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Recognition of Arbitral Awards in the US – US Courts Explore Two Sides of the Same Coin

December 1, 2015 • CRITICAL ANALYSIS, SPECIAL FEATURES, International Law, In-depth, Americas, Unprotected Post

By Theresa Bowman and Charles Camp

Charles Camp and Theresa Bowman share their assessment of two important US District Court disagreements regarding the appropriate procedure for the recognition of arbitral awards.

 

Disagreement among US District Courts regarding the appropriate procedure for the recognition of arbitral awards has recently injected a significant element of uncertainty into the decision-making process by which investors choose to agree to arbitration against foreign sovereigns and sovereign-owned entities. The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”) provides for awards to be entered in two ways: either pursuant to the ICSID rules or the ICSID additional facility rules. ICSID awards are confirmed and enforced according to specific mechanisms provided for by the Convention. Awards entered pursuant to the ICSID Additional Facility rules are recognised and enforced according to the 1958 UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”).

Both ICSID and the New York Convention provide for a mechanism of review of the arbitral award before enforcement. Both review processes ask substantially similar, although not, identical questions. The crucial difference between the processes is the adjudicative body to which the review is entrusted. Under the ICSID rules, the power of appeal rests solely with the arbitral institution. Under Article 52 of the Convention, parties may apply to the ICSID Secretary General for an annulment of the award. Under the New York Convention, the power of appeal rests with the national courts of the country in which an award is confirmed. Review of awards under the New York Convention lend a great deal of discretion to national courts. Notably, recognition of an award may be denied for “public policy” reasons. ICSID awards are reviewed more restrictively, but the effects of an ICSID review are more permanent and wide-reaching. An annulment erases the award entirely, as if it was never made. A national court’s ability to deny recognition of an award has only the limited impact of prohibiting enforcement within the one jurisdiction for which enforcement is sought.

ICSID awards are confirmed and enforced according to specific mechanisms provided for by the Convention. Awards entered pursuant to the ICSID Additional Facility rules are recognised and enforced according to the “New York Convention”.

Where American Courts are currently divided is on the question of whether ICSID’s clear imperative to remove national judicial review of awards of any kind, in stark contract to the New York Convention processes, is limited by domestic law on enforcement such as the Foreign Sovereign Immunities Act (“FSIA”). The ICSID Convention is valued by parties, in part, because its articles regarding the recognition and enforcement of judgments reflect a desire to bypass review of awards by domestic courts. This desire is driven by both consistency and time and cost-saving considerations. ICSID Contracting States articulated a desire to ensure Awards were enforceable around the world, regardless of the Award’s conformity with any one States’ domestic public policy. Automatic conversion of awards to domestic judgments likewise removed a procedural step capable of manipulation by debtors in order to delay payment and increase the costs of debt recovery.

The ICSID Convention provides that US courts must enforce arbitral awards adjudicated under to the ICSID Convention as “a final judgment of the courts of a constituent state.” The Convention includes no additional procedures for the recognition and enforcement of awards when a party refuses to comply. “Recognition” is not explicitly mentioned, while enforcement is left to domestic law. The ICSID Convention is codified at 28 U.S.C. §1650a. 28 U.S.C. §1650a states that ICSID awards are “enforced” as a “final judgment of a court of general jurisdiction of one of the several States” but likewise does not mention recognition. Courts are split on the appropriate procedures to convert an arbitral award to a judgement given that the seemingly simple directive to enforce an award as a domestic judgment does not mention recognition.

Specifically, courts in New York and the District of Columbia disagree about whether parties enforcing arbitral awards may take advantage of streamlined state law procedures to enforce state judgments ex parte, or upon the simple, unilateral petition of the awardees. Ex parte proceedings offer an expedited route by which a judgment may be registered in a new court without filing a separate, plenary action to confirm the arbitral award,, which would require basic due process requirements such as notice by service of process and the opportunity to challenge the registration of the judgment. Where a foreign sovereign or sovereign-owned entity is involved, due process and notice requirements would, in theory, be governed by the FSIA. Challenges under FSIA rules of service have the potential to delay recognition, whereas an ex parte proceeding saves time and money.

