The US remains a stable environment for commercial arbitration award enforcement

March 2020 | SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

March 2020 Issue

As indicated by recent US court decisions, the US remains a stable and attractive forum for enforcing foreign and domestic commercial arbitration awards. Barring only narrowly defined exceptions, US courts will consistently enforce commercial arbitration awards as a final judgment when there is a written agreement to arbitrate.

Commercial arbitration award enforcement basics

Consistent with the 1985 UNCITRAL Model Law on International Commercial Arbitration and pursuant to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), US courts should enforce arbitration awards, subject only to certain narrow exceptions. The New York Convention has been enacted into US federal law through the Federal Arbitration Act (FAA).

To enforce a commercial arbitration award in US courts, the winning party should present an authentic copy of the award to a court of competent jurisdiction. In US federal court, arbitration awards are “presumed to be confirmable”, and the burden of proving a basis for non-recognition rests on the party opposing enforcement.

US federal law is traditionally favourable to enforcement of arbitration awards and has consistently held that the New York Convention’s Article V enforcement exceptions are to be narrowly construed. In a recent Florida District Court case, De Rendon v. Ventura, the federal court rejected an award enforcement challenge while emphasising “its ‘extremely limited’ review of arbitral awards” and “the powerful presumption that the arbitral body acted within its powers”.

Pursuant to New York Convention, Art. V, a court can refuse to recognise an award only if: (i) the arbitration agreement was invalid; (ii) the “party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case;” (iii) the award “deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration”; (iv) the composition of the arbitral body or the arbitral procedure was not in accordance with the agreement of the parties, or failing such agreement, was not in accordance with the law of the country where the arbitration took place; (v) the award “has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made”; (vi) the “subject matter” of the dispute is not “capable of settlement by arbitration” under that country’s law; or (vii) award enforcement would be contrary to “public policy”.

Using the public policy exception as an example of just how narrowly US federal courts construe the New York Convention’s Article V enforcement exceptions, courts have held that enforcement may be denied on that basis only where it would “violate the forum state’s most basic notions of morality and justice”. Similarly, in a recent New Jersey District Court decision, KG Schifffahrtsgesellschaft MS Pacific Winter MBH & CO. v. Safesea Transport, Inc., the federal court rejected an enforcement challenge while noting that “courts have strictly applied the Article V defences and generally view them narrowly”, and that “the Convention does not sanction the second guessing of an arbitrator’s interpretation of the parties’ agreement as this type of judicial review frustrates the basic purpose of arbitration”.

Recent successful award enforcement challenges

Given the limited basis available for non-enforcement, and US federal courts’ predisposition in favour of enforcement, more often than not, enforcement challenges fail. As illustrated in two recent cases, however, there are limits to US federal courts’ presumptive pro-arbitration stance.

Al-Qarqani v. Chevron Corporation. In this case, a Saudi Arabian sought to enforce an arbitral award that had been rendered against two US Chevron affiliates, among others, purportedly under the auspices of the International Arbitration Centre in Cairo, Egypt. In response to the petition, the US affiliates argued that: “[T]he Award was the product of sham proceedings engineered to produce an award in Petitioners’ favor, that there was never an agreement to arbitrate between the Petitioners and Respondents, that the arbitral proceedings violated the plain terms of the arbitration agreement the tribunal purported to rely upon, that the claims fell outside the arbitral agreement, and that the arbitral process was riddled with gross irregularities and criminal misconduct.”

In refusing enforcement because of the lack of a valid agreement to arbitrate, the California District Court noted that the sole basis for arbitration had been a 1933 concession agreement between the government of Saudi Arabia and a Standard Oil affiliate. Because the Saudi claimants had never been parties to the 1933 concession, the federal court found that they could not invoke the arbitration clause against Chevron.

Monster Energy Co. v. City Bevs., LLC. The limits of the US federal courts’ pro-arbitration stance is further illustrated by a recent domestic award enforcement decision. In Monster Energy Co. v. City Bevs., LLC, the Ninth Circuit refused to enforce an award and held that arbitrators must disclose: (i) the arbitrator’s ownership interest, if any, in the entity under whose auspices the arbitration is conducted; and (ii) whether the entity under whose auspices the arbitration is conducted and one or more of the parties were previously engaged in nontrivial business dealings.

The arbitration in Monster Energy Co. arose out of Monster Energy Co.’s termination of its distribution agreement with City Beverages, LLC d.b.a. Olympic Eagle Distributing. The agreed-upon JAMS arbitrator provided a multipage disclosure statement that disclosed his previous arbitrations with Monster and stated: “I practice in association with JAMS. Each JAMS neutral, including me, has an economic interest in the overall financial success of JAMS. In addition, because of the nature and size of JAMS, the parties should assume that one or more of the other neutrals who practice with JAMS has participated in an arbitration, mediation or other dispute resolution proceeding with the parties, counsel or insurers in this case and may do so in the future.”

However, it was later revealed that the arbitrator was biased in favour of Monster because the arbitrator was a co-owner of JAMS and JAMS had administered 97 arbitrations for Monster over the past five years. Monster claimed that Olympic had waived any claims of arbitrator partiality, and, alternatively, that the arbitrator’s disclosures were sufficient. Olympic petitioned to vacate the award. The district court confirmed the award and Olympic appealed.

The Ninth Circuit acknowledged its authority to vacate an arbitration award “where there was evident partiality... in the arbitrators”. It rejected Monster’s assertion that Olympic had waived its claim of arbitrator partiality, because Olympic did not have constructive knowledge of the arbitrator’s bias. The arbitrator’s “partial disclosure” omitted “the crucial fact” that the arbitrator has an ownership interest in JAMS, which distinguished him from other JAMS neutrals with an interest in the “overall financial success of JAMS”. According to the court, the arbitrator’s evident partiality justified vacating the award because: (i) the arbitrator’s ownership interest is substantial – his ownership interest, which entitles him to a portion of the profits for all of JAMS’s arbitrations, greatly exceeds the general economic interest of all other JAMS neutrals; and (ii) the rate of arbitration between JAMS and Monster (97 arbitrations in five years) is evidence of a non-trivial business relationship.

The exceptions prove the rule

While examples of successful enforcement challenges exist in US federal courts, they tend to represent relatively egregious examples of the New York Convention’s narrow enforcement exceptions. The vast majority of arbitral award enforcement challenges fail, and US federal court remains a predictably pro-arbitration forum. Neither of these cases discussed above indicate a trend against enforcement of commercial awards generally. But they do illustrate the US federal court’s insistence that basic requirements be met, including the existence of a valid arbitration agreement and the absence of substantial procedural fairness issues.

Sarah Reynolds is a partner at Mayer Brown LLP. She can be contacted on +1 (312) 701 7644 or by email: sreynolds@mayerbrown.com.

Sarah Reynolds

Mayer Brown LLP