Recently a US district judge in New York dismissed, for improper venue, a New York Convention award-enforcement action against the Republic of Bulgaria by an Israeli company that had won a $10.3 million award against Bulgaria and its Privatization Agency in an ad hoc UNCITRAL Rules arbitration in Paris. The basis for dismissal was that the sales contract between the Agency and the Israeli firm (for purchase of a controlling stake in Bulgaria’s state-owned airline) contained a forum selection clause providing that “execution” of any Award “against the Seller” would be conducted exclusively in Bulgarian courts. (Zeevi Holdings Ltd. v. Republic of Bulgaria, 2011 U.S. Dist. LEXIS 38565 (S.D.N.Y. April 5, 2011)).
Whether that forum selection clause merited enforcement will be the main focus of this commentary. Article III of the Convention provides for enforcement of awards “in accordance with the rules of procedure of the territory where the award is relied upon,” provided those rules are not “substantially more onerous” than those that govern enforcement of domestic awards. The district court, viewing the enforceability of the forum selection clause, under Second Circuit precedent, as an issue of US procedure, held that the forum selection clause could support dismissal of award enforcement action under Convention Article III on “procedural” grounds even though none of the Convention Article V “substantive” defenses to enforcement were even argued to apply. I return to this unsettling application of Article III of the Convention after a review of the remainder of the district court’s opinion.
The Court then addressed the Israeli award-winner’s position that “execution” meant, narrowly, the process of securing assets to satisfy the Award after confirmation. The Court, purporting to apply Bulgarian law to this issue — based on the contract’s general choice-of-law clause – held that the phrase “execution” was not so limited and that it did indeed encompass the confirmation process. Here a more fulsome choice-of-law analysis by the Court would have been desirable, as it is less than intuitive that both parties intended the law applicable to the commercial terms of the agreement also to apply to either the arbitration clause or the award-enforcement forum selection clause. Further, one might have expected that the pro-enforcement bias of the New York Convention and the FAA would have weighed in favor of a narrow interpretation of contract provisions encroaching on rights conferred by the Convention. Petitioner had previously sought and obtained confirmation (but not satisfaction) in an Israeli court, which had applied Israeli law to interpretation of the forum clause. Petitioner here argued that the Israeli court decision was res judicata, but the US court summarily rejected that position “because this Court finds that Bulgarian law governs….” , furnishing no further support for this choice-of-law position.
It would seem that the same considerations that potentially call for the application of different law to the arbitration clause than applies to the rest of the contract, could weigh in favor of a different choice of law for a forum selection clause concerning enforcement of the resulting award. The latter is as much a “contract within a contract” as is the arbitration clause. There is little basis to assume that an Israeli party that accepted Bulgarian law as applicable to the business terms of its purchase of a controlling interest in the Bulgarian state airline, also intended and expected that Bulgarian law would govern either the arbitration clause or the award enforcement forum selection clause. The selection of Paris as the place of arbitration and the UNCITRAL Rules as the governing arbitration rules would suggest a more transnational view of those provisions.
That is not to say that French law was a logical candidate to govern enforceability of the forum selection clause. Neither the parties nor the district court appear to have suggested this. And it seems sensible that the parties would have assumed that the selection of Paris as the seat brought into play French law only concerning the conduct of the arbitration proceedings and the role of French courts in supervision of those proceedings and review of the award.
But the choice of Paris as the seat of the arbitration, and the choice of United National arbitration rules, does suggest that the common intention of the parties was that provisions of the contract concerning of arbitration procedure would not be governed by the law of the State that was a commercial party to the contract. Here both parties reasonably should have expected that if the Bulgarian Privatization Agency were to be on the losing side of an arbitration, and if voluntary compliance with the Award were not forthcoming, the Israeli award- winner would seek confirmation outside Bulgaria in a State where assets of that Republic might be found. The issue of interpretation being one that is intimately related to any such potential enforcing State’s fulfillment of its international obligations under the New York Convention, and the State or States where enforcement might be sought being unidentified and unforeseeable at the time the contract was made, the parties might reasonably have expected that trans-national principles would control. Or stated differently, it is quite well justified to attribute to the parties an intention that both the meaning of terms in forum clause and the validity and enforceability of that forum clause would be governed by transnational principles.
Would the US court have given a narrower berth to “execution of the award” under transnational principles rather than Bulgarian law? Perhaps. The Court’s opinion relies on a number of transnational sources for evidence of the proper interpretation of the terms “execution,” (noting, for example, that the Geneva Convention on enforcement of award that was replaced by the New York Convention concerned “the Execution of Foreign Arbitral Awards“). The notion that federal arbitration policy called for a restrictive interpretative of contract terms limiting rights conferred by the New York Convention did not enter into the Court’s analysis.
