Enforcing Arbitration Agreements Amid Multi-Jurisdictional Litigation
Enforcing Arbitration Agreements Amid Multi-Jurisdictional Litigation
Companies that engage in cross-border transactions, while willing to accept some market risks, are usually reluctant to risk becoming embroiled in litigation in their counterparty's home court. For this reason, many international contracts contain dispute resolution clauses in which the parties agree to submit future disputes to arbitration in a neutral venue. Within the Americas, many arbitral institutions are available to administer a dispute, including the International Chamber of Commerce (ICC), the AAA's International Centre for Dispute Resolution (ICDR) and Inter-American Commercial Arbitration Commission (IACAC). Ad hoc arbitrations may take place under the Arbitration Rules of the United Nations Commission for International Trade Law (UNCITRAL), among others. In certain transactions involving sovereigns, the International Centre for Settlement of Investment Disputes (ICSID) may also be available. Whatever the venue, an arbitration agreement offers parties a level of 'forum certainty,' and mitigates the risk of exposure to litigation in a possibly hostile foreign forum. To a certain extent, 'choice-of-court' clauses may achieve some of the same goals but, as discussed below, such clauses lack all of the treaty safeguards enjoyed by arbitration.
All too often, however, parties have different ideas about forum selection when a dispute eventually arises. The phenomenon of 'forum shopping' — of one party launching proceedings in a place other than the agreed forum— is a recurring feature of 'multi-jurisdictional litigation' in the Americas. In such cases, a party seeking to enforce the bargained-for dispute resolution clause (or forum selection clause) may need to act promptly to vindicate its rights. This article will focus, primarily from the standpoint of US arbitral practice, on the strategies that can be employed to enforce an arbitration agreement and thus steer a multi-jurisdictional dispute towards forum certainty.
The legal framework for enforcement of international arbitration agreements
The principal regional arbitration treaty within the Americas is the 1975 Inter-American Convention on International Commercial Arbitration (the Panama Convention). Most states in this region are also party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). While the two Conventions are virtually identical, US courts will usually give precedence to the Panama Convention where coverage overlaps. Both Conventions provide that written arbitration agreements will be recognised as 'valid' in the courts of contracting states. In other words, the courts of contracting states will compel parties to arbitrate where they have agreed to do so in their underlying transaction documents.
The basic tool for enforcing arbitration agreements is a court order compelling arbitration. Such relief can be sought defensively — by a defendant to litigation bringing a motion to compel arbitration — or offensively, by a separate petition to compel arbitration. Where one or both Conventions apply, a US court has power to order arbitration 'at any place . . . provided for [in an arbitration agreement], whether that place is within or without the [US].' Thus, a US court may order that parties submit to arbitration in venues such as London, Singapore or Moscow (all of which are located in New York Convention states).
When moving to compel arbitration, a party will usually seek to stay or dismiss any claims covered by the arbitration clause, and may also seek a discretionary stay of related litigation that, while not arbitrable itself, is nevertheless sufficiently dependent upon the outcome of the arbitration that a stay is prudent and an efficient use of judicial resources.
This is not to say that courts will enforce all arbitration agreements all of the time. Some courts have declined to enforce clauses that provide for arbitration in a non-Convention state. Complications may also arise where parties fail to specify a place of arbitration. Nevertheless, in most cases, an arbitration clause serves a solid basis for channeling disputes away from litigation and into the agreed arbitral forum.
Use of anti-suit injunctions to protect the parties' arbitration agreement
The use of anti-suit injunctions to protect the integrity of the jurisdiction of courts in the United States is well recognised. However, it is equally well-recognised that an anti-suit injunction is a weapon to be used sparingly, 'only when the strongest equitable factors favor its use.'1 A party seeking anti-suit relief in the US federal courts against foreign litigation generally needs to show that:
- the foreign proceedings involve the same issues and parties;
- the case before the US court will be 'dispositive' of the issues in the foreign tribunal; and
- international comity and equitable considerations favour anti-suit relief.
Absent such a showing, courts generally will allow local and foreign litigation to proceed 'in parallel,' on the basis that a final judgment in one will have res judicata effect in the other.
