The New York Convention, 1958 provides a full-fledged regime for enforcement of foreign commercial arbitral awards; while also affording remedial access to the award-debtor seeking non-enforcement of award. Yet enshrined in the Convention remains a clear pro-enforcement bias; effectively seeking to limit the scope for non-enforcement and challenge. Thus, any interpretation of its provisions that contravenes the Convention’s objective cannot be rendered sustainable. In short, action for negative declaration (preventing the enforcement of foreign arbitral awards) becomes entirely without legitimacy or efficacy as per the Convention’s stipulations.
In Abdullah v. M/s CNAN Group SpA, Pakistan’s Single Bench of the Sindh High Court (“the Court”) ruled on the question of maintainability of an action for negative declaration under the New York Convention, 1958, when it is invoked to prevent enforcement of foreign arbitral award. The Court’s decision was in response to a Civil Suit brought before it towards this end. Before concluding on its admissibility, the Court referred to case law from various jurisdictions and consulted treatises by leading authorities. Nevertheless, during its deliberations, the Court encountered competing views on the issue of maintainability. It is significant to note which position it ultimately endorsed, since either would have likely prompted an identical outcome.
Background:
The parties i.e., M/s CNAN Group SpA, an Algerian enterprise; M/s Igen, a Karachi-based proprietary concern of one Mr. Muhammad Nadeem Shahenshai; and M/s Hasan Ali Rice Export Company (HAREC), a sole proprietorship of Mr. Abdullah, allegedly entered into an arbitration agreement contained into a charterparty dated 07.11.2005. When differences arose among the parties, arbitration proceedings were initiated in London by M/s Igen against M/s CNAN. These were governed by the terms of procedure of London Maritime Arbitrators Association (LMAA). The tribunal ruled in favor of M/s CNAN on 17.10.2012, awarding it a sum of USD 269,810.38 while issuing certain declarations against Mr. Abdullah, proprietor of HAREC, considering him party to the arbitration proceedings and consequently holding him primarily responsible for payment of award money.
Mr. Abdullah (“the Plaintiff”), however, rejected the tribunal’s findings and filed a Civil Suit before the Court (Karachi), pleading that he was not a signatory to the charterparty and therefore not party to the arbitration agreement; thus all findings against him were null and void. He further alleged that he was neither a party to the arbitration proceedings and nor was any notice issued to him in the pendency of it. Therefore, no declarations adverse to his interests could be made by the tribunal. On the same grounds, he sought a negative declaration from the Court to the effect that the award was invalid and illegal in the eye of law and thus could not be enforced. Towards this end, the Plaintiff additionally lodged an interim application before the Court seeking to suspend enforcement of the award during the Suit’s pendency. He categorically repudiated the tribunal holding him as the undisclosed principal of M/s Igen, as per Section 30 of the (UK) Arbitration Act, 1996.
Questions Encountered by the Court:
The Court encountered two questions while deciding the interim application. First, did the Plaintiff’s premise for seeking non-enforcement of the award fall within the purview of Article V of the New York Convention, providing exclusive grounds on which foreign awards can be refused? Second, was the Suit for negative declaration, preventing enforcement of foreign arbitral award, maintainable under the Convention?
The Convention’s Pro-Enforcement Bias:
The Court’s judgment reveals that it conscientiously studied the New York Convention’s objective before addressing the aforementioned two questions. It subsequently concluded that the Convention is founded upon a pro-enforcement bias and thus naturally seeks speedy enforcement of foreign arbitral awards in member states. Towards this end, the Court first referenced the judgment of English Court of Appeal in Lombard-Knight and another v. Rainstorm Pictures Inc., wherein Tomlinson, LJ observed as follows:
“… the International Council for Commercial Arbitration (ICCA) has produced a Guide to the Interpretation of the 1958 New York Convention: A Handbook for Judges (May 2012 edition) (“ICCA Guide”) which sets out the questions to be answered and the steps to be followed by the courts when applying the Convention. The guide summarises the overall object and purpose of the New York Convention as follows:
‘The Convention is based on a pro-enforcement bias. It facilitates and safeguards the enforcement of arbitration agreements and arbitral awards and in doing so it serves international trade and commerce. It provides an additional measure of commercial security for parties entering into cross-border transactions.’
