Strategies to Collect International Arbitration Awards

One of the problems that parties to international arbitration face is that the opposing party may attempt to move its assets so that if an award it entered against it, the assets will no longer be available to satisfy the award.  Here, we discuss a recent case in which a losing party in an international arbitration allegedly attempted to do just that, and some strategies to avoid such an occurrence.

The Lao PDR Arbitration

In 2019, the Lao People’s Democratic Republic (“Lao PDR”) successfully defended claims in an arbitration before the International Centre for Settlement of Investment Disputes (“ICSID”) and the Permanent Court of Arbitration (“PCA”) brought by two foreign investment companies alleging that Lao PDR failed to afford sufficient protection to their foreign investments, in violation of international obligations arising under two bi-lateral investment treaties.  The ICSID Tribunal awarded Lao PDR $1.9 million in fees, expenses and costs of arbitration, and the PCA Tribunal awarded $1.8 million for similar reimbursement.

In April 2020, Lao PDR filed a complaint in federal court in Idaho to enforce the arbitral awards against James Baldwin and Bridge Capital, LLC, alleging that they were alter egos of the two arbitral award debtors, Lao Holding N.V. and Sanum Investments Ltd.  Lao PDR filed the complaint pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), as implemented by Title 9 of the United State Code, the Federal Arbitration Act.

After Bridge Capital moved to dismiss the complaint for lack of jurisdiction, Lao PDR moved to amend the complaint to add another Bridge Capital entity as a defendant.  After Baldwin moved to dismiss the complaint for lack of jurisdiction, Lao PDR moved to amend the complaint again, seeking to add a fraudulent transfer claim and a new defendant, Coleman, LLC.  Lao PDR alleged that Coleman is an Idaho LLC that is owned by Baldwin, managed by his relatives, and owns real estate in Idaho.

In May 2021, Lao PDR filed a motion for leave to file a third amended complaint and a motion for a temporary restraining order and preliminary injunction, seeking to enjoin the disposal, transfer, or encumbrance of property alleged to be Baldwin’s.  The Third Amended Complaint alleged the judgment debtor was attempting to shield his assets through an elaborate series of transfers, including the sale of a property originally listed for sale at $12 million to entities related or controlled by the judgment debtor for just $5.5 million.  Lao PDR also alleges that the judgment debtor removed certain bank accounts from Idaho, and that the defendant entities in Idaho were alter egos of the judgment debtor.

The U.S. District Court in Idaho granted Lao PDR’s motion for leave to file its Third Amended Complaint in July 2021.  Government of the Lao People’s Democratic Republic v. Baldwin, 2021 WL 3007251 (July 15, 2021).  The Court ruled that Lao PDR had plausibly alleged that the judgment debtor had transferred and encumbered property to put it out of the reach of Lao PDR, knowing the Lao PDR might seek to enforce its arbitral award in Idaho.

Pre-Award Strategies

     Security for Costs

Most arbitrable tribunals have procedural rules that allow orders to establish security for costs as a matter of interim relief, to avoid the kinds of collection issues Lao PDR alleges it has faced.  Aside from the procedural rules of the forum, the tribunals have the inherent power to order an advance payment for security.

     Interim Relief from the Courts or the Tribunal

New York’s Civil Practice Law and Rules provides for a temporary attachment or preliminary injunction against conveying assets in New York as an interim remedy to secure future recovery. CPLR 7502(c) is available for 30 days to secure payment in an arbitration that “is pending or that is to be commenced.”  New York courts expect that the arbitral tribunal will then decide whether that provisional remedy should be continued while addressing the merits of the case.

     Joining an Additional Party in the Arbitration

Tribunal procedural rules also provide for joining additional parties to the arbitration, which made aid in collection of an award. Where conveyances of assets occurs during the arbitration, and the contract giving rise to the arbitration is one of those assets, the successor and assigns provisions of the contract may allow the arbitration to continue against the successor. Using this tool may delay the arbitration as the newly joined party can contest jurisdiction and fairness, but it may also make the tribunal aware of questionable transfers that raise doubts about the credibility and trustworthiness of the counterparty. Often, rather than allowing the tribunal to delve into the questionable transfer, the successor will simply agree to be liable on any ultimate award.

In sum, collection is frequently an issue in any dispute resolution, as the Lao PDR case demonstrates.  But these strategies may help in alleviating such issues.

Objectives and Considerations

The majority of international arbitrations are decided by three-member arbitration panels. Each party selects its “party-appointed” arbitrator, and the president or chair of the three-member panel is selected by the two party-appointed arbitrators, by a neutral authority or by other agreement of the parties.[1] This blog discusses some of the more critical considerations that a party and its attorney should review in the selection of its arbitrator. The importance of an in-depth review and analysis of an arbitrator’s background, experience and ability to work with her co-arbitrators cannot be overstated. Indeed, the selection of an arbitrator may be one of the most critical decisions a party makes.

Predisposition vs. Appearance of Bias

The ideal party-appointed arbitrator is a person who, because of her legal or cultural background, nationality, history and professional and technical experience is likely to be predisposed toward the selecting party’s side. To that end, prior professional positions and relationships, arbitration experience, including prior decisions, and academic writings should be scrutinized. However, a commonality of views with the appointing party cannot override her conscience and professional judgment, undermine her effectiveness and/or violate the governing arbitration rules regarding bias, independence and partiality. She should have not only stature, experience and gravitas, but the credibility to persuade her co-arbitrators of the strength of her party’s position.