Anti-suit injunctions also may issue to prevent a party from avoiding its obligation to arbitrate. In Paramedics Electromedicina Comercial, Ltda v GE Med Sys Info Techs, Inc,2 for example, a dispute arose between US company GE Medical Systems Information Technology (GEMS-IT) and Brazilian company Tecnimed concerning performance of a distribution agreement. GEMS-IT commenced an arbitration under the IACAC rules, as provided for in the parties' contract. Tecnimed retaliated by filing two lawsuits:
- a claim in the New York courts, seeking a stay of the IACAC arbitration; and
- a claim in the courts of Porto Alegre, Brazil, naming as defendants both GEMS-IT and GE Brasil (an affiliate of GEMS-IT) and seeking damages as well as a declaration that its disputes were not arbitrable.
At this point, a New York federal judge granted GEMS-IT's request for an order compelling arbitration and restraining the Brazilian proceedings.
On appeal, the Second Circuit Court of Appeals affirmed the anti-suit injunction and enforced the arbitration agreement. It held that the parties to the Brazilian lawsuit were 'sufficiently similar' to the New York arbitration to conclude that there was an identity of parties and issues in the two claims. The mere fact Tecnimed had joined an extra defendant (GE Brasil) to the Brazilian claim was immaterial because GE Brasil had been joined 'chiefly on the basis of its aspects of identity with GEMS-IT.' Moreover, the Brazilian claim was 'a tactic to evade arbitration,' which violated 'the federal policy favoring the liberal enforcement of arbitration clauses'; a policy that 'applie[d] with particular force in international disputes.' Indeed, once the court determined that all of Tecnimed's claims were arbitrable, it had little difficulty concluding that no further legitimate purpose could be served by allowing Tecnimed to pursue the Brazilian lawsuit.
Not every case of parallel litigation and arbitration warrants anti-suit relief, however. This was recently illustrated in Laif X Sprl v Axtel, SA de CV,3 in which the bylaws of a Mexican corporation, Axtel, called for AAA/ICDR arbitration in New York of any disputes between and among its shareholders. One of those shareholders, Laif X (a Belgian company), brought an AAA arbitration against Axtel's majority shareholder, Telinor, accusing it of improperly diluting Laif X's rights. Telinor responded by filing a lawsuit in Monterrey, Mexico, seeking a declaration that Laif X's purported shareholding in Axtel was invalid. Although a New York federal court ordered Telinor to arbitrate the share dilution issue with Laif X, neither it nor the Second Circuit were willing to grant an anti-suit injunction barring the Monterrey lawsuit. Anti-suit relief was denied because:
- the Monterrey lawsuit raised separate issues and thus was not an attempt to 'sidestep arbitration';
- the Monterrey court had a legitimate interest in adjudicating Mexican corporate law issues; and
- in contrast, the US courts had little interest in enjoining a foreign lawsuit between a Belgian investor and a Mexican company.
Paramedics and Laif X suggest that US courts will give serious consideration to anti-suit relief where foreign proceedings are being used to evade arbitration. At the same time, the mere pendency of parallel litigation and arbitration, standing alone, will not guarantee anti-suit relief. Rather, a petitioner will likely need to demonstrate that the foreign litigation is a stratagem being employed to evade the parties' arbitration agreement.
Finally, where a party breaches an arbitration clause, an anti-suit injunction may conceivably be sought from the arbitral tribunal itself. Under most arbitral rules, arbitrators have general power to grant 'interim measures,' which would appear to include anti-suit relief. (In addition, statutes adopting the UNCITRAL Model Law (such as in Connecticut, California, Illinois, Florida, Louisiana, Oregon and Texas) grant arbitrators the power to issue 'interim measures.') Although this area of law is relatively undeveloped, the Eleventh Circuit in Four Seasons Hotels & Resorts, BV v Consorcio Barr SA,4 stated, in dicta, that an anti-suit injunction by a Venezuelan arbitrator did not violate US public policy.
One drawback in seeking arbitral anti-suit relief may be that, unlike a court, an arbitral tribunal lacks the sovereign power to punish parties for contempt for noncompliance with its own orders. The utility of arbitral injunctions thus depends, in part, on whether the arbitral tribunal's order will be complied with by the enjoined parties on pain of adverse consequences in the underlying arbitration itself.
Use of 'anti-anti-suit' injunctions
If a US court (or arbitrator) is capable of issuing anti-suit relief, so too are foreign courts. Thus, when seeking anti-suit relief, one should also consider seeking a preliminary 'anti-anti-suit injunction.' Such an injunction is designed to prevent one's adversary from itself seeking to obtain injunctive relief in a foreign forum while the US (or arbitral) anti-suit injunction application is pending, and thus prevent the US court or arbitrator from issuing anti-suit relief. 'Anti-anti-suit injunctions', while rare, have been granted by US courts and by state courts throughout the United States where the applicant has shown that he has a real and concrete basis to believe that the other party will seek to frustrate enforcement of the parties' arbitration agreement or forum selection clause in the absence of such relief.
