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NYLJ.COM | Alternative Dispute Resolution | MONDAY, AUGUST 7, 2017 | S7
Dealmaking With State-Owned Companies: Drafting, Enforcement Tips
BY DENNIS TRACEY AND DAVID MICHAELI
P arties entering into commercial agree- ments with foreign state-owned entities frequently insist that their agreements
provide for disputes to be resolved through binding arbitration rather than litigation. The reasons for this preference are straightfor- ward. Counterparties owned by foreign gov- ernments often enjoy a powerful “home court” advantage in litigation, and their home courts may have a reputation for corruption or a lack of due process that calls into question their ability to reliably and fairly resolve complex business disputes. Neutral countries’ courts may be available, but may not be trusted by one or both sides. The arbitration solution seems perfect: Parties can select an arbitral body, seat, and internationally respected gov- erning law in their agreement, ensuring a fair process for resolving any disputes.
The reality is not so simple. As recent cases make clear, enforcing arbitral awards against sovereign-owned entities is often expensive and difficult for a host of reasons, including weaknesses in the drafting of the arbitra- tion agreements and judicial doctrines that may undermine a party’s ability to enforce arbitral awards. The good news is that many enforcement problems can be addressed at the drafting stage. We discuss some common issues in this article, including issues relating to sovereign immunity, personal jurisdiction, and forum non conveniens challenges to arbi- tral enforcement, and suggest drafting tips to address them.
Do You Need a Sovereign Immunity Waiver in Your Agreement?
Foreign governments and state-owned companies are typically shielded from law- suits—including lawsuits seeking to confirm or enforce arbitral awards—by sovereign immunity doctrines or statutes. In the United States, foreign sovereigns and their instru- mentalities are presumptively immune from suit under the Foreign Sovereign Immunities Act (FSIA), and actions against them may only proceed if an FSIA exception applies or the immunity is waived.
An express waiver of sovereign immunity is often the surest way to eliminate immu- nity challenges to enforcement of an arbi- tral award. Waivers may not be necessary, however, if other grounds exist to overcome sovereign immunity in enforcement actions.
DENNIS TRACEY is a partner at Hogan Lovells in New York. He is head of the firm’s litigation practice in the Americas. DAVID MICHAELI is a senior associate at the firm.
In sum, state-owned entities and those doing business with them can eliminate many enforcement hurdles by including language addressing sovereign immunity, FNC, the finality of arbitral awards, and the personal jurisdiction of courts prevailing parties are likely to turn to for award enforcement.
v. Citizen Band, Potawatomi Indian Tribe of Oklahoma, 532 U.S. 411, 423, 121 S. Ct. 1589, 1597, 149 L. Ed. 2d 623 (2001) (Indian tribe waived its sovereign immunity by entering into an agreement containing an arbitra- tion clause that permitted judgment to be entered by a court); Oglala Sioux Tribe v. C & W Enterprises, 542 F.3d 224, 232 (8th Cir. 2008) (finding that “[o]nce [a sovereign Indian] Tribe waived its immunity by agree- ing to arbitration, it constitute[d] a waiver of whatever immunity the Tribe possessed.”) (citing C&L).
But relying exclusively on the FSIA’s arbitra- tion exception can lead to problems, because some courts have found that the waiver of immunity is limited to the scope of the arbitra- tors’ authority, and that the immunity waiver does not apply where the arbitration award exceeds the scope of that authority. Courts have set an appropriately high standard for asserting a “beyond the scope” challenge to an immunity waiver, but to avoid potential litigation over the issue, parties should con- sider including an express waiver of sovereign immunity in their agreements.
Include a Forum Non Conveniens Waiver in the Agreement?
Parties negotiating agreements with foreign sovereigns should also consider including an express forum non conveniens (FNC) waiver in their agreements. FNC is a common law doctrine that permits a court, after weighing private and public interest factors, to decline to exercise jurisdiction where the forum would be inconvenient for the defendant. See Piper Aircraft v. Reyno, 454 U.S. 235, 241 (1981). U.S. courts are split over whether a party that loses an arbitra- tion can invoke FNC to secure dismissal of a confirmation or enforcement proceeding, but some courts have dismissed actions on this basis. For instance, in Figueiredo Ferraz e Engenharia de Projeto Ltda. v. Republic of Peru, the Second Circuit held that a Peruvian statute limiting the amount of money a Peru- vian government agency may pay annually to satisfy a judgment was a principal factor to be considered by the court on a motion to dismiss an award-enforcement petition. 665 F.3d 384, 392 (2d Cir. 2011). Although enforcement of international arbitral awards is a favored U.S. policy, the court found “that general policy must give way to the significant public factor of Peru’s cap stat- ute.” Id. at 392. The court held further that the Panama Convention explicitly provides that execution of international arbitration awards “may be ordered ... in accordance with the procedural laws of the country where it is to be executed,” and forum non conveniens is a doctrine “of procedure.” Id. (quotations and citations » Page S10
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The most common is the FSIA’s “arbitration” exception. U.S. courts interpreting the FSIA have found a “strong legislative intent to provide enforcement for” arbitration agree- ments, with the Second Circuit holding in 2013 that “[t]o our knowledge, every court to consider whether awards issued pursu- ant to the [New York] Convention fall within
the arbitral award exception to the FSIA has concluded that they do.” Blue Ridge Invest- ments v. Republic of Argentina, 735 F.3d 72, 85 (2d Cir. 2013). U.S. courts have also held that a sovereign or its instrumentality may be deemed to have waived its sovereign immu- nity where it agrees to submit disputes to the arbitral process. See C & L Enterprises
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