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First Circuit affirms lower court’s decision that Fed. R. Civ. P. 59(e) prevents presentation of new arguments in motions for reconsideration even when issues concerned relate to international arbitration
In 2000, Marks 3-Zet-Ernst Marks GmbH (Plaintiff), a German company, and Presstek, Inc. (Defendant), a Delaware corporation, had entered into a commercial agreement. The agreement stated that the Plaintiff would market Defendant’s products in various parts of Europe. Neither party had the right to terminate the contract for three years, except under certain conditions.
Section 10(g) of the contract provided in part: “Applicable Law and Jurisdiction. Any dispute . . . between the Parties arising out of, or relating to, this Agreement which cannot be settled amicably shall be referred to, and determined by, arbitration in the Hague under the International Arbitration rules. The ruling by the arbitration court shall be final and binding…..”
The arbitration clause notably fails to designate the specific arbitral body at The Hague for there are several. The contract also states that “the International Arbitration Rules” would govern the dispute when there are no rules by that name.
In April 2002, Defendant notified Plaintiff that it wished to terminate the contract. Plaintiff looked upon this termination as a contract breach and tried several times to persuade Defendant to arbitrate. The record shows only that the first request was under the UNCITRAL Arbitration Rules. All other attempts were unsuccessful. Plaintiff next sent letters to the Permanent Court of Arbitration at The Hague (PCA) asking it to launch an arbitration proceeding. In its application, Plaintiff asserted that the arbitration clause calls for UNCITRAL to provide the governing rules. The PCA did notify Defendant of Plaintiff’s arbitration request, but raised questions about the PCA’s competence to arbitrate this case. Defendant eventually responded to the PCA. It refused to stipulate to the applicability of the UNCITRAL Arbitration Rules, contending that the contract language was not clear enough. The PCA later concluded that it did lack the competence to handle this case.
In March 2004, Plaintiff again implored Defendant to arbitrate the dispute, this time pursuant to the Netherlands Arbitration Act. Defendant failed to respond. Plaintiff moved the New Hampshire federal court in April 2005 to compel arbitration under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, [21 U.S.T. 2517; T.I.A.S. 6997; 330 U.N.T.S. 3; June 7, 1959.] Plaintiff asked, inter alia, for an order directing Defendant to arbitrate in The Hague under the American Arbitration Act’s International Rules. In effect, Plaintiff was trying to arbitrate the dispute at the PCA under rules which the PCA could not honor.
In September 2005, the district court dismissed Plaintiff’s petition. Plaintiff moved for reconsideration under Fed. R. Civ. P. 59(e) which the district court denied. Plaintiff appealed but the First Circuit affirms.
In his Rule 59 motion, Plaintiff had urged new arguments. Stressing the broad federal policy favoring arbitration of disputes, it claimed (1) that it is entitled to arbitration in some forum (not necessarily the PCA), (2) that this could take place under some set of arbitration rules, (3) that it required a court hearing to sort out the possibilities. It argued that “the Supreme Court has noted that the policy favoring arbitration has ‘applies [sic] with special force in the field of international commerce.’ See Restoration Pres. Masonry Inc. v. Grove Eur. Ltd., 325 F.3d 54, 60 (1st Cir. 2003) ….” [Slip op. 9] According to Plaintiff, it was not improper to wait until the motion for reconsideration to specify this relief since the petition was seeking “such other and further relief as the Court deems appropriate and just.”
The First Circuit, however, disagrees. “[B]road policy favoring arbitration — even in the context of international arbitration — does not create an exception to the general rule that a motion to reconsider does not allow a party ‘to introduce new evidence or advance arguments that could and should have been presented to the district court prior to the judgment.’ Aybar, 118 F.3d 10, 16 (1st Cir. 1997).” [Slip op. 10] .
“Arbitration clauses were not meant to be another weapon in the arsenal for imposing delay and costs in the dispute resolution process. . . . In the context of international contracts, the opportunities for increasing the cost, time, and complexity of resolving disputes are magnified by the presence of multiple possible fora, each with its own different substantive rules, procedural schematas, and legal cultures. This is fertile ground for manipulation and mischief, and acceptance of [plaintiff's] arguments would lead to the very problems the [New York] Convention sought to avoid.” [Slip op. 10]
Citation: Marks 3-Zet-Ernst Marks GmbH & Co. KG v. Presstek, Inc., 455 F.3d 7 (1st Cir. 2006).
Filed in: 2006 International Law Update, Issue8
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Fifth Circuit holds foreign government liable for arbitration award, even though it acted through its subsidiary where government exercised complete control over subsidiary and where it was using subsidiary to perpetrate fraud or injustice
In 1993, Bridas (plaintiff), an Argentine Corporation, entered into a 25-year Joint Venture Agreement (JVA) to exploit oil and gas resources with an entity designated by the Government of Turkmenistan (defendant). Recently liberated from the Soviet Union, defendant lacks the technical expertise to extract its vast resources. The JVA secured plaintiff an unlimited export license for developing hydrocarbons. (These are organic chemicals associated with oil, natural gas and coal.) It allocated all hydrocarbon production up to November 1992 levels to the Turkmenian party; the parties were to split any later increases in production.
To raise its share of future proceeds, the defendant ordered plaintiff to halt operations in November of 1995 and to stop importing items into, and exporting hydrocarbons from, Turkmenistan. Six months later, plaintiff began arbitration proceedings in Texas.
The defendant next replaced the Turkmenian party as signatory to the JVA with an entity it called “Turkmenneft.” It also set up a special State Oil and Gas Development Fund (SOGDF) to hold the proceeds from all oil and gas exports, declaring the SOGDF assets immune from seizure.
The proceedings took place in Houston before an arbitration panel of the International Chamber of Commerce. The panel’s main issue was whether it could hold the defendant liable though it had never signed the JVA. The panel held both Turkmenneft and defendant liable for repudiation of contract and in 2001 handed down a $495 million damage award.
A Texas federal court initially upheld the award against the defendant based on agency and estoppel. On appeal, the Fifth Circuit considered several theories which can bind a non-signatory to an arbitration agreement: i.e., agency, alter ego, estoppel, and third-party beneficiary. Finding the other theories inapplicable, the Court remanded the case for a determination solely on the theory of alter ego.
On remand, the district court vacated the arbitration award on grounds that the defendant did not constitute Turkmenneft’s alter ego. Plaintiff duly took an appeal. The Fifth Circuit now reverses and remands, holding that the JVA binds the defendant as an alter ego of the signatory, Turkmenneft.
