I- Summary of the case.
The recent case of Molecular Dynamics Ltd. v. Spectrum Dynamics Medical Ltd. (2nd Cir., 2025) brings back to the forefront the debate over the scope of judicial review of foreign awards under the 1958 New York Convention. Can US courts set aside an award rendered in another country if the parties agree to do so? The court’s answer: no. This article explains the facts of the case, the decision, its relationship to US doctrine, and what it means for the practice of international commercial arbitration.
II- The facts: a clause with extraterritorial ambition
The dispute arose from a joint venture in the medical technology sector between Molecular Dynamics and Biosensors (later acquired by Spectrum Dynamics). The License Agreement contained:
- Arbitration clause: arbitration administered under Swiss rules, seated in Geneva, Switzerland, language English.
- Applicable law: New York.
- Exclusive jurisdiction: New York courts for “matters related to arbitration.”
After several years of arbitration in Geneva, the tribunal issued two awards (partial and final) in favor of Spectrum Dynamics, awarding USD 7.5 million plus costs. The losing party, Molecular Dynamics, commenced proceedings in the US to set aside the awards, invoking the exclusive jurisdiction clause.
III- The decision of the Second Circuit Court of Appeals
The appeals court upheld the district court’s conclusion:
- Federal courts lack jurisdiction to hear actions to set aside awards rendered abroad.
- Legal basis:
- Chapter 2 of the Federal Arbitration Act (FAA) (9 U.S.C. § 203) only confers jurisdiction over actions “falling under the Convention,” which includes recognition and enforcement, but not annulment outside the seat.
- The New York Convention ( V(1)(e)) recognizes that only “the competent authority of the country in which, or under whose law, the award was made” may set aside an award.
- Agreeing to exclusive jurisdiction in the US does not create jurisdiction to set aside foreign awards: the autonomy of the parties cannot expand the limits of the treaty or the FAA.
The judgment begins by defining the problem, which in this case is a question of jurisdiction or subject matter jurisdiction. It refers to the theory established by previous rulings of the courts of justice of the United States of America on similar cases, distinguishing between two concepts: primary jurisdiction, which is the power of the courts of the place where the award was rendered to hear matters related to it; and secondary jurisdiction, which corresponds to the courts of the place where the arbitral award is sought to be enforced, focusing on issues of recognition and enforcement. In the Restatement (Third) of the U.S. Law of Int’l Commercial Arbitration 1.3, it is stated: “The country in which or under whose arbitration law an award has been made is considered to have primary jurisdiction over the arbitral award. This country is essentially the country of the legal seat of the arbitration, and we will see later why it is so important to define the seat. Conversely, all other countries that are signatories to the New York Convention are secondary jurisdictions, since in all these countries it is possible to proceed with the recognition and enforcement of the arbitral award.
This distinction is relevant because, according to the interpretation of the US courts, the country of the seat of arbitration has primary jurisdiction and not only has the power to define the rules of validity of the award, but it is also this country that has the necessary jurisdiction to define the procedural mechanisms and grounds for an action to set aside an arbitral award.
In summary, in this case: the US is a secondary jurisdiction with respect to a Swiss award, and its only role is to decide whether to recognize or enforce it.
Here it is important to distinguish between two concepts that are different but can be confused: on the one hand, the annulment of an arbitral award and, on the other, the failure to recognize and enforce the award. According to this ruling, an action for annulment can only be brought in the country that has primary jurisdiction, i.e., the country where the arbitration took place.
The mechanism available to the other signatory countries of the New York Convention, which are countries with secondary jurisdiction, is to decide on the recognition and enforcement of that arbitral award. We are therefore talking about two dimensions of the ineffectiveness of an award: on the one hand, annulment or action for annulment, which is governed by the rules of the country with primary jurisdiction, i.e., the country where the arbitration took place, and, on the other hand, recognition and enforcement or refusal of recognition and enforcement, which is decided in the country with secondary jurisdiction where recognition and enforcement of the award is sought and where the applicable rules must be those of the New York Convention.
This distinction is also important because it allows us to clearly understand when the losing party can take action against the award. In the action (or appeal) for annulment, the losing party has the initiative, as it can initiate the action (or appeal) for annulment under the terms provided by the arbitration legislation of the country of the seat of arbitration that has primary jurisdiction. In the proceedings for recognition and enforcement of the award, the losing party is in a reactive position because it is only when the winning party seeks recognition and subsequent enforcement of the award that the losing party may raise an objection under the New York Convention to prevent recognition and enforcement of the award in the country with secondary jurisdiction.
