Marc J. Goldstein Arbitrator & Mediator NYC
April 11, 2011

A Curious Decision on Article VI Stays of Award Enforcement in US Courts

The New York Convention provides in Article VI that a court may stay or postpone decision on an enforcement petition in case an action to set aside the award is pending in a court at the seat of the arbitration. The less-heralded and less-invoked Inter-American (“Panama”) Convention similarly provides in its Article VI that enforcement proceedings may be stayed or postponed “[i]f the competent authority in Article 5(1)(e)” — i.e., the court at the seat of arbitration — “has been requested to annul or suspend the arbitral decision.” US courts asked to stay enforcement proceedings pending vacatur proceedings in courts at the seat of the arbitration must integrate a combination of pragmatic, policy, and diplomatic considerations — articulated most notably several years ago by the US Second Circuit Court of Appeals in Europcar Italia, S.p.A v. Maiellano Tours, Inc., 156 F.3d 310 (2d Cir. 1998).

Late last month a federal district judge in Washington D.C. agreed to impose such a stay of enforcement proceedings, upon the request of the Republic of Honduras. This decision temporarily halted enforcement proceedings on a $51 million award, obtained by a US company against a Honduran state agency in an arbitration held in Honduras under Honduran law before three Honduran arbitrators. (DRC, Inc. v. Republic of Honduras, 2011 U.S. Dist. LEXIS 32056 (D.D.C. Mar. 28, 2011)).

Why is this US company made to wait? The reasons given by the district court are several, and I catalog them here in approximately the order of importance ascribed to them by the district court. First, the US company initiated the enforcement action in Honduras, then sought from the Honduran court, and was granted, a temporary suspension of the proceedings, but took inconsistent positions on why it sought the suspension of proceedings — first telling the Honduran court it was engaged in efforts to reach a settlement with the Republic of Honduras, but then explaining to the US Court that the true reason was its belief the Honduran officials were attempting to influence the Honduran judge. Second, the Honduran state entity had opposed confirmation, alleging procedural irregularities in the arbitration and that the award was contrary to Honduran law. For the district court, these parallel enforcement proceedings concerning the same award implicated considerations of “comity,” which were best resolved by permitting issues of Honduran law to be addressed by the Honduran court before they were faced by a US Court of lesser competence to assess their merits. Third, in the background, and surely influencing the district court’s discretion in a less than explicit way, was the fact that the US company, DRC, had done its work in Honduras as a contractor for the U.S. Agency for International Development (USAID), and was defendant in a pending False Claims Act case in which USAID claimed fraud by DRC in the procurement and execution of the contract.

Is the stay of enforcement in the US based on Article VI of the Conventions the right outcome as a matter of US arbitration law and policy?

First, as a technical matter, it does not even appear from the district court’s decision that any motion to set aside the award had been made by the Honduran government instrumentality in the enforcement action in the Honduran court. The US court recites that the Honduran instrumentality had opposed confirmation of the award, and quotes from Honduras’s brief its argument that the Honduran proceedings were “prior in time and will determine whether the arbitration award is enforceable.  Adding further to the mystery of whether any vacatur proceedings were before the Honduran court, the US district court does not quote or accurately paraphrase Article VI of the governing Panama Convention or the parallel provision of the New York Convention, and the consequence is to elide — whether intentionally or not — the essential precondition for a stay of enforcement, i.e. that a motion to set aside the award shall have been made in the foreign court at the seat of arbitration (or in the State whose arbitration law applies). Said the district court: “Article VI … provides a court with the discretion to ‘postpone a decision on the execution of the arbitral decision’ if there is a pending action in the State in which, or according to the law of which, the award was made.”  That formulation is plainly wrong, focusing of the pendency of a related action, rather than on the pendency of a vacatur request by the award loser. If there had been no motion to vacate the award made in the Honduran court, there was no jurisdiction conferred on the district court by the Panama (or New York) Convention to stay or postpone enforcement; the fact that a party has opposed enforcement under the Conventions on Article V grounds in a court at the seat, but without moving to set aside the award, provides no basis under the Conventions, in the courts of another Member State, to stay or postpone enforcement.     

