S.C. § 4; see also Econo-Car Int'l, Inc. v. Antilles Car Rentals, Inc., 499 F.2d 1391, 1394, 11 V.I. 258 (3d Cir. 1974) (Section 4's "requirement that arbitration take place in the district court where the petition is filed is clear and unequivocal").

Footnote 6. In PaineWebber Inc. v. Faragalli, this court held that an action to compel arbitration under Section 4 of the FAA "accrues only when the respondent unequivocally refuses to arbitrate." 61 F.3d 1063, 1066 (3d Cir. 1995) (interpreting Section 4's language that "[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement"). That threshold requirement, however, has only been applied by this court, and by other courts of appeal applying similar requirements, to domestic arbitration agreements. A district court's primary authority to compel arbitration in the international context comes from 9 U.S.C. § 206, rather than from 9 U.S.C. § 4. PaineWebber's threshold requirement, therefore, does not apply to international arbitration agreements governed by the New York Convention. Cf. Jain v. de Méré,, 51 F.3d 686, 691 (7th Cir. 1995) ("[W]hile the provision of § 4 allowing a court to order arbitration in its own district should apply to an action under chapter 2 [of the FAA], its jurisdictional limits should not.").

Thus, when an arbitration agreement lacks a term specifying location, a district court may compel arbitration only within its district. See Jain, 51 F.3d at 690-91 (holding that a district court has the power to compel arbitration in the district where suit was brought where the international agreement failed to specify an arbitration forum); see also Bauhinia Corp. v. China Nat'l Mach. & Equip. Imp. & Exp. Corp., 819 F.2d 247, 249-50 (9th Cir. 1987) (same). Because the District Court here compelled arbitration within its own district (even though it based its decision on other grounds), this court will affirm the District Court's Order. See Nicini v. Morra, 212 F.3d 798, 805 (3d Cir. 2000) ("We may affirm the District Court on any grounds supported by the record.").

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