SECURITY FOR AND ENFORCEMENT OF ARBITRATION AWARDS

Transcription

1 SECURITY FOR AND ENFORCEMENT OF ARBITRATION AWARDS Michael Payton, Clyde & Co. I Introduction The success of arbitration depends on the ability both to seek interim relief and to enforce awards globally. Without recognition of these mechanisms in local courts, arbitration will be viewed as a waste of time and money. With over 140 States signed up to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards one might have anticipated moves towards standardisation on the granting of interim relief and the enforcement of Awards. Things are never quite that simple. Despite a degree of standardisation concerning the rules governing arbitrations, particularly with the adoption of the UNCITRAL Model Law and the IBA rules of evidence, there remain quite different ends of the spectrum. For example, at one end we have Dubai with its new DIFC-LCIA arbitration centre, and Hong Kong with the Hong Kong International Arbitration Centre, both taking active steps to improve their arbitration institutions. At the other end of the spectrum, there are jurisdictions, like the Ukraine and Saudi Arabia, which have proven to be rather less helpful when it comes to the enforcement of foreign arbitration awards. Under Ukrainian law a limited number of disputes can be referred to arbitration, and the courts have no clear mechanism by which to order interim relief. And this is despite having adopted the UNCITRAL Model Law and being a signatory to the New York Convention since December In the Ukraine, many of the problems facing arbitration arise because arbitration is neither well known nor well-established. There is, however, some hope that Judges in the Ukraine are beginning to familiarise themselves with foreign arbitration and international practice. By contrast, there are three main arbitration institutions in the UAE: the Abu Dhabi Commercial Conciliation and Arbitration Centre of the Abu Dhabi Chamber of Commerce and Industry; the Dubai International Arbitration Centre; and the joint venture initiative between the DIFC and the LCIA. The DIFC-LCIA has been modelled on the LCIA rules and promises to be a welcome step in the right direction to uniformity of enforcement of arbitral Awards. The DIFC is a segregated area of the UAE with its own laws. As regards interlocutory applications, the UAE court retains its powers to grant interim measures. Therefore it may be difficult to make attachment orders against assets held in the UAE where the party seeking the award is not a UAE national or UAE national company. The UAE courts can also be called upon to adjudicate whether an arbitration clause is valid. Enforcement of an Award in the UAE requires initial ratification by a UAE court. Although the courts are not supposed to assess the merits of the underlying dispute, they often do. There is a concern that the local UAE courts will refuse to recognise and enforce arbitration Awards on "public policy" grounds. 1

2 On 19 April 1994, Saudi Arabia ratified the New York Convention. Saudi Arabia has further enacted the "Laws of Arbitration" to govern arbitrations. Parties are free to adopt any arbitration rules to govern proceedings. However, if parties adopt arbitration rules from nations outside the GCC, the courts will not adjudicate on any disputes arising from the arbitration. This will be a particular concern with regard to enforcement. Enforcement of a foreign arbitration Award in Saudi Arabia is made easier if the foreign country is also a signatory to the Riyadh Convention; however, as with the UAE, the contrary to public policy carve-out is frequently employed. The difficulties of enforcing a foreign arbitration Award in Saudi Arabia are well known. Even when Awards are rendered within Saudi Arabia, they are not considered final and binding, so parties are still likely to face difficulties. Interim relief in the form of attachment orders and freezing orders is widely available in other jurisdictions - for instance, Hong Kong, China and generally throughout the Middle East and Asia. The difficulties in obtaining such relief may differ in practice. A recent case in Bolivia 1 questioned whether an English court had jurisdiction to grant interim relief in the form of a freezing injunction in support of a foreign arbitration; it was held that the English courts did not. However, it is thought that if the arbitration had been subject to ICC rules, or the responding party had assets in the UK, the case would have been decided differently. Following the decision in West Tankers, 2 it is feared that English courts' jurisdiction with regard to interim relief in support of arbitration will be given a narrow reading By way of further illustration of the importance of local knowledge, let us look at recent developments in two of the major world economies, USA (on security) and China (on enforcement). II Security USA Interim Relief - Rule B Attachment Orders and Post Judgment attachment Proceedings Rule B of the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions of the Federal Rules of Civil Procedure has raised some important questions over the past few years, with the recent frenetic Court activity perhaps now coming to an end with the case of The Shipping Corporation of India Lt. v Jaldhi Overseas Pte, Ltd, 585 F.3d 58 (2d Cir. 2009), on which the US Court of Appeals for the Second Circuit, in an unexpected decision, overturned its previous ruling in Winter Storm Shipping Ltd. v TPI, 310, F.3d 263, 278 (2d Cir 2002), and held that Rule B does not apply to electronic fund transfers (EFTs). 1 ETI Euro Telecom International NV v Republic of Bolivia [2008] EWCA Civ, 89 2 Reunione Adriatica di Sicurta SpA RAS v West Tankers Inc C-185/07 2