The major international arbitration institutions have rules relating to bias, impartiality and/or independence. For example, the arbitration rules of the United Nations Commission on International Trade (UNCITRAL),[2] the London Court of International Arbitration (LCIA)[3] the International Arbitration Rules of the American Arbitration Association (AAA)[4] and the International Chamber of Commerce (ICC)[5] embody one or more of these concepts. There are requirements regarding the disclosure of bias, and there are provisions regarding the potential overruling of an arbitration award if bias can be demonstrated.

Both parties expect to pursue justice in an unbiased fashion. Even if the party-appointed arbitrator may be generally predisposed to the party personally or to its position, the other arbitrators should believe that the appointee will vote against the appointing party if required by the facts and/or law. Although an arbitrator may qualify as non-biased pursuant to relevant rules, a party should avoid selecting an arbitrator who will be perceived by the other arbitrators as biased in favor of the appointing party. A party-appointed arbitrator is expected to vote for the party with the better or more compelling arguments, law and facts, even though the arbitrator may be sympathetic to the appointing party because of a common nationality, shared background, culture or shared legal perspectives ― such as a common or civil law training, view about contract interpretation and summary disposition, and inclination regarding limited or more expansive discovery.

Experience as an Arbitrator

In most cases, it is best to select an individual with multiple experiences in international arbitration, or at least to avoid an individual who has never served as an arbitrator. The lack of experience can undermine confidence in the appointee during deliberations and in crafting an award, and limit the appointee’s effectiveness. Of course, there must be a first time for every arbitrator and there may be times when an individual’s other qualities are compelling enough for the appointing party to give the individual an opportunity, even if he or she lacks experience in arbitrations.

Knowledge/Stature in Field

For similar reasons, it is important to select a person who is knowledgeable or an expert in the area that is the focus of the arbitration and ideally enjoys a level of stature and respect. Knowledge is needed for the arbitrator to fully understand the issues and to participate in a meaningful way in deliberations and the drafting of the award. A reputation in the relevant area adds weight to any arguments that the arbitrator may present to the other arbitrators. For example, in a complex construction matter, many parties are likely to prefer to appoint an arbitrator with expertise not only in construction generally, but in the technical issues critical to the resolution of the dispute.

People Skills

A knowledgeable and experienced person will have little impact on their fellow arbitrators if they lack interpersonal skills or have off-putting personality traits. An arbitrator who is the greatest figure in his field will not be persuasive if he constantly announces himself as such. It is best to select a person who is confident and forceful, as well as collegial and capable of participating in a respectful, meaningful and persuasive discussion.

Availability

Checking the availability of a prospective candidate is a must. Selecting a highly skilled arbitrator who is too busy can be problematic. So it’s best to evaluate this issue and try to get an honest assessment of the arbitrator’s schedule in advance.

Sources of Information

The best source of information to be used in selecting an arbitrator is the appointing party’s or its lawyers’ personal experience with the individual. However, in many cases, the decision will be made in the absence of that direct personal knowledge. In these situations, the decision is usually based on a recommendation from a network of friends and professional connections or an evaluation of the individual’s CV and information that can be garnered from the internet and other public sources of information.

Some private vendors are attempting to develop more detailed, data-driven analytics to aid in a more objective assessment of arbitrators and their professional qualities. For each prospective arbitrator, these vendors obtain a variety of information relating to critical aspects of an arbitration(s) from participants. This data includes:

  • How the arbitrator under discussion administered the proceedings
  • How often the tribunals (on which the arbitrator sat) engaged in an early resolution of issues
  • How satisfied or dissatisfied the parties were with the award.

The vendors then create reports on each arbitrator candidate that include graphs and charts, as well as information regarding how to interpret the data.

Conclusion

A party-appointed arbitrator is selected with the hope that she will be able to persuade the other two arbitrators about the merits and truths of her client’s position. Remember that the opposing party has the same view about its arbitrator. A party-appointed arbitrator with stature, the requisite skills and experience will understand the importance of independence and the appearance of objectivity, which cannot be overstated. The checklist of arbitrator characteristics set forth above is not a guarantee that one’s position will prevail, but the list will help guide a party in the appointment of an arbitrator who can maintain that balance.

[1]           Each arbitral institution has its own rules about the selection of the presiding arbitrator if the parties cannot agree. Those rules are beyond the purview of this blog.

[2]           UNCITRAL Arbitration Rules, Articles 11 and 12.

[3]           LCIA Arbitration Rules, Articles. 5, 10, and 11.

[4]           AAA International Rules, Articles 7 and 8.

[5]           ICC Arbitration Rules, Articles 11, 13, and 14.

For the second time in four years, the U.S. Supreme Court has declined to resolve an arbitration-related issue that state and federal courts have been wrestling with over the last decade:  whether the Federal Arbitration Act (“FAA”) precludes courts from invoking public policy as a ground for refusing to enforce arbitration awards.  While public policy challenges to arbitration awards have a long history, some state and federal courts have interpreted a 2008 Supreme Court decision entitled Hall Street Assocs. v. Mattel, Inc., 552 U.S. 576 (2008), as foreclosing such challenges in arbitrations governed by the FAA.

Last month, the Supreme Court denied a petition for a writ of certiorari to review a decision of the Nebraska Supreme Court holding that, under Hall Street, courts may not vacate awards on public policy grounds in arbitrations governed by the FAA.[1]  The Court declined to review a similar ruling by the Texas Court of Appeals four years earlier.[2]  That means the issue will likely remain a point of contention in state and federal courts.

