|
 | |
|
How International Arbitration Awards Can Be Enforced in the United States
|
|
November 26, 2007
(A revised version of this article appears in The Construction Lawyer, Volume 27, No. 4, Fall 2007, published by the American Bar Association's Forum on the Construction Industry.)
|
|
|
|
By David Buoncristiani
Howrey LLP
National borders are beginning to erode, and more domestic contractors are finding themselves performing construction work outside the United States, as well as agreeing with foreign contactors to build projects in the United States.
To avoid the uncertainty of many foreign judicial systems in this trans-border construction landscape, project participants principally rely on arbitration to resolve disputes in both foreign and domestic construction agreements. As a result, it is crucial to understand both the rights and defenses to enforceability of arbitration awards entered against or in favor of such foreign entities.
Enforcing foreign arbitral awards in the United States is not as daunting a task as one may think although at times counsel must navigate through international treaties and conventions as well as procedural and jurisdictional issues. The primary mechanism is the Federal Arbitration Act (FAA), which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and the Inter-American Convention on International Commercial Arbitration (Panama Convention). If the FAA does not apply, a party then must look to relevant bilateral treaties or request the court to apply general equitable principles of comity.
Federal Arbitration Act
The FAA contains the basic procedures for enforcing domestic and foreign arbitration awards in the United States. 1/ Its fundamental purpose is to "ensure that private agreements to arbitrate are enforced according to their terms." 2/ Pursuant to the FAA's underlying policy in support of arbitration, any doubts must be resolved in favor of arbitration. 3/ This policy applies equally to domestic and international arbitration. 4/
The FAA is divided into three parts. Chapter 1 contains the general provisions governing arbitration agreements and awards. These sections address: the scope, validity and irrevocability of arbitration agreements; the procedures required for arbitration; and the process and standards for enforcement, modification or annulment of the arbitral award. Although Chapter 1 embraces foreign commerce, it does not specifically provide for enforcing foreign arbitral awards. Such matters are dealt with expressly in Chapters 2 and 3, which implement respectively the New York Convention and the Panama Convention.
The New York and Panama Conventions
Scope and Applicability
The New York Convention is the primary means for enforcing international arbitration agreements and awards in the United States. 5/ It applies to: arbitral awards "made in the territory of a State other than the State where the recognition and enforcement of such awards are sought" 6/ and arbitral awards that are "nondomestic," i.e. "not considered as domestic awards in the State where their recognition and enforcement are sought." 7/ Although the New York Convention does not define "non-domestic award," FAA §202 does:
An agreement or award arising out of [a legal relationship, whether contractual or not, which is considered as commercial, including a transaction, contract, or agreement described in section 2 of this title and] which is entirely between citizens of the United States shall be deemed not to fall under the Convention unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states. For the purpose of this section a corporation is a citizen of the United States if it is incorporated or has its principal place of business in the United States. 8/
Further, in ratifying the New York Convention, the United States limited the scope of the Convention's otherwise broad application by electing the "commercial reservation" and the "reciprocity reservation," which limit its applicability to "commercial" disputes 9/ and restricts its scope to the enforcement of arbitration agreements with signatory countries. 10/ Presently, more than 135 countries have ratified or acceded to the New York Convention. 11/
The Panama Convention provides jurisdiction for the recognition and enforcement of arbitration agreements and awards in international commercial transactions just between persons from member countries of the Organization of American States (OAS). 12/ Like the New York Convention, the Panama Convention, as implemented by the United States, applies only to arbitration agreements "with respect to a commercial transaction" 13/ and is limited to the enforcement of arbitration agreements with signatory countries. 14/ Because the Panama Convention does not define "commercial," courts in this country have applied the U.S. Supreme Court's broad definition of "commerce." 15/
As one would expect, there are times when both the New York Convention and the Panama Convention may be applied to an arbitral award. In such a case, the Panama Convention provides: "If a majority of the parties to the arbitration agreement are citizens of a State or States that have ratified or acceded to the Panama Convention and are members of the OAS, the Panama Convention applies. In all other cases the New York Convention applies." 16/ Thus, while there is little substantive difference between the two procedures, there is a general preference in favor of the New York Convention.
