Inability to Pay Does Not Stop International Arbitration
The Eleventh Circuit Court of Appeals recently addressed an issue of first impression – whether a party can prevent an international arbitration from going forward by arguing high costs keep him from effectively vindicating his rights. The Court noted that existing precedent under the Federal Arbitration Act and New York Convention suggest that such a public policy defense can be raised at the confirmation stage but not at the enforcement stage. Recognizing that such a defense would likely fall within the “effective vindication doctrine” available in domestic arbitration cases under Chapter 1 of the FAA, the Court noted the doctrine had never been invoked “to invalidate an arbitration agreement in the context of a New York Convention case.”
The facts are straightforward. Willman Suazo, a Nicaraguan seaman, signed an employment agreement with NCL that provided any dispute would be resolved exclusively by binding arbitration pursuant to the New York Convention in the seaman’s country of origin (Nicaragua) or, if unavailable, the Bahamas. The Agreement did not contain a costs provision but incorporated a collective bargaining agreement that provided that NCL would pay the costs of the arbitration, including forum and arbitrator fees, if the seafarer was represented by the Union but otherwise was silent as to who would pay costs if the seaman opted out and selected his own counsel. The rules of the administering institution, the International Centre for Dispute Resolution, provided that each party would bear half of the costs pending the arbitrator’s ultimate costs ruling.
Following his injury, Suazo retained his own counsel and filed suit in Miami-Dade County circuit court. NCL removed the case to federal district court pursuant to Chapter 2 of the FAA and then moved to compel arbitration. In response, Suazo submitting an affidavit stating he could not bear the expense of arbitration. The district court granted the motion to compel arbitration reasoning that Suazo’s public policy defense could not be considered at the arbitration enforcement stage pursuant to the New York Convention. Suazo appealed.
On appeal, the Court held that the four-part test to determine whether an international arbitration should be enforced was met: the agreement was “in writing,” provided for arbitration in a territory of a signatory to the New York Convention, arose from a commercial relationship, and at least one party was not an American Citizen (or the commercial relationship related to a foreign state). Next, the Court ruled that the only viable challenges to an international arbitration were the defenses set forth in Article II of the New York Convention: that the agreement is null and void, inoperative or incapable of being performed.
The Court noted that the precise issue of whether a “cost-based effective vindication defense” falls within the “incapable of being performed” defense had not been previously adjudicated. However, the Court held that Suazo failed to prove his inability to pay and compelled arbitration. Suazo’s election not to proceed with union-appointed counsel at NCL’s expense also undermined his effective vindication defense.
This case highlights the different standards that apply to compel domestic and international arbitration. It also leaves open the possibility as to whether a party can effectively avoid international arbitration with substantiated evidence establishing the inability to pay rendering the arbitration agreement incapable of performance. The case is Suazo v. NCL (Bahamas), Ltd., No. 14–15351 (11th Cir. May 10, 2016). The opinion is here.
If you have questions or issues regarding this post, please contact me. Please look for my post next Wednesday and follow me on twitter.
Ava Borrasso is the principal of Ava J Borrasso, P.A., a Miami-based law firm that concentrates on business and international litigation and arbitration. She also serves as an Arbitrator.
