CIVIL PROCEDURE - ABSENCE OF BINDING ARBITRATION AGREEMENT WARRANTS DENIAL ON MERITS RATHER THAN DISMISSAL FOR LACK OF JURISDICTION - AL-QARQANI V. CHEVRON CORP., 8 F.4TH 1018 (9TH CIR. 2021).

• Author: Clark, Mitchell

The New York Convention (the Convention) and its implementing legislation, which govern the recognition and enforcement of foreign arbitral awards, provide that courts must confirm arbitral awards unless they find grounds for refusal as specified in the Convention. (1) Article V of the Convention states that the existence of a binding arbitration agreement is a prerequisite to enforcing an award under its terms. (2) In Al-Qarqani v. Chevron Corp. (3), the Ninth Circuit considered whether the Convention's requirement that a binding arbitration agreement exists is properly categorized as a jurisdictional or a merit-based question. (4) The Court affirmed the dismissal of the plaintiffs' petition to enforce the arbitral award, but concluded the district court "incorrectly attached a jurisdictional label to what should have been a decision on the merits." (5)

In 1933, the Saudi Arabian government and the Standard Oil Company of California (SOCAL), an affiliate of what would later become Chevron Corporation (Chevron), entered into a land concession agreement for oil exploration and extraction. (6) Article 31 of the concession agreement provided for an arbitration agreement between SOCAL and the Saudi Arabian government. (7) Later that year, SOCAL assigned its rights under the concession agreement to a wholly owned subsidiary that would later become Arabian American Oil Company (Aramco). (8) Three years later, SOCAL surrendered its majority ownership interest in the subsidiary, and, by 1948, SOCAL was a minority shareholder, owning only thirty percent of Aramco. (9) In 1949, the Saudi Arabian government transferred some of the land subject to the 1933 concession agreement to a state official named Khalid Abu Al-Waleed Al-Hood Al-Qarqani, who then leased that land to Aramco. (10) While the 1949 deed containing the lease agreement specifically referenced certain provisions of the 1933 concession agreement, it made no mention of the arbitration agreement located in article 31 of the 1933 concession agreement. (11)

In 2014, several of Al-Qarqani's heirs commenced arbitration against Chevron before the International Arbitration Center in Cairo, Egypt, claiming billions of dollar in rent due under the 1949 lease agreement. (12) Chevron objected, arguing that (1) it was not a party to the relevant contracts, (2) there was no valid agreement to arbitrate, and (3) the arbitration clause in the 1933 concession agreement upon which the heirs relied did not authorize arbitration to take place in Cairo. (13) Despite these objections, arbitration proceeded, and, after dismissal by the initial arbitral panel, the panel was reformulated, the dismissal was withdrawn, and Chevron was ordered to pay the heirs $18 billion. (14)

The heirs then petitioned to enforce the award against both Chevron Corporation and Chevron U.S.A. in the Northern District of California, invoking the New York Convention. (15) The district court dismissed the petition for lack of subject-matter jurisdiction, reasoning that there must first be a valid arbitration agreement under the terms of the Convention in order to fall under the Convention's jurisdiction, and there was no valid agreement here because the parties before the court were not bound by the agreement and numerous irregularities tainted the arbitral process. (16) This Court affirmed the result although on different procedural grounds, stating that the heir's enforcement was properly denied on the merits because the Convention's requirement that a binding arbitration agreement exist is not jurisdictional as it is not contained in a jurisdiction-granting provision. (17)

Two opposing views have been espoused by circuit courts regarding the procedural classification of the Convention's requirement that a valid arbitration agreement must exist in order to enforce an arbitral award. (18) The jurisdictional approach, adopted by the Eleventh Circuit, holds that the party seeking enforcement must first demonstrate that a written arbitration agreement falling under the Convention existed in order to establish the court's subject matter jurisdiction over the case. (19) The merit-based approach, adopted by the Second Circuit in response, argues that the existence of a written arbitration agreement is a merit-based question that does not affect subject matter jurisdiction. (20)

This difference of opinion is the result of courts' interpretations of what they view as the Convention's jurisdiction-granting provisions. (21) The Eleventh Circuit accords great weight to the "mandatory" nature of Article IV's language, treating it as a threshold question that establishes a court's jurisdiction. (22) On the other hand, the Second Circuit has relied on [section] 203 of the Convention's implementing legislation as the operative jurisdictional provision with [section] 202 providing further clarification by defining relevant terms. (23)