Congress enacted the FAA nearly a century ago to replace judicial opposition to arbitration with a national policy favoring arbitration and placing arbitration agreements on equal footing with other contracts.  The Act, which applies to all contracts involving commerce, except certain collective bargaining agreements, provides expedited judicial review to confirm, vacate, or modify arbitration awards.  Under Section 9 of the FAA, a court “must” confirm an award “unless” it is vacated, modified, or corrected “as prescribed” in Sections 10 and 11.  Section 10 lists grounds for vacating an award, including where the award was procured by “corruption,” “fraud,” or “undue means,” and where the arbitrators were “guilty of misconduct,” or “exceeded their powers.”

Prior to the Supreme Court’s decision in Hall Street, courts generally permitted challenges to arbitration awards on public-policy grounds, although they interpreted that ground narrowly.  It applied only if an award was contrary to “some explicit policy” that is “well defined and dominant” and ascertained “by reference to the laws and legal precedents.”[3]  The doctrine “derives from the basic notion that no court will lend its aid to one who founds a cause of action upon an immoral or illegal act, and is further justified by the observation that the public’s interests in confining the scope of private agreements to which it is not a party will go unrepresented unless the judiciary takes account of those interests when it considers whether to enforce such agreements.”[4]

In Hall Street, the Supreme Court considered whether parties could contractually agree  to vacate an award on grounds not set forth in Section 10 of the FAA —specifically, by agreeing that a court could vacate an award where the arbitrator’s findings of facts are not supported by substantial evidence or where the arbitrator’s conclusions of law are erroneous.  In a 6-3 decision authored by Justice Souter, the Court ruled that parties could not contractually expand the scope of review in an FAA arbitration.  Rather, the Court held, Sections 10 and 11 “provide the FAA’s exclusive grounds for expedited vacatur and modification.”

Although Hall Street did not address a challenge to an arbitration award on public policy grounds and did not mention that issue, some courts have interpreted its holding that the statutory grounds for vacatur are the “exclusive” grounds permitted under the FAA as foreclosing other judicially created grounds, including the ground that an award violates public policy.  Thus, for example, the U. S. Court of Appeals for the 11th Circuit has held that “our judicially-created bases for vacatur are no longer valid in light of Hall Street.”[5]  The highest courts in Alabama, Florida, and Nebraska have ruled the same way.[6]

In contrast, the U.S. Court of Appeals for the 7th Circuit ruled that Hall Street “did not overrule Eastern Associated Coal or W.R. Grace, both of which recognized a public policy exception to the general prohibition on overturning arbitrator awards.”[7]  Similarly, the U.S. Court of Appeals for the 9th Circuit recently stated that “a court may vacate an arbitration award that is contrary to public policy.”[8]

In light of the fact that Hall Street did not expressly address the issue of public-policy challenges to arbitration awards, parties will likely continue to litigate whether the Court intended to foreclose that previously well-established basis for challenging awards—except in jurisdictions like Alabama, Florida, Nebraska, and the 11th Circuit, where the courts have already decided the issue.  Parties may also argue that such a broad reading of Hall Street conflicts with Section 2 of the FAA, which provides that agreements to arbitrate shall be valid and enforceable, “save upon such grounds as exist at law or equity for the revocation of any contract”—because courts have long held that agreements that are contrary to public policy are void and unenforceable.[9]  The Supreme Court may be unlikely to review the issue, however,

[1]  See Seldin v. Estate of Silverman, 2021 WL 1951803 (May 17, 2021).

[2]  See Parallel Networks, LLC v. Jenner & Block LLP, 137 S. Ct. 2176 (2017).

[3]  Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1486 (D.C. Cir. 1997) (quoting United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 43 (1987)).

[4]  United Paperworkers, 484 U.S. at 42.

[5]  Frazier v. CitiFinancial Corp., 604 F.3d 1313, 1324 (11th Cir. 2010).

[6]  See Cavalier Mfg., Inc. v. Gant, 143 So. 3d 762, 768-69 & n.5 (Ala. 2013); Visiting Nurse Ass’n of Fla., Inc. v. Jupiter Med. Ctr.,Inc., 154 So. 3d 1115, 1128, 1132 (Fla. 2014); Seldin v. Estate of Silverman, 305 Neb. 185, 206-07 (2020).

[7]  Titan Tire Corp. of Freeport, Inc. v. United Steel Workers Int’l Union, 734 F.3d 708, 717 n.8 (7th Cir. 2013) (citing Eastern Assoc. Coal Corp. v. United Mine Workers, 531 U.S. 57 (2000), and W.R. Grace & Co. v. Local Union 759, 461 U.S. 757 (1983).

[8]  DeMartini v. Johns, 693 F. App’x 534, 537 (9th Cir. June 7, 2017).

[9]  See United States v. Bonanno Organized Crime Family, , 879 F.2d 20, 28 (2d Cir. 1989) (“[I]llegal agreements, as well as agreements contrary to public policy, have long been held to be unenforceable and void.”).

Governor Andrew Cuomo signed into law on June 14 legislation that amended Article 53 of the New York Civil Practice Law and Rules (“CPLR”), changing the rules regarding the state’s recognition of foreign money judgments.

