On May 30, 2018, an arbitral award from the China International Economic and Trade Arbitration Commission (CIETAC) got recognized and enforced by the United States District Court for the Eastern District of New York (E.D.N.Y.). The case involved is Tianjin Port Free Trade Zone International Trade Service Co., Ltd. v. Tiancheng Chempharm, Inc. USA (case number 2:17-cv-04130, E.D.N.Y., the “Case”). This article aims to make brief comments on the Case merits and further analyzes the involved typical issues which often occur in international arbitrations.

1. Basic Facts

The applicant in the arbitration proceedings of the Case is Tianjin, a Chinese company whereas the respondent is Tiancheng, a US company incorporated under the laws of New York State with its principal place of business located in New York City.

On December 16, 2013, both parties entered into a Sales Contract, by which Tiancheng agreed to purchase the goods with the contract price of $480,000 from Tianjin. Tianjin delivered the goods in a timely manner and Tiancheng had no objection regarding the quality of the goods. However, Tiancheng failed to pay the contract price. Tianjin reminded Tiancheng of its payment obligation, but the latter still refused to fulfil its payment obligation.

The Sales Contract between the parties contained the following arbitration clause:

All disputes in connection with this contract or the execution thereof shall be amicably settled through negotiation. In case no settlement can be reached between the two parties, . . . the case under dispute shall be submitted to China International Economic and Arbitration Commission for arbitration, in accordance with the commission’s arbitration Rules in effect at the time of applying for arbitration [and] shall take place in Tianjin. The decision made by the Arbitration Commission shall be accepted as final and binding upon both parties. The fee for arbitration shall be borne by the losing party unless otherwise awarded.

Having failed to receive payment from Tiancheng, Tianjin commenced an arbitration proceeding before CIETAC on March 19, 2015. On May 13, 2015, CIETAC sent copies of the notice of arbitration, the arbitration rules, as well as a list of panel of arbitrators to Tiancheng, and confirmed that documents were duly received on May 18, 2015. On June 17, 2015, CIETAC sent a notice of fee payment to both parties. On July 14, 2015, CIETAC sent out the constitution of the arbitral tribunal along with a notice of the hearing date. However, those documents sent to Tiancheng were returned to CIETAC by the post office saying that “no acceptance as the recipient does not work here.” As a result, Tianjin provided CIETAC with a new address of Tiancheng, which is published by the New York Secretary of State. The foregoing mentioned documents were all sent to the new address and not been returned.

On October 15, 2015, the arbitration hearing was held in Beijing. Tianjin attended the hearing and answered questions from the tribunal, while Tiancheng did not appear nor did it offer any reason for its absence. On October 20, 2015, CIETA sent to Tiancheng the materials submitted by Tianjin during the hearing and informed Tiancheng that any reply must be submitted within a specific time period. CIETAC verified that such documents were duly served on Tiancheng on October 23, 2015. However, no reply was received.

CIETAC issued a written arbitral award on December 14, 2015, ordering Tiancheng to pay Tianjin the purchase price of the goods of $480,000 as well as interest and the costs of the arbitration. Since the payment was not made by Tiancheng according to the award, Tianjin applied to the E.D.N.Y for recognition and enforcement of the award.

2. Key Issues

In the hearing of the US court’s proceedings, Tiancheng raised 3 grounds for refusal of enforcement: (1) it was never properly served during the underlying arbitration proceedings; (2) the Sales Contract was a forgery; (3) Tianjin failed to, as required under the Sales Contract, amicably negotiate the dispute before commencing the arbitration. Tianjin claimed against Tiancheng’s arguments in its entirety.

3. Judgement of the Court

 (1) Had Tiancheng been properly served?

As per Article V (1) (b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), recognition and enforcement of a foreign arbitral award may be refused at the request of the party against whom it is invoked, if the party was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings, or was otherwise unable to present his case.

However, in the Case, the US court upheld that CIETAC provided Tiancheng with the opportunity to participate in the arbitration in a proper manner. As the award set forth, notice of the arbitration and all documents were sent to Tiancheng at the address listed in the Sales Contract. When some documents were later returned to CIETAC, Tianjin provided the new address of Tiancheng as listed with the New York Secretary of State and the documents were again sent to Tiancheng at that address. Those documents were not returned and CIETAC verified that the documents were duly served on Tiancheng. Tiancheng simply chose not to participate in the arbitration proceedings. Therefore, the court concluded that the service was consistent with the standards of due process.

 (2) The validity of the Sales Contract

On judging the validity of the Sales Contract, the US court held, citing Europcar Italia, S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310, 315 (2d Cir. 1998), that whether the underlying contract was forged or fraudulently induced is a substantial issue to be determined exclusively by the arbitral tribunal. The party cannot, if fails to raise the issue during the arbitration process, raise such ground during recognition and enforcement process.

