Parties engage in international arbitration proceedings to obtain a final, binding and enforceable arbitral award. A strong enforcement regime, created by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), ensures that an international arbitration award is readily enforceable in nearly 150 countries that are signatories to the New York Convention. A court in the United States petitioned to confirm a foreign award under the New York Convention “shall” do so “unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the [New York] Convention”.1 Seven exclusive nonrecognition grounds are specified in the New York Convention. However, in addition to these grounds, a party opposing enforcement of an award in the United States may also raise a procedural defense that is second nature to all familiar with US litigation – lack of personal jurisdiction.
In a recent decision, the Fifth Circuit Court of Appeals answered the question of first impression in that circuit and held that a lack of personal jurisdiction is a valid defense to the enforcement of a foreign award under the New York Convention. The Fifth Circuit affirmed a Louisiana district court’s dismissal of a petition to confirm an award for lack of personal jurisdiction over the defendants, and found that the dismissal was appropriate as a matter of constitutional due process. The Fifth Circuit’s decision is in line with decisions from a number of other circuits, and serves as a reminder to parties and practitioners in international arbitration not to lose sight of due process requirements under the United States Constitution.
First Investment Corporation of the Marshall Islands (“First Investment”) and two Chinese companies, Fujian Shipbuilding Industry Group Corp. (“FSIGC”) and Fujian Mawei Shipbuilding Ltd. (“Mawei”), were parties to a number of shipbuilding contracts. In 2004, First Investment initiated arbitration in London alleging breach of contract by FSIGC and Mawei. Arbitration was conducted under the rules of the London Maritime Arbitration Association and resulted in an award of approximately US$26 million in damages in favor of First Investment. After the Chinese court refused to enforce the award, First Investment turned to the United States District Court for the Eastern District of Louisiana. The district court dismissed the enforcement petition for lack of personal jurisdiction over the Chinese defendants.2 First Investment appealed, arguing that standard personal jurisdiction criteria do not preclude US courts from enforcing awards under the New York Convention.3 First Investment reasoned that personal jurisdiction may not block the enforcement proceedings, since it is not among the non-recognition grounds listed in the New York Convention.
The Fifth Circuit disagreed. The court noted that personal jurisdiction is “an essential element of the jurisdiction” of a district court – without personal jurisdiction, the court has no power to proceed.4 Thus, even though personal jurisdiction is not mentioned in the New York Convention or the United States Federal Arbitration Act implementing the New York Convention, personal jurisdiction is grounded in constitutional due process concerns, and therefore, takes precedence over the language of the New York Convention and its implementing statute.5
Relying on established US Supreme Court personal jurisdiction precedent, the Fifth Circuit explained that the personal jurisdiction requirement protects an individual’s liberty interests.6 It guarantees that a party will not be “haled into court” and subjected to proceedings in a forum with which it has no meaningful contacts, ties, or relations.7
To satisfy the due process requirement, there must be constitutionally sufficient contacts between the defendant and the state where the court is located, and subjecting the nonresident defendant to jurisdiction must be consistent with “traditional notions of fair play and substantial justice”.8 A court, in essence, determines whether the exercise of jurisdiction over a defendant would be reasonable, considering a number of factors, including the burden on the defendant, the interests of the forum state and of the plaintiff, the interest in obtaining efficient resolution of controversies, and the interest in “furthering fundamental substantive social justice”.9 Hence, the decision whether sufficient minimum contacts exist involves a fact-specific inquiry, and depends on the particular circumstances of each case. The personal jurisdiction requirement may also be satisfied if the defendant consents to jurisdiction or has its principal place of business or residence in the forum. In addition, in the absence of personal jurisdiction over the defendant’s person, quasi in rem jurisdiction may be exercised over the defendant’s property located in the forum state, if the property is related to the dispute.10
Neither FSIGC nor Mawei had contacts with Louisiana or the United States. Hence, the arbitral award could not be enforced against them in the United States. The Fifth Circuit cited decisions from the Second, Third, Fourth, Seventh, Ninth and Eleventh circuits that have also held that personal jurisdiction over the defendant is a prerequisite to seeking confirmation of awards under the New York Convention.11
Thus, parties and practitioners looking to the United States to enforce a foreign award must be able to demonstrate a proper constitutional basis, whether arising from the defendant’s residence, his conduct, the location of his property, or his consent, that would justify making the defendant subject to the court’s adjudicatory and compulsory powers. The personal jurisdiction requirement may indeed impede enforcement of many arbitral awards. However, it is unlikely that this and similar decisions will make the United States a less attractive enforcement forum, especially where a defendant’s assets can be located within the United States’ territory.