United States: International Dispute Resolution Update: May 2011 - Part 1

In a recent StayCurrent, we wrote about two major rulings in the ongoing dispute between the Chevron Corporation, a group of plaintiffs seeking compensation for alleged environmental damage resulting from oil exploration in the Ecuadorian rain forest, and the Republic of Ecuador itself. While those decisions have generated a great deal of attention and commentary, the first five months of 2011 have seen a number of other interesting decisions in the field of international dispute resolution.

Enforcement of Judgments and the Separate Entity Rule: JW Oilfield Equipment LLC v. Commerzbank AG, ___ F. Supp. 2d ___, 2011 WL 507266 (S.D.N.Y. Jan. 14, 2011)

JW Oilfield began when the original plaintiff, JJS Oilfield Supply GmbH ("JJS"), filed suit against JW Oilfield Equipment LLC ("JW") in the U.S. District Court for the Western District of Oklahoma. JW defended the suit and ultimately was granted judgment as a matter of law following a two-day trial. The Oklahoma court also granted JW's motion for attorneys' fees, and entered judgment against JJS in the amount of $166,169.53. JJS did not satisfy the judgment, prompting JW to seek, and the Oklahoma court to grant, orders in aid of enforcement (a) enjoining JJS from disposing of any property of money pending further order of the court, and (b) directing JJS (through a corporate representative) and its principal officer to appear for deposition and to produce documents regarding JJS's corporate assets. Neither the corporate representative nor the principal officer appeared as directed; the Oklahoma court thus ordered the officer to show cause why it should not be held in civil contempt. The officer failed to respond to respond to the show cause order, and the Oklahoma court entered a civil contempt order against him.

JW registered the Oklahoma judgment in the U.S. District Court for the Southern District of New York. Following its registration of the judgment, JW commenced a special proceeding against Commerzbank, a German bank at which JJS maintained an account, in which it sought an order (a) freezing and restraining any accounts maintained by or for the benefit of JJS, and (b) ordering Commerzbank to turn over to JW the proceeds of any JJS accounts in satisfaction of the Oklahoma judgment.¹ In response, JJS filed an action in Frankfurt, Germany seeking an injunction directing Commerzbank to ignore the asset freeze imposed by the Oklahoma court and pay the funds in the Commerzbank accounts to JJS. The German court denied JJS's motion.

The issue before the New York court thus involved whether Commerzbank could be ordered to turn over the proceeds of JJS's account to JW in satisfaction of the judgment. Commerzbank claimed that it could not be so ordered, because the funds at issue were on deposit in an account at a branch in Germany. Relying on the New York Court of Appeals' 2009 decision in Koehler v. Bank of Bermuda,² the New York court ruled that because it had personal jurisdiction over Commerzbank, it could issue a turnover order directing Commerzbank to deliver the proceeds of JJS's German account (up to the amount of the judgment) to JW.

Commerzbank raised three additional arguments in opposition to JW's motion for turnover. First, Commerzbank claimed that because the New York court lacked personal jurisdiction over JJS and/or in rem jurisdiction over the funds in the account, application of Koehler would violate the due process rights of JJS. Noting the general rule that parties typically lack standing to assert the constitutional rights of third parties, the New York court analyzed Commerzbank's claim under the doctrine of jus tertii, or third party standing, and found that Commerzbank could assert JJS's due process rights only if it could demonstrate (a) a "close relationship" with JJS, and (b) that JJS was "hindered" in its ability to assert its constitutional objections directly. The court found that Commerzbank could not satisfy either element of this test. With respect to the necessary "close relationship," the court found that Commerzbank and JJS were not closely aligned in interest. Specifically, the court noted that JJS had commenced litigation against Commerzbank in an attempt to evade the Oklahoma court's freezing order, and that Commerzbank's true motivation for asserting the due process claim was that it, being potentially subject to conflicting duties under the legal systems of two sovereigns (Germany and the United States), feared that it would be forced to pay the same amount twice. The court concluded by observing that even if JJS were subject to jurisdiction in New York, Commerzbank's litigation posture would be no different. The court thus held that Commerzbank could not be an effective advocate for JJS's due process rights. It also made quick work of the "hinderance" element, noting that there was no reason that JJS could not itself have made a special appearance in the action against Commerzbank to assert its jurisdictional objections.

The court turned next to Commerzbank's argument that New York's "separate entity rule," which generally holds that "each branch of a bank be treated as a separate entity for attachment purposes," prohibited turnover of funds held in Germany. The court rejected this argument, holding that Koehler abrogated the applicability of the separate entity rule in post-judgment execution proceedings.³ Because the court had personal jurisdiction over Commerzbank by virtue of its presence in New York, the court held that it could, consistent with Koehler, order Commerzbank to pay the funds to JW in New York.

