Article

Topics: Arbitration; Enforcement of Arbitral Award

Note: In 1997, Nova Hut, a.s. (Owner) engaged ICF Kaiser Netherlands B.V. (Contractor) whereby Contractor agreed to build a steel mill for Owner at its facility in the Czech Republic (the Agreement). Under the Agreement, Kaiser Group International, Inc. (Parent/Debtor), the parent company of Contractor, secured Contractor’s performance by obtaining a USD 11,100,000.00 standby letter of credit in favor of Owner. The standby was to be renewed annually; Owner obtained financing for the project from the International Finance Corporation (Creditor). In April 2001, after Contractor failed to satisfy a performance test on the project, Owner drew on the standby for the full amount. In June 2000, however, Parent/Debtor had filed for Chapter 11 relief under the U.S. Bankruptcy code. Subsequently, Parent/Debtor sued Owner in a bankruptcy action for breach of the Agreement and return of the standby proceeds. Owner moved to stay the proceedings pending arbitration, to compel arbitration, and to dismiss the complaint. When the bankruptcy court denied Owner’s motion, the United States District Court for the District of Delaware reversed. When Parent/Debtor appealed, the appellate court ordered Owner and Contractor to arbitrate after balancing the equities.

In April 2006, the International Chamber of Commerce (ICC) issued a final award in favor of Owner finding that Contractor had “failed to build the steel mill in accordance with the performance requirements of the Agreement” and thus Owner was entitled to draw on the standby. When Owner sought to enforce the arbitral award against Parent/Debtor in bankruptcy court on res judicata grounds, the court denied the request and ordered further arbitration. In March 2016, the ICC issued another award in Owner’s favor. Subsequently, Owner motioned in bankruptcy court to lift the stay of proceedings and confirm the 2016 ICC award in its favor as well as dismiss Parent/Debtor’s third amended complaint. The United States Bankruptcy Court for the District of Delaware, Walrath, J., granted Owner’s motion.

In response to Parent/Debtor’s arguments against enforcement of the award, the Judge applied the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the Convention). The Convention prompts courts to confirm foreign arbitral awards “except in very limited circumstances.” Parent/Debtor argued primarily that the award should not be enforced because Parent/Debtor was unable to fairly present its case at arbitration. Noting that the arbitration tribunal “made a well-reasoned decision”, the Judge applied the Convention to enforce the award stating that “a full scrutiny of awards would frustrate the entire purpose of arbitration.” Insisting that enforcement of the award at issue would be at odds with a separate award against Creditor and favorable to Parent/Debtor, the Judge explained that the Convention provided no grounds for such a refusal. Owner also noted that principles of res judicata were inapplicable because the parties to the other arbitral award were different than those in the bankruptcy proceeding.

[MJK]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.