Awards: Early Stage Consideration of Enforcement Issues

We have yet to meet a client who is happy incurring costs to obtain an award they cannot enforce.

Identification of possible issues

By its very nature, an arbitration will invariably arise under an arbitration agreement between the parties.

Save for ad hoc arbitrations, the starting point will most likely be that you are in an arbitration with a counterparty with whom you have had a relationship, whether contractual or otherwise. No matter how much control you had over the relationship during the period of that relationship, for example a contract for a limited period, when it comes to arbitrating any dispute arising under the contract, you are immediately talking about a longer timescale.

Therefore, even if you enter into your contract on the basis that your counterparty is ‘good for the money’ for the period of the contract, have you thought about where things will be in, say, one or two years when a possibly protracted and complicated arbitration process has been concluded?

• Will your counterparty even exist when you come to enforce any award?
• What assets does your counterparty have?
• Where are they located?
• Is that location one in which enforcement of an award is easy, or even possible?
• Where will you locate the seat of your arbitration?
• Does the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the New York Convention) even apply in the most natural seat or forum?
• What disputes can you reasonably anticipate?
• Which law will be most advantageous to you?

Depending on whether you are likely to enforce under the New York Convention or under a bilateral or multilateral treaty, you also need to consider what the requirements for enforcement will be.

The New York Convention helpfully sets out an exhaustive list of grounds^[2] under which the recognition and enforcement of Convention awards can be refused; this has been implemented in England and Wales under Section 103 of the Arbitration Act (International Investment Disputes) 1996. The New York Convention grounds go to the heart of the procedural and structural integrity of the award, including, for example, that the award deals with matters outside the scope of the submission to arbitrate.

None of the grounds require or allow the court to investigate the merits of the dispute that is the subject of the award. In practice, courts are careful not to be drawn into a review of the merits of the award in challenges to enforcement. Some examples are as follows:

• The parties to the agreement were under some incapacity, or the agreement is not valid under the law to which the parties have subjected it.
• The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings.
• The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration.
• The composition of the arbitral authority was not in accordance with the agreement of the parties.
• The award has not yet become binding on the parties, or has been set aside or suspended.

Note that the New York Convention also provides that its provisions do not ‘deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law of the treaties of the country where such award is sought to be relied upon’.^[3]

This means that domestic rules relating to the recognition and enforcement of foreign awards that are more favourable than those set out in the New York Convention can be applied, and so the enforceability of an award will vary between signatories.

In the United Kingdom, foreign awards from countries that are not party to the New York Convention continue to be enforced under Section 37 of the Arbitration Act 1950.^[4] The United Kingdom is also a party to the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927 and has enacted:

• the Foreign Judgments (Reciprocal Enforcement) Act 1933, which provides for the enforcement of judgments and arbitral awards from specified former Commonwealth countries; and
• the Arbitration (International Investment Disputes) Act 1966, which provides for the recognition and enforcement of International Centre for Settlement of Investment Disputes (ICSID) awards pursuant to the ICSID Convention.

Contract drafting considerations

Parties usually turn their minds to enforcement only after an award is obtained, but that is often too late. Parties should begin to think strategically about the ultimate enforcement of awards at the contract drafting stage.

First, the choice of seat of the arbitration will be of fundamental importance:

[I]f the parties explicitly choose the seat of arbitration, their agreement can have a real basis in the expectations of the parties regarding the potential future enforcement of the arbitral award in a particular state, including the possibility of applying international treaties, whether bilateral or multilateral, or the existence of reciprocal relations between the state where the award was made and the state of enforcement, etc.^[5]

Standards differ as to the grounds for challenging arbitral awards, even among New York Convention contracting states. As noted above, under the Convention (Article V(1)(e)), one of the potential grounds for non-enforcement of an award is that the award has been set aside by the courts at the place of the arbitration. If the parties choose a seat that, for example, will be hostile to a non-national or where the courts are likely to second guess the arbitrators, the parties increase the risk that their award may be unenforceable anywhere.