The bill updates state law, making it consistent with the revised Uniform Foreign-Country Money Judgments Recognition Act (the “2005 Uniform Act”) already enacted in at least 26 states. The purpose of the amendments is to clarify provisions of Article 53, resolve inconsistent case treatment and avoid forum shopping. The new law takes effect immediately and applies to all actions commenced on or after its effective date. The most notable amendments include:

  • Definition of “Foreign Country.” The legislation changed Section 5301, replacing “foreign state” with the newly defined term, “foreign country.” It makes it clear that a judgment of a foreign country does not include any judgment of a sister state or other judgment subject to the Full Faith and Credit Clause of the U.S. Constitution.
  • Definition of “Foreign Country Judgment.” The amended law excludes “a judgment for divorce, support or maintenance, or other judgment rendered in connection with domestic relations” from the definition of a Foreign Country Judgment, which is subject to Article 53 recognition proceedings. The previous version of Article 53 contained a more narrow exclusion with respect to family law matters: “a judgment for support in matrimonial or family matters.” Tax judgments, fines and penalties continue to be excluded from the “Foreign Country Judgment” definition.
  • Burdens of Proof. The new law codifies the burdens of proof. Section 5302(c) provides that a party seeking recognition of a foreign country judgment has the burden of establishing that Article 53 applies to its foreign country judgment. In defamation matters, a party seeking recognition also has the burden to establish that the foreign defamation law provided at least as much protection for freedom of speech and press in the foreign proceeding as would be provided by both the United States and New York constitutions. Section 5304(c) provides that a party resisting recognition of a foreign country judgment has the burden of establishing that a ground for non-recognition exists.
  • Grounds for Non-Recognition. The new law includes additional grounds for mandatory and discretionary non-recognition of a foreign judgment. The new Section 5304(a)(3) requires non-recognition when the foreign court lacked subject matter jurisdiction. Previously, contrary to the 2005 Uniform Act, lack of subject matter jurisdiction was a discretionary ground for non-recognition in New York, creating opportunities for forum shopping.

The new Section 5304(b)(7) provides that New York courts have discretion to deny recognition where the foreign country judgment “was rendered in circumstances that raise substantial doubt about the integrity of the rendering courts with respect to the judgment.” The new Section 5304(b)(8), similarly, provides New York courts discretion to deny recognition where “the specific proceeding in the foreign court leading to the judgment was not compatible with the requirements of due process of law.”

  • Statute of Limitations. The new Section 5303(d) provides that an “action to recognize a foreign country judgment must be commenced within the earlier of the time during which the foreign country judgment is effective in the foreign country” or 20 years from the judgment’s original effective date. The previous Article 53 did not contain the statute of limitations and the case law primarily applied New York’s 20 year statute. Under the amendment, the applicable statute of limitations may now be shorter than 20 years.

In cases involving contracts between U.S. companies, courts frequently allow a nonsignatory to a contract to enforce an arbitration provision in the contract against a signatory, when the signatory to the contract relies on the terms of that agreement in asserting its claims against the nonsignatory.  On June 1, 2020, the United States Supreme Court ruled unanimously that this principle—known as “equitable estoppel”—may also be applied to international contracts governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, because nothing in that Convention conflicts with the enforcement of arbitration agreements by nonsignatories under domestic-law equitable estoppel doctrines.

The Supreme Court’s decision in GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC[1] overturned a ruling of the United States Court of Appeals for the 11th Circuit, and resolves a split on this issue between the 11th and 9th Circuits, on the one hand, and the 1st and 4th Circuits, on the other.

GE Energy concerned a company that entered into three contracts with F.L. Industries, Inc. for the construction of cold rolling mills at a steel manufacturing plant in Alabama.  Each of the contracts contained an identical arbitration clause, providing for arbitration of disputes to take place in Germany in accordance with the Rules of Arbitration of the International Chamber of Commerce.  After executing those agreements, F.L Industries entered into a subcontract agreement with GE Energy Power Conversion France SAS, Corp. (“GE Energy”) for the design, manufacture and supply of motors for the cold rolling mills.  The owner of the steel plant and its insurers filed suit against GE Energy in Alabama state court, alleging that the motors that it supplied failed, resulting in substantial damages.

GE Energy removed the action to federal court and then moved to dismiss and compel arbitration of the claims, relying on the arbitration clauses in the contracts between F.L. Industries and the original owner of the plant.  The District Court ruled that GE Energy qualified as a party under the arbitration clauses because the contracts defined the terms “Seller” and “Parties” to include subcontractors and compelled arbitration.[2]

The 11th Circuit reversed, ruling that the New York Convention includes a requirement that the parties actually sign an agreement to arbitrate their disputes in order to compel arbitration.[3]  It then ruled that GE Energy could not rely on state-law equitable estoppel doctrines to enforce the arbitration agreement as a nonsignatory because, in the court’s view, equitable estoppel conflicts with the New York Convention’s signatory requirement.  The 11th Circuit’s ruling on the equitable estoppel was consistent with an earlier 9th  Circuit decision,[4] and inconsistent with decisions of the 1st and 4th Circuits.[5]

The Supreme Court reversed.  In a unanimous opinion written by Justice Thomas, the Court noted that it has previously ruled that the Federal Arbitration Act permits nonsignatories to rely on state-law equitable estoppel doctrines to enforce an arbitration agreement.  The Court ruled that nothing in the New York Convention prohibits the application of domestic equitable estoppel doctrines to international contracts providing for arbitration, and that the treaty’s silence on that issue was dispositive.  The Court also found support for its interpretation by looking to decision by courts of other New York Convention signatories, which it found also permitted enforcement of arbitration agreements by entities that did not sign the agreement.

