Proskauer Rose International Practice Guide Proskauer Rose LLP |
      Proskauer on International Litigation and Arbitration:
       Managing, Resolving, and Avoiding Cross-Border Business or Regulatory Disputes
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  1. Internal challenges — Each arbitral body has its own procedures for parties to seek modification or reconsideration of an award.
  2. Where to challenge award in the courts
    1. The New York Convention allows a losing party to seek to vacate or annul an award only in (i) the country where the award was made or (ii) the country whose procedural laws were utilized for the arbitration. Articles V.1.(e) and VI. Those countries have "primary jurisdiction" over the arbitral award.
      1. See M&C Corp. v. Erwin Behr GmbH & Co., KG, 87 F.3d 844, 847-49 (6th Cir. 1996) ("We hold ... that such a motion to vacate may be heard only in the courts of the country where the arbitration occurred or in the courts of any country whose procedural law was specifically invoked in the contract calling for arbitration of contractual disputes."). See also Karaha Bodas Co., LLC. v. Perushahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, 289-290 (5th Cir. 2004).
      2. Pointer: When drafting an arbitration agreement that sets the location for an arbitration, the parties should know what the statute of limitations is in that country to seek to vacate an arbitral award. For example, the losing party to an arbitration in the United Kingdom has 28 days after he has exhausted his rights to appeal to the arbitral body to challenge an award in the courts.
  3. Grounds for denying enforcement under the New York Convention
    1. Defenses to enforcement under the New York Convention are construed narrowly, "to encourage the recognition and enforcement of commercial arbitration agreements in international contracts." Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, 288 (5th Cir.), cert. denied, 543 U.S. 917 (2004) (citations omitted).
    2. The seven enumerated defenses to enforcement appear in Article V of the New York Convention are:
      1. The parties were under an incapacity at the time the arbitration agreement was made, or the agreement is not valid under the laws of the country to which the parties have subjected it to (Art. V.1.(a)).
      2. The losing party at the arbitration was not given proper notice or was otherwise unable to present his case. (Art. V.1.(b)).
        1. Denying enforcement:
          1. Where one arbitrator on panel instructed party to present its case with summary documents, and the arbitration panel thereafter ruled against the party because it had not supplied the panel with the supporting documentation, the Second Circuit found that the party had not been able to present its case, and affirmed the denial of enforcement. See Iran Aircraft Industries v. Avco Corp., 980 F.2d 141, 143 (2d Cir. 1992).
        2. Enforcing arbitral award:
          1. In Parsons & Whittemore Overseas Co., 508 F.2d 969, 975-76 (2d Cir. 1974) the court held that the petitioner was not prohibited from presenting its case where an arbitral tribunal refused to accommodate a key witness's schedule. The court concluded that "[t]he arbitration tribunal acted within its discretion in declining to reschedule a hearing for the convenience of [the petitioner's] witness. [The petitioners'] due process rights under American law, rights entitled to full force under the Convention as a defense to enforcement, were in no way infringed by the tribunal's decision."
          2. In Goetech-Lizenz-AG v. Evergreen, 697 F.Supp. 1248, 1253 (E.D.N.Y. 1988) the defendant failed to appear or present witnesses at a scheduled arbitration. The defendant argued that the arbitrator's award, without the defendant's appearance, was a valid V.1.(b) defense. The court concluded the defendant was not denied the opportunity to present its defenses under article V(1)(b) when it had notice of an arbitration, but chose not to respond.
      3. The award deals with an issue not subject to the arbitration agreement or beyond the scope of the arbitration agreement (Art. V.1.(c).
        1. In Encyclopaedia Universalis S.A. v. Encyclopaedia Britannica, Inc., 403 F.3d 85, 92 (2d Cir. 2005), the district court held an arbitrator's award unenforceable because the "arbitrators exceeded their powers." Id. at 92. On appeal, the Second Circuit held the district court's refusal to confirm the arbitration award on grounds that the arbitration panel exceeded its powers was "not, however, one of the seven exclusive grounds for denying enforcement under the New York Convention." (but see section (d) below)
      4. the composition of the arbitral body or the arbitral procedure was not in accordance with the agreement of the parties, or failing such agreement, was not in accordance with the law of the country where the arbitration took place. (Art. V.1.(d)).
        1. Encyclopaedia Universalis, S.A. v. Encyclopaedia Britannica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005) (holding a foreign arbitration award was unenforceable under Article V.1.(d) where a third arbitrator was appointed (when the agreement expressly provided for only two) because "the composition of the arbitral authority was not in accordance with the parties' agreement."); Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1442 (11th Cir. 1998) (concluding that Panel's consideration of late-filed report did not constitute a circumstance where "the arbitral procedure was not in accordance with the agreement of the parties" under Article V.1.(d)).