The US court did however apply American law to the enforceability of the forum selection clause (a dépécage that goes unexplained in the decision), and this choice was decisive, as under American law the primary reason for denying enforcement to a forum selection clause is if there is very substantial evidence that requiring the party seeking relief to proceed in the contractual forum would be tantamount to denial of any meaningful relief.
Examining that issue under US law, the Court found that petitioner’s evidence of judicial corruption and undue State encroachment on the independence of the Bulgarian judiciary “failed to meet the high (US) standard necessary to demonstrate that Bulgaria is a fundamentally unfair forum….” The Court cited no transnational standards or principles as a cross-check on the legitimacy of this outcome.
One issue not explored in the opinion and presumably not raised by petitioner was whether the Republic of Bulgaria was entitled to the benefit of the forum selection clause in a contract to which the signatory was the Privatization Agency, not the Republic itself. Bulgarian courts were the exclusive forum for execution of the Award “against the Seller” — arguably meaning the Agency only. Indeed Bulgaria had objected to the Arbitral Tribunal’s jurisdiction on the ground that it was a non-party to the contract. The Court’s decision does not reveal the basis for the Tribunal’s assertion of jurisdiction over the Republic. But one wonders whether the body of law from which the Tribunal applied principles of agency, estoppel, alter ego, etc. to bind the Republic of Bulgaria to the Award would also allow Bulgaria, as a Member State of the New York Convention, to take advantage of a clause in the contract to confine enforceability of an Award against itself to courts inside its borders.
The more extended Commentary that follows here concerns the district court’s decision that Article III of the New York Convention permitted the court to deny recognition and enforcement even though none of the ostensibly exclusive grounds for denial of recognition and enforcement under Article V of the Convention were even argued to exist. In taking this position, the district court adhered to the holding by the US Second Circuit Court of Appeals in Monegasque de Reassurances S.A.M. (Monde Re) v. NAK Naftogaz of Ukraine, 311 F.3d 488 (2d Cir. 2002) (“Monde Re”) that Article III of the Convention permits denial of enforcement of international arbitral awards according to rules of procedure in the territory where enforcement is sought, so long as the rules applied are not substantially more onerous than those applied to enforcement of domestic arbitration awards. The Court in Monde Re proceeded to hold that the US procedural doctrine of forum non conveniens could be applied to dismiss an enforcement petition under the Convention, and it proceeded to affirm the dismissal of a petition to enforce, against the State of Ukraine, an award that had been made in Moscow against the Ukrainian state-owned energy pipeline company in an arbitration to which the State of Ukraine itself was not a party.
In Monde Re, the Second Circuit had devoted rather little attention to whether there existed any original understanding among the Convention’s drafters, or any evolved understanding among commentators and courts, about what types of national rules may be understood as Article III “rules of procedure.” (fn 1) The Court addressed “rules of procedure” according to US law, and observed that the US Supreme Court in a 1994 case had “classified the doctrine of forum non conveniens as ‘procedural rather than substantive.'” The Court further stated that “[t]he procedural rule known as forum non conveniens finds its roots in the inherent power of the courts ‘to manage their own affairs so as to achieve the orderly and expeditious disposition of cases.'”
The Second Circuit decision in Monde Re has drawn criticism for having imported legal barriers to a court’s exercise of adjudicative power (such as forum non conveniens) through the “rules of procedure” harbor of Article III of the Convention. If one accepts the view that Article III’s “rules of procedure” include only rules about the mechanics of enforcement – rules that will not prevent enforcement unless the petitioner fails to comply with them — and not legal doctrines whose application would bar adjudication, the Monde Re decision may be viewed, and has been viewed abroad, as a violation by the United States of its international obligations to enforce awards under the Convention. (fn2)
But in American jurisprudence Monde Re is regarded as treaty interpretation, not treaty violation. And by virtue of the American judicial doctrine of stare decisis, federal district courts within the federal judicial circuit that issued Monde Re — the Second Circuit, which includes New York, the U.S. capital of international arbitration or at least litigation relating to it — must follow its holding as to the scope of Article III “rules of procedure” until that decision is overruled, or unless the decision can be distinguished and therefore treated as not controlling. Thus, a federal appellate decision like Monde Re that arguably places the United States in violation of international treaty obligations can have a viral effect, at least within its stare decisis domain.