Further, it is not apparent why the award winner’s initial choice to enforce at the seat of the arbitration, where the award loser’s assets are presumably concentrated, should count as a reason favoring a stay when the award winner then seeks enforcement in a second State. The Second Circuit in Maiellano Tours observed that where the plaintiff “first sought to enforce his award in the originating country, the argument for enforcement by the plaintiff in the district court loses force because the possibility of conflicting results and the consequent offense to international comity can be laid at the plaintiff’s door.  The district court in DRC v. Honduras quotes and directly relies upon this statement. But this position is flawed. The award winner has the right to enforce the award in any Convention Member State where jurisdiction over the person of the award loser may be obtained, and there is no principle of “primary jurisdiction” giving the court at the seat of the arbitration the primary competence to determine whether defenses to enforcement under the Convention are available. The “offense to international comity” from the enforcement action in the non-seat State arises because the award loser has made a motion to vacate the award in the court at the seat.  The vacatur motion, and resulting potential clash of inconsistent judgments, can be “laid at plaintiff’s door” only in the sense that the enforcement action prompted the vacatur action as a responsive measure. But a vacatur proceeding at the seat would be a predictable response even if the enforcement action were filed only in the courts of the non-seat State. There is an “offense to international comity,” from the filing of a second enforcement action, only in the sense that the court at the seat was already seized of the enforcement case, not in the sense that the court at the seat has any superior competence over enforcement of the award. But this is not the type of “comity” concern that should justify a stay, because the Convention contemplates the enforcement of the award in any Convention Member State where assets of the award loser may be found. Once the requirement of a pending motion to set aside the award at the seat is satisfied, the “comity” analysis in the enforcing court of non-seat State #2 should have two branches: first, would the court in deciding the availability of Convention defenses to enforcement have to decide the very same questions of the foreign domestic law that have been raised at the seat in the vacatur proceeding; second, even if the Convention defenses can be addressed without reference to such foreign law, will proceeding with the enforcement impair the international effectiveness of any subsequent vacatur judgment by the court at the seat?   

The Court in DRC v. Honduras makes no such two-pronged analysis. Instead, it bases its decision on a flawed assumption that simply by entertaining the enforcement action, it would have to decide the same issues of Honduran law that were presented by Honduras in the Honduran proceedings. Even if there had indeed been a motion to vacate in Honduras, it is not necessarily true that the assertion of Article V defenses in the US court would require the Court to examine those same issues of Honduran law. In this decision the district court does not even mention which defenses to enforcement under the Convention had been raised but Honduras in the district court. If Honduras only raised matters of the fairness of the arbitration procedure as a Convention defense in the enforcement action, resolving that matter would involve no particular issues of Honduran law. The district court also pays no attention to (i) the particular issues of Honduran law that Honduras had raised in the Honduran court, (ii) whether Honduras had shown even a prima facie likelihood of success on those issues in the Honduran court, or (iii) whether a vacatur on those grounds would necessarily render the award ineligible for enforcement in the United States.

In view of the objectives of the New York and Panama Conventions and the Federal Arbitration Act to secure prompt and efficient award enforcement, the party moving for an Article VI stay ought to be required to show at least prima facie that vacatur by the court at the seat is reasonably possible, and that the grounds for seeking vacatur that have such a reasonable prospect of success are reasons that a US court would consider as being effective to render the award unenforceable in the United States.  


The DRC v. Honduras decision reflects a continuing struggle in some US courts to sort out the different issues and consequences of Convention defenses to enforcement, on the one hand, and grounds for vacatur under the domestic law of a foreign seat of the arbitration, on the other hand. It also reflects a lack of dexterity in handling the interplay between the “comity” issue and jurisprudence on potential enforceability of annulled foreign awards.  As the United States remains a jurisdiction where these principles are largely uncodified and ascertainable only from case law below the level of the US Supreme Court, erratic judicial approaches to difficult issues will remain a considerable risk.


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