HOW TO ENFORCE A FOREIGN ARBITRAL AWARD

US Supreme Court

Undisputed Legal | Process Service 

International arbitration is extensively utilized and is now an area of potential growth. This development is not least due to the fact that enforcing judgments under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards is quite straightforward. However, United States courts are careful about enforcing foreign awards where there are significant doubts about the award’s authenticity, especially refusing enforcement where questions and serious points of law arise

Many businesses include clauses in their contracts that allow for international arbitration as a way to mitigate risk in cross-border transactions. To resolve an issue, arbitration clauses are. mostly specified under neutral arbitration tribunals. These clauses enable arbitration before a tribunal and usually will use ICC rules or those of a similarly reputed arbitration organization affiliated with the American Arbitration Association or the London Court of International Arbitration.

[1.0] HOW DOES ARBITRATION UNDER THE NEW YORK CONVENTION WORK.

When companies choose international arbitration, they often select New York Convention arbitration since judgments issued by an international arbitral tribunal are enforceable across the globe. As to the significance of the terms of the New York Convention specifically, the treaty holds great value since it has been signed by 158 countries, including major trading nations.  It is thus enforced according to two major principles: [A.] an ‘agreement to arbitrate’ which includes an arbitration clause, and [B.] the final judgment nature of an arbitral award, undertaken with specific exceptions, against each contracting country.   Under the Federal Arbitration Act, the New York Convention has been put into United States law.

For arbitration under the auspices of the New York Convention, an authentic copy of the award is required to be submitted to the court and as long as that judgment is enforceable, it will be accepted by the courts. However, the losing party still stands a chance in US courts if it can establish a basis for non-recognition under Article V of the New York Convention.

Article V of the New York Convention allows non-recognition under the conditions of [A.] the arbitration agreement is invalid; [B.] the losing party not being properly notified of the arbitral proceedings; [C.]  the award ‘dealing with a difference not contemplated by or not falling within the terms of the submission to arbitration, or containing decisions on matters beyond the scope of the submission to arbitration; [D.] the tribunal composition being improper; [E.] the award ‘being set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made;’  [F.] the ‘subject matter of the dispute not being ‘capable of settlement by arbitration under that country’s law; or [G.]  award enforcement being contrary to ‘public policy.’

[2.0] ISSUES WITH IMPLEMENTATION OF ARTICLE V

In Federal law, the reasons in Article V are clearly defined as limitations. In these instances, U.S. courts often refuse to enforce international arbitral judgments that are contested by the losing party in order to evade the scope of the award itself.  Majorly, in KG Schifffahrtsgesellschaft MS Pacific Winter MBH & CO. v. Safesea Transport, Inc, the court noted that ‘courts have strictly applied the Article V defenses and generally view them narrowly,’ and maintained  ‘the Convention does not sanction the second-guessing of an arbitrator’s interpretation of the parties agree as this type of judicial review frustrates the basic purpose of the arbitration.’

Consideration must be given to different rules of procedure and jurisdiction when bearing in mind the enforcement of international arbitral decisions in the United States since foreign money judgments are handled differently. Furthermore, the type of arbitral award at issue in the enforcement action should be mentioned clearly as well as a clarification regarding whether the action seeks to enforce a domestic or non-domestic award (via the court’s primary jurisdiction or the court’s secondary jurisdiction). It must be known that the way the pleadings have been set out is a major indicator of what jurisdiction the award may be, especially determining whether the action is for a domestic award under the primary jurisdiction of the federal court or whether the award is a foreign arbitral award under its secondary jurisdiction. This information is critical since it determines how to enforce an arbitral judgment issued outside of the United States.

[3.0] FORM OF THE AWARD

Recognition and enforcement of arbitral awards are governed in the United States chiefly by the Federal Arbitration Act (FAA), although other provisions of law can apply as well. Most of the time, the Federal Arbitration Act (FAA) is the arbitral award recognition and enforcement authority in the United States. Whether the arbitration award under consideration is governed by which of the three chapters under the FAA depends on whether the award is domestic or foreign.  

