In a significant development for companies with international operations, on July 19, 2016, a three-judge panel of the United States Court of Appeals for the Tenth Circuit affirmed a district court’s decision not to enforce a $1.6 million Chinese arbitration award against a Colorado company. The case, CEEG (Shanghai) Solar Sci. & Tech. Co., Ltd v. LUMOS LLC, 15-1256, --- F.3d ----, 2016 WL 3909579 (10th Cir. July 19, 2016), joins a handful of other published cases that decline to enforce a foreign arbitration award after determination that the notice of arbitration was inadequate. The authors of this alert, James R. Nelson, Meghan Paulk Ingle, and Bradley M. Smyer from DLA Piper, represented the defendant.

The Tenth Circuit’s analysis clarified and arguably expanded the bases upon which courts may rely in making that determination.

Background

In 2009, CEEG (Shanghai) Solar Science & Technology Co., Ltd., a Chinese company based in Shanghai that develops solar panel products, and Lumos Solar LLC, a Boulder, Colorado-based provider of high-value solar energy products, entered into a co-branding agreement. The agreement contained a choice-of-language provision requiring that all documents exchanged by the parties, including judicial notices, be provided in English. It also provided that any disputes would be subject to arbitration by the China International Economic and Trade Arbitration Commission (CIETAC).

On May 17, 2010, Lumos and CEEG executed a sales contract providing that CEEG would deliver solar products to Lumos. Like the agreement, the contract, written in both English and Chinese, included a provision that CIETAC would resolve any dispute. The contract contained no choice-of-language provision, although it did state that if its Chinese and English versions conflicted, the English version would govern.

A dispute arose regarding two shipments of solar modules that Lumos asserted were defective and CEEG’s demand for payment for those shipments. In April 2013, Lumos received a document written in Chinese with no English translation or any explanation of its contents. All previous communications between CEEG and Lumos (including those regarding the dispute) had been in English. Lumos eventually learned that the document was a notice that CEEG had instituted arbitration against Lumos under the CIETAC rules. Despite the choice-of-language provision in the agreement, CEEG’s knowledge that Lumos personnel were not fluent in Chinese, and the fact that all the dealings between the parties to that point had been in English, CEEG and its counsel did not request that the notice of the request for arbitration sent by CIETAC to Lumos be in English and did not notify Lumos that the request for arbitration had been filed.

Eventually, in response to an inquiry from Lumos regarding the status of settlement discussions, CEEG informed Lumos that CEEG had instituted arbitration. However, CEEG still did not explain the Chinese document or reference any deadlines. By the time Lumos found a translator to explain the notice and retained counsel, the deadline for selection of arbitrators had passed and the arbitration tribunal that would decide the case had been appointed.

The arbitration proceeded in Chinese, and, following a hearing, the panel issued an award in favor of CEEG. In connection with its decision, the panel determined that the dispute arose solely under the contract and that it had jurisdiction under the arbitration clause in the contract, not the agreement.

US court proceedings

CEEG filed a motion in the United States District Court for the District of Colorado to recognize and enforce the arbitration award under the Federal Arbitration Act and the New York Convention. Lumos opposed enforcement, arguing that notice of the arbitration proceedings was inadequate and thereby had denied Lumos the opportunity to participate in selecting the arbitral tribunal. In response, CEEG argued that it was not required to provide notice of the arbitration to Lumos in English because the contract sued upon did not contain a choice-of-language clause. CEEG also argued that CIETAC’s default rules designate Chinese as the appropriate language and that Lumos was not prejudiced because Lumos was granted a delay in the arbitration proceedings to allow it to prepare for, and it did participate in, the arbitration.

Senior Judge Wiley Y. Daniel of the District of Colorado refused to enforce the award. Judge Daniel found that because the overall governing agreement contained a choice-of-language provision requiring all notices to be “drawn up in the English language” and the parties had always communicated in English, CEEG’s failure to provide notice of the arbitration to Lumos in English was contrary to the agreed procedures between the parties and resulted in Lumos being deprived of the opportunity to participate in selection of the arbitration panel. Therefore, Lumos “did not receive notice reasonably calculated to apprise it of the pendency of the arbitration and allow it a meaningful opportunity to be heard, as required to satisfy due process.”

In a substantial addition to US arbitration jurisprudence, the Tenth Circuit affirmed the ruling of the district court and declined to enforce the award. Applying US due process standards, the Tenth Circuit concluded that the “Chinese-language notice was not reasonably calculated to apprise LUMOS of the proceedings” where “[a]ll previous communications between CEEG and LUMOS had been in English, the Contract reinforced that English would govern the relationship by requiring that the English language version of the Contract would control, and the Agreement memorialized the parties’ understanding that all interactions and dispute resolution proceedings would be in English.”

The Tenth Circuit also rejected CEEG’s argument that because Lumos fully participated in the arbitration proceedings and could not show that the arbitrators were biased, Lumos had not demonstrated prejudice. After noting that “[h]indering the right to participate in the panel-selection process is not a minor procedural misstep,” the court held that depriving a party the “right to participate in appointing the arbitral tribunal itself evidences substantial prejudice.” (emphasis added)

Significance

An arbitral tribunal determines the parties’ rights with virtually no possibility of appeal or review. The standard of review of arbitral awards “is among the narrowest known to the law.” See ARW Expl. Corp. v. Aguirre, 45 F.3d 1455, 1462 (10th Cir. 1995). United States courts afford “maximum deference” to the arbitrators’ decisions, and even “[a]n arbitrator’s erroneous interpretations or applications of law are not reversible.” Id. at 1463.

This Tenth Circuit decision underscores the significance of each party’s right to participate in the arbitration process, particularly selection of arbitrators, and arguably expands the scope of existing arbitration jurisprudence. Because notice must be reasonably calculated to apprise the parties of the pendency of the action and afford them an opportunity to present their objections, the Tenth Circuit recognized that an assertion that a party “should have known” of the arbitration proceedings is irrelevant. The Tenth Circuit also recognized that determining whether notice of an arbitration proceeding was reasonably calculated requires courts to consider all the circumstances, including the parties’ other agreements and course of performance. For example, the Tenth Circuit considered the language provision of an agreement the tribunal had concluded was irrelevant to the underlying dispute.

In addition to clarifying the limits of reasonable notice, the Tenth Circuit’s decision is an important reminder that the New York Convention does not require courts to turn a blind eye to conduct that limits another party’s ability to participate in the agreed arbitration procedures. There are limits to deference to arbitration awards, and courts will not condone gamesmanship that forecloses a party’s ability to meaningfully participate in the arbitration process.