As U.S. companies increasingly do business with foreign companies, many are discovering that their operations could be put at significant financial risk based on an arbitration conducted in a foreign country. Whatever familiarity an in-house general counsel may have with conducting corporate litigation in U.S. courts, they may not be prepared for the fact that an arbitration award against them abroad could be enforced against them in the U.S. Furthermore, the U.S. court likely wouldn’t consider the underlying claims in the dispute in ruling that the arbitration award should be enforced. Allow me to answer a few critical questions about this growing threat to U.S. companies engaged with companies around the world.
Why would a U.S. court enforce an arbitration decision from another country?
In short, because they’re required to by law, specifically the Federal Arbitration Act. The Act recognizes a United Nations agreement reached in 1958 that now includes 159 contracting states, including the U.S., China, Japan, Germany, the United Kingdom, Canada, France , Italy, Brazil and India. Known as the New York Convention, all signatory nations agree that each will recognize and enforce arbitral awards made in the territory of another.
How are such awards determined to be enforceable in the U.S.?
Under the Federal Arbitration Act (U.S.C. §§201-208), as long as the arbitration award meets the following criteria, it is enforceable in a federal court of the United States, if the enforcement action is brought within a statute of limitations of three years:
- The award arise out of “commercial” relationship, whether contractual or not; and
- At least one party is not a United States citizen, or if all parties are U.S. citizens but the matter “involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states.” Id. §202.
So how does this work in practice?
It’s pretty straightforward. For example, both the People’s Republic of China and the United States are signatories to the New York Convention. If a Chinese company—which is not a U.S. citizen—obtains an arbitration award in China against a U.S. company, and the award is arising out of a commercial relationship, then the Chinese company is entitled to file a petition to confirm the arbitration award within three years in the United States.
This example is not hypothetical. Since 2000, more than a dozen of petitions to confirm arbitration award have been filed by Chinese companies against U.S. companies in the U.S. federal courts. And the trend is that more and more petitions are going to be filed since more and more Chinese companies favor arbitration to litigation and like to insert an arbitration clause in their contracts and agreements.
How does a U.S. court determine whether to enforce an award from another country?
One thing the court does not do is to examine the underlying issues presented before the arbitration proceeding.
For example, in Tianjin Port Free Trade Zone Int’l Trade Serv. Co., Ltd. v. Tiancheng Chempharm Inc. USA, No.17-CV-413 (JS) (AYS 2018 LEXIS 90106 (E.D.N.Y., May 30, 2018), a Chinese company obtained an arbitration award before the China International Economic and Trade Arbitration Commission against a U.S. company for breach of sales agreement. The Chinese company filed a petition to confirm this arbitral award with the district court of New York. The U.S. Company asserted as a ground to dismiss the petition that the sales agreement “in question was in fact fabricated, and the Buyer’s representative signature was forged.” Id. at 5. But the court rejected this argument and held that “the issue of whether the underlying contract that is the subject of the arbitrated dispute was forged or fraudulently induced [is] a matter to be determined exclusively by the arbitrators.” Id.
What might lead a U.S. court to refuse to enforce an arbitration award?
When considering to block enforcement of an arbitration award, the court will review the seven grounds enumerated by the New York Convention Article V:
- The parties were under an incapacity at the time when the arbitration agreement was made or the agreement is not valid;
- The losing party at the arbitration was not given proper notice or was otherwise unable to present his case;
- The award deals with an issue not subject to the arbitration agreement or beyond the scope of the arbitration agreement;
- The composition of the arbitration authority or the arbitral procedure was not in an accordance with the agreement or if failing such agreement, was not in accordance with the law of the county where the arbitration took place;
- The award has not yet become binding or has been set aside or suspended;
- The subject matter of the different is not capable of settlement by arbitration; and
- The recognition or enforcement of the award would be contrary to the public policy of the county where enforcement is sought.
What if we felt due process wasn’t followed in the foreign arbitration?
If the U.S. company appeared at the arbitration proceedings, then almost any resulting arbitration award will be recognized and enforced by the U.S. courts. When the court has denied the petitions filed by Chinese companies, it is usually due to lack of an arbitration agreement, or lack of proper notice, thus violating due process.
For example, In Quanqing (Changshu) Cloth-Making Co., Ltd. v. Pilgrim Worldwide Trading, Inc., No. 2:09–cv–03785 2010 WL 2674589 (D. N.J. Jun. 29, 2010), the Chinese company brought a petition to confirm a arbitration award it obtained before the the China International Economic and Trade Arbitration Commission against the U.S. company for breach of sales agreement. The court decides that the U.S. company didn’t sign the Sales Confirmation, and that the Chinese company could not establish that the one who signed the Sales Confirmation was a representative or agent of the U.S. company. Id. at 2. Since there was no signed writing binding the U.S. company to the Sales Confirmation or its arbitration clause, the court denied the Chinese company’s petition. Id.
In Qingdao Free Trade Zone Genius International Trading Co., Ltd. v. P and S. International Inc., No. 08-1292-HU, 2009 WL 2997184 (D. Or. Sept. 16, 2009), the Chinese company brought a petition to confirm a default arbitration award it obtained before the Qingdao Arbitration Commission against the U.S. Company for breach of sales contract. The U.S. company asserted that it did not receive proper notice and due process since it was not notified of the arbitration in English. The court agreed with it and held that the U.S. company “has no actual knowledge that Qingdao had commenced an arbitration proceeding, to take place on a particular date in a particular place.” Id. at 4. It further stated “nor does the contract P&S contain a provision under which P&S agreed to service of process in Chinese.” Id.
Given all of this, what should I do if I’m looking to form a commercial relationship with a foreign company?
You should start by determining if the country in which the company is incorporated is a signatory to the New York convention; they likely are. Generally speaking, under the Federal Arbitration Act and the New York Convention, a foreign company is entitled to file a petition to confirm and enforce an arbitration award it has obtained in another state, which is a party to the New York Convention .
Because of this power by the foreign company, when you begin fostering that commercial relationship, pay particular attention to arbitration clauses in the contracts or agreements, and seek guidance from an attorney schooled in this area of law. Failure to do so may result in a huge loss to your company’s bottom line.