Under the law of England and Wales, an award is to be treated as if it were made at the seat of the arbitration, regardless of where it was signed, from where it was dispatched or to where it was delivered.^[6]

The seat of arbitration need not be the same country as the hearing venue (though, in practice, it often is) and need not correspond with the law applicable to the substantive dispute. Agreement on the seat of arbitration outside the domicile of the parties can also be influenced by considerations regarding the potential future enforcement of the award.

If the award is made in a New York Convention contracting state and the assets are also located in a New York Convention state, then it should be straightforward to enforce.

Further, Article III of the Convention provides that contracting states ‘shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon’. This allows the courts of contracting states to follow their own procedural rules in enforcement proceedings, which can result in additional requirements beyond those expressly stipulated in the Convention. Accordingly, parties should try to anticipate the jurisdictions in which enforcement will be sought and plan accordingly.

For example, if enforcement is likely to be sought in the United States, it is generally advisable to include language indicating that ‘judgment upon any award rendered by the arbitrators may be entered by any court having jurisdiction thereof’. The US Federal Arbitration Act (FAA) provides that if the parties ‘in their agreement have agreed that a judgment of the court shall be entered upon the award’, then the courts may confirm the award.^[7] Although some US courts have held that a clause providing for consent to the entry of judgment clause is not required in the context of an international contract governed by the New York Convention, it is advisable nonetheless to include such a clause.

Parties should also avoid including provisions in the arbitration agreement that will impede the enforcement process. For example, US courts have grappled with the matter of whether parties can expand or narrow judicial review of the award during the enforcement stage. Including this type of provision in the agreement can unnecessarily delay enforcement proceedings with court challenges.

Other clauses that could unnecessarily delay satisfaction of the award include imposing specific arbitrator qualifications or limited periods within which the arbitration must be completed. If these clauses are not complied with, they can create grounds for challenge by the losing party. If a clause is necessary, careful consideration should be given to drafting it.

Finally, contracting with sovereign entities can raise additional challenges. The arbitration clause should ideally include a broad waiver of immunity, including both pre- and post-judgment attachment of assets. Moreover, if contracting with an agency or instrumentality of a sovereign state, research should be undertaken to determine whether the national law of the agency or instrumentality imposes specific requirements regarding approvals that must be obtained prior to entering into the arbitration agreement or whether there are any restrictions on the ability of that entity to arbitrate a future dispute.

Enforcement due diligence

Although the expectation may (and even should) be that any arbitration award will be honoured, the reality is that even the best counterparty may be unable or unwilling to effect payment. It is easy to see, therefore, from the example of the United Kingdom discussed above, the complexity of the issue. The key point is to determine what assets your counterparty has and where they are located. You can then determine what the requirements are for enforcement in that jurisdiction.

But do not lose sight of the need to ensure that, assuming, say, you are enforcing under the New York Convention, there are no grounds on which enforcement can be refused. A few examples are considered below.

Notice of appointment

Was proper notice of the appointment of the arbitrator, or of the proceedings, given? To the right person, in the right form and in the correct manner?

You will need to look at the arbitration agreement and consider any applicable institutional rules, as well as the rules of the arbitral seat and all relevant facts.

Opportunity to present case

Did the party against whom an award was given have an opportunity to present its case?

We have run arbitration hearings before panels of three arbitrators to obtain an award so that there can be no suggestion that there was any impropriety, and have then gone on to enforce the award under the New York Convention. The test is not whether the person failed to attend, but whether, for reasons outside their control, they were unable to present their case.

Location of assets

Once you know where the assets are located, obtain local advice on how the award will be enforced before commencing proceedings. Also, check what those assets are: we were informed in a particular matter about a prospective client who sought to enforce an award in a foreign jurisdiction. The property they had been advised of was only rented, and they were reduced to removing and selling office furniture – that may be why they are looking for new legal representation.

Alternatives to traditional enforcement

Arbitration awards are not self-executing. If the award debtor does not voluntarily pay, judicial enforcement is required. The New York Convention provides the overall enforcement mechanism for such an award as well as the grounds on which an award can be refused recognition and enforcement.