3 The Background to Rule B and the Shipping Corporation of India Decision Maritime attachments arose because maritime parties are peripatetic and their assets are often transitory. Thus, the traditional US policy underlying maritime attachment has been to permit attachments of assets wherever they can be found and not to require the plaintiff to scour the globe to find a proper forum for suit or property of the defendant sufficient to satisfy a judgment. Rule B is a prejudgment remedy that enables a plaintiff with a maritime claim against an absent defendant to gain jurisdiction over that defendant through the attachment of its property located within the jurisdiction of the court issuing the attachment order. The attachment also serves as security which can be used to satisfy the judgment eventually obtained against the defendant. When faced with the attachment of its property, the absent defendant has two choices: it can come into the jurisdiction to defend the claim on the merits, or risk the entry of a default judgment against it although the amount of the default judgment would be limited to the amount of its property that had been attached, not the amount of the claim. Rule B provides for the attachment of the defendant's "tangible or intangible personal property." For more than 150 years, Rule B was used to attach "traditional" types of property such as bunkers, cargo, and funds on deposit in bank accounts, and as such it generated little controversy or notice. In 2002, however, the use of Rule B expanded significantly when the Second Circuit Court of Appeals in New York, in Winter Storm Shipping, Ltd. v. TPI, 310 F3d. 263 (2d Cir. 2002), interpreted Rule B's definition of property to include electronic fund transfers ("EFTs") being processed at intermediary banks. The lower court determined that the issue of whether an EFT was property subject to attachment under Rule B was governed by state law as set forth in the New York Uniform Commercial Code, which prohibits the attachment of EFTs at intermediary banks. On appeal, however, the Second Circuit rejected the lower court's application of state law, and instead determined that the issue was governed by US federal law which it interpreted as allowing the attachment of EFTs. The Winter Storm decision resulted in an immediate and significant increase in the use of Rule B attachments because the majority of international maritime transactions require payment of funds in US dollars. And, because the intermediary banks that process these dollar-denominated wire transfers are located almost exclusively in Manhattan, the vast majority of these Rule B attachment proceedings were filed in the United States District Court for the Southern District of New York - the US court which exercises jurisdiction over Manhattan. In the years following the 2002 Winter Storm decision, the use of Rule B attachments continued to increase steadily, as did the criticism of the Court's legal reasoning underlying that decision. In 2006, in Aqua Stoli Shipping Ltd. v. Gardner Smith Pty Ltd., 460 F.3d d Cir. 2006), a case involving procedural issues under Rule B, the Second Circuit acknowledged the growing chorus of complaints over its Winter Storm decision. In Aqua Stoli, the Court stated that "[t]he correctness of our decision in Winter Storm seems open to question" because the cases on which it relied decided only the question of whether an EFT was property that could be attached, but did not address "the more salient question of whose assets they are while in transit." Id. 460 F.3d at 445 n 6 (emphasis added). Two years later, this statement 3