Possible action for contractual damages for breach of arbitration clause
At bottom, an agreement to arbitrate is a form of contract, the breach of which, at least in principle, may entitle the wronged party to damages. To be sure, damages may be inadequate to fully compensate a party who is dragged into the wrong forum — which is why the customary remedy for breach of an arbitration agreement is an order compelling arbitration (akin to 'specific performance'). Nevertheless, some courts have held that a party violating an arbitration agreement may be liable to compensate the wronged party for the damage incurred as a consequence of that breach (eg, for the fees, costs and expenses of defending proceedings that were brought in the wrong forum). In such a case, the court can be said to merely be vindicating a party's contractual expectations, which are otherwise frustrated if he has to litigate in multiple fora even though the parties had agreed to a single forum (arbitration) to resolve their disputes. Parties seeking to enforce arbitration clauses will have a further remedy at their disposal if a party to an arbitration agreement persists with the foreign litigation in derogation of the arbitration clause.
Alternatives to arbitration — forum selection clauses
Within the US, forum selection or 'choice of court' provisions are generally enforceable, with some limited exceptions. Indeed, some states have specifically enacted legislation to facilitate the use of their courts even where the parties themselves have no connection to the state. New York, for example, has legislation providing that in disputes involving US$1 million or more and which are governed by New York law, a contractual submission to the jurisdiction of the courts of New York will be enforceable even in the absence of specific contacts between the parties and the New York forum.
Unlike with arbitration, however, there is no international treaty guaranteeing recognition of forum selection clauses. Consequently, there is no guarantee that foreign states will recognise and enforce such clauses. Additionally, the interpretation of forum selection clauses can vary from state to state. Some US courts require that a choice-of-court clause explicitly state that the parties submit to the exclusive jurisdiction of the US courts (an 'exclusive' forum selection clause) in order to foreclose litigation in other places, whereas other courts may infer exclusivity without express language. Likewise, where the parties want their disputes adjudicated by a judge and not by a jury, an explicit jury trial waiver is required. Thus, although choice-of-court clauses are a useful tool to consider when the risk of multi-jurisdictional litigation is of concern, arbitration agreements usually provide greater certainty of forum.
Cases involving sovereigns: ICSID arbitration
Where the other party to a transaction is a sovereign entity, it is sometimes possible to agree to submit all future disputes to the ICSID, a World Bank-affiliated arbitral body in Washington, DC, pursuant to the 1965 Convention on the Settlement of Investment Disputes (the ICSID Convention). The basic prerequisites for ICSID jurisdiction are:
- that the parties 'consent' to ICSID jurisdiction — for example, through a contractual arbitration clause;
- that the investor be a 'national' of an ICSID Convention state;
- that the host state also be an ICSID Convention State; and
- that the dispute relate to an 'investment' in the host state, as defined by the ICSID Convention.
If these pre-requisites are met, the ICSID Convention provides that '[c]onsent . . . to [ICSID] arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy.' Thus, recourse to ordinary courts is precluded — with the possible exception of litigation to seek 'provisional measures' for the preservation of rights pending arbitration. ICSID awards also carry potentially greater force than awards governed by the Panama and New York Conventions, because article 54(1) of the ICSID Convention requires ICSID awards to be treated as a 'final judgment[s]' in each contracting state (thus obviating the need to bring local court action to recognise such awards). In appropriate cases, therefore, an ICSID agreement offers numerous advantages to both parties.
Seeking finality once an award is rendered
Res judicata status of arbitral awards
For parties who have chosen arbitration as the means for resolving their disputes the rendering of a final arbitral award should bring finality to a dispute. Both the Panama and New York Conventions require courts in contracting states to give an arbitration award the same treatment as a 'final judicial judgment' and to grant execution of that award in like manner (unless the award is either annulled in the country where it was rendered, or meets one of the extremely narrow criteria for non-recognition of a foreign arbitral award).
Within the US, a final arbitral award may give rise to res judicata and collateral estoppel, precluding future claims on the same subject matter between the parties involved. Principles of res judicata also may extend to all parties in 'privity' with the losing party, meaning that affiliates of the losing party (even if they did not directly participate in the arbitral proceedings) may be prevented by the award from litigating the same issues in another forum. For a party battling satellite litigation brought by affiliates of the losing arbitral party, this rule may prove very useful.
