In international contract arbitration matter, Third Circuit rules that U.S. defendant's unheeded jurisdictional objections to Chinese arbitration proceedings based on claim that someone had forged contracts with arbitration clauses showed that district court had failed to carry out its independent duty to make factual findings on defendant's jurisdictional claims
Chi Mei (defendant) is a New Jersey corporation and China Minmetals Materials Import and Export Co., Ltd. (Minmetals) (plaintiff) is a corporation formed under the laws of the People's Republic of China (PRC). Also involved in this litigation is Production Goods and Materials Trading Corp. of Shantou S.E.Z. (Shantou), a PRC corporation.
All three parties played some role in this much disputed business transaction. In Chi Mei's view, it at no time agreed to sell anything to Minmetals, claiming that the "contracts" relied on by the latter were forgeries. The arrangement merely involved an oral agreement with Shantou to discount a certain amount of U.S. dollars for which Chi Mei would get a .7% commission. Minmetals was to obtain the funds by way of a letter of credit secured from the Bank of China.
In opposition, Minmetals asserted that it had issued millions in letters of credit to Chi Mei as the price of some electrolytic nickel cathode alloy. Chi Mei had then submitted phony documents to a New York bank so that it could get hold of the money. Ultimately, the defendant had failed to deliver the goods it had agreed to sell.
At the core of this case are two documents Chi Mei had supposedly sent to a PRC bank which purported to be contracts for the sale of the alloy to Minmetals for an amount equivalent to the sums specified in the letters of credit (the "Sale of Goods" contracts). Defendant claimed that the two contracts were wholly deceitful, bearing a forged signature of a nonexistent Chi Mei employee as well as a phony corporate stamp. Chi Mei further avers that it had never even heard of these alleged "contracts" until they turned up at the contested arbitration.
Defendant also contended that it had carried out its duties under the currency discounting arrangement and had forwarded the funds to Shantou after collecting its .7% commission. Declining to send any of them along to Minmetals, Shantou illegally held onto the funds.
In November 1997, Minmetals filed an arbitration proceeding against Chi Mei before the China International Economic and Trade Arbitration Commission (CIETAC) pursuant to the arbitration clauses contained in the questioned Sale-of-Goods contracts. Defendant appeared and repeatedly challenged CIETAC's jurisdiction as resting on forged arbitration clauses.
The arbitrators ultimately found that Chi Mei had failed to prove the forgeries. Moreover, it held, even if someone had forged defendant's signature and stamp, its own behavior (such as sending documents to the New York bank and drawing on the letters of credit) confirmed the validity of the arbitration clauses. In August 2000, the CIETAC panel awarded Minmetals more than $4 million.
In July 2001, plaintiff petitioned the New Jersey federal court to uphold and enforce the arbitration award. Defendant resisted. In a cross motion to deny relief to Minmetals, Chi Mei introduced many documents and affidavits, among them the affidavit of its CEO, Jiaxiang Luo. Minmetals put in the alleged agreements but filed no opposing affidavits. Instead of holding an evidentiary hearing, the district court merely heard oral argument on the motions. In June 2002, the court confirmed and enforced the award, denying Chi Mei's cross motion. Without ever filing an explanatory opinion, the district court entered judgment in favor of Minmetals two months later for $4,040,850.41.
Defendant duly noted an appeal. The U.S. Court of Appeals for the Third Circuit vacates and remands for further proceedings consistent with this opinion.
Chi Mei contended that the Court of Appeals should read the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention) [21 U.S.T. 2517; T.I.A.S. 6997; 330 U.N.T.S. 3] as a whole. One major part of the Convention deals with motions to preclude arbitration and the other with judicial review of past arbitration rulings. In its view, Convention Article V both expressly and impliedly embodies Article II's requirement for a valid written agreement.
In contrast, plaintiff suggested that the panel's decision as to the validity of the arbitration agreement is conclusive unless an Article V exception applies, which, it argued, is not the case here. For its part, defendant consistently maintained that the district court had an independent duty to determine the validity of the agreement. The Court of Appeals agrees with defendant.
Since chapter 1 of the domestic Federal Arbitration Act (FAA), applies to international actions brought under the Convention (see FAA, chapter 2) to the extent they are not in conflict, 9 U.S.C. Section 208, Chi Mei relies heavily on the Supreme Court's decision in First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995). Although First Options involved the domestic FAA, not the Convention, it was dealing with closely analogous facts.
"In First Options, as here, the district court had confirmed an arbitration award where the parties against whom the award was enforced had contended both in the arbitration proceedings and before the district court that they had never signed the document that bore the arbitration clause. Id. at 941. In that case, the Supreme Court had ruled that the district court, and not the arbitration panel, must decide the question of arbitrability " that is, the question whether a certain dispute is subject to arbitration under the terms of a given agreement unless the parties clearly and unmistakably have agreed that the arbitrator should decide arbitrability. Id. at 943."[281]
As the Third Circuit sees it, "if this case had arisen under the domestic FAA, First Options clearly would have settled in Chi Mei's favor both the question of the need for a valid agreement to arbitrate and the question of the district court's role in reviewing an arbitrator's determination of arbitrability when an award is sought to be enforced. We, therefore, must determine whether First Options provides the rule of decision in a case involving enforcement of a foreign arbitration award under the Convention."
"Our cases involving enforcement under the Convention largely have arisen under Article II, with one party seeking an order compelling another party to arbitrate a dispute. Under those cases, it is clear that, if Minmetals had initiated proceedings in the district court to compel arbitration, the court would have been obligated to consider Chi Mei's allegations that the arbitration clause was void because the underlying contract was forged. [Cite.]"