The Court begins its analysis by noting that generally, “a parent corporation is not liable for actions taken by its subsidiaries, including entities owned by foreign governments.” [Slip op. 20] The Court then recognizes an exception to this general immunity. The alter ego principle as a form of the “piercing the corporate veil” doctrine, renders a parent liable when it uses its subsidiary as a “sham to perpetrate a fraud.” [Slip op. 3]
The Court lays out the two key elements of the alter ego doctrine: “(1) the owner exercised complete control over the corporation with respect to the transaction at issue and (2) such control was used to commit a fraud or wrong that injured the party seeking to pierce the veil.” [Slip op. 3]
First, the Court analyzes the fraud prong of this test, placing the burden of proving that the defendant misused the subsidiary to commit fraud or injustice on the plaintiff. Plaintiff can satisfy this burden by evidence that the defendant had injured it by destroying the value of the JVA.
The defendant assigned Turkmenneft as the new party to the JVA, requiring it to arbitrate disputes and making it liable for all possible adverse awards. Defendant purported to make Turkmenneft immune from seizure, however, because it got its funding from the newly created SOGDF. The Court concludes that these and other actions by the defendant aimed at preventing plaintiff from recovering any substantial damage award, and thus satisfy the “fraud or injustice” prong of the test.
Second, the Court analyzes whether the defendant had enough control over Turkmenneft. The district court used twenty-one private and public law factors to aid in its determination and concluded that the Government did not exercise the necessary control.
The relevant “private law” factors considered in Bridas S.A.P.I.C. v. Government of Turkmenistan (“Bridas I”), 345 F.3d 347 (5th Cir. 2003) were whether: “(1) the parent and subsidiary have common stock ownership; (2) the parent and subsidiary have common directors or officers; (3) the parent and subsidiary have common business departments; (4) the parent and subsidiary file consolidated financial statements; (5) the parent finances the subsidiary; (6) the parent caused the incorporation of the subsidiary; (7) the subsidiary operated with grossly inadequate capital; (8) the parent pays salaries and other expenses of subsidiary; (9) the subsidiary receives no business except that given by the parent; (10) the parent uses the subsidiary’s property as its own; (11) the daily operations of the two corporations are not kept separate; (12) the subsidiary does not observe corporate formalities.” [Slip op. 4]
The district court also considered three additional “private law” factors: “(1) whether the directors of the ‘subsidiary’ act in the primary and independent interest of the ‘parent’; (2) whether others pay or guarantee debts of the dominated corporation; and (3) whether the alleged dominator deals with the dominated corporation at arm’s length.” [Slip op. 4-5]
The relevant “public law” factors considered by the Bridas I court were: “(1) whether state statutes and case law view the entity as an arm of the state; (2) the source of the entity’s funding; (3) the entity’s degree of local autonomy; (4) whether the entity is concerned primarily with local, as opposed to statewide, problems; (5) whether the entity has the authority to sue and be sued in its own name; and (6) whether the entity has the right to hold and use property.” [Slip op. 5]
The Fifth Circuit sees clear error in the district court’s application of the alter ego factors. The alter ego analysis must examine – not so much the form of the relationship – as its realities; it demands a focus on the actual conduct of the parent towards its subsidiary. The district court went wrong because it glorified form over substance.
The district court first balanced the “formalities” and “operational” factors, finding that Turkmenneft existed as a separate and independent entity. Then the district court contradicted itself by stating that the defendant did not deal with Turkmenneft at arm’s length, but instead as a “closely held subsidiary.” [Slip op. 6] Furthermore, in reviewing the “finance” factors, the district court unearthed more indicia of Turkmenneft’s dependence on the defendant.
The Fifth Circuit determines that, in combination, these factors satisfy the “control” prong. The court noted that “undercapitalization is often critical in alter ego analysisthe fact that a subsidiary maintains what amounts to a ‘zero balance,’ and relies exclusively upon another entity to service its debts, is strong evidence that the subsidiary lacks an independent identity.” See HystroProds., Inc. v. MNP Corp., 18 F.3d 1384, 1389 (7th Cir. 1994). [Slip op. 6]
After the defendant forced the plaintiff out of the JVA through export bans, it used its power over Turkmenneft in an effort to deprive plaintiff of any contractual remedies. “Intentionally bleeding a subsidiary to thwart creditors is a classic ground for piercing the corporate veil.” [Slip op. 7] Although plaintiff did satisfy the alter ego test in the instant case, the Court stresses that the test should be stringent where a creditor had an opportunity to seek a guarantee of the subsidiary from the parent.
Citation: Bridas S.A.P.I.C. v. Government of Turkmenistan, No. 04-20842 (5th Cir. April 21, 2006).
Filed in: 2006 International Law Update, Issue 5
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In dispute over enforceability of international arbitration award, D.C. Circuit holds that district court had jurisdiction over Ukrainian state entity by virtue of FSIA’s arbitration exception and because “minimum contacts” requirements of Due Process Clause do not apply to entities that are identical with foreign state itself
TMR Energy Ltd. (TMR) is a Cyprus-based corporation. It brought an action in the District of Columbia federal court to confirm an arbitration award it had obtained in Sweden against the State Property Fund of Ukraine (SPF).
The dispute arose after the Ukraine had declared its independence in 1991. The State-owned Lisichansk Oil Refining Works (LOR) entered into a joint venture called Lisoil with a Swiss company to modernize an oil refinery in eastern Ukraine.
The Swiss company later assigned its interest in Lisoil to TMR. As part of its privatization program, the Ukranian government converted LOR into a joint stock company called Linos. SPF held 67 percent of Linos shares on behalf of the Ukraine.
In 1997, Linos ran into economic problems and stopped shipping crude oil to the Lisoil refinery. Three years later, TMR started arbitration proceedings in Sweden against SPF, Linos, and the State of Ukraine. The arbitrators found that SPF had failed to comply with its contract duties and awarded TMR $36.7 million in damages.
In the present suit, TMR is seeking to enforce that award. The district court later entered judgment in favor of TMR, and SPF appealed. The U.S. Court of Appeals for the District of Columbia Circuit, however, affirms.
SPF argued that the district court should have dismissed the case because SPF lacked the required minimum contacts with the U.S. The appellate Court disagrees.
It first rules that there is personal jurisdiction over SPF based on the arbitration exception to the Foreign Sovereign Immunities Act (FSIA) (28 U.S.C. Section 1605(a)(6)(B)). This section recognizes an exception from immunity for a foreign state in the enforcement of an arbitration award that “is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.” See Convention on the Recognition and Enforcement of Foreign Arbitral Awards (June 7, 1959, 21 U.S.T. 2517; T.I.A.S. 6997; 330 U.N.T.S. 3), often referred to as the “New York Convention.”
