Agreement to Submit Disputes to Arbitration before Non-Existent European Forum Was Enforceable to Require Arbitration in New Jersey

The U.S. Court of Appeals for the Third Circuit held that an arbitration clause, in which the parties agreed to submit their disputes to arbitration before a European tribunal that did not exist, was enforceable, and a federal court in New Jersey could require a foreign party who was subject to its jurisdiction to arbitrate its claims in New Jersey. Control Screening LLC v. Technological Application and Production Company (Tecapro). HCMC-Vietnam, No. 11-2896 (3d Cir. July 26, 2012).

The contract in question—entered into between Control Screening, a New Jersey company, and Tecapro, a Vietnamese entity—concerned the purchase by Tecapro of 28 X-ray machines. The agreement contained the following dispute resolution provision:

In the event all disputes are not resolved, the disputes shall be settled at International Arbitration Center of European countries for claim in the suing party’s country under the rule of the Center.

When a dispute arose, Control Screening filed an action in the U.S. District Court for the District of New Jersey, seeking to compel Tecapro to arbitrate its claims in New Jersey. Tecapro resisted the request. The district court granted Control Screening’s request and ordered Tecapro to submit its claims to arbitration in New Jersey. Tecapro appealed to the Third Circuit.

The Third Circuit observed that the parties’ chosen arbitration forum—the “International Arbitration Center of European countries”—“does not exist.” As explained by the court, Article II(3) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides that,

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.

Citing Rosgoscirc v. Circus Show Corp., No. 92-Civ.-8498, 1993 WL 277333, at *4 (S.D.N.Y. July 16, 1993, the Third Circuit reasoned that, “Since the parties mistakenly designated an arbitration forum that does not exist, the forum selection provision of the arbitration agreement is ‘null and void’ under Article II(3).” However, the court determined that the arbitration forum selection provision was severable from the remainder of the arbitration clause, in part, because “both parties … expressed a willingness to arbitrate their dispute notwithstanding the uncertain meaning of the forum selection provision.”

Because the forum selection provision was void, the court treated the otherwise valid arbitration agreement as if it did not select a forum. The court noted that, pursuant to Section 206 of the Federal Arbitration Act, a district court has the authority to “direct that arbitration be held in accordance with the agreement at any place therein provided for, whether that place is within or without the United States.” Citing Jain v. de Méré, 51 F. 3d 686 (7th Cir. 1995), the Third Circuit wrote that “when an arbitration agreement lacks a term specifying location, a district court may compel arbitration only within its district.” Accordingly, the court held that the New Jersey district court did not err in compelling Tecapro—who the Third Circuit independently confirmed was subject to jurisdiction in New Jersey—to arbitrate its claims in that state.

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