United States: Seventh Circuit Analyzes Its Jurisdiction Under The Panama Convention

International arbitration can be tricky, and it's not often that the Seventh Circuit has an opportunity to analyze the grounds for its jurisdiction in this area. That makes the court's recent decision in Pine Top Receivables of Illinois v. Banco de Seguros del Estado, Nos. 13-1364 & 13-2331 (7th Cir. Nov. 7, 2014), a unique case worth remembering.

The case began when Pine Top sought to compel arbitration by filing a complaint in the Northern District of Illinois against Banco de Seguros del Estado, an entity wholly owned by Uruguay. The dispute concerned approximately $2.3 million that Pine Top claimed Banco owed under reinsurance contracts. The district court denied the motion to compel, and Pine Top took an interlocutory appeal under 9 U.S.C. § 16, as it was authorized to do under that part of the Federal Arbitration Act. Or was it?

The issue wasn't whether § 16 allowed for interlocutory appeals from orders denying motions to compel. It clearly does, since subsections (a)(1)(B) and (a)(1)(C) allow for "[a]n appeal [to] be taken from an order . . . (B) denying a petition under section 4 of this title to order arbitration proceed, [or] (C) denying an application under section 206 of this title to compel arbitration." There can't be much debate there.

What was at issue—and what concerned the Seventh Circuit enough to order supplemental briefing on an issue that it thought "ha[d] escaped the attention of [its] sister circuits . . . [and] escaped mention by commentators"—was whether § 16 applied at all to an arbitration involving a Uruguayan party.

A brief tour of the Federal Arbitration Act is in order. Most of the FAA is contained in chapter 1 of title 9 of the United States Code. That's where § 16 resides, for example. Chapter 2 of the FAA implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, or what most people call the "New York Convention." 150 countries are signatories, not including Uruguay. Chapter 3 of the FAA implements the smaller (with 19 countries) Inter-American Convention on International Commercial Arbitration, or the "Panama Convention" for short, to which Uruguay is a party.

Section 16 contains clear language making it applicable to chapters 1 and 2, so this question wouldn't have arisen if the foreign party had been covered by the New York Convention. But when Congress added § 16 in 1988, there was a chapter 1 and a chapter 2. Chapter 3 wasn't added until 1990, but § 16 wasn't then amended. This is what gave the Seventh Circuit pause.

Without clear language making § 16 applicable to the Panama Convention, the parties needed another provision to incorporate § 16 into chapter 3. As the court saw it, the parties had only two shots. The first was § 302, which incorporates much of the New York Convention into chapter 3. Perhaps § 16 was applicable to the Panama Convention through the New York Convention. Alas, no. Section 302 does incorporate much of the New York Convention, but not all of the New York Convention, and the part of chapter 2 (§ 206) that incorporates the relevant provision of § 16 is one not picked up by chapter 3. The parties' second shot was § 307, "which provides for residual application of chapter 1 in its entirety . . . 'to the extent that chapter 1 is not in conflict' with chapter 3 or the Panama Convention itself." This looked promising. It's a well-recognized principle that § 307 incorporates § 4 of chapter 1, allowing district courts to use § 4′s rules of procedure. Since § 16(a)(1)(B) is linked to § 4, the court held that § 16 could apply to proceedings under the Panama Convention by way of § 307 and § 4. The Seventh Circuit would have jurisdiction after all.

Banco opposed this logic. It pointed out that § 4 conflicts with part of chapter 3—namely, § 303, which allows a court to order arbitration wherever the agreement provides for it. Section 4, by contrast, permits a court to order arbitration only within the district. The arbitration agreements here provided for arbitration to take place in Phoenix (not within the N.D. Ill. when we last checked), so Banco thought that that conflict should prevent chapter 3 from adopting § 4. The court disagreed and held that it could excise the inconsistent part of § 4 and adopt the remainder, something it had done previously in Jain v. de Méré, 51 F.3d 686 (7th Cir. 1995).

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