The Myths and Math of Domestic Provisional Remedies for Domestic and Offshore Arbitrations

• Author: David J. Cook
• Position: Cook Collection Attorneys, PLC
• Pages: 705-778

e Indonesian Journal of International & Comparative Law

ISSN: 2338-7602; E-ISSN: 2338-770X

http://www.ijil.org

© 2016 e Institute for Migrant Rights Press

thE myths and math of domEstiC

Provisional rEmEdiEs for domEstiC

and offshorE arBitrations

David J. Cook

Cook Collection Attorneys, PLC.

E-mail: davidcook@cookcollectionattorneys.com

R (p) = ∑Location (3)

Unlike the United Kingdom, the U.S. federal rules decline to authorize the feder-

al courts to “freeze” a debtor’s assets pending the outcome of a lawsuit for money

damages absent an independent statutory basis. Over the past 40-plus years, in-

dividual states have revamped their provisional remedies based on the U.S. Su-

preme Court’s rulings that due process must be provided when a collection plain-

ti seeks provisional remedies. is article reconciles the statutory mechanics of

provisional remedies (i.e., pre-judgment attachments and claim and delivery)

with the common limitations in oshore arbitration between an oshore vendor

and a U.S. customer that empowers only the arbitrator to issue provisional relief.

As the oshore vendor oen invokes this relief on the eve of the defaulted U.S.

customer’s nancial demise, understanding this apparent gap between law and

practice is not academic, but vitally important. Failure to attach the debtor’s

assets, which frames the creditor as unsecured, is fatal to any recovery given a

debtor’s assets are encumbered by other creditors. e conclusion of this article

is that it is futile to repose sole power to issue provisional remedies with the

arbitrator oshore because provisional relief can only come from a sitting judge

(federal or state) relying on the relief provided by state law.

Keywords: International Commercial Law, International Sales Law, International Ar-

bitration, Transnational Enforcement Law, Conict of Laws, Comparative Contract

La w.

III Indonesian Journal of International & Comparative Law 705-78 (October 2016)

706

Cook

I. INTRODUCTION: THE DOCTRINE

OF LOCALITY—LOCALITY IS THE

FABRIC OF PROVISIONAL REMEDIES

Absent of a letter of credit, pre-payment, or a guaranty of payment by

a solvent third party obligor, an oshore vendor of goods, services,

FDA-mandated [bio-life or drug] trials, or the credit facilitator, any

creditor confronts the inevitable risk that the U.S. customer will de-

fault.1 A common scenario upon default, particularly of a U.S. custom-

er, commences with demand letters, emails, and even telephone calls,

none of which revive the faltering transaction. e oshore vendor

soon concludes that the U.S. customer is stumbling toward one or all

of: bankruptcy, an assignment for benet of creditors, foreclosure by a

senior lien holder, bulk sale to a buyer (i.e., a sacrice sale of assets),

or even a fraudulent conveyance. ese outcomes are all disastrous for

the vendor who faces the risk of an empty arbitration award or ensuing

civil judgment.

While every contract between the oshore vendor and U.S. customer

provides for remedies in the event of default, many are limited to an

oshore, neutral arbitration, located typically in e Hague, London,

Beijing, Singapore, Zurich, or even the locale of the vendor. Upon

the rendition of the money award due the oshore vendor, oshore

vendors look again to the contract to determine the forum that would

convert the award into a money judgment. Some contracts compel the

oshore vendor to le suit in its own jurisdiction that would result in

an oshore foreign money judgment, while others allow the vendor to

convert the foreign arbitral award into a U.S. money judgment, subject

to perhaps a forum selection clause for a particular U.S. Court (or state

court).2

While there are several legitimate reasons why a U.S. customer may

1. Default usually means non-payment of an obligation that might lead to the

acceleration of the entire unpaid balance, default of the total due, or default in

the performance of non-economic covenants. An oshore facilitator of credit

guaranties payment for oshore shipments of product coming into the U.S.

market.

2. New York is a commonly selected forum.

707

e Myth and Math of Domestic Provisional Remedies for Domestic and Oshore Arbitrations

Cook

choose not to participate in an oshore arbitration or suit to conrm

the award (such as its expense, no valid defense, or a claim of lack

of jurisdiction), in many cases, between the facts of the default and

continuing default, and its non-participation, the oshore vendor may

fear that the U.S. customer is in nancial straits or is plotting another

strategy to avoid payment (better known as asset protection).3

Fearing that the U.S. customer is slipping into insolvency, headed

to bankruptcy court, or will cycle through ownership changes to

deter any enforcement, the oshore vendor becomes concerned that

the U.S. customer will become “judgment of proof.” If this concern

is raised only aer the oshore vendor has invested funds to obtain

a money judgment, a $5,000,000 loss becomes a $5,500,000 one due

to the attorney’s fees, and with little or nothing to show for it, despite

international contracts that lock in terms that enable the oshore

vendor to control all litigation.

is scenario highlights the pre-ordained chasm between a

contractual regime of contractual terms (i.e., forum selection, arbitral

rights, choice of law, among other) on the one hand, and provisional and

supplemental remedies oered under local state law on the other. e

contractual regime encompasses the breach at the outset to the oshore

arbitral award or money judgment at the end. State law (i.e., a state in

the United States) might or might not oer provisional remedies to the

oshore vendor arising out of an oshore arbitration, or very limited

provisional remedies under any set of facts.4

e imperative of provisional remedies that accrue early in the

prosecution of an oshore arbitration or litigation requires attention,

lest the oshore vendor nds itself defeated at the hands of the U.S.

customer that rendered itself judgment proof while the oshore vendor

was busy cycling through the process of domesticating and conrming

the oshore arbitral award in a U.S. court. To avoid the situation

where the creditor is pounding on the front door, while the debtor

beats a hasty retreat through the back door with all its valuable assets

3. “Asset protection strategies” is a moniker for fraudulent conveyances. See also

In re Marriage of Dick, 18 Cal. Rptr. 2d 743, 752 (Cal. Ct. App. 1993) [discuss-

ing fraudulent conveyances in the context of trusts and fraudulent corpora-

tions].

4. See, e.g., N.Y. C.P.L.R. 7502(c) (McKinney 2016) that permits an attachment

arising from an international attachment.