Because the 11th Circuit concluded that the New York Convention prohibited enforcement by nonsignatories, it did not determine whether GE Energy could enforce the arbitration clauses under principles of equitable estoppel or which body of law governed that determination.  The Supreme Court remanded the case to the 11th Circuit to make those determinations.

The Supreme Court’s decision resolved an issue on which the federal appeals courts were split.  It also brings the enforcement of arbitration provisions in international contracts into conformity with the enforcement of such provision in domestic contracts in regard to the potential for nonsignatories to compel a signatory to bring its claims in arbitration, rather than to litigate against the nonsignatory in court.  The decision provides nonsignatories with an option to compel arbitration when the conditions for equitable estoppel are met.

[1] Case No. 18-1048 (June 1, 2020).

[2] Outokumpu Stainless USA LLC v. Converteam SAS, 2017 WL 401951 (S.D. Ala. Jan. 30, 2017).

[3] Outokumpu Stainless USA LLC v. Converteam SAS, 902 F.3d 1316 (11th Cir. 20218).

[4] Yang v. Majestic Blue Fisheries, LLC, 876 F.3d 996 (9th Cir. 2017).

[5] Aggarao v. MOL Ship Mgmt. Co., 675 F. 3d 355 (4th Cir. 2012); Sourcing Unlimited, Inc. v. Asimco Int’l, Inc., 526 F.3d 38 (1st Cir. 2008).

The Supreme Court has granted certiorari on an issue involving domestic arbitration that has divided the federal courts of appeal (Badgerow v. Walters, Docket No. 20-1143):

Do federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the Federal Arbitration Act (FAA) where the only basis for such jurisdiction is that the underlying dispute involved a federal question?

The federal courts of appeal are split on this issue. The 1st, 2nd, 4th, and 5th Circuits have ruled that federal courts have jurisdiction over such motions, because the court can “look through” the motion to determine if the underlying arbitration proceeding would have been subject to federal jurisdiction but for the arbitration clause. See Quezada v. Bechtel OG & C Constr. Servs., 946 F.3d 837 (5th Cir. 2020); McCormick v. Am. Online, Inc., 909 F.3d 677 (4th Cir. 2018); Ortiz-Espinosa v. BBVA Secs. of Puerto Rico, Inc., 852 F.3d 36 (1st Cir. 2017); and Doscher v. Sea Port Group Secs., LLC, 832 F.3d 372 (2d Cir. 2016). The 3rd and 7th Circuits, however, have ruled that federal courts do not have jurisdiction over such motions. These courts have held that the court cannot “look through” the motion to determine if the underlying proceeding would have been subject to federal jurisdiction. Rather, they apply the traditional “well-pleaded complaint” rule, so that a motion to confirm or vacate an arbitration award must, on its face, necessarily raise a federal issue or otherwise have a basis for federal jurisdiction. See Goldman v. Citigroup Global Markets, Inc., 834 F.3d 242 (3d Cir. 2016); Magruder v. Fid. Brokerage Services LLC, 818 F.3d 285 (7th Cir. 2016).

This jurisdictional quandary arises because the FAA’s domestic arbitration provisions under Chapter 1 do not bestow an independent basis for federal court jurisdiction, unlike Chapter 2 of the FAA, which governs international arbitration and implements the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards — and provides for federal court jurisdiction.

In Vaden v. Discover Bank, 556 U.S. 49 (2009), the Supreme Court addressed the proper standard for determining federal jurisdiction when faced with a petition to compel arbitration under Section 4 of the FAA. The Court rejected the standard articulation of the well-pleaded complaint rule ordinarily used to analyze federal jurisdiction, under which courts would look to the face of the federal court petition for a basis for federal jurisdiction. Instead, the Court adopted the so-called “look through” approach. Under this approach, “[a] federal court may ‘look through’ a § 4 petition to determine whether it is predicated on an action that ‘arises under’ federal law.” Id. at 62. Thus, whereas the well-pleaded complaint rule would require that the Section 4 motion to compel itself evinces a federal cause of action, under Vaden, courts examine the underlying dispute potentially subject to arbitration to determine whether that dispute presents a federal question.

In reaching this result, the Supreme Court relied in part on the language of Section 4, which states that a proponent of arbitration may seek an order compelling arbitration in “any United States district court which, save for [the arbitration] agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties.” The Court also held that the look-through approach was consistent with basic jurisdictional tenets and practical considerations, because failure to look through to the arbitration proceeding’s subject matter “would permit a federal court to entertain a § 4 petition only when a federal-question suit is already before the court, when the parties satisfy the requirements for diversity-of-citizenship jurisdiction, or when the dispute over arbitrability involves a maritime contract.” Id. at 65. Such an “approach would not accommodate a § 4 petitioner who could file a federal-question suit in (or remove such a suit to) federal court, but who has not done so.” Id.

After Vaden, however, the circuit courts have split over whether the same logic applies to motions to confirm an arbitration award under Section 9 of the FAA, to vacate an award under Section 10, or to modify an award under Section 11. The circuits are divided principally because Sections 9, 10, and 11 lack the “save for [the arbitration] agreement” language of Section 4 that was, at least in part, the basis for the Supreme Court’s ruling in Vaden. The 3rd and 7th Circuits maintain that the absence of that language in Sections 9, 10 and 11 compels a different jurisdictional analysis for the various motions that can be brought after an arbitration award has been issued under the FAA. The 1st, 2nd, 4th and 5th Circuits, however, reason that although this “save for” language is absent in these other sections, the Supreme Court’s guidance in Vaden and the background principles animating its jurisdictional analysis under the FAA require the use of the same look-through approach for post-award motions as those brought pre-award under Section 4.

