Second Circuit Finds Provision of New York Convention Self-Executing

 

“Hurricane Ida Makes Landfall in Louisiana”

by NASA’s Marshall Space Flight Center

is licensed under CC BY-NC 2.0

The Constitution’s Supremacy Clause states that “all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land,” but the U.S. Supreme Court has long distinguished between self-executing and non-self-executing treaties. Self-executing treaty provisions are effective as federal law without implementing legislation. Non-self-executing treaty provisions are not and therefore must be implemented by an act of Congress to have domestic legal effect. In an important decision for the arbitration of international insurance disputes, the Second Circuit recently held that Article II(3) of the New York Convention, requiring U.S. courts to enforce agreements to arbitrate, is self-executing.

Why does this matter for insurance disputes? Because the McCarran-Ferguson Act (MFA) provides that “[n]o Act of Congress shall 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.” If Article II(3) is not self-executing, it would be effective only through federal implementing legislation—here, the Federal Arbitration Act (FAA)—and thus “reverse preempted” by the MFA. If, on the other hand, Article II(3) is self-executing, it would be effective without regard to the FAA and would not be reverse preempted by the MFA because the Convention is not an “Act of Congress.”

In a prior decision 30 years ago, the Second Circuit held that the New York Convention was not self-executing because it had been implemented by the FAA. But in Certain Underwriters at Lloyds, London v. 3131 Veterans Blvd LLC, the court of appeals found that its prior decision had been superseded by the U.S. Supreme Court’s decision in Medellín v. Texas (2008). Writing for a unanimous panel, Judge Gerard E. Lynch applied Medellín’s factors for self-execution and held that Article II(3) is indeed self-executing and therefore not covered by the MFA. As a result, the court held, Article II(3) required enforcement of the arbitration clauses in several insurance contracts notwithstanding a Louisiana law forbidding arbitration clauses in insurance contracts.

Hurricane Ida

The two contested policies in this case were issued by surplus lines insurers at Lloyds, London. They contained identical provisions choosing New York law to govern the policies and providing that “[a]ll matters … in relation to this insurance” would be settled exclusively by arbitration in New York.

Surplus lines insurers cover risks that are otherwise uninsurable, such as the costs of hurricane damage in high-risk areas like Louisiana. The two policies at issue covered properties in Louisiana that were damaged by Hurricane Ida in 2021. The plaintiffs were two separate companies that bought these properties after the hurricane, along with the rights of the original insureds under the policies. Thinking the insurance carriers’ offers of compensation too low, the companies sued in Louisiana state court.

Louisiana insurance law is, as the Second Circuit put it, “unfriendly to arbitration clauses.” By statute, Louisiana provides that “[n]o insurance contract delivered or issued for delivery in this state … shall contain any condition, stipulation, or agreement … [d]epriving the courts of this state of the jurisdiction or venue of action against the insurer.”

The insurance carriers filed petitions in the Southern District of New York seeking to compel arbitration under the New York Convention, to which both the United Kingdom and the United States are parties. Article II(3) of the Convention provides:

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 district courts in the two cases denied the petitions to compel arbitration, reasoning that they were bound by the Second Circuit’s decision in Stephens v. American International Insurance Co. (1995), holding that the New York Convention is non-self-executing and therefore reverse preempted by the MFA.

The Impact of Medellín

Stephens says almost nothing about self-execution. The panel in that case seems to have assumed that the New York Convention was non-self-executing simply because Congress passed Chapter II of the FAA to implement it. But in Medellín, Judge Lynch noted, “the Supreme Court did not confine its analysis to the narrow question of whether Congress enacted legislation purporting to implement the treaty at issue.”

Instead, the Court identified several hallmarks of a “self-executing” treaty provision within a larger treaty—namely: (1) that it provides “a directive to domestic courts” of the contracting nation; (2) that it “provide[s] that the United States ‘shall’ or ‘must’” take a particular action; and (3) that the “text, background, negotiating and drafting history” regarding the provision indicate the Senate and/or the President’s intention, that the ratified treaty take “immediate legal effect in domestic courts.” (Citations omitted.)

After Medellín, both the First and Ninth Circuits had occasion to apply these factors to Article II(3) of the New York Convention, and both concluded that the provision was self-executing.

Judge Lynch agreed. The first two factors point clearly to self-execution. Article II(3) is a directive to the domestic courts of contracting states, and it says that they “shall” refer parties to arbitration. The companies argued that other provisions of the New York Convention give the United States discretion about how to implement the treaty. But as Judge Lynch noted—citing among other things Restatement (Fourth) of Foreign Relations Law § 310 cmt. b—treaties can have both self-executing and non-self-executing provisions. That Congress may limit the scope of the Convention as a whole does not undermine the self-executing character of Article II(3) specifically.

Applying the third Medellín factor was more complicated. President Johnson and Senator Kearney had said that changes to the FAA would be required before the United States could join the New York Convention. But here the court leaned again on the provision-by-provision approach. That some changes would be needed did not establish that Article II(3) specifically was self-executing.

The Supreme Court’s decision in Medellín is often considered a defeat for self-executing treaties, holding as it did that a provision of the U.N. Charter on enforcing ICJ judgments was non-self-executing. But the Second Circuit’s decision in Certain Underwriters tests the conventional wisdom. Judge Lynch used Medellín to revisit a question of self-execution that seemed settled in the Second Circuit. He employed a provision-by-provision approach to focus narrowly on the language of Article II(3), sidelining other provisions of a more discretionary character. Having found a clear direction to domestic courts and mandatory language in Article II(3) (the first two factors), he presumed that this provision is self-executing and required those challenging the proposition to find legislative history to prove the opposite—that Article II(3), specifically, is not self-executing.

The Implications for Insurance Disputes

As discussed above, because Article II(3)’s obligation to enforce arbitration clauses is self-executing, it is not reverse preempted by the MFA. The MFA states that no “Act of Congress” shall supersede state laws regulating insurance. Article II(3) is not an act of Congress and does not depend on one to give it domestic legal effect. With the MFA out of the way, the ordinary rules of treaty supremacy apply, and the New York Convention’s requirement to enforce arbitration agreements prevails over contrary state law.

To be clear, Louisiana state law allowing parties to ignore arbitration agreements can be ignored only when the New York Convention applies, which generally means when the insurer is a foreign company. But many large insurance companies are located outside the United States, and Certain Underwriters assures them that their arbitration clauses will be enforceable not just in the First and Ninth Circuits, but in the Second as well.