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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
Senior associate in Freshfields Bruckhaus Deringer’s international arbitration practice group in New York.
A federal district court in New York confirmed an award against the Government of Laos which was subsequently annulled at the seat of arbitration in Malaysia. Following a motion by the Government of Laos, the district court in New York, affirmed on appeal by the Second Circuit, vacated its prior judgment confirming the award. Because the Malaysian proceedings were not tainted with the kind of factors that would give rise to violations of ‘basic notions of justice’ in the United States, federal courts in New York deferred to the Malaysian judgment. Attempts to enforce a separate English judgment confirming the award were also rejected.
On 20 July 2017, the Second Circuit Court of Appeals rejected the efforts of Petitioners Thai-Lao Lignite (Thailand) Co., Ltd. (‘TLL’) and its subsidiary, Hongsa Lignite (Lao PDR) Co., Ltd. (‘HLL’) (together, ‘Thai-Lao’ or ‘Petitioners’) to enforce in the United States an arbitral award issued in their favor and against the Government of the Lao People’s Democratic Republic (‘Laos’) by a three-member panel in Kuala Lumpur, Malaysia, but which had been vacated by the Malaysian courts.
The commercial relationship between TLL, HLL and Laos commenced in the early 1990s, when TLL entered into successive contracts with Laos pursuant to which Laos granted TLL the right to conduct mining operations in the Hongsa region (the ‘Mining Contracts’). TLL and Laos later entered into an additional contract, known as the Project Development Agreement (‘PDA’), pursuant to which Laos granted TLL the right to build and manage a plant that would generate electrical power with the coal from the mining activities. Disputes arising out of the PDA would be submitted to arbitration in Kuala Lumpur, Malaysia, and be conducted under the UNCITRAL Rules.
After TLL’s financing efforts were hindered by the Asian Financial Crisis, in 2006 Laos expressed concern that TLL would not be able to meet its obligations under the PDA. Laos thereafter sent TLL a notice of default, and then terminated the PDA and the Mining Contracts.
TLL and HLL commenced arbitration in Malaysia in June 2007, claiming that Laos’s termination was wrongful. In 2009, the tribunal determined that Laos had breached the PDA and awarded Thai-Lao approximately US$ 57 million in damages.
Thai-Lao then sought to enforce the award in the United States, the United Kingdom and France, in accordance with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’).
The New York Convention is implemented in the United States through Chapter Two of the Federal Arbitration Act (FAA). Pursuant to section 207 of the FAA, a district court is to confirm an award falling under the New York Convention ‘unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention’ (9 U.S.C. § 207).
After Thai-Lao sought enforcement of the award in June 2010 in a New York state court, Respondent Laos removed the case to the Federal District Court for the Southern District of New York, and moved for dismissal on three separate grounds: (i) lack of personal jurisdiction under Rule 12(b)(2) of the Federal Rules of Civil Procedure; (ii) forum non conveniens; and (iii) the arbitration panel having exceeded its jurisdiction by resolving disputes subject to the Mining Contracts in addition to those arising under the PDA.
In a decision dated August 2011, District Judge Kimba M. Wood denied Respondent’s motion to dismiss and granted Thai-Lao’s petition to confirm the arbitral award. Judge Wood found that the court had personal jurisdiction over Laos because it had been properly served and was not entitled to sovereign immunity under the Foreign Sovereign Immunities Act (FSIA). According to the District Court, Laos waived sovereign immunity in the agreement with TLL and the case fell under one of the FSIA’s exceptions to immunity because the award was rendered pursuant to an arbitration agreement governed by the New York Convention (see 28 U.S.C. § 1605(a)(6)).
With respect to forum non conveniens, the District Court found that it was ‘not apparent that Petitioners were motivated by forum shopping’ in their decision to bring the enforcement action in New York, and that their choice of forum was ‘entitled to a presumption of validity’. Notably, the District Court found that the fact that petitioners brought enforcement actions in multiple jurisdictions did not, on its own, indicate that they engaged in forum shopping, since the New York Convention ‘specifically contemplates multiple, simultaneous enforcement proceedings’. Thai-Lao Lignite (Thailand) Co., Ltd. v. Gov’t of the Lao People’s Democratic Republic, No 10 Civ 5256, 2011 WL 3516154, at *10 (S.D.N.Y. Aug. 3, 2011).