The court turned next to Commerzbank's argument that because the turnover order would conflict with German law (which it claimed permits German banks to respond only to execution orders of German courts), the court should decline to exercise jurisdiction in the interest of international comity. The court analyzed Commerzbank's comity argument under the five-point test set forth in Minpeco S.A. v. Conticommodity Services, Inc.,⁴ and found it unconvincing. While accepting as "undoubtedly true" Commerzbank's argument that Germany has a strong interest in bank regulation and the enforcement of foreign judgments, the court found that the German court's denial of JSS's motion for an injunction was significant, since that denial represented a statement by the German court that Germany's interests in enforcing its own banking laws did not necessarily outweigh the United States' interest in enforcing the judgments of its own courts. The court also applied the general rule that foreign court orders are not entitled to comity where the party who procures them has done so to deliberately court impediments to a federal court order, noting JSS's refusal to obey the Oklahoma court's discovery orders and its order to show cause (although curiously neglecting to note JSS's application for a German injunction). The court also found that Commerzbank's compliance with the a turnover order would not impose an impermissible hardship, as it would not require the violation of any German criminal law, pose the risk of any sanctions that could be seen as the equivalent to criminal penalties, or conflict with German public policy as expressed in legislation. To the contrary, the court found that Commerzbank's compliance with the turnover order posed only the risk of "speculative civil liability." Against this backdrop, the court concluded that the importance of vindicating the Oklahoma judgment substantially outweighed any hardship on Commerzbank, particularly where it remained uncertain how the German court would ultimately rule, and it refused to refrain from exercising jurisdiction on comity grounds.⁵

JW Oilfield demonstrates, with particular clarity, the jurisprudential trend in New York favoring assertive exercises of jurisdiction to ensure the swift enforcement of judgments. Most notable is the decision's conclusion – which was implicit in Koehler – that the separate entity rule no longer will no longer allow judgment debtors to avoid enforcement simply by claiming that assets otherwise subject to execution are domiciled in an account outside New York. To the contrary, New York enforcement principles now firmly rest on principles of in personam – not in rem – jurisdiction, which courts will apply to require garnishees to deliver assets into the jurisdiction for purposes of satisfying New York judgments.⁶ JW Oilfield also illustrates how U.S. courts recognize a vital national interest in the enforceability of their judgments, as well as a judicial willingness to exercise their jurisdiction to its outer limits in order to vindicate that vital interest, particularly in cases where the judgment debtor has demonstrated an unwillingness to honor the U.S. court's orders.

Competent Judicial Authorities/Manifest Disregard Review in International Arbitration Proceedings: International Trading and Industrial Investment Co. v. Dyncorp Aerospace Tech., ___ F. Supp. 2d ___, 2011 WL 192517 (D.D.C. Jan. 21, 2011)

Dyncorp Aerospace arose out of a dispute between an American defense contractor ("Dyncorp") and a Qatari company ("International Trading") over the termination of an agreement whereby the Qatari company was to help the contractor establish a Qatari branch office. After Dyncorp attempted to terminate the agreement, International Trading disputed its ability to do so under the parties' agreement, and commenced arbitration before the International Chamber of Commerce ("ICC"). The ICC chose Paris as the seat of the arbitration; the parties agreed that Qatari law would govern the substantive dispute, and that the ICC Rules would apply to any procedural issues. The arbitration tribunal awarded International Trading $1,107,764.95 in damages, plus costs and interest.

Dyncorp filed actions seeking to set aside the award in the courts of France and Qatar. The Qatar trial court and Court of Appeal denied Dyncorp's petition. However, the Court of Cassation, the highest court in Qatar, ruled that the tribunal failed to properly apply Qatari law and set it aside. The French courts, however, rejected Dyncorp's petition. Following the Qatari proceedings, and while the French proceedings were ongoing, International Trading filed a petition to confirm the award in the U.S. District Court for the District of Columbia. Dyncorp opposed confirmation on two grounds: that the annulment of the award by the Qatari Court of Cassation provided a ground for non-recognition under the New York Convention, and that the award was made in manifest disregard of the law. The district court rejected both arguments.

Dyncorp's argument that the Qatari court's annulment of the award warranted non-recognition required the district court to consider the proper scope of Article V(1)(e) of the New York Convention, which authorizes a court to refuse to recognize an arbitral award where the award "has been set aside or suspended by a competent authority of the country in which, or under the law of which, the award was made." While conceding that because the award was made in Paris, the French courts presumptively were the "competent authority," DynCorp argued that the case did "not involve a 'typical enforcement action' because International Trading assented to judicial review by the Qatari courts" and "consented to the jurisdiction of the Qatari courts by voluntarily participating in the proceedings before those courts without ever objecting." Based on these facts, DynCorp argued that International Trading was estopped from contesting that the Qatari courts were a "competent authority" within the meaning of Article V.

The court rejected DynCorp's arguments. Specifically, the court held that International Trading's consent to the Qatari courts' jurisdiction was irrelevant, finding that a court's "competence" to annul an arbitral award under Article V of the New York Convention concerns that court's subject matter jurisdiction. Noting it to be axiomatic that subject matter jurisdiction cannot be conferred by consent, the court found International Trading's participation in the Qatari proceedings to be immaterial on the question of the Qatari courts' "competence" for purposes of Article V. The court next rejected DynCorp's argument that the Fifth Circuit's decision in Karaha Bodas v. Pertamina⁷ supported its argument that International Trading's participation in the Qatari proceedings gave rise to estoppel, noting that while Karaha Bodas presented a question concerning the proper interpretation of the parties' arbitration agreement, the parties in this case had clearly agreed that France was the seat of the arbitration. Finally, the court rejected DynCorp's argument that the Qatari court's judgment should be afforded res judicata effect on grounds of international comity, noting that international comity is a matter of grace, rather than a mandatory doctrine, and noting further that comity is only owed where the court whose ruling is to be respected is itself a competent authority. Because the Qatari courts were not a competent authority, the court concluded that comity did not require it to give the Qatari decision preclusive effect.