The pro-enforcement bias of the New York Convention is also supported by Van den Berg in his work to which I have already referred above, as did Mance LJ in Dardana Limited v. Yukos Oil Company [2002] EWCA Civ 543, [2002] 2 Lloyd’s Rep 326], at page 4:
‘As far as the object and purpose of the New York Convention are concerned, they are to facilitate the enforcement of arbitration agreements within its purview and of foreign arbitral awards. The object and purpose must, in the first place, be seen in the light of enhancing the effectiveness of the legal regime governing international commercial arbitration’.”
The Court additionally referred to the findings given in the Australian case, IMC Aviation Solutions Pty Ltd. v. Altain Khuder LLC, as well as to the US Court of Appeal judgment in, Glencore Grain Rotterdam B.V. v. Shivnath Rai Harnarain Co. In both cases, the Court found the Convention to enshrine the principle of discouraging non-enforcement of foreign arbitral awards. That is, commitment to pro-enforcement prevails.
First Question Addressed:
Having reached the aforementioned conclusion, the Court turned its attention to the first question, cited above. In so doing, it relied upon findings given in Dallah v. Pakistan, in which Lord Collins has observed as under:
“Although Article V(I)(a) … deals expressly only with the case where the arbitration agreement is not valid, the consistent international practice shows that there is no doubt that it also covers the case where a party claims that the agreement is not binding on it because that party was never a party to the arbitration agreement. Thus in Dardana Ltd. v. Yukos Oil Co. [2002] 2 Lloyd’s Rep 326 it was accepted by the Court of Appeal that section 103(2)(b) applied in a case where the question was whether a Swedish award was enforceable in England against Yukos on the basis that, although it was not a signatory, it had by its conduct rendered itself an additional party to the contract containing the arbitration agreement. In Sarhank Group v. Oracle Corp, 404 F3d 657 (2d Cir 2005) the issue, on the enforcement of the Egyptian award, was whether a non-signatory parent company was bound by an arbitration agreement on the basis that its subsidiary, which had signed the agreement, was a mere shell; and in China Minmetals Materials Import and Export Co. Ltd. v. Chei Mei Corpn., 334 F3d 274 (3d Cir 2003) enforcement of a Chinese award was resisted on the ground that the agreement was a forgery. See also Born, International Commercial Arbitration (2009), pp 2778-2779.”
In keeping with the above, the Court observed that the Plaintiff’s plea of not being party to the arbitration agreement falls within Article V(I)(a) of the Convention, which reads as under;
“V(1). Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
(a) The parties to the agreement referred to in Article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or
Hence the grounds on which the Plaintiff made his non-enforcement plea were found to fall within the scope of the New York Convention.
Second Question Addressed:
Thereafter, the Court turned its attention to the second question, that is, whether the pursuit of negative declaration was maintainable under the Convention. For this purpose, the Court’s first recourse was to a French case, titled, Société Acteurs Auteurs Associés v. Société Hemdale Film Corporation, in which it was held as follows:
“However, [Art. V of the New York Convention] only lists the cases in which recognition and enforcement can be refused by ‘the competent authority’ of the State – either ex-officio (Art. V(2)) or at the request of the party against whom the award is invoked (Art. V(I))–without regulating the procedural forms by which recognition and enforcement may be refused. These forms are explicitly left to the discretionary power of the State where the arbitral award is relied upon (Art. III of the Convention). Hence we may not infer that a main action eninopposabilite, which has a preventive character, is inadmissible [under the Convention] if it is admissible in the state where the action is commenced.”