To get around this clear exception, the Ukraine argued that the Due Process Clause of the Fifth Amendment to the U.S. Constitution requires a nexus with the forum where enforcement is sought. SPF claims to lack the requisite “minimum contacts” because it lacks any significant relationship to the District of Columbia. The Court, however, is unpersuaded.
“This court rejected a similar argument in Price v. Socialist People’s Libyan Arab Jamahiriya, 294 F.3d 82 (D.C. Cir. 2002). There we held a foreign state is not a ‘person’ as that term is used in the due process clause. … We noted first that, ‘in common usage, the term ‘person’ does not include the sovereign,’ and went on to observe that it would make no sense ‘to treat foreign sovereigns more favorably that ‘States of the Union,’ which are decidedly not ‘persons’ within the meaning of the due process clause. …”
“That is not to say [that] a foreign state is utterly without recourse but only that, ‘[u]nlike private entities, foreign nations [being] the juridical equals of the government that seeks to assert jurisdiction over them,’ have available ‘a panoply of mechanisms in the international arena through which so (sic) seek vindication or redress’ if they believe they have been wrongly haled into court in the United States …. In short, it is not to the due process clause but to international law and to the comity among nations, as codified in part by the FSIA, that a foreign state must look for protection in the American legal system.” [Slip op. 4-5]
In the Court’s view, this principle may apply to government-controlled entities as well. The question there is whether the entity at issue has a constitutional status different from that of the State itself. “If the State of Ukraine exerted sufficient control over the SPF to make it an agent of the State, then there is no reason to extend to the SPF a constitutional right that is denied to the sovereign itself.”
“The record in this case shows that the State of Ukraine has plenary control over the SPF. … [T]he SPF’s chairman is ‘appointed and discharged by the President of the Ukraine … [T]he SPF’s expenses are paid from the budget of the State of Ukraine. From these structural features it is apparent that the SPF is an agent of the State, barely distinguishable from an executive department of the government, and should not be treated as an independent juridical entity. Therefore, the SPF – like its principal, the State of Ukraine – is not a ‘person’ for purposes of the due process clause and cannot invoke the minimum contacts test to avoid personal jurisdiction of the district court.” [Slip op. 6]
The Court also rejects SPF’s contention that customary international law also requires “minimum contacts” with the forum. “Never does customary international law prevail over a contrary federal statute. … In this case, the controlling federal statute is 28 U.S.C. Section 1330(b): ‘Personal jurisdiction over a foreign state shall exist as to every claim for relief over which the district courts have jurisdiction under subsection (a) where service has been made under section 1608 of this title.’ That provision clearly expresses the decision of the Congress to confer upon the federal courts personal jurisdiction over a properly served foreign state – and hence its agent – coextensive with the exceptions to foreign sovereign immunity in the FSIA.”
“We therefore reject the SPF’s attempt to condition the jurisdiction of the courts of the United States upon the ‘minimum contacts’ purportedly required under customary international law; we hold the district court properly asserted personal jurisdiction over the SPF based solely upon the requirements of the FSIA.” [Slip op. 6]
Citation: TMR Energy Ltd. v. State Property Fund of Ukraine, 411 F.3d 296 (D.C. Cir. 2005).
Filed in: 2005 International Law Update, Issue 7
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Second Circuit overturns enforcement of Egyptian arbitration award against U.S. parent company since only subsidiary had agreed to arbitrate and since district court need not accept foreign finding that parent company may also be bound
The Sarhank Group is an Egyptian company with its principal place of business in Cairo, Egypt. In 1991, it entered into a contract with a subsidiary of Oracle Corporation. Oracle is a Delaware corporation with its principal place of business in California. The subsidiary (not a party to this action) is registered in Cyprus. The contract, extended annually through May 1997, required Sarhank to perform certain services for Oracle within Egypt.
Its arbitration clause provided for arbitration under Egyptian law. When the Oracle subsidiary terminated the contract in 1997, Sarhank resorted to arbitration against both Oracle and its subsidiary. Oracle itself was not a signatory to the contract, nor did it ever agree to arbitrate with Sarhank.
When arbitration began before the Cairo (Egypt) Regional Centre for Commercial Arbitration, Oracle objected to the arbitration because it had never signed any agreement with Sarhank. The three-member arbitration panel, ostensibly applying Egyptian law, found Oracle bound by the contract and later found both Oracle and its subsidiary liable for $1.9 million. Oracle unsuccessfully appealed to the Cairo Court of Appeals and to the Egyptian Court of Cassation (ECC).
Sarhank next filed a petition in a New York federal court, seeking to confirm the award based on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Convention) [21 U.S.T. 2517; T.I.A.S. 6997; 330 U.N.T.S. 3 (in force for U. S., Dec. 29, 1970)] see also 9 U.S.C. Sections 201-208. The district court ruled in Sarhank’s favor and Oracle appealed. The U.S. Court of Appeals for the Second Circuit vacates and remands.
Oracle first argued that the district court lacked subject matter jurisdiction in the absence of a signed and written arbitration agreement between Sarhank and itself. The Court disagrees. “Where, as here, the Petition seeks relief under the Constitution or the laws of the United States, the federal courts have subject matter jurisdiction under 28.U.S.C. Section 1331, unless the federal claim is immaterial, frivolous and insubstantial or made solely for the purpose of obtaining jurisdiction. …”
“Sarhank claimed jurisdiction under the Convention; described as a written agreement between [the Oracle subsidiary] and Sarhank; in effect, alleged that a legal relationship was created between Oracle and Sarhank because [the subsidiary] was a shell corporation; and described the arbitral award. Thus, Sarhank has, for subject matter jurisdiction purposes, adequately pleaded an arbitral award falling under the Convention.” [Slip op. 8]
Article V(2) of the Convention provides, however, that a U.S. court may not enforce an agreement if the subject matter is not capable of arbitration in the U.S., or if the enforcement of the award would be contrary to American public policy.
“Under American law, whether a party has consented to arbitrate, is an issue to be decided by the Court in which enforcement of an award is sought. An agreement to arbitrate must be voluntarily made, and the Court decides, based on general principles of domestic contract law, whether the parties agreed to submit the issue of arbitrability to the arbitrators. … As arbitrability is not arbitrable in the absence of the parties’ agreement, the district court was required to determine whether Oracle had agreed to arbitrate.” [Slip op. 9-10]
Here, the district court failed to decide whether Oracle had consented to arbitration. The Egyptian Arbitral Tribunal found that an arbitration proceeding involving a subsidiary can implicate the parent company. In the Circuit Court’s view, however, that finding did not bind the district court as a matter of law. In enforcement actions, federal arbitration law controls. An American non-signatory does not have to arbitrate in the absence of a supporting legal theory based on American contract or agency law.
