U.S. Second Circuit Clarifies Law on Arbitral Award Enforcement
On 18 January 2017, the U.S. Second Circuit Court of Appeals (the Second Circuit) overturned a ruling by the Southern District of New York (SDNY) dismissing an action to enforce an ICC arbitration award rendered in Paris. The judgment (subject to a later correction issued in March) will likely be cited often as it helps clarify how the influential Second Circuit views the enforcement of awards, the applicable law regarding who an award may be enforced against, and what issues an award may preclude from later judgment.
The factual background of this case is complex, and much of it is not essential to understand the outcome of the case. In early 2008, a Swiss company (SBT) owned by AMCI International GMbH (AMCI), entered into a series of contracts for the sale of pig iron with the Appellants, a group of Brazillian companies (CBF). The contracts, which did not bind SBT’s successors-in-interest, contained an agreement for ICC arbitration in Paris.
When SBT defaulted on these contracts CBF brought an arbitration claim in Paris. Shortly thereafter, SBT transferred all its assets to another AMCI-owned shell company, Prime Carbon, and filed for bankruptcy in Switzerland. At the arbitration proceedings, the administrator for SBT argued that the company did not have sufficient assets to defend itself, and the arbitral tribunal entered an award in CBF’s favor for USD 48 million. The award, however, did not extend to assets now held by AMCI, Prime Carbon or other successors-in-interest (the Appellees) because the tribunal found that CBF had failed to prove that SBT had engaged in fraud during the bankruptcy proceedings.
CBF brought an action in the SDNY against the Appellees for the enforcement of the arbitral award and for various state law fraud claims relating to SBT’s bankruptcy. The SDNY dismissed the action on the grounds that:
• the award had not been previously been confirmed by a competent court; and
• that the CBF’s fraud claims were precluded by the ICC tribunal’s conclusions.
The Second Circuit, however, vacated the SDNY’s judgment on both issues.
Enforcement of foreign arbitral awards
The Second Circuit, relying heavily on the draft Restatement (Third) of the U.S. Law of International Commercial Arbitration, clarified the requirements of the Federal Arbitration Act (FAA) and New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) with respect to the recognition and enforcement of awards.
To this end, the Second Circuit recalled the important distinction between (i) domestic award (i.e. award rendered in the United States); (ii) nondomestic award (i.e. award rendered in the United States but which does not apply U.S. law or which has another significant non-U.S. dimension); and (iii) foreign arbitral awards (i.e. award rendered outside the United States) in its case-law.
Specifically, where a U.S. federal court rules on an award made in the United States, whether domestic or nondomestic, it sits in primary jurisdiction and therefore has the power to confirm (or set aside or modify) the award. However, where it rules on an award made in another country (a foreign award) it sits in secondary jurisdiction and has only the power to enforce (or refuse to enforce) the award. The court further clarified that while the FAA uses the term “confirmation” with respect to both contexts, it should be understood to mean “recognition and enforcement” in situations where such a reading would be consistent with the requirements of the New York Convention.
The Second Circuit also recalled that the New York Convention explicitly eliminated the so-called double exequatur requirement of obtaining prior confirmation of an award from the country with primary jurisdiction before seeking execution in another. The Second Circuit therefore held that the SDNY could enforce the award as a single, one-step process without prior confirmation.
Applicable law and corporate identity
The Second Circuit also ruled on the law applicable to whether the award, which did not name Appellees, could be enforced against them. The Second Circuit found that Article 3 of the New York Convention states that the enforcement of a foreign award is subject to the procedural laws of the enforcing jurisdiction, which cannot impose more onerous conditions than on the enforcement of a domestic award. As a consequence, the question of alter-ego liability – in other words CBF’s ability to pierce Appellees corporate veil – must be determined by the law applicable in the SDNY.
Finally, the Second Circuit held that while normally an argument considered and rejected during the course of arbitration was precluded from being raised during a subsequent enforcement action, principles of equity did not bar the consideration of issues that may be tainted by a party’s fraud. Specifically, the Second Circuit found that SBT had misled the ICC tribunal and that therefore CBF never had a chance for full and fair consideration of its fraud claims. Consequently it held that the SDNY could consider these claims on remand.
At the end of the day, the Second Circuit vacated the SDNY’s judgment dismissing the enforcement action and remanded the case for further proceedings.
Because of the comprehensiveness of the Second Circuit’s assessment, this case is required reading for practitioners contemplating an action for the enforcement of an award in that jurisdiction.
PS: I would like to thank Catherine Gordley for her valuable contribution to this post – Quentin.