Marc J. Goldstein Arbitrator & Mediator NYC
April 15, 2011

US Court Dismisses Convention Enforcement Case Based on Forum Selection Clause

Last week 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 after 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) provided 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)).

The Convention provides for enforcement of awards “in accordance with the rules of procedure of the territory where the award is relied upon.” (Art. III). The district court, viewing the enforceability of the forum selection clause, under Second Circuit precedent, as an issue of US procedure, began its analysis by holding that the forum clause might warrant denial of enforcement of the Award as a “procedural” matter even though none of the Convention Article V “substantive” defenses to enforcement were even argued to apply.

This initial premise seems uncontroversial — except it might be debated whether the “rules of procedure” that fall within Convention Article III are a narrow category comprised only of rules with which the enforcing party might reasonably comply. But such a debate is not the focus of this Commentary.

The Court then addressed the award winner’s position that “execution” meant, narrowly, the process of securing assets to satisfy the Award after confirmation. Purporting to apply Bulgarian law to this issue — based on the contract’s general choice-of-law clause — the Court found that the “execution” was not so limited and that it encompassed the confirmation process. 

Here a more fulsome choice-of-law analysis would have been desirable. 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 rejects that position “because this Court finds that Bulgarian law governs….

Whether the law applicable to determine the validity and scope of an arbitration agreement should be the same law chosen by the parties to govern the substantive commercial terms of a transnational contract has been a topic of considerable debate. Whether such a general choice of law clause should govern the validity and effect of a clause designating the forum for Award-execution proceedings seems to raise the same issues — i.e. what were the reasonable expectations of the parties concerning these matters of procedure?

Neither the parties nor the Court appear to have suggested that the lex arbitri (French law) should have governed the issue. And it seems sensible that the parties would have assumed that the selection a Paris as the seat brought into play French law concerning only the conduct of the arbitration proceedings and the role of French courts in supervision of those proceedings and review of the award.

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 and intention that the 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? Probably not. The Court’s opinion in all events relies on a number of transnational sources for evidence of the proper interpretation (noting, for example, that the Geneva Convention that the New York Convention replaced was a convention “on the Execution of Foreign Arbitral Awards“).

The US court did however apply US law to the overall issue of the enforceability of the forum selection clause (a dépécage that goes unexplained in the decision), and this choice was decisive, as the case ultimately turned on whether requiring petitioner to proceed in Bulgaria would effectively deny any enforcement remedy.

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.



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