Next, DynCorp argued that the court should refuse to recognize the award because the Qatari court had found that the sole arbitrator had "acted in manifest disregard of Qatari law." While the continued applicability of the manifest disregard doctrine in arbitrations governed by Chapter 1 of the FAA has been the subject of considerable judicial scrutiny since the Supreme Court's 2008 decision in Hall Street v. Mattel,⁸ courts have paid far less attention to whether the doctrine applies in international arbitration cases governed by Chapter 2.⁹

The DynCorp court addressed this issue directly. Beginning its analysis with the observation that it "harbors a heavy dose of skepticism towards DynCorp's proposition that the Award can be refused confirmation under the New York Convention due to an arbitrator's alleged 'manifest disregard of the law,'" the court found that manifest disregard review was unavailable under the New York Convention. The court specifically found (as the federal courts uniformly have) that the grounds for non-recognition set forth in Article V of the New York Convention are exclusive, and that because "manifest disregard" did not appear to be embraced within any of those specific grounds, it could not constitute grounds for refusing to confirm and enforce an arbitration award.

Finally, the court rejected DynCorp's claim, derived from Article VII of the New York Convention and the decision in In re Chromalloy,¹⁰ that it should be entitled to rely upon all the defenses to enforcement available under U.S. law, not just those set forth in Article V of the Convention. The court rejected this argument as well, holding that Article VII only permits a party seeking to "avail itself" of an arbitration award to resort to domestic remedies, and that it could not be invoked by a party seeking to oppose enforcement of an award.¹¹

DynCorp provides a thorough and useful discussion of two critical issues in international arbitration: the concept of primary jurisdiction and the scope of review. The court's treatment of the Qatari annulment constituted a proper application of the primary jurisdiction doctrine, which was explained most extensively in the Karaha Bodas decision. Furthermore, the court's discussion of the applicability of manifest disregard review in international cases was consistent with the view that (a) the specific grounds for non-recognition in the New York Convention are exclusive and may not be expanded nor supplemented by courts; and (b) that the New York Convention's partial incorporation of domestic arbitration law may only be invoked by parties seeking to enforce – not avoid – an arbitration award. As such, the decision vindicates the bedrock U.S. policy, long reflected in federal arbitration jurisprudence, favoring the prompt enforcement of arbitration agreements and awards.

Scope of "Public Policy" Defense to Enforcement of Arbitral Award: Republic of Argentina v. BG Group PLC., ___ F. Supp. 2d ___, 2011 WL 182138 (D.D.C. Jan. 21, 2011)

BG Group involved Argentina's attempt to avoid enforcement of an arbitration award issued under the auspices of the Agreement for the Promotion of Investments entered into between the United Kingdom and Argentina in 1990. BG Group claimed in the arbitration that certain regulatory actions taken by the Argentine government toward its gas sector had undermined the value of an investment it had made, through a consortium, in MetroGAS, an Argentine gas distribution company, and had in effect expropriated its investment in MetroGAS. The arbitration tribunal, based in the United States, agreed, and awarded BG Group over $185,000,000, plus interest, costs, and attorneys' fees.

Argentina opposed recognition of the arbitral award on two grounds: that the tribunal exceeded its powers and that the award violated the public policy of the United States. Having previously disposed of Argentina's first defense in its ruling rejecting Argentina's motion to set aside the award, the district court focused on Argentina's public policy defenses, which claimed that the award was contrary to U.S. public policy for three reasons: that the dispute was not arbitrable, that the arbitration was in essence a "derivative" claim, and that the tribunal's damages assessment was flawed. The court, noting at the outset of its analysis that the public policy defense is to be construed narrowly and that the burden of establishing it is "high, and infrequently met,"¹² rejected each.

Argentina claimed that the dispute was not properly subject to arbitration because the treaty providing for arbitration required that any dispute first be submitted to a "competent tribunal" in the country in which the investment at issue was made, after which the claimant could proceed to arbitration. The tribunal had found that while the treaty required, "as a general matter," BG Group to submit its dispute to the Argentine courts for 18 months before commencing arbitration, it further found, as a matter of treaty interpretation, that the initial submission could not be viewed as an absolute prerequisite to arbitration, since such a requirement, even if consistent with the treaty's text, would be inconsistent with international law. The tribunal therefore found that permitting a direct resort to arbitration was necessary to avoid an "absurd and unreasonable result." Applying well-established U.S. arbitration jurisprudence, the Court held that because Argentina had agreed that the tribunal had the "principal power to rule upon its jurisdiction," it was required to accept the tribunal's interpretation of the treaty. As a necessary consequence of that finding, the court concluded that, under the tribunal's interpretation, the award did not violate the principle of U.S. public policy providing that an arbitral award may not be enforced against a party who arbitrated without consent.

Argentina's next claim was that the arbitration was a "derivative" claim in that BG Group was seeking to recover losses to the value of the stock it held in MetroGAS, the party that was directly affected by the regulatory action. While it likely could (and probably should) have done so, the court did not find that it was required to accept the tribunal's findings concerning the "derivative" nature of the claim. Instead, the court noted that, while general principles preclude a shareholder from maintaining a direct action against a party who has caused damage to the corporation in which he is a shareholder, there are "numerous exceptions" to that rule, including where the alleged wrongdoer owes a special duty to the shareholder. The court found there was "no question that Argentina, as a 'contracting party,' directly owed BG Group, an 'investor,' the duty under the Investment Treaty to refrain from enacting 'unreasonable or discriminatory measures' that would 'impair'" BG Group's investment. The court thus concluded that the award was consistent with, rather than contrary to, well-settled principles of U.S. corporate law.