"It is, of course, true that the FAA, of which the Convention is a part, establishes a strong federal policy in favor of arbitration and that the presumption in favor of arbitration carries "special force' when international commerce is involved. [Cites.] Nonetheless, we have stated that the "liberal federal policy favoring arbitration agreements ... is at bottom a policy guaranteeing the enforcement of private contractual arrangements,' [Cite.] and that because "arbitration is a matter of contract, ... no arbitration may be compelled in the absence of an agreement to arbitrate.' [Cites.] [Id.]
" ... This narrow interpretation of the Convention is in keeping with 9 U.S.C. Section 207 which unequivocally provides that a court in which enforcement of a foreign arbitration award is sought "shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.' (emphasis added). The absence of a written agreement is not articulated specifically as a ground for refusal to enforce an award under Article V of the Convention. In fact, the Convention only refers to an "agreement in writing' in Article II, which requires a court of a contracting state to order arbitration when presented with an agreement in writing to arbitrate, unless it finds that agreement to be void, inoperative, or incapable of being performed." [283]
" ... On the other hand, the crucial principles common to all of these decisions ... suggest that the district court here had an obligation to determine independently the existence of an agreement to arbitrate even though an arbitration panel in a foreign state already had rendered an award, unless Minmetals' argument concerning the exclusive nature of Article V or some other principle provides a meaningful reason to distinguish the cases we have cited." [283-84]
After the Court analyzes the authorities cited by plaintiff, it concludes as follows. "Indeed, although only Article II contains an "agreement in writing' requirement, Article IV requires a party seeking to enforce an award under Article V to supply "[t]he original agreement referred to in article II' along with its application for enforcement. Furthermore, Article V expressly provides that the party opposing enforcement may furnish "to the competent authority where the recognition and enforcement is sought proof that ... the said agreement is not valid ....' Read as a whole, therefore, the Convention contemplates that a court should enforce only valid agreements to arbitrate and only awards based on those agreements." [284]
Next the Court inquires whether the international context of the arbitration at issue affects First Options' principle that the district court should determine whether there was a valid agreement to arbitrate. "... [D]espite the principle's presumption in favor of allowing arbitrators to decide their own jurisdiction, it appears that every country adhering to the competence competence principle allows some form of judicial review of the arbitrator's jurisdictional decision where the party seeking to avoid enforcement of an award argues that no valid arbitration agreement ever existed. Even the traditional German model allowed for judicial review when the very making of the competence competence agreement was challenged. [Cite.]" [286]
"It therefore seems clear that international law overwhelmingly favors some form of judicial review of an arbitral tribunal's decision that it has jurisdiction over a dispute. ... International norms of competence competence are therefore not inconsistent with ... First Options, at least insofar as the holding is applied in a case where, as here, the party resisting enforcement alleges that the contract on which arbitral jurisdiction was founded is, and always has been, void."
"In sum, First Options holds that a court asked to enforce an arbitration award, at the request of a party opposing enforcement, may determine independently the arbitrability of the dispute. Although First Options arose under the FAA, the Court's reasoning in the case is based on the principle that "arbitration is simply a matter of contract between the parties; it is a way to resolve those disputes but only those disputes that the parties have agreed to submit to arbitration.' First Options, 514 U.S. at 943. This rationale is not specific to the FAA." [289]
The need for a valid agreement to arbitrate thus remains vital, in the Court's view. "Indeed, even international laws and rules of arbitration that traditionally grant arbitrators more leeway to decide their own jurisdiction have allowed a party objecting to the validity of the agreement to arbitrate to seek judicial review of an arbitral panel's decision that it has jurisdiction under the alleged agreement."
"For these reasons, we hold that, under the rule of First Options, a party that opposes enforcement of a foreign arbitration award under the Convention on the grounds that the alleged agreement containing the arbitration clause on which the arbitral panel rested its jurisdiction was void ab initio is entitled to present evidence of such invalidity to the district court, which must make an independent determination of the agreement's validity and, therefore, of the arbitrability of the dispute, at least in the absence of a waiver precluding the defense."[Id.]
Alternatively to asking the Third Circuit to enter judgment in its favor, Chi Mei asks it to send the case back to the district court for further proceedings to ascertain the validity of the contracts. Given the obvious dispute as to the facts, the Court agrees that a remand is called for.
Plaintiff also maintained that, by voluntarily taking part in the arbitration proceedings, Chi Mei had waived its jurisdictional objections. The Court, however, is not persuaded. "The record in this case makes clear that Chi Mei's participation in the CIETAC proceedings largely was limited to arguing the forgery issue. Although it appears to have presented at least one alternative argument, it consistently objected to the arbitral panel's jurisdiction both in the arbitration proceedings and before the district court."
"Furthermore, its decision to proceed with the arbitration despite its jurisdictional objection was likely necessary to prevent an award being entered against it in its absence; it appears that Minmetals may not have had sufficient contacts with New Jersey or the United States for it to have been subject to the jurisdiction of the federal district court in New Jersey or elsewhere, so that Chi Mei likely would not have been able to initiate suit against [Minmetals] to enjoin the arbitration, at least not in the United States. [Cite.]" [290]
"Thus, whether we apply federal law or New Jersey law, the result is the same: Chi Mei did not waive its objection to CIETAC's jurisdiction inasmuch as it participated in the arbitration primarily to argue the forgery/jurisdiction issue and consistently objected to CIETAC's jurisdiction throughout the proceedings." [291-92]
Citation: China Minmetals Materials Import and Export Co., Ltd. v. Chi Mei Corporation, 334 F.3d 274 (3rd Cir. 2003).
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