The case of the day, Ingaseosas Int’l Co. v. Aconcagua Inv. Ltd. (S.D. Fla. 2011), raises interesting questions of federal subject matter jurisdiction of motions to vacate awards made under the New York Convention. Ingaseosas and Aconcagua were both British Virgin Islands firms. They entered into a stock purchase agreement concerning shares in another BVI company that owned a Coca-Cola franchise in Ecuador. The agreement contained an arbitration clause requiring arbitration in disputes in Miami, subject to New York law. When the parties failed to consummate the stock purchase agreement, Aconcagua demanded arbitration and asserted a claim for breach of contract. Ingaseosas counterclaimed. The tribunal’s award was in favor of Aconcagua. Aconcagua sought recognition and enforcement of the award in the courts of the British Virgin Islands, and Ingaseosas sought to vacate the award in the federal court in Miami. When Ingaseosas failed to post a bond in the BVI proceeding, the court there granted Aconcagua’s application and entered a judgment in its favor. Aconcagua then filed a motion in the U.S. proceeding to confirm the award. The question in the case was whether the U.S. court had subject matter jurisdiction of Ingaseosas’s motion to vacate the award.

The key statutory provision is Section 203 of the FAA, which provides:

An action or proceeding falling under the Convention shall be deemed to arise under the laws and treaties of the United States. The district courts of the United States (including the courts enumerated in section 460 of title 28) shall have original jurisdiction over such an action or proceeding, regardless of the amount in controversy.

The question, then, is whether a motion to vacate an award is “an action or proceeding falling under the Convention.” Plainly the Convention contemplates actions in the courts at the seat of the arbitration to set aside awards. Article V(1)(e) specifies the consequences that follow when a court sets aside an award. But the Convention itself does not govern applications to set aside an award, and the Miami court cited several authorities for the proposition that such an application is governed not by the Convention, but solely by the domestic law of the courts at the seat of the arbitration. The court also dismissed the argument that the general federal question statute granted jurisdiction, citing Supreme Court precedent to the effect that cases brought under the FAA are not automatically federal question cases bunt instead require a separate statutory basis for jurisdiction. Finally, the court refused Ingaseosas’s invitation to find that since jurisdiction would clearly have existed had Aconcagua filed its motion first, the presence of a motion to confirm in the case gave the court supplemental jurisdiction over the motion to vacate. A counterclaim cannot give rise to supplemental jurisdiction over an otherwise jurisdictionally faulty complaint. (There was, of course, no question of diversity jurisdiction, as the parties were both aliens).

What are the practical implications if this is right? Even if there is no federal jurisdiction, the state courts are open to hear claims for vacatur. Interestingly, it may be that where one party seeks to vacate an arbitral award in a state court, the other party may be able to remove the case to the federal court even if neither party could have brought the case in the federal court in the first instance: Section 203, quoted above, applies only to “actions and proceedings falling under the Convention”, while Section 205, the removal provision in Chapter 2 of the FAA, requires only that “the subject matter of an action or proceeding pending in a State court relate[] to an arbitration agreement or award falling under the Convention.” As the Miami court pointed out, there are cases holding that a motion to vacate an award brought in state court may properly be removed. It’s also worth noting that in cases with significant amounts of money at stake, where one of the parties is American, there will be diversity jurisdiction in any event.

Readers may be interested in fellow blogger Marc J. Goldstein’s take on this issue. He argues that Section 203 should be read broadly to create subject matter jurisdiction of motions to vacate. This approach would certainly avoid the anomaly of having the courts’ removal jurisdiction in this area be broader than its original jurisdiction. But in light of the case of the day, it’s unclear whether this approach, despite its merits, will ultimately prevail.