Enforcing Arbitration Awards Against Foreign Entities

Tuesday, November 1, 2005 - 01:00

The move toward alternate dispute resolution mechanisms to resolve business disputes is a growing trend likely to continue into the future. In this time of burgeoning global commerce, arbitration awards involving foreign entities are also growing by leaps and bounds. It is important to have a basic understanding of what to do with an award obtained in an arbitration involving a foreign entity, whether rendered in a foreign arbitral tribunal, or rendered in the United States.

In 1958, to permit the enforcement of such awards across international boundaries, the United Nations drafted the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Convention). The Convention has been adopted by 113 sovereignties across the world, and was adopted by the United States in 1970 by Article II of the Federal Arbitration Act (FAA), 9 U.S.C. § 201.

The Convention applies only where the arbitral award was rendered in a country which is a signatory to the Convention. Footnote 29 to the Convention. As adopted by the United States, the Convention also applies solely to "commercial transactions." Art. I.3.; Footnote 29 to Convention; 9 U.S.C. § 202. Generally, "commercial" has been interpreted to mean commercial in its ordinary, plain sense. See e.g. Island Territory of Curacao v. Solitron Devices, Inc., 356 F. Supp. 1 (S.D.N.Y., 1973). Contracts for sale of goods, insurance contracts, even employment contracts have all been held to be commercial and thus falling under the Convention. Also, fraud in the inducement or performance of commercial transactions, and even tortious interference claims, have been held to fall within the definition of "commercial" under the Convention.

The parties must also have had an agreement in writing to arbitrate. Art. II. This has been construed broadly in favor of enforcement of foreign awards. For example, the mention of an arbitration provision in an insurance binder was held sufficient as an agreement in writing to arbitrate. Stony Brook Marine Transportation Corp. v. Wilton, 1996 U.S. Dist. LEXIS 22222, 1997 AMC 351 (E.D.N.Y., 1996). However, a telex from one party, objected to by the other party, was not an agreement to arbitrate. Sen Mar, Inc., v. Tiger Petroleum Corp., 774 F. Supp. 879 (S.D.N.Y., 1991).

Under the convention, each signatory country agrees that arbitral awards of other signatory countries will be enforced "in accordance with the rules of procedure of the territory where the award is relied upon." Thus, when seeking enforcement in a United States District Court, the Federal Rules of Civil Procedure would apply to the proceedings. Art. III.

To obtain confirmation and enforcement of the award, the party advancing enforcement, the plaintiff, must apply to a court, and submit (1) a duly authenticated original award or a certified copy thereof; (2) the original agreement to arbitrate or a certified copy thereof; and (3) translations of the same if needed. Art. IV. Thus, the plaintiff must file a complaint to enforce the arbitration, and comply with all rules of service of process, venue, and in personam jurisdiction over the defendant.

Defenses to enforcement of the arbitration award and entry of a judgment are limited to two basic types: assertions that the agreement to arbitrate should not have been enforced and a list of seven defenses set forth in the Convention itself. Thus, Article II of the Convention provides that arbitration should not be ordered if the agreement to arbitrate is (1) null and void; (2) inoperative; or (3) incapable of being enforced. Null and void and inoperative has been held to require a showing of duress, mistake, fraud or waiver in the entry into the agreement to arbitrate, or that the agreement to arbitrate contravenes public policy. Oriental Commercial and Shipping Co., Ltd., v. Rossell, N.V., 609 F. Supp. 75 (S.D.N.Y., 1985). Incapable of being enforced can mean designating a nonsignatory country as the place of arbitration, thus making the award unenforceable under the Convention, or being a noncommercial matter, and thus also incapable of being enforced under the Convention.

Article V sets forth seven affirmative defenses to enforcement: (1) incapacity of a party or invalidity of the agreement; (2) lack of proper notices regarding the proceedings; (3) the award exceeds the authority given the arbitrator by the parties in their contract; (4) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties or the law of the country where the arbitration took place; (5) the award is not binding or was set aside by a competent authority of the country in which, or under the law of which, that award was made; (6) the subject matter of the arbitration cannot be arbitrated in the country in which enforcement is sought; or (7) the recognition or enforcement of the award would be contrary to the public policy of the country in which enforcement is sought.