The first chapter regulates domestic arbitration procedures and awards and instructs courts to enforce arbitral decisions unless certain reasons are present for setting them aside. Chapter 2 implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention) and Chapter 3 implements the Inter-American Convention on International Commercial Arbitration (also known as the Panama Convention), which largely tracks the New York Convention for the purposes of recognition and enforcement.

The enforcement of awards made by the International Centre for Settlement of Investment Disputes (ICSID) is governed by the Washington (ICSID) Convention, which is implemented in the United States by 22 USC Section 1650a; the FAA does not apply to the enforcement of ICSID awards.

[3.0] WHAT CONSISTS OF PERSONAL JURISDICTION

Memorably, since arbitral award enforcement procedures differ from other forms of money judgment enforcement, there are significant procedural differences between them. There is no standard federal legislation for enforcing foreign money judgments in the United States, and the country is not a party to any treaties regarding this issue. For this reason, state laws and procedures govern the execution of foreign judgments in the United States.

For a detailed understanding as to the hurdles that might be involved in personal jurisdiction, it is imperative to analyze the effect that Daimler AG v. Bauman has had in recognition and enforcement proceedings. Personal Jurisdiction is a U.S. law concept that signifies the power of a court to determine the rights and liabilities of a party involved in a lawsuit.

A solution as to enforceability is the consent amongst arbitration parties – consent being a cornerstone of arbitration- ensured by virtue of an enforcement clause. While the overwhelming majority of arbitration judgments are honored willingly, certain parties may not choose to comply with verdicts rendered against them. Since ‘arbitral awards are not self-enforcing in the U.S., they must, therefore ‘be given force and effect by being converted to judicial orders by courts‘. By implementing these efforts, U.S. courts expect that litigants must also satisfy state and federal constitutional and legal criteria regulating personal jurisdiction in order to attempt to convert an arbitral decision to a domestically enforceable judgment. For this reason, prior US District Court judgments have ruled that both the New York Convention and the Panama Convention impose limits on how someone may challenge an arbitration award’s recognition and enforcement.

Although the Conventions do not change the basic constitutional requirement that the person or entity against whom enforcement is sought must be subject to the jurisdiction of the court to which enforcement is requested, they do increase the possibilities for relocating assets. Even when jurisdictional criteria are fulfilled, the court may dismiss an enforcement action started in a state because the state is an unfriendly forum. 

Broadly speaking, federal and state constitutional and legal criteria for personal jurisdiction may be met in three primary ways. The first step in executing a judgment in a state other than the debtor’s state of residence is to [A.]  demonstrate that the enforcing party has ‘general’ or ‘all purpose’ jurisdiction. Additionally, an enforcing party may [B.]  attempt to establish particular or ‘specific’ jurisdiction by establishing that the corporate agent or person who happens to be in the state that offers the litigation has committed certain single or occasional actions. In addition, there is case law that allows a party to base jurisdiction on [C.] the assets of the award debtor (i.e., the in rem jurisdiction particularly surrounding property).

[3.1] UNDERSTANDING THE DAIMLER STANDARD

In 2014, the U.S. Supreme Court (the ‘Supreme Court’) issued an opinion in Daimler AG v. Bauman. The Supreme Court’s decision is understood to be ‘general’  jurisdiction for the purpose of a lawsuit against a company at its main place of business or incorporation and similar general jurisdiction for a lawsuit against a foreign person at their domicile. The Supreme Court’s decision is seen as having ‘marked a dramatic change in the law’ because it may have eliminated the previous rule that permits general jurisdiction (corporate ‘presence’ in a state in which it ‘does business’ for both ‘continuously and systematically’) in the event the corporation is no longer present in that state. Arbitration award enforcement procedures in the U.S. have had a notable effect because of this and federal courts have articulated the Daimler standard for recognition and enforcement cases.

