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March 20, 2012

Dismissal of Confirmation Cases for Lack of Personal Jurisdiction: An Avoidable Problem

Each time a US court declines to entertain a petition to confirm a foreign arbitration award, there are at least two questions that we as practitioners in the field should ask: (1) Was the Court’s decision correct?; and (2) What lessons can we learn from the experiences of the parties that we can use as arbitrators or as counsel?  Last week a Federal District Court in New Orleans denied the petition of a group of American companies to obtain confirmation of an award made in consolidated London arbitration proceedings against a shipbuilding firm domiciled in China.  The Court held that it lacked personal jurisdiction over the Chinese Respondent.  [In re Arbitration Act of 1996 (Covington Marine Corp. v.  Xiamen Shipbuilding Industry Co.), 2012 WL 876240 (E.D. La. Mar. 14, 2012)]

It is no longer controversial that a US court must have personal jurisdiction over the award debtor as a pre-condition to recognition and enforcement of an award under the New York Convention and FAA Chapter Two.  (See in this regard Section 4-27 of the Restatement (Third) of the  US Law of  International Commercial Arbitration and the Reporters’ Notes to that Section). In this case, the award creditor named the People’s Republic of China (PRC) as a Respondent in the confirmation case, although the PRC had not been a party to the underlying arbitration (or the merits appeal of the initial award to the High Court in London, or the proceedings on remand before the arbitral tribunal after the High Court rejected the original award’s merits conclusions), and alleged that the award debtor was an agency and instrumentality of the PRC.  Had this argument succeeded, personal jurisdiction over the award creditor itself would have become irrelevant, as US decisions hold that foreign States are not “persons” entitled to the protections of due process clauses of the US Constitution.

But in an order preceding this decision, the federal district court  in New Orleans had held that the allegations that the PRC dominated and controlled the award debtor such that it was an agency of the PRC had not been established, and dismissed the action as against the PRC.  The award creditor was left to establish personal jurisdiction based only on the award debtor’s contacts with the forum (or at least with the United States), and was unable to establish any – including offering no evidence to support its pleaded allegation that the award debtor had or would in the future have property in the jurisdiction of the district court.

The lessons to be learned from this?  One wonders what was the intended enforcement strategy of the Claimants at the time they commenced the arbitrations.  The Respondent was a shipbuilding company in the PRC, and on the surface would seem to have been unlikely to have significant assets outside the PRC.  Would it not have been preferable to name the PRC as a Respondent in the arbitration – while reserving the position that it while the arbitral tribunal could provisionally decide upon its jurisdiction over then non-signatory, it would ultimately be for an enforcing court to decide that matter? Alternatively, would it not have been useful to take advantage of Article 32 of the UK Arbitration Act of 1996 – which allows a party to obtain a court adjudication of a preliminary point of jurisdiction in a pending arbitration, either upon agreement of the parties, or with permission of the arbitral tribunal and the Court if it is satisfied that substantial time and costs could be saved in the arbitration by making the preliminary ruling? 

By seeking determination of the PRC’s status from the arbitral tribunal or from a court at the seat as a preliminary matter, one would think Claimants chances of having a more fulsome factual inquiry into the Respondent’s relationships with the PRC would have been enhanced. There is no indication in the US court’s decision that the Claimants as award creditors sought discovery on the question of whether Respondent was indeed a PRC state-controlled entity. But a confirmation proceeding in a US court is intended to be a summary proceeding, and a federal district judge may be understandably reluctant to transform what should be a routine confirmation case into a jurisdiction mini-trial, and to order a foreign-based award debtor, with no evident connections to the forum, to produce evidence in a foreign language, with the necessary costly translations, concerning its alleged relationship with the foreign Sovereign. (The burdens of making such an inquiry moved the Second Circuit in the much-discussed Monegasque case to sustain dismissal of a confirmation case based on forum non conveniens so that a court in the Ukraine would determine the relationship between the award debtor and the Government of Ukraine. In that case also, the State’s liability to satisfy the award was raised for the first time at the confirmation stage).

And what might an arbitral institutions and tribunals do to manage this problem? One might hope that the issue of joinder of additional parties would be systematically raised by the administering institutions in communications with the parties prior to the formation of the arbitral tribunal – perhaps with appropriate mention of the difficulties that might attend the joinder of parties after formation of the tribunal in view of their non-participation in the selection of the tribunal. Arbitral tribunals might also systematically raise the additional party joinder issue in preliminary conference hearings, while being mindful that the applicable rules or arbitration law may confine or eliminate the power of the tribunal to join new parties absent consent of all the existing parties.

It seems trite to say that all participants in the arbitral process should work towards the eventual enforceability of the award, including its execution if necessary against property that legally should be subject to application for that purpose. But if the “where is the money?” question were systematically on the pre-arbitral agendas of all the players, perhaps disappointing outcomes (from a prevailing Claimants’ perspective) like the one in this recent case from New Orleans would more often be avoided.