        2. Satyam Computer Services, Ltd v. Venture Global Engineering, LLC, (6th Cir. May 25, 2007) (holding that respondent's argument that arbitrator violated arbitral procedure by applying New York law when the agreement contained a provision stating that Michigan law governed, was, in reality, an improper attempt to re-litigate the issues in the case and was not about arbitral procedure).
      5. the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority in the country in which, or under the law of which, the award was made. (Art. V.1.(e))
        1. See Termorio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928 (D.C. Cir. May 25, 2007) (affirming dismissal of enforcement proceeding where court in Columbia, the country where the arbitration took place, had vacated the arbitral award). See also Continental Transfer Technique Ltd. v. Federal Government of Nigeria, 2010 WL 1048827 (D.D.C. 2010) ("[u]nder the Convention, the critical element is the place of the award: if that place is in the territory of a party to the Convention, all other Convention States are required to recognize and enforce the award, regardless of the citizenship or domilice of the parties to the arbitration.").
        2. But see In re Chromalloy Aeroservices, 939 F. Supp. 907 (D.D.C. 1996). In that case, the District Court addressed an arbitration agreement between the Egyptian Air Force and an American in which the parties provided that the losing party would not seek review of the arbitration award. While the American company's petition for enforcement of its award was pending before the District Court, Egypt filed an appeal with the Egyptian Court of Appeal to nullify the award. The District Court refused to recognize the decision of the Egyptian court to nullify the award, finding that to do so would violate clear United States public policy in favor of arbitration and would reward Egypt's breach of the express contractual agreement not to take any appeal from the arbitration award.
        3. Although a U.S. court can decline to enforce a foreign arbitral award if it has been vacated by a competent court in of primary jurisdiction, it cannot itself vacate that foreign award (unless U.S. procedural law applied). Courts, however, do not have to provide any deference to a foreign court's order purporting to vacate an award if that court is not one with primary jurisdiction. In Karaha Bodas Co., v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274 (5th Cir.), cert. denied, 543 U.S. 917 (2004), the Fifth Circuit affirmed enforcement of an award even where an Indonesian court had annulled the award and enjoined the prevailing party from enforcing the award elsewhere. The court held that the only court that could issue such an order was a court in Switzerland, where the arbitration took place, and held that the Indonesian court's orders were of no force and effect.
        4. If the losing party has petitioned the courts of the country with primary jurisdiction to vacate the award, a court with secondary jurisdiction "may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security." (Art. VI).
        5. Parallel proceedings
          1. Generally, U.S. courts will not stay an enforcement proceeding in favor of another proceeding in another country if that other country is not one of primary jurisdiction.
          2. In Europcar Italia, 156 F.3d at 317-318, the Second Circuit outlined a set of criteria district courts should consider in determining whether to stay an enforcement proceeding before it in favor of a proceeding in another country, including "(1) the general objectives of arbitration - the expeditious resolution of disputes and the avoidance of protracted and expensive litigation; (2) the status of the foreign proceedings and the estimated time for those proceedings to be resolved; (3) whether the award sought to be enforced will receive greater scrutiny in the foreign proceedings under a less deferential standard of review; (4) the characteristics of the foreign proceedings, including (i) whether they were brought to enforce an award (which would tend to weigh in favor of a stay) or to set the award aside (which would tend to weigh in favor of enforcement); (ii) whether they were initiated before the underlying enforcement proceedings so as to raise concerns of international comity; (iii) whether they were initiated by party now seeking to enforce the award in federal court; and (iv) whether they were initiated under circumstances indicating an intent to hinder or delay resolution of the dispute; (5) a balance of the possible hardships to each of the parties, keeping in mind that if enforcement is postponed under Article VI of the Convention, the party seeking enforcement may receive ‘suitable security' and that, under Article V of the Convention, an award should not be enforced if it is set aside or suspended in the originating country ... and (6) any other circumstances that could tend to shift the balance in favor of or against adjournment."
          3. See also, MGM Productions Group, Inc. v. Aeroflot Russian Airlines, 2003 WL 21108367, at *5-6 (S.D.N.Y. May 14, 2003) (enforcing award despite "parallel" proceedings in Sweden that had "only just begun" and stating that the "inability to carry on meaningful business operation[s] was a factor strongly militating against a stay).