Enforcement of Awards
In theory, enforcing an arbitral award through the New York and Panama Conventions is straightforward. Any case falling under the conventions is within the jurisdiction of U.S. District Courts. 17/ To confirm the award, an action must be commenced within three years of the award being issued. 18/ The party seeking enforcement establishes a prima facie case for enforcement under the New York Convention by supplying the original or a certified copy of the arbitration agreement and award. 19/
Once a prima facie case for enforcement is established, a District Court's review of the arbitral award is extremely limited 20/ and it generally must confirm the award unless the opposing party proves that enforcement or recognition should be refused based on one of the enumerated grounds: 21/
|  | Incapacity of the parties or invalidity of the arbitration agreement. 22/
|
| | Improper notice of the arbitration proceedings. 23/
|
| | Inability to properly present one's case. 24/
|
| | The arbitral award exceeds the scope of the arbitration agreement. 25/
|
| | The arbitration procedure or panel was not in accordance with the arbitration agreement or governing law. 26/
|
| | The arbitral award "has been suspended or set aside by a competent authority of the country in which, or under the law of which, the award was made." 27/
|
| | Enforcement of the award would be contrary to public policy. 28/
|
In addition, an award will not be recognized under the Panama Convention if "the subject of the dispute cannot be settled by arbitration under the law of [the] state" in which the recognition and enforcement is sought. 29/
In keeping with the FAA's general policy favoring arbitration, U.S. District Courts narrowly apply these grounds for non-enforcement. For example, courts only apply the public policy ground for non-enforcement "where enforcement would violate our 'most basic notions of morality and justice.' " 30/ However, as to an arbitral award that "has been suspended or set aside by a competent authority of the country in which, or under the law of which the award was made," the District Courts are split as to whether an award vacated by a foreign court fits within this ground for non-enforcement and whether such an invalidated award nevertheless can be enforced.
In The Matter of Arbitration Between Chromalloy Aeroservices and the Arab Republic of Egypt, 31/ Chromalloy commenced an action in the United States to enforce an arbitral award rendered in Egypt against the Egyptian government pursuant to Egyptian law. During the action, the award was nullified by an Egyptian Court of Appeal in a proceeding brought by the Egyptian government for that purpose. The District Court found that by appealing the arbitral award, Egypt had repudiated its solemn promise to abide by the results of the arbitration. 32/ The court enforced the "vacated" arbitral award because to do otherwise would violate the FAA and the clear United States public policy in favor of arbitration. 33/
Likewise, in Karaha Bodas Co., LLC v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara 34/ a Cayman Islands company sought enforcement of a Swiss arbitral award against an Indonesian government-owned company issued in Switzerland pursuant to Swiss procedural law. The Indonesian company successfully petitioned an Indonesian court to annul the award and then asserted the annulment as a defense to enforcement of the award under the New York Convention. Despite the annulment, the District Court enforced the award against the Indonesian company. 35/ The 5th U.S. Circuit Court of Appeals reasoned that Switzerland had primary jurisdiction over the arbitration because the arbitration took place in Switzerland pursuant to Swiss law while the Indonesian court only had secondary jurisdiction. The court held that the substantive difference between primary and secondary jurisdiction is that only the former has the power to annul an arbitral award and, therefore, only an annulment by a Swiss court could serve as a ground for not enforcing the arbitral award. 36/
In contrast, in Baker Marine (Nigeria) Ltd. v. Chevron (Nigeria) Ltd. 37/ Baker Marine sought enforcement of two arbitral awards by a Nigerian court while the losing party petitioned the same court to vacate the awards. After the Nigerian court set aside both awards, Baker Marine attempted to enforce the arbitral award in the United States pursuant to the New York Convention, arguing that the Nigerian court's reasons for setting aside the awards were not valid under FAA standards. The District Court rejected the argument because Baker Marine agreed that disputes were to be arbitrated under Nigerian law, and there was no claim that the Nigerian High Court was an incompetent authority in that country. Relying on principles of comity within the Convention, the 2nd U.S. Circuit Court of Appeals affirmed. 38/
