International arbitration and enforcement in U.S. federal courts.

• Author: Taherzadeh, Mohamad

1. INTRODUCTION

   In the international arena, the advantage of arbitration over litigation as a method of dispute resolution is no longer subject to debate.(1) One reason for this trend is that private international arbitration agreements allow parties to draft provisions suited to their particular needs in anticipation of future disputes.(2) Indeed, arbitration agreements are in essence a type of forum selection agreement that attempts to avoid many of the problems related to jurisdiction.(3) Such problems range from whether a court has jurisdiction over the defendant(4) to the unattractiveness of disputing or attempting to enforce a judgment in the other party's country, where the tribunal may be more inclined to favor its own nationals.(5) In other words, international businesses have a strong incentive to avoid the local bias that may be faced when arguing a dispute in the courts of other countries. Arbitration also provides flexibility, speed, and financial savings in international disputes, whereas litigation can be slow and costly.(6) Arbitration also foregoes the need for a judge and the accompanying formal proceedings. Instead, the parties agree on an impartial third person to act as arbitrator.(7) Typically the arbitrator is more informed than judges or juries about the subject of the dispute and the customs of the industry and can preside over the proceedings without formal procedural requirements, such as rules of evidence, which often create an overly adversarial environment.(8) Thus, the increasing use of international arbitration, when conducted under the auspices of an arbitral institution,(9) shows that "privatized rulemaking" can, at least in the area of comparative law, serve as a practical tool to the international commercial community.(10)

   The effectiveness of private international arbitration, however, is dependent "on substantial and predictable governmental and intergovernmental support."(11) This reality leads to the irrefutable logic that in the absence of "reciprocal commitments and effective control," there is little reason to believe that one country's courts would allow its citizens' property to be confiscated simply because a private actor has ruled so.(12) Taking this logic a step forward, "[w]ithout the assurance of enforcement by a national court in whose territory an award debtor's property is located, international commercial arbitration simply will not work."(13) But it has worked.(14) Unlike criminal law, where ideological and other differences between nations have prevented the forming of a unified rule of international law,(15) in private, commercial matters, nations have been willing and able to reach some consensus.(16) Without such a consensus, the explosive expansion of international commerce and the recognition of the global economy would be in doubt.(17) The decision of an arbitrator, however, does not necessarily result in the resolution of a dispute. Parties to an arbitral proceeding will often resort to domestic proceedings in local courts to enforce either the agreement to arbitrate or the award decision reached by the arbitrator.(18) With the assigned roles of an arbitral tribunal and domestic courts, it is inevitable that contradictory rulings may occasionally occur. This inconsistency can be particularly problematic when a domestic court and an arbitral tribunal disagree in implementation of enforcement provisions of the United Nations Convention on the Recognition and Enforcement of Foreign `Arbitral Awards, also known as the "New York Arbitration Convention of 1958" (Convention).(19) Two recent federal court cases illustrate this dilemma: In re Arbitration of Certain Controversies Between Chromalloy Aeroservices, Corp. and the Arab Republic of Egypt (Chromalloy)(20) and Alghanim & Sons v. Toys "R" Us (Toys "R" Us).(21) Two important issues are raised by these two decisions. In Chromalloy, the issue is whether U.S. domestic arbitration law should be allowed to sustain an international award that was nullified under the national law of the rendering state.(22) In Toys "R" Us, the court determines whether U.S. domestic arbitration law should govern the enforceability of an international award rendered in the United States.

   This Comment will discuss defenses to enforcement of private international arbitration agreements. Part II will discuss the Convention and related parts of the Federal Arbitration Act (FAA) regarding enforcement of foreign judgments. Part III will critique the reasoning employed by the Chromalloy and the Toys "R" Us courts as they relate to the Convention and the implications of such decisions for international comity. This Comment then concludes in Part IV by asserting that arbitration can be a viable alternative to traditional international litigation provided that certain issues are addressed.

2. ENFORCEMENT OF ARBITRAL AWARD IN THE UNITED STATES

   1. The Federal Arbitration Act

      Before the passage of the FAA in 1925, courts were not adverse to allowing suits in violation of contractual agreements to arbitrate.(23) This attitude reflected a common law doctrine that permitted revocation of arbitration agreements at any time prior to the awarding of an arbitral award.(24) But the FAA changed that doctrine, since it states that arbitration agreements are "valid, irrevocable, and enforceable."(25) The FAA allows a party to petition a U.S. district court for an order to compel arbitration as stated in an agreement, to appoint an arbitrator if one has not been designated, and to enforce an award.(26) Other rights provided by the FAA include the right of the party allegedly to be in default under an agreement to demand a jury trial.(27) A jury has the power to rule on whether a valid agreement was made and whether one party has defaulted under such agreement.(28) Also, "[i]f the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof."(29) The FAA requires a court to stay litigation that is commenced in violation of a valid arbitration agreement,(30) but nowhere does the FAA provide for a stay of arbitration. The FAA limits grounds for non-enforcement of arbitral agreements to "such grounds as exist at law or in equity for the revocation of any contract."(31) Section 10 of the FAA in particular allows courts to reverse arbitral awards on four grounds:

      (a) Where the award was procured by corruption, fraud, or undue means. (b) Where there was evident partiality or corruption in the arbitrators.... (c) Where the arbitrators were guilty of misconduct in refusing to postpone the hearing ... or in refusing to hear evidence ... or of any other misbehavior.... (d) Where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.(32) The FAA provides for additional grounds under which an award can be attacked. These provisions, however, are in essence no different from similar provisions authorized by the Convention, discussed below.

   2. The New York Convention

      The origins of the Convention stem from some of the problems discussed in the introduction to this Comment. But an additional problem also existed. Sovereign states had been reluctant in the past to give equal weight to a private arbitrator's decision and to another sovereign's courts.(33) Much of the apprehension existed because international arbitration lacked the hierarchical institutions of domestic court systems.(34) These issues were addressed by the Convention, which was intended as a "universal charter."(35) The Convention has now been ratified by over 100 countries.(36) The United States ratified it in 1970.(37) The basic concept of the Convention "was to make arbitral awards rendered in a foreign state enforceable in any state party to the Convention."(38) Thus, by adhering to the Convention, contracting states agree to recognize the arbitral process as a method of resolving disputes.(39) The U.S. Supreme Court noted the following:

      The goal of the Convention, and the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.(40) The operative section of the Convention is Article III, which states that "[e]ach Contracting State 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, under the conditions laid down in the following articles."(41) The Convention states that it applies to "awards made in the territory of a State other than the State where the recognition and enforcement ... are sought...."(42) The Convention also applies to "arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought."(43) What follows from the above provisions is that the Convention does not require the parties to be domiciled under the laws of the contracting states. Additionally, the provisions are silent on the nationality of the parties. Thus, it seems that the Convention applies to both arbitration awards rendered outside of the enforcing state and to nondomestic awards granted within the enforcing state.(44) This rationale accords with the goals of the Convention,(45) which are to make awards rendered in foreign state enforceable, as long as the other state is also a party to the Convention.(46) This also has the effect of removing the need to first confirm the award in the courts of the foreign state before attempting to enforce the judgment in some other state.(47)

      1. Twin Goals of The New York Convention

         On its face, the Convention has in mind two important goals: to unify national law...