Keywords

ENFORCEMENT; ALTER EGO;ISSUE PRECLUSION; COLLATERAL ESTOPPEL

Introduction

In the United States, enforcement of New York Convention awards is governed by a federal implementing statute: Chapter 2 of the Federal Arbitration Act (‘FAA’).  Section 207 of the FAA provides that any party with a foreign award falling under the New York Convention may apply to a federal court for an order ‘confirming’ the award.In CBF Indústria de Gusa S/A v AMCI Holdings Inc., 846 F.3d 35 (2d Cir. 2017), the Court of Appeals for the Second Circuit (the ‘Second Circuit’), which is the federal appellate court for New York, clarified that Chapter 2 of the FAA does not require a separate confirmation proceeding prior to enforcement, even where enforcement is sought against persons not parties to the award.  The decision alsoaffirmed the federal courts’ jurisdiction to decide alter-ego liability in enforcement proceedings against those alter egos, and the availability of issue preclusion in light ofthe arbitrators’ decision in the award. 

Underlying arbitration proceeding

After Steel Base Trade AG (‘SBT’), a Swiss company, defaulted on a series of agreements to purchase pig iron, a group of Brazil-based sellers (referred to collectively as ‘CBF’) initiated an ICC arbitration in Paris in 2009 against SBT, the only signatory of the purchase agreements.

In the arbitration, in which the tribunal was requested to award damages for unpaid deliveries, CBF presented a request for interim relief. Alleging that SBT hadfraudulently transferred all of its assets and operations to another Swiss entity called Prime Carbon GmbH, before filing for bankruptcy, CBF asked the arbitral tribunal to: (i) order SBT to post a guarantee and provide information about SBT’s assets and management; and (ii) findthat ‘the existence of fraudulent acts’entitledCBF to reach the assets of related third parties. The tribunal ordered SBT to provide the requested information, which SBT never did, but denied the request for security and deferred its decision on the fraud allegations until the final award.

SBT’s bankruptcy administrator informed the tribunal that SBT admitted CBF’s contract claims and would not defend itself in the arbitration. In 2011, tribunal issued an award in favour of CBF, holding SBT liable to pay over US$48 million in damages as well as CBF’s costs and fees. However, it declined to reach Prime Carbon or any related third parties because CBF had not introduced ‘sufficient evidence …to demonstrate the existence of fraud in the bankruptcy proceedings’.

The enforcement and confirmation actions in the lower court

In 2013, having been unable to collect on the arbitral award against SBT, CBF filed an action to enforce the award in the district court for the Southern District of New York (federal trial court).Its action was directed solely against third partiesas SBT’s alter egos or successors in interest. They included Prime Carbon, AMCI Holdings Inc., American Metals & Coal International Inc., K-M Investment Corporation, Primetrade Inc., and two individuals, Hans Mende and Fritz Kundrun (collectively ‘Third-Party Defendants’). In the same action, CBF also brought substantive fraud claims against the Third-Party Defendants. In 2014, in CBF Industria de Gusa S/A v AMCI Holdings Inc., 14 F. Supp. 3d 463, 473 (S.D.N.Y. 2014), the district court dismissed the enforcement action on the ground that Section 207 of the FAA explicitly requires award creditors to start an action to confirm the award against the debtor before starting an action to enforce the award.The district court also dismissed CBF’s attempt to pierce the corporate veil against the Third Party Defendants, as such claims are precluded in enforcement actions. In an earlier decision predating the United States’ ratification of the New York Convention, Orion Shipping & Trading Co. v Eastern States Petroleum Corp. of Panama SA,312 F.2d 299, 301 (2d Cir. 1963),the Second Circuit had held that an action under Chapter 1 of the FAA to confirm awards was a summary proceeding and was therefore not an appropriate action to pierce the corporate veil and find third-party liability. According to the Second Circuit in Orion, such actions must be brought separately against the third party. Finally, the lower court dismissed CBF’s fraud claims on the ground that, under the doctrine of issue preclusion, they were barred by the arbitral tribunal’s denial of SBT’s fraud claims (14 F. Supp. 3d 463, 479).

CBF then started a second action to confirm the award, which the lower court dismissed in 2015 on the ground that SBT lacked the capacity to be sued under the Federal Rules of Civil Procedure because, by then, it had been deleted from the Swiss Commercial Register: CBF Indústria de Gusa S/A v Steel Base Trade AG, No. 14 Civ. 3034, 2015 WL 1191269, at *3 (S.D.N.Y. Mar. 16, 2015).

The Second Circuit’s reversal and remand

Both actions were consolidated inCBF’s subsequent appeal of, among others, the following issues: whether (1) a New York Convention awardmade in a foreign jurisdiction must be confirmed prior to enforcement; and (2) issue preclusion applies to CBF’s fraud claims.

Prior confirmation not required

Through an eloquentand extensivereaffirmation ofcertain basic principles of US law on international arbitration, in CBF Indústria de Gusa S/A v AMCI Holdings Inc., 846 F.3d 35, 51 (2d Cir. 2017),the Second Circuit clarified that enforcement of New York Convention awards made outside the United Statesrequired only a singleproceeding under Chapter 2 of the FAA. No prior confirmation was needed, as the term ‘confirm’as used in Chapter 2 of the FAA is equivalent to ‘recognition and enforcement’ as used in the New York Convention.

Guidance on judicial determination of third-party liability

The Second Circuit therefore reversed the lower court’s decision, and remanded the case to the same lower court, with the instruction to determine whether the parties’ arbitration agreement coveredthe question of whether non-signatory third parties may be bound by the arbitration award (ibid. at 52).In doing so, the Second Circuit reminded the district court that under the US Supreme Court’s decision in First Options, courts must decide issues such as the personal and material scope of an arbitration agreement (confusingly labelled ‘arbitrability’ in the US), unless the parties had demonstrated a clear and unmistakable intent that the issue of arbitrability be decided by the arbitral tribunal (ibid at 52, citing First Options of Chicago Inc. v Kaplan, 514 U.S. 938, 942 (1995)). The Second Circuit therefore instructed the lower court not to disturb the arbitrators’ decision on whether to bind third parties if the parties had delegated that decision to the arbitrators. If not, the lower court should determine whether the Third Party Defendants could be liable under ordinary principles of contract and agency, namely (1) incorporation by reference, (2) assumption, (3) agency,  (4) veil piercing/alter ego, and (5) estoppel (ibid. at 54).

In remanding the action, the Second Circuit implicitly accepted that an award creditor could seek to hold third parties liable in an enforcement action. While this may seem inconsistent with the Second Circuit’s decision in Orion, the two cases are distinguishable because Orion involved an action against both the award debtor and third parties whereas CBF is solely directed at third parties. In this latter case, concerns of judicial efficiency vis-à-vis the debtor do not exist.

Issue preclusion may be unavailable in case of fraud in the arbitration

Finally, without ruling on the question of issue preclusion, the Second Circuit instructed that, on remand, CBF should be allowed to conduct discovery with respect to its fraud claims. The Second Circuit reminded the lower court that, as an equitable doctrine, issue preclusion cannot be invoked by a party with ‘unclean hands,’i.e. where that party’s fraud and misconduct during the arbitration had deprived another party of a full and fair opportunity to litigate an issue. As this was precisely what CBF had alleged, the Second Circuit considered it ‘inappropriate’ to dismiss those allegations without further enquiry. Following discovery, the district court would then have discretion to decide whether to allow the Third-Party Defendants to raise issue preclusion anew (ibid. at 56).

The saga may not be over, however, as the Third Party Defendants have presented a petition for an en banc rehearing by the Second Circuit.