The Court therefore remands for a determination of whether Oracle had agreed to arbitrate, or whether there is support in American contract or agency law to otherwise bind Oracle.
Citation: Sarhank Group v. Oracle Corporation, No. 02-9383, 2004 WL 3267566 (2d Cir. April 14, 2005).
Filed in: 2005 International Law Update, Issue4
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Ontario Court of Appeals turns down Mexico’s challenge of ICSID arbitration award to U.S. company denied “national treatment” in violation of NAFTA
Marvin Ray Feldman Karpa (taxpayer) is a citizen of the United States who owns and operates an export business in Mexico called Corporacion de Exportaciones Mexicanas S.A. de C.V. (CEMSA). CEMSA was buying cigarettes from volume retailers such as Wal Mart and Sam’s Club within Mexico and selling them to customers outside Mexico.
Impuesto Especial Sobre Produccion y Servicios (the “Special Tax on Production and Services” or IEPS) applies to the manufacture and sale of cigarettes. If a cigarette business exports certain products, such as cigarettes, subject to the IEPS tax , the Mexican government may give rebates to the exporter. To obtain the rebate, however, the exporter has to produce invoices that “separately and expressly state the amount of the IEPS tax paid”.
From time to time, CEMSA applied for the tax rebates and the Mexican government generally granted them. Mexico later changed its approach, however, and refused to pay CEMSA the tax rebates; it claimed that CEMSA could not come up with invoices that separately set forth the amount of the tax paid.
Apparently what happened was this. Cigarette manufacturers declined to sell to CEMSA and other exporters; leading CEMSA to buy its cigarettes from volume retailers (VRs). The invoices sent to CEMSA by the VRs, however, did not separately list the tax because the makers had already paid it before selling the cigarettes to the VRs. As a result, the price paid by CEMSA for cigarettes included the tax, but the tax portion did not show up on the invoices gotten from the VRs.
In 1998, the Mexican Taxation Agency, the Secretaria de Hacienda y Credito Publica (SHCP) audited CEMSA. The SHCP decided that CEMSA had incorrectly received IEPS tax rebates between January 1996 and September 1997. SHCP demanded repayment of about US $25 million. The audit also alleged that CEMSA had flagrantly overstated the amount of the IEPS tax it had paid.
In April 1999, CEMSA filed a notice of arbitration at the International Center for Settlement of Investment Disputes (ICSID) in Ottawa pursuant to Chapter 11, Article 1120, of the North American Free Trade Agreement (NAFTA). The tripartite tribunal had members from Greece, the United States and Mexico.
In its application, CEMSA asked for damages roughly equivalent to US$ 50 million and raised three arguments. Most importantly, CEMSA maintained that Mexico’s refusal to pay it the IEPS rebates constituted a violation of NAFTA article 1102 requiring that Mexico grant to investors of another party to NAFTA treatment no less favorable than it affords to its own investors. After a hearing, a majority of the tribunal held that Mexico had breached Article 1102 on “national treatment.” The tribunal saw no merit in the other two claims.
The majority award defined the issue under Article 1102 of NAFTA as follows at para. 169: “The question … is whether rebates have in fact been provided for domestically owned cigarette exporters while denied to a foreign re seller, CEMSA. … Thus, if the IEPS Article 4 invoice requirement is ignored or waived for domestic cigarette reseller/exporters, but not for foreign owned cigarette reseller/exporters, that de facto difference in treatment is sufficient to establish a denial of national treatment under Article 1102.”
In concluding that Mexico had breached article 1102, the tribunal stated at para. 187 of the award: ” … [A] majority of the Tribunal concludes that Mexico has violated the Claimant’s rights to non discrimination under Article 1102 of NAFTA. The Claimant has made a prima facie case for differential and less favourable treatment of the Claimant, compared with treatment by SHCP of the Poblano Group.”
“The inescapable fact is that the Claimant has been effectively denied IEPS rebates for the April 1996 through November 1997 period, while domestic export trading companies have been given rebates not only for much of that period but through at least May 2000, suggesting that Article 4(III) of the law has been de facto waived for some, if not all, domestic firms.”
“Finally, the Claimant has not been permitted to register as an exporting trading company, while the Poblano Group firms have been granted this registration. All of these results are inconsistent with the Respondent’s obligations under Article 1102, and the Respondent has failed to meet its burden of adducing evidence to show otherwise.”
The majority awarded damages to CEMSA based substantially on the amount of rebates withheld from CEMSA. As adjusted downward, the award was equivalent to about U.S. $1.6 million. Mexico applied to the Ontario courts for judicial review since Ottawa was named as the place of arbitration. In the Superior Court of Justice, Mexico proceeded under the ICAA, c. I 9 and the UNCITRAL Model Law on International Commercial Arbitration (Model Law).
The first instance judge dismissed the application and Mexico appealed to the Ontario Court of Appeal. That Court unanimously dismisses the appeal.
The appellate court first comments on the scope of its review in cases such as this. “Notions of international comity and the reality of the global marketplace suggest that courts should use their authority to interfere with international commercial arbitration awards sparingly.” [¶ 34]
The Court cites Quintette Coal Ltd. v. Nippon Steel Corp., [1990] B.C.J. No. 2241 (B.C.C.A.). It declared that the “concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes … are as compelling in this jurisdiction as they are in the United Sates or elsewhere. It is meet therefore, as a matter of policy, to adopt a standard which seeks to preserve the autonomy of the forum selected by the parties and to minimize judicial intervention when reviewing international commercial arbitral awards.’” [¶ 36]
“Quite apart from principles of international comity, our domestic law in Canada dictates a high degree of deference for decisions of specialized tribunals generally and for awards of consensual arbitration tribunals in particular.” [¶ 37]
“The ICSID Additional Facility rules, which govern this arbitration, provide that ‘the award shall be final and binding’ and no more. There are no additional words to exclude appeals and judicial review. Indeed, judicial review is expressly provided for under Section 34 of the Model Law.”
