Friday, April 3, 2009

Arbitration and the Enforceability of International Judgments

While I was doing some legal research for a pro bono project, I came across an interesting issue that (admittedly) I know little about. In the United States, the Full Faith and Credit Clause typically places a strong presumption in favor of the enforceability of judgments between the individual states. See Fauntleroy v. Lum, 210 U.S. 230 (1908). In the international arbitration context, however, the same principle on respecting foreign judgments has been somewhat different. Specifically, U.S. courts have sometimes refused to recognize valid judgments rendered by foreign nations.

Though U.S. courts are not bound to do so under the Full Faith and Credit Clause, there are associated treaty obligations; specifically, contracting States to the New York Convention (to which the United States is a party) “[must] recognize [foreign] arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon.” However, the “[r]ecognition and enforcement of the award may be refused, at the request of the party against whom it is invoked . . . if that party furnishes . . . proof that” the arbitration award, as rendered, falls under one of the grounds for refusal under Article V of the Convention. See Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention"), 9 U.S.C. § 201, et seq. One such ground for refusal under Article V(1)(e) is where the state in which the arbitration took place vacates the award of the final judgment.

Thus, if a party gets an arbitration award in Country A, and attempts to enforce it in Country B, Country B must honor the award unless Country A sets it aside (in which case it should not honor the award).

But U.S. courts have not always complied. In Chromalloy Aeroservices v. Egyptian Arab Republic, 939 F. Supp. 907 (D.D.C. 1996), for example, the court was faced with a peculiar set of facts which required it to assess this principle in light of conflicting public policies between two nations. In that case, the plaintiff entered into a contract with the defendant to “provide parts, maintenance, and repair for helicopters belonging to the Egyptian Air Force." Id. at 908. The plaintiff alleged that the defendant later terminated the agreement unlawfully, and thus commenced arbitration proceedings in Egypt pursuant to an arbitration clause in the contract. Id. After the proceedings, the arbitration panel entered an award for the plaintiff, which the plaintiff subsequently sought to enforce in the United States District Court for the District of Columbia. However, shortly after the plaintiff's enforcement action commenced, the defendant obtained an order from the Egypt Court of Appeal, nullifying the award on the grounds that the arbitrator in the case applied incorrect law to the dispute--notwithstanding the fact that the parties had agreed not to seek judicial review of any award. Id. Accordingly, Egypt argued that the District Court should refuse enforcement out of deference to the Egyptian court under Article V(1)(e) of the Convention. Id.

The Court declined Egypt's request because, as it reasoned, the conduct of the Egyptian court in vacating the award strongly cut against U.S. policy favoring arbitration, and thus, should not be respected. Id. at 915. Other courts have recognized this limited policy-based exception to Article V(1)(e), while openly questioning its application in situations presenting different factual circumstances than Chromalloy. See, e.g., Termorio S.A. E.S.P. v. Electrificadora Del Atlantico S.A. E.S.P., 421 F. Supp. 2d 87 (D.D.C. 2006) (recognizing the exception, but limiting it to the facts of Chromalloy).

The distinction between U.S policy on the pro-enforceability of judgments between (U.S.) states and this limited exception recognized by some U.S. courts with respect to foreign states is quite interesting. And I'm not sure the difference can be reconciled solely by reference to the requirements imposed by the Full Faith and Credit clause and New York Convention treaty obligations, respectively. I look forward to hearing any feedback or thoughts on this from our readers.


  1. The real, political and practical question is: What's the worst a complaining party can do if the US breaches a contract and the S.Ct refuses to enforce it?

    The Answer: Nothing.

    The policy rationale is simple and is the twin brother of the traditional concept of sovereign immunity to suits-- the King will never force himself to do something (e.g follow a contract) that he himself doesn't feel is appropriate or advantageous.

  2. Fred raises an interesting point, but I still think this disparity is troubling. Thanks for flagging the issue, Nima.

  3. The matter can be chalked up to a simple point relating to the NY Convention. There are over 200 signatories to the Convention, and each respective state has different views on arbitrability of claims. When a state with jurisdiction places itself in a position to examine claims (particularly against the state itself) there is often room for unfair funny business to happen, but this is simply a necessary risk of int'l arbitration. Thus, U.S. Courts likely view such actions with doubt, and place higher scrutiny on them.

  4. Great post, Nima. Just wanted to highlight a difference between set-aside and refusal to enforce: Art.V authorizes a signatory country to refuse to enforce an award on any of the grounds outlined. In your Country A/Country B hypothetical, Country B is not required to honor the award unless Country A sets it aside. Country B may unilaterally refuse to enforce the award on an Art.V ground even if there has been no set-aside, though Country A (where the award was rendered) is the only jurisdiction with authority to formally set the award aside.

    One argument for permitting enforcement despite set-aside in the rendering jursidiction, as in Chromalloy, is the language of Art.V itself: a country may, but is not required to, refuse enforcement under V(1)(e).

    Another rationale is that a country which is granted authority under the Convention to unilaterally refuse to enforce an award under Art.V (notwithstanding recognition of that award in other jurisdictions), also has the authority to unilaterally enforce that award, if it so chooses.

    The arbitral award itself is at its root the product of a private proceeding, regardless of the "stamp" a domestic court may later put on it. However, international comity does come into play once the award is converted into a judgment, and a party seeks to have that court-ordered judgment on the award (in this case the set-aside) enforced against the other party who is seeking to cash in on the award.

    An arguable benefit of the Convention is that it maximizes portability by allowing recognition of arbitral awards themselves notwithstanding what foreign courts have said. The rationale is Chromalloy seems to have been, "Egypt has no say in this matter, we're enforcing only in the US against assets located in the US, so we decide."

    If we get rid of the power of a signatory state to recognize an award in an isolated context, is the Convention rendered useless?

    Thanks, Nima. It would be cool to see more posts on arbitration in the future!



  5. @ 9:25 --

    Thank you for your response. I think you are absolutely right on the implications of the Chromalloy decision in the international context, but I still have to wonder whether, even if states "monkey" with arbitral awards, it is desirable for U.S. courts to nonetheless enforce them.

    S.Muffin -

    I appreciate your detailed, well-reasoned response. I have two points:

    (1) You state the argument that, based on the permissive language of Article V, there may be grounds for refusal to recognize an otherwise valid order setting aside an arbitral award by another "competent" jurisdiction. The court in Chromalloy, as you noted, partly relied upon this argument, but the general rule, as I understand it, is that U.S. courts practically always will refuse to enforce an award if it is properly set aside. See Baker Marine v. Chevron, 191 F.3d 194 (2d Cir. 2000).

    2. I see your point about the difference between private and state court proceedings, but when a court (for example, country A in my hypo) sets aside an award, it would presumably do so based on an official order, thus placing a gloss of finality over the issues adjudicated in the arbitration--absent a limited procedural disposition. For Country B to then recognize the award seems to cut against the effect that should be given to the foreign court's decision under the Convention. Maybe it is different in the arbitration context, but from my limited understanding, this is the way it works. Am I incorrect?

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