Archive for February, 2014

US (Non-) Enforcement of Annulled Foreign Awards: Shall We Welcome A Dash of French Eccentricity?

Sunday, February 23rd, 2014

It seems that we never tire of thinking, and writing, about “Chromalloy“. That famous 1996 case from a federal district court in Washington D.C. (939 F. Supp. 907) has given its name, at least for the US arbitration community, to a body of case law and legal theory concerning the circumstances in which a court in one country might recognize and enforce, under the New York Convention and its own arbitration law, a foreign arbitration award that has been set aside by a competent court at the seat of the arbitration or (more rarely) by the competent court of a State that did not host the arbitration but whose arbitration law was made applicable by agreement of the parties. The French, who in the 1990s as now sought to protect their nation’s position as net exporter of cutting edge arbitration theory, had their own Chromalloy case, gave it an attractive additional partner called Hilmarton, wrote furiously for years about the notion of an autonomous arbitral legal order, and bottled that cogitation into a recent 1er Cru (Cour de Cassation 2007) called Putrabali.

While the courts and scholars of many countries have weighed in, the field remains dominated by a France v. US dialectic.  Greatly simplified, French law and theory treats the award as a-national (or “de-localized”), so that the setting aside of the Award in Seat State A under State A arbitration law has little relevance when confirmation of the Award is sought in Non-Seat State B. US law (it may be a stretch to suggest the US has any “theory”) recognizes a rather organic relationship between a foreign arbitral award and the lex arbitri under which it was made, claims that the existence of this relationship is derived from  the text of the New York Convention Article V(1)(e), and applies a strong presumption in favor of the binding effect of the Seat State court’s decision to vacate an award based on principles of “comity between nations.”  Comity is a rather cherished concept in American jurisprudence, functioning perhaps as a jurisprudential antidote to our nation’s ambivalent legacy of foreign military intervention (but see France, 1944).

Until now, the American approach has faced little competition from the French on the US home field.  We have a common law, precedent-based fortress, built up since Chromalloy in a handful of familiar (and sometimes criticized) decisions that will not be reviewed in extenso here. I refer to Baker Marine in the Second Circuit (191 F.3d 194); Termo Rio in the D.C. Circuit (487 F.3d 928); and PEMEX in the Southern District of New York (2013 WL 4517225) where, exceptionally. a Mexican award was recognized despite vacatur in the Mexican courts.

Now there a new decision, and it falls in the familiar comity pattern: Thai-Lao Lignite (Thailand) Co. v. Government of the Lao People’s Democratic Republic, 2014 WL 476239 (S.D.N.Y. Feb. 6, 2014). In this latest decision, the Court has vacated its own 2011 judgment granting recognition to an award made in Malaysia, on the ground that subsequent to entry of that judgment the competent Malaysian court vacated the award and that the Malaysian court judgment commands the respect of the US courts in the absence of extraordinary circumstances that would render non-recognition of the award a violation of fundamental US public policy. Says this Court at a critical juncture in the opinion: “The Court will not disregard comity considerations and refuse to recognize the Malaysian courts’ judgments unless Petitioners can demonstrate that the process before the Malaysian courts ‘violated basic notions of justice.'”

As in prior US cases in the Chromalloy line, there is no acknowledgment or consideration of the French point of view in the Thai-Lao Lignite decision. But we Americans are not isolated in our resistance. The French view is seen as eccentric in some lofty European quarters as well (read e.g. Professor van den Berg , 2010 J. Int’l Arb. 179). And critics of the délocalisation theory point out that it is not applied in France as an interpretation of Article V(1)(e) of the Convention, but as a sort of second-level dictum behind the French statute on enforcement of foreign awards. That statute is more recognition-friendly than the New York Convention’s Article V, as it does not include annulment in the country of origin as a potential ground for non-recognition, and this brand of recognition-friendliness has its own port in the New York Convention — Art. VII. But the oracles of the eccentric French theory are as lofty as its critics, and the theory resonates here in New York, the island of pragmatism, where we endorse the idea that New York should be chosen as the seat of arbitration for such non-organic reasons as our fine restaurants, good transit hubs, and spanking new conference facilities.  So the condemnation of French theory as eccentric should not prevent the planting of some French seeds in the Federal Arbitration Act /New York Convention garden, to see what ideas might blossom in the Second Circuit Springtime if the Thai-Lao Lignite case returns to an appellate court which on last encounter with the same case upheld the order granting recognition to the Award.