Next, the District Court addressed Respondent’s argument that the petition to confirm the award should be dismissed because the arbitral panel exceeded its jurisdiction. Judge Wood ultimately denied Respondent’s objection, finding that, rather than challenges to the arbitral panel’s jurisdiction, Respondent’s arguments were disagreements with the arbitral panel’s interpretation of the PDA and its calculation of damages, issues which the District Court could not independently review. Judge Wood further noted that, because Respondent was a signatory to an arbitration agreement that, by incorporating the UNCITRAL Rules, delegated issues of arbitrability to the arbitrators, the District Court would have had to defer to the arbitral panel’s decision regarding the scope of its own jurisdiction. The District Court therefore held that summary confirmation of the award was warranted under the New York Convention and Section 207 of the FAA.
After Respondent Laos appealed the decision, in a summary order dated 13 July 2012, the Court of Appeals for the Second Circuit affirmed the lower court’s decision. The Court of Appeals for the Second Circuit again found that ‘[t]here is no question … that the arbitral panel was free to decide the scope of its own jurisdiction’ since the agreement in question, to which Laos was a party, provided that any arbitration was to be governed by the UNCITRAL Rules, which in turn granted the arbitral panel the authority to rule on challenges to its own jurisdiction. Thai-Lao Lignite (Thailand) Co., Ltd. v. Gov’t of the Lao People’s Democratic Republic, 492 Fed. App’x 150, 151 (2d Cir. 2012).
On 19 October 2010, while the New York enforcement proceedings were ongoing, Laos initiated proceedings to set aside the arbitral award before the High Court of Malaysia in Kuala Lumpur. Initially, the High Court dismissed the set aside action as untimely. Under Malaysian law, a party wishing to challenge an arbitral award has 90 days to do so. Yet, more than nine months had passed since the arbitral panel had issued its award in the instant case.
The Malaysian Court of Appeal, however, reversed. It determined that Respondent Laos ‘should not be prejudiced by the fact that it was not conversant with local law requirements and did not receive adequate advice from its legal advisors to enable the application to set aside the award to be made within time in Malaysia’. Thai-Lao Lignite (Thailand) Co., Ltd. v. Gov’t of the Lao People’s Democratic Republic, 997 F. Supp. 2d 214, 217 (S.D.N.Y. 2014). The Malaysian Court of Appeal then remanded the case to the High Court.
On remand, on 27 December 2012 the Malaysian High Court annulled the arbitral award and ordered re-arbitration of the dispute before a new panel of arbitrators. The High Court determined that the arbitrators had exceeded their jurisdiction in violation of the Malaysian Arbitration Act when they assumed jurisdiction over disputes concerning the Mining Contracts, which the parties had entered into before the PDA was executed, and by adjudicating claims by non-signatories to the PDA. The High Court concluded that the arbitral award had impermissibly ‘lumped together or co-mingled the claims and disputes under the Mining Contracts with the claims and disputes under the PDA’. Thai-Lao Lignite (Thailand) Co., Ltd. v. Gov’t of the Lao People’s Democratic Republic, 864 F.3d 172, 180 (2d Cir. 2017).
In early 2014, the Malaysian Court of Appeals affirmed the High Court’s decision. A further appeal by Thai-Lao of the lower court’s decision to set aside the award was rejected by the Federal Court of Malaysia, the country’s highest court, in August 2017.
Pursuant to the New York Convention’s system of dual jurisdiction (as interpreted in US jurisprudence), the domestic courts of the State in which, or under the law of which, the award is rendered have ‘primary jurisdiction’ over that award, i.e. they have exclusive jurisdiction to set aside or vacate the award pursuant to that State’s own domestic arbitration law. The courts of all other signatory countries have ’secondary jurisdiction’. Their authority is limited to determining whether to enforce the award by reference to Article V of the New York Convention. They may not set aside or vacate the award under domestic law. See Yusuf Ahmed Alghanim & Sons v Toys ‘R’ Us, Inc., 126 F.3d 15, 23 (2d Cir. 1997); Karaha Bodas Co. v Perusahaan Petrambangan Minyak Dan Gas Bumi Negara, 500 F.3d 111, 115 n.1 (2d Cir. 2007).