In the current context, an employee of a Louisiana financial service company, Denise Badgerow, who was on the losing side of an employment-related arbitration, is now asking the Supreme Court to resolve the circuit split in a petition for certiorari she filed in February 2021, in a case entitled Badgerow v. Walters, No. 20-1143, 2021 WL 706204 (Feb. 2021). Badgerow originally filed a petition to vacate the arbitration award as to certain defendants in Louisiana state court. The defendants removed the action to federal court. Badgerow moved to remand, asserting that the federal court lacked subject-matter jurisdiction over her petition to vacate. The district court held that it did have subject-matter jurisdiction, denied the remand, and then denied Badgerow’s motion to vacate the arbitration award. Badgerow appealed to the U.S. Court of Appeals for the 5th Circuit, solely on the jurisdictional issue. The 5th Circuit affirmed, following the “look through” analysis that the court had adopted in Quezada and finding that Badgerow’s assertion of a federal law claim in the underlying arbitration was sufficient for the court to have jurisdiction over her motion to vacate. See Badgerow v. Walters, 975 F.3d 469 (5th Cir. 2020). Badgerow’s petition for certiorari followed, in which she argued that the jurisdictional issue “is ripe and cries out for a definitive resolution by this Court.”

The Supreme Court will decide this issue in the fall of 2021.

As the U.S. Supreme Court currently considers the issue of whether a private international arbitration constitutes a “foreign or international tribunal” within the meaning of 28 U.S.C. § 1782(a), the lower courts continue to receive applications for discovery assistance in international arbitration matters.  Section 1782(a) authorizes U.S. district courts to provide assistance to foreign or international tribunals by ordering discovery of persons in the district.

On May 10, 2021, the United States District Court for the District of Columbia found that the Dubai International Finance Centre-London Court of International Arbitration (“DIFC-LCIA”) constitutes a “tribunal” within the meaning of Section 1782.[1]

The D.C. Court held that DIFC-LCIA is a “foreign or international tribunal” within the meaning of Section 1782 because it is “sanctioned, regulated, and overseen by” the UAE government.  See In re Application of: Food Delivery Holding 12 S.A.R.L., No. 1:21-MC-0005 (GMH), 2021 WL 1854343, at *5 (D.D.C. May 10, 2021).  In other words, the Court determined that DIFC-LCIA is a “state-sponsored” tribunal, not a private arbitration forum.  The Court relied on the Fourth Circuit’s decision in Servotronics, Inc. v. Rolls-Royce PLC et al., and found that:

The DIFC-LCIA is a joint venture of the Dubai International Financial Center and the London Court of International Arbitration. The DIFC itself was established by a United Arab Emirates decree. The Arbitration Institute, which is part of the DIFC, was created by statute, is funded by the Dubai government, and is governed by a board of trustees appointed by the Dispute Resolution Authority, one of the three “pillars” of the DIFC.  The DIFC’s Arbitration Institute staffs the DIFC-LCIA, including legal counsel, casework managers and administrators, and office managers.  Additionally, UAE courts have the authority under the UAE’s Federal Arbitration Law to appoint arbitrators, adjudicate arbitration issues, including jurisdictional determinations and procedural issues, and can assist in taking evidence and intervening to ensure the compliance of defiant parties.  Like the arbitration in the Fourth Circuit’s Servotronics case, all of this suggests that the DIFC-LCIA in Dubai is “sanctioned, regulated, and overseen by” the UAE government…

(citations omitted).

The Court concluded that even under the narrow definition of Section 1782 that was adopted by several Circuit Courts, an international arbitration tribunal might be considered to be within the definition of the statute as long as such tribunal is “state-sponsored.”  It did not reach the issue of whether section 1782 extends to private arbitrations because as a “state-sponsored” tribunal, the DIFC-LCIA  can seek discovery assistance in federal court under Section 1782.  It remains to be seen how the Supreme Court will decide this issue in Servotronics, Inc. v. Rolls-Royce PLC et al., Case No. 20-794.

[1]             We previously discussed a decision in In re Application of: Food Delivery Holding 12 S.A.R.L., 1:21-mc-00005, 2021 WL 860262 (Mar. 8, 2021), in which Food Delivery Holding 12 S.a.r.l. (“FDH”) filed an application under 28 U.S.C. §1782 for an order to issue a subpoena for the taking of deposition and production of documents for use in a matter before the DIFC-LCIA.

In that decision, the D.C. Court noted that FDH’s application “stumbles just out of the gate” because it failed to acknowledge and to address “in any depth” the fact that the federal courts have reached different conclusions as to whether a private arbitration fits within Section 1782’s definition.  However, the Court allowed the parties to submit supplemental briefings specifically addressing this issue.

An employee of a Louisiana financial service company who lost in an employment-related arbitration is asking the U.S. Supreme Court to resolve an arbitration-related issue that has divided the circuit courts: Do federal courts have subject-matter jurisdiction to confirm or vacate an arbitration award under Sections 9 and 10 of the Federal Arbitration Act (FAA) where the only basis for such jurisdiction is that the underlying dispute involved a federal question?

