Beware of 9 U.S.C. Section 9: It Provides For Judicial Confirmation Of Arbitral Awards Only Upon Consent Of The Parties
Swissmex-Rapid S.A. de C.V. and SP Systems, LLC arbitrated a commercial dispute concerning backpack agricultural sprayers manufactured by Swissmex, a Mexican corporation. The arbitration resulted in a net award in favor of Swissmex in the amount of of $1,424,039, which award was confirmed by the trial court. SP appealed, arguing “that the parties did not agree in their arbitration agreement that the award could be judicially confirmed, and therefore the trial court erred in confirming the award.” Swissmex-Rapid S.A. de C.V. v. SP Systems, LLC, Case No. B238054 (2nd Dist. Div. 3 Dec. 28, 2012) (Klein, J., author) (published).
Why, you may well ask, is this even a problem? After all, the trial court has statutory jurisdiction to enforce an arbitration agreement entered into in California, and that includes entering judgment on an award under the agreement. Code of Civil Procedure section 1293. Alas, the Federal Arbitration Act (FAA) works differently. Because this matter involved international commerce, it implicated the FAA. Unlike the California Arbitration Act (CAA), the FAA provides for judicial confirmation of arbitral awards only upon consent of the parties.
Thus, the questions presented in Swissmex are whether the FAA rule, requiring consent of the parties for judicial enforcement of an arbitral award, preempts California law, and if so, whether the parties had in fact consented to judicial confirmation of the arbitral award.
First, the Court of Appeal held that Section 9 of the FAA is procedural and therefore inapplicable to state court proceedings (the procedural rule would only apply in federal court). The fundamental substantive rule of the FAA is that courts are to enforce arbitration agreements, and that fundamental substantive rule preempts state law. But purely procedural aspects of the FAA, which apply in federal court, do not preempt. In footnote 6 of the Swissmex opinion, the Court of Appeal notes that “various other courts have characterized section 9 of the FAA as ‘substantive.’ . . . . However, those decisions are not binding on this court.” Given this footnote, it would seem prudent to cover the bases and consider the consequences if Section 9 of the FAA is viewed as substantive and preemptive of state law, rather than as merely procedural. That is exactly what the Court did next.
Second, the Court of Appeal considered the possibility that Section 9 of the FAA was applicable, and concluded the result would be the same, because here the parties agreed to submit to the Commercial Arbitration rules of the American Arbitration Association. Under Rule R-48(c) the parties are deemed to consent to judicial confirmation of an award. Idea Nuova, Inc. v. GM Licensing Group, Inc., 617 F.3d 177 (2d Cir. 2010) “is on point.”
That left just one last hurdle (or maybe pebble) to get over. The matter was administered by the International Centre for Dispute Resolution (ICDR) of the AAA. SP contended the arbitration was conducted in accordance with the AAA’s International Dispute Resolution Procedures, not the Commercial Arbitration Rules allowing for judicial enforcement of the arbitral award. The Court of Appeal resolved this last conundrum by focusing on the ICDR’s notification to the parties “that the matter would be ‘administered under the International Dispute Resolution Procedures . . . unless the parties agree otherwise.’” Here, the parties did “agree otherwise” by incorporating the Commercial Arbitration Rules. Thus, the matter could be administered by the ICDR, but arbitrated under the Commercial Arbitration Rules allowing for judicial enforcement of the arbitral award.
Presto! Judgment affirmed.
Drafting tip: If the arbitration is likely to be covered by the FAA, expressly provide that the arbitral award can be enforced in state or federal courts of competent jurisdiction.