In general, the courts favor enforcement of arbitrations, and will construe these defenses narrowly, and look upon their assertion with some disfavor. There are few, if any, cases where a foreign award was denied enforcement based upon an Article V defense.

The remainder of Chapter 2 of the Federal Arbitration Act deals with the mechanics of the enforcement proceeding. Section 202 provides that any controversy must include at least one foreign citizen. Thus, the Convention and Chapter 2 of the FAA cannot be used to enforce wholly domestic disputes, with "citizen" defined the same as the general federal venue provisions.

Section 203 grants federal subject matter jurisdiction. Any arbitration that falls under the Convention will have original federal subject matter jurisdiction for enforcement, and section 205 permits removal to federal court of actions in state court to enforce arbitrations that fall under the Convention.

Under § 204, venue for enforcement proceedings is proper in only two circumstances. First, where venue would have been proper had the parties litigated and not arbitrated. That is, venue for enforcement is the same as the general venue provisions set out in 28 U.S.C. § 1391 et seq. Second, venue is proper in the district where an arbitration award was rendered if that district covers the place "designated" by the parties in the agreement to arbitrate. At least one court has held that if the place where the arbitration was actually held was not specifically designated in the agreement to arbitrate, venue is not proper in that district for the confirmation proceeding. In 3573522 Canada, Inc., v. North Country Natural Spring Water, Ltd., 2002 U.S. Dist. LEXIS 20057 (E.D. Pa., 2002), a New York plaintiff and a Canadian defendant had agreed to arbitrate under the rules of the International Chamber of Commerce without otherwise designating a location for the arbitration. The ICC selected Philadelphia as the place of arbitration, so enforcement was sought in the Eastern District of Pennsylvania. However, the District Court held that venue was not proper in that District under the first venue prong, as neither party was a citizen of the State, and was also not proper under the second prong, as the parties had not designated Philadelphia as the place of arbitration in their written agreement to arbitrate - the ICC had designated the place of arbitration. Thus, the complaint was transferred to the Western District of New York, where the plaintiff was a citizen.

Section 207 of the FAA provides that the Complaint to confirm the arbitration award "may" be filed within three years of the rendering of the arbitration award. Similar language in Chapter 1 of the FAA has routinely been held to be an absolute time limitation, 9 U.S.C. § 9; see also Photopaint Technologies, L.L.C., v. Smartlens Corporation, 207 F. Supp. 2d 193 (S.D.N.Y., 2002), such that § 207 should also be considered as an absolute time limitation.

The application to confirm a foreign arbitration award is made "to any court having jurisdiction," 9 U.S.C. § 207, which the Third Circuit, and other Circuits, has held requires that the District Court have personal jurisdiction over the defendant. See Base Metal Trading, Ltd., v. OJSC Novokuznetsky Aluminum Factory, 2002 U.S. App. LEXIS 18408 (3rd Cir., 2002). Traditional jurisdictional analysis is applied, such that the party seeking enforcement must prove either specific jurisdiction or general jurisdiction, and satisfy the various criteria for minimum contacts and the oft-repeated "traditional notions of fair play and substantial justice."

Thus, judgment cannot be obtained against a foreign defendant that does not have a presence in the United States. Further, although a foreign defendant may move products into and through the United States, this is generally not sufficient to sustain personal jurisdiction. The Ninth Circuit did suggest that a plaintiff could obtain personal jurisdiction based on the existence in the forum of assets of the defendant against which it seeks to execute, the so-called in rem type II jurisdiction. Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarian Co., 284 F.2d 1114 (9th Cir., 2002). However, as in Base Metals, if a plaintiff cannot identify assets presently located in the state, personal jurisdiction is usually found to be lacking.

Finally, foreign money awards are converted to U.S. dollars on the date of the entry of the judgment, and not the date of the award. Island Territory of Curacao, 356 F. Supp., at *34.

David W. Phillips is a Partner at St. John & Wayne, LLC of Newark, New Jersey. His practice is focused on complex commercial litigation with emphasis on chancery practice, trademark and unfair competition litigation, lender liability defense and real property litigation. This article was first published in the August 29, 2005 issue of New Jersey Law Journal and is republished here with permission. © 2005 ALM Properties, Inc. All rights reserved .

Please email the author at dwp@stjohnlaw.com with questions about this article.