How To Ensure That Your Foreign Arbitral Award Is CollectibleOctober 13, 2017 – Articles New York Law Journal
For many creditors, winning an arbitral award is just the beginning of a long road to actual recovery. With different rules, jurisdictional issues, and debtors who are determined to hide their assets at any cost, it might become challenging and expensive to collect a foreign arbitral award even in jurisdictions such as New Yorkwho has been traditionally liberal to the enforcement of foreign judgments. There are, however, certain steps a creditor (or potential creditor) should consider to ensure that any recovery is plausible. These steps include: seeking preliminary enforcement measures prior to or during arbitration, following the right procedures to enforce a foreign award and considering whether an award could be enforced against any third parties.
It is prudent to start planning a potential collection prior to arbitration or while an arbitration is still pending. For example, if a creditor has reasons to believe that a debtor is located or doing business and has accounts or property in New York, a creditor should consider utilizing CPLR 7502(c) to obtain an order of attachment or preliminary injunction to secure any future recovery. Recently a number of litigants had successfully utilized this provision. SeeMoquinon v. Gliklad , 55 Misc.3d 1212(A) (N.Y. Co. April 6, 2017); Rockwood Pigments NA v. Elementis Chromium LP , 124 A.D.3d 509 (1st Dep’t 2015).
Since Article 7502(c) only applies to an arbitration that is “pending or that is to be commenced,” a creditor cannot affirmatively rely on this provision after the award is issued. It has been suggested, that in order to circumvent this gap in legislature, a creditor may convert its foreign arbitral award to a foreign judgment. See John Fellas, “Jurisdictional Obstacles and Enforcing Foreign Arbitral Awards,” 255 NYLJ 65 (April 6, 2016). Unlike arbitration, CPLR provides clear post-judgment enforcement mechanisms in Article 62. Specifically, CPLR 6201(5) authorizes attachment in actions involving enforcement of foreign judgment.
Follow the Right Procedure
As evidenced by a recent decision of the Second Circuit in CBF Industria de Gusa S/A v. AMCI Holdings , 850 F.3d 58 (2d Cir. 2017), there is a confusion among litigants and courts about the procedures that should be followed to enforce a foreign arbitral award.
In CBF, the ICC in Paris issued the $48 million award in favor of CBF claimants and against a bankrupt company. CBF also sought an award against certain non-signatories, the debtor’s interrelated companies and individuals, but the arbitral tribunal declined the request. CBF then brought an action in the United States District Court for the Southern District of New York seeking to enforce a foreign arbitral award against non-signatories as alter-egos of the then-defunct award-debtor.
The district court dismissed the action, finding that CBF was required to confirm its award prior to seeking its enforcement. After CBF refiled a second proceeding seeking to confirm the foreign award, the district court also dismissed that action finding that the bankrupt liquidated debtor was immune from suit.
The Second Circuit found that the district court incorrectly required the claimant to confirm its award. The Circuit explained that while under the Geneva Convention, which preceded the New YorkConvention, an international arbitral award could not be enforced until it had been confirmed by a court in the place of the arbitration (known as “double exequatur” requirement), under the New YorkConvention only one proceeding is necessary. The Second Circuit noted that in certain international (“nondomestic”) arbitrations, which take place in the United States, a creditor might be required to file a confirmation proceeding before seeking to enforce. However, imposing such a requirement in cases where the United States is not the primary jurisdiction would be inconsistent with the New York Convention. Therefore, the Second Circuit made it clear that a creditor of the foreign arbitral award (award made in one country for which enforcement is sought in another) does not need to seek confirmation of such an award but may directly seek its enforcement in New York courts.
However, to avoid any future confusion, the Second Circuit noted:
[W]e encourage litigants and district courts alike to take care to specify explicitly the type of arbitral award the district court is evaluating (domestic, nondomestic, or foreign), whether the district court is sitting in primary or secondary jurisdiction, and accordingly, whether the action seeks confirmation of a domestic or nondomestic arbitral award under the district court’s primary jurisdiction or enforcement of a foreign arbitral award under its secondary jurisdiction.
CBF, 850 F. 3d at 75.
Consider Other Sources for Recovery
CBF also involved another enforcement issue, namely the question of whether a third party not named in an arbitral award may have that award enforced against it under a theory of alter-ego liability.
The Second Circuit explained that “the question of whether a third party not named in an arbitral award may have that award enforced against it under a theory of alter-ego liability, or any other legal principle concerning the enforcement of awards or judgments, is one left to the law of the enforcing jurisdiction, here the Southern District of New York, under the terms of Article III of the New York Convention.” Id. The Circuit noted that, similar to the signatories, the non-signatories could avoid enforcement only on one of the five bases for refusal to enforce a foreign arbitral award under Article V(1) of the New York Convention or by showing, in accordance with Article V(2), that the dispute was not arbitrable under the United States law or that enforcement of the award was contrary to the public policy of the United States. The court remanded the case back to the district court with instructions to determine whether the non-signatories could successfully invoke any exception to enforcement.
Finally, the Second Circuit found that the district court erred in finding that CBF was estopped from asserting fraud claims against the non-signatories because those claims had been already arbitrated and denied by the ICC tribunal. The court noted that “[b]ecause issue preclusion is an equitable doctrine, the Second Circuit and federal courts adhere to the maxim that ‘he who comes into equity must come with clean hands.’” Id. at 78. Here, CBF alleged that the non-signatories had misled the tribunal regarding the nature of their alleged fraud. Specifically, CBF claimed that after CBF filed a request for arbitration, the alter egos liquidated the debtor and transferred all the assets from the debtor. At the same time, the alter egos represented to CBF and tribunal that the debtor “is still existing and has not resolved to be dissolved and liquidated.” Id. at 65.
The Second Circuit held that these allegations, taken at face value, were sufficient to deny motion to dismiss and warrant fact discovery with respect to CBF’s claim that they did not have “full and fair opportunity to litigate the merits of their fraud” claims before the ICC. Id.
Based on the above, in order to ensure potential recovery of arbitral awards, it is recommended to start planning early. Prior to arbitration or while arbitration is pending, a claimant should consider locating the debtor’s assets and seeking preliminary enforcement measures. After obtaining an arbitral award, a claimant should follow the correct proceeding for its enforcement. As established by the Second Circuit in CBF, a winner of the foreign arbitral award is not required to confirm the award prior to its enforcement. Finally, if recovery against the signatory seems unlikely, the claimant may potentially enforce the award under a theory of alter-ego liability against the non-signatories.
Reprinted with permission from the October 13 issue of the New York Law Journal. (c) 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.