Regardless of the differing rationales employed by the courts in Chromalloy and Karaha Bodas, the primary factor that distinguishes them from Baker Marine is that those cases involved arbitration awards against sovereigns and sovereign related entities while the parties in Baker Marine were private entities. Therefore, it seems apparent that the present split in authority merely reflects the courts' skepticism of decisions by foreign courts that vacate arbitration awards entered against their own sovereign. Nonetheless, as long as the parties, the arbitration agreement and the award fit within the scope of the Conventions, District Courts generally will enforce "non-domestic" arbitral awards that involve all foreign parties, a mix of foreign and American parties, or all American parties. 39/
Non-Convention Bases for Non Enforcement of Awards
In addition to the enumerated defenses in the Conventions, some courts have adopted further defenses that are not expressly set out in the Conventions. These defenses, instead, are derived from Chapter 1 of the FAA because the provisions of Chapter 1 are incorporated by reference into both FAA Chapter 2 (New York Convention) and FAA Chapter 3 (Panama Convention). 40/ For example, some courts have vacated or modified awards under the New York and Panama Conventions if an award was in "manifest disregard" of the terms of the arbitration agreement or the law. 41/ However, not all courts agree that they have the jurisdiction to consider a ground for non-enforcement that is not explicitly contained in the Conventions. Some courts expressly reject "manifest disregard of the law" as a basis for refusing enforcement. 42/
Jurisdictional Related Defenses to Enforcement
Even though an arbitration award may fall under the one of the Conventions and is not subject to any of the enumerated defenses, this does not mean that a District Court is capable of enforcing an award in all cases. The Conventions are not jurisdictional, and a party seeking to confirm the award in the United States may be required to overcome traditional jurisdictional defenses based on subject matter jurisdiction, personal jurisdiction, venue and sovereign immunity.
By way of example, in International Standard Electric Corp. v. Bridas Sociedad Anonima Petrolera Industrial y Commercial 43/ a District Court in New York held that it lacked the jurisdiction to vacate an arbitral award issued in Mexico against a U.S. party based on New York substantive law and Mexican procedural law because Article V(1)(e) of the New York Convention requires that an application to vacate an award only be made to a court in the country in which, or under the procedural law of which, the award was made. 44/ Also, in Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain Co. 45/ the 9th U.S. Circuit Court of Appeals refused to enforce an arbitral award under the New York Convention because the court lacked personal jurisdiction over the defendant, an Indian company, because that company did not have the necessary minimum contacts with the State of California. 46/ Similar jurisdictional issues arise when one of the parties before the court is a sovereign state, but jurisdiction still may be maintained over a sovereign if it is established that the country either waived its sovereign immunity or that the District Court has jurisdiction pursuant to the arbitration exception to the Foreign Sovereign Immunities Act. 47/
Awards Not Falling Under the Conventions
Situations may arise in which an arbitration award is not subject to one of the Conventions, such as when the award is against a company whose country of incorporation is not a signatory to either Convention. In that case, the party seeking enforcement should determine whether the unsuccessful party's country has a Bilateral Friendship, Commerce and Navigation Treaty with the United States. If the United States has entered into such a bilateral treaty with the nonsignatory country, the two countries may recognize and enforce their arbitration agreements and awards in the country where they were made. 48/ If a judgment on the confirmed award then is brought to the United States, the party may seek enforcement under general principles of comity. 49/
Finally, as a last resort, if neither a bilateral treaty nor a convention applies to a foreign arbitral award, the party still may seek enforcement in state or federal court pursuant to FAA Chapter 1 or bring a contract action in state or federal court. 50/ In those instances, the court would look to cases interpreting the FAA's enumerated grounds for non-enforcement of an award to determine whether the award should be enforced. 51/
Conclusion
Every year the construction industry is becoming more global, and increasing numbers of contractors soon will enter into their first foreign contract and possibly their first international arbitration (regardless of whether the arbitration is conducted in the United States or abroad). Enforcing an arbitration award does not need to be more difficult than obtaining the award in the first place so long as practitioners are cognizant of the available mechanisms for enforcing or defending against the enforcement of foreign arbitral awards in the United States.
If you would like to receive legal reports and updates more quickly, by e-mail, click here and fill out the mailing list form. If you would like to subscribe to our RSS feeds or learn more about RSS, click here.