The Second Circuit’s controlling precedent, Baker Marine, is non-specific about the “adequate reasons for refusing” to respect the annulment order that might perhaps be offered, and that might in some other case make the issue of whether to recognize an annulled award a closer call. The Court simply said there was no violation of US public policy by respecting the Nigerian court annulment, and distinguished Chromalloy (US Chromalloy, that is) mainly on the basis that the applicant was not a US citizen and had not initially sought confirmation in the US. The facts orienting the arbitration to Nigeria in Baker Marine lent themselves to conventional inside-the-box comity-of-nations thinking: the underlying contract was made in Nigeria by Nigerian affiliates of US companies, concerned extraction of natural resources in and of Nigeria, was governed by the contract law of Nigeria, and the arbitration agreement even included a phrase embracing Nigerian arbitration procedure to fill gaps not covered by the UNCITRAL Rules. The Second Circuit did not have to consider in Baker Marine how the New York Convention discretion to enforce an annulled award might be affected when the only connection of the arbitration to the seat of the arbitration is the designation of the seat in the parties’ arbitration agreement (or indeed a designation of the seat by an administering institution in the absence of a contractual express choice). But that question may be prominent in Thai-Lao Lignite if an appeal ensues.

In Thai-Lao Lignite the parties and transactions and history of proceedings scarcely invite a “comity”-based judicial deference to a Malaysian court’s merits-based review of three American arbitrators’ decisions applying New York law.  The parties were not Malaysian, but Thai and Laotian. The objective of the underlying contracts was to mine coal in Laos and put it to use in Laotian plants to generate electric power for sale into Thailand. And the provisions of Malaysian arbitration law on which annulment was based were essentially in parallel to the provisions of the New York Convention and the UNCITRAL Model Law that permit an award to be refused recognition or annulled in the country of origin if the Award contains decisions on matters that exceed the scope of the submission to arbitration. Where the answers to those scope-of-submission questions given by American arbitrators selected by the parties depended on their application of the New York contract law selected by the parties, first to decide the relationships among the contract containing the arbitration clause and prior contracts that did not provide for arbitration, and then to decide the relationship of certain non-signatories to the arbitration agreement, one might seriously question what is the source of any sovereign interest of Malaysia, that should command deference from the courts of United States, in having its judiciary be the pre-emptive forum to decide — with global res judicata effect — whether the arbitrators stayed within their jurisdiction.

Perhaps it is reading too much into the New York Convention for American courts to say that the comity principles they apply in this context are based on the Convention. We read in the US case law that the Convention establishes “very different regimes” for judicial review in the country of origin and in a non-originating State where recognition of a foreign award is sought. That statement is half-wrong. The Convention establishes no regime for judicial review in the courts of the seat of arbitration when the application to the court is not to confirm the award but to annul it. What the Convention does do is acknowledge that Member States might have separate annulment regimes (or, like Belgium, might not), and that the courts of a Member State when asked to recognize a foreign award (i) may elect (or not) to respect the outcome of the annulment process in the country of origin (Art. V(1)(e)), or (ii) may recognize an annulled award if domestic law specifically permits recognition despite the annulment (Art. VII).

The Second Circuit may be invited in Thai-Lao Lignite to think more systematically about the connections linking (i) the discretion under Art. V(1)(e) to disrespect the foreign annulment, (ii) the contractual basis of all American arbitration law, and (iii) the nature of the particular contractual choice made by the parties in regard to the seat of arbitration in a particular case. “Comity” may on close examination be revealed to be an unsuitable paradigm. International arbitrations and the resulting awards may be neither organically national nor invariably international (de-localized). Rather, characterization of the award in relation to the seat, with consequences for the scope of discretion to enforce an annulled award, might be seen as fact-dependent and in play on a case-by-case basis.

French eccentricity has always been welcomed in Manhattan, up to a certain point.

New York Confronts Archaic Obstacle to Award Enforcement Against Assets Held in Bank Branches Abroad

Saturday, February 1st, 2014

There may shortly be a dramatic change in the powers of an unpaid Award Creditor to use New York’s courts to seize Award Debtor assets held in foreign bank accounts. If the change occurs, Award Creditors will be able to require foreign banks that have a New York branch to deliver to the creditor in New York assets held in foreign branches to satisfy a judgment enforcing an international arbitration award. The implications for international arbitrations seated in New York, and for New York’s attractiveness as an arbitral seat, are considerable.