4 led to another appeal of the Winter Storm rule in a case entitled Consub Delaware LLC v. Schahin Engenharia Limitada, 543 F3d 104 (2d Cir. 2008). In Consub Delaware, however, the Court affirmed its earlier decision in Winter Storm, again rejecting the argument that New York state law should be applied to determine the issue of whether an EFT at an intermediary bank is the "defendant's property" subject to attachment under Rule B. Because the EFT involved in the Consub Delaware case had been sent by the defendant as the originator, the Court specifically noted in a footnote to its decision that "[w]e do not reach today the question of whether the funds involved in an EFT en route to a defendant are subject to a Rule B attachment." Id, 543 F3d at 109 n. The Consub Delaware decision was issued on September 28, 2008, just as the worldwide financial crisis was reaching its peak. This situation led to the "perfect Rule B storm" as plunging commodity prices and shipping rates left large numbers of parties to international shipping contracts unable to meet their obligations. These contract breaches, in turn, led to an explosion in the number of Rule B complaints being filed in the Southern District of New York. For example, during the four month period from October 1, 2008 through January 31, 2009, a total of 962 new Rule B Complaints seeking to attach more than $1.35 billion in assets were filed in the Southern District. These cases constituted 33% of all lawsuits filed in that Court during that period. These additional filings also led to renewed complaints from the banking community about the burdens being imposed on them by the increased use of Rule B. For example, under the applicable rules, a Rule B attachment order directing a bank to attach the defendant's property is required to be served on the bank on a daily basis until the full amount sought has been attached. Accordingly to statistics supplied to the courts by the banking industry, approximately attachment orders were being served on the banks each day as a result of this daily service requirement even before the increased use of Rule B caused by the financial crisis. The Shipping Corporation of India Decision On October 19, 2009, the Second Circuit Court of Appeals issued its decision in Shipping Corporation of India in which it overruled its holding in Winter Storm, and held that EFTs are not property subject to attachment under Rule B. This decision was somewhat surprising to the parties and the New York maritime legal community in general because the only issue presented on appeal and briefed by the parties was whether an EFT of which the defendant was the intended beneficiary was the defendant's property subject to attachment under Rule B. However, the Court went beyond this limited issue and determined that EFTs being sent by, as well as sent to, the defendant were immune from attachment under Rule B. In Shipping Corporation of India, the plaintiff succeeded in attaching several EFTs, some of which the defendant had originated and on some of which it was the intended beneficiary. The lower court vacated the attachments of the "beneficiary" EFTs on the grounds that those EFTs did not become the defendant's property until the transfer was completed and the funds actually were deposited into the defendant's account. Accordingly, a beneficiary EFT being processed at an 4