For more information about the issues covered in this report, please contact David Buoncristiani in our San Francisco office at 415-848-4928 or at buoncristianid@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
ENDNOTES
| 1/ | 9 USC §§1 through 307.
|
| 2/ | Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 54 (1995), quoting Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Jr. University, 489 U.S. 468 (1989).
|
| 3/ | Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983); see also Way Bakery v. Truck Drivers Local No. 164, 363 F.3d 590, 593 (6th Cir. 2004) ["A court's review of an arbitration award [under the FAA] is one of the narrowest standards of judicial review"].
|
| 4/ | Fotochrome, Inc. v. Copal Co., Ltd., 517 F.2d 512 (2d Cir. 1975).
|
| 5/ | Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 UST 2517, 330 UNTS 3 (New York Convention). The United States acceded to the New York Convention on December 29, 1970. For a current list of convention signatories, go to www.uncitral.org. For more specific analysis on the enforcement of arbitral awards, see W. Park, The International Currency of Arbitral Awards, Practicing Law Institute (PLI Order No. 8710 March 2006); P. Bruner and P. O'Connor, Jr., Bruner and O'Connor on Construction Law, §§20:141 to 20:152 (updated 2006); P. Sanders, Editor, International Handbook on Commercial Arbitration (updated 2006) [provides country-specific domestic and foreign arbitration information].
|
| 6/ | New York Convention, Article I.
|
| 7/ | New York Convention, Article I (1).
|
| 8/ | See also R. Von Mehren, The Enforcement of International Arbitral Awards, International Commercial Litigation at 325 (PLI Order No. H0-0031 Feb. 1999) [discussing enforcement of non-domestic and foreign arbitral awards].
|
| 9/ | The country "may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such a declaration." New York Convention at Article I (3).
|
| 10/ | "When signing, ratifying or acceding to this Convention, or notifying extension under Article X hereof, any State may on the basis of reciprocity declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State." New York Convention, Article I (3).
|
| 11/ | C. Barwick and J. Abbott, New York Convention, International Financial Law Review (November 2006).
|
| 12/ | Inter-American Convention on International Commercial Arbitration, OAST No. 42, 14 ILM 336 (1975). The following countries are signatories of the Panama Convention: Argentina, Brazil, Bolivia, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, United States, Uruguay and Venezuela. For a list of current members, see www.oas.org/juridico/english/Sigs/b-35.html.
|
| 13/ | 9 USC §302.
|
| 14/ | 9 USC §304.
|
| 15/ | Citizens Bank v. Alabco, Inc., 539 U.S. 52, 56 (2003).
|
| 16/ | 9 USC §305.
|
| 17/ | 9 USC §§203, 302.
|
| 18/ | 9 USC §§207, 302.
|
| 19/ | China Minmetals Materials Import and Export Co., Ltd. v. Chi Mei Corp., 334 F.3d 274, 292-93 (3d Cir. 2003).
|
| 20/ | See also Encyclopedia Universalis S.A. v. Encyclopedia Britannica, Inc., 403 F.3d 85 (2d Cir. 2005) [enforcing arbitral award did not violate public policy].
|
| 21/ | See generally N. Pengelley, The Convention Strikes Back: Enforcement of International Commercial Arbitration Awards Annulled Elsewhere, 8 Vindobona Journal of International Commercial Law and Arbitration 195 (2004); V. Nanda and D. Pansius, 2 Litigation of International Disputes in U.S. Courts, §19:2 [enforcement of vacated awards].
|
| 22/ | New York Convention, Article V and 9 USC §302.
|
| 23/ | First State Insurance Co. v. Banco de Seguros del Estado, 254 F.3d 354, 357 (1st Cir. 2001).
|
| 24/ | Iran Aircraft Industries v. Avco Corp., 980 F.2d 141, 145 (2d Cir. 1992).
|
| 25/ | CBS Corp. v. WAK Orient Power and Light Ltd., 168 F.Supp. 2d 403, 412 (E.D. Pa. 2001).
|
| 26/ | Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys "R" Us, Inc., 126 F.3d 15, 19 (2d Cir. 1997).
|
| 27/ | Id.
|
| 28/ | Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1442 (11th Cir. 1998).
|
| 29/ | 9 USC §304.