        6. The subject matter of the difference is not capable of settlement by arbitration under the law of the country where enforcement is sought (Art. V.2.(a))
          1. This argument has rarely been invoked as a defense to enforcement of an arbitral award, and has even more rarely been successful. However, in Corcoran v. Ardra Ins. Co. Ltd., 77 N.Y.2d 225 (2d Cir. 1990), the New York State Court of Appeals determined that state law preempts federal law in the context of insurance, and in New York, the law provides that liquidators of insolvent insurance companies are not permitted to enter into arbitration. Even though insolvent entity had a valid arbitration agreement with foreign reinsurer, the dispute had to be handled in state court.
        7. The recognition or enforcement of the award would be contrary to the public policy of the country where enforcement is sought (Art. V.2.(b)).
          1. A foreign arbitration award is violative of public policy within the meaning of Article V.2.(b) of the New York Convention "only when the award violates some explicit public policy that is well-defined and dominant and is ascertained by reference to the laws and legal precedents and not from general consideration of supposed public interests. " Industrial Risk Insurers, 141 F.3d at 1445. "The public policy defense is to be construed narrowly to be applied only where enforcement would violate the forum state's most basic notions of morality and justice." Karaha Bodas Co., L.L.C. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274, 306 (5th Cir.), cert. denied 543 U.S. 917 (2004). "The general pro-enforcement bias informing the convention ... points to a narrow reading of the public policy defense." Id. "Public policy arguments [under the New York Convention] should be accepted with caution, so as not to discourage enforcement of United States arbitration awards by courts of other countries." MGM Productions Group, Inc. v. Aeroflot Russian Airlines No. 03 Civ. 0500, 2003 WL 21108367, at *5 (S.D.N.Y. May 14, 2003), aff'd, 91 Fed. App. 716 (2d Cir.), cert. denied, 543 U.S. 956 (2004). As with each of the defenses under the New York Convention, the burden is on the party opposing enforcement of the Award. See Europcar Italia S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310, 313 (2d Cir. 1998
          2. In MGM Productions Group, Inc., the respondent argued that enforcement of the foreign arbitration award would cause it to violate the Iranian Transactions Regulations ("ITR"), regulations implemented by executive order, which prohibited U.S. businesses from engaging in transactions related to Iran and subjecting violators to penalties. There, respondent had made the argument to the arbitrator, who rejected it, but the District Court and the Second Circuit found that even if the award caused respondent to violate the ITR, that did not amount to a violation of the United State's "most basic notions of morality and justice." 2003 WL 21108367, at *4
        8. More expansive defenses that may apply to domestic arbitration awards are inapplicable to foreign awards. For example, in many circuits, courts allow parties to block enforcement of domestic awards if they can prove the award was made in "manifest disregard of the law." They have uniformly found, however, that such defenses are not available to oppose enforcing a foreign award. See, e.g., M&C Corp. v. Erwin Behr GmbH & Co., 87 F.3d 844, 850-851 (6th Cir. 1996); See also See Encyclopaedia Universalis, S.A. v. Encyclopaedia Britannica, Inc., 403 F.3d 85, 92 (2d Cir. 2005) ("That an arbitration panel exceeded its powers is not ... one of the seven exclusive grounds for denying enforcement under the New York Convention").
  4. Waiver of defenses to enforcement
    1. Failure to raise certain defenses to enforcement at the arbitration may act as a waiver of the defense during enforcement proceedings in the U.S. District Courts.
      1. See AAOT Foreign Econ. Ass'n (VO) Technostroyexport v. Int'l Dev. & Trade Services Inc., 139 F.3d 980 (2d Cir. 1998) (holding that respondent waived Article V.2.(b) public policy defense to enforcement of foreign arbitral award when it knew during the arbitration proceeding that the arbitration panel was corrupt, but did not raise issue until its defense to enforcement);
      2. MGM Prods., 2003 WL 21108367, at *4 (losing party failed to meet burden under Article V.2.(b) on claim that "the arbitrators' award seeks to compensate [prevailing party] for acts that [violate U.S. law], and to impose liability on [losing party] for not enabling [prevailing party] to engage in further illegal acts," where issue had been raised before the arbitrators and decided against losing party);
      3. La Societe Nationale Pour La Recherche, La Production, Le Transport, La Transformation et La Commercialisation des Hydrocarbures v. Shaheen Natural Res., Co., 585 F. Supp. 57, 62, 65 (S.D.N.Y. 1983), aff'd, 733 F.2d 260 (2d Cir.), cert. denied, 469 U.S. 883 (1984) (holding the party resisting enforcement "should have presented its objection to the arbitration panel. . . . To deny recognition and enforcement to the arbitration award ... at this stage would be to violate the goal and the purpose of the Convention, that is, the summary procedure to expedite the recognition and enforcement of arbitration awards.") citing Imperial Ethiopian Gov't v. Baruch-Foster Corp., 535 F.2d 334, 335 (5th Cir. 1976).

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