The preventive action before the French court in the aforementioned case failed due to its non-provision under French law. Then the Court switched its focus to the decision of the US Court of Appeals for the Seventh Circuit in Mary D. Slaney v. International Amateur Athletic Federation. Here, the award-debtor (the appellant, Mary Slaney) filed a suit before the relevant US District Court seeking declaratory relief that the award rendered by the tribunal on the dispute between her and International Amateur Athletic Federation (IAAF) was not enforceable. The District Court dismissed the suit inter-alia on the grounds that the Convention prohibited such an action. A subsequent appeal was similarly quashed. The Court then moved to reference a third source, namely the judgment passed by Italy’s Supreme Court in Lanificio Mario Zegna SpA v. Ermenegildo Zegna Corporation and another. Here, an award was made in Paris in favour of the first respondent, enforcement for which was sought in Italy. The appellant chose not to file an opposition to the award as provided for under Italian law, but instead started its own action seeking, inter alia, a negative declaration regarding the award’s enforceability in Italy. The proceedings were duly dismissed. The appeal met the same fate when it appeared before the Supreme Court, which held as follows:
“The Court notes that … the lower court followed the jurisprudence of the Supreme Court that an action seeking a negative declaration is an atypical instrument that [is inadmissible] where a typical instrument [is available] and where such [atypical action] if granted would lead to circumventing the specific criteria for a judgment imposed by law.
In the case at issue the court of appeal – which was the court having jurisdiction on the issue whether the conditions for recognizing the foreign award in Italy were met, in the context of typical enforcement proceedings – correctly held that [Mario Zegna’s] action was inadmissible as it would have prevented [Ermenegildo Zegna] from using the instruments made available in Arts. 839 and 840 CCP. The court of appeal thus prevented frustration of a typical instrument, which guarantees [the possibility] to attack [an award] on limited grounds…”
The Court thereafter cited a treatise on the New York Convention, in which it has been opined, as under;
“As a general rule, courts should be cautious in allowing an application by the respondent to an arbitration either for a declaratory judgment that recognition should be denied or for challenging the award in general; courts should permit it only when such a party shows a legitimate interest or need. To find a “legitimate interest”, courts should require the party to show an existing adverse impact of the arbitration award, such as a denial of rights or other use of the award by the award-holder.”
The Court also noted another treatise on the Convention, which sets it out as under:
“The lex fori also determines the question whether the award debtor against whom an arbitration award may be enforced, may file for preventive declaratory judgment (rather than wait until the award creditor applies for recognition and enforcement.”
After duly considering all references, the Court concluded that the suit for negative declaration is, as a general principle, maintainable under the Convention. However, on whether this can, in reality, be instituted – the Court stressed recognition of lex fori as the governing standard. In this instance, this means the law of Pakistan. Thus the Court resorted to Section 7 of Pakistan’s Recognition and Enforcement (Arbitration Agreements and Foreign Awards) Act, 2011. This provides that recognition and enforcement of a foreign arbitral award shall not be denied except in conditions outlined in Article V of the Convention. Hence the Court found that no action extending beyond these limits could be upheld.
Elaborating on this last point, the Court found that the Article V(I) of the Convention declares: “Recognition and enforcement of the award may be refused at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: …”. This provision, the Court observed, functions as a shield only –not a sword. Thus the award-debtor may invoke the above only upon commencement of enforcement proceedings, not before. Yet in this case, since M/s CNAN had initiated no such action, therefore, the advantage of Article V(I)(a) of the New York Convention could not be made available to the Plaintiff (award-debtor).
As evidenced, the Court deliberated the second question put before it in two distinct manners. Firstly, it resorted to foreign judgments and treatises, before concluding that the New York Convention did not bar action of negative declaration. However, the Court added a qualifier: the action can only be initiated under the lex fori, (hereinafter referred as “the former view”). Secondly, the Court referenced Article V(I) of the Convention; observing that this provision be invoked only once enforcement proceedings have been instituted. Thus the action of negative declaration is precluded under the Convention (hereinafter referred as “the latter view”).
