September 30, 2017
Originally appeared in the newsletter of the Commercial & Business Litigation Section of the American Bar Association
Most litigators are quite familiar with the procedure for confirming an arbitration award under the Federal Arbitration Act (FAA). Basically, it involves seeking a confirmation order under section 9 of the FAA. Once the award is confirmed, it has been reduced to judgment and can be enforced in American courts just like any other judgment. This process is in many ways old hat.
Where the arbitration took place in a foreign country, though, section 9 of the FAA does not apply; Chapter 2 of the FAA does. Congress passed Chapter 2 of the FAA in 1970 to implement the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). In a nutshell (and in simple terms), under Article III of the New York Convention, a signatory state will accord to foreign arbitrations at least the same respect it accords to domestic arbitrations. Before the convention, a party to an arbitration could confirm it in a foreign country only if he or she first confirmed it in the country that was the "seat" of the arbitration. The convention eliminated that "two confirmations" requirement: Arbitrations now can be confirmed in any signatory country.
So far, so good. The problem, as usual, is in the details. More precisely, some of the old precedents and some of the language of the convention have produced curious results (more on this below). But earlier this year, the Second Circuit cut through a lot of the confusion. Its opinion in CBF Industria de Gusa S/A v. AMCI Holdings, Inc., 850 F.3d 58 (2d Cir. 2017), contains an almost textbook-like explanation of exactly how Chapter 2 of the FAA, the New York Convention, and the case law are supposed to work. The opinion even suggests proper terminology to use in the future, to avoid confusion.
First, some basics of the New York Convention and FAA Chapter 2. By its terms, in Article I, the convention applies to arbitral awards made outside the country and awards "not considered as domestic" under local law. Article II requires signatory states to recognize written arbitration agreements and to refer disputes to arbitration when there is an arbitration clause. Once an award is rendered, Article III applies. Under Article III, for arbitral awards governed by the convention, a signatory state may not impose "substantially more onerous conditions or higher fees or charges on the recognition or enforcement" than are imposed on domestic awards. A signatory state is required to recognize convention awards as binding and to enforce them in accordance with local law.
The convention goes on in Article V to list the very limited grounds under which a court may refuse "recognition and enforcement" of a convention award. Most of these will look familiar because they are quite similar to the grounds for denying confirmation under the FAA: incapacity of a party, invalidity of the agreement to arbitrate under the law governing the arbitration, the award exceeded the arbitrators' powers; the arbitral tribunal was defective or the process did not follow the parties' agreement, or the award is not final. A court may also refuse to enforce an award in a case that local law does not permit to be arbitrated or that would violate public policy. There are some other provisions relating to implementation, jurisdiction, and other matters, but for current purposes—and for most practitioners—the above provisions are the most pertinent ones.
Chapter 2 of the FAA implements the convention. One notable feature of Chapter 2 is—in clear contrast to normal arbitrations between American parties—litigation concerning convention arbitrations is within federal subject matter jurisdiction. 9 U.S.C. § 203. If a case relating to a convention arbitration is pending in state court, it may be removed. 9 U.S.C. § 205. Venue under section 204 is in any district where it otherwise could be under normal venue rules or where the arbitration clause provides. Like section 4 of the FAA, section 206 empowers a court to direct the parties to arbitrate.
Section 207 governs post-award proceedings. It provides, in its entirety, as follows:
Within three years after an arbitral award falling under the Convention is made, any party to the arbitration may apply to any court having jurisdiction under this chapter for an order confirming the award as against any other party to the arbitration. The court shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.
As we know from practicing law, words are important. The New York Convention refers to "recognition and enforcement" of arbitral awards. It does not use the word "confirmation," which of course pervades the FAA. The result has been a bit of confusion. Perhaps more than just a bit. One of the reasons is that, when Americans talk about "enforcing" a judgment, typically they mean taking steps to collect it. That is not what the convention means by "enforcing" an award.
The Second Circuit's opinion in CBF Industria, issued on March 2 of this year, cuts through the terminological morass and provides detailed instructions on how to handle arbitral awards that have some foreign element. (The opinion also has an interesting discussion of how collateral estoppel applies to foreign arbitrations, but that is a discussion for another time.) The case started with an arbitration at the International Chamber of Commerce in Paris. The claimant (CBF) sought an award against an entity called SBT, based on a series of contracts for pig iron. During and after the arbitration, SBT's assets were stripped out and transferred to related parties, and SBT filed for bankruptcy. The assets were then transferred a few more times after that. CBF obtained an arbitration award for over $48 million.
