The New York Convention for the Enforcement of Foreign Arbitral Awards

The New York Convention itself is fairly short and straightforward. Each country adopting the New York Convention agrees to enforce foreign arbitral awards in accordance with the internal rules and procedures of the enforcing country. Depending on such country's election at the time of ratifying the Convention, this enforcement right may apply to all foreign awards or only to awards issued in other countries party to the Convention.

Two Practical Purposes

The Convention serves two practical purposes. First, it allows equipment lessors to pursue claims by way of arbitration in a chosen forum and pursuant to agreed rules and procedures instead of pursuing claims by way of court trial in the equipment lessor's jurisdiction, the lessee's jurisdiction or some other agreed jurisdiction. Many, if not most, cross-border equipment lessors believe, or at least assume, that an arbitration conducted in North America or Europe under the auspices of one of the established arbitration companies or organizations will result in findings of fact, applications of chosen law, and the granting of awards in a manner fairer and more predictable and consistent with cross-border business practices than in a lawsuit brought in a court in the lessee's jurisdiction, and would be more expeditious and less expensive than pursuing lawsuits in any jurisdiction. Second, many believe or assume that enforcing a foreign arbitral award against a lessee in the lessee's home jurisdiction is easier and quicker than enforcing a foreign judgment in that jurisdiction. In fact, enforcing a foreign arbitral award may be the only way to seek recourse against a lessee other than to bring an action or arbitration in the lessee's home jurisdiction, in that some countries that refuse to enforce foreign judgments are nonetheless parties to the New York Convention.

The Convention, on its face, does not, however, support any assumptions of quick or easy enforcement of foreign awards. It neither mandates expeditious, easy and inexpensive enforcement nor does it provide procedures for enforcing foreign arbitral awards. The Convention merely requires the member countries to impose enforcement rules, procedures and fees no more onerous than those for enforcing domestic arbitral awards. Thus, the burdens, expenses and delays in enforcing foreign arbitral awards may vary greatly from country to country.

Refusing Enforcement

The New York Convention does, however, set forth certain bases for refusing enforcement, the raising of any of which could delay and complicate enforcement proceedings. Furthermore, notwithstanding the intent of the New York Convention to promote arbitration and the enforcement of foreign arbitral awards, courts have been known to interpret these bases for denying enforcement very broadly in order to shield their citizens against foreign awards.

According to the Convention, each member state shall enforce foreign arbitral awards unless the party resisting enforcement proves:

a) the agreement to arbitrate is invalid as a result of incapacity or any other reason under the chosen law;

b) the party resisting enforcement was not given proper notice of the arbitration or was unable to present its case;

c) the arbitration was not done in accordance with the parties' agreement or the law of the jurisdiction chosen for arbitration, or the award is beyond the scope of the parties' agreement to arbitrate;

d) the award is not yet binding;

e) the dispute giving rise to the award is not one that can be settled by arbitration under the law of the enforcing country; or

f) enforcement would be contrary to public policy in the enforcing country.

The public policy exception to enforcement is probably the most problematic. It is the easiest for a court to latch onto or rely upon when seeking to protect its citizens to the prejudice of foreigners seeking to enforce foreign arbitral awards. Although there are anecdotal stories from time to time of courts abusing the public policy exception or other exceptions to enforcement, studies have shown that, generally, foreign arbitral awards do eventually get enforced in New York Convention countries.

One exception may be Indonesia. Indonesia has enacted laws and procedures for the enforcement of foreign arbitral awards in conformity with the New York Convention. Nonetheless, Indonesian counsel have advised that there are a number of instances where Indonesian courts have refused to give effect to the enforcement of arbitration agreements or arbitral awards for reasons (sometimes specified, sometimes not) other than those set forth in the Convention and Indonesian legislation.

One would think that if the award could survive the above-described attacks, enforcement would be as simple as submitting an original or copy of the arbitral award to the local court and having it convert the award into a judgment. Troubles and delays may arise, however, in complying with that court's rules, procedures and schedules. The devil is in the details.

For example, in Indonesia local counsel advise that enforcing a foreign arbitral award is not a very straightforward process and may take considerable time. In Japan, it is expected that courts will take one to three months to make a decision on whether to enforce an arbitral award, but in some cases the decision has been delayed for a year or more. In Colombia, local counsel at G'mez-Pinz'n Zuleta Abogados S.A. have advised that it may be more expeditious and less expensive to pursue claims against Colombian lessees via expedited or summary court proceedings in Colombia rather than trying to enforce a foreign arbitral award.

In doing due diligence on enforcement rights in a lessee's country, the equipment lessor's focus should be on just how easy or difficult enforcement may be in any particular country and not rely solely upon whether that country is or is not a party to the New York Convention. Equipment lessors should consult with local counsel prior to agreeing to mandatory arbitration in their leases or commencing arbitration where it is not mandatory. It is possible that pursuing a lessee in court in the lessee's home country may be more expeditious than arbitrating in the equipment lessor's location, and then seeking enforcement of the resulting arbitral award in the lessee's jurisdiction.