Equipped with the Malaysian court decision setting aside the award, on 11 February 2013, Respondent Laos returned to District Court for the Southern District of New York. This time, Respondent moved pursuant to Rule 60(b)(5) of the Federal Rules of Civil Procedure and Article V of the New York Convention for an order vacating the District Court’s prior judgment enforcing the arbitral award.
Rule 60(b)(5) allows a district court to ‘relieve a party … from a final judgment’ when that judgment is ‘based on an earlier judgment that has been reversed or vacated’. Article V(1)(e) of the New York Convention provides that ‘[r]ecognition and enforcement of the award may be refused’ if 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’.
Respondent argued that the setting aside of the award in Malaysia, the country in which it was rendered, required vacatur of the judgment enforcing the award in the United States. Petitioners opposed and argued that: (i) Respondent’s own inequitable conduct precluded it from seeking equitable relief under Rule 60(b); (ii) neither the New York Convention nor Second Circuit case law required vacatur; and (iii) there were adequate reasons for the District Court not to defer to the Malaysian judgment. Petitioners pointed in particular to Laos’s delay in challenging the award in Malaysia.
The District Court proceeded to analyze Respondent’s motion under the system of dual jurisdiction provided by the New York Convention. It noted that while the use of the permissive ‘may’ in Article V(1)(e) of the New York Convention grants courts of secondary jurisdiction discretion to enforce a foreign arbitral award that has been set aside by a court of primary jurisdiction, such discretion is narrowly defined. Referring to TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928 (D.C. Cir. 2007) (‘TermoRio’) and Corporación Mexicana de Mantenimiento Integral, S. de R.L. de C.V. v. Pemex-Exploración y Producción, 832 F.3d 92 (2d Cir. 2016), (‘Pemex’), the District Court explained that it had discretion to enforce an award set aside at the seat when the foreign judgment setting aside the award either: (i) is ’repugnant to fundamental notions of what is decent and just in the State where enforcement is sought’; or (ii) violates ‘basic notions of justice’. Thai-Lao Lignite, 997 F. Supp. 2d at 222-23.
Petitioners maintained that the New York court should disregard the Malaysian courts’ decision vacating the award, and focused in particular on the Court of Appeal’s disregard of the 90-day statute of limitations and the merits of the subsequent High Court judgment. The District Court found that the alleged errors in the Malaysian proceedings did ‘not rise to the level of violating basic notions of justice’ sufficient to ‘ignore comity considerations and disregard the Malaysian judgments’ (ibid. at 223). Accordingly, on February 6, 2014, the District Court granted Respondent’s motion and vacated its prior judgment enforcing the arbitral award.
The District Court distinguished the present case from prior instances in which an annulled award was enforced, noting that: (i) Respondent was not an entity of the Malaysian government, which could raise concerns with respect to the Malaysian courts’ partiality, instead, Malaysia was a neutral third country that the parties had chosen as the seat of the arbitration; (ii) the Malaysian High Court set aside the award on a ‘universally-recognized ground that the arbitrators exceeded their jurisdiction’; and (iii) the High Court’s decision did not leave Petitioners without a remedy: the Malaysian court ordered re-arbitration of the dispute before a different panel of arbitrators and Petitioners were able to pursue an appeal of the High Court’s decision (which was ultimately affirmed) (ibid. at 227).
Enforcement of the English judgment confirming the award is denied by the District Court in 2014
In separate enforcement proceedings in November 2012, prior to the Malaysian High Court’s decision setting aside the award, the High Court of Justice of England and Wales entered judgment enforcing the arbitral award.
In February 2013, Petitioners sought to enforce the English judgment in the United States pursuant to New York’s Uniform Foreign Country Money-Judgments Recognition Act before the same federal court, the Southern District of New York.
In March 2014, the District Court denied Petitioners’ request, on the ground that ‘the [foreign] judgment conflicts with another final and conclusive judgment’. See N.Y. CPLR § 5304(b)(5). Noting that the English judgment enforcing the award was in conflict with the Malaysian judgment annulling the award, the District Court found that ‘the later Malaysian judgment should have priority because Malaysia, as the seat of the arbitration and therefore the primary jurisdiction under the New York Convention, had the sole authority to determine whether the arbitral award was valid and, if not, to set it aside’. Thai-Lao Lignite, 864 F.3d at 181.