CBF then brought the award to the Southern District of New York to enforce the award against what CBF alleged were SBT's alter egos. The court dismissed the action, holding that the award had to be confirmed first before it could be enforced against alter egos, 14 F. Supp. 3d 463 (S.D.N.Y. 2014). The court relied on Orion Shipping & Trading Co. v. Eastern States Petroleum Corp., 312 F.2d 299 (2d Cir. 1963), in deciding that alter ego issues could not be addressed in a confirmation proceeding, which is designed to be narrow and quick. (Note that Orion predates the New York Convention and the enactment of FAA Chapter 2. More on this later.) CBT then commenced an action against SBT to confirm the award, but by that time, SBT was no longer in existence under Swiss law and could no longer sue or be sued. As a result, the district court dismissed the action to confirm the award based on Federal Rule of Civil Procedure 17(b). With this convoluted history, the case arrived at the Second Circuit.
The Second Circuit's decision lays out, in detail, the role of the courts in handling arbitrations where there is some involvement of a foreign party or foreign law. The state (or country) where an award is made has primary jurisdiction over the award. That means it applies its own law in all proceedings concerning the award. All other countries that signed the convention have secondary jurisdiction. These countries have only limited power: They can decide only whether or not to enforce the award and may decline enforcement only on the grounds set forth in the convention.
There are three kinds of awards to consider. Disputes between U.S. entities decided under U.S. law give rise to "domestic" awards. Court proceedings relating to domestic awards are handled under normal local law (state or federal), and the convention plays no role. Awards made outside the United States that are brought to U.S. courts are "foreign" awards. There also are "nondomestic" awards. A nondomestic award has some foreign element: for example, it was decided under foreign law or involved non-U.S. parties (even if decided in the United States under U.S. law), or it concerned property or performance abroad.
It was important to get this nomenclature right because FAA Chapter 2 and the New York Convention use different words to refer to similar things. "Confirmation" is the FAA term for the process of reducing an arbitration award to judgment. This term applies to awards in which the United States has primary jurisdiction, typically domestic awards and nondomestic awards.
The problem is that the New York Convention, which applies to awards that are not domestic, does not use the term "confirmation." It uses "recognition and enforcement." The terms functionally mean the same thing—obtaining a judgment on an arbitration award—except that "confirmation" covers domestic and nondomestic awards, while "recognition and enforcement" covers foreign awards. In this context, "recognition" refers to according the award preclusive effect, while "enforcement" means embodying the award in a judgment. "Enforcement" does not mean in this context what it usually means in the United States, a judgment creditor's efforts to collect the judgment. This difference in nomenclature is apparently what led to the lower court confusion in CBF.
As the Second Circuit pointed out, section 207 (which is quoted above) provides that the district court may decline to confirm an award on any of the bases that the convention says are grounds for denying recognition and enforcement—which implies that these are functionally the same thing.
The CBF case involved a foreign arbitration award. That means the convention governs it, and U.S. courts have secondary jurisdiction. Under Article III of the convention, U.S. courts cannot impose greater requirements on a foreign award than they would on a domestic award. That sets the procedure for domestic awards as the substantive baseline for whether the award can be confirmed ("enforced," in convention lingo). Normal domestic law—here, the law of New York—determines whether the arbitration award against SBT can be enforced against the alleged alter egos. It is a single-step proceeding. The two-step procedure that the district court envisioned—first confirmation, then enforcement—came out of the Orion case, which predated the New York Convention and FAA Chapter 2. The convention obviated the second step.
On remand, the district court could consider in a single case (1) whether to enforce/confirm the award under the convention, i.e., whether any of the grounds for refusing recognition and enforcement were present under convention Article V; and (2) whether the alleged alter egos were correct parties against whom to enforce it.
As a practical matter, this case means foreign arbitration awards can be reduced to judgment and enforced in the United States as readily and on the same terms as domestic arbitration awards. It is not necessary to do two steps, first confirmation and then enforcement. They are instead a single step.
|Stuart Riback is a business litigator with nearly 30 years of experience, and a frequent author of topics germane to the world of litigation. This article was published in the newsletter of the Commercial and Business Litigation Committee of the Litigation Section of the American Bar Association. If you have any questions about arbitration awards, feel free to contact Stuart by email at email@example.com or by telephone at (212) 981-2326.|