Furthermore, the benefits of the New York Convention may be completely illusory if the jurisdiction in which the lessee is located does not permit resolution of claims under a commercial equipment lease by way of domestic arbitration (including claims for recovery of equipment as well as for past due payments and early termination amounts). Although this author knows of no such jurisdiction, equipment lessors should nonetheless consult with local counsel on this issue before agreeing to mandatory arbitration. Likewise, equipment lessors should confirm that the procedures agreed for an arbitration will result in an award enforceable in the lessee's home jurisdiction and in any jurisdiction in which the leased equipment may be located. For example, presently, under Saudi Arabian law, arbitral awards (domestic or foreign) are not enforceable unless the arbitrators are male and of the Islamic faith. There is, however, a Royal Decree pending in the Kingdom of Saudi Arabia that would change this requirement to a university degree in Shariah or law. An equipment lessor would not want to find itself in a situation where its sole remedy for seeking recourse under its lease is an arbitral award that for procedural or other reasons will not be recognized in the lessee's home jurisdiction.

Conclusion

An equipment lessor should have a good understanding of both the legal and practical barriers to enforcing its leases in each jurisdiction where its equipment and lessees will be located, before entering into those markets, before agreeing to dispute resolution provisions in its leases and before commencing any actions for damages or recovery of equipment. No one should take undue comfort in the mere fact that a particular foreign jurisdiction is a party to the New York Convention.

James R. Cairns is a partner in the Los Angeles office of White & Case LLP, where his practice has an emphasis on leasing and equipment finance. He has represented and advised lessors, lessees, lenders, intermediaries and equity interests in a wide variety of equipment leasing transactions. He can be reached at [email protected].

Cross-border equipment lessors and their financiers often prefer binding arbitration clauses in their lease agreements on the assumption that, under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, an arbitral award granted, for example, in the United States would be simple and quick to enforce in the foreign jurisdiction of the lessee. This, however, is not necessarily the case and, in some instances, a foreign arbitral award may be more difficult or time consuming to enforce than simply commencing a lawsuit in the lessee's home jurisdiction.

The New York Convention

The New York Convention is one of several international conventions or treaties governing the enforcement of foreign arbitral awards. It was developed by the United Nations in 1958 and has been ratified by more than 140 countries, including the United States, Canada, Mexico and the BRIC countries, Brazil, Russia, India and China. It is one of the most widely ratified conventions in existence. Other conventions touching on arbitral awards include the 1965 International Centre for Settlement of Investment Disputes Convention on the Settlement of Investment Disputes Between States and Nationals of other States (the “Washington Convention”), the 1975 Inter-American Convention on International Commercial Arbitration (the “Panama Convention”), the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards (the “Montevideo Convention”) and the 1983 Riyadh Arab Agreement for Judicial Cooperation. Furthermore, the United Nations Commission on International Trade Law has developed for adoption by member countries model laws on arbitral procedures covering all stages of the arbitral process from the arbitration agreement, the composition and jurisdiction of the arbitral tribunal and extent of court intervention through the recognition and enforcement of arbitral awards. These model laws have been adopted by more than 60 countries, again, including certain states and provinces in the United States and Canada, Mexico, Russia and India but not Brazil or China (other than Hong Kong and Macao).

The New York Convention itself is fairly short and straightforward. Each country adopting the New York Convention agrees to enforce foreign arbitral awards in accordance with the internal rules and procedures of the enforcing country. Depending on such country's election at the time of ratifying the Convention, this enforcement right may apply to all foreign awards or only to awards issued in other countries party to the Convention.

Two Practical Purposes

The Convention serves two practical purposes. First, it allows equipment lessors to pursue claims by way of arbitration in a chosen forum and pursuant to agreed rules and procedures instead of pursuing claims by way of court trial in the equipment lessor's jurisdiction, the lessee's jurisdiction or some other agreed jurisdiction. Many, if not most, cross-border equipment lessors believe, or at least assume, that an arbitration conducted in North America or Europe under the auspices of one of the established arbitration companies or organizations will result in findings of fact, applications of chosen law, and the granting of awards in a manner fairer and more predictable and consistent with cross-border business practices than in a lawsuit brought in a court in the lessee's jurisdiction, and would be more expeditious and less expensive than pursuing lawsuits in any jurisdiction. Second, many believe or assume that enforcing a foreign arbitral award against a lessee in the lessee's home jurisdiction is easier and quicker than enforcing a foreign judgment in that jurisdiction. In fact, enforcing a foreign arbitral award may be the only way to seek recourse against a lessee other than to bring an action or arbitration in the lessee's home jurisdiction, in that some countries that refuse to enforce foreign judgments are nonetheless parties to the New York Convention.

