ENFORCEMENT AGAINST
A FOREIGN STATE OF AN ARBITRAL AWARD
ANNULLED IN THE FOREIGN STATE
By:
Georges R. Delaume
Washington, D.C.
A recent decision of the District Court for the District of Columbia is the first to: (i) apply the substantive exception to jurisdictional immunity in the Foreign Sovereign Immunities Act of 1976 ("FSIA"), 28 U.S.C. § 1605(A)(6), to assume jurisdiction over a foreign state entity, and (ii) grant recognition to a foreign arbitral award annulled in its country of origin on the basis of U.S. rules, rather than those of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). (In the matter of the Arbitration of Certain Controversies between Chromalloy AeroServices and the Arab Republic of Egypt, D.D.C., Civ. No. 94-2339, July 31, 1996.)
The facts of the case are straightforward. Following the termination by the Government of Egypt (Egypt) of a contract with an American company (CAS) for the provision of parts and maintenance of military helicopters, CAS instituted arbitration proceedings against Egypt pursuant to an arbitration clause providing for the application of Egyptian law and fixing Cairo as the seat of arbitration. An award was rendered and Egypt challenged its validity by bringing annulment proceedings in the Egyptian courts. The courts annulled the award. CAS sought recognition and enforcement of the award in the United States. Egypt objected to recognition "out of deference" for the Egyptian courts.
The first issue facing the District Court concerned jurisdiction. The Court held that it had original jurisdiction under 28 U.S.C. § 1330(a) by applying the immunity exception contained in 28 U.S.C. § 1605(a)(6) which was added to the FSIA in 1988. That exception provides, in relevant part, that a foreign state is not immune from the jurisdiction of U.S. courts when the action is brought to confirm an award "governed by a treaty or other international agreement in force . . . calling for the recognition and enforcement of arbitral awards," in this case the New York Convention (for the history of the events leading to this FSIA amendment, see Kahale, Legislation in the United States Facilitates Enforcement of Arbitral Agreements and Awards Against Foreign States, 6 J. Int'l Arb. (No. 2) 57 (1989)). This exception would have been sufficient to found the Court's jurisdiction. However, the Court also stated that its jurisdiction could also be upheld on the basis of the United States Arbitration giving effect to the New York Convention (9 U.S.C. § 203).
Having positively resolved the jurisdictional issue, the court addressed the question of whether the award should be granted recognition even though it had been annulled in Egypt. This question raised two sub-issues: whether the answer should be sought under the New York Convention, applicable pursuant to Chapter 2, §§ 201 et seq. of the Federal Arbitration Act, or under Chapter 1 of the Act.
To set the issue in proper perspective, it should be recalled that under Article V(1)(e) of the New York Convention, recognition "may be refused" if the award has been "set aside" in the country in which, or under the law of which, the award was made. Thus, if the Convention applied, the Court might have, at its discretion, declined to enforce the award. The provisions of Article V are, however, qualified by those of Article VII of the Convention, according to which the Convention "shall not deprive" a party seeking recognition of an award from doing so on the basis of domestic rules if those are more favorable to recognition than those of the Convention.
In this particular case, this meant that the Court had to compare the provisions of Article V of the Convention with those of § 10 of the Federal Arbitration Act. The court found that under that statute awards are presumed to be binding and can be denied effect only in very limited cases, such as corruption, fraud, partiality, misconduct or excess of power on the part of the arbitrators and, possibly, manifest disregard of the law (a ground of no practical significance in the context of international awards). Since, as a matter of U.S. law, the award was proper, the court granted recognition to the award.
In the absence of earlier judicial pronouncements on the subject, the court's ruling must be regarded as a landmark decision. It is also a decision which creates a bridge between the U.S. rules and those of several European countries regarding the respective domains of the New York Convention and domestic laws.
Thus, for more than a decade, the French Supreme Court has, pursuant to Article VII of the Convention, held that the recognition of foreign awards (including awards annulled in their country of origin) was governed by French law since it was more favorable to recognition than the New York Convention. More recently, the German Supreme Court has followed suit, and in The Netherlands the Arbitration Act of 1986 (Article 1076) now specifically gives a party seeking recognition of a foreign award the option to rely on Dutch law rather than the New York Convention if the Dutch rules are more favorable to recognition.
In those countries and now in the United States, if the Chromalloy decision is followed, the practical implications of domestic rules are apparent. To the extent that those rules are more liberal than those of the New York Convention, they will significantly curtail its application since (i) the award creditor is likely to rely on domestic law rather than the Convention, or (ii) the courts will be under a mandate to apply the lex fori ex oficio if the award creditor fails to invoke it.
These developments contribute to ensuring the binding character of arbitral awards, thereby enhancing their international effectiveness. However, it is only fair to note that the common philosophy which inspires these judicial and statutory developments is not necessarily conducive to uniformity of concrete solutions. The reason is that domestic rules are not always coterminous and that, depending upon the circumstances, they may lead to different solutions. Although not intended to promote competition among potential recognition fora, different domestic rules may provide the award creditors with interesting opportunities to engage in forum shopping.