The federal courts of appeals are split on this issue. The 1st, 2nd, 4th, and 5th Circuits have ruled that federal courts have jurisdiction over such motions, because the court can “look through” the motion to determine if the underlying arbitration proceeding would have been subject to federal jurisdiction but for the arbitration clause. See Quezada v. Bechtel OG & C Constr. Servs., 946 F.3d 837 (5th Cir. 2020); McCormick v. Am. Online, Inc., 909 F.3d 677 (4th Cir. 2018); Ortiz-Espinosa v. BBVA Secs. of Puerto Rico, Inc., 852 F.3d 36 (1st Cir. 2017); and Doscher v. Sea Port Group Secs., LLC, 832 F.3d 372 (2d Cir. 2016). The 3rd and 7th Circuits, however, have ruled that federal courts do not have jurisdiction over such motions. These courts have held that the court cannot “look through” the motion to determine if the underlying proceeding would have been subject to federal jurisdiction. Rather, they apply the traditional “well-pleaded complaint” rule, so that a motion to confirm or vacate an arbitration award must, on its face, necessarily raise a federal issue or otherwise have a basis for federal jurisdiction. See Goldman v. Citigroup Global Markets, Inc., 834 F.3d 242 (3d Cir. 2016); Magruder v. Fid. Brokerage Services LLC, 818 F.3d 285 (7th Cir. 2016).

This jurisdictional quandary arises because the FAA’s domestic arbitration provisions under Chapter 1 do not bestow an independent basis for federal court jurisdiction, unlike Chapter 2 of the FAA, which governs international arbitration and implements the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards — and provides for federal court jurisdiction.

In Vaden v. Discover Bank, 556 U.S. 49 (2009), the Supreme Court addressed the proper standard for determining federal jurisdiction when faced with a petition to compel arbitration under Section 4 of the FAA. The Court rejected the standard articulation of the well-pleaded complaint rule ordinarily used to analyze federal jurisdiction, under which courts would look to the face of the federal court petition for a basis for federal jurisdiction. Instead, the Court adopted the so-called “look through” approach. Under this approach, “[a] federal court may ‘look through’ a § 4 petition to determine whether it is predicated on an action that ‘arises under’ federal law.” Id. at 62. Thus, whereas the well-pleaded complaint rule would require that the Section 4 motion to compel itself evinces a federal cause of action, under Vaden, courts examine the underlying dispute potentially subject to arbitration to determine whether that dispute presents a federal question.

In reaching this result, the Supreme Court relied in part on the language of Section 4, which states that a proponent of arbitration may seek an order compelling arbitration in “any United States district court which, save for [the arbitration] agreement, would have jurisdiction under title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between the parties.” The Court also held that the look-through approach was consistent with basic jurisdictional tenets and practical considerations, because failure to look through to the arbitration proceeding’s subject matter “would permit a federal court to entertain a § 4 petition only when a federal-question suit is already before the court, when the parties satisfy the requirements for diversity-of-citizenship jurisdiction, or when the dispute over arbitrability involves a maritime contract.” Id. at 65. Such an “approach would not accommodate a § 4 petitioner who could file a federal-question suit in (or remove such a suit to) federal court, but who has not done so.” Id.

After Vaden, however, the circuit courts have split over whether the same logic applies to motions to confirm an arbitration award under Section 9 of the FAA, to vacate an award under Section 10, or to modify an award under Section 11. The circuits are divided principally because Sections 9, 10, and 11 lack the “save for [the arbitration] agreement” language of Section 4 that was, at least in part, the basis for the Supreme Court’s ruling in Vaden. The 3rd and 7th Circuits maintain that the absence of that language in Sections 9, 10 and 11 compels a different jurisdictional analysis for the various motions that can be brought after an arbitration award has been issued under the FAA. The 1st, 2nd, 4th and 5th Circuits, however, reason that although this “save for” language is absent in these other sections, the Supreme Court’s guidance in Vaden and the background principles animating its jurisdictional analysis under the FAA require the use of the same look-through approach for post-award motions as those brought pre-award under Section 4.

Denise Badgerow, who was on the losing side of an employment-related arbitration that she brought, is now asking the Supreme Court to resolve the circuit split in a petition for certiorari she filed in February 2021, in a case entitled Badgerow v. Walters, No. 20-1143, 2021 WL 706204 (Feb. 2021). Badgerow originally filed a petition to vacate the arbitration award as to certain defendants in Louisiana state court. The defendants removed the action to federal court. Badgerow moved to remand, asserting that the federal court lacked subject-matter jurisdiction over her petition to vacate. The district court held that it did have subject-matter jurisdiction, denied the remand, and then denied Badgerow’s motion to vacate the arbitration award. Badgerow appealed to the U.S. Court of Appeals for the 5th Circuit, solely on the jurisdictional issue. The 5th Circuit affirmed, following the “look through” analysis that the court had adopted in Quezada and finding that Badgerow’s assertion of a federal law claim in the underlying arbitration was sufficient for the court to have jurisdiction over her motion to vacate. See Badgerow v. Walters, 975 F.3d 469 (5th Cir. 2020). Badgerow’s petition for certiorari followed, in which she argued that the jurisdictional issue “is ripe and cries out for a definitive resolution by this Court.” The Supreme Court is expected to decide shortly whether to grant the petition and review the issue.

Insolvency proceedings can create potential roadblocks for arbitration proceedings that require careful navigation. Arbitration proceedings are private contractual proceedings intended to resolve individual claims. In contrast, insolvency proceedings are public proceedings intended to resolve claims collectively. Yet, an arbitration within an insolvency proceeding can be useful for resolving individual claims that may help resolve the collective issues. Counsel must be aware that the jurisdiction in which the insolvency proceeding is pending, as well as the applied law of the arbitration (lex arbitri) will determine the rules for resolving the conflicts between the two types of proceedings

One of the primary goals of any arbitration is to arrive at an enforceable award that is not subject to vacatur. Thus, parties should not proceed with an arbitration without knowing whether the insolvency proceeding will affect the enforceability of the award.