It is therefore important to ask if the district court in Zeevi Holdings had latitude, consistent with Monde Re, to find that Article III’s “rules of procedure” do not include the application of ordinary contract law to enforce a forum selection clause addressing only the forum for award enforcement proceedings against Contracting State of the Convention. The district court rightly viewed Monde Re as having held only that “rules of procedure” under Article III encompasses rules regarded as procedural in the courts where the award is relied upon, and that U.S. courts regard forum non conveniens as a procedural rule. Monde Re thus left open, not only technically but conceptually, whether enforcement of a award enforcement forum selection clause, i.e. a rule concerning the results of a Convention arbitration (fn 3) developed by the parties to a investor-State contract, as opposed to a non-arbitration rule of judicial economy developed by the courts and applicable in all cases, should be so classified.
Giving this issue rather short shrift, the Zeevi Holdings court stated: “[A]s the Second Circuit has noted, questions relating to enforcement of forum selection clauses ‘are essentially procedural, rather than substantive, in nature.” But the Second Circuit case cited in support of this statement concerned the substance-procedure distinction made among issues of law presented to US federal courts in diversity of citizenship cases, a distinction that enables US courts to decide whether the matter is governed by state law (substantive issues) or federal law (procedural issues). Further, the Court applied no effort to the question whether — even assuming enforcement of a general forum selection clause is generally a procedural issue — the enforcement of an award-enforcement forum selection clause in the investor-State contract of a Convention Contracting State involves mainly an issue of procedure (in which forum rights will be vindicated) or substance (whether the worldwide award enforcement rights guaranteed by the Convention may be curtailed by a Contracting State acting in its economic self-interest).
Monde Re‘s holding and rationale would not have prevented the District Court from taking the position that whether a matter is a “rule of procedure” under Article III needs to be evaluated with emphasis on the objective of Article III, which of course is to broadly assure transnational enforceability of awards, not to add to the Article V list of grounds for refusal of recognition. The drafters of the New York Convention having limited the grounds for refusal of recognition and enforcement to those listed in Article V, it seems plain that the “rules of procedure” mentioned in Article III should be those rules whose observance by the petitioner will permit an award enforcement action to proceed, subject to invocation by the respondent of Article V defenses. But until Monde Re is reversed by the Second Circuit or overruled by the US Supreme Court, Article III must be understood in New York, the most frequent host to Convention award enforcement litigation in the US, to extend at least to “rules” of judicial origin that limit access to federal courts in all cases — e.g., personal jurisdiction, forum non conveniens, standing to sue, mootness.
But even so, the Zeevi Holdings court could have taken an approach to Article III that drove a wedge between these broad judicial doctrines, on the one hand, and, on the other, the enforcement of a forum selection clause which is rather in the category of conferral of judicial imprimatur on a private rule of procedure adopted by the parties. Partly the answer is that whereas US courts generally perceive the Convention per Article III to have a “pro-enforcement bias,” (fn 4) and given broad acceptance of the proposition that the grounds for refusal of enforcement named in Article V should be construed narrowly (fn 5), the creation of new barriers to enforcement under the aegis of Article III “rules of procedure” should be approached with at least as much reluctance and hesitation.(fn 6) It would be simple enough, following this path, to conclude that enforcement of the forum selection clause in an investor-State contract between a foreign investor and a foreign State, and relating only to the forum for enforcement of the results of arbitration where the foreign State is the losing party, implicates no US “rule of procedure” applicable generally to cases in the federal courts, or applicable equally to the enforcement of domestic and international arbitration awards.
But there is a more powerful alternative route to rejection of the Article III holding in Zeevi Holdings, involving breach and complicity in the breach of obligations imposed by the Convention on its Contracting States. If the Second Circuit hears the Zeevi Holdings case, the question ought not to be framed, as it was in the district court, in terms of the courts’ general predisposition toward enforcement of freely-negotiated forum selection clauses in international commerce. This is a special case of a forum selection clause pertaining to a particular aspect of arbitration proceedings, recognition and enforcement, in a particular scenario, i.e. where the award loser is an instrumentality of the State party to the contract, and the State party is a Convention Member State. The purpose of the agreement is not the one normally associated with US courts’ predisposition to honor forum-selection clauses, i.e. to promote international commerce by allowing parties the freedom to decide with certainty the forum in which they will resolve disputes about their commercial dealings. Instead the purpose of this clause is to abrogate the right of international portability of a Convention award, to the detriment of a citizen of one Contracting State (Israel) and for the benefit of another Contracting State (Bulgaria). By giving judicial sanction to such an agreement, the United States aids and abets a violation (fn 7) by Bulgaria of its implied obligation of good faith , as a Convention Member State, not to interfere with the international enforceability of a Convention award against one of its citizens. And the US itself violates the Convention by issuing a judgment that a Convention award in this instance is only enforceable in the courts of the State party to the contract. It should not be controversial that a Contracting State’s making of a self-interested agreement in derogation of its own obligations under the Convention and of the fundamental rights conferred by the Convention on its contractual counterparty violates obligations of good faith inherent in all international treaties (fn 8), and that US judicial enforcement of contracts violating such obligations transgress U.S. and international public policy and therefore enforcement will not be granted.