The Convention, on its face, does not, however, support any assumptions of quick or easy enforcement of foreign awards. It neither mandates expeditious, easy and inexpensive enforcement nor does it provide procedures for enforcing foreign arbitral awards. The Convention merely requires the member countries to impose enforcement rules, procedures and fees no more onerous than those for enforcing domestic arbitral awards. Thus, the burdens, expenses and delays in enforcing foreign arbitral awards may vary greatly from country to country.

Refusing Enforcement

The New York Convention does, however, set forth certain bases for refusing enforcement, the raising of any of which could delay and complicate enforcement proceedings. Furthermore, notwithstanding the intent of the New York Convention to promote arbitration and the enforcement of foreign arbitral awards, courts have been known to interpret these bases for denying enforcement very broadly in order to shield their citizens against foreign awards.

According to the Convention, each member state shall enforce foreign arbitral awards unless the party resisting enforcement proves:

a) the agreement to arbitrate is invalid as a result of incapacity or any other reason under the chosen law;

b) the party resisting enforcement was not given proper notice of the arbitration or was unable to present its case;

c) the arbitration was not done in accordance with the parties' agreement or the law of the jurisdiction chosen for arbitration, or the award is beyond the scope of the parties' agreement to arbitrate;

d) the award is not yet binding;

e) the dispute giving rise to the award is not one that can be settled by arbitration under the law of the enforcing country; or

f) enforcement would be contrary to public policy in the enforcing country.

The public policy exception to enforcement is probably the most problematic. It is the easiest for a court to latch onto or rely upon when seeking to protect its citizens to the prejudice of foreigners seeking to enforce foreign arbitral awards. Although there are anecdotal stories from time to time of courts abusing the public policy exception or other exceptions to enforcement, studies have shown that, generally, foreign arbitral awards do eventually get enforced in New York Convention countries.

One exception may be Indonesia. Indonesia has enacted laws and procedures for the enforcement of foreign arbitral awards in conformity with the New York Convention. Nonetheless, Indonesian counsel have advised that there are a number of instances where Indonesian courts have refused to give effect to the enforcement of arbitration agreements or arbitral awards for reasons (sometimes specified, sometimes not) other than those set forth in the Convention and Indonesian legislation.

One would think that if the award could survive the above-described attacks, enforcement would be as simple as submitting an original or copy of the arbitral award to the local court and having it convert the award into a judgment. Troubles and delays may arise, however, in complying with that court's rules, procedures and schedules. The devil is in the details.

For example, in Indonesia local counsel advise that enforcing a foreign arbitral award is not a very straightforward process and may take considerable time. In Japan, it is expected that courts will take one to three months to make a decision on whether to enforce an arbitral award, but in some cases the decision has been delayed for a year or more. In Colombia, local counsel at G'mez-Pinz'n Zuleta Abogados S.A. have advised that it may be more expeditious and less expensive to pursue claims against Colombian lessees via expedited or summary court proceedings in Colombia rather than trying to enforce a foreign arbitral award.

In doing due diligence on enforcement rights in a lessee's country, the equipment lessor's focus should be on just how easy or difficult enforcement may be in any particular country and not rely solely upon whether that country is or is not a party to the New York Convention. Equipment lessors should consult with local counsel prior to agreeing to mandatory arbitration in their leases or commencing arbitration where it is not mandatory. It is possible that pursuing a lessee in court in the lessee's home country may be more expeditious than arbitrating in the equipment lessor's location, and then seeking enforcement of the resulting arbitral award in the lessee's jurisdiction.

Furthermore, the benefits of the New York Convention may be completely illusory if the jurisdiction in which the lessee is located does not permit resolution of claims under a commercial equipment lease by way of domestic arbitration (including claims for recovery of equipment as well as for past due payments and early termination amounts). Although this author knows of no such jurisdiction, equipment lessors should nonetheless consult with local counsel on this issue before agreeing to mandatory arbitration. Likewise, equipment lessors should confirm that the procedures agreed for an arbitration will result in an award enforceable in the lessee's home jurisdiction and in any jurisdiction in which the leased equipment may be located. For example, presently, under Saudi Arabian law, arbitral awards (domestic or foreign) are not enforceable unless the arbitrators are male and of the Islamic faith. There is, however, a Royal Decree pending in the Kingdom of Saudi Arabia that would change this requirement to a university degree in Shariah or law. An equipment lessor would not want to find itself in a situation where its sole remedy for seeking recourse under its lease is an arbitral award that for procedural or other reasons will not be recognized in the lessee's home jurisdiction.

Conclusion

An equipment lessor should have a good understanding of both the legal and practical barriers to enforcing its leases in each jurisdiction where its equipment and lessees will be located, before entering into those markets, before agreeing to dispute resolution provisions in its leases and before commencing any actions for damages or recovery of equipment. No one should take undue comfort in the mere fact that a particular foreign jurisdiction is a party to the New York Convention.

James R. Cairns is a partner in the Los Angeles office of White & Case LLP, where his practice has an emphasis on leasing and equipment finance. He has represented and advised lessors, lessees, lenders, intermediaries and equity interests in a wide variety of equipment leasing transactions. He can be reached at [email protected].