The stage has been set for this potential change by a decision two weeks ago from the US Second Circuit Court of Appeals, in which the Second Circuit has asked New York State’s highest court, the New York Court of Appeals, to decide an unresolved question of New York law. The “certified question” is whether New York’s so-called “Separate Entity Rule” has been, or should be, abolished, such that an order to turn over assets to satisfy a judgment, when served on the New York branch of a foreign or global bank, would require the bank to turn over the judgment debtor’s assets held in all the bank’s branches wherever located. (Tire Engineering & Distribution, L.L.C. v. Bank of China Ltd. (and two consolidated cases raising the same issue), 2014 WL 114285 (2d Cir. Jan. 14, 2014)).

Consider the current plight of the Award Creditor, victorious against a non-US party in an arbitration with a New York seat. A judgment from a federal district court in New York giving recognition to the Award under the New York Convention is readily obtainable, and on a very short timetable if there are good reasons for expedition such as demonstrable risk of asset dissipation or concealment by the Award Debtor. That process also enables the Award Creditor to enlist the district court’s support in fixing a short timetable for the Award Debtor to present, in the same proceeding, any cross-motion to set aside the award — rather than the longer timetable otherwise afforded to the Award Debtor by Chapter Two of the FAA. But proceedings to recognize the Award in the USA are unhelpful if there are no assets here and the Award Debtor is not physically present, unless the US court has an enforcement “long-arm” based on the presence here of a bank whose foreign branches hold Award Debtor assets.  Such “long-arm” enforcement power, if it exists, potentially eliminates the need for the Award to be recognized and enforced in multiple jurisdictions where the Award Debtor may keep assets.

The New York Court of Appeals has addressed some related issues in the last few years, but the decisions offer little predictive value. In the Koehler case in 2009, the Court held that a foreign bank that was jurisdictionally present in New York could be required by a turnover order to deliver in New York stock certificates held for the Judgment creditor at the bank’s headquarters office in Bermuda.  (Koehler v. Bank of Bermuda Ltd., 12 N.Y.2d 533 (2009)). After Koehler, many litigants have argued, and a few trial level courts have held, that the “separate entity” rule was overruled by implication in that case. But the assets in Koehler were not held by a foreign branch of the bank, and so the “separate entity” issue was not presented. In the Commonwealth of Northern Mariana Islands v. Canadian Imperial Bank of Commercce case last year (21 N.Y.2d 55), the Court held that assets in possession of a foreign subsidiary of a Canadian bank jurisdictionally present in New York did not have to be delivered in satisfaction of a turnover order, because the turnover provision of New York’s Civil Practice Law & Rules requires turned over of assets in “possession or custody” of the garnishee but does not extend to assets in the “control” of a garnishee by reason of a parent-subsidiary relationship. Commonwealth also fails to answer the question now certified to the Court by the Second Circuit, which presents the situation of a bank with New York and foreign branches that are in the same corporate entity, i.e. they are not legally separate under applicable laws, and are to be regarded as separate only if the legal fiction of separateness based on the “Separate Entity Rule” is recognized by New York’s highest court.

The Separate Entity Rule is an anachronism, on a practical level, having its origins long before the Internet Age in a concern about the burden that would be imposed if far-flung branches had to communicate with one another about account balances. A broader comity concern is also associated with the Rule, as it operates to force the Judgment Creditor to proceed in the courts of, and subject to the banking laws and debtor-creditor laws of, the jurisdiction where the assets are located. Comity is likely to be much debated before the Court of Appeals. The banking industry will argue that forced compliance with US turnover orders will subject the banks to criminal violations of banking laws in many jurisdictions. Creditor interests will argue that such concerns are overstated and, indeed, that bank secrecy laws and related restrictions sometimes exist to foster the growth of the banking industry in emerging global financial centers, and that the laws serve the interest of the banks and their customers more than the interests of the enacting States.

The Separate Entity Rule has never received the imprimatur of New York’s highest court, a fact that should make it easier for the Court to reject it. Such rejections seems reasonably likely, and also likely to be coupled with a reminder that comity is a discretionary doctrine and that courts may on case-by-case basis excuse compliance with a turnover order if considerations of comity counsel in favor of requiring the judgment creditor to apply for relief in the jurisdiction where the assets are held.  That would send the Tire Engineering case back to the Second Circuit, and perhaps in turn back to the District Court for a first instance consideration of comity in each of the consolidated cases.

But rejection of the Separate Entity Rule would be a major step in modernizing judgment enforcement law in New York, making New York a more appealing host venue for international arbitrations.