Basic Checklist

Will the arbitration be stayed during the insolvency proceedings?

Generally, insolvency proceedings stay all claims against the debtor, including arbitration proceedings. Sometimes the insolvency proceedings will stay not only arbitrations against the debtor, but also arbitrations brought by the debtor against others. A review of the law in the jurisdiction where insolvency proceeding is taking place, as well as any orders in the insolvency case, will determine whether the arbitration can be filed, whether it can proceed and against whom.

Can permission be obtained to file an arbitration or to proceed with an arbitration within the insolvency proceeding?

If the filing or continuation of an arbitration is stayed by the insolvency proceedings, there may be grounds to obtain relief from the insolvency court to proceed. The insolvency court wants to resolve claims and preserve assets. For example, the insolvency court may allow proceedings against the debtor’s insurance carrier only, without recourse to the debtor’s assets. Sometimes the insolvency court will allow an arbitration to commence or continue, but only to decide the quantum of the claim, so that the claim can be submitted in the insolvency proceeding.

The insolvency proceeding may have its own legal regime that applies to certain issues central to the proceeding itself — such as whether the proceeding is properly filed, whether assets have been improperly transferred or recoverable, and how the insolvency proceeding should be resolved as a whole.

The regime of bankruptcy law on these issues in the United States is well-developed. The U.S. Federal Arbitration Act is also well-developed and establishes a strong preference for arbitration where the parties have agreed to arbitrate resolution of disputes. This policy preferring arbitration conflicts with the bankruptcy laws where the substantive rights sought to be arbitrated are rights created by the bankruptcy proceeding, and would not exist but for the bankruptcy proceeding.

In bankruptcy proceedings where the issues are “core proceedings,” the bankruptcy court has the discretion to stay arbitration in favor of the specialized bankruptcy court. For example, in Pillsbury Winthrop Pittman LLP v. Cuker Industries, now on appeal to the Court of Appeals for the 9th Circuit, the district court in January 2021 denied a request to arbitrate contested counsel fees pursuant to an arbitration clause in an engagement letter. The court held that the core issue of the extent and validity of the counsel fees as a secured claim was one of the issues that could be arbitrated.

A bankruptcy court in the United States has the discretion to decide that permitting the arbitration to proceed would conflict with the underlying purposes of the Bankruptcy Code to have bankruptcy law issues decided by bankruptcy courts, centralizing resolution of bankruptcy disputes and avoiding piecemeal litigation. In the case of GE Capital Retail Bank v. Belton, the U.S. Supreme Court denied certiorari from the 2nd Circuit on March 8, 2021, which held that an otherwise valid arbitration clause would not be enforced to resolve a putative class action case against the bank for violation of the post-discharge injunction by enforcing discharged claims against credit card holders. The lower courts had found that allowing arbitration would impede the bankruptcy court from enforcing its own orders.

Cases decided in jurisdictions outside of the United States apply similar reasoning in deciding the equities of allowing the parties to work out their dispute resolution issues outside of the insolvency regime.

Does the law of the arbitration provide that arbitration can proceed over the objection or notwithstanding the insolvency proceeding?

In some cases, arbitrators have concluded that the arbitration could or should proceed notwithstanding the objection of the insolvency proceeding. This decision may be correct based on the law of the arbitration, and yet diametrically opposed to the insolvency legal regime or under the choice of law provision.

This is illustrated best in several cases involving the Polish company Elektrim SA. Vivendi Universal SA had filed an arbitration before the LCIA against Elektrim SA, which then filed a Polish insolvency proceeding. Polish insolvency law abrogates commercial arbitrations against a debtor. But UK law, where Vivendi Universal SA is incorporated, contains no such provision. The ultimate arbitration award was confirmed by the High Court of London.

The results in an arbitration filed against Elektrim SA in Switzerland were entirely different. Under Swiss law, the conflicts of law analysis determined that Polish law should apply, and Elektrim SA was dismissed from the Swiss multiparty arbitration.

Moving forward with an arbitration without the permission or approval of the insolvency court creates two risks. First, proceeding without permission or approval may violate a stay order imposed upon the non-debtor party, which could have consequences. Second, the uncertainty of the disposition of the arbitration in light of the insolvency proceedings may result in an award that is unenforceable or subject to vacatur.

What are best practices when arbitrating and the insolvency proceedings may be in conflict with the arbitration proceeding?

Generally, the non-debtor party files a notice or a proof of its claim in the insolvency proceeding. But this decision must be reviewed carefully because, in most jurisdictions, this is akin to agreeing to the jurisdiction of the insolvency proceeding. In addition, the non-debtor party should seek relief from any injunction or order that is an impediment to arbitrating the matter. In the alternative, permission can be sought to arbitrate the matter, but collection will be limited to third party assets, such as insurance proceeds and guarantors, or the arbitration award can be used to establish the quantum of the claim in the insolvency proceeding, with collection pursued through the insolvency proceeding.

Conclusion

Insolvency proceedings pose numerous hurdles for parties in or about to commence arbitration. One must tread carefully and understand the rules of both games to ensure that an arbitration award, if obtained, will be enforceable.