Finally, the court considered Argentina's claim that the tribunal's damage calculation violated U.S. public policy, specifically (a) the U.S. principle requiring damages to reflect only actual pecuniary losses flowing from the alleged wrongful act, and (b) the Fifth Amendment's rule requiring that the owner of property taken by the government be awarded only "just compensation." Argentina claimed that the tribunal's analysis ran afoul of these principles by calculating damages based on a transaction that occurred in 1998 (when it claimed that the Argentine economy was at its peak), rather than measuring the loss based on the value of the investment on the day before the emergency measures at issue were taken, by which time the Argentine economy had already collapsed. While disagreeing with Argentina's characterization of the tribunal's analysis, the most important passage of the district court's consideration of the damages issue may be where the court stated that "in considering whether enforcement of the Award is contrary to public policy, the Court is without authority to conduct 'an exercise in factfinding' ... as 'the parties did not bargain for the facts to be found by a court, but by an arbitrator chosen by them."

BG Group did not announce any novel legal principles, but it is nonetheless noteworthy as a very clear illustration of U.S. courts' unwillingness to act as appellate tribunals that will review arbitrators' factual findings or legal conclusions. The decision also demonstrates the narrow scope of the "public policy" defense set forth in Article V of the New York Convention, as well as a proper rejection of an attempt by Argentina to obtain judicial review of arbitral rulings that are, when viewed as jurisdictional or merits questions, largely unreviewable, by asking that those rulings be evaluated against the norms of U.S. legal principles. As the court noted, the public policy defense permits a court to refuse to enforce an arbitration award where the award offends the "most basic notions of morality and justice" recognized by U.S. law and policy, but not where the award simply fails to bring about the same result as would have obtained in a U.S. litigation proceeding conducted under U.S. law.

Nonjusticiable Political Questions/Act of State Doctrine: Spectrum Stores, Inc. v. CITGO Petroleum Corp., 632 F.3d 938 (5th Cir. 2011)

Spectrum Stores involved two class actions brought by gasoline retailers against oil producers, the majority of which are owned by the OPEC member nations, in which the retailers alleged that the producers conspired with the OPEC nations to fix prices of both crude oil and refined petroleum products, and that the conspiracy was commercial, as opposed to sovereign or governmental, in nature. The producer defendants moved to dismiss on various grounds, including that the suit would require the court to sit in judgment of the actions of other sovereign nations in violation of the act of state doctrine, and also that the case presented nonjusticiable political questions. Characterizing the complaints as "challenging the decisions of sovereign states to restrict the production of crude oil located within their own territories," the U.S. District Court for the Southern District of Texas dismissed the complaints pursuant to Fed. R. Civ. P. 12(b)(6) under each of these doctrines. Central to the district court's ruling was that the complaints alleged that "the price fixing at issue is caused by the production decisions of the sovereign state members of the conspiracy," which necessarily would require it to sit in judgment of the actions of foreign sovereigns in violation of the act of state doctrine. The district court held further that it was constrained to dismiss the case under the political question doctrine, as its adjudication of the claims raised in the complaint would "express a lack of respect for the Executive Branch because of its longstanding foreign policy that issues relating to crude oil production by foreign sovereigns be resolved through intergovernmental negotiation."

The Court of Appeals for the Fifth Circuit affirmed. At the outset of its analysis, the Court of Appeals recharacterized the defendants' political question defense as one that went to subject matter jurisdiction, rather than whether the retailers had pleaded a cognizable cause of action (which is how the district court had characterized it).¹³ Noting that the political question doctrine "excludes from judicial review those controversies which revolve around policy choices and value determinations constitutionally committed for resolution to the halls of Congress or the confines of the Executive Branch," the Court went through the six individual factors established by the Supreme Court to determine whether a case presents a nonjusiticiable political question, noting further that the presence of any one of the factors is sufficient to warrant dismissal on political question grounds. The factors are:

• a textually demonstrable commitment of the issue to a coordinate political branch;
• the lack of judicially discoverable and manageable standards to resolve the dispute;
• the impossibility of deciding the case without an initial policy determination of a kind clearly for nonjudicial determination;
• the impossibility of a court's resolution of the issue without expressing a lack of respect for the coordinate branches of government;
• an unusual need for unquestioning adherence to a political decision already made; and
• the potentiality of embarrassment from multifarious pronouncements by various departments on one question.¹⁴

Noting its mandate to apply a "discriminating analysis of the particular question posed, in terms of the history of its management by the political branches, of its susceptibility to judicial handling in light of its nature and posture in the specific case, and of the possible consequences of judicial action,"¹⁵ the Court of Appeals focused primarily on the first two factors, though it ultimately concluded that all six Baker factors compelled a finding that the suits presented a political question.

The court first addressed whether the suit presented an issue that has been textually committed to a coordinate department. The plaintiff retailers claimed that the case did not involve such an issue, as it merely required the court to "interpret domestic antitrust law and apply it to conduct within the United States having only tangential effects on foreign affairs." In response, the producers pointed to various the constitutional provisions empowering Congress and the Executive to act with respect to foreign affairs. The Court agreed with the producers, finding that "matters relating to the conduct of foreign relations are so exclusively entrusted to the political branches of government as to be largely free from judicial inquiry or interference" and that the court had consistently "followed the command that matters implicating foreign relations and military affairs are generally beyond the authority or competency of a court's adjudicative powers." The court distinguished Japan Whaling Ass'n v. Am Cetacean Soc.,¹⁶ in which the Supreme Court held that a suit requesting that a court order the Secretary of Commerce to repudiate an international agreement was justiciable. It held that while Japan Whaling presented a "purely legal question of statutory interpretation," the retailers' case "would require that we review the considered foreign policy judgment of the political branches, which in contrast to those branches' chosen policy regarding the whaling quotas at issue in Japan Whaling is not codified in a treaty that we are merely asked to interpret." The court noted further that in Japan Whaling, all that was requested was an order compelling U.S. officials to act according to the law, whereas the retailers' case requested the court to "essentially ... reprimand foreign nations and command them to dismantle their international agreements." Finally, the court took cognizance of arguments submitted by various federal agencies claiming that adjudication of the case would "result in the frustration of various objectives 'of vital interest to the United States' national security,'" including the disruption of oil exports to the United States from the OPEC nations and a reduction in the degree of cooperation with those nations on issues such as counter-terrorism and nuclear proliferation. For all these reasons, the Court found that the retailers' case squarely implicated foreign policy issues that were textually committed by the Constitution to the political branches, and thus incapable of judicial resolution.