However, under certain circumstances, an award debtor may be better served by seeking recognition of a foreign judgment (i.e., an award confirmed at the seat and converted into judgment), rather than the award itself. For example, in the United States, courts have required personal jurisdiction over the defendant or the presence of a defendant’s assets as a prerequisite to bringing an enforcement action under the New York Convention.^[8] Additionally, although courts have held that having assets in the jurisdiction is enough for establishing in rem or quasi in rem jurisdiction, some courts have concluded that a mere ‘good faith’ belief as to the existence of assets in a particular jurisdiction is not enough.^[9]

In contrast, some US courts have concluded that establishing personal jurisdiction over a judgment debtor is not required as a prerequisite to enforcing a foreign judgment.^[10] Even if one cannot locate assets of the debtor in the United States at the time the judgment is sought, there are advantages to having a judgment in the United States. Discovery is a critical part of an enforcement strategy, as noted above. US states generally provide for broad discovery in aid of judgment enforcement, which can provide leverage for enforcement efforts in other jurisdictions. Although perhaps not as broad as in the United States, other countries likewise provide mechanisms for the disclosure of information in connection with judgment enforcement proceedings.

Another consideration in favour of enforcing a judgment as opposed to an award includes a potentially longer statute of limitations.

In the United States, for example, Section 207 of the FAA provides that a party seeking confirmation of an arbitral award under the New York Convention must apply within three years of the date of the award. Although the statute of limitations for the enforcement of a foreign judgment varies by state, that period is often longer than three years and can be as long as 20 years in some jurisdictions.^[11] Accordingly, consideration should be given as to whether it is appropriate to turn an award into a judgment at the seat of the arbitration and then enforce the judgment in that country.

Ways to monetise an award without enforcement

Outside the New York Convention or bilateral and multilateral treaty regimes, the successful party may struggle to enforce its award and so may need to consider how best to monetise the award without ‘enforcement’, as the term is generally understood. The following is a non-exhaustive summary of options that may be available.

Obtain security for your claim before or after you commence proceedings, but in any event, before you obtain your award. In the shipping context, we do this by using the admiralty procedures to arrest an asset of the owner (e.g., a vessel) or time charterer (e.g., bunkers) to obtain security by way of a bank guarantee, P&I club letter or payment into escrow.

Consider also whether you have a right of lien under your contract over any asset of your counterpart.

Certain jurisdictions allow you to attach bank accounts, even before proceedings are commenced: the Dutch Arbitration Act contains a number of provisions pertaining to foreign arbitrations before an application for enforcement is made, for instance in respect of the ability to apply for the attachment of assets to satisfy a foreign arbitral award before the arbitration is initiated. Even jurisdictions such as Switzerland will attach bank accounts once an award is obtained.

Do not think that just because you have an award, it is too late to negotiate. If you are able, for example, to promise mutually beneficial commercial terms to the party against whom you have the award, they may still be willing to pay a good proportion of the award even if the circumstances mean they are unable, or unwilling, to pay it in full.

Although not to be confused with security, as discussed above, a freezing injunction obtained at an early stage may be particularly useful if a party wishes to make sure that the respondent has sufficient assets to comply with the award, or as a method of securing assets (including overseas assets)^[12] for the enforcement of an award.^[13]

To obtain a freezing injunction, it is necessary to provide evidence that there is a real risk that the award may not be satisfied. The court applies an objective test and considers the effect of the respondent’s actions, not their intent. It has been held that what has to be shown is that ‘there is a real risk that a judgment or award will go unsatisfied, in the sense of a real risk that, unless restrained by injunction, the defendant will dissipate or dispose of his assets other than in the ordinary course of business’.^[14]

As well as freezing injunctions, the courts of England and Wales have power to order the appointment of receivers, including over a respondent’s foreign assets, to help prevent the dissipation of the assets and thereby assist with enforcement of an award against them.^[15]

A judge can also arrange insurance to cover the risk of sovereign default on arbitral awards, thus removing what is often seen as the greatest hurdle associated with funding arbitration in connection with a bilateral investment treaty (i.e., the risk of non-payment by a sovereign state).^[16]