Anti-suit relief to enjoin post-award litigation
Occasionally, a losing party may seek to thwart enforcement of a final award through unorthodox post-award litigation tactics. This was illustrated by the long-running KBC/Pertamina saga. In that case, Karaha Bodas Company (KBC), a Cayman Islands company, accused Indonesian state-owned oil company Pertamina of breaching a geothermal energy contract. The contract called for arbitration of all disputes before an UNCITRAL tribunal in Geneva. In an award rendered in 2000 (the Geneva Award), a tribunal awarded KBC US$250 million in damages.
Disappointed, Pertamina initially sought to annul the Geneva Award in the courts of Switzerland, but its annulment application was dismissed by the Swiss courts in 2001. Undaunted, in 2002, Pertamina brought fresh proceedings to annul the Geneva Award, this time in the courts of Jakarta, Indonesia. In those proceedings, Pertamina also sought (and later obtained) a worldwide anti-suit injunction barring KBC from enforcing the Geneva Award in any jurisdiction (including Texas, where it has been seeking to confirm the award). This led to two dueling anti-suit injunctions: one from a Texas federal court restraining Pertamina from pursuing the Jakarta proceedings, and one from the Jakarta court, annulling the Geneva Award and imposing a daily fine on KBC of US$500,000 for each day that it sought to enforce the award.
In 2003, however, the Fifth Circuit vacated the Texas federal court's anti-suit order. Its reasoning was simple: under the New York Convention, the Jakarta court only had power to deny enforcement of the Geneva Award within Indonesia. Thus, the Jakarta court's order did not threaten the ability of the US courts to recognise and enforce the Geneva Award. Moreover, the Jakarta court's US$500,000 daily fines did not pose immediate hardship because, among other things, Pertamina had promised not to enforce them. In the circumstances, 'as a court of secondary jurisdiction under the New York Convention, charged only with enforcing or refusing to enforce a foreign arbitral award, it is not the [US courts'] burden . . . to protect KBC from all the legal hardships it might undergo in a foreign country as a result of this foreign arbitration or the international commercial dispute that spawned it.'5
Events now shifted to New York. In 2006, after KBC had successfully attached a series of New York bank accounts held by Pertamina, a New York federal court ordered that the sum of US$319 million (almost the full outstanding under the Geneva Award, with interest) be released to KBC in satisfaction of that award. No sooner was this done than Pertamina filed a lawsuit against KBC in the Cayman Islands (KBC's place of incorporation), seeking damages against KBC equivalent to the full award sum, on the theory that KBC had procured the Geneva Award by 'fraud,' and also seeking a worldwide freezing order prohibiting KBC from disposing of US$319 million that had just been released to it.
This time, the US courts did grant anti-suit relief. In 2006, a New York federal judge granted an order enjoining Pertamina from pursuing the Cayman Islands litigation, In affirming this order, the Second Circuit noted the factors supporting anti-suit relief:
- the purpose of the Cayman Islands lawsuit did not merely seek to 'vitiate' the Geneva Award, but was also collateral attack on the US courts' actions in enforcing that award; and
- the US courts had a direct interest in preventing their own enforcement decisions being 'undermined' by foreign litigation.6
Thus, Pertamina's final bid to thwart collection of the Geneva Award was unsuccessful.
Although an unusual case, the KBC/Pertamina experience shows that the courts' tolerance for post-award litigation seeking to subvert an arbitration award is limited, and that anti-suit relief may become appropriate if parties engage in particularly abusive litigation tactics.
No matter how carefully-framed, a dispute resolution clause cannot alter human nature. Once a commercial relationship goes awry, many litigants find it hard to resist the temptation to forum-shop, even if this violates their prior agreement and leads to multi-jurisdictional litigation. What can be done, however, is to minimise in advance the chances of such tactics succeeding. In most cross-border transactions, an arbitration clause offers the best means presently available of achieving that goal.
1. Laker Airways Ltd v Sabena, 731 F2d 909, 931-32 (DC Cir 1984).
2. 369 F3d 645 (2d Cir 2004).
3. 390 F3d 194 (2d Cir 2004).
4. 377 F3d 1164 (11th Cir 2004).
5. Kahara Bodas Co v Pertamina, 335 F3d 357, 360-61 (5th Cir 2003).
6. Karaha Bodas Co v Pertamina, 500 F3d 111, 117 (2d Cir 2007), cert denied 128 S Ct 2958 (2008).