Next, the Court of Appeals considered whether there was a lack of judicially discoverable and manageable standards that could be applied to resolve the case. The court had little trouble finding that this factor was implicated:

The court then held that the last four factors – which it deemed the "prudential considerations" – also weighed in favor of dismissal. Its analysis of these factors was somewhat brief, and largely consisted of a recap of the considerations it identified in finding the first two factors to be present; the court noted that the executive branch had managed the United States' relationship with OPEC for 35 years, and that any ruling would invariably involve a policy determination "at odds with this longstanding policy of diplomatic engagement" and create a risk of embarrassing the executive. Having found, therefore, that all six Baker factors weighed in favor of dismissal, the Court of Appeals concluded that the retailers' claim presented nonjusticiable political questions and was required to be dismissed for lack of subject matter jurisdiction.

While finding that it was not required to do so – since its ruling that subject matter jurisdiction was lacking disposed of the case in its entirety – the Court of Appeals nonetheless addressed the producers' act of state defense and the district court's ruling on that defense. The act of state doctrine operates in a manner similar to the political question doctrine, though unlike the political question doctrine it applies only to the acts of foreign states. As the Court of Appeals explained, the act of state doctrine provides that "the courts of one country will not sit in judgment on the acts of the government of another, done within its own territory." Like the political question doctrine, this rule is rooted in concerns for the separation of powers and is designed to prevent the judiciary from wading into matters generally allocated to the political branches. Noting that the Supreme Court had held previously that the allocation of natural resources is an inherently sovereign (as opposed to commercial) function, and again recapping the considerations it identified in finding that the case presented political questions, the court concluded that the case would require the courts to wade "brazenly into the sphere of foreign relations," and thus found it barred by the act of state doctrine.

The Fifth Circuit's ruling in Spectrum Stores is significant. While most political question cases involve direct challenges to actions by U.S. government officials, the Fifth Circuit's ruling has the effect of immunizing foreign actors for alleged violations of U.S. law on the grounds that (a) the unlawful acts were orchestrated by sovereign entities, and (b) the political branches have decided to tolerate the allegedly unlawful acts or to address them diplomatically. This is clearly distinct from the typical situation in which the political question doctrine has been applied.

Furthermore, the rationale underlying the court's decision can easily be viewed as the foundation for a broader rule providing that commercial conduct by state-owned enterprises lies beyond the reach of U.S. courts. Particularly where the Fifth Circuit held that "exploitation of natural resources is an inherently sovereign function," the court's rule could be expanded to bar suits involving mining, automobiles, steel, non-petroleum energy exploitation, agriculture, or any other number of basic industries characterized by a high degree of involvement by foreign states on the one hand, and regulation by U.S. government agencies on the other. The ruling could also expand substantially the ability of state-owned corporations to avoid the jurisdiction of U.S. courts, as the political question and act of state doctrines, as applied by the Fifth Circuit in Spectrum Stores, can easily be seen as providing a jurisdictional shield for commercial activity that would not exist under the Foreign Sovereign Immunities Act, which affords states and state-owned enterprises jurisdictional immunity in connection with governmental acts, but not commercial acts. While it is reasonable to expect that Spectrum Stores will be limited to its facts and/or to suits involving OPEC, the logic of the decision could apply to a far broader class of disputes. It will be interesting to see the extent to which litigants attempt to use it in this fashion, and how U.S. courts will react to such attempts.

Contempt Against Sovereigns for Discovery Abuse: FG Hemisphere Assoc. v. Dem. Rep. of Congo, ___ F.3d ___, 2011 WL 871174 (D.C. Cir. Mar. 15, 2011)

FG Hemispheres – a case arising out of a dispute that is well known to courts around the world – addressed the question of whether a sovereign state may be sanctioned by a U.S. court for discovery misconduct. FG Hemispheres arose out of Congo's breach of a credit agreement. FG Hemispheres took its claim to arbitration; Congo did not appear. FG Hemispheres then sought to enforce the resulting arbitration award in the United States; again Congo did not appear (though it eventually did so following the issuance of a default judgment). Following issuance of the default judgment, FG Hemispheres propounded discovery in aid of execution. Congo failed to respond to the discovery, and when the district court issued an order compelling it to provide discovery concerning two categories of assets, it largely ignored that order as well. Two years after ordering Congo to provide discovery, the district court entered an order of contempt against Congo, providing that Congo would be required to pay a fine, payable to FG Hemispheres, of $5,000 per week, doubling every four weeks until reaching a maximum of $80,000 per week until Congo satisfied its discovery obligations. Congo – joined by the United States as amicus curie – appealed, arguing that the district court lacked authority under the Foreign Sovereign Immunities Act to impose contempt sanctions on a foreign state.