The reasoning contained in this resolution leads us to a conclusion that is entirely reasonable and appropriate, namely that the losing party does not have the possibility of engaging in forum shopping to find a jurisdiction. It is clear, then, that from that reactive position, the losing party would have to wait for the party that prevailed in the arbitration to initiate its action for recognition and enforcement of the award, granting that particular country secondary jurisdiction to hear the opposition that the losing party could bring against the order in order to prevent it from being enforced, but always within the grounds specifically established in the New York Convention.
This ruling incorporates a relevant element to limit the jurisdiction of US federal courts, preventing them from hearing actions for annulment issued in foreign jurisdictions. The reasoning used in the ruling is based on the constitutional principle that federal courts are courts of limited jurisdiction and can only hear matters expressly conferred upon them by the Constitution or by a specific law. The ruling therefore concludes that federal courts do not have jurisdiction to rule on actions for annulment of arbitral awards issued in countries other than the one where enforcement of the award is sought.
In addition, the ruling examines the New York Convention to determine whether this rule grants US federal courts jurisdiction to hear actions for annulment. After analyzing its content, the Court considers that states with secondary jurisdiction are only authorized by the Convention to resolve issues related to the recognition and enforcement of awards, but not in relation to actions for annulment.
Thus, by establishing that the Convention does not grant jurisdiction over these cases to countries with secondary jurisdiction, and combining this criterion with the concept of limited jurisdiction, it is concluded that US federal courts lack jurisdiction to hear actions to set aside arbitral awards rendered abroad.
This reasoning is important in the case at hand because, as noted in the background, the arbitration clause granted by an agreement of the New York courts would have exclusive jurisdiction over “matters related to arbitration,” and the reasoning we have outlined in the previous paragraph allows the Court to link it to the case law that states that jurisdiction, by reason of subject matter, cannot be conferred by agreement of the parties because it comes exclusively from the law, concluding that the clause agreed upon by the parties did not confer jurisdiction on the federal courts.
IV- Lessons from the ruling for international arbitration
In my opinion, the Second Circuit Court of Appeals’ ruling leaves the following lessons for practitioners of international arbitration:
- Distinction between Primary and Secondary Jurisdiction
- Primary jurisdiction: the country where the arbitration is seated (or whose procedural law was applied). It has the full power to set aside the award under its domestic law.
- Secondary jurisdiction: any other contracting state. Its courts cannot set aside the award; they can only refuse recognition or enforcement if one of the grounds in Article V of the Convention is established.
- Impact on the enforcement of awards under the New York Convention
- Foreign awards are resistant to collateral attacks in the US: The losing party cannot bring an independent action for annulment before US courts if the award was made in another country.
- The only opportunity to challenge an award in secondary jurisdictions is defensive, when recognition is sought.
- This reinforces the portability and stability of the award, avoiding parallel forums for its invalidation.
- Limitations on Autonomy of Will
- Even if the parties agree to “exclusive jurisdiction” in New York for matters related to arbitration, they cannot extend the jurisdiction of US courts beyond what the Convention and the FAA allow.
- Contractual autonomy cannot create federal jurisdiction if the law and the treaty do not recognize it.
V- Conclusions
The ruling reaffirms a widely accepted idea in arbitration practice: the choice of the seat of arbitration is decisive. This decision defines the lex arbitri, i.e., the law that will govern the arbitration, and establishes which court will have jurisdiction to hear a possible annulment of the award, including the applicable procedure and the grounds for nullity valid in that jurisdiction.
In particular, regarding the possibility of applying to the courts of the United States to seek annulment of an award, the decision leaves two important lessons: one permissive and the other restrictive.
On the one hand, if the option of challenging the award before US courts is desired, the seat of arbitration must be in the United States. Otherwise, the only avenue available in that country will be to resist its enforcement based on the limited grounds outlined in Article V of the New York Convention (such as lack of capacity, violation of due process, excess of jurisdiction, procedural irregularities, award set aside at the seat, or violation of public policy).
On the other hand, if the aim is to prevent US courts from setting aside the award on grounds other than those provided for in the New York Convention, it would be most reasonable to set the seat of arbitration outside the United States.
This point is fundamental, since the seat of arbitration is a legal concept, not a physical or geographical one. In practice, this means that even if the hearings are held in the United States and US substantive law applies, if the legal seat of arbitration is in another country, US courts will not have jurisdiction to hear actions for annulment based on grounds other than those provided for in the New York Convention.