The District Court’s decisions are affirmed by the Court of Appeals for the Second Circuit in 2017
On 20 July 2017, the Court of Appeals for the Second Circuit again affirmed the lower court’s decisions.
First, the Court of Appeals addressed the interplay between Rule 60(b)(5), which allows district courts to vacate a final judgment when that judgment ‘is based on an earlier judgment that has been reversed or vacated’, and the standards for declining to enforce an arbitral award under the New York Convention. Thai-Lao Lignite, 864 F.3d at 184.
The Court of Appeals determined ‘that Rule 60(b)(5) applies to a district court’s consideration of a motion to vacate a judgment enforcing an arbitral award that has since been annulled in the primary jurisdiction’ (ibid. at 176). Article III of the New York Convention provides that contracting States are to ‘recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon’. The Court of Appeals found that Rule 60(b) is one such ‘rule of procedure’ (ibid. at 185).
Second, turning to 'how courts adjudicating a Rule 60(b)(5) motion to vacate a judgment confirming an arbitral award that has been vacated in the primary jurisdiction should proceed’ the Court of Appeals noted that district courts should incorporate considerations under Article V(1)(e) of the New York Convention into their Rule 60(b) analysis. In other words, a district court should give ‘significant weight’ to the annulment of the award in the primary jurisdiction. By the same token, however, vacatur of a judgment enforcing a subsequently annulled award is not warranted if giving effect to the judgment annulling the award would offend ‘fundamental notions of what is decent and just in the United States’ (ibid. at 186, citing Pemex at 107).
In addition to incorporating Article V(1)(e) concerns in their analysis, district courts must not simply treat the annulment as dispositive of the Rule 60(b)(5) analysis, but should evaluate the ‘full range of interests protected by Rule 60(b)’ (ibid. at 186). These include whether the Rule 60(b) motion was made within a reasonable time, whether the movant acted equitably, and whether vacatur would strike an appropriate balance between the interests in the finality of judgments and in achieving justice, as well as the prudential concern for international comity. The concern for international comity evinced in Article V(1)(e) of the New York Convention is but one of the relevant considerations district courts are to take into account when assessing the merits of a Rule 60(b) motion.
In the present case, the Court of Appeals noted that a ‘[m]ore explicit consideration of a broader range of Rule 60(b) factors by the District Court’ would have been desirable (ibid. at 187). It nonetheless concluded that the District Court had not exceeded its discretion in granting Laos’s Rule 60(b)(5) motion. The District Court had considered the interests of justice when it determined that the Malaysian proceedings did not leave Petitioners without a remedy and the ‘circumstances surrounding the proceedings in Malaysia are far less suspect and therefore more worthy of presumptive recognition, than the circumstances surrounding the proceedings in Pemex’ (ibid. at 187). The Court of Appeals also noted that the conduct complained of by Petitioners did not rise to the level required to deny Laos otherwise merited relief. Indeed, Petitioners mostly challenged ‘the merits of legal positions taken, and not egregious behavior of another sort’.
The Second Circuit also affirmed the District Court’s non-enforcement of the English High Court Judgment. According to the Court of Appeals, the English judgment ‘had strong and explicit ties’ to the earlier, and now vacated, judgment of the District Court confirming the award. In particular, the English High Court had relied on the District Court’s prior determination that the points raised by Laos did not warrant denying confirmation of the award. The English High Court had in fact noted that ‘as a matter of English law at least, the conclusion of the US courts on these … issues would give rise to an issue estoppel’ (ibid. at 190).
The Court of Appeals therefore concluded that ‘equity favors giving heavier weight to the Malaysian judgment – the decision of the primary jurisdiction – over the English, particularly when the English ruling was so closely related to the District Court’s own judgment, which had in the meantime been vacated’ (ibid. at 191).
While the District Court and the Court of Appeals for the Second Circuit recognized that multiple enforcement proceedings are specifically contemplated under the dual jurisdiction system in the New York Convention, they determined that enforcement of an award annulled at the seat was not warranted because the Malaysian proceedings did not give rise to violations of ‘basic notions of justice’.