Where American Courts are currently divided is on the question of whether ICSID’s clear imperative to remove national judicial review of awards of any kind, in stark contrast to the New York Convention processes, is limited by domestic law on enforcement.

The Southern District of New York has repeatedly read 28 U.S.C. §1650a to authorise the ex parte recognition of ICSID awards under New York state law. In New York state, out-of-state judgments may be registered in a New York state court ex parte, without the filing of a plenary action. The use of this state procedure has been extended repeatedly in New York federal courts, and so has been applied to ICSID awards as well.

Why is state law appropriate for the recognition of an award rendered under an international treaty? In February 2015, the Southern District clarified in Mobil Cerro Negro Ltd. v. Bolivarian Republic of Venezuela, 87 F. Supp. 3d 573 (S.D.N.Y. 2015), that because § 1650a addresses enforcement, but does not mention recognition, there was a statutory gap properly filled by state law. Indeed, the Rules of Decision Act states that “the laws of several states, except where the Constitution or treaties of the United States or Acts of Congress otherwise require or provide, shall be regarded as rules of decision in civil actions in the courts of the United States….” 28 U.S.C. § 1652. In that case, Venezuela argued that the application of state law to serve as a gap-filler for an international treaty that, by its own terms, seeks to de-emphasise the application of national law was inappropriate. The Court rejected Venezuela’s argument that the use of state law in the ICSID context would lead to an offensive frequency of inconsistencies in the recognition of ICSID awards. Some inconsistency, noted the Court, was built into the ICSID Convention itself. The Court pointed to the ICSID Convention’s use of varying enforcement mechanisms of each of its Contracting States.

As the Court noted, ICSID convention drafters departed consciously from the more involved revision provisions within the New York Convention. In their view, requiring a new confirmation action would entitle an ICSID debtor to “more process than… due under the New York Convention, under which at least a streamlined petition-based confirmation process is used.” On the other hand, the Court did not see a difference between the ex parte proceedings and the review necessitated by a plenary action. “The nature of that proceeding would not expand or contract Venezuela’s rights.”

In May 2015, the federal District Court for the District of Columbia reviewed ex parte recognition of an ICSID award for the first time. The ICSID creditor in that case sought to take advantage of a District of Columbia local law which, in a near identical fashion to the New York state law at issue in Mobil Cerro, allowed for expedited recognition of an out-of-state judgment in a District of Columbia court. In Micula v. Govt. of Romania, Case No. 1:14-cv-600 (D.D.C. May 18, 2015), the Court fundamentally disagreed that § 1650(a) contained a statutory gap at all. The Court noted that the enabling statute itself provides federal courts with exclusive jurisdiction over “actions and proceedings” under 1650(a). By contrast, Congress used the word “confirm” in the Federal Arbitration Act to incorporate the provisions of the New York Convention. The deliberate difference in statutory language strongly indicated a Congressional intent to require an action, and not an ex parte petition, to convert an award into a domestic judgment.

Only a short time later, the District Court for the Southern District of New York issued an opinion in a concurrent enforcement proceeding against Romania in which the Micula plaintiff intervened. In a dramatic turn, the Court, examining the exact same award as the District Court, explicitly spurned Judge Mehta’s opinion. See Micula v. Govt. of Romania, No. 15 MISC. 107, (S.D.N.Y. Aug. 5, 2015).

The Southern District Court stating that that court had wrongly “collaps[ed] all distinction between ‘recognition’ and ‘enforcement.’” Provisions regarding enforcement of an award, opined the Court, did not speak on the propriety of procedures to confirm an award in keeping with the Convention’s overall emphasis upon streamlined procedures. The Southern District Court reiterated that a gap in § 1650a requires the use of appropriate state law procedures.