“That said, Section 34 of the Model Law limits judicial review to traditional jurisdictional grounds. In addition, Section 34 provides judicial review if the subject matter of the dispute is not capable of settlement by arbitration under Ontario law or the award is in conflict with the public policy of Ontario.” [¶ 39]
“NAFTA tribunals settle international commercial disputes by an adversarial procedure under which they determine legal rights in a manner not dissimilar to the courts. This may suggest that such tribunals ought not to attract a high degree of deference upon judicial review. However, I accept that there is merit in the submission of counsel for [CEMSA] that ‘the dispute settlement mechanism and the need for expertise, all combine to indicate that the statutory purpose is to take the resolution of these disputes out of the hands of domestic courts.’” [¶ 41]
“The matters to be decided by the tribunal in this case were heavily fact laden. … However, it is trite to say that a tribunal, which is engaged primarily in a fact finding task, is entitled to a high degree of judicial deference. Taking the above factors into account, I conclude that the applicable standard of review in this case is at the high end of the spectrum of judicial deference.” [¶¶ 42-43]
“Mexico submits that the majority award is contrary to article 2105 of NAFTA by drawing adverse inferences from Mexico’s failure to make disclosure of information related to domestic taxpayers. Article 2105 provides: ‘Nothing in this Agreement shall be construed to require a party to furnish or allow access to information the disclosure of which would impede law enforcement or would be contrary to the Party’s law protecting personal privacy or the financial affairs and accounts of individual customers of financial institutions.’” [¶ 45]
“Mexico further argues that since a chapter 11 tribunal is without authority to compel disclosure of taxpayer information, it has no authority to draw an adverse inference from a party’s inability to lawfully provide such information.” [¶ 46]
“[Appellant] refers in particular to paragraph 178 of the arbitration award, where the majority made reference to the failure of the appellant to provide an explanation why it did not lead evidence to show that a domestic group of companies had not been treated in a more favourable fashion than CEMSA.” [¶ 47]
“Mexico [also] relies upon Article 34(2)(a)(ii) of the Model Law which provides that an arbitral award may be set aside by the court if the party seeking judicial review was unable to present its case. This ground of appeal is linked to the first ground of appeal in that Mexico relies upon the majority’s drawing of adverse inferences from the appellant’s failure to present evidence in respect of the treatment of domestic taxpayers.”
“[Appellant] submits that, pursuant to Article 69 of its Fiscal Code, it was prohibited from disclosing the treatment afforded to other taxpayers and that such position was consistently stated to the tribunal. Mexico further submits that by drawing adverse inferences from its failure to present evidence of the position of other taxpayers, the tribunal effectively prevented Mexico from presenting its defence.” [¶¶ 49-51]
The Court of Appeal points out that the tribunal did not require Mexico to produce any information which it did not wish to produce contrary to Article 69 of the Fiscal Code. “It chose to file the statements of Mr. Diaz and other evidence. The majority were not persuaded that Mexico had satisfied the burden of responding to the prima facie case made by the claimant, Mr. Feldman.”
“I see some merit in Mexico’s argument that, if the tribunal is without authority to compel disclosure of taxpayer information, it has no authority to draw an adverse inference from a party’s inability to provide such information. … [Mexico] decided, however, to produce certain taxpayer information. That information failed to satisfy the tribunal which, in turn, led the tribunal to conclude that if Mexico had [other] evidence that a domestic taxpayer had ‘been treated in a manner equivalent to the claimant…[it] would have provided that evidence.’ In my view, the tribunal was entitled to come to such a conclusion.” [¶¶ 57-58]
“… [T]he issue … was essentially a question of fact ‘whether rebates have in fact been provided for domestically owned cigarette exporters while denied to a foreign reseller, CEMSA’. In this case, the majority found, on Mexico’s own evidence, that it had allowed rebates for domestic exporters that it had refused to CEMSA. On a finding of fact, for which there is support in the evidence, the court must defer to the tribunal.”
“I am unable to conclude that the majority of the tribunal acted in breach of NAFTA article 2105 … In my view, the arbitral procedure was not contrary to the agreement of the parties and Mexico was not prevented from presenting its case.” [¶¶ 60-61]
The Court of Appeal also addresses Mexico’s contention that the damages awarded to CEMSA rested upon unlawful rebates and are, therefore, contrary to Ontario public policy.[see ¶ 39 above] The Court, however, is unpersuaded.
“The damages are equivalent to the rebates that CEMSA had been refused at the same time that domestic exporters were receiving rebates. Mexico was in effect waiving the requirement to produce invoices stating the tax separately for domestic exporters, while at the same time refusing to waive the requirement for CEMSA.” This is incompatible with “national treatment.”
The Court also finds nothing fundamentally unjust or unfair about the arbitral award. “It is rationally connected to the discriminatory conduct found by the tribunal and seeks to redress the effect of the discrimination. The award is a logical quantification of the harm caused to CEMSA by the discriminatory conduct.” [¶ 67]
Nor does CEMSA’s conduct in claiming fictitious rebates render the adjusted award contrary to Ontario public policy. “While this court does not condone such conduct, the extent to which it should affect the award of damages is for the tribunal to decide. The tribunal made allowances for the inflated rebate claims in its [downward] assessment of damages. I cannot conclude that its failure to deny any monetary recovery is contrary to public policy.” [¶ 68]
Citation: United Mexican States v. Karpa, Docket No. C41169, [2005] O.J. No. 16, 2005 WL 95624, 2005 CarswellOnt. 32 (Ont. Ct. App. January 11).
Filed in: 2005 International Law Update, Issue3
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In reviewing provisions of New York Arbitration Convention and Federal Arbitration Act relating to judicial confirmations of arbitral awards, Second Circuit concludes that, in Convention cases, 9 U.S.C. Section 207 preempts FAA Section 9′s “consent-to-confirmation” requirement so that U.S. courts may confirm foreign arbitral awards even if arbitration agreement does not specifically say so
In 1993, Phoenix Aktiengesellschaft (a German corporation) licensed Ecoplas (a U.S. corporation) to produce and sell “Phoenix polyester – (UP) – moulding compounds.” To do this, Phoenix passed on confidential information and technical expertise to Ecoplas. The licensing agreement required arbitration of relevant disputes before the International Chamber of Commerce (ICC) in Zurich, Switzerland, with Swiss law applying. Phoenix later decided to sell certain assets to Bakelite AG. When Phoenix sought Ecoplas’ consent to the transfer of the licensing agreement, however, Ecoplas objected and declared the agreement terminated.
Phoenix next brought a complaint before the ICC’s International Court of Arbitration (ICA). It argued that the original licensing agreement between the parties continued in effect and that Ecoplas had failed to pay the licensing fees. Agreeing, the ICA awarded Phoenix about $100,000 in damages plus costs. Because Ecoplas failed to pay, Phoenix filed suit in New York federal court under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) (June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997).
Ecoplas argued that the district court lacked jurisdiction because the arbitration agreement did not reflect the parties’ consent to judicial confirmation of the arbitration award, as required by Section 9 of the Federal Arbitration Act (FAA), 9 U.S.C. Sections 1-16, 201-08, 301-07 (2000).
