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May 11, 2012

Staying Enforcement of Convention Awards: A Narrow Exception Remains So

We do not often hear about staying enforcement of an award that is subject to recognition and enforcement under the New York Convention – except of course in the scenario where a vacatur action is pending in a court at the seat of the arbitration. After all, the policy of the Convention and the FAA is to expedite recognition and enforcement by defining narrowly the grounds for opposition, and streamlining the proceedings in which those grounds are to be raised and considered. The Convention of course provides no general authority for courts to stay confirmation proceedings. Article VI of the Convention provides that courts may adjourn a decision on the enforcement of the award only if an application has been made in a proper forum to vacate (or “suspend”) the award.

But courts in the US are divided as to whether there is “inherent authority” in federal district courts, as a matter of case and docket management and equitable discretion, to grant a stay of enforcement. The US First Circuit Court of Appeals held that such inherent power does exist (Hewlett-Packard Co. v. Berg, 61 F.3d 101 (1st Cir. 1995)), and remanded the case for the district court to consider whether to exercise of that power. The US Fifth Circuit declined to decide if such inherent power exists (Wartsila Finland OY v. Duke Capital LLC, 518 F.3d 287 (5th Cir. 2008)), and found that even if it does, the circumstances for granting such a stay were not present.

A stay of enforcement, if tolerated by courts with less than vigilant limitation, could grow into a standard ploy in the enforcement context. Credit a federal district judge in Northern California, therefore, for blowing the whistle earlier this month on what was evidently are purely tactical application for such a stay. (Injazat Technology Fund, B.S.C. v. Najafi, 2012 WL 1535125 (N.D. Cal. May 1, 2012)).

Respondent in Injazat was the loser in a London ICC case, evidently for having misrepresented the finances of the company of which he was CEO, to induce a new investor to put in $3 million. Admitting there were no available Convention defenses, Respondent instead started a new ICC arbitration in London on the very day his opposition to the confirmation petition was due, and asked the federal court to stay enforcement pending the completion of the new case. The argument was simply that the award in its favor against the petitioner Injazat in the new case would be an offset, and, moreover, whereas Injazat was “winding up,” Respondent might have serious collection difficulties.  

The Court found this unconvincing, as there was no proof that Injazat was insolvent and would be unable to satisfy an award, and moreover, Najafi had no convincing reasons for having failed to pursue his counterclaim in the first arbitration or at least more promptly than on the very day his opposition to the confirmation petition was due. (Have sympathy however for Najafi’s US counsel, evidently engaged on the eve of confirmation and not responsible for the client’s failure to prosecute the counterclaim in timely fashion).

Contrast the Injazat case, as did the Court, with the unusual circumstances that justified a stay of enforcement in Hewlett-Packard v. Berg, the First Circuit case above-mentioned.  There HP was able to demonstrate that the first arbitral tribunal had rejected its rather urgent pleas to receive and hear its counterclaim, for reasons the court saw as insufficient. Further, the award in the second arbitration, commenced by HP in timely fashion against the award winner in the first case, stood to be uncollectible as the respondent was now demonstrably insolvent. Consider also how narrow an exception the HP case creates, as reflected in the Fifth Circuit’s decision in Wartsila. In Wartsila — which involved a four-phase infrastructure project, and a first arbitration held while work was still in progress on later phases —  the first arbitration also did not determine all claims, but for a different reason: the Chairman was appointed a High Court Judge in the UK and resigned, and the Tribunal determined not to reconstitute but instead to issue a final award on the claims then before it, without prejudice to either party bringing other claims, asserted but not yet fully presented, in a separate new arbitration. But in Wartsila the Respondent, asking for a stay of enforcement pending the new arbitration on unresolved counterclaims, could offer no evidence of Claimant’s insolvency or any other potential obstacle to collection.

The HP and Wartsila cases, and the handful of other cases reviewed by the district court in Injazat, suggest that a stay of enforcement may only be granted as a matter of discretion where the party seeking the stay was effectively prevented from bringing its allegedly offsetting claim in the initial arbitration and that the insolvency of the award winner in the first arbitration in highly likely to prevent effective realization of the sums that might be awarded on the offsetting claim. One could conceive of the window being opened a bit further, perhaps to accommodate the situation where the award winner in the first case has a history of dodging enforcement of legitimate claims, forcing its creditors to extraordinary efforts and cost despite evident financial wherewithal. In that situation the award winner, seeking the support of the New York Convention for the confirmation of an award in its favor, might equitably be denied such support on a temporary basis if it has a history of flouting the Convention or other federal and state award confirmation laws as its standard business practice. But certainly this California district court was on solid ground in recognizing that a stay of enforcement of an award under the Convention should not be available where the award loser manufactures a scenario of incomplete adjudication by forebearing or omitting a counterclaim in the first proceeding and then commencing an arbitration on that claim just as the confirmation of the first award is about to occur.