The Court of Appeals, viewing the case as one of first impression in the D.C. Circuit, disagreed with Congo and affirmed the contempt and sanctions order. In doing so, the Court of Appeals agreed with the U.S. Court of Appeals for the Seventh Circuit, which held in a 2007 decision that "there is not a smidgen of indication in the text of the FSIA that Congress intended to limit a federal court's inherent contempt power."¹⁷

While the D.C. Circuit clearly took pains to limit the scope of its ruling – noting that "[w]e hold today only that the FSIA does not abrogate a court's inherent power to impose contempt sanctions on a foreign sovereign, and that the district court did not abuse its discretion in doing so here" – FG Hemispheres is noteworthy for its discussion of the manner in which federal discovery rules apply to foreign states. Not infrequently, foreign states – perhaps emboldened by the general principle that is often stated by federal courts confronted with contested claims of immunity under the FSIA, that discovery against sovereigns must be undertaken in a more circumspect and careful manner than in cases involving private parties – are unwilling to provide discovery of the kind contemplated by the federal rules.¹⁸ The Court of Appeals, however, reviewed the FSIA's legislative history and determined that Congress did not "attempt to deal with questions of discovery" in the FSIA, finding that "[e]xisting law appears to be adequate in this area," and further that Congress specifically contemplated that contempt sanctions would be available in cases under the FSIA to remedy discovery violations.¹⁹ FG Hemispheres thus underscores the basic, if oft-forgotten or overlooked, proposition that foreign states (particularly those who, by virtue of a waiver or other exception from the FSIA's immunities, have been found to be subject to a court's jurisdiction) are generally required to litigate by the same rules as private parties, and that they may be sanctioned if they refuse to do so.

Stay of Proceedings to Confirm Foreign Arbitral Award Under Inter-American Convention: DRC, Inc. v. Rep. of Honduras, ___ F. Supp. 2d ___, 2011 WL 1118472 (D.D.C. Mar. 28, 2011)

DRC v. Honduras, a case involving an award creditor's attempt to obtain recognition of a Honduran arbitral award in the United States, addresses important issues of comity which should be heeded by any party seeking to enforce a foreign arbitration award in the United States. The case arose out of construction contracts between DRC and FHIS, an instrumentality of the Honduran government. DRC, alleging non-payment of various amounts under the construction contracts, commenced arbitration against FHIS in 2009, and was ultimately awarded over $51,000,000 on its claim. Two months after the award was handed down, DRC commenced an action in the courts of Honduras to confirm the award. Following the commencement of this action, the parties engaged in settlement negotiations, prompting DRC to request a "temporary suspension" of the enforcement action; FHIS agreed to a suspension provided it would not exceed 60 days, whereupon the court granted it "under the conditions and reservations made" by FHIS.

Two months after commencing the Honduran action, but prior to seeking the suspension, DRC filed an enforcement action in the U.S. District Court for the District of Columbia pursuant to the Inter- American Convention on International Commercial Arbitration (the "Panama Convention"), which governs the enforcement of foreign arbitral awards rendered in the Americas.²⁰

In response, Honduras moved, inter alia, for a stay of enforcement in the United States pending the conclusion of the Honduran enforcement proceedings. Honduras' motion sought to stay the U.S. enforcement action in favor of three prior-filed, related actions: (1) a fraud action brought by the United States against DRC; (2) an action brought by DRC against the U.S. Agency for International Development, which DRC claimed was obligated in connection with the same non-payment for which it commenced arbitration against FHIS; and (3) the Honduras enforcement action. While noting that courts in the D.C. Circuit had "not yet had occasion to offer much guidance regarding the manner in which a district court should 'postpone' a case" brought under the Panama Convention, the district court applied a six-factor test developed by the Second Circuit under the rubric of Article VI of the New York Convention (which, like Article VI of the Panama Convention, affords courts discretion to stay enforcement proceedings).²¹ The six factors that courts are required to consider in determining whether to defer to foreign proceedings are:

• the general objectives of arbitration (i.e., the expeditious resolution of disputes and the avoidance of protracted and expensive litigation);
• the status of the foreign proceedings and the estimated time for their completion;
• whether the award sought to be enforced will receive greater scrutiny in the foreign proceeding under a less deferential standard of review;
• the characteristics of the foreign proceeding, including whether they were brought to enforce (rather than set aside) the award, whether the proceeding was commenced prior to the action sought to be stayed, whether the proceeding was commenced by the party seeking to enforced the award in the U.S., and whether circumstances suggested that the foreign proceedings were commenced with an intent of delaying the resolution of the dispute;
• a balancing of the relative hardships; and
• any other relevant circumstances.²²

The district court found that the "factors weigh in favor of a stay," though a review of the court's analysis suggests that the court focused on the fourth factor and ruled on the basis of that factor alone. Specifically, the court observed that DRC commenced the Honduran proceeding, and that that proceeding was commenced before the U.S. proceeding was filed. The court held that this sequence of events raised concerns about international comity; because it was DRC that commenced the Honduran action, it held that the "possibility of conflicting results and the consequent offense to international comity can be laid at plaintiff's door." Based on its consideration of the fourth factor, the Court found "that it would be 'acting improvidently by enforcing the award prior to the completion of the foreign proceedings' in Honduras," and stayed the case. It concluded by observing that:

One of the significant features of the New York Convention is the fact that it expressly contemplates and permits a party to bring multiple enforcement proceedings simultaneously; this is one of the ways in which the New York Convention achieves its central policy of ensuring that arbitral awards will promptly enforced, and lengthy litigation avoided. The DRC court does not seem to have addressed that policy point, despite the fact that it is included among the factors that Europcar identified. DRC should, therefore, serve as a caution to any party contemplating bringing proceedings to enforce a foreign arbitral award, as DRC stands for the proposition that an enforcing party's commencement of an enforcement proceeding at the arbitral seat may result in an inability to prosecute an enforcement proceeding in the U.S. courts for so long as the action at the seat remains pending. When the courts of the arbitral venue do not have a strong record with respect to the enforcement of arbitral awards, this can become a particularly acute problem, since a U.S. court's entry of a stay would assure that the foreign court would rule first. If the foreign court were to annul the award while the U.S. proceedings were stayed, enforcement would become much more difficult, since both the Panama and New York Conventions include annulment by a primary jurisdiction's court as a ground for non-recognition.

