Enforcement focused arbitration: the road to recovery
March 2013 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION
Described by Lord Mustill as “The most effective instance of international legislation in the entire history of commercial law”, the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the ‘New York Convention’) is credited with providing legally binding awards that are recognised and enforceable across the globe by 148 countries.
Nevertheless, achieving recognition and enforcement of arbitral awards is not without significant hurdles and pitfalls, all of which should be recognised at the outset of any dispute (or more effectively at the outset of the commercial deal), and should be addressed, as far as possible, in the drafting of the dispute resolution clause and the strategy employed in the pursuit of any arbitration claim.
Article III of the New York Convention provides for the recognition and enforcement of arbitral awards, under which a victory on paper can be translated into an effective remedy, whether by way of monetary payment or specific performance. However, Article V sets out seven exhaustive alternative grounds on which enforcement of an award may be refused; namely: (i) invalidity or incapacity of the arbitration agreement; (ii) lack of proper notice or due process; (iii) lack of jurisdiction; (iv) procedural impropriety; (v) lack of a binding award; (vi) lack of arbitrability; and (vii) violation of public policy.
Even at the negotiation stage of any transaction, the parties should consider whether the arbitration agreement as drafted could jeopardise enforcement of an award on any of these grounds. Of particular note for the financial sector is the popular provision that financial institutions have the right to choose (after the dispute has arisen) whether any dispute is submitted to arbitration or litigation. These unilateral option clauses are perceived as maximising enforcement and recovery by affording the best of both dispute worlds. However, this perception can prove treacherously deceptive. In certain jurisdictions (such as Poland, France and Russia), unilateral option clauses are more likely to impede enforcement than maximise the chances of recovery, because their unequal treatment of the parties is considered to be contrary to public policy and to render the clauses unenforceable (see, for example, the Russian courts’ decision in Sony Ericsson Mobile Communications Rus vs. Russian Telephone Company, Decree No. 1831/12 of 19 June 2012).
Care must also be exercised in the drafting of provisions for the composition and constitution of the tribunal. The recent English Supreme Court case of Jivraj v Hashwani  UKSC 40 highlights the dangers of restricting the selection of arbitrators to one ethnic or religious group, although the clause (restricting the tribunal to respected members of the Ismaili community) was ultimately found not to violate public policy. Of equal importance is to ensure that any formalities stipulated in the arbitration clause are fulfilled. The Supreme Court of Hong Kong reluctantly concluded that an arbitration agreement requiring arbitrators from the ‘Beijing list’ was not satisfied by the appointment of arbitrators from the ‘Shenzhen list’ (although enforcement was ultimately allowed on estoppel grounds) (China Nanhai Oil Joint Service Cpn v Gee Tai Holdings Co Ltd (1995) XX Ybk Comm Arb at 671). The US Court of Appeals for the Second Circuit refused enforcement of an award on the grounds that the third member of the tribunal had been appointed prematurely by the English Commercial Court in non-compliance with the arbitration agreement (Encyclopaedia Universalis SA (Luxembourg) v Encyclopaedia Britannica Inc (US) (2005) XXX Ybk Comm Arb at 1136 – 1143).
At the drafting stage, the parties should consider whether the arbitration agreement raises any sovereign immunity issues, which arise where the counterparty is a sovereign State or a State agency. State immunity applies at two levels: immunity from jurisdiction and immunity from execution. If a State agrees to refer disputes to arbitration, it will generally be bound by that arbitration agreement, and be considered to have waived immunity from jurisdiction. However, an agreement to arbitrate does not act as a waiver of immunity from enforcement, without which enforcement requires the difficult (if not impossible) task of identifying assets of the State that are located outside the State and used exclusively for commercial purposes. It is therefore imperative when contracting with a sovereign State that the State also provides an express waiver of sovereign immunity from recognition and enforcement.
Effective arbitration has to be focused at all times on the ultimate enforcement jurisdiction: the place where the respondent’s assets are located or the specific performance is to take place. It is generally more straightforward to enforce an award in the jurisdiction where the arbitration is seated. However, a counterparty’s assets are usually located where it is domiciled, which would give the counterparty a home advantage if the arbitration was seated in that jurisdiction. Usually, therefore, an alternative more neutral seat has to be sought, taking account of: (i) any assets located outside the counterparty’s domicile; and (ii) seats that are ‘arbitration friendly’.
At a minimum, the seat should be a State that is a signatory to the New York Convention, which provides sensible arbitration legislation and supportive pro-arbitration local courts. Jurisdictions which allow for extensive domestic proceedings to set aside awards are to be avoided (hopeless annulment actions are often deliberately filed to delay execution of any award and to gain time for the dissipation of assets). The claimant should also take advantage of seats where the domestic courts are prepared to issue interim freezing orders to prevent dissipation of assets (such as the English courts), and should consider utilising the new emergency arbitrator provisions increasingly available from the key arbitral institutions (although these are as yet untested and their enforceability is uncertain).
The enforcement goal should similarly guide the way in which the arbitration proceedings are pursued, and the claimant must at all times remain mindful of the grounds for refusing enforcement under the New York Convention. Whilst the claimant will want to ensure as tight a procedural timetable as possible, from an enforcement perspective, it is imperative that the proper procedures are followed. Even minor failures to follow procedural requirements can lead to awards being challenged for a violation of due process. A German court found that an award based on arguments not raised in the course of the arbitration violated the requirements of due process (decision of the Stuttgart Court of Appeal dated 6 October 2001 referred to in Liebscher: “The Healthy Award, Challenge in International Commercial Arbitration” (Kluwer Law International 2003), 406). The English Court of Appeal held that a respondent had been deprived of the right to be heard because he had been unable to attend a hearing owing to a serious illness (Kanoria and others v Guinness [2006 ] EWCA Civ 222). The parties should also give careful thought to how they frame their request for relief in the arbitration (especially in the case of specific performance), to ensure that the relief sought is in fact enforceable in the jurisdiction where enforcement is most likely.
The worst possible outcome for any successful claimant is to have spent time and costs on achieving a hollow victory on paper, with no prospect of meaningful recovery. This can best be avoided by maximising the chances of enforcement in the drafting of the arbitration agreement, planning for enforcement throughout the life of the dispute, and mitigating risks of non-enforcement wherever possible.
Penny Madden is a partner and Sarah Wazen is an associate at Skadden, Arps, Slate, Meagher & Flom (UK) LLP. Ms Madden can be contacted on +44 (0)20 7519 7231 or by email: firstname.lastname@example.org.
© Financier Worldwide
Penny Madden and Sarah Wazen
Skadden, Arps, Slate, Meagher & Flom (UK) LLP