Enforcing international commercial arbitral awards
July 2018 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION
Advocates of arbitration often cite the alleged ease and simplicity of recognition and enforcement of international arbitral awards, as compared with the patchwork of rules applying to the enforcement of foreign court judgments, as one of arbitration’s strongest drawcards. Yet, as parties to international arbitration become increasingly experienced and sophisticated, the enforcement of international arbitral awards may no longer be quite as straightforward. A party which has successfully obtained an international arbitral award may believe the hard work is done, but if the unsuccessful party does not voluntarily comply with the award, the winning party must take steps to enforce it, and those steps are becoming ever more complex and costly. Though often treated as an afterthought by parties and their counsel, the enforceability of arbitral awards matters, for failure to enforce an arbitral award will, in most cases, render that award of little or no value whatsoever.
Research shows that the vast majority of arbitral awards are complied with voluntarily. In the 2008 Queen Mary International Arbitration Survey on enforcement, 84 percent of participating counsels indicated that, in more than 76 percent of arbitration proceedings, the non-prevailing party voluntarily complied with the arbitral award. This is good news for the efficacy and integrity of the international arbitration system as a whole, but what happens in those infrequent cases where enforcement is, rightly or wrongly, resisted?
There are, in effect, two ways of seeking enforcement of an arbitral award: through informal channels or through the relevant local courts. Where a losing party fails to comply voluntarily with an award, it is usually advisable to explore the informal channels first. In the context of international commercial arbitral awards, these informal methods often consist of applying commercial, diplomatic or reputational pressure, for example through the losing party’s home government, or negotiating an agreed reduction in the losing party’s payment obligations, in return for swifter and more certain compliance with the award. In many instances, parties that opt for the informal approach achieve success in reaching an agreement on compliance. However, the situation becomes a lot more difficult and expensive where such informal methods are unsuccessful.
In that case, the winning party must locate one or more jurisdictions, preferably arbitration-friendly ones, in which the losing party holds assets against which the award may be enforced. This is often far from a straightforward process, and a lot of time and money can be spent simply tracing and locating assets. Increasingly, sophisticated commercial parties are taking advantage of jurisdictions in which oversight and compliance mechanisms are low, and assets more easily sheltered, in order to protect them from arbitral enforcement. Furthermore, assets against which an arbitral award can be enforced, and the legal mechanisms for enforcing against them, vary considerably according to each jurisdiction’s laws.
In the best-case scenario, a winning party will have an arbitration seated in, and find enforceable assets located in, a state which has signed up to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (NYC), a mutual enforcement treaty for arbitral awards signed by over 150 states. The state parties to the NYC have agreed to enforce arbitral awards rendered at the seat of any of the other state parties as if they were local judgments, without the need for, or possibility of, a further review of the underlying merits of the case. As long as both the country in which the award was rendered and the country in which enforcement is sought are signatories to the NYC, and the award meets the NYC’s basic requirements of formal validity, for example it is in writing and is signed, the award will, at least in theory, be treated as binding and enforceable in any of the other signatory states.
There are, however, some limited substantive grounds on which local courts may refuse to recognise and enforce the award, even under the NYC. First, incapacity of the parties or invalidity of the arbitration agreement. Second, failure to give proper notice to the other side of the appointment of the arbitrator or the arbitration. Third, the award refers to an issue not submitted to the arbitration. Fourth, the composition of the arbitral tribunal or the arbitral procedure adopted by the tribunal was not in accordance with the parties’ agreement or applicable law. Fifth, the award is not binding or has been set aside or suspended at the seat. Sixth, the subject-matter of the dispute is not capable of being resolved through arbitration. Finally, enforcement of the award could be contrary to the public policy of the enforcing state. This is an exhaustive, rather than representative, list of reasons for resisting enforcement; if none of these criteria are met to the satisfaction of the local court, then the award should be enforced.