 (3) Tianjin’s obligation to settle amicably

According to the US court, CIETAC had specifically indicated in the award that the person-in-charge of Tiancheng avoided meeting with the Tianjin’s representative and refused to fulfill the payment obligations under the Contract. Accordingly, the arbitral tribunal found that Tianjin did attempt to settle its dispute with Tiancheng before commencing arbitration. Tiancheng, however, failed to cooperate. Tiancheng’s motion to dismiss Tianjin’s petition on the grounds that Tianjin failed to fulfill its obligation to attempt to settle before commencing arbitration is therefore denied.

For the foregoing reasons, the US court finally rejected Tiancheng’s motion to set aside the arbitral award and supported the application made by Tianjin.

4. Comments

This Case is a dispute over payment obligation arising from a sales contract for international goods. The basic fact of the Case is not complicated but 3 key issues involved are typical in international arbitration and deserve our attention.

 (1) Pay attention to the procedural issues of arbitration

Comparing with the litigation, arbitration has, especially international arbitration, higher criteria for procedures. The fundamental principle of arbitration is that the arbitral award shall be final and binding (though, in some jurisdictions, such as English law, the parties are permitted to appeal to the court for legal issues in arbitral awards under limited conditions), but the parties still can file an application for refusing to recognize and enforce the arbitral award due to some procedural defects (such as ineffective service, the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, etc. See Article V of the Convention).

For that reason, when participating in the international arbitration, we shall not only keep eyes on substantial issues of a case but also focus on the procedural issues --- so as to avoid the unfavorable condition that a winning award cannot be recognized or enforced due to the procedural defects during the arbitration proceedings.

 (2) Cannot refuse to recognize and enforce awards due to substantial defects

In this case, when the respondent claimed that the underlying contract was forged, the US court ruled that such substantial issue shall be decided by the arbitral tribunal and cannot be raised in the recognition and enforcement procedures. The ruling hereof is consistent with the international judicial practice. It is highlighted in most jurisdictions that when deciding whether to recognize or enforce a foreign arbitral award, a court can simply carry out review towards the formality/procedural issues rather than the substantial issues of the award. The involved court has no right to decide the rightness of the arbitral award on the substantial issues of a case. In the case of considering whether to refuse the enforcement of an arbitral award, the court shall not review the substantial issues or issues concerning the underlying transaction hereof.

Therefore, parties concerned shall handle the case in a comprehensive manner, so as to ensure that all the substantial issues can be solved during the arbitration proceedings rather than raising these issues to the court in the enforcement proceedings.

 (3) tips for multi-tiered dispute resolution clauses

The arbitration clause of the above-mentioned case, which treated the amicable negotiation between the parties as a pre-condition before commencing the arbitration (All disputes involved in the contract or its execution shall be settled through amicable negotiation. If two parties fail to settle, ……the disputed case shall be submitted to CIETAC for arbitration), is actually a multi-tiered arbitration clause.

A multi-tiered dispute resolution clause is a compound-type of dispute resolution clause, which reflects the multi-tired and multi-step dispute resolution mechanism agreed by the parties. Alternative Dispute Resolution (ADR) mechanisms such as “negotiation”, “mediation” and “expert decision” are usually used as the pre-conditions of arbitration or litigation.

The advantages of such clause lie in: except for the tit-for-tat arbitration and litigation, a multi-tiered dispute resolution clause provides the parties with a more moderate possibility to settle disputes, maintain commercial relations, as well as save money, personnel and time costs, etc.

However, such clauses also have disadvantages: the pre-condition (such as negotiation) may be used maliciously by the parties to delay time and evade obligations; some pre-conditions (such as mediation and expert decision) also cost time and money (if the parties fail to settle disputes through such procedures and the case goes on to enter formal litigation or arbitration procedures, the costs for the parties will be even higher than those use direct litigation or arbitration). In addition, any carelessness in the conclusion of a multi-tiered dispute resolution clause may easily lead to formality defects affecting the effectiveness of the clause itself--- whether the application of the agreed pre-condition is selective or mandatory, or whether certain behaviors of the parties have satisfied the pre-condition may also easily give rise to disputes.

Therefore, it is suggested that after the parties determine that they indeed want to adopt a multi-tiered dispute resolution clause, they shall agree on the pre-conditions in a specific and clear manner (such as giving specific time limits, specifying particular steps, etc.), so that they can hereby abide by such provision. Besides, the pre-conditions shall not be too complicated and lengthy so as to prevent the parties from consuming excessive cost and further suffering larger losses in conducting the pre-conditions.