You may be able to claim against a litigation funder. For example, US cotton companies were handed an arbitration award in a dispute against an Indian yarn spinner (Tradeline). A confirmation from a US federal judge required Tradeline to cover the costs incurred by the cotton companies in fighting Tradeline’s unfair competition claims, but Tradeline still did not pay. The claimants mentioned to the federal judge that a litigation funder (Arrowhead), who had been used by their opponent in association with the case, should also be responsible for the judgment and urged the judge to add Arrowhead as a judgment debtor. In support of their request, they submitted that Arrowhead took a chance and backed the defendant (Tradeline). Since Arrowhead must have realised the weakness of Tradeline’s claims, it was argued that it should now suffer some of the consequences for doing so.^[17]

In a shipping context, a party who has obtained a monetary award that remains unsatisfied can still bring an action in rem on the underlying cause of action, there being no bar to a separate claim against the ship.^[18]

Even the threat of enforcement can be enough to obtain payment: in 2016, an ICSID tribunal concluded that Venezuela had breached its investment treaty with Canada by wrongfully ousting Crystallex from an operating contract for a mine containing one of the largest undeveloped gold deposits in the world. Crystallex attempted to enforce the award against Venezuelan assets through litigation in a variety of courts. In those proceedings, a US district court ruled that the Canadian company could seize shares of a subsidiary of Venezuela’s state-owned oil company. Following negotiations, Crystallex agreed to pause enforcement efforts in exchange for Venezuela agreeing to pay the entire award plus interest.^[19]

Thinking outside the box:

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 a 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.
However, 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.^[20]

Shaming may also work (i.e., notifying trade organisations), such as the old practice of posting awards on the Baltic Exchange in London. International arbitration websites are full of news of recent awards being handed down. The issue for awards in England and Wales is confidentiality; however, the same issue does not arise in, for example, the United States, where there is no per se confidentiality of the award absent party agreement.

Risk sharing with third parties

Third-party funding is increasingly important in international arbitration. However, the acceptance of funding varies from country to country. In some jurisdictions, third-party funding is not accepted, while in others, including the United States, it is prevalent. That raises the question: will the courts of a jurisdiction where arbitration funding is disallowed enforce an arbitral award made from another jurisdiction that was funded?

There is not yet a conclusive answer to that. However, as the use of funding continues to grow, undoubtedly this question must be asked whenever a case starts, particularly if enforcement will be sought in a jurisdiction where funding is disallowed.

As has already been mentioned, the grounds for refusing recognition and enforcement of an award are limited. However, to the extent that such a challenge will be brought, the only potentially applicable ground for refusal of enforcement is the public policy ground. As noted, the New York Convention provides that recognition and enforcement of an award may be refused when ‘[t]he recognition or enforcement of the award would be contrary to the public policy of that country’.^[21]

In 2015, the International Bar Association’s Subcommittee on Recognition and Enforcement of Arbitral Awards published a report attempting to define public policy and catalogue its manifestations.^[22] The report found that although public policy is often invoked in challenging an award, its ‘manifestations remain uncommon, and recognition and enforcement of a foreign award are rarely refused under Article V(2)(b)’ of the New York Convention. Indeed, none of the ‘manifestations’ of public policy violations summarised by the report included the existence of a funding.

Arbitral tribunals have been known, depending on the circumstances, to order disclosure of the existence of funding (see, for example, Article 24(l) of the Singapore International Arbitration Centre’s Investment Rules 2017). Even if the existence of funding is disclosed, the terms of the arrangement generally are not. That said, as the existence of third-party funding becomes more prevalent, a diligent party should at the outset analyse the effect of a funded arbitration if enforcement will be sought in a jurisdiction that disallows funding.

The impact of Brexit on enforcement

Compared with other areas of jurisdictional dispute, the impact of Brexit on arbitration is less substantial. Arbitration is excluded from the scope of the Brussels I Regulation, and the United Kingdom’s withdrawal from the European Union will not affect its membership of the New York Convention. Therefore, the enforcement of awards granted in England and Wales in EU Member States, and vice versa, under the provisions of the New York Convention will be unaffected. Arbitration may well be seen as a preferable option for parties seeking to choose a dispute resolution clause that offers a more certain possibility of enforcement.

Notes