A problem arises because different national courts apply the NYC differently in practice. This divergence is facilitated by the fact that the NYC provides only that local courts ‘may’ refuse enforcement if one of the criteria is met, not that they must. In practice, this has led to a number of radically different approaches across jurisdictions. For example, one of the most commonly-presented grounds for resisting enforcement is that the arbitral award has been set aside or suspended by the courts at the seat of arbitration. In England, the courts have generally refused to enforce an award that has been set aside at the seat: in the 2017 case of Nikolay Viktorovich Maximov v. Open Joint Stock Company, for instance, the English Commercial Court declined to enforce an award set aside at its seat in Russia, notwithstanding the English court’s obvious concerns as to the validity of the Russian court’s reasoning.
In France, however, the courts have taken the opposite view, allowing ‘zombie’ awards to be enforced, notwithstanding that they have previously been set aside at the seat. In Société Hilmarton Ltd v. Société Omnium de traitement et de valorisation (OTV), the French Court of Cassation (Cour de Cassation) decided to enforce an award previously set aside at the arbitral seat in Switzerland, holding that the award was an international award that was not integrated into the legal order of the Swiss state and which, therefore, continued to exist even though it had been set aside. The US courts have, at times, taken a similar approach. In Chromalloy Aeroservices v. Arab Republic of Egypt, for instance, an arbitral award had been set aside by the courts of Egypt, on the basis that the tribunal had incorrectly applied the substantive law in refusing to apply Egyptian administrative law. The US District Court for the District of Columbia declined to follow the Egyptian court’s set-aside decision, ruling that the Egyptian court’s purported ground for set-aside would, at worst, have constituted a mistake of law by the tribunal, which was not a proper subject for review by the enforcement courts.
The diverging approaches adopted in different jurisdictions mean that there is not as much consistency in the interpretation and application of the NYC as one might presuppose. This can create significant problems when a winning party seeks to enforce its award in multiple jurisdictions. The winning party will often find that it has to meet differing standards in each jurisdiction, which can give the losing party a clear advantage in resisting enforcement.
Moreover, there are approximately 50 states which are not party to the NYC, including a significant number of countries in Africa, the Middle East and the Pacific Islands. Where enforcement is sought in one of these states, the best solution will be if there exists a bilateral or multilateral treaty for the recognition and enforcement of arbitral awards, to which both the state of the arbitral seat and state in which enforcement is sought are parties. But this is not always the case.
It may be possible to enforce even where no direct enforcement treaty is available, for instance through the use of a third-party state. If a third-party state is a party to the NYC and also has a bilateral or multilateral treaty for the enforcement of judgments with the state in which enforcement is sought, the party seeking enforcement may be able to apply to the courts of the third-party state for recognition of the judgment under the NYC, and then enforce the resulting court judgment in the state in which enforcement is sought under the bilateral or multilateral treaty.
Even where the state of the arbitral seat is not party to the NYC, it may still be possible, in some instances, for an award to be enforced through a third-party state via the use of two bilateral treaties for the recognition of awards or court judgments. Such mechanisms are obviously complex and heavily reliant on both the terms of the relevant bilateral treaties and the willingness of the courts to apply them favourably and effectively.
In short, although the regime for the enforcement of international arbitral awards is often simpler than for the enforcement of court judgments, it still brings its own, at times expensive and complex, challenges. Parties agreeing to enter into international arbitration agreements should be aware of these risks, and should not assume that the challenges in obtaining relief in international arbitration always end at the moment an arbitral award is issued.
Nathalie Allen Prince is counsel and David Turner is an associate at Boies Schiller Flexner (UK) LLP. Ms Allen Prince can be contacted on +44 (0)203 908 0726 or by email: firstname.lastname@example.org. Mr Turner can be contacted on +44 (0)203 908 0734 or by email: email@example.com.
© Financier Worldwide
Nathalie Allen Prince and David Turner
Boies Schiller Flexner (UK) LLP