5 intermediary bank en route to the defendant's account is not subject to attachment. Id., 585 F3d at 66. On appeal, however, the Second Court went beyond this narrow issue, stating that "[b]efore we can reach the question presented squarely by this appeal whether an EFT is defendant's property when defendant is the beneficiary of that EFT we must first consider the threshold issue of whether EFTs are indeed 'defendant's' property subject at all to attachment under the Admiralty Rules." Id. at The Court then determined that Winter Storm had been decided incorrectly, principally because the federal court cases on which that decision had been based did not resolve, or even address, the issue of who owns an EFT while it is being processed at an intermediary bank. After concluding that federal law did not provide the answer to this ownership question, the Court followed the general rule that in the absence of controlling federal law, a court looks to state law to determine property rights. This, in turn, led the Court back to the New York State Uniform Commercial Code which provides that an EFT at an intermediary bank is not the property of either the originator or the beneficiary, and therefore is not subject to attachment under Rule B. Id. at 71. Approximately one month later, the Second Circuit issued another Rule B decision entitled Hawknet, Ltd. v. Overseas Shipping Agencies, F.3d, 2009 WL (2d Cir. 2009), in which the Court specified that its decision in Shipping Corporation of India applied retroactively to all of the hundreds of Rule B cases then pending in the Southern District of New York. Within days of this decision the lower court judges in the Southern District of New York began issuing orders directing the plaintiffs in all of the pending Rule B cases to "show cause" why, in view of this new Second Circuit decision, the attachment orders previously issued by the courts authorizing the attachments of EFTs should not be vacated, and the EFTs attached pursuant to those orders released. Since that time, save for a very small number of cases involving specific circumstances such as an agreement between the parties to continue the attachment, the judges in the Southern District uniformly have held that the previously authorized attachments were improper, and have ordered the release of the attached funds. The plaintiff in Shipping Corporation of India has filed a Petition for Writ of Certiorari seeking permission to appeal the decision to the United States Supreme Court. However, given the extremely limited number of cases selected for review each year by the Supreme Court, and the insufficient "national importance" of the point, it appears unlikely that the case will be accepted for appeal by the Supreme Court. Accordingly, while Rule B continues to exist and still can be used to attach more traditional types of property such as funds in a bank account in New York, it no longer poses a threat of attachment of EFTs being wire transferred through intermediary banks located in New York or elsewhere. Post-Judgment Attachment Proceedings post Koehler v Bank of Bermuda Although Rule B has effectively been eliminated as a method of satisfying maritime arbitration Awards, a recent decision issued by the New York State Court of Appeals 5

6 provides a new weapon to plaintiffs for the post-judgment enforcement of Awards in New York. On June 4, 2009, the New York Court of Appeals issued its decision in Koehler v. Bank of Bermuda, 12 N.Y.3d 533 (2009), which expands significantly the power of a New York court to satisfy judgments using a defendant's property located outside New York State or even outside the United States. Under New York State law (Article 52 of the New York Civil Practice Law and Rules), a plaintiff may enforce a judgment against the judgment debtor directly by filing a motion to compel the judgment debtor to turn over its assets to satisfy the judgment. The law also allows the judgment creditor to commence a similar proceeding against a third-party garnishee who has possession or control over the judgment debtor's assets, such as a bank holding funds belonging to the judgment debtor. In this special proceeding, the judgment creditor obtains from the court a "turn over order' directing the garnishee to turn over the assets to the judgment creditor. In the Koehler case, the Bank of Bermuda had possession in Bermuda of stock certificates owned by the judgment debtor. A federal court in New York (Southern District) ordered the Bank of Bermuda, which operated in New York and therefore was subject to the Court's jurisdiction, to bring those stock certificates from Bermuda into New York so they could be used to satisfy the outstanding judgment. After 10 years of litigation over the issue of whether the Bank was subject to the jurisdiction of the Court, it was revealed that the Bank no longer had possession of the stock certificates. Thereafter, the federal court dismissed the petition for the turn over order, holding that a New York court cannot attach property that is not physically located within New York State. Because this issue involved a question of New York State law, the federal court invoked a procedural device that enabled it to refer the question to the New York State Court of Appeals for decision. The Court of Appeals held that so long as the New York court is able to exercise personal jurisdiction over the third-party garnishee, it has the power to order that garnishee to bring the judgment debtor's assets under its control but located outside New York, into New York, so that they can be turned over to the judgment creditor to satisfy the judgment. Accordingly, this newly expanded power of the New York Courts to enforce judgments against a defendant's assets located around the world may to some degree come to replace the judgment satisfaction procedures no longer available under Rule B. III Enforcement of Foreign Arbitration Awards General Enforcement of arbitration awards is mandatory in all New York Convention signatory states. If a party wishes to contest the award, it bears the burden of proof. 3 Enforcement may be contested on the following grounds, as set out in Article V (1) of the Convention: 3 Corporation Transnacional de Inversiones SA de CV v STET International SpA (2000) 49 OR 414 6