This change in the standard for ‘general’ jurisdiction from a lower standard of operating business activities to a higher threshold of physical presence via proof of the place of incorporation in a state has posed challenges for parties in such proceedings who cannot demonstrate continuous and systematic business operations. Foreign parties may thus find themselves facing costly and/or lengthy litigation targeted at locating assets or people who may provide the jurisdictional connections required to get a U.S. court to exercise ‘general jurisdiction.’ In reality, this implies that a foreign party will likely be unable to implement its arbitration decision in the U.S. for many years, even if it underwent the litigation necessary

However, depending on property-based jurisdiction is subject to significant restrictions. The award will only be confirmed up to the assets existing in the jurisdiction. It is not just property orders that courts may hesitate to issue, but also other alleviating measures, including orders against property. Since jurisdiction that depends on the concurrent presence of the property in the forum state may also possibly be defeated by transferring the property out of the forum state, this might also award debtors the ability to defeat in rem jurisdiction. Award creditors try to avoid this situation by attempting to secure a pre-judgment attachment of properties as falling under the law of the state, which happens upon the conversion of a foreign arbitral award into an equanimous foreign judgment. 

[4.0] EFFECTIVE PERSONAL JURISDICTION 

Faced with the above conundrums, parties should include a provision in their arbitration clause addressing enforcement issues in the U.S.

The parties’ agreement may contain an arbitration clause that addresses the arising of any enforcement obstacles in the U.S.  Courts of the United States has affirmed that people in the United States can consent to the exercise of personal jurisdiction for the purpose of enforcing a foreign arbitral award. While the judiciary may use a person’s Constitutional rights to establish jurisdiction, people retain the right to consent to personal jurisdiction by virtue of their own due process rights.  

When compared to setting personal jurisdiction according to ‘general’ jurisdiction, the U.S. courts have applied the more rigorous Daimler test of ‘general’ jurisdiction to foreign parties, and as a result, parties that utilize an arbitration agreement in these proceedings should include a forum selection provision in order to clear up questions of enforcement of arbitral awards.

There is no FAA regulation specifying the forms of the arbitral decision required. As noted in Section 13(b) of the FAA, when a party that has been awarded anything confirms, modifies or corrects that award, that party must provide the court with a copy of the award, thereby suggesting that awards must be in writing. Article IV(1)(a) of the New York Convention requires that award or certificate be presented ‘in a form in which it can be lawfully validated and which is issued with the authority of the relevant body.’ Most courts need an affidavit from a lawyer certifying that the copies are accurate and correct, although other courts may have different requirements based on the jurisdiction.

If an award has been rendered in the United States, Chapter 1, Section 11 of the FAA permits a party to move to modify or correct the award if [A.] the award contains ‘an evident material miscalculation of figures or an evident material mistake in the description of any person, thing or property, [B.] the arbitrators have issued a decision on a matter not submitted to them, or [C.] the form of the award is imperfect, but that imperfection does not affect the merits of the controversy. Any petition for modification or correction must be served within three months of the parties receiving the award. US courts may not revise or retract an award.

Under the New York Convention, the laws of the nation in which the award was made govern petitions to vacate or set aside awards. In the United States, arbitral awards cannot be appealed. Vacatur of arbitral awards given in the United States in only certain restricted situations is provided for, although this applies only to awards delivered in the United States.

An award must be filed or delivered within three months after service of notice of a petition to vacate the award. Required service of process may be time-consuming, especially when dealing with another country. As such, one should move to vacate an award as soon as practicable after filing or delivering the award so that time will be available to effect service.

Courts in the United States often accept interim judgments (such as partial or provisional decisions) by arbitrators prior to the final decision. Despite the widespread belief that only a final judgment may be set aside under the FAA, a number of federal courts have taken the position that an interim or partial award that resolves one and only one claim can be set aside because it decisively settles a distinct and independent claim.

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Sources

1. Foster v. Neilson, 27 U.S. 253, 314 (1829). Valentine v. U.S. ex rel. Neidecker, 57 S.Ct. 100, 103 (1936); Medellin v. Dretke, 125 S.Ct. 2088, 2103 (2005); Sanchez-Llamas v. Oregon, 126 S.Ct. 2669, 2695 (2006).