|
| 30/ | Waterside Ocean Navigation Co. v. International Navigation Ltd., 737 F.2d 150, 152 (2d Cir. 1984); Parsons & Whittemore Overseas Co. v. Societe Generale de L'Industrie du Papier (RAKTA), 508 F.2d 969, 974 (2d Cir. 1974) [rejecting an American construction company's public policy defense because "to deny enforcement of this award largely because of the United States falling out with Egypt would mean converting a defense intended to be of narrow scope into a major loophole in the Convention's mechanism for enforcement"].
|
| 31/ | In the Matter of Arbitration Between Chromalloy Aeroservices and the Arab Republic of Egypt, 939 F. Supp. 907 (D.D.C. 1996).
|
| 32/ | Id. at 287.
|
| 33/ | Id. at 913.
|
| 34/ | 364 F.3d 274 (5th Cir. 2004).
|
| 35/ | Karaha Bodas Co., LLC v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, 290-91 (5th Cir. 2004).
|
| 36/ | Id. at 288-89.
|
| 37/ | 191 F.3d 194, 197 n.2 (2d Cir. 1999) [affirming the District Court's decision not to enforce the arbitral award].
|
| 38/ | See also Spier v. Calzaturificio Tecnica, 71 F. Supp. 2d 279, 288 (S.D.N.Y 1999) [U.S. citizen not entitled to enforce Italian arbitral award that had been overturned by the Italian courts, including its highest court, because the arbitrators had exceeded their power].
|
| 39/ | See, e.g., Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys "R" Us, Inc., 126 F.3d 15, 19 (2d Cir. 1997); Lander Co. v. MMP Investments, Inc., 107 F.3d 476, 481-482 (7th Cir. 1997); Bergesen v. Joseph Muller Corp., 710 F.2d 928, 932 (2d Cir. 1983).
|
| 40/ | 9 USC § §208, 307.
|
| 41/ | Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys "R" Us, Inc., 126 F.3d 15, 20 (2d Cir. 1997); Banco de Seguros del Estado v. Mutual Marine Offices Inc., 257 F. Supp. 2d 681 (S.D.N.Y. 2003).
|
| 42/ | American Life Insurance Co. v. Parra, 269 F. Supp. 2d 519 (D. Del. 2003) [holding that "manifest disregard of the law" is not a basis for vacating or refusing to enforce arbitral awards under the Panama Convention, even if those awards were rendered in the United States, since "manifest disregard of the law" is a non-statutory or common-law ground for vacating arbitration awards. The court emphasized that the New York Convention does not recognize "manifest disregard" as a basis for vacating arbitral awards].
|
| 43/ | 745 F. Supp. 172 (S.D.N.Y. 1990).
|
| 44/ | 745 F. Supp. 172, 178 (S.D.N.Y. 1990).
|
| 45/ | 284 F.3d 1114 (9th Cir. 2002).
|
| 46/ | Id. at 1128.
|
| 47/ | 28 USC §1605(a)(6)(B); see S & Davis International v. The Republic of Yemen, 218 F.3d 1292 (11th Cir. 2000) [holding that even though Yemen was not a signatory to the New York Convention, it did waive its sovereign immunity, pursuant to the arbitration exception to the Foreign Sovereign Immunities Act, and that the District Court had jurisdiction to enforce an arbitral award against it].
|
| 48/ | T. Oehmke, 2 Commercial Arbitration at §41:3 (Updated July 2006); see also International Handbook on Commercial Arbitration, supra, at U.S.A.-68, §VII(b) (Bilateral Treaties).
|
| 49/ | Commercial Arbitration at §§3A.131, 41:3.
|
| 50/ | In the Matter of Arbitration Between Chromalloy Aeroservices and the Arab Republic of Egypt, 939 F. Supp. 907, 910 (D.D.C. 1996).
|
| 51/ | These circumstances include whether the award was procured by fraud or undue stress; the arbitrators were partial or corrupt; the arbitrator's misbehavior prejudiced a party's rights; or the arbitrator exceeded, or failed to execute, his authority. Id., discussing 9 USC §10. In addition, the arbitral award will be set aside if it was made in "manifest disregard of the law." Id., quoting First Options of Chicago v. Kaplan, 514 U.S. 938 (1995). |
©2007 Howrey LLP
|
|
| |