Fn 1 — The Second Circuit cited drafting history of Article III as recounted in a scholarly article by one of the American delegates. The Court referred to deliberations on a proposal by Belgium to require that the rule of procedures applicable to Convention awards in any State should be the same as those applied to domestic awards, and noted that this proposal was rejected in favor of the requirement that rules of procedure for Convention award enforcement should not be “substantially more onerous” than the rules for enforcement of domestic awards. But this discussion did not address at all whether, as other writers have shown convincingly, the rules of procedure the drafters had in mind concerned only the mechanics of award enforcement and not broad procedural doctrines concerning the ability or willingness of courts to engage in adjudication.
Fn 2 — See, e.g., W.W. Park and A.A. Yanos, Treaty Obligations and National Law: Emerging Conflicts in International Arbitration, 58 Hastings L. Rev. 251 (2006), a condensed version of which was republished as W.W. Park, Respecting the New York Convention, Vol. 18 No. 2 ICC Bulletin 2007; J. Harwood, The Role of Forum Non-Conveniens in Declining to Recognize New York Convention Awards (www.whoswholegal.com, Oct. 2010), D. Santoro, Forum Non-Conveniens: A Valid Defense under the New York Convention?, www.homburger.ch/filedadmin/publications/VALDFNYC.pdf.
Professor Park however concludes that the result in Monde Re – but not its position on the scope of Article III “rules of procedure” — can be justified on the basis that there was doubt whether the Ukrainian State was a proper party against whom enforcement could be sought, that this issue was more properly resolved by a court in the Ukraine applying Ukrainian law, and that there was no obstacle to renewal of the US enforcement petition if that preliminary question were resolved in the Ukraine in Petitioner’s favor. See W.W. Park, Respecting the New York Convention, supra at 75-76. See also C.H. Brower II, Reflections on Forum Non Conveniens: Monde Re was Right?!?, Kluwer Arbitration Blog http://kluwerarbitrationblog.com, Mar. 16, 2010).
Fn 3 — I refer to this as a “Convention arbitration” not only technically because the award was made in the territory of a Convention State, France, but also because the petitioner was a citizen of a Contracting State, Israel, and the respondent was a Contracting State, Bulgaria.
Fn 4 — This view was expressed by the US Second Circuit in Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie de Papier (RAKTA), 508 F.2d 969 (1974), which has been cited for this proposition numerous times.
Fn 5 — See. e.g,. A. Redfern, Law and Practice of International Commercial Arbitration, $10-34 at p. 445 (2004)),
Fn 6 — As Park and Yanos observe:”In the International arena, American projection of the qualities of fair play and evenhandedness compels a robust respect for American treaty commitments. As a general matter, this means that the process by which the Convention is implemented must err on the side of facilitating, rather than impeding, award recognition.” Park + Yanos, supra n.1, at __.
Fn 7 — Article 27 of the International Law Commission Draft Articles on State Responsibility provides: “Aid or assistance by a State to another State, if it is established that it is rendered for the commission of an internationally wrongful act carried out by the latter, itself constitutes an internationally wrongful act, even if, taken alone, such aid or assistance would not constitute the breach of an international obligation.”
Fn 8 — The International Court of Justice (among others) has articulated this requirement, stating that the “principle of good faith obliges the Parties to apply [a treaty] in a reasonable way and in such a manner that its purpose can be realized.” The ICJ also stated in the same case that “it is the purpose of the Treaty, and the intentions of the parties in concluding it, which should prevail over its literal application.” Case Concerning the Gabcikovo-Nagymaros (Hungary v. Slovakia), I.C.J. Reports 1997, at ¶ 142. See also W. R. Slomanson, FUNDAMENTAL PERSPECTIVES ON INTERNATIONAL LAW (Wadsworth, 6th ed. 2010) at 369 (“A state must not act in a way which would frustrate the purpose of a treaty that it has signed or ratified”).
Bulgaria’s forum selection clause is not a violation of a express positive duty the Convention imposes upon Bulgaria. Rather the breach consists of a violation of a duty of good faith that requires a Contracting State not to engage in actions that frustrate the purpose of the Convention. A contractual requirement that awards against a Bulgarian State entity may be enforced in no Convention State other than Bulgaria does precisely that.