Circuit Split: Is the New York Convention Enforceable in the United States

The McCarran-Ferguson Act
Enacted in 1945, the McCarran-Ferguson Act¹ provided U.S. states’ the exclusive right to regulate the insurance industry within their own borders. Under the Act, individual states have the authority over the business of insurance without interference from federal regulations. The Act specifically stipulates that state laws governing insurance shall not be invalidated by federal laws, except when federal laws explicitly pertain to the insurance business. Some states have relied on the Act to pass laws prohibiting the use of arbitration to resolve insurance disputes.

The New York Convention
The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the “New York Convention,” establishes a worldwide standard for enforcing foreign arbitration agreements and awards in the signatory countries.² With 172 signatories, including the United States, the Convention mandates that courts insignatory countries enforce arbitration agreements (absent certain narrow exceptions). Article II is particularly relevant, stating:

1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration.

...

3. 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.

The Doctrine of Self-Executing Treaties
The U.S. Constitution provides that treaties concluded by the U.S. have the status of the “supreme Law of the Land,” which means they are directly enforceable by U.S. courts.³ Not all treaty provisions are automatically enforceable however. While some provisions are considered self-executing, meaning that they have the force of domestic law envisaged by the Constitution, others are non-self-executing, which generally means Congress must first pass legislation to make them enforceable. Courts have relied on an inconsistent range of factors to determine whether a treaty is self-executing.

The Circuit Split
The question of whether the Convention is self-executing, and thus superseding of contrary state law, has been the focus of numerous disputes, all of which arise within the insurance industry. Each factual scenario is the same generally. A resident of a state where arbitration is prohibited (plaintiff) initiates a lawsuit against a non-U.S. insurance provider, who then seeks to compel arbitration pursuant to the arbitration agreement in the policy. The plaintiff attempts to resist arbitration, arguing that the arbitration agreement is not enforceable under the state’s arbitration law. The insurer responds that the Convention supersedes state law because the Convention is self-executing.

While some courts have held that the Convention (specifically, Article II(3)) is “self-executing,” others have concluded the opposite and upheld state laws prohibiting the use of arbitration agreements. For instance, in Stephens v. American International Insurance Co. (1995),⁴ the U.S. Court of Appeals for the Second Circuit ruled that the Convention is not self-executing. Its reasoning was simple: Congress had enacted part of the U.S. Federal Arbitration Act to implement Convention, which indicated that the Convention was not intended to be self-executing. The court denied enforcement of the arbitration agreement.

In contrast, the U.S. Court of Appeals for the Ninth Circuit, which oversees states like California, ruled in CLMS Management Services Ltd v. Amwins Brokerage of Georgia (2021)⁵ that the Convention was self-executing. According to the court, Article II(3) specifically directs the courts to enforce arbitration agreements and it leaves no room for Congress to determine when not to enforce those agreements. While the court acknowledged the existence of the Federal Arbitration Act, it found no evidence that the Convention’s drafters believed Article II(3) specifically was not self-executing. The arbitration agreement was enforced in that case.

Other courts have adopted one of these two positions in recent years, leading to contradictory rulings throughout the United States. Recently, a New York federal court ruled in Certain Underwriters at Lloyds v. 3131 Veterans Blvd LLC (2023)⁶ that the Convention was not self-executing, reasoning that it was bound by the Second Circuit’s precedent in Stephens. Two months earlier however, the Court of Appeals for the First Circuit, which oversees states like Massachusetts and Puerto Rico, ruled in Green Enterprises, LLC v. Hiscox Syndicates Limited at Lloyd’s of London (2023)⁷ that Article II(3) is self-executing, relying heavily on the Ninth Circuit’s opinion in CLMS. The court notably brushed off the Stephens decision, finding that it failed to address the text of Article II(3).

Implications
Disagreements among courts like this are usually resolved by the U.S. Supreme Court, but it is difficult to predict when the Court will take up the issue. Regardless, any resolution will have significant implications for the Convention and its place in the U.S. legal framework. If the Convention is declared self-executing, courts will be bound to apply it, meaning arbitration agreements subject to the Convention will generally be enforceable in all parts of the United States. This would certainly strengthen the authority of the Convention in the U.S. legal framework and bolster the use of arbitration as a mechanism for resolving disputes.

If the Convention is declared non-self-executing however, it will carry far less weight. In certain scenarios, e.g., insurance disputes, courts will likely be bound by the law of the individual state, even if those laws prohibit arbitration. This poses significant risk of placing the United States in violation of the Convention’s mandate, which still applies to the United States as a whole even if the Convention is not self-executing.

While it is entirely unclear as of now which position will ultimately prevail, both sides would be wise to consider alternative arguments in their favor. The benefit to these alternatives is that they avoid the self-executing problem all together. Supporters of the Convention could argue that the McCarran-Ferguson Act is solely focused on domestic matters and was not intended to preempt treaties executed with foreign governments. A federal court in Virginia recently took this position in Keller North American, Inc. et al v. Certain Underwriters at Lloyd’s of London (2023),⁸ notably on the same day the New York court decided Veterans Blvd (above).

On the other hand, skeptics of arbitration could argue that the McCarran-Ferguson Act gives state’s the authority to decide whether insurance disputes are “a subject matter capable of settlement by arbitration,” which is provided for in Article II(1) of the Convention. (See text above.) This way, states have flexibility to decide whether arbitration is permissible within the bounds of the Convention.

Click here to read the article as featured on Lexology’s website.

¹ 15 U.S.C. § 1011-1015.
² 330 U.N.T.S. 3 (entered into force on June 7, 1959).
³ U.S. Constitution, art. IV, paragraph 2.
⁴ 66 F.3d 41 (2nd Cir. 1995).
⁵ 8 F.4th 1007 (9th Cir. 2021).
⁶ 2023 WL 5237514 (S.D.N.Y. August 15, 2023).
⁷ 68 F.4th 662 (1st Cir. 2023).
⁸ 2023 WL 5225983 (E.D. Va August 15 2023)