Footnotes

1 The latter form of relief, known in New York parlance as a "turnover" order, is governed by Section 5225 of the New York Civil Practice Law and Rules. Fed. R. Civ. P. 69(a) provides that state law governs proceedings to enforce a federal court judgment, so long as no federal statute applies.

2 12 N.Y.3d 533 (2009).

3 In Koehler, the plaintiff obtained a judgment against a Bermuda resident, which he then registered in the Southern District of New York, where he sought to enforce the judgment through a turnover petition directed to the Bank of Bermuda Limited ("BBL"), which held stock certificates owned by the judgment debtor. BBL argued that a New York court could not lawfully order a party, other than the judgment debtor himself, to deliver assets into New York, even if the court had personal jurisdiction over the party. The New York Court of Appeals disagreed, distinguishing postjudgment enforcement from prejudgment attachment, which is based on a court's jurisdiction over the property being attached. The Court reasoned that when a judgment debtor is subject to a New York court's personal jurisdiction, "that court has jurisdiction to order the judgment debtor to bring property into the state, because the court's authority is based on its personal jurisdiction over the judgment debtor," id. at 540, and thus concluded that a postjudgment enforcement proceeding under CPLR Article 52 requires only personal jurisdiction over the judgment debtor. "Bearing in mind the fundamental differences between enforcement and attachment discussed above," the Court further held that "a New York court with personal jurisdiction over a defendant may order him to turn over out-of-state property regardless of whether the defendant is a judgment debtor or a garnishee." Id. at 541. For a full discussion of Koehler, see Pratt's Journal of Bankruptcy Law, vol. 5, no. 5, at 433 (2009).

4 116 F.R.D. 517 (S.D.N.Y. 1987). Minpeco held that where two states have jurisdiction to prescribe and enforce rules and enforcement by each state of its rule could require inconsistent conduct on a party, each state is required by international law to consider moderating the application of its law, with reference to (a) the vital national interests of each state, (b) the extent and nature of any hardship that the inconsistent obligations could impose, (c) the extent to which the required conduct is to take place in the territory of the other state, (d) the nationality of the person, and (e) the extent to which enforcement by either state can be expected to achieve compliance with that state's rule. Minpeco, 116 F.R.D. at 526-27.

5 The court also rejected, in a rather cursory and straightforward fashion, Commerzbank's forum non conveniens claim. While noting that some commentators who have objected to Koehler on policy grounds have suggested that the robust application of the forum non conveniens doctrine might be a good way to temper Koehler's effect, it found that none of the factors typically present in a successful forum non conveniens challenge were present: JJS commenced the case by filing a lawsuit in Oklahoma, and the New York proceedings were designed to enforce that Oklahoma judgment. Those facts, coupled with the fact that JW is an American company, fatally undermined Commerzbank's forum argument.

6 There is disagreement among lower courts about Koehler's impact on the separate entity rule. A New York state trial court recently came to a different conclusion than the district court in JW Oilfield, noting that Koehler did not specifically address the doctrine and also that Koehler was distinguishable on the ground that Bank of Bermuda, the garnishee in that case, had consented to jurisdiction. See Samsun Logix Corp. v. Bank of China, 2011 WL 1935954 (N.Y. Sup. Ct. May 12, 2011). The Samsun court also noted that post-Koehler decisions of both state and federal courts had alluded to the separate entity rule as a viable doctrine, though the court's reliance on those cases for the proposition that the separate entity rule continues to be viable in the post-judgment context after Koehler is highly questionable, as none of those decisions involved post-judgment turnover proceedings. The case principally relied upon by the Samsun court, Allied Maritime, Inc. v. Descatrade SA, 620 F.3d 70 (2d Cir. 2010), concerned pre-judgment maritime attachments, and thus has no bearing upon the continued applicability of the separate entity rule to post-judgment attachment. Likewise, John Wiley & Sons, Inc. v. Kirtsaeng, 2009 WL 3003242 (S.D.N.Y. Sept. 15, 2009) concerned whether contempt should be imposed as a result of a bank's having permitted a party withdraw funds in violation of a prejudgment attachment; while the court relied upon the separate entity rule in holding that the withdrawal of funds from a California account did not violate a prejudgment attachment order served on a New York branch of the same bank, the case did not implicate Koehler or its holding that a court's personal jurisdiction over a bank authorizes the court to order the bank to deliver funds in its possession to New York for purposes of turning them over to a judgment creditor. The last case, Levin v. Bank of New York, 2011 WL 812032 (S.D.N.Y. Mar. 4, 2011), did involve a post-judgment turnover proceeding, and the district court in that case found that service of a writ of attachment on the garnishee bank's Maryland branch was ineffective as to funds held in the bank's New York branch. The district court's decision in Levin, however, contains no mention of Koehler, suggesting that the parties seeking turnover in that case never raised the issue. In sum, the Samsun court's analysis fails to appreciate the legal basis underlying the Court of Appeals' decision in Koehler, and appears to have erroneously conflated the rules governing attachment (which largely operates as an in rem remedy) with the in personam authority exercised in Koehler. While further decisions will surely explore Koehler's effect on the separate entity rule, the JW Oilfield court's analysis reflected a proper reconciliation of Koehler's effect on that doctrine.