Furthermore, Ecoplas maintained, under Article (V)(1)(b) of the Convention, the district court should not enforce the arbitration award because the arbitrator had refused to hear certain evidence as to the usefulness of Phoenix’ technical advice.
Nevertheless, the district court granted Phoenix’ motion to confirm the award. Ecoplas appealed. The U.S. Court of Appeals for the Second Circuit affirms. It holds that 9 U.S.C. Section 207 of the FAA preempts the consent-to-confirmation requirement of 9 U.S.C. Section 9 in cases based on the Convention.
The Court notes that this case presents an unresolved issue under the FAA, namely, the scope of the authority of federal courts under 9 U.S.C. Sections 9 and 207 to confirm an arbitration award. Section 9 provides that “[i]f the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration, … then … within one year after the award is made any party … may apply to the court so specified for an order confirming the award …”
Section 207 provides that “within three years after an arbitral award … is made, any party to the arbitration may apply to any court having jurisdiction under this chapter for an order confirming the award against any other party to the arbitration.”
The Court explains that the U.S. did not join the 1958 Convention, but later implemented it by enacting Chapter 2 of the FAA (now 9 U.S.C. Sections 201-208). Under Section 208, the pre-Convention provisions of the FAA, i.e., Chapter 1 (9 U.S.C. Sections 1-16), continue to apply to the enforcement of foreign arbitral awards except to the extent that Chapter 1 conflicts with the Convention or with Chapter 2.
Conformity with that “consent to confirmation” requirement is only necessary if Section 9 is consistent with Section 207. If the provisions conflict, the latter provision preempts the former (see 9 U.S.C. Section 208), and consent is unnecessary for confirmation by a court.
“Section 207 does not in any way condition confirmation on express or implicit consent. Because the plain language of Section 207 authorizes confirmation of arbitration awards in cases where Section 9′s consent requirement expressly forbids such confirmation, we hold that the two provisions conflict. Accordingly, we hold that Section 207 preempts Section 9′s consent-to-confirmation requirement in cases under the Convention. See 9 U.S.C. Section 208. The only other circuit court to rule on this issue has reached the same conclusion. See McDermott Int’l, Inc. v. Lloyds Underwriters of London, 120 F.3d 583, 588-89 & n. 12 (5th Cir. 1997).” [Slip op. 9-10]
The Court also sees no merit in Ecoplas’ claim that it was unable to present its case in arbitration and thus that the Court should not enforce the award on that ground. “Under Article V(1)(b) of the Convention, an exception to enforcement arises where ‘the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or the arbitration proceedings or was otherwise unable to present his case.’ See also 9 U.S.C. Section 207 (‘The court 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.’).”
“Ecoplas contends that the arbitral panel refused to permit it to substantiate its main defense by denying admission of testimony from Ecoplas’ technical staff regarding the defectiveness of the ‘transferred know-how.’ We find the Article V(1)(b) claim meritless.”
“The record reveals that Ecoplas received an opportunity to raise the defense question and that the arbitrator rejected it on the merits. Because the contract between Ecoplas and Phoenix required only transfer of sufficient know-how to manufacture Phoenix’s compounds, and not to develop them for new applications, the arbitrator found that the testimony concerning the transfer of additional development know-how was irrelevant to whether the contract had been breached. Given the arbitrator’s careful consideration of the issue, Ecoplas’s claim that it was ‘unable to present [its] case’ is groundless.” [Slip op. 14-15]
Citation: Phoenix Aktiengesellschaft v. Ecoplas, Inc., 2004 WL 2828941; No. 03-9000 (2d Cir. Dec. 10, 2004).
Filed in: 2004 International Law Update, Issue12
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In case where worker was injured while working on ship, Fifth Circuit dismisses appeal for lack of appellate jurisdiction to review district court’s discussion of international arbitration law; dissenter opines that arbitration agreement at issue satisfies “low bar” inquiry that Congress intended courts to apply when determining whether arbitration agreements fall under Convention on Foreign Arbitral Awards
In 1999, Vinod Kumar Dahiya signed two employment-related documents in New Delhi, India, to receive two years of training and then work for two years for Neptune Shipmanagement Services (Neptune). One of the documents, the “deed,” included an arbitration clause, requiring that any dispute would be subject to arbitration in Singapore or India. During his subsequent training on the M/T EAGLE AUSTIN, Dahiya suffered injuries at the vessel’s incinerator and was treated in Louisiana.
Dahiya brought a maritime personal injury action in Louisiana state court against his employer Neptune, Talmidge International (the owner of the ship), and other parties (jointly “Defendants”). He alleged violations of the Jones Act [46 U.S.C.A. app. Section 688], general maritime law, and other applicable law. The Defendants removed to federal court because the dispute was subject to an arbitration agreement pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards [9 U.S.C.A. Sections 201-208]. Dahiya argued that the arbitration clause in the deed did not qualify as an arbitration agreement under the Convention and did not support removal pursuant to the Convention. The district court agreed that the forum selection clause was unreasonable, and remanded to state court for lack of subject matter jurisdiction and denied Defendants’ motion to compel arbitration. The Defendants sought review of the district court’s order.
The U.S. Court of Appeals for the Fifth Circuit finds that the district court’s remand deprives this Court of appellate jurisdiction to consider any part of the district court’s order.
28 U.S.C. Section 1447(d) [removal jurisdiction] bars a federal appellate court from reviewing the remand ruling no matter how erroneous it may be. Here, the district court apparently concluded that it lacked subject matter jurisdiction and remanded on that basis. That remand is unreviewable.
“That Appellants removed under Section 205 of the Convention does not vest us with jurisdiction despite Section 1447(d). In cases removed under Section 205, ‘the procedure for removal of causes otherwise provided by law shall apply.’ 9 U.S.C.A. Section 205. This ‘procedure for removal’ includes the strictures of Section 1447(d). … Thus, when a case removed under Section 205 is subsequently remanded for lack of subject matter jurisdiction, an appellate court cannot review the order of remand.” [Slip op. 6-7]
The dissenter opines that the Court does in fact have appellate jurisdiction over the order denying arbitration and that the district court erred in refusing to order arbitration under the Convention. First of all, such an arbitration order is a separable collateral order. The Court should have reviewed the district court’s refusal to compel arbitration de novo. The forum selection clause in this case is presumptively valid under M/S BREMEN v. Zapata Off-Shore Co., 407 U.S. 1 (1972). Dahiya failed to meet his heavy burden of showing that the forum selection clause is unreasonable.