As the Court noted, ICSID convention drafters departed consciously from the more involved revision provisions within the New York Convention.

Key to the Court’s analysis was the observation that a plenary action would neither expand nor contract the rights of the parties. Like the court in Mobil Cerro, the Micula court observed that a plenary action would not entitle parties to challenge the award or request the kind of review built into the procedures mandated by the New York Convention. A plenary action would only serve in “delaying the inevitable recognition of the Award.” No. 15 MISC. 107 at *4. The arguments raised by Romania would appear to bolster that Court’s point regarding the futility of a plenary action in the ICSID context. Romania argued that the judgment premised upon the ICSID Award was void and should be vacated on the basis of substantive defenses such as the act of state doctrines. Judge Schofield reminded the defendant that a national court in an ICSID member state has an extremely limited role. The court simply confirms the award, but undertakes no substantive review of any kind.

recognition-arbitral-awards-1The initial obvious takeaway is that New York is currently the most attractive venue for the recognition of ICSID awards in the United States for parties wishing to pursue simplified and expedited modes of obtaining a US Judgment from an ICSID Award. New York courts, are consistent in allowing ex parte state procedures to recognise arbitral awards. The expedited procedure circumvents the possibility of delay where the necessity of serving a new lawsuit gives debtors the opportunity to challenge the effectuation of due process requirements in a plenary action.

It is important to remember that the district court split does not lower or heighten the bars present to enforcement of awards against foreign sovereigns in the United States. New York courts rejected sovereign immunity as a defense to recognition of an ICSID award given that, in their view, the broader purpose of the ICSID Convention, “to put in place an expedited and automatic recognition procedure,” did not support application of FSIA procedures to the conversion of ICSID awards. Mobil Cerro Negro Ltd., et. al. v. Bolivarian Republic of Venezuela, 87 F. Supp. 3d 573 (February 13, 2015). In that case, Judge Engelmayer stressed that the FSIA provisions on enforcement would in no way be altered by the ICSID Convention, given that questions of immunity against execution are ceded to national courts applying their domestic law.

A second, more nuanced takeaway is that the district court split reflects a tension between the desire of courts to comply with the spirit and overall objectives of a treaty and enabling legislation even where those objectives raise procedural ambiguities. In New York, the courts in Micula and Mobil Cerro were both guided by New York precedent allowing for the limited use of state ex parte petitions to confirm a state judgment in a federal court. Both courts cited a perceived statutory gap making the use of state law appropriate. It is on this point that courts in Washington D.C. have registered a vigorous dissent. The real concern, appears to be that requiring the extra step of a new plenary action will give defendants a foot in the door to proffer substantive arguments challenging arbitral awards in national courts – not in ICSID annulment proceedings. While the enabling legislation is clear on this point, further analysis by higher United States courts on the issues underlying the current split will likely address this concern in more detail – the extent to which giving parties the procedural opportunity to voice procedurally inappropriate arguments stands to erode the “automatic confirmation” envisioned by the ICSID Convention’s drafters.

About the Authors

charles-campCharles Camp teaches international negotiations at the George Washington University Law School and is an international lawyer with over thirty years experience representing foreign and domestic clients in international litigation, arbitration, negotiation and international debt recovery. In 2001, Mr. Camp opened the Law Offices of Charles H. Camp, P.C. to focus exclusively on effective, personalised representation in complex, international matters.

theresa-HeadshotTheresa Bowman is an associate at the Law Offices of Charles H. Camp, P.C., practicing in the areas of international commercial disputes and arbitration. Before her current post, Ms. Bowman, a graduate of the George Washington University Law School and President of the Student Bar Association, completed a post-graduate fellowship as a judicial law clerk for the Honorable Reggie B. Walton, District Court Judge for the District of Columbia.

 

 

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