7 (a) The parties to the agreement referred to in Article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or (b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or (c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or (d) The composition of the arbitral authority 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; or (e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. This list of grounds is exhaustive. 4 refused if the local court finds that: Recognition of an arbitration award can also be (a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or (b) The recognition or enforcement of the award would be contrary to the public policy of that country. (Article V (2)) (emphasis added) Enforcement of Awards in China China has been a party to the New York Convention since 22 April Theoretically, any Award made in another New York Convention signatory state should be recognised and enforceable in China. Despite this, enforcement rarely happens in practice, primarily because the "public policy" exception is relied on in order to deny the enforcement of foreign arbitration Awards. A party seeking to enforce a foreign arbitration Award in China must first apply to the People's Republic of China Court where the Respondent's assets are located. The party seeking enforcement has two years from the date of the Award to make this application. Previously this limitation was six months, so this extension could be viewed as an encouragement to enforcement of foreign Awards in China. 4 Karaha Bodas LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negra [2003] 380 HKCU 1 5 China ratified the New York Convention subject to the reservations of reciprocity and that the dispute is of a commercial nature. 7

8 The China International Economic and Trade Arbitration Commission (CIETAC) is the oldest and most popular arbitration institute in China. In 2008, CIETAC held 1,230 cases whereas the Hong International Arbitration Centre (HKIAC) held only 602. CIETAC has, however, been criticised in some quarters for the lack of impartiality of its Awards and lack of internal co-ordination. There are various new arbitral bodies emerging, such as the Beijing Arbitration Commission (BAC) as well as the HKIAC, but there remains a question mark over how effective these bodies are in comparison to CIETAC. At present, BAC handles 10 per cent of the international cases that CIETAC does. Furthermore, BAC is not as well established or recognised. Traditionally, it has been thought that the courts in the PRC were reluctant to enforce an arbitration Award made outside China. Our own Shanghai office has had a mixed experience with regard to enforcement of foreign arbitration Awards. They have had instances where enforcement has been blocked, but also cases where enforcement has been allowed. Factors such as the strength and the status of the enforcing party, and commercial pressures influence local courts. China has not implemented domestic laws or regulations to determine the grounds for refusing to enforce foreign arbitration Awards. Therefore, the New York Convention applies. Nevertheless, although PRC courts should not review the merits of the underlying arbitration, they often do, of their own volition. This has resulted in a regime which is fraught with uncertainty. The recent case of Duferco v Ningbo Arts and Craft Import and Export Co, 6 however, may show a new willingness among PRC courts to enforce international arbitration Awards in mainland China. A Swiss steel company Dufreco brought a claim against a Chinese company, Ningbo Arts and Crafts Import and Export Co. The contract between the parties provided that disputes should be determined by arbitration at the "Arbitration Committee of the International Chamber of Commerce in China". Under this clause, the Claimant brought a claim against the Respondent at the ICC in Beijing. The Respondent challenged the jurisdiction of the ICC, arguing that the contract had in effect provided for arbitration by CIETAC. This challenge was rejected, and having accepted jurisdiction of the case, the ICC made an award in favour of Dufreco on 21 September On 4 December 2007, Dufreco took their Award to the Ningbo Court in the PRC and applied for recognition and enforcement. The Respondent challenged the ICC's award on the grounds that enforcement of the Award would result in a violation of domestic law, because the ICC did not have jurisdiction over the case. The Ningbo court refused to allow the Respondent to challenge the validity of the arbitration because the Respondent failed to raise its objection prior to the first hearing. Relying on Article I (1) of the New York Convention, 7 the Ningbo court held that the Award constituted a non-domestic Award and was therefore enforceable. 6 concerning the ICC award 14006/MS/JB/JEM 7 "This Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of 8