The Court’s Observations:
In seeking resolution of a single question, the Court found that two parallel positions equally existed. In a subsequent para of its judgment, the Court ultimately endorsed the former view and observed as under:
“Of course this does not mean that such a challenge is eliminated altogether. What it does mean, in my view, is that if the relevant statute in the lex fori does not so provide either expressly or by necessary implication, then a challenge or objection to an award must be regarded as being limited to proceedings brought by the award-creditor.”
In the same sequence the Court further held:
“I cannot, with respect, agree with what appears to be the rather more expansive approach suggested in Kronke (op.cit.). Certainly, in my view, the case law cited above does not support such a conclusion.”
It is significant to note that the Court, while supporting the former view, did not seek to censure the latter view; thereby drawing no distinction between the two approaches. Rather, it appears that having examined judgments from different jurisdictions, the Court simply sanctioned the position which seemed dominant, while refraining from disclosing its own particular reasons towards this end. Yet the Court did note in its judgment, however, that it disagreed with Herbert Kronke et al. Nevertheless, it refrained from opining on decision of the US District Court in Mary D. Slaney v. International Amateur Athletic Federation, which held that action seeking negative declaration is prohibited by the Convention.
By choosing to stand by the former view, the Court was subsequently moved to dismiss the interim application filed by the Plaintiff (award-debtor) in the Suit.
Author’s Observations:
The New York Convention provides a full-fledged regime for enforcement of foreign arbitral awards, while also affording remedial access to the award-debtor seeking non-enforcement. This element of structural redress translates into the barring of any recourse other than those enshrined in the Convention. Lew, Mistelis & Kröll, declare three options available to the award-debtor who is both dissatisfied with an award and unwilling to voluntarily accept its effect i.e., (i) to file an appeal where this is permitted under the law or rules of arbitration; (ii) to resist enforcement of award where the award-holder initiates enforcement proceedings; and (iii) to challenge the award at the seat of arbitration. These remedies are entrenched in Article V of the New York Convention.
In essence, Article V is very clear about the grounds on which enforcement of award may be refused, dedicating two paragraphs towards this end. Moreover, Article V(I)(e) categorically refers to the setting aside and suspension of the award; which by implication legitimizes setting aside proceedings and suspension of the award, but only as envisaged in the Convention. Article (V)(I)(e) notes as under:
“V(1). Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
(e) The award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.”
The Convention further decrees that both actions – that is, setting aside and suspension of award – must take place before the competent authority in the country issuing the award or else under the law of which it was made. Setting aside proceedings are the original proceedings, however, suspension of award may be made ancillary to the setting aside proceedings or appellate proceedings, latter as mentioned by the authors. The Convention nowhere makes a mention that the action for negative declaration can be brought and further that the same be a subject matter of lex fori.
That aside, action seeking negative declaration may well be described as redundant, given its overlapping similarities with the setting aside action. In short, both these proceedings appear identical in purpose, form and effect. Yet one marked difference prevails and it is a difference that prompts award-debtors to largely shun the latter approach. The setting aside proceedings are initiated at the seat of arbitration, hence, governed by its domestic law. By contrast, action for negative declaration occurs at the place of enforcement, meaning it is subject to the law of place of enforcement. In most cases, this is the award-debtor’s home jurisdiction. Thus the prospect of convenience and a familiar environment represent an undeniable pull for the award-debtor. This is even though no such incentive has been envisaged anywhere in the Convention.
The Convention’s sole intention and purpose hinges on enforcement of foreign arbitral awards. It therefore stands to reason that any narrowing of the grounds for non-enforcement or challenge mechanisms – in short, any action hostile to enforcement – cannot extend beyond the limits set forth in the Convention. Thus, the action seeking negative declaration preventing enforcement of foreign award subject to the lex fori is completely beyond the Convention’s scope, hence precluded.
Bibliography can be made available upon request.
This articles has been first published in the TDM Journal – volume 12 (2015), issue 2: Arbitration in the Middle East: Expectations and Challenges for the Future.
The writer is a Partner at Hussain & Associates (Advocates). He is also a Lecturer of International Arbitration and Commercial Law has a LL.M degree from Queen Mary, University of London.