2. De Rendon v. Ventura, U.S. District Court for the Southern District of Florida: Various parties entered into a settlement agreement concerning the share ownership in a Colombian pharmaceutical company, which provided for arbitration of disputes before an ICC tribunal in Bogota, Colombia.

 After a dispute arose, one of the parties obtained an arbitral award of $900,000 for breach of the agreement’s confidentiality provisions. The losing party opposed enforcement of the award on a variety of grounds under Article V of the New York Convention, including that the arbitration clause, as applied, had become ‘invalid’ because the ICC had improperly treated the case as an international (rather than domestic) arbitration. These and other challenges were rejected, with the court emphasizing ‘its ‘extremely limited’ review of arbitral awards and ‘the powerful presumption that the arbitral body acted within its powers.’

3. New Jersey District Court in the U.S. Federal District Court: A German shipowner received a $122,367.86 judgment against a U.S. business and sued the American firm for violation of a charter party agreement. One of the losing parties claimed that the award should be rejected because it was against public policy and was thus illegal.

4. Determining whether it is  domestic, nondomestic, or foreign

5. Whether confirmation, enforcement, or secondary jurisdiction enforcement

6. United States Arbitration Act (Pub.L. 68–401, 43 Stat. 883, enacted February 12, 1925, codified at 9 U.S.C. ch. 1

7. Epic Systems Corp. v. Lewis on May 21, 2018, the Supreme Court ruled that the FAA is not overridden by the protection of concerted activity established by the National Labor Relations Act of 1935, effectively making individual arbitration agreements in contracts wholly enforceable

8. Shearson/American Express Inc. v. McMahon, 482 U.S. 220 (1987)

9. 22 U.S. Code § 1650a – Arbitration awards under the Convention

10. Rogers, Catherine A., et al. ‘The Law Governing the Judicial Role in Investor-State Arbitration.’ The ALI Adviser, 11 May 2017, thealiadviser.org/international-commercial-arbitration/the-law-governing-the-judicial-role-in-investor-state-arbitration/.

11.  Restatement (Third) of the Foreign Relations Law of the United States § 481 CMT. an (Am. Law Inst. 1987

12. Power Partners MasTec, LLC v. Premier Power Renewable Energy, Inc., 2015 WL 774714 (S.D.N.Y. Feb. 20, 2015)

13 . Frontera Res. Azerbaijan Corp. v. State Oil Co. of Azerbaijan Republic, 582 F.3d 393, 397 (2d Cir. 2009).

14. Monegasque De Reassurances S.A.M. (monde Re) v. Nak Naftogaz of Ukr., 311 F.3d 488, 495-96 (2d Cir. 2002).

15. CME Media Enters. B.V. v. Zelezny, 2001 WL 1035138 (S.D.N.Y. Sept. 10, 2001

16. Daimler AG v. Bauman 134 S. Ct. 746 (2014)

17. CME Media Enters. B.V. v. Zelezny, 2001 WL 1035138 (S.D.N.Y. Sept. 10, 2001

18. UNCITRAL, Report on the Survey Relat-ing to the Legislative Implementation of the  Convention on the  Recognition and Enforcement of Foreign Arbitral Awards, U.N. Doc. A/CN.9/656/Add.1,    8  (2008)

19. The arbitration award is converted into a foreign judgment acknowledging the award, and then the award is sought recognized in the United States. When there is no resistance to the enforcement action, the personal jurisdiction requirements for recognition of foreign judgments are considerably more permissive.

20. Brown v. Lockheed Martin Corp., 814 F.3d 619, 625 (2d Cir. 2016). Parties usually express their consent through forum selection clauses or contractual consent provisions.

21. Article IV(1)(a) of the New York Convention requires the presentation of a ‘duly authenticated original award or a duly certified copy thereof’ as a condition for recognition

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