9 This apparent move towards recognition of an international arbitration Award in mainland China has been heralded as a welcome shift towards easing enforceability within the jurisdiction. However, celebrations may be premature. In the 2004 case of Zueblin, 8 for example, the PRC Court delved more deeply into the Respondent's objections to the ICC's jurisdiction, and held that the reference to the ICC Rules in the contract did not satisfy the requirements for the arbitration to be decided by the ICC. It remains to be seen whether the Ningbo decision will be followed: it was a unique set of facts, and decided on a procedural point. Furthermore, because China is a civil law country, the PRC courts are under no obligation to follow precedent. As discussed, China often relies on the "contrary to public policy" exception under Article V 2(b) of the New York Convention, in order to refuse enforcement of a foreign award. PRC courts are known to be obstructive with regard to enforcement, and other factors such as commercial and political pressure typically influence their decisions. On a positive note, the Ningbo court did cite the New York Convention in their decision, which in itself represents a move towards recognition. It will be interesting to see which way the PRC courts will lean, going forwards. Another point to note is that Chinese law does not recognise arbitration where the seat is in mainland China, but the arbitral institution is not an approved mainland arbitration body. In the Ningbo case, there were discrepancies between the English version and the Chinese version of the arbitration clause. The Chinese version of the contract provided that: "any dispute relating to the performance of this contract or in connection with this contract should be submitted to the arbitration committee of the International Chamber of Commerce situated in Beijing, China and be arbitrated under the United Nations Convention on Contracts of International Sales of Goods". The English version provided that disputes " should be submitted to the International Chamber of Commerce International Arbitration Court with the arbitral seat in China, and be arbitrated under the United Nations Convention on Contracts of International Sales of Goods." It is unclear to what extent this influenced the court's decision; it therefore remains advisable for parties where one of them is PRCdomiciled, or who intend to arbitrate in the PRC, to arbitrate under CIETAC, or another PRC-approved arbitration body. The position in mainland China contrasts with the position in Hong Kong. Hong Kong, as part of the PRC, is a signatory to the New York Convention. In Hong Kong, both enforcement of foreign arbitration Awards, and the granting of interim relief are more readily available compared to mainland China. The HKIAC has taken steps to ensure that it is seen as a being friendly to arbitration (both domestic and foreign), adopting, for instance, the UNCITRAL model law. differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought." 8 In this a local court (the Wuxi Intermediate Court) decided that an arbitration clause stating that ICC rules would be applied was invalid under Chinese law. 9

10 In 2009, HKIAC adopted the new HKIAC Administered Arbitration Rules. The HKIAC has also introduced a new Arbitrator Appointment Committee, which will be charged with nominating arbitrators. With the 25 th anniversary of the HKIAC in 2010, it is expected that its success and reputation as an international arbitration centre will be cemented. IV General Conclusions Are we seeing a shift towards global standardisation of arbitration? The Hong Kong HKIAC and the DIFC in Dubai have taken steps to model their arbitration institutions on those of the LCIA and other internationally recognised bodies, such as the ICC, in a move to make these pro-arbitration centres. Despite this, arbitration remains an unwelcome guest to many local courts. Domestic courts have the last say when it comes to enforcement of Awards or the granting of interim relief within their jurisdiction. Policy considerations and political factors often influence local courts decisions. The Rule B development in Shipping Corporation of India is an indicator that, although the decision was arguably legally correct, there were also influential local commercial decisions. The case of Ningbo gives us a glimmer of hope, with regard to China, in demonstrating that the local courts can be persuaded to enforce foreign arbitration Awards and apply the New York Convention. Ultimately, however, the enforceability of arbitral Awards in domestic courts remains, in a number of jurisdictions, unpredictable. Therefore, factors such as where the other parties assets are located, and what forms of interim relief are available, remain an important consideration before deciding to arbitrate. The ability to obtain security for foreign arbitration Awards is essential in order for arbitration to operate as an effective alternative to litigation. Considerations such as where assets are located, and the degree of connection to the jurisdiction in which the relief is being sought, will be highly relevant to the likelihood of success of the application. 10