Federal appeals court addresses interplay of New York Convention and state law

The United States Court of Appeals for the First Circuit has held that the New York Convention can limit the applicability of state law, even in the context of insurance claims.

The McCarran-Ferguson Act, Pub. L. No. 79-15, 59 Stat. 33 (1945), codified at 15 U.S.C. §§ 1011-1015, generally provides that state law should preempt any federal statute in the context of insurance regulation. In Green Enterprises, LLC v. Hiscox Syndicates Limited at Lloyd's of London, 68 F4th 662, (1st Cir. May 19, 2023), the First Circuit had to determine whether the McCarran-Ferguson Act’s “reverse preemption” – which, in this case, would have required the court to give effect to a Puerto Rico law prohibiting arbitration of insurance disputes – overrides the United States’ obligations under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3 (the New York Convention). The court found that it does not, that the New York Convention preempted the Puerto Rico law, and that the dispute before it was arbitrable despite Puerto Rico law that provided otherwise.

This case arose from a lawsuit initiated by Green Enterprises, LLC, a Puerto Rican recycling company. Green Enterprises had filed an insurance claim after a fire destroyed one of its plants. That claim was denied by the company’s insurer, prompting Green Enterprises to initiate a lawsuit against the insurer, which in turn moved to compel arbitration.

Central to the insurer’s claim that the dispute was arbitrable was whether Article 11.190 of the Puerto Rican Insurance Code, which “prohibits and declares void any agreement that deprives the insured of right of access to the courts for determination of his rights under an insurance policy in the event of dispute,” applied. Green Enterprises, LLC, 68 F4th at 665 (internal alterations omitted). If it did, the case would be required to be heard in court; if not, it would be arbitrable.

Under the McCarran-Ferguson Act, Congressional acts cannot be construed to “invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.” Id. As a result, the First Circuit explained that Article 11.190 of the Puerto Rican Insurance Code “would reverse preempt the [Federal Arbitration Act’s (the FAA)] general mandate to enforce arbitration agreements.” Id. at 666.

However, the insurer did not rely on the FAA as the basis for its motion to compel arbitration. Instead, it relied on the New York Convention – the multilateral treaty that facilitates recognition and enforcement of foreign arbitral awards in signatory countries such as the United States. The parties agreed that the McCarran-Ferguson Act did not preempt the New York Convention, because it is a treaty rather than a Congressional act. So the remaining issue was whether, and to what extent, the New York Convention was self-executing (ie, directly enforceable) and thus would preempt the application of Article 11.190 in the lawsuit, or whether it relied upon the FAA, Chapter 2 of which was designed to implement the New York Convention in the United States.

The First Circuit engaged in a detailed analysis on the meaning of self-executing treaties under prior US Supreme Court precedent. Specifically, in Medellín v. Texas, 552 U.S. 491 (2008) the Supreme Court explained that a treaty is self-executing when it is a “directive to domestic courts.” See id. at 667 (quoting Medellín, 552 U.S. at 508). Based on this analysis, the First Circuit relied on a prior decision of the Ninth Circuit, in which that court had concluded that Article II(3) of the New York Convention provides a clear “directive to domestic courts” because it “mandates that domestic courts ‘shall’ enforce arbitration agreements, and ‘leaves no discretion to the political branches of the federal government whether to make enforceable the agreement-enforcing rule it proscribes.’” Id. at 667 (quoting CLMS Mgmt. Servs. Ltd. P'ship v. Amwins Brokerage of Ga., LLC, 8 F.4th 1007, 1013 (9th Cir. 2021)).

The First Circuit followed the Ninth Circuit’s analysis, concluding that Article II(3) was, itself, self-executing. The Court of Appeals went on to reject Green Enterprises’ position that unless every provision of the New York Convention was self-executing, the treaty as a whole should be considered non-self-executing. In so doing, the First Circuit joined the Fifth and Ninth Circuits, which have both concluded that treaties may contain both self-executing and non-self-executing provisions.

The First Circuit also rejected Green Enterprises’ argument that the court should refuse to enforce the arbitration agreement pursuant to Article II(3) of the New York Convention because this agreement should be considered “null and void, inoperative or incapable of being performed” under public policy grounds. Id. at 676. The Court of Appeals explained that not only is that argument contrary to its own prior precedent – which found the application of this clause limited only to situations like fraud, mistake, duress, and waiver that could be applied neutrally on an international scale – but any public policy analysis would weigh in favor of permitting performance of the agreement as a result of the emphatic federal policy in favor of arbitral dispute resolution.

This decision not only brings the First Circuit in line with the Fifth and Ninth Circuits with respect to the interpretation of self-executing and non-self-executing treaties, but provides important clarity on the scope and role of the New York Convention – a treaty that is central to arbitration enforcement matters.