The Supreme Court commented on the proper treatment of mandatory prescriptions in the procedural context, stating that mandatory status does not necessarily create a jurisdictional label. (24) Additionally, the Supreme Court strictly interpreted threshold limitations on a statute's scope, treating any such limitation as non-jurisdictional when "Congress does not rank a statutory limitation on coverage as jurisdictional." (25) Three factors guide a court's analysis of congressional ranking: (1) whether the provision is "clearly labeled jurisdictional," (2) whether the provision is "located in a jurisdiction-granting provision," and (3) whether some "other reasons necessitate[ ] that the provision be construed as jurisdictional." (26)

In Al-Qarqani v. Chevron Corp., the Court began by acknowledging the split of authority, but ultimately sided with the Second Circuit's position that mandatory prescriptions do not automatically create a jurisdictional label. (27) Therefore, strictly construing limitations on statutory scope, the Court applied the three-factor analysis to establish that the Convention's prerequisite requirements do not qualify as a congressional limitation on jurisdiction. (28) The Court then analyzed its jurisdiction over the heirs' complaint under what it understood to be the proper jurisdictional provision in [section] 203. (29) The Court drew an analogy between [section] 203 and [section] 1331's grant of federal question jurisdiction to support its assertion that the two provisions should be read similarly. (30) Thus, the Court held that the proper standard to assess jurisdiction over a foreign arbitral award is whether the petitioner has made a nonfrivolous claim that the award is covered by the Convention. (31) Concluding that the heirs cleared this "low bar," the Court assumed subject matter jurisdiction and held that because the heirs failed to establish that a binding arbitration agreement existed, their petition for enforcement should have been denied on the merits rather than dismissed for lack of subject matter jurisdiction. (32)

Joining the Second Circuit, this Court aptly espoused a common sense understanding of congressional limitations on a court's jurisdiction. (33) Such an understanding, encapsulated by the three-factor analysis articulated in Leeson, is consistent with established Supreme Court precedent, rather than engaging in ad hoc statutory interpretation motivated by whatever "mandatory language" is deemed relevant to the case at bar. (34) In the process, the Court reinforced long-standing principles of statutory interpretation regarding the treatment of mandatory language. (35)

To read the Convention's prerequisites as creating additional jurisdictional hurdles under [section] 203 would create precisely the kind of "drive-by jurisdictional rulings" the Supreme Court has expressly condemned and sought to curtail. (36) Of course, one could try to understand the prerequisites as consistent with [section] 203's grant of jurisdiction. (37) The Court, however, was keen to anticipate this response, guarding against this interpretation by comparing language used in [section][section] 202-03 to well established federal question jurisprudence. (38)

The Court's decision in Al-Qarqani will likely have a marked impact on other jurisdictions deciding similar questions under the Convention as it now creates a two-one majority opinion among split circuits. (39) The Court's opinion is in line with recent appellate decisions, evidencing a trend toward disfavoring the treatment of the Convention's prerequisites as jurisdictional questions and consequently providing clearer guidance for courts the next time this issue arises. (40) Furthermore, this decision is important even among circuits in agreement with the Ninth Circuit because it provides a far less murky treatment of the issues than the Second Circuit. (41)

In Al-Qarqani v. Chevron Corp., the Ninth Circuit Court of Appeals considered whether to treat the New York Convention's prerequisite that a binding arbitration agreement exists as either a jurisdictional or a merit-based issue. The Court wisely chose to side with the Second Circuit on the matter, rejecting the Eleventh Circuit's reasoning and conclusion. Ultimately, the Court decided the case on its merits, holding that the lack of a binding arbitration agreement warrants denial rather than dismissal for want of subject matter jurisdiction.

Mitchell Clark

(1.) See Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 9 U.S.C. [section] 207 (outlining procedure for confirmation of arbitral award). Within three years after an arbitral award is made, "any party to the arbitration may apply to any court having jurisdiction under this chapter for an order confirming the award as against any other party to the arbitration." Id. See also Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15 (1974) (explaining New York Convention's overarching purpose). The United Nations Convention on the Recognition and Enforcement of Foreign...