7 364 F.3d 274 (5th Cir.), cert. denied, 125 S. Ct. 59 (2004).

8 552 U.S. 576 (2008).

9 StayCurrent has closely followed recent cases that have considered whether the "manifest disregard" doctrine – which had long been understood as a judicially-created ground upon which a court could refuse to recognize an arbitral award – survived the Supreme Court's decision in Hall Street, in which the Supreme Court held that the grounds for nonrecognition set forth in Section 10 of the Federal Arbitration Act are exclusive. The Supreme Court has now refused to reach the issue in two separate cases, (see Stolt-Nielsen S.A. v. AnimalFeeds International Corp., 130 S.Ct. 1758, 1768 n.3 (2010) ("We do not decide whether 'manifest disregard' survives our decision in [Hall Street].") ; Lagstein v. Certain Underwriters at Lloyd's, London, 607 F.3d 634 (9th Cir. 2010), cert. denied, 131 S.Ct. 832 (2010)) leaving in place the current consensus among the circuits that the doctrine, while not independently cognizable, continues to exist as a "gloss" on Section 10(a)(4) of the FAA.

10 939 F. Supp. 907 (D.D.C. 1996).

11 The court, taking note of the D.C. Circuit's decision in TermoRio S.A. v. Electranta S.P., 487 F.3d 928 (D.C. Cir. 2007), questioned whether Chromalloy remains good law. Chromalloy, while a district court decision, is well-known within the arbitration community, as it stands as the leading decision supporting the proposition that a U.S. court may enforce an arbitration award under the New York Convention even where that award has been annulled or set aside by a court in the primary jurisdiction. While it remains an open question whether Chromalloy has been abrogated, the DynCorp court's questioning of that decision's continued vitality likely previews an issue that is likely to recur in future cases and be the subject of extensive comment among arbitration practitioners; while somewhat collateral to the main issues in the case, the DynCorp court's statement concerning Chromalloy is clearly one of the most significant aspects of the decision.

12 The court, quoting a New York district court, rejected the notion that an award's mere inconsistency with a U.S. statute is tantamount to a violation of public policy, and that "[a]ll laws, be they procedural or substantive, are founded on strong policy considerations. Yet not all laws represent this country's 'most basic notions of morality and justice.' Were it otherwise, the Convention's public policy exception would eviscerate the very goal of the Convention as a whole – to encourage the recognition and enforcement of commercial arbitration agreements." Rep. of Argentina, 2011 WL 182138, at *7-8 (quoting A. Halcoussis Shp'g Ltd. v. Golden Eagle Liberia Ltd., 1989 WL 115941, at *2 (S.D.N.Y. Sept. 27, 1989)).

13 The Court of Appeals noted that the political question doctrine necessarily implicated subject matter jurisdiction because it involved "the concept of justiciability" and "the jurisdictional limitations imposed upon federal courts by the 'case or controversy' requirement of Article III."

14 Id., at 949 (quoting Baker v. Carr, 369 U.S. 186, 217 (1962)).

15 Id. (quoting Baker, 369 U.S. at 211-12).

16 478 U.S. 221 (1986).

17 FG Hemispheres, 2011 WL 871174, at *3 (citing Autotech Techs. v. Integral Research & Dev., 499 F.3d 737, 744 (7th Cir. 2007)).

18 The conduct at issue in FG Hemispheres, while an unusually stark example of a sovereign's reluctance to provide discovery, is by no means an unprecedented, or even a rare case. See, e.g., Kensington Intern. Ltd. v. Republic of Congo, 461 F.3d 238, 244 (2d Cir. 2006) (affirming district court's order of prejudgment attachment of sovereign debtor's assets despite not being able to identify which assets were non-immune, as such identification was defendant's burden which defendant failed to satisfy by refusing to provide any discovery regarding its assets); Export-Import Bank of Republic of China v. Grenada, No. 06 Civ. 2469, 2010 WL 5463876, at *5 (S.D.N.Y. Dec. 29, 2010) (finding sanctions appropriate against foreign sovereign that expressly waived immunity for failing to comply with plaintiff's discovery requests by refusing to provide any information that would aid plaintiff in ascertaining the existence of executable funds). 19 FG Hemispheres, 2011 WL 871174, at *3 (citing H.R. Rep. No. 94-1487, at 23 (1976)).

20 1438 U.N.T.S. 248, codified at 9 U.S.C. § 301 et seq. Specifically, the Panama Convention (as opposed to the New York Convention, which in most cases would apply as well) applies in cases where (a) a majority of parties to the arbitration agreement at issue are citizens of a state or states that have ratified the Convention and that are member states of the Organization of American States. See 9 U.S.C. § 305(2).

21 The Court noted the well-settled principle that the New York and Panama Conventions "are intended to achieve the same results." DRC, 2011 WL 1118472, at *6 (quoting Energy Transp. Ltd. v. M.S. San Sebastian, 348 F. Supp.2d 186, 198 (S.D.N.Y. 2004)).

22 Id., at *7 (quoting Europcar Italia S.p.A. v. Maiellano Tours, Inc., 156 F.3d 310, 317 (2d Cir. 1998)).

23 Id., at *8 (citing Europcar, 156 F.3d at 317 (2d Cir. 1998)).

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