“It is clear that both Congress … and the Supreme Court, … have expressed a liberal federal policy favoring the enforcement of arbitration provisions. … This strong presumption in favor of arbitration ‘applies with special force in the field of international commerce.’ … In light of the strong federal policy favoring arbitration, courts are to conduct a ‘very limited inquiry’ when deciding whether to compel arbitration pursuant to the Convention. …”
“Thus, this Court has outlined a simple four-step analysis for courts to perform: whether ‘(1) there is an agreement in writing to arbitrate the dispute, (2) the agreement provides for arbitration in the territory of a Convention signatory, (3) the agreement arises out of a commercial legal relationship, and (4) a party to the agreement is not an American citizen.’ … Once an arbitration agreement is found to fall under the Convention, the district court is authorized by 9 U.S.C. Section 206 to order arbitration pursuant to the parties’ agreement, within or outside the United States. In fact, the Convention mandates that courts order arbitration. … I would find that Dahiya’s arbitration clause easily meets all four requirements of the Convention and that the district court erred in not compelling arbitration and staying the proceedings per Appellants’ motion.” [Slip op. 45-46]
Citation: Dahiya v. Talmidge Int’l, Ltd., No 02-31068 (5th Cir. May 18, 2004).
Filed in: 2004 International Law Update, Issue5
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As matter of first impression, Second Circuit overturns lower court’s failure to confirm Swedish arbitral award against sovereign nation (here Russian Federation) where Russian Government, one of sovereign’s political organs, was party to arbitration
Compagnie Noga D’Importation et D’Exportation, S.A. (“Noga”) sought confirmation of a Swedish arbitration award by a New York federal court, naming the “Russian Federation” as defendant. In 1990, Noga and the former Union of Soviet Socialist Republics (USSR) (the predecessor of the Russian Federation) had entered into $550 million worth of contracts to supply food and consumer goods to foreign trade agencies of the USSR and the Federative Socialist Soviet Republic of Russia (RSFSR) (a constituent republic of the USSR). The anticipated third-party financing for these contracts failed, and Noga agreed to make up part of the shortfall.
In April 1991, Noga lent $422.5 million to the RSFSR in return for the RSFSR’s crude oil products. Nine months later, Noga signed onto another $400 million loan agreement with “the Government of the Russian Federation, acting for and on its own behalf” (the Government) also in return for crude oil.
Both loan agreements provided (1) for arbitration of contract disputes before the Chamber of Commerce of Stockholm, Sweden; (2) for the application of Swiss substantive law to these disputes; (3) for the waiver of immunity with respect to the enforcement of any arbitration award, and (4) for its consent to be sued, inter alia, in New York. [Editors' Note: The USSR collapsed between the 1991 and 1992 loan agreements. In the 1992-1993 period, the Russian Federation assumed the debts and assets of the former USSR and its constituent republics.]
In December 1992, Noga declared the Government to be in default on the loans. Accordingly, it began arbitration proceedings before the Stockholm Chamber of Commerce, naming the “Russian Federation” as respondent. The Government’s attorneys argued that the Russian Federation was not the proper respondent, but nevertheless, for eight years, participated in the arbitration. The tribunal awarded Noga about $50 million in the liability and damages phase of the arbitration, and another $23.3 million in consequential damages.
During 1993 and 1994, Noga assigned portions of the expected arbitration awards to four Swiss banks which had financed Noga’s performance of the 1991 and 1992 loan agreements. In 1997, however, Noga filed for protection from creditors in a Swiss court in Geneva. It proposed a composition plan [similar to a Chapter 11 reorganization plan in the U.S.] to pay back its creditors. The Geneva court approved Noga’s plan and allowed Noga to discharge its debts by paying 12 percent on the creditors’ claims. The assignee banks were to receive their portions from Noga’s collection of the arbitration awards.
The Russian Federation opposed the confirmation of the award. It contended that it had neither (1) signed the loan agreements nor (2) taken part in the arbitration proceedings. In its view, the Government of Russia, an organ of the Russian central government, would be the proper party in this case.
The district court denied Noga’s motion to confirm and enforce the arbitral award. It relied on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 53) (the Convention), as implemented in the Federal Arbitration Act (FAA) (9 U.S.C. Sections 201-208). The court did not consider the Russian Federation a proper party because it had taken part neither in the underlying arbitration proceedings nor in the loan agreements. Therefore, the court reasoned, it lacked jurisdiction to confirm the award against the Federation.
The U.S. Court of Appeals for the Second Circuit, however, vacates and remands. Essentially, it holds that, for purposes of this proceeding, the Russian Federation and the Government are the same party.
The Court first points out that the Convention and the Act govern the U.S. enforcement of arbitration awards. “… [T]he principal issue in this appeal is whether the Government is an instrumentality established as a juridical entity distinct and independent from the Russian Federation. [Thus] the [decision in] National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611 (1983) (Bancec) [that] public international law and federal common law determine the separate juridical status of a Cuban trade bank is of little help to us here. In any event, because we conclude that the answer to this question is the same regardless which of the bodies of law advocated by the parties is applied here, we need not cut the Gordian choice-of-law knot presented to us by the parties. …” [Slip op. 24]
“The Russian [Federation's] Constitution provides for a bicameral federal executive consisting of the President of the Russian Federation, who is described as being ‘the head of State,” Konst. RF art. 80(1), and the Government, which shall exercise ‘executive power in the Russian Federation,’ id. Art. 110(1). The Government consists of the Chairman of the Government … and the Deputy Chairman of the Government and the federal ministers … Id. arts. 83(a), (e), 110(2), 111(1).”
“The Russian Constitution also enumerates the responsibilities of the Government, which include, among other things: (i) submitting a federal budget to the State Duma; (ii) ‘ensuring the implementation … of a uniform financial, credit, and monetary policy’; and (iii) ‘exercising any other powers vested in [the Government] by the Constitution of the Russian Federation, [Russian] federal laws, and decrees of the President of the Russian Federation.’ Id. Art. 114(a), (b), (g). …”
“Plainly, … that entity is not a sovereign, corporation, or instrumentality separate from the Russian Federation. Rather, the Government is a political organ of the Russian Federation, analogous to the cabinet of the American president. Most significantly, … the Government ‘is not a juridical person and enjoys no autonomous legal capacity.’ …”
“Indeed, given the … Bancec decision, had either the Government or the Russian Federation wanted to shield the latter entity from being the subject of these confirmation proceedings, either could have designated a publicly-owned state corporation or instrumentality as the entity to contract with Noga. At bottom, the Government was performing a quintessential ‘governmental’ function: financing the purchase of massive quantities of basic necessities and infrastructure improvements to provide for the Russian people and paying for those necessities and improvements with the country’s natural resources.”
“Finally, the Russian Federation has not satisfied its burden of proving that the Government is a separate juridical entity that can sue and be sued in Russian courts for obligations that are analogous to the ones set forth in the Loan Agreements or, indeed, for any legal obligations.”
“For example, the Russian Federation could have presented docket entries or court filings from Russian courts indicating that the Government had sued or been sued in this capacity. No such evidence was presented to the District Court, however. Accordingly, we find that, under Russian law, the Government and the Russian Federation should be treated as the same party for the purpose of this confirmation proceeding.” [Slip op. 25-27]
The Court then turns to U.S. federal common law. The issue of whether a federal court will confirm a foreign arbitral award against a sovereign nation, where one of the sovereign’s political organs was a party to the arbitration, is one of first impression. Prior to this, federal courts had only considered confirmation of arbitral awards against foreign sovereigns where the foreign sovereign [had] acted through a corporation. Usually, the legal theories behind it are that the corporation was the alter ego or agent of the foreign sovereign, or that the corporate veil should be pierced.
In other contexts, the federal courts have held that the fact of an internal separation of some sort between the sovereign and one or more of its organs was of no legal significance. “The most developed area of federal common law concerning this issue relates to whether, in the context of the [Foreign Sovereign Immunities Act of 1976, as amended, 28 U.S.C. Sections 1602 ff) (FSIA)], a ministry or other political subdivision of a foreign sovereign should be treated either as the foreign state itself or a political subdivision of it (in which case it would be immune from suit), or as an ‘agency or instrumentality’ of the foreign state in which case it would be subject to suit under 28 U.S.C. Section 1605(a)(3).”
” … Significantly, in the case at bar, it is clear … that the Government owns no assets that could be attached to satisfy a judgment confirming the … Award and, moreover, that all such assets are owned by the Russian Federation.”
“Finally, we note that an issue similar to the one before us has arisen in the federal common law of bankruptcy and set off. Specifically, when monies are owed to an individual by one federal agency and that individual owes a debt to another federal agency, the two federal agencies may set off the debts owned by one of them against the claims of the other. In other words, the agencies are treated as constituent parts of a unitary entity. …” [Slip op. 31-37]
Neither does international law support the defendant’s distinction between a sovereign and its governmental organs. It attributes the act of a State organ to the State regardless of the State organ’s functions.
For example, in the arbitration over Libya’s nationalization of its oil industry, the arbitrator overruled Libya’s objection that the contracts at issue had been entered into by the Libyan Minister of Petroleum and that Libya (as a State) was not a party to it. See Texaco Overseas Petroleum Co. v. Government of the Libyan Arab Republic, 53 I.L.R. 393 (1975).
Citation: Compagnie Noga D’Importation et D’Exportation S.A. v. The Russian Federation, Nos 02-9237(L) & 02-9272(CON), 2004 WL 504604 (2d Cir. March 16).
Filed in: 2004 International Law Update, Issue3
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Eleventh Circuit affirms district court’s refusal to confirm English arbitration award for lack of subject matter jurisdiction under Federal Arbitration Act because plaintiff failed to prove existence of prior written arbitration agreement
Czarina, LLC, is the assignee of Halvanon Insurance Co. Ltd. Halvanon, an Israeli company, entered into a 1984 agreement with the Florida reinsurance company W.F. Poe Syndicate (Poe). According to industry custom, before they had worked out all the details, the companies agreed that Poe would reinsure Halvanon, and that their underwriters would get together later to draft a written agreement. They never did. The following year, Halvanon became insolvent and was liquidated. Czarina bought some of Halvanon’s accounts receivable, including the Poe account.
None of the communications exchanged between Poe and Czarina had mentioned arbitration. Halvanon’s 1982 Sample Wording form for similar agreements did include a clause specifying arbitration in London before a two-member panel. Neither party here, however, had signed any such form.
When Poe refused to pay, Czarina filed for arbitration in London to collect the alleged indebtedness. The only part Poe took in the arbitration was to send the panel two short letters declaring that it had never agreed to arbitrate this dispute and that the merits weighed heavily on Poe’s side. The panel nevertheless awarded Czarina over 150,000 British Pounds.
Czarina then sued Poe in a Florida federal court under Article II of the Federal Arbitration Act (FAA) [9 U.S.C. Sections 201-208] to confirm the foreign arbitral award. After a three-day bench trial, the court ruled that there had never been an agreement to arbitrate. Thus, lacking subject matter jurisdiction to confirm the award, it dismissed Czarina’s case.
Czarina appealed. The U.S. Court of Appeals for the Eleventh Circuit, however, affirms.
Czarina argued that the district court erred in holding that the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards [21 U.S.T. 2517; T.I.A.S. 6997; 330 U.N.T.S. 3] (the Convention) required that there can be no valid arbitration award without a written arbitration agreement.
Incorporating the terms of the Convention, the FAA provides that federal district courts have original jurisdiction over two types of actions coming within the Convention. The first is an action under FAA Section 206 to compel a future arbitration proceeding pursuant to a valid written agreement to arbitrate.
Secondly, pursuant to Section 207, a federal court may entertain a suit like this one to confirm a past foreign arbitration award based on a valid contract to arbitrate. Under Convention Articles II and IV, the plaintiff has the burden of proving a written arbitration agreement between the parties. In the appellate court’s view, Czarina was unable to do so here.
“Where a party has failed to satisfy the agreement-in-writing prerequisite, courts have dismissed the action for lack of jurisdiction. … And, when enforcing an agreement or confirming an award, courts first assure themselves of their jurisdiction by deciding whether the agreement-in-writing requirement has been met. …”
“The FAA provides in Section 207 that: ‘Any party to the arbitration may apply to any court having jurisdiction under this chapter for an order confirming the award [falling under the Convention] as against any other party to the arbitration. The court 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.’”
“… The failure of a party to satisfy Article IV’s requirements qualifies as one of the ‘grounds for refusal or deferral … specified in the said Convention.’ …, [T]he Convention uses mandatory language in establishing the prerequisites: ‘to obtain the recognition and enforcement mentioned in the preceding article, the party applying for recognition and enforcement shall, at the time of the application, supply’ a copy of the award and the arbitration agreement, Convention, … Art. IV, sec. 1, 9 U.S.C. Section 201 (historical and statutory notes) … This mandatory language also indicates that, without these requirements being satisfied, the court is without power to confirm an award.” [Slip op. 9-12]
Citation: Czarina, L.L.C. v. W.F. Poe Syndicate, 2004 WL 205611, No. 03-10518 (11th Cir. February 4).
Filed in: 2004 International Law Update, Issue2
